CSR Price Premium

As demonstrated in Chapter 8, Walmart has found that adopting specific

aspects of CSR (sustainability, in particular) need not undermine the firm’s
business model and can in fact enhance it. What Chapter 8 also demonstrates,
however, is that Walmart is still taking the path of least resistance in the early
stages of CSR implementation:
“There is a substantial opportunity to make green pay,” [Rand Waddoups,
Wal-Mart’s senior director of corporate strategy and sustainability] said.
“We haven’t even gotten to the low-hanging fruit yet. We are still picking
up $1,000 bills off the floor.”11
Walmart’s business strategy relies on a core competence of minimizing costs
and passing those savings on to customers. As such, there is little evidence to
suggest Walmart would choose the socially responsible long-term option when
that decision would lead to a short-term increase in costs. Doing so would
threaten the laser-like focus on costs that Walmart executives have spent
decades instilling in the firm’s employees. What happens, therefore, when CSR
increases costs and firms are forced to pass those increases on to their
customers in the form of higher prices?
As indicated earlier, firms that seek to differentiate their products on some
feature other than low cost often charge a price premium for that product.
What is also clear (as with most differentiated products), however, is that the
market for these offerings is limited. A quick scan of public opinion polls and
media articles about consumers’ willingness to pay for products differentiated
on an ethical or environmental basis reveals that, in the United States, “35
percent said they are willing to pay extra for a green product.” 12 Reports
elsewhere, however, suggest such results are inflated. A report in the UK, for
example, notes that “only 22 percent of consumers around the world will pay
more for ‘eco-friendly’ products even though 83 percent believe it is
‘important for a company to have environmental programs.’” 13 Increasingly,
consumers say they expect firms to be socially responsible, but “they don’t
expect to pay for it. They are, however, more than willing to punish if it’s not
there.”14
Firms should take two things away from this shift in market expectations
regarding CSR. First, firms should ensure they understand the operational
value that CSR offers. An important distinction, therefore, is between those
firms that perceive CSR to be a cost and those that perceive it to be an
opportunity.15 Until firms understand CSR as an opportunity to add operational
value above and beyond any potential short-term increase in sales, they will
have little chance of successfully implementing CSR throughout operations.
Second, part of the reason for consumer skepticism about the value of CSR is
firms’ record in marketing prior CSR activities. A combination of promises
that have subsequently been revealed to be misleading with a proliferation of
product labels and ratings designed to educate consumers about the CSR
credentials of various firms and products (but more often just confusing them)
has made people reluctant to pay the associated bill.
CSR Market Abuse
The market for CSR is complicated by the potential for abuse. Stakeholders, in
general, and consumers, in particular, need to be vigilant. There is a gap
between the information about a product that is known to the firm and the
information that the consumer is willing and able to access—in other words,
“the information asymmetry between manufacturers and the buying public
about the real social, health, and environmental impacts of consumer goods.” 16
As the number of groups and individuals interested in CSR grows, so too does
the amount of information that is distributed by firms seeking to take
advantage of consumer trends and sympathies. Some of this information will
be accurate, while some will be misleading; some of the misleading
information will be mistakenly so, while some will be deliberately deceptive.
Either way, the proliferation of information is confusing for the firm’s
stakeholders. In the face of such a barrage, most consumers disengage. 17
Whether deliberate or accidental, therefore, the effect is negative. As CSR
becomes more profitable, the potential for greenwash increases. 18
Greenwash measures the extent to which firms are willing to jump on the CSR
bandwagon and mislead consumers in the hope of financial gain. Research
suggests that a significant percentage of CSR product-marketing claims are
false or misleading. In 2010, for example, the environmental marketing
organization Terrachoice tested the veracity of the 12,061 environmental
claims made on the labels of 5,296 consumer products and found that “more
than 95% of consumer products claiming to be green were found to commit at
least one of the ‘Sins of Greenwashing.’”19 In total, there are “seven sins”20
that firms engage in when marketing the CSR components of their products:
the Sin of the Hidden Trade-off, the Sin of No Proof, the Sin of Vagueness, the
Sin of Irrelevance, the Sin of Lesser of Two Evils, the Sin of Fibbing, and the
Sin
of Worshipping False Labels. Taken together, they indicate “both that the
individual consumer has been misled and that the potential environmental
benefit of his or her purchase has been squandered.” 21 The accusation is that
firms say the correct things but do not necessarily alter the way they do
business. As Terrachoice’s report indicates, there are many examples to choose
from, ranging from toilet paper22 to hybrid cars23 to the Olympics:24
McDonald’s may support sustainable fisheries, but its core business is still
selling Big Macs. Big oil companies can talk all they want about reducing
greenhouse emissions, but they are still drilling for hydrocarbons. 25
Moreover, as different groups seek to establish their CSR ranking,
certification, or policy as the standard, CSR comes to mean different things to
different people. And because it takes time for information and practices to
emerge as the standard, the potential for confusion grows. Consumers, in
particular, stand to lose as different self-proclaimed experts bombard them
with more information, leading to the growth of green noise, “static caused by
urgent, sometimes vexing or even contradictory information [about the
environment] played at too high a volume for too long”: 26
An environmentally conscientious consumer is left to wonder: Are lowenergy
compact fluorescent bulbs better than standard incandescents, even
if they contain traces of mercury? Which salad is more earth-friendly, the
one made with organic mixed greens trucked from thousands of miles
away, or the one with lettuce raised on nearby industrial farms? Should
they support nuclear power as a clean alternative to coal?
