W13420 ABERCROMBIE & #FITCHTHEHOMELESS Karen Robson, Colin Campbell and Justin Cohen wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright © 2013, Richard Ivey School of Business Foundation Version: 2013-10-03 “In every school there are the cool and popular kids, and then there are the not-so-cool kids; candidly, we go after the cool kids. We go after the attractive all-American kid with a great attitude and a lot of friends. A lot of people don’t belong [in our clothes], and they can’t belong. Are we exclusionary? Absolutely.”1 Abercrombie & Fitch CEO Mike Jeffries, 2006 In May 2013, nearly three weeks had passed since a quote made by Abercrombie & Fitch CEO Mike Jeffries in 2006 — that some people simply didn’t belong in his company’s clothes — had resurfaced, and the backlash against the company showed no signs of waning. Increased social media usage and the proliferation of user-generated content had amplified the situation, and the #FitchTheHomeless campaign had gone viral. Celebrities who normally represented brands took on a campaign of dis-endorsement of the Abercrombie & Fitch label. In the face of this crisis, a team of Abercrombie & Fitch executives — excluding Jeffries — was set to meet with the president and CEO of the National Eating Disorder Association and members of America the Beautiful Teen Empowerment Series to discuss the situation. Moving forward, Abercrombie & Fitch had some decisions to make about how to appease angry consumers and restore its brand image.2 BACKGROUND Abercrombie & Fitch David T. Abercrombie and Ezra H. Fitch created Abercrombie & Fitch in New York City in 1892 to serve the needs of wealthy outdoor sportsmen and hunters.3 The company existed for nearly 80 years before 1 www.salon.com/2006/01/24/jeffries/, accessed August 23, 2013. www.washingtonpost.com/blogs/on-leadership/wp/2013/05/22/abercrombie-fitchs-big-bad-brand-mistake/, accessed August 23, 2013. 3 www.nytimes.com/2004/07/13/business/abercrombie-fitch-may-be-cool-but-cool-only-goes-so-far.html?Pagewanted =all&src=pm, accessed August 23, 2013. 2 This document is authorized for use only in Laureate Education, Inc.'s WAL DDBA 8161 Upgrade Business Strategy and Innovation for Competitive Advantage-1 at Laureate Education Baltimore from Feb 2019 to Mar 2020. Page 2 9B13A032 going bankrupt in the late 1970s.4 The brand was then acquired by a Texas-based sporting goods company and reborn as a mainly mail-order specialty retailer. In 1988, the Ohio-based clothing company, The Limited, purchased the brand for $47 million.5 By 1992, Abercrombie & Fitch had evolved from supplying safari clothes and supplies to the U.S. elite at the end of the nineteenth century to pleasing twenty-first-century teens with a particular “All-American” style of clothing.6 Jeffries, hired to lead the business in 1992, could take credit for this transformation — the development and success of the Abercrombie & Fitch label was the result of his vision for the company. When he assumed the role of CEO, Abercrombie & Fitch operated only 36 stores with annual revenue of roughly $50 million; by 2013, under his leadership, the company had grown to operate more than 1,000 stores with annual revenue exceeding $4.5 billion.7 Jeffries had overseen the launch of flagship stores in high value markets in Europe and Asia; he also developed complementary brands to reach other youth segments. The Abercrombie & Fitch brand had an undeniable global reach. REPEATED LAWSUITS TELL A DIFFERENT STORY Controversy was not uncommon at Abercrombie & Fitch. Typically, controversies fell into two categories: lawsuits regarding improper hiring and dismissal practices and lawsuits from consumer groups who believed that Abercrombie & Fitch had offensive product lines. Numerous former employees had made accusations of racial and religious prejudice. Abercrombie & Fitch responded to the accusations by claiming to have hired an above industry average number of minorities and denied having improper hiring or management practices. Yet, accusations ranged from claims of wrongful dismissal for wearing a head scarf8 to job applicants who claimed they were told that they could not have a position due to quotas of their particular ethnicity already being filled.9 In 2004, Abercrombie & Fitch paid $40 million to settle a class action lawsuit in which minority employees claimed that they were forced to work in the storeroom rather than on the shop floor so that they would not be seen by customers. Although Jeffries denied wrongdoing, some alleged that these issues were the result of systemic dysfunction linked to strict style guides that specified the classic “All-American” look that Jeffries prescribed. A lawsuit filed by a former company pilot highlighted Jeffries’s bizarre attention for detail. Cabin staff on the company’s jet were required to adhere to a strict uniform and style guide and were instructed exactly how reading materials should be prepared, what snacks were to be served and even how beds were to be made and carpets vacuumed. In addition, there were specific instructions as to where Jeffries’s beloved dogs were to sit.10 Jeffries’s vigilance and precise requests carried over to his vision for his brand ambassadors, the people who wore his clothes, and his employees, whom he viewed as in-store models. The numerous controversies and lawsuits that Abercrombie & Fitch had faced had result in financial settlements and legal fees, but they had not resonated strongly with its target market. Indeed, these 4 www.fundinguniverse.com/company-histories/abercrombie-fitch-co-history/, accessed August 23, 2013. www.nytimes.com/2004/07/13/business/abercrombie-fitch-may-be-cool-but-cool-only-goes-so-far.html?pagewanted =all&src=pm, accessed August 23, 2013. 6 Ibid. 7 www.businessinsider.com/abercrombie-ceo-at-a-crossroads-2013-8#ixzz2bia9UFuF, accessed August 23, 2013. 8 http://jezebel.com/5479980/american-beauty-a-brief-history-of-abercrombies-hiring-practices, accessed August 23, 2013. 9 www.cbsnews.com/8301-18560_162-657604.html, accessed August 23, 2013. 10 www.nytimes.com/2012/10/20/business/suit-exposes-strict-manual-for-abercrombie-flight-crew.html?_r=0, accessed August 23, 2013. 5 This document is authorized for use only in Laureate Education, Inc.'s WAL DDBA 8161 Upgrade Business Strategy and Innovation for Competitive Advantage-1 at Laureate Education Baltimore from Feb 2019 to Mar 2020. Page 3 9B13A032 controversies had little impact on brand equity, and many branding pundits had been quick to compliment Jeffries for his focus on and vision of his brand’s personality.11 SOCIAL MEDIA: NOT A “GOOD LOOK” FOR ABERCROMBIE & FITCH On May 3, 2013, Business Insider posted an article mentioning that while Abercrombie & Fitch manufactured XL and XXL sizes for men, the company refused to manufacture clothes for plus size women. The article made reference to a 2006 interview with Jeffries in which the CEO covered a number of controversial topics about the company’s perceived brand direction, image and strategy.12 In this 2006 Salon.com interview (a quote from which prefaces this case), Jeffries stated that the company featured certain types of people “because good-looking people attract other good-looking people, and we want to market to cool, good-looking people. We don’t market to anyone other than that.” The response from consumers and the general public was swift. By May 9, his remarks had sparked outrage across the Internet. Social news and entertainment website Reddit posted multiple consumer responses to these resurfaced quotes.13 The commentary on Reddit was aggressive and insulting towards Jeffries, with numerous postings of photos mocking his appearance and ironically suggesting that he was not attractive enough to wear the brand himself. For instance, an unflattering picture depicting the CEO wearing an Abercrombie & Fitch garment was overlaid with the phrase: “If the CEO of Abercrombie and Fitch only wants attractive people wearing his brand . . . then he’s going to have to go ahead and take off that sweater.” Another less kind version stated: “Wants only attractive people to shop in his stores. Looks hideous.” Similar photo creations poked fun at his looks by comparing him to Old Bif Tannen, a movie character who did not age well, and Rocky Dennis, a boy disfigured due to a rare genetic bone disorder.14 Abercrombie & Fitch did not respond. Following the Reddit posts, an open letter entitled “Sizing Up Abercrombie — A Letter to Mike Jeffries” from Andrea Neuser, a mother of three, was published on The Huffington Post website. In her letter, Neuser wrote: Your customer is an “attractive, all-American kid with a great attitude and lots of friends.” I am a mom of three daughters, ages 17, 13, and 10. They are all thin, attractive, all-American kids with great attitudes and lots of friends. They shop at Abercrombie. I believe they are your target audience . . . . Please find the enclosed clothing, purchased at our local Abercrombie/Abercrombie and Fitch stores. My thin, popular, cool kids will not need them anymore.15 On the same day, Change.org released a petition entitled “Abercrombie & Fitch CEO Mike Jeffries: Stop telling teens they aren’t beautiful; make clothes for teens of all sizes!”16 Major news organizations began to take notice.17 11 www.stealingshare.com/blog/index.php/the-temporary-slide-of-abercrombie-fitch/, accessed August 23, 2013. www.businessinsider.com/abercrombie-wants-thin-customers-2013-5, accessed August 23, 2013. 