Summary

In this Lesson, we begin understanding the structure and overview of modern Corporate Sustainability, primarily through standardized filings and how organizations measure sustainability.  During this exploration, we specifically seek to understand more about Planet-centric metrics and messages, and how organizations use them in Corporate Sustainability Reports (CSR).  As I hope will be developed throughout the course, we will begin to see how relative definitions are in sustainability, and how even seemingly similar efforts can have drastically different metrics and underpinnings.

Arguably, one of the the most valuable attributes a modern participant in Sustainability can have is the ability to discern and differentiate facets of programs in order to evaluate efficacy.  We will begin that journey in this Lesson.

Learning Outcomes

By the end of this lesson, you should be able to:

• discern Planet-centric metrics and initiatives within a Corporate Sustainability Report;
• evaluate an organization's approach to Planet issues through the lens of their stated Vision, Mission and Values;
• compare established and emerging environmental standards and initiatives;
• appraise how sustainability may reduce the environmental risk profile of an organization;
• discern "badge proliferation" and marketing from meaningful third-party certifications.

Lesson Roadmap

Questions?

If you have any questions, please send them to my axj153@psu.edu Faculty email. I will check daily to respond. If your question is one that is relevant to the entire class, I may respond to the entire class rather than individually.

“In its purest, most distilled form, the imperatives of sustainability are summed up by just three words: Planet. People. Profit..”

In the practice of sustainability, the "3Ps" are widely known, and while there may be a few variations on the theme, they are almost universally agreed upon. At this level, there is no nuance or measurement or hierarchy, just the simple imperative that the role of sustainability is to simultaneously maximize benefit to:

This all sounds lovely, until we remember that by this same reductive logic, many daunting tasks can be made to sound downright simple:

"It's simple, Orville. All we need to do is make a machine that flies. We have an entire garage full of bicycle parts and canvas!"

What we will see is that the complexity of sustainability lies one layer beneath the elegance of Planet. People. Profit., when one is tasked with the details of how to make all three of these imperatives–which are very commonly in direct opposition–thrive within the organization. As we will address in this lesson and many throughout this course, maximizing the 3Ps involves virtually every facet and function of an organization, and is never truly complete.

But, luckily for us, the constraints, unmet needs, scarcities, and imperatives that face those seeking to improve sustainability are the essential building blocks for developing compelling product and service offerings. As we will cover in the coming lessons, the 3Ps will become a framework for how we seek to innovate.

Variations on the Theme

There are a handful of other expressions of the sustainability imperatives, the leading probably being the "Triple Bottom Line." Though they may be stated or modeled differently, below is a matrix comparing the terminology used in a few different models for sustainability:

Elkington's Pressure Waves

In order for us to fully understand the Planet imperative of sustainability, it can be helpful to consider a historical context for the environmental issues that have shaped our world. Elkington has delineated the events of the last generation into three environmental "pressure waves" of public opinion occurring from 1961-2001:

Corporate Sustainability Report and Sustainable Development frameworks (frequency of mentions, 1961–2001).

Credit: Elkington, John. “Good News & Bad: The Media, Corporate Social Responsibility and Sustainable Development.” SustainAbility with Ketchum and the United Nations Environment Programme (UNEP). ISBN 190316804X

Three pressure waves
From 1960 to the present, three great waves of public pressure have shaped the environmental agenda. The roles and responsibilities of governments and the public sector have mutated in response to each of these three waves – and will continue to do so. Although each wave of activism has been followed by a downwave of falling public concern, each successive wave has significantly expanded the agendas of politics and business:

• Wave 1 brought an understanding that environmental impacts and natural resource demands have to be limited, resulting in an initial outpouring of environmental legislation. The business response was defensive, focusing on compliance, at best.
• Wave 2 brought a wider realization that new kinds of production technologies and new kinds of products are needed, culminating in the insight that development processes have to become sustainable – and a sense that business would often have to take the lead. The business response began to be more competitive.
• Wave 3 focuses on the growing recognition that sustainable development will require profound changes in the governance of corporations and in the whole process of globalization, putting a renewed focus on government and on civil society. Now, in addition to the compliance and competitive dimensions, the business response will need to focus on market creation.

(Elkington, 2004)

While he has not updated this annotated graph, it is important to note that Elkington has since referred to a "Sustainability Wave" which began in 2005, and reached its relative peak around 2012. Let's hope that peak continues to rise!

One pressure wave event not specifically noted in the graph, but which has had tremendous influence, is the creation of the Environmental Protection Agency (EPA) in 1970. While we will more closely examine the influence of the EPA and regulatory pressures later in this lesson and in future lessons, it is worth noting that in the American environmental movement, the influence of the EPA is not to be underestimated.

In the case of innovation, the regulatory realm presents a significant set of opportunities that can be leveraged to create sustainability-oriented products and services. We must always consider that with any set of constraints and limitations introduced into an organization, whether externally introduced (i.e., regulatory, competitive) or internally introduced (i.e., self-imposed), there is an opportunity for a product or service to bridge the void. We will dive more deeply into how exactly to accomplish this in later lessons, but it is important that we view every sustainability challenge as an opportunity.