The effect of this information overload on consumer behavior is to reduce
consumer confidence in companies and arouse suspicion about CSR claims.
While, to an extent, this confusion is unavoidable (CSR is complex), the result
of too much information is paralysis—ineffective, bad, or non decisions. Here,
CSR is a victim of its own success. Without its growing popularity and
acceptance, the issue of growing and contradictory information would neither
exist nor matter. Nevertheless, the goal for any firm serious about CSR should
be to have an honest and genuine conversation with its stakeholders about its
efforts—a conversation that Unilever is seeking through “five simple levers”:
Make it understood, Make it easy, Make it desirable, Make it rewarding, and
Make it a habit.27
A strategic CSR perspective demands “solutions where you can take your
customers with you. You can be one step ahead of them and take them with you.
But if you’re three steps ahead, you’ll lose them.” 28 Understanding the market
for CSR (i.e., when stakeholders are willing to pay a CSR premium while
punishing greenwash) ensures that executives are much better equipped to deal
with the complex environment in which business is conducted today. This
understanding is gained by applying a CSR filter to the firm’s strategic
planning and day-to-day operations.
The CSR Filter in Action
The model of strategy formulation presented in Figure 11.2 summarizes the
relationship between CSR and strategy. Corporate success assumes that
strategy matches internal competencies with the external environment, within
the constraints of mission and vision. The implementation of strategy, however,
rests upon corporate operations being successful. Finance, accounting, human
resources, and other functional areas must be executed effectively if the
strategy is to be successful at matching competencies to market opportunities.
To improve overall performance, therefore, leaders create strategic objectives
that aim to strengthen these corporate operations. To ensure sufficient financial
resources, for example, a strategic objective may be set for the accounting
department to accelerate the collection of accounts receivable. Or, marketing
might be tasked with the strategic objective of gaining 5% market share. These
strategic objectives, however, must be viewed as strategic imperatives that
enhance the firm’s CSR goals; otherwise, the tactics and strategies may cause
resistance among stakeholders. To achieve these strategic objectives that meet
the firm’s strategic imperatives, key players must undertake strategic initiatives
in the form of action-oriented projects. The head of accounting, for example,
might create a task force charged with a project that identifies and tracks
clients who are slow to pay their bills. A similar action-oriented task force
might also be created in marketing to evaluate the firm’s advertising as a first
step to gaining market share. However these actor-oriented projects perform,
they must do so by achieving strategic objectives in ways that are consistent
with the firm’s strategic imperatives; otherwise, larger threats to the firm’s
viability arise. As such, the firm’s strategic perspective is surrounded by a CSR
filter.
Companies understand the value of being perceived as good corporate citizens.
Until now, however, managers have largely confined this concern to public
relations departments because they were able to control the information that
shaped the public face of the corporation. Figures 2.1, 2.2, and 2.3 in Chapter 2
illustrate why this situation is changing as power swings away from companies
and toward their various constituent groups. As globalization progresses,
communication technologies will continue to democratize and fuel the
exchange of information in all free societies. The CSR filter enables firms to
capture these trends within their strategic planning in a way that better reflects
stakeholder priorities and, as a result, increases the likelihood of success in the
marketplace.
Importantly, however, firms must reflect stakeholder concerns via genuine
engagement. Ideally, progressive companies seek to stay ahead of these
evolving values and meet new demands as they arise. In order for this to
happen, business leaders must be persuaded that CSR offers strategic value to
the firm. Strategic CSR, powered by stakeholder theory, delivers these results.
It is a means of allowing firms to analyze the total business environment and
formulate the appropriate strategic response. It can protect the firm and its
assets, while also offering a point of competitive differentiation—it is the route
to success in business today.
Figure 11.2 Strategy Formulation Using the CSR Filter