13 http://knowyourmeme.com/memes/events/abercrombie-anti-plus-size-controversy, accessed August 23, 2013. 14 www.uproxx.com/webculture/2013/05/abercrombie-and-fitch-ceo-mike-jeffries-vs-the-internet/, accessed August 23, 2013. 15 www.huffingtonpost.com/andrea-neusner/abercrombie-sizes-mike-jeffries_b_3247213.html, accessed August 23, 2013. 16 www.change.org/petitions/abercrombie-fitch-ceo-mike-jeffries-stop-telling-teens-they-aren-t-beautiful-make-clothes-forteens-of-all-sizes, accessed August 23, 2013. 17 http://abcnews.go.com/blogs/entertainment/2013/05/small-sizes-an-overweight-distraction-for-abercrombie-fitch/, accessed August 23, 2013. 12 This document is authorized for use only in Laureate Education, Inc.'s WAL DDBA 8161 Upgrade Business Strategy and Innovation for Competitive Advantage-1 at Laureate Education Baltimore from Feb 2019 to Mar 2020. Page 4 9B13A032 By May 13, 2013, there was still no response from Abercrombie & Fitch, and the momentum against the brand was still gaining. Greg Karber, James DeLorean and Daniel Lisi released a video entitled #FitchTheHomeless on YouTube.18 Karber conceived of the video as a means to protest Abercrombie & Fitch’s refusal to make plus size women’s clothing, determination to market to attractive people and alleged practice of burning damaged clothing rather than donating it to shelters. The video featured Karber searching for Abercrombie & Fitch clothes at a thrift shop, ridiculing the brand and its customer base, and then trying, in some cases with difficulty, to give Abercrombie & Fitch clothes away to the homeless. The message and purpose of the video were clear: Abercrombie & Fitch needed a brand image readjustment. The video was an immediate hit, accumulating 4.3 million views in its first three days.19 In addition, mainstream media picked up the #FitchTheHomeless campaign; a morning show, “The Talk,” featured a panel of women reflecting ethnic, racial, physical and age diversity, who debated the Abercrombie & Fitch controversy. Prominent African American comedian and actress Aisha Tyler pointed out the prejudice that exists in the United States against weight: Weightism is the last bastion of discrimination in America. . . It is the last group of people that it is OK to discriminate against. . . Imagine if he said we don’t want gay people to wear our clothes or we don’t want black people to wear our clothes. We made our jeans so they don’t fit big booties so black girls won’t wear them.20 The next day, actress Kirstie Alley, known for her engagement with the media and entertainment industry about her weight struggles, commented on “Entertainment Tonight”: This dude from Abercrombie & Fitch — he’s the CEO — what a [expletive]! . . . He says . . . Abercrombie clothes are for people that are cool and who look a certain way and are beautiful and who are thin and blah, blah, blah. He goes on and on and on. That would make me never buy anything from Abercrombie even if I was cool and thin. I got two kids in that age bracket that will never walk in those doors because of his view of people.21 THE ABERCROMBIE & FITCH RESPONSE The brand finally addressed the controversy on May 15. In a Facebook post, Jeffries stated: I want to address some of my comments that have been circulating from a 2006 interview. While I believe this seven-year-old resurrected quote has been taken out of context, I sincerely regret that my choice of words was interpreted in a manner that has caused offense. A&F is an aspirational brand that, like most specialty apparel brands, targets its marketing at a particular segment of customers. However, we care about the broader communities in which we operate and are strongly committed to diversity and inclusion. We hire good people who share these values. We are completely opposed to any discrimination, bullying, derogatory characterizations or other anti-social behavior based on race, gender, body type or other individual characteristics.22 18 www.youtube.com/watch?v=O95DBxnXiSo, accessed August 23, 2013. http://tech.fortune.cnn.com/2013/05/16/harsh-anti-abercrombie-video-goes-viral/, accessed August 23, 2013. 20 www.youtube.com/watch?v=YmWmhzTQLLQ, accessed August 23, 2013. 21 www.etonline.com/news/134051_Kirstie_Alley_Blasts_Abercrombie_and_Fitch_CEO_Mike_Jeffries/index.html, accessed August 23, 2013; www.youtube.com/watch?v=ZkMLkOk2j3I, accessed August 23, 2013. 22 www.facebook.com/abercrombie/posts/10151345201895378, accessed August 23, 2013. 19 This document is authorized for use only in Laureate Education, Inc.'s WAL DDBA 8161 Upgrade Business Strategy and Innovation for Competitive Advantage-1 at Laureate Education Baltimore from Feb 2019 to Mar 2020. Page 5 9B13A032 The response from Jeffries did little to assuage consumers or the media. Two days later, comedians Ellen DeGeneres and Jimmy Kimmel both addressed the controversy on their shows. DeGeneres’s approach involved absorbing the Abercrombie & Fitch controversy into the larger issue of female body image. She reached out to her global audience by saying: “There is a size zero, which I don’t understand. Zero is nothing. Now they have a double zero. There’s a double zero! What are we aspiring to? ‘Honey, do these jeans make my butt look invisible?’ — Beauty isn’t between a size zero and a size eight. It is not a number at all. It is not physical.”23 Kimmel released a spoof video with a strong, yet comedic, message. Mimicking the #FitchTheHomeless video and starring actor Jim O’Heir, the video depicts the plus-sized actor purchasing multiple Abercrombie & Fitch shirts and stapling them together to make a shirt that would fit him.24 Angered by Abercrombie & Fitch’s refusal to cater to plus size women, on May 19 the self-described “fat” blogger Jes “The Militant Baker” recreated print ads for the brand that featured herself and a hired male model with the tagline “Attractive & Fat.” Both were topless in the spoof ads, which also mimicked the black-and-white style common to Abercrombie & Fitch.25 In an open letter to Jeffries, she explained her motivation in making the video: I’m sure you didn’t intend for this to be the outcome, but in many ways you’re kind of brilliant. Not only are you a marketing genius (brand exclusivity really is a profitable move), but you also accidentally created an opportunity to challenge our current social construct. My hope is that the combination of these contrasting bodies will someday be as ubiquitous as the socially accepted ideal.26 Her response was emotive enough that she was later invited to speak about this issue on the “Today” show on NBC and was interviewed by CNN. She also challenged Jeffries to pose shirtless with a “fat chick.” ABERCROMBIE & FITCH: THE NEXT SEASON Despite the humour injected by entertainers during their discussion of this controversy, this episode was no laughing matter for Abercrombie & Fitch. Sales at their stores plummeted due to the negative publicity and backlash.27 The Forbes BrandIndex impression scores showed that Abercrombie & Fitch closed at an annual low, almost 40 points below its previous low that year (see Exhibit 1).28 Almost three weeks after #FitchTheHomeless was released on YouTube, a team of executives and Abercrombie & Fitch critics gathered at company headquarters to discuss the crisis. Jeffries was noticeably absent from these meetings. At their conclusion, Abercrombie & Fitch released the following statement: We look forward to continuing this dialogue and taking concrete steps to demonstrate our commitment to anti-bullying in addition to our ongoing support of diversity and inclusion. We 23 www.youtube.com/watch?feature=player_embedded&v=5VRJRy9rnfE, accessed August 23, 2013. https://www.youtube.com/watch?v=DZxw1vydvwI, accessed August 23, 2013. 25 www.themilitantbaker.com/2013/05/to-mike-jeffries-co-abercrombie-fitch.html, accessed August 23, 2013. 26 Ibid. 27 www.huffingtonpost.com/2013/05/24/abercrombie-sales-ceo-controversy_n_3332601.html, accessed August 23, 2013. 28 www.forbes.com/sites/brandindex/2013/06/06/abercrombie-impression-with-young-adults-continues-to-fall-following-coolkid-comments/, accessed August 23, 2013. 24 This document is authorized for use only in Laureate Education, Inc.'s WAL DDBA 8161 Upgrade Business Strategy and Innovation for Competitive Advantage-1 at Laureate Education Baltimore from Feb 2019 to Mar 2020. Page 6 9B13A032 want to reiterate that we sincerely regret and apologize for any offense caused by comments we have made in the past which are contrary to these values.29 Moving forward, Abercrombie & Fitch had a lot of decisions to make. What was the best way to demonstrate commitment to anti-bullying, to support inclusion and to hold true to their latest apology? How could the company restore its brand image without diluting its “All-American” heritage? Had Abercrombie & Fitch become a poster child for hatred towards unattainable beauty? Should they sell larger sized clothing? What would the “next season” bring? Karen Robson is a PhD candidate at Segal Graduate School of Business, Simon Fraser University. Colin Campbell is an assistant professor in the Department of Marketing and Entrepreneurship at Kent State University. Justin Cohen is a research fellow at Ehrenberg-Bass Institute for Marketing Science, School of Marketing, University of South Australia. 