The innovation implications of a single event

Credit: Left: 1973 Chrysler Newport Sedan, Right: 1973 Chrysler Newport Sedan by The Henry Ford is licensed under CC BY-NC-ND 2.0 DEED

In keeping with the idea that 'every sustainability challenge is an opportunity,' examine the pressure wave events Elkington notes and consider the implications of each event. Regardless of our views on any specific outcome, consider the depth of implications from even one of the environmental events.

Why do I mention these implications? Because in every case, growth and innovation was the response. We must always remember that regardless of the reason, any time an organization or industry is in a state of flux, it is an opportunity for the innovator or the upstart to gain a foothold. In the case of the 1973 Arab Oil Embargo, it was a groundswell of automotive innovation and a resurgence of development into technologies that may have been cost-prohibitive curiosities in the past.

It just happens that sustainability opens entire industries to innovation.

Diminishing Supplies, Increasing Demand

Today, we are faced with an increasing world population with increasing standards of living, and both trends place considerable pressure on a wide range of natural resources from water to tungsten to timber. This escalation of demand in the face of decreasing availability of resources leads to a natural increase in commodity prices... and therefore, more aggressive exploration. At its most extreme, very low supply with high demand can lead to aggression of a different kind: according to the United Nations Environment Programme, between 1990 and 2009, "...at least eighteen violent conflicts have been fuelled by the exploration of natural resources. In fact, recent research suggests that over the last sixty years, at least forty percent of intrastate conflicts have a link to natural resources" (UNEP, 2009).

Consider the overall trajectory of commodity prices now, as compared to other times of scarcity, namely World War I:

Credit: McKinsey Global Institute, Richard Dobbs, Jeremy Oppenheim, et al. Resource revolution: Meeting the world's energy, materials, food, and water needs.

One Economist's View on Scarcity in the Next 20 Years

Put simply, the world’s dwindling supplies of arable land, fresh water, energy, and minerals—essential for the production of food and appliances such as mobile phones, cars, televisions and washing machines— cannot meet rising global demand.

Commodity demand is being driven by three primary factors: the rising world population, expected to grow from roughly 7 billion today to 9 billion by 2050; increasing global wealth, with an estimated 3 billion people expected to join the ranks of the middle class by 2030; and a marked trend toward urbanization. On the last point, demographers predict that the number of urban dwellers will rise from 3 billion today to 5 billion by 2030, and each of them will demand better quality foodstuffs and modern conveniences that will accelerate the draw on the world’s resources.

On the supply side, however, arable land, potable water, energy, and minerals are finite, scarce and rapidly depleting. Take land—the earth contains approximately 13 billion hectares (32 billion acres) of land, or an area about 16 times the size of the United States. Of that, just 11% (1.4 billion hectares, or 3.5 billion acres) is arable and thus suitable to grow crops. The other 89%—including mountains and deserts—is prohibitively harder to exploit and farm. With the world’s population exploding, many more people will be looking to live and grow food on smaller patches of land.

Then there is water. Although the earth is 70% water, less than 1% is easily accessible fresh water that can be used for the sustenance of life, such as for drinking and sanitation. Meanwhile, by consuming about 85 million barrels of oil a day, we are living off oil discoveries that date as far back as the 1950s. Moreover, environmental concerns about fracking and shale gas could limit their promise so that such alternatives do not offer a real reprieve to global energy woes.

Finally, the global supply of minerals like copper is undermined by a decline in quality, a shrinking number of discoveries, and increased vulnerability to political interventions. Increasingly, companies have to go much farther afield, into more difficult terrain and riskier geopolitical environments, in order to secure these minerals.

Moyo, D. (2012, June 8). The resource shortage is real. Time. Retrieved Feb 2, 2015.

Scarcity and the Influence of Subsidies

It would be a natural response of consumers in a free market to respond to increasing prices by changing their behavior to consume less of the resource or product. If the price of gasoline reaches $3.50/gallon, people will tend to drive less than if gasoline were $1.00/gallon. If the price of electricity increased 500% overnight, people would take a much harder look at LED lighting, improvements to the energy efficiency of their homes, or perhaps invest in down jackets. Regardless of the mitigating behavior, in time, the market would find equilibrium between supply, demand, and price. But, that market balance can be upset in a significant way by subsidies. If there is an "invisible hand" which finds balance and equilibrium of market forces, we can think of subsidies as an "invisible finger" pushing down on one side of the scale. In essence, subsidies distort the balance of markets. If a government subsidizes the price of gasoline, it weakens the price signals which balance supply, demand, and price. This can lead to severe overconsumption of resources.

For decades, governments from Egypt to Indonesia have subsidised the price of basic fuels. Such programmes often start with noble intentions—to keep down the cost of living for the poor or, in the case of oil-producing countries, to provide a visible example of the benefits of carbon wealth—but they have disastrous consequences, wrecking budgets, distorting economies, harming the environment and, on balance, hurting rather than helping the poor.

Emerging markets are not the only places that distort energy markets. America, for instance, suppresses prices by restricting exports. But subsidies are more significant in poorer countries. Of the $500 billion a year the IMF reckons they cost—the equivalent of four times all official foreign aid—half is spent by governments in the Middle East and north Africa, where, on average, it is worth about 20% of government revenues. The proceeds flow overwhelmingly to the car-driving urban elite. In the typical emerging economy the richest fifth of households hoover up 40% of the benefits of fuel subsidies; the poorest fifth get only 7%. But the poorest suffer disproportionately from the distortions that such intervention creates. Egypt spends seven times more on fuel subsidies than on health. Cheap fuel encourages the development of heavy industry rather than the job-rich light manufacturing that offers far more people a route out of poverty.