29 www.huffingtonpost.com/2013/05/23/abercrombie-and-fitch-apology_n_3323668.html, accessed August 23, 2013. This document is authorized for use only in Laureate Education, Inc.'s WAL DDBA 8161 Upgrade Business Strategy and Innovation for Competitive Advantage-1 at Laureate Education Baltimore from Feb 2019 to Mar 2020. Page 7 9B13A032 EXHIBIT 1: FINANCIAL INFORMATION FOR ABERCROMBIE & FITCH (‘000) 2012 2011 2010 2009 2008 Net Sales $4,510,805 $4,158,058 $3,468,777 $2,928,626 $3,484,058 Gross Profit $2,816,709 $2,550,224 $2,217,429 $1,883,598 $2,331,095 Operating Income $374,233 $221,384 $237,180 $117,912 $498,262 Net Income from Continuing Operations Income (Loss) from Discontinued Operations, Net of Tax $237,011 $143,138 $155,709 $78,953 $308,169 - $796 - ($78,699) ($35,914) Net Income $237,011 $143,934 $155,709 $254 $272,255 $0.70 $0.70 $0.70 $0.70 $0.70 Basic $2.89 $1.65 $1.77 $0.90 $3.55 Diluted Net Income (Loss) Per Share from Discontinued Operations $2.85 $1.60 $1.73 $0.89 $3.45 Dividends Declared Per Share Net Income Per Share from Continuing Operations Basic - $0.01 - ($0.90) ($0.41) Diluted - $0.01 - ($0.89) ($0.40) $2.89 $1.66 $1.77 $0.00 $3.14 Net Income Per Share Basic Diluted $2.85 $1.61 $1.73 $0.00 $3.05 Basic Weighted-Average Shares Outstanding $81,940 $86,848 $88,061 $87,874 $86,816 Diluted Weighted-Average Shares Outstanding $83,175 $89,537 $89,851 $88,609 $89,291 $2,987,401 $3,117,032 $2,994,022 $2,821,866 $2,848,181 $617,023 $858,248 $927,024 $776,311 $622,213 $1.89 $2.23 $2.68 $2.73 $2.38 Net Cash Provided by Operating Activities $684,171 $365,219 $391,789 $395,487 $491,031 Capital Expenditures $339,862 $318,598 $160,935 $175,472 $367,602 Free Cash Flow $344,309 $46,621 $230,854 $220,015 $123,429 - - $43,805 $50,927 $100,000 $63,942 $57,851 $24,761 $20,286 $5,881 $1,818,268 $1,931,335 $1,943,391 $182,797 $1,845,578 Return on Average Stockholders’ Equity 13% 7% 8% 0% 16% Comparable Sales -1% 5% 7% -23% -13% $485 $463 $390 $339 $432 Total Number of Stores Open 1,051 1,045 1,069 1,096 1,097 Gross Square Feet 7,958 7,778 7,756 7,848 7,760 95,800 91,000 83,000 83,000 96,200 Other Financial Information Total Assets (including discontinued operations) Working Capital Current Ratio Borrowings Leasehold Financing Obligations Stockholders’ Equity (including discontinued operations) Net Store Sales Per Average Gross Square Foot Stores at End of Year and Average Associates Average Number of Associates Source: Abercrombie & Fitch Annual Report 2012. This document is authorized for use only in Laureate Education, Inc.'s WAL DDBA 8161 Upgrade Business Strategy and Innovation for Competitive Advantage-1 at Laureate Education Baltimore from Feb 2019 to Mar 2020. Business Strategy and Innovation: Effecting Positive Social Change Business Strategy and Innovation: Effecting Positive Social Change Program Transcript [MUSIC PLAYING] ERIC BARTON: I incorporated a positive social change strategy into BOBA and its mission by taking the time to research what challenges small businesses. Also, by understanding, as a business owner myself, what it takes to run a business successfully. As I left the Marine Corps and attended seminary, eventually went to the Middle East to spend years developing my own business, and moved our businesses into the United States, I understood from the beginning-- as a Marine, later as a seminarian, and as a business owner-- that if we're not providing a positive social change in our own communities, then what's it worth? We can't make a change for everyone. But if we can make a change for that one business owner that then can turn around and hire a new employee to make a positive impact in our community and their community-- ultimately, our world-that's what BOBA's about. And that's what being part of a community and part of a loving neighborhood really is. As my executive team at BOBA researched the impact small businesses have to our nation and to their communities, we found that 28 million small businesses in the United States employ more than 99.7% of all employees. That's a huge financial impact in every community in the United States. And in fact, I believe it's the same throughout the world. Because of this, BOBA is making a positive social change by bringing financial balance back to the economy. Small business owners are the people in each and every community that are working, that are contributing, and that are making a difference in local organizations. That are putting food on the table, that are working with churches and local nonprofits to bring back, again, that financial balance. [MUSIC PLAYING] As a small business owner, creating positive social change does have costs, and there are risks associated with it. For example, if we allow our employees, as a small business owner, to volunteer in the community, that pays dividends. We don't see the financial rewards possibly on the next payroll, or the next payroll that goes through, but what we do see is that our brand starts to be recognized as one that adds value, and that is ingrained in the community. Unlike large businesses that have vast resources, that have marking departments and branding departments, the typical small business doesn't have © 2016 Laureate Education, Inc. 1 Business Strategy and Innovation: Effecting Positive Social Change that. But what we do have is our employees. We do have a team, we do have a brand that's so important. And we don't have the time, nor can we have afford the risk of not being a part of our community. Therefore, things like volunteering, being active at your chamber of commerce, wanting to make a difference in your local nonprofits, become so critical. We don't see dividends right away, possibly, but long-term, you're going to, as a small business owner, see the rewards. Locally, we own Lex Lin Gypsy Ranch. We have a program called the Gypsy Gift Program. And through that, we donate horses each and every year to therapy centers throughout the country. These centers are impacting tens of thousands of children and people with disabilities. Other programs are Angels over America. That foundation has created endowments to support families and children of Marines to support other community members and employees to put their kids through college. We believe that education is an economic driver. Another organization that's a sister company to BOBA is Peak Technical Institute. We are giving financial scholarships. We're working with manufacturers and other businesses in our local community and beyond to bring education, particularly as it relates to blue-collar workforces and technical trades, that are so needed, as we bring manufacturing back into the United States. Other organizations that we work with include the United Way. I am on the Alexis de Tocqueville Society. We also work with Smoky Mountain Service Dogs. Smokey Mountain Service Dogs is a great organization that provides service and mobility canines to veterans and other wounded warriors throughout the east Tennessee Community. Part of the risk that we face everyday at Business Owners Benefits Association, which includes the strategic planning over years, which includes our current operations today, is that it's very challenging to go to small businesses to help them understand why it's important that we come together in our association. And so financially, being able to put money into the business association, as well as being able to market to discuss with community leaders, with other business owners, the importance of what we're doing, takes a lot of time. We have been blessed to have resources to put into the business, but at the same time, we understand that you can only do that for so long. And there are only so many available resources. So part of our risk is convincing our neighbors and our other business owners in the community and in the nation that this is worthwhile, this is important, and indeed, this will make a positive social change. [MUSIC PLAYING] © 2016 Laureate Education, Inc. 2 Business Strategy and Innovation: Effecting Positive Social Change BOBA believes that social change is so critical. It's not just about profit in terms of dollars, but it's profit in terms of good, sound, healthy communities. Giving back is something that makes a difference in my life and makes a difference in my team's life. And we talk about passion, and advising, and walking alongside business owners. It's not just about the dollar, but it's about making a difference, making an impact that goes well beyond the years we're living. For me and for the businesses that I'm a part of, for Business Owners Benefits Association, we always incorporate social change into our mission. If it's worth doing, if it's worth putting your time and effort into, and if you're passionate about it, then it's going to make a difference in your community. So I believe that making a positive social change is always important and always worthwhile in each and every business that I am a part of. [MUSIC PLAYING] Business Strategy and Innovation: Effecting Positive Social Change Additional Content Attribution FOOTAGE: BenEricPromotion Photo used by permission of Dr. Eric Barton. Eric_in_Dubai Photo used by permission of Dr. Eric Barton. Retrieved from https://www.flickr.com/photos/ericbarton/4029137825/sizes/l/ EricPinningOnPromotion Photo used by permission of Dr. Eric Barton. 100_0538 Photo used by permission of Dr. Eric Barton. IMG_1603 Photo used by permission of Dr. Eric Barton. Retrieved from www.govanquish.com BOBA Logo_193 PMI_RGB_300.dpi Photo used by permission of Dr. Eric Barton. Retrieved from www.whyboba.com 100_0887 Photo used by permission of Dr. Eric Barton. Retrieved from https://www.flickr.com/photos/ericbarton/4029891860/ © 2016 Laureate Education, Inc. 3 Business Strategy and Innovation: Effecting Positive Social Change Eric at Vanquish office (2) Photo used by permission of Dr. Eric Barton. Retrieved from www.govanquish.com Eric at Vanquish office Photo used by permission of Dr. Eric Barton. Retrieved from www.govanquish.com DSC_0244 Photo used by permission of Dr. Eric Barton. Retrieved from www.whyboba.com © 2016 Laureate Education, Inc. 4 Copyright 2015 by Kelley School of Business, Indiana University. For reprints, call HBS Publishing at (800)545-7685. BH 731 Business Horizons (2016) 59, 213—221 Available online at www.sciencedirect.com ScienceDirect www.elsevier.com/locate/bushor Asking ‘‘What Else?’’ to identify unintended negative consequences Kathleen M. Wilburn *, H. Ralph Wilburn St. Edward’s University, 3001 S. Congress Avenue, Austin, TX 78704, U.S.A. KEYWORDS Unintended negative consequences; Decision making; Scenario thinking; Stakeholder theory; Corporate social responsibility Abstract With the advent of big data, the Internet of Things, cognitive computing, and social media, it is becoming more difficult to argue that one could not have known or at least have considered more alternatives, particularly negative unintended consequences that happen in addition to the intended positive ones. Organizations too often make a decision that will produce a positive consequence and then focus on how to implement it, rarely stepping back to ask ‘‘What else could happen?’’ Any decision changes the system in which it exists. The longer the time required to implement a decision, the more systemic changes can alter the effects of the decision on the system. Decisions to implement Corporate Social Responsibility and sustainability initiatives usually involve many different stakeholders and may involve systems in which organizations have little expertise or experience. A major negative unintended consequence, even for a CSR initiative, can damage the stakeholders’ trust in the organization. This article proposes a 5-step process to answer the question ‘‘What else could happen?’’ in order to identify possible unintended negative consequences, thereby helping organizations support their commitment to people, planet, and profit. # 2015 Kelley School of Business, Indiana University. Published by Elsevier Inc. All rights reserved. 1. Introduction The idea that decisions are only bad in hindsight highlights the fact that decisions, both personal and business, are made based on the available information the decision maker chooses to consider. A decision’s worth must be based on what was known when it was made versus what is known now. A bad decision may be the result of important information * Corresponding author E-mail addresses: kathleew@stedwards.edu (K.M. Wilburn), ralphw@stedwards.edu (H.R. Wilburn) not being available or the decision maker thinking it was not relevant. However, with the advent of big data, cognitive computing, and social media, it is more difficult to argue that one could not have known or at least have considered more alternatives. Additionally, as businesses adopt corporate social responsibility (CSR) and sustainability initiatives in the global community, they make decisions that have not been part of their strategic thinking and thus require more and different information. In this article, we consider ways to reduce the amount of unintended negative consequences–—results that happen in addition to the intended positive ones. 0007-6813/$ — see front matter # 2015 Kelley School of Business, Indiana University. Published by Elsevier Inc. All rights reserved. http://dx.doi.org/10.1016/j.bushor.2015.11.006 This document is authorized for use only in Laureate Education, Inc.'s WAL DDBA 8161 Upgrade Business Strategy and Innovation for Competitive Advantage-1 at Laureate Education Baltimore from Feb 2019 to Mar 2020. Copyright 2015 by Kelley School of Business, Indiana University. For reprints, call HBS Publishing at (800)545-7685. 214 Asking ‘‘What else could happen?’’ after making a strategic decision can allow an organization a way to pause before jumping straight to implementing the decision. This article proposes a 5-step What Else? process to identify possible unintended consequences of strategic decisions. This begins with ensuring the intended positive consequence of a decision is aligned with the organization’s purpose and strategic vision, which is particularly important when considering decisions about starting social or environmental initiatives. Next, the organization must identify the major stakeholders involved with implementing the decision, and then describe the system in which the decision exists and how that decision might change the system in both the short and long term. This is especially necessary in the global business space. In the fourth step, decision makers should use scenarios to propose possible consequences other than the chosen positive one. Scenarios then identify the data to track to verify the increasing or decreasing probability of the identified possible unintended consequences occurring. An increasing probability of negative consequences could lead to halting or altering the implementation of the decision or to developing a mitigation strategy to minimize possible harm to stakeholders. If stakeholders have identified possible negative unintended consequences, an organization can increase stakeholder trust by considering them; in fact, it may find that stakeholders can accept the possibility of negative unintended consequences if the organization is committed to tracking the increasing or decreasing probability of their occurrence. Finally, an organization should implement a system for tracking the trends that indicate an increased or decreased probability of identified negative consequences; this allows space to develop strategies to prevent them or mitigate their effects. Using such a model demonstrates a commitment to people, planet, and profit, which can counter criticism on social media. This article will provide examples of negative unintended consequences that were the result of decisions made to achieve positive results, and how asking What Else? could have prevented them, or at least mitigated their severity. 2. Unintended consequences Any action changes the system in which it exists, and the longer the time required to implement an action, the more those changes in the system can alter the effects of that action on the system. Merton (1936) defined unintended consequences as outcomes that are not the ones intended by a K.M. Wilburn, H.R. Wilburn purposeful action and noted that the longer it takes to implement an action, the greater the possibility that unintended consequences happen by chance. Both Merton (1936) and Dörner (1996) said that the key reasons people do not think about unintended consequences stem from acting out of habit and assuming that the future will look like the present and the past. Merton (1936) also recognized that there can be emotional attachment to certain actions and decisions, which may prevent the decision maker from conducting due diligence in gathering information. Merton (1936) suggested that consequences cannot be assigned to the realm of ignorance if knowledge could have been obtained and was not. Thus, ‘‘How was I supposed to know?’’ is only valid if there is proof that the consequence was in no way knowable even as the implementation of the decision unfolded. In the 21st century, this will become more difficult to prove as access to big data and the Internet of Things becomes commonplace. By utilizing sources of data like RFID tags and video cameras, ‘‘advanced analytics software programs find patterns in large sets of data and extract meaning from them’’ (Kelly & Hamm, 2013, p. 47), providing instant information. It will become increasingly easier to use artificial intelligence to ask ‘‘What else could happen?’’ This narrows the bounded rationality model of Simon (1982) that proposed limited and/or unreliable information about possible alternative consequences and a limited capacity of humans to evaluate and process available information are constraints on decision making. Decisions may still be made quickly and the reliability of information may still need to be verified, but information is no longer limited and humans have help in processing and evaluating information. An example of the verification issue happened with Google Flu Trends. In 2009, Google was successful in identifying the spread of the H1N1 flu virus early. ‘‘Google’s method does not involve distributing mouth swabs or contacting physicians’ offices. Instead, it is built on ‘big data’–—the ability of society to harness information in novel ways to produce useful insights or goods and services of significant value’’ (Mayer-Schönberger & Cukier, 2014, p. 2). However, in 2012, the algorithms did not take into account that news outlets had predicted a severe flu season and Web users asked questions for information when they did not have symptoms; thus, Google’s predictions were too high. Still, as the Internet of Things allows algorithms to make associations, it will be easier to have access to accurate information with which to think about the future. ‘‘It’s a step up from correlation toward knowledge. Prime examples here are computer systems that can This document is authorized for use only in Laureate Education, Inc.'s WAL DDBA 8161 Upgrade Business Strategy and Innovation for Competitive Advantage-1 at Laureate Education Baltimore from Feb 2019 to Mar 2020. Copyright 2015 by Kelley School of Business, Indiana University. For reprints, call HBS Publishing at (800)545-7685. Asking ‘‘What Else?’’ to identify unintended negative consequences place words in context. IBM’s Watson is such a technology’’ (Lohr, 2015, p. 109). To better prepare for the inevitable unintended consequences, the 5-step What Else? process can focus users on what short- and long-term information they need for considering the possible outcomes of decisions. 3. The 5-step What Else? process 3.1. Step #1: Ensure the goal aligns with the organization’s purpose The alignment of decisions with the organization’s mission and strategic plan is essential in order to ensure that the resources and commitment necessary to prevent unintended negative consequences or enact a plan to mitigate the effects will be in place. A description of this alignment must be created. A publication by McKinsey&Company (Bonini & Bové, 2014) points to surveys that have shown CEOs moving away from perceiving CSR as a fad and toward a strategic requirement to consider both profit and planet. The report recommends that because sustainability has an increased importance in business strategy, companies should: Align internally on what they stand for and what actions they want to take on these issues, whether it’s economic development or changing business practices. Whatever approach companies take, they should develop a strategy with no more than five clear, well-defined priorities–—one of the key factors for successful sustainability programs. The Governance and Accountability Institute (2014), using the Global Reporting Index (GRI; ‘‘Global Reporting Initiative’s Survey,’’ 2011), reported that in 2011 the non-reporters of CSR were in the minority and ‘‘53% of the S&P 500 and 57% of the Fortune 500 companies are reporting on their Environmental, Social, and Governance (ESG) impacts.’’ The report also noted that asset managers had increased the assets of those who publish CSR and sustainability by 22%. Those reporting have moved from just those organizations created with a CSR mindset like Patagonia and early adopters like PepsiCo, Unilever, and Nestlé to organizations like Ford, Shell, Toyota, Caterpillar, and Walmart, as well as financial services, technology hardware, and energy companies. Since CSR and sustainability initiatives are voluntary integration of social and environmental concerns with business concerns of profit and return on investment–—and in the public sector, a return to stockholders–—it is easy for organizations to make decisions and adopt programs that 215 are outside their areas of expertise, so alignment with the mission may be absent. One strategy for increasing their expertise is to create long-term partnerships with key stakeholders as a means of focusing limited resources on areas where CSR or sustainability initiatives can have the greatest benefit to society and the greatest benefit to business based on organizations’ missions. However, ‘‘smart partnering is not for the faint of heart. It requires greater focus, work, and long-term commitment than do many standard CSR pet projects, philanthropic activities, and propaganda campaigns, but the rewards are potentially much greater for both sides’’ (Keys, Malnight, & van der Graaff, 2009). De George’s (1986, p. 264) ethical norms for multinational corporations (MNCs) operating in developing countries include the following: ‘‘Do no intentional direct harm; produce more good than bad for the host country.’’ However, intentional and direct have new meaning in the 21st century where it is possible to have computer programs develop probabilities of the effects of climate change, water scarcity, or population changes. Consequently, there may be few instances in which an organization can claim it had no access to data that presented those possibilities. For example, a company might decide to help train workers to work in a supplier’s factory in a developing country–—an action which aligns with its strategic goals of producing a quality product. However, communicating with a non-governmental organization (NGO) about the initiative might uncover political uncertainty in the country. Asking What Else? might produce the possibility of being forced to exit the country because of political upheaval. The political issue can be tracked and the decisions modified or changed if the probability of upheaval increases. This is what happened to Tata Motors in 2008: It was forced to leave a newly built factory in Singur, West Bengal, India, that was to produce the world’s cheapest car. It had made the decision to build there to provide people in a poor state with jobs in its factory and those of the suppliers that would move there. However, political differences between the state government and the local government created a hostile environment, and Tata decided it could not operate the factory safely and refused to have the state government provide soldiers for protection. 3.2. Step #2: Describe stakeholders and their concerns Mitroff and Linstone (1993, p. 141) said that stakeholders are ‘‘any individual, group, organization, institution that can affect as well as be affected by an individual’s, group’s, organization’s, or This document is authorized for use only in Laureate Education, Inc.'s WAL DDBA 8161 Upgrade Business Strategy and Innovation for Competitive Advantage-1 at Laureate Education Baltimore from Feb 2019 to Mar 2020. Copyright 2015 by Kelley School of Business, Indiana University. For reprints, call HBS Publishing at (800)545-7685. 216 institution’s policy or policies.’’ Stakeholders can be customers, suppliers, and partners as well as social, political, and government entities. Groups that operate in a national or international arena, such as NGOs, religious groups, social justice groups, and communities–—including their subgroups such as family units, interest groups, property owners, property users, businesses, and farmers–—can be stakeholders in an organization’s strategy. Organizations must identify the stakeholders who will be or could be affected by their decisions and identify their needs and concerns. This communication will often uncover conflicts, which must be addressed in the process of deciding if and how to implement the decision. These may form the basis for identifying possible unintended positive and negative consequences when What Else? is asked. For example, local governments many times are at odds with communities when they try to find sources of revenue to provide community resources. Nestlé recently responded to complaints from the stakeholders in Northern California on the McCloud River over a 50-year contract from the county for access to local water for use in its bottled water products by deciding to work with the community to ensure that the river would continue to support its fish populations (Asmus, 2009). A company focused only on profit may be able to simply shrug off a negative consequence of a decision or action as part of doing business. However, the current focus on CSR and the interest in social purpose by millennials, with their access to social media, means all organizations are held to a higher level of accountability. When Knight and Pretty (1995) studied the financial consequences of catastrophes such as Johnson & Johnson’s 1982 Tylenol recall and the Heineken’s 1993 glass bottle recall, they found that stakeholders’ perceptions affected organizations’ shareholder value. The study revealed that if the company had a good reputation of concern for customers before the catastrophe, it was able to recover its stock value. 