The Economist (2014, Jun 14). Scrap them. Retrieved Feb 3, 2014.

Below is a Congressional Budget Office view of United States energy subsidies over the past decades. Consider the influence these subsidies may have had in increasing–or decreasing–innovation and natural market balance. In the next lesson, we will explore the relationships between subsidies, greenhouse gas emissions, and carbon taxes.

Credit: Congressional Budget Office. How Much Does the Federal Government Support the Development and Production of Fuels and Energy Technologies?

The Most Contentious Facet of Sustainability

I'd like us all to temporarily cleanse our minds of any preconceived notions of greenhouse gases or carbon. Deep breath in, hold for 5 counts, deep breath out. Go to a serene place. Get a beverage and come back. I'll wait.

There are entire swaths of the practice of sustainability which, with discussion, rationale, and logic, can be met with incredible support in virtually every corner. Waste minimization and energy reduction tend to fall into this category. It's about living lean, reducing waste, and saving money while saving the planet. It's about responsibility, stewardship, and not wasting all of the work it took to create that aluminum can. It takes a little messaging and discussion, but, invariably, success can be had with even the most skeptical among us.

And then comes the issue of greenhouse gases (GHG) and carbon taxes.

In this topic, I would like us to explore a concept known as The Tragedy of the Commons (Hardin, 1968) as an entry point to help us understand why carbon regulation is a logical step which can help drive innovation and eliminate the market-biasing subsidies mentioned in the last section. For more about this please watch the following 6:36 video.

Video: Tragedy of the commons | Consumer and producer surplus | Microeconomics (6:36)

If you would like, you can read Hardin's original 1968 article setting forth this concept.

The Tragedy of the Commons is an intuitive explanation of something that happens every day in the world around us: finite, common-access resources–such as air, water, or fisheries–are depleted when individuals are given unrestricted access. In this regard, we must remember that the concept of "maximizing gain" is not necessarily restricted to physical benefit, but to any erosion of public resources by the self-interests of individuals. Regardless of the specific expression of the Tragedy of the Commons, the ultimate result is the same: the resource is either depleted or eroded to the point of collapse.

Greenhouse gases could perhaps be the purest expression of The Tragedy of the Commons: a byproduct which is invisible and created in thousands of ways in daily life and that will damage entire systems of common resources, worldwide. The idea of a finite, tangible resource, such as a pasture or pond being depleted is quite accessible, but when it comes to impacts on the scale of greenhouse gases, it can be so large as to be almost inconceivable.

Greenhouse Gases

Greenhouse gases refer to a group of seven gases found in the atmosphere: carbon dioxide, methane, nitrous oxide, chlorofluorocarbons (CFCs), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride. There is also some level of discussion about other potential greenhouse gases, one of which is perfluorotributylamine, a man-made chemical which currently exists in extremely small quantities in the atmosphere, yet is "7.100 times more powerful at warming the Earth over a 100-year time span than CO₂" (Goldenburg, 2013). Typically, the discussion on greenhouse gases tends to center squarely on carbon dioxide, as it is the most prevalent greenhouse gas and is generated heavily through the combustion of fossil fuels. In total, greenhouse gases share a common attribute in that they trap heat (infrared radiation) in the atmosphere and work to elevate temperatures.

Credit: Earth Untouched

In sustainability reporting and in the calculation of the greenhouse gases generated from an entity (commonly referred to as the "carbon footprint"), the common measure used is carbon dioxide equivalent or "CO₂e", which accounts for the emission of carbon dioxide and methane. The amount of these gases generated is typically normalized as "kilograms of CO₂e" per (hour, mile, kilowatt or other measure of usage or operation) and can be utilized in measuring the emissions of virtually any direct or indirect activity, from operating a tractor to composting. Measuring and reporting carbon emissions is made easier by the excellent availability of data to calculate Scope 1 (direct) carbon emissions, but measurement becomes far more complicated in the calculation of Scope 2 and Scope 3 (indirect) emissions. These emissions are generated in the creation of energy utilized (Scope 2) or as consequences of transport, production, supply chain, and other outside activities (Scope 3). As we will see in many issues of sustainability in coming lessons, measuring and reporting Scope 2 or 3 emissions many times requires one to make estimations and judgment calls based on the best information available... and many times, comes down to being transparent about the assumptions made.

Carbon Taxes

We may consider that any currency, be it the US Dollar or any other, is not inherently "good" or "bad". It is simply a mechanism by which the market accepts and unifies around a means of trade. We may consider the sheer mechanism of CO₂e measurement in a similar way. It is a mechanism which the world at large accepts as the unified measurement of greenhouse emissions from virtually any activity from lighting a baseball field to burning off a wheat field. CO₂e is so able to be empirically measured, we can even go as far as discerning the difference in emissions from burning the wheat straw residue vs rice straw residue:

The versatility of CO₂e is that it can be a universal mechanism of measurement which may be applied to help us avoid The Tragedy of the Commons, and furthermore which may be used to eliminate the market biasing effect of subsidies. For example, imagine that, in attempting to avoid The Tragedy of the Commons, a government would like to tax the negative impact of emissions from antiquated power generation operations and use the funds to research alternative fuels.