3.2.1. Stakeholder theory However, not all stakeholders’ concerns are equal. Freeman’s (1994) stakeholder theory assumes that values are necessarily and explicitly a part of doing business. As further developed by Donaldson and Preston (1995), the theory states that stakeholders have ethical rights and their interests have intrinsic worth, whether or not the stakeholders add to the financial bottom line. According to this perspective, managerial relationships with stakeholders are based on normative, moral commitments rather than on a desire to use those stakeholders solely to maximize profits. The integrative social contracts K.M. Wilburn, H.R. Wilburn theory of Donaldson and Dunfee (1999) looks to relevant sociopolitical communities for determining norms by which to establish stakeholder requirements. Recognizing that there may be conflicting norms among stakeholder groups, ‘‘the norms of the community having the most significant interests in the decision should be the candidates for priority. Otherwise, where there are conflicting norms with no clear basis for prioritization, organizations have substantial discretion in choosing among competing norms’’ (Donaldson & Dunfee, 1999, p. 248). Different stakeholder groups may perceive the decisions of the organization differently. Some may perceive a decision as unacceptable, while others perceive it as an acceptable trade-off. The more information an organization can have about its stakeholders and their requirements and desires, the better it can find data sources to alert it to increasing probabilities of an unintended negative consequence. Royal Dutch Shell provides examples of both situations. The company assumed that it was not responsible for harm done by a government, and thus stood on the sidelines when the Nigerian government hanged nine environmental activists who had protested Royal Dutch Shell’s gas-development project on the grounds of environmental damage. A global activist boycott of Royal Dutch Shell products followed, and its stock price and profits plummeted. The company settled out of court without admitting guilt in 2009. Later that year, when it planned to develop an operation to extract natural gas off the Coast of Palawan Island in the Philippines, it developed a social license to operate (SLO) with the community. The SLO is not a legal right to operate a business granted by the government or other legal entity, but a contract granted by the local community. ‘‘Without this approval, a business may not be able to carry on its activities without incurring serious delays and costs’’ (The Ethical Funds Company, 2009). Shell presented its plans to the community and met with community representatives monthly to discuss progress and issues. When a leak occurred, Shell’s actions to clean it up were transparent. If an environmentalist group protested, it would have the community as an ally. In addition, when local people asked the government to halt operations due to a problem, the company was not stopped in its work as it had been in the past. ‘‘By working to obtain community consent at a project in the Philippines, Shell may have saved as much as $72 million in project delays, which amounted to a 1,200 percent return on its community consent’’ (Slack, 2008). 3.2.2. Types of stakeholders Stakeholders may be divided into two groups: vested and non-vested. Vested stakeholders are those who This document is authorized for use only in Laureate Education, Inc.'s WAL DDBA 8161 Upgrade Business Strategy and Innovation for Competitive Advantage-1 at Laureate Education Baltimore from Feb 2019 to Mar 2020. Copyright 2015 by Kelley School of Business, Indiana University. For reprints, call HBS Publishing at (800)545-7685. Asking ‘‘What Else?’’ to identify unintended negative consequences have a right to something tangible or an interest in the future of something that is a stake in the organization’s initiative or decision–—such as owning physical property or inhabiting property with a need for resources such as water, arable land, and clean air. They would have a voice and a vote in the decision once it is presented to them, especially if the organization is using an SLO. Nonvested stakeholder groups would have only a voice and could be overridden by the vested stakeholders and the organization. Non-vested stakeholders could be governments who want economic growth, suppliers who want customers, or NGOs campaigning for global protection of water, forests, or animals (Wilburn & Wilburn, 2012). Elm (2015) comments that an organization should use its own ‘‘‘Ethical Code of Business Conduct’ as a touchstone for identifying legitimate stakeholders’’ and ‘‘hold ‘environmental’ groups to the same standard as your other business relationships–—if they don’t operate within your ethical framework, move on.’’ For example, even though the government may grant a license to a mining company to open a mine, the company might be concerned about the unintended consequences of their actions in an area inhabited by a native tribe. It would see those tribal members as vested because they own physical property or inhabit property with a right to resources such as water, arable land, and clean air, now and in the future. The tribal members would have a voice and a vote in the discussion of the plans for drilling and transport. For example, they could vote against mining or transporting on sacred land, or they could limit it to certain periods during the year. They might require that the mining company use practices that would not pollute the air or water. Similarly, the mining company could agree to immediately notify the stakeholders of a spill into a river and to monitor the air quality during the drilling phase. The company could also train local inhabitants to work in the mines and support educational endeavors for children and adults. Thus, even if nonvested groups like environmental groups protested against the mining activity, the community could support the organization. This would help rebut any online media campaigns against the company by arguing that it is providing necessary raw materials and jobs, and it is doing so in a responsible manner. Ben and Jerry’s found itself in a stakeholder conflict in 2009 when People for the Ethical Treatment of Animals (PETA) asked it to use human breast milk in its ice cream in order to stop the unethical mistreatment of cows, based on the announcement that a restaurant in Switzerland was partially 217 replacing cow’s milk with human breast milk in its sauces. The founders recognized that PETA is a nonvested stakeholder in any food product in the United States, but did not dismiss it. Instead, it issued a statement focused on the needs of its vested stakeholders–—customers, stores, suppliers, regulators–—explaining that public harm could come from using unregulated breast milk in ice cream and a mother’s milk was best used for her baby. When Unilever acquired Ben & Jerry’s in 2010, it was aware that many of the ice cream company’s stakeholders supported Ben & Jerry’s CSR focus: using sustainable, Fair Trade certified and organic suppliers, including milk from local dairy farmers who did not use hormones; using environmentally friendly packaging; and giving a percent of its pretax revenues to charity. Unilever decided to allow Ben & Jerry’s to continue its CSR initiatives. The non-vested stakeholders’ concerns must be noted and tracked, in part because of their access to social media, because they may effect a decision indirectly. For example, in the spring of 2010, Greenpeace activists targeted Nestlé because Nestlé was buying 1.25% of its palm oil from a supplier who was contributing to the deforestation of rainforests and damaging orangutan habitats. Greenpeace said this was unacceptable, even though Nestlé had a target of buying 50% of its palm oil from sustainable sources by 2015. Protestors dressed in orangutan costumes took to the streets of five major cities in different countries. The protests were not reported by the mainstream press, but thousands of people shared photos of the protesters through Facebook and Twitter (Steel, 2010). The CEO then pledged to use 100% sustainable sources of palm oil by 2015, but Nestlé’s stock still dropped from $51 a share on March 31, 2010, to $44 on May 24, 2010. Because Nestlé had identified palm oil sourcing as a concern, it had made a decision to increase its source from sustainable sources. Nestlé also had a good reputation with its vested stakeholders, and it highlighted its CSR Report on its webpages citing its 33% reduced water withdrawal between 2000 and 2010–—even while its production volume increased by 63%–—and its commitment to producing products in developing countries where it obtained its raw materials. Its stock rose to $50 on July 15, 2010, and was $54 by October 4, 2010. Nestlé reported on its responsible sourcing website that by September 2013, 100% of its palm oil was Roundtable on Sustainable Palm Oil (RSPO) certified (Steel, 2010). Keeping track of an increasing global concern for deforestation might have helped Nestlé recognize it needed to end its contracts with noncertified suppliers earlier. This document is authorized for use only in Laureate Education, Inc.'s WAL DDBA 8161 Upgrade Business Strategy and Innovation for Competitive Advantage-1 at Laureate Education Baltimore from Feb 2019 to Mar 2020. Copyright 2015 by Kelley School of Business, Indiana University. For reprints, call HBS Publishing at (800)545-7685. 