Without measuring CO₂e, the government in question could attempt to modify behavior in a few different ways, all of which are somewhat removed from the actual goal of reducing damaging emissions:

• Tax on a per-site basis. This is flawed in that a power company could have a shuttered facility which is in no way contributing to the negative impact of carbon emissions. Furthermore, the emissions of the restricted class of plants could be drastically different, yet they would all be taxed in the same way.
• Tax the revenue of the site. This approach is difficult in that the accounting can be quite complex, and therefore prone to loopholes.
• Subsidize clean energy. This may sound appealing, but consider that these subsidies are reducing price signals in the market, and therefore distorting market balance. This would also not deter a profitable company with antiquated plants from continuing their operations.
• ... and so on

Taxing CO₂e emissions directly, on the other hand, would be considered a Pigovian tax, so named for British economist, Arthur. C. Pigou. Pigovian taxes are defined by the shared trait that they are designed to mitigate "negative externalities" (such as overgrazing, or greenhouse gas emissions) with the application of taxes specifically valued to offset the negative impacts. If you think back to The Tragedy of the Commons, it is an almost perfect parable of negative externalities: an activity where individual use of a shared resource is of detriment to others. In their purest form, we may think of Pigovian taxes as not artificially choosing "winners or losers" as subsidies may, but simply acting as an unbiased, unemotional accountant. These taxes essentially say, "You can build whatever kind of powerplant you prefer, but you will pay your share of any damage to shared resources."

The classic issue with Pigovian taxes is the valuation of the negative externality, essentially placing value on the erosion of a shared resource which is already difficult to valuate. For example, imagine placing a value on the shared visual damage wrought by a new residential development in a picturesque area, or the Pigovian price tag of a kilogram of carbon emissions. These are not easy determinations, but they may indeed change the landscape of daily life in the coming decades.

Current Reality

There are literally hundreds, if not thousands, of environmental certifications and standards today, ranging from those which could barely pass the sniff test of the marketing department in which they were incubated, to those which must pass formal audit and critical review by expert panels. Furthermore, to a casual observer, it may be difficult to differentiate between the extremes without performing research.

Unfortunately, the types of badges we may consider some of the most egregious offenders may have been created specifically to deflect or defuse what would be deserved criticism of environmental practices. This explosion of environmental marks may be referred to as "badge bloat," which is when there may be ten or more different standards all essentially certifying the same attribute. Unlike a battle of tangible and differentiated product standards (think of VHS v. Betamax or HD-DVD v. Blu-Ray) where the losing standard quickly ceases to exist because there is a direct cost, badges can live as long as the issuing industry group, NGO or corporation continues to exist. This persistence and proliferation can lead to tremendous confusion on the part of the consumer, and many a dinner debate among sustainability professionals as to the superior standard.

Prominent Certifications and Standards

Note that the term I use here is "prominent," and this is for a reason: below are some of the generally most referred to standards, and not necessarily the most valid or rigorous within a segment. As you gain more direct and indirect experience with certifications, you may begin to realize that some of those which are most popular may be beneficiaries of "first mover advantage" more than the most rigorous or well-defined.

A Summary of Different Certifications

Logo/Badge	Summary
	Leadership in Energy and Environmental Design (LEED) Primary domain: Sustainability of commercial, and increasingly, residential buildings. Primarily a US standard, though applied internationally. Statement: "LEED, or Leadership in Energy & Environmental Design, is a green building certification program that recognizes best-in-class building strategies and practices. To receive LEED certification, building projects satisfy prerequisites and earn points to achieve different levels of certification. Prerequisites and credits differ for each rating system, and teams choose the best fit for their project." Recipients: There are currently about 80,000 sites internationally holding a level of LEED certification or currently undergoing review. These sites range from Google locations and hospitals to manufacturing plants and private homes... and notably our Business Building, IM Building, and Moore Building on campus are all currently undergoing LEED certification. Notes: LEED is an example of a standard which gained a first mover advantage... and never stopped growing. It tends to be a bit of a hybrid standard in that it is partially prescriptive, yet flexible. To underscore this, it goes as far as to reward not only compliance with the various standards, but innovation in those areas. LEED AP (professional certifications) are very much in demand, with the U.S. Green Building Council reporting that over 9,000 job postings in the US between Mar 2013 and Feb 2014 required a LEED credential. To get a feel for what LEED looks like in practice, you can also peruse a database of LEED certified facilities and take a look at how your home might score according to the latest LEED standard.
	International Organization for Standardization (ISO) 14001 Primary domain: A framework for the creation and reporting standards of an environmental management system (EMS). Global standard. Statement: "ISO 14001:2004 sets out the criteria for an environmental management system and can be certified to. It does not state requirements for environmental performance, but maps out a framework that a company or organization can follow to set up an effective environmental management system. It can be used by any organization regardless of its activity or sector. Using ISO 14001:2004 can provide assurance to company management and employees as well as external stakeholders that environmental impact is being measured and improved." Recipients: Many, especially in manufacturing (General Motors, Ford) and large facilities (hospitals, universities). In all, as of the ISO 2013 Survey, almost 302,000 sites worldwide held ISO 14001 certification. Notes: Many of ISO's standards in the sustainability realm, notably 14001, are not at all prescriptive. In fact, a typical refrain from those sites holding ISO 14001 certification is that it is more about process reporting and record keeping than the specific environmental impacts. Consider that a site could conceivably violate state or federal environmental regulations, and yet still comply with ISO 14001 without as much as an infraction. Of late, there has been increasing discussion of ISO becoming more prescriptive in new revisions of standards. In keeping with their sometimes idiosyncratic ways, ISO does not have a badge for 14001 certification, instead allowing companies to create their own according to a very specific set of standards (and contingent on ISO approval). Ironically, the vast majority of these badges are in violation of ISO standards, as ISO strictly requires all badges to refer to standard year (i.e., ISO 14001:2004). Most do not. ISO has provided an 11-page document on specifically how to refer to ISO 14001.
	Global Reporting Initiative (GRI) 3.2 and 4.0 Primary domain: Organizational reporting and transparency, weighted toward large, publicly-traded corporations of all types. Global standard. Statement: "GRI's mission is to make sustainability reporting standard practice for all companies and organizations. Its Framework is a reporting system that provides metrics and methods for measuring and reporting sustainability-related impacts and performance. The Framework – which includes the Reporting Guidelines, Sector Guidance and other resources – enables greater organizational transparency and accountability. This can build stakeholders' trust in organizations, and lead to many other benefits. Thousands of organizations, of all sizes and sectors, use GRI's Framework to understand and communicate their sustainability performance." Recipients: A heavy percentage of the Fortune 500 and other large corporations worldwide, from Pepsi to Nike to Fiat. Overall, about 22,000 companies worldwide have filed reports with GRI, though many are not necessarily externally audited (you can submit what is called a "non-compliant" report, which basically means your company acknowledges that the report does not address each GRI reporting item). You can access all of the reports on their searchable Sustainability Disclosure Database, which we will be using more later in the semester. Notes: We will be using GRI quite a bit to unearth positions and potential areas for innovation, so I will delve into that discussion in those lessons. While it is also not a prescriptive standard, it is extremely rigorous in the items to be disclosed, from executive compensation to governance documentation. In essence, it forces transparency by capturing a company's responses to very specific questions.
	Sustainable Forestry Initiative (SFI) Primary domain: Lumber products, both domestic and exotic. Global standard. Statement: "The SFI program's unique fiber sourcing requirements promote responsible forest management on all suppliers' lands. SFI chain-of-custody (COC) certification tracks the percentage of fiber from certified forests, certified sourcing and post-consumer recycled content. SFI on-product labels identify both certified sourcing and COC claims to help consumers make responsible purchasing decisions. SFI Inc. is governed by a three-chamber board of directors representing environmental, social and economic sectors equally." Recipients: As we might expect, recipients are centered around wood products and fiber, including large wood products companies (Georgia Pacific, Boise Cascade) and major printers (QuadGraphics, R.R. Donnelley). Notes: A criticism leveled against SFI is that it is a "fluff" certification and sets a low bar. I have captured one of those lines of public discourse in the FSC Notes.
	Forest Stewardship Council (FSC) Primary domain: Lumber products, both domestic and exotic. Global standard. Statement: "The Forest Stewardship Council A.C. (FSC) shall promote environmentally appropriate, socially beneficial, and economically viable management of the world's forests." Recipients: HP, AT&T, Allstate and many others, notably also those who are using paper and fiber products as a relatively small part of core operation (i.e., Allstate). Notes: SFI and FSC are an example of two certifications occupying a rather similar space, and there have been some rather public criticisms and more than a few cease and desists exchanged in regard to SFI v. FSC.
	Energy Star ​Primary domain: Energy performance of appliances, lighting, HVAC components, and building systems. Primarily a US standard. Statement: "ENERGY STAR is a joint voluntary program of the U.S. Environmental Protection Agency and the U.S. Department of Energy that helps businesses and individuals save energy and fight climate change throughenergy-efficientt products, homes, and buildings." Recipients: Samsung, LG, Owens Corning, Carrier, and many other products have been rated to the Energy Star standard. Notes: Arguably, one of the more visible environmental standards in daily life, as it has become very widely used in everything from hot water heaters to refrigerators. (Interestingly, the yellow "EnergyGuide" label you see on every new appliance showing how it compares to peers in energy consumption has no affiliation with EnergyStar, as it is provided by the Federal Trade Commission, and not the EPA.)
	B Corporation ​Primary domain: 3P-centric organizational standard, favored by small- and mid-sized companies. Global standard, though primarily US-based companies. Statement: "B Corp is to business what Fair Trade certification is to coffee or USDA Organic certification is to milk. B Corps are certified by the nonprofit B Lab to meet rigorous standards of social and environmental performance, accountability, and transparency. Today, there is a growing community of more than 1,000 Certified B Corps from 33 countries and over 60 industries working together toward 1 unifying goal: to redefine success in business." Recipients: Companies from Ben & Jerry's and Patagonia to lesser-known LEAP Organics and Pachamama Coffee Co-op are all certified B Corps. Notes: Along with GRI, we will be taking a deeper look into B Corp later in the semester as a fertile ground for innovation.
	Terracycle ​Primary domain: Upcycling of packaging of consumer packaged goods, primarily food packaging, from large corporate partners. Global program, though heavily US-based companies. Statement: "TerraCycle is a proud triple-bottom line company. [...] More than just a recycling company, TerraCycle strives to be a driving force behind increasing environmental awareness and action. Our goal is to be a trusted resource for families, schools, communities, and even corporations to find tips, stats, facts, tactics, and news to help them live a greener, cleaner lifestyle. Together, we are Eliminating the Idea of Waste®. Today, TerraCycle is a highly awarded, international upcycling and recycling company that collects difficult-to-recycle packaging and products and repurposes the material into affordable, innovative products. TerraCycle is widely considered the world's leader in the collection and reuse of non-recyclable, post-consumer waste." Users: Target, Frito-Lay, Mars, and other consumer packaged goods and food companies. Notes: While not a certification, it is a mark that a given package waste can be collected and sent to TerraCycle for upcycling. There has also been some criticism leveled against TerraCycle for how and what they upcycle... if it is effective. (Note the comments section in the link, as a TerraCycle Co-founder rebuts some of the claims made.)

Critical Analysis of Certifications and Standards

We will be embarking on quite a bit of critical analysis this semester, the reason being that the explosion of the sustainability practice has come with a number of certifications and companies with creative, interesting, and compelling public faces... and little else. When examining potential standards for your organization or the claims of others, it can be useful to consider the following:

• What is the peer group? In essence, what organizations are supporting the standard and what are the resulting filings/reports/outcomes? While not perfect, it can be very useful to watch the moves that highly respected, and importantly, third-party verified sustainability leaders are making in regard to environmental standards.
• Are organizations making it a requirement of their own supply chains? We will spend some amount of time on this topic as a source of opportunity and potential innovation, but if a company requires suppliers to be certified to an environmental standard, chances are they have quite a bit of interaction with it and believe it has an important role. One caution here is that these certifications can be in vogue on an industry basis... for example, conflict mineral standards are emerging as a significant concern in electronics, but are barely on the radar of many other industries not using these materials.
• Are audits and reports public? In many cases, the results of third-party audits of the standards are made public, and these can provide an excellent view into how rigorous a standard is in practice. Metaphorically, think of certifications as a physical... if all that is being reported in the report is "blood pressure and heart rate," we could expect the doctor is not terribly concerned with the well-being of the patient.
• Who can you talk to? One thing to remember is that those in the sustainability practice tend to be very highly engaged, though perhaps time- and resource constrained. If you are interested in a standard or choosing between competing standards, find a small handful of sustainability peers at organizations utilizing the standards and get in contact. I believe you will find that many are very willing to provide unvarnished experiences with the standards.

Morning in America

It's a lovely Wednesday morning in February. The sun is shining and birds are happily singing about 900 miles south of your current locale. But you have hot coffee. You arrive at your office at about 8:30 a.m., and promptly at 8:45 a.m. every morning, between 150 and 600 pages of indecipherable legal text citing indecipherable legal text from years past metaphorically lands on your desk, and the desk of every single organization and person in the United States. Every single workday of every year.

Welcome to the Federal Register, "The Daily Journal of the United States Government."

While the word "journal" may conjure thoughts of sitting lakeside somewhere in an Adirondack chair and drawing ferns in your Moleskine, this is very different. This journal contains new rules, proposed rules, required notices, and other information with which your organization has to comply with in one way or another. These new rules and requirements can be literally decades in the making, or may arrive with no notice.

The fog of the regulations with roots in this document is literally so thick that the government many times does not agree with itself. Consider that a service of many environmental consultants is to literally take your organization's regulatory question, write a brief, submit it to a group of state or federal regulators, and ask for a formal ruling. If there are seven regulators on the panel, you could conceivably have seven different interpretations of the regulation, each of which could have wildly different implications for your organization. Perhaps this is an inflation. You may only receive four different interpretations with four wildly different implications for your organization.

While "E pluribus unum" may have appeared on the dollars you handed the barista that morning, the morning delivery of the Federal Register should bear "Ignorantia juris non excusat" – "ignorance of the law excuses no one."

Regulatory Influence and Legal Risk

The influence of regulations is not uniquely American. In fact, we may be beginning to see the creation of de facto global regulations due to the multinational nature of so many corporations. In essence, multinationals seek to unify systems and internal environmental reporting across international sites, as well as being able to sell products internationally, and they do so many times through the application of the more stringent regulations across all sites internationally. This, in turn, exerts downward pressure through the supply chains the company uses in each country as they similarly require suppliers to meet their standards. We are beginning to see this exercised with the application of European REACH chemical regulations being applied worldwide, as well as the very practical step of a unified chemical labeling and pictographic standard (the "Globally Harmonized System of Classification and Labeling of Chemicals" (GHS)).

Interestingly, in many cases, it has not necessarily been global accords or other international agreements which have led to this dissemination of regulations across the world, but it has been the multinational corporations and the desire for efficient international trade.

The influence of environmental regulations on the organization varies depending on the organization, as a small bakery will be subject to a fraction of the regulations borne by a chemical plant or a metal plating operation due to the complexity, volumes, materials, and chemicals used in their operations. As we will examine further in a moment, those regulations have very direct and indirect costs on the organizations, and becoming more sustainable is an excellent way to reduce regulatory influence–and risk–in the organization.

Below are a few examples of regulatory influences and how they can affect an organization:

Public Influence and Reputational Risk

Protest in Nike Store in support of strike at Dongguan Yue Yuen Shoes Factory, a supplier to many athletic brands.