218 3.3. Step #3: Describe possible effects on the system Any action changes the system in which it exists. The longer the time required to implement a decision, the more those changes in the system can alter the effects of that decision on the system. Dörner (1996, p. 198) focused on the importance of considering systems: Whether we want it to or not, any step we take will affect many other things. We must learn to cope with side effects. We must understand that the effects of our decisions may turn up in places we never expected to see them surface. Any action changes the system in which it exists. The longer the time required for implementation of an action, the more those changes in the system can alter its effects on the system. One example of the system impact on an action is described by Cohen (2004). During the 1930s, the French used DDT in an isolated mountain village in the Aurès region of Algeria to fight a high incidence of malaria and typhoid fever. The intended positive consequence was achieved: Typhoid and malaria were eradicated. However, this triggered an unintended negative consequence. A demographic explosion resulted in the population doubling in one generation. To meet the need to feed the increased population, goat herds were enlarged and moved to areas used for crops. However, the livestock rapidly destroyed the soil, so the ability to continue to raise livestock decreased. Furthermore, since there was little new arable land for growing crops, agriculture decreased. Within 20 years, most of the people were in abject poverty. The stakeholders in this case gladly accepted the use of DDT in order to eradicate malaria and typhoid. Asking ‘‘What else will happen to the system?’’ when typhoid and malaria were eradicated might not have been expected 40 years ago, but it would definitely be expected today. Today, a computer program could provide possible population growth numbers within seconds, and a company helping to eradicate a disease could enlist not only vested stakeholders but also nonvested ones by being prepared to develop new farming techniques plus food and water sources so that negative unintended consequences do not happen. By asking What Else?, a mitigation program prevented unintended negative consequences for a medical initiative in Bangladesh in 2006. The government and NGOs built a modern operating room in a district hospital and funded the education of local doctors. The intended positive consequence was that local doctors could operate on district residents rather than requiring residents to travel to the city. K.M. Wilburn, H.R. Wilburn However, asking What Else? posited an answer that the local doctors might move to the cities for better pay and better education for their children. When the NGOs saw the first trained doctors leave, they had the doctors still in training develop flowcharts for typical illnesses and diseases, and the doctors trained local midwives to follow the flowcharts. Thus, the women could provide everyday health care to their neighbors, and doctors were brought back as needed to perform operations (‘‘Millennium Development Goals,’’ 2007). Additionally, they used technological innovations to connect with the doctors for consultations to identify new illnesses or to treat them earlier. As a result, the positive intended consequence of increasing the health of the local people still happened, even though an unintended consequence also happened. Since better health will cause an increase in population, the government and NGOs must track what is happening in the area in order to ensure that the area can continue to support an increasing population. An evaluation of the system and the environment, particularly in a global environment, requires a wide-ranging investigation from both the ground level and 10,000-foot high level. Government policies and budget may require that an organization deal with unintended consequences on its own. Systems changes over which the organization has no control–—from global warming to conflict to pandemics–—still must be considered. Stakeholders may not hold organizations accountable for such systems changes, but in the 21st century, they do expect that the organizations will make them aware of what the possible negative consequences of those systems might be. Another example of unintended consequences that could have been identified by asking What Else? involved the 2014 Ebola outbreak. Too late, many NGOs realized that their decisions about treating the outbreak should have considered the local people’s customs for handling and burying the dead and their fear of outsiders who might take their loved ones to a hospital from which their bodies could not be removed in the case of death. 3.4. Step #4: Create short mini-scenarios Short scenarios create stories that answer ‘‘What else could happen?’’ and thus allow the organization to consider unintended negative consequences and their effects on different stakeholders. Scenario thinking requires both creative and critical thinking. Creativity is needed to imagine the future and what the systems in which a decision is implemented might be like. Scenarios are plausible stories that describe ways in which the intended reality may change or mutate in the future. Creating scenarios This document is authorized for use only in Laureate Education, Inc.'s WAL DDBA 8161 Upgrade Business Strategy and Innovation for Competitive Advantage-1 at Laureate Education Baltimore from Feb 2019 to Mar 2020. Copyright 2015 by Kelley School of Business, Indiana University. For reprints, call HBS Publishing at (800)545-7685. Asking ‘‘What Else?’’ to identify unintended negative consequences also allows the organization to analyze the unconscious assumptions that underlie the decisions it is considering and to identify the adjustments that may need to be made as events unfold. With increasing access to information and possibilities generated by the Internet of Things, scenarios can help to identify specific information that may be important to changes in the system. They also help identify the signposts that will indicate that the probabilities of certain possibilities noted in the scenarios are increasing or decreasing. Using big data to track these signposts allows the organization to identify trends, drivers, and uncertainties that may change the results of a decision. Chermack (2004) says that scenarios can mitigate the tendency of decision makers to be bounded by their current environment and to use information and knowledge that is in conflict. Using the systems and environmental forces that were identified in Step 3, it is possible to think about those forces behaving differently than required by the intended consequence of a decision and consider how that would affect implementation of a decision. Scenarios identify both beneficial and detrimental consequences of changing forces and allow consideration of different adjustments that could be needed as events unfold. Existing global scenarios can be used as the foundation of short, mini-scenarios for What Else? questions. Shell International Limited (2005, 2008), the U.S. National Intelligence Council (2012), and the World Economic Forum (2009) have all developed global scenarios for 2030, and the Global Reporting Initiative (2014) looks at possible future sustainability trends. Organizations can thus benefit from the research that has already been done by those who have been writing global scenarios for many years. Additionally, organizations can tap research such as that of McKinsey & Company’s (Bonini & Bové, 2014) surveys that ask executives about forces in the global economy. In 2010, McKinsey & Company’s research team identified five important forces. The first two were the strength of emerging-market countries to contribute more to the global economy than developed ones and the need to focus on efficiencies in productivity. The third force was the increasing connectivity of the global economy. The fourth was the increased demand and decreasing supply of some resources, along with increasing focus on the negative effects that accessing and using those resources has on the environment. The fifth force was the stress of governments to provide social stability while at the same time driving economic growth (Bisson, Stephenson, & Viguerie, 2010). The emergence of robotics and 3D printers is affecting all five as they contribute to a changing workforce, 219 changing use of resources, and more efficiency in productivity. Nanotechnology is providing substitutes for natural resources in construction at the macro level and for microchips at the micro level. The increased access to electronic communication devices and global communication networks allows those in developing countries to have information and data that can form their opinions of organizations, especially foreign ones. Scenarios allow organizations to consider different realities. Those organizations who have their own organizational scenarios can easily plug a decision into their scenarios to answer What Else? Scenarios can be shared with stakeholders as a way of helping them understand what an organization may not have control over, what it is tracking, and what mitigation it might be planning. 