Credit: Protesters marched in the shop by SACOM Hong Kong from Flickr is licensed under CC BY 2.0 DEED

In addition to the influence of required environmental regulations under which an organization operates, there is a significant component of risk to an organization's reputation. Reputational risk, stemming from poor environmental performance being brought to the public eye, is not to be underestimated. A notable case we will examine in the next lesson is that of the public's influence on the Nike approach to worker rights, and we will spend significant time in this course examining stakeholder engagement as a tool for innovation. I'd like to lay a bit of a framework for thought here, and we will be taking a far deeper look in the area of public influence throughout the semester.

Brands are the persona–the soul–of an organization, from the smallest non-profit to the largest corporation. Consider the years and billions of dollars spent annually to create and build brands that would otherwise sell commoditized goods, be they carbonated brown sugar water or printed T-shirts. The brands are what create the tremendous sales, continuous PR, and command a price premium in the market... as well as attracting investment. Despite their tremendous value, brands are extremely fluid and fickle, and it does not take catastrophic damage to a reputation to put the organization in peril. The damage to the reputation of a brand need be just enough to cause customers to consider other brands... after that door is opened with loyal customers, the market does the rest. The brand loses its gloss... it becomes less attractive, maybe people think twice about how they would be perceived as an owner of the product. In time, the brand–and sales–erode.

The easiest way to think of reputational risk to the brand is what I call "The Jilted Lover Effect." When a customer has a very personal involvement with your brand and strongly associates with the persona and there has been a significant transgression of those brand values, "The Jilted Lover Effect" dictates that those who once loved your brand the most will become your most vehement, vocal, and lasting critics. Imagine if Patagonia were found to be dumping toxic byproducts behind their plant... this would cause a very immediate backlash, beginning first in its (formerly) most passionate fans.

Primary and Secondary Damage to Reputation

While many of us may first think of protests as pictured above when thinking of "environment" and "public influence," it is necessary to look beyond the more limited and episodic risks and into the far more invasive secondary damages.

Sustainability's Role in Reducing Regulatory and Reputational Risk

Throughout this course, you will be asked to carefully consider the linguistics, metaphor, and frames that we use in both description and messaging. This is not an empty exercise. We do this in order to underscore that words not only have tremendous underlying meaning, but also so that we may more succinctly package our responses, messages, and arguments. A significant goal is for us to understand our philosophies on sustainability, how it fits within the organization, and how to create significant value from sustainability-driven innovation.

Allow us to take a moment to examine the word "footprint" as it is used in sustainability to describe the collection of impacts a person or organization makes on the world around it. It really is a passive, somewhat delicate word. Think of the places where one might encounter footprints... in sand, on grass, in snow, in freshly vacuumed carpet... in all cases, the footprint is temporary and easily remedied (if "remedy" is needed at all).

So, if "footprints" are of minimal impact, then "reducing our footprint" sounds to be of even lesser concern, akin to someone mentioning they are 'working to limit how many times they blink daily.' Blinking is not widely perceived to be a problem to start with, let alone something to be reduced.

So, we must be cognizant in our messages, frames, and arguments that some terms may work to trivialize sustainability and our need to reduce impact and risk (note: two very non-passive words).

When it comes to sustainability's role in reducing regulatory and reputational risk, consider that sustainability works to reduce the exposure of the organization subject to risk. An organization can't be fined by the EPA or state regulators for hazardous waste it doesn't have; it can't be devastated by a public campaign against environmental abuses in which it does not partake. Every movement the organization makes TOWARD sustainability is similarly a movement AWAY FROM legal, regulatory, and reputational risk. We must be clear that sustainability not only represents a very tangible opportunity for innovation and growth, but that it is part of a core business imperative to reduce risk to the organization. Some organizations place special emphasis on this role of sustainability, and structure sustainability as a function of the Legal department.

So, as we hear discussions of reducing an organization's "environmental footprint" or "carbon footprint," we should consider the frame we set and the message we convey using those terms... no matter how prevalent they may be. Let us consider sustainability as playing a far more directed, serious, and essential role in an organization, and that role is one of reducing the risk profile of the organization. Much as in the clinical setting, we seek to use every available means to strategically reduce our risk profile... be it through process innovation, reporting and goal setting, transparency, supply chain auditing, stakeholder engagement, reduction of hazardous materials, or otherwise.

An Explanation of Sustainability Reporting

The Global Reporting Initiative offers forth the following summary of sustainability reporting:

A sustainability report is a report published by a company or organization about the economic, environmental and social impacts caused by its everyday activities.

A sustainability report also presents the organization's values and governance model, and demonstrates the link between its strategy and its commitment to a sustainable global economy.

An increasing number of companies and organizations want to make their operations sustainable and contribute to sustainable development. Sustainability reporting can help organizations to measure, understand and communicate their economic, environmental, social and governance performance. Sustainability – the ability for something to last for a long time, or indefinitely – is based on performance in these four key areas.

Systematic sustainability reporting helps organizations to measure the impacts they cause or experience, set goals, and manage change. A sustainability report is the key platform for communicating sustainability performance and impacts – whether positive or negative.

To produce a regular sustainability report, organizations set up a reporting cycle – a program of data collection, communication, and responses. This means that their sustainability performance is monitored on an ongoing basis. Data can be provided regularly to senior decision makers to shape the organization's strategy and policies, and improve performance.

Sustainability reporting is therefore a vital resource for managing change towards a sustainable global economy – one that combines long term profitability with ethical behavior, social justice and environmental care.

We will spend significant time this semester working with CSRs as a type of source material for innovation and strategy. So while we will be taking a far more technical and critical view of CSRs as the weeks pass, I'd like to offer a primer here.

The Effective CSR

There tend to be two ends of the CSR spectrum: one of which represents the very conceptual and aspirational, long on vision, but short on execution… and the other which tends to take a more accounting-like view of reporting, simply laying out the numbers, without emotion, context, or philosophical underpinnings.

Upon reading many CSRs, you may begin to see that some seem to just flow. They're interesting, they're charming, they have aspiration and vision, but are also practical and show vulnerability. You may find you feel a certain bond to the brand after reading it. In fact, there is a case to be made that the purest expression of a brand may not lie in its advertising, but in its sustainability report. Advertising talks at you, but many times, sustainability reports talk to you. We may consider five facets of an effective CSR as a lens through which to not only critically evaluate the content of a sustainability program, but also how it is presented.

Vision, Mission, and Values

A section of the CSR I would like to call attention to specifically is the Vision, Mission, and Values (VMV) of the organization. It may go by any one of those names, or some derivative, but it is typically set forth quite clearly early in the CSR, and acts to set the context of the organization's sustainability. The VMV acts as the frame by which we can judge a company's sustainability efforts. VMV sets the desired destination, so our first goal is not necessarily to judge the destination, but to understand if the organization's stated strategy, approach, and indicators align with the destination. In essence, we do not bring our preconceptions or existing frames to measure the organization, but we use their own words and definitions of what is important to their organization.

In keeping with the theme of this week's case, the below is a sample of the stated VMVs for a handful of outdoor products companies:

Mission Statements

Organization	Stated Vision / Mission / Values
	[From CEO's letter] "Our love of the outdoors anchors our focus on exploration, protecting recreation areas, and addressing the environmental effects of our business. To marshal our resources most effectively, we are targeting our energies at the areas where we can achieve the greatest impact. For The North Face, this means focusing on resource efficiency and material selection in our product manufacturing."
	"Our Reason for Being: Build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis."
	"REI’s purpose is to inspire, educate and outfit for a lifetime of outdoor adventure and stewardship. At the co-op, being a good steward is reflected in how we care for the world in which we play, work and live, and how we connect people to nature. Specifically, our efforts are designed to: Facilitate the active conservation of nature Inspire the responsible use and enjoyment of the outdoors Enhance the natural world and our communities and the places in which we work through responsible business practices Foster opportunities for outdoor recreation, with a focus on young people Maintain REI as an employer of choice, where employees are highly engaged and reflect the diversity of our communities"
	"At Columbia Sportswear, we are committed to building a company of which we can all be proud – not only of the innovative products we create and the financial results we achieve, but the manner in which we achieve them. Whether it’s responsible sourcing, giving back to our communities, or reducing our environmental impact, we believe corporate responsibility is a company wide effort."
	"The single biggest area of our company’s environmental impact is the products we design and make. As a result, our environmental initiatives are primarily structured to address the footprint and composition of our product and materials. In general, we seek to operate in a responsible, efficient, and mindful way. This translates to minimizing waste in our operations, to sourcing safe and effective materials, and perhaps most importantly, to designing and manufacturing products to be the longest lasting and best performing in our industry. Our environmental initiatives, like our product design in general, focus on extending the lifetime and performance of the products. These initiatives span product design and care, materials research and development, efficient manufacturing, and responsible sourcing."

As you can see, the VMVs of a relatively defined group of companies vary greatly in their formality, depth, and areas of emphasis, but nonetheless, set forth a context by which their sustainability efforts may be judged.

The White Whale of Sustainability Reporting

Credit: Melville, Herman, and Mead Schaeffer. Moby Dick. New York, Dodd, Mead and company, 1922. Wikimedia (Public Domain

There are hundreds, if not thousands, of Planet elements that could be addressed in a CSR, from solvent emissions to carbon emissions to chain of custody reporting, and it would appear that some organizations indeed feel compelled to address every single one. So, the CSR and sustainability program attempts to do everything, acquire every certification, address every standard... and in the process, does not actually progress toward any meaningful goal. For this reason, one might consider this overscoped organizational approach to Planet as pursuing some mythical "White Whale of Sustainability Reporting," as it represents a relentless, yet futile, chase on the part of the sustainability program.

If we try to understand the motivations of these organizations chasing the "White Whale," the underlying root cause may ultimately be a sustainability program weak in VISAS facets. Instead of concentrating on those Planet elements and metrics which are of high importance for their own sustainability vision, the tendency can be to "fill the void." Because the sustainability program lacks direction, purpose, and personality, it does what is easy and superficial... and it does so through a high volume of essentially meaningless activities. As we will see throughout the semester, effective sustainability programs are just as much about saying "yes" as they are about saying "no." We must make choices about what is important to the organization as we develop a platform for innovation.

For your consideration

BMW Group has more than 110,000 employees worldwide, around € 75 billion in annual revenue... and is arguably one of the most sustainable companies in the world.

It has three environmental Key Performance Indicators (KPI): (1) Energy consumption per vehicle produced, (2) Waste for disposal