3.5. Step #5: Track probabilities and communicate change As a result of the scenarios, the organization then asks what it would do if any of those unintended outcomes were to happen. The organization must create a process to track changes in the system that might increase the probability of the unintended negative consequences occurring. As forces that could create unintended negative consequence are tracked, the organization must decide at what point it would develop a detailed plan to take action. These plans should allow accommodation of new changes as they happen. Unintended consequences can, of course, be positive. A newly developed corn seed whose purpose was to improve yields for farmers in developing countries could be found to also require less irrigation in a particular environment. Some medications developed to treat one ailment could be found to be effective in treating another. However, even these positive consequences must be tracked. For example, it is possible that less irrigation may provide an environment for an insect to thrive that could damage the crop, or a medication may have a negative interaction with another medication required for the second ailment but may not appear immediately. However, it is the negative unintended consequences that are detrimental to organizations. Tracking the probability of the consequences becoming reality can provide organizations information about when to share it with stakeholders. For example, pharmaceutical companies share possible unintended consequences of their drugs with doctors who share it with those patients for whom they are considering use–—the vested stakeholders. However, sometimes the information is available to all stakeholder groups through television advertising This document is authorized for use only in Laureate Education, Inc.'s WAL DDBA 8161 Upgrade Business Strategy and Innovation for Competitive Advantage-1 at Laureate Education Baltimore from Feb 2019 to Mar 2020. Copyright 2015 by Kelley School of Business, Indiana University. For reprints, call HBS Publishing at (800)545-7685. 220 that lists possible side effects, including those that can lead to death. Formal communications with vested stakeholders should be maintained, especially if a social license to operate exists. The organization’s credibility in the eyes of its various stakeholders can then be a source for collaboration rather than protest. If stakeholders believe that the organization has included their interests as a part of their organizational strategy, they can understand the sometimes difficult decisions when conflicts occur. If they understand that the organization has done its best to identify possible unintended consequences, then they will be willing to work on compromises rather than complain to the government or mount a social media protest. For example, an agricultural company may be considering providing a drought-stricken community whose staple food is rice with free rice. Its intended consequence may be to avoid famine. However, asking What Else? might lead to a scenario in which the free rice will mean rice farmers in that community will not be able to sell the small supply of rice they have produced and will be unable to plant a crop the next season. Therefore, an unintended consequence may offset the good that the company intends, and a short-term solution to the problem of hunger, although necessary, may lead to long-term reliance on free rice. As a result of this scenario, the company may decide to buy the rice the farmers have produced and add it to their supply of free rice so the farmers can continue farming; or the company may provide seed for the next year and perhaps help farmers develop more efficient means of irrigation. The company could share these ideas with stakeholders to demonstrate its commitment to stakeholder concerns. PepsiCo, for example, understands that it cannot use its old manufacturing blueprints for new beverage plants. Decisions to locate into areas of the world with water scarcity that would have positive consequences for creating jobs and industry for the developing countries, as well as lower prices for its products, required What Else? thinking. Few stakeholders would want their access to limited drinking water to be used to produce product. Thus, in India, PepsiCo has a goal of a positive water balance because almost all of the available water is used for agriculture. To accomplish this, it has built rainwater-harvesting systems to avoid depleting the aquifers, and it has taught farmers to use a direct seeding method for planting rice that does not require flooding seedlings with water. In 2009, it opened its first overseas ‘green’ beverage plant that complies with the LEED standard in China in the western city of Chongqing. It uses 22% less water and K.M. Wilburn, H.R. Wilburn 23% less energy than the average PepsiCo plant in China by utilizing a high-pressure cleaning system, a water-free conveyor belt lubricant, and watersaving fixtures. In addition, it reuses water from the plant’s operations for cleaning and landscaping purposes. To save energy, 75% of the plant’s indoor areas feature natural lighting, and a roof garden insulates the office building and saves energy on cooling and heating (PepsiCo, 2009). Years ago, Nike and The Gap found themselves facing social media backlash about outsourcing their manufacturing to factories that were unsafe and hired children. Even though both companies argued they were providing jobs in developing countries, social media focused on their profit motives. Answering What Else? might have uncovered the possibility that they would be held accountable for knowing the practices and working conditions of their supply chain factories. Since at the time companies were not held responsible for their suppliers’ actions, a scenario based on the What Else? might have provided changes that could be tracked regarding stakeholder responses. Once evidence was found that there was attention being focused on working conditions, both companies might have made changes to how they outsourced. As it was, both were forced to break contracts with manufacturers and set up a process to monitor future suppliers to salvage their reputations. Nestlé might have used this process for cutting contracts with noncertified palm oil growers before a social media protest forced its hand and its products were boycotted. 4. Conclusion As corporate social responsibility becomes the global norm and not something that sets an organization apart, and as the Internet of Things and big data allow organizations to understand possibilities and probabilities, there is a growing expectation that organizations will use scenario thinking and consider not just the intended positive consequences of their decisions but also the possible negative unintended consequences they might produce. Understanding the stakeholders who have an interest in an organization’s decisions is even more important as organizations work in global communities with different cultures, norms, and needs. Social media is now global, and it can be the platform for stakeholders to form alliances that either support an organization’s decisions or attack them. Following the 5-step process described in this article can help organizations step outside the boundaries of the present and use scenario thinking to imagine what else could happen. Organizations This document is authorized for use only in Laureate Education, Inc.'s WAL DDBA 8161 Upgrade Business Strategy and Innovation for Competitive Advantage-1 at Laureate Education Baltimore from Feb 2019 to Mar 2020. Copyright 2015 by Kelley School of Business, Indiana University. For reprints, call HBS Publishing at (800)545-7685. Asking ‘‘What Else?’’ to identify unintended negative consequences can use their scenario teams–—if they have them–—or convene a separate team comprised of employees who have expert knowledge of vested stakeholders’ needs, to ask the What else? question once a decision has been approved. Organizations can also provide training for all employees to think about future consequences and about other stakeholders besides the ones directly involved in the decision. The increasing access to big data that can produce possible future correlations and probabilities will make such thinking easier for organizations, but also more expected by stakeholders. By identifying what to track to determine increasing and decreasing probabilities and by communicating with stakeholders, organizations can be better prepared to adapt to future system changes because they have at least considered the possible unintended consequences. References Asmus, P. (2009, August 19). When it comes to water, can corporations and community really coexist? AlterNet. Retrieved June 14, 2012, from http://www.alternet.org/story/142030/ when_it_comes_to_water%2C_can_corporations_and_ community_really_coexist Bisson, P., Stephenson, E., & Viguerie, S. P. (2010, June). Global forces: An introduction. 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Retrieved August 4, 2013, from http://www. weforum.org/reports/future-global-financial-system-nearterm-outlook-and-long-term-scenarios This document is authorized for use only in Laureate Education, Inc.'s WAL DDBA 8161 Upgrade Business Strategy and Innovation for Competitive Advantage-1 at Laureate Education Baltimore from Feb 2019 to Mar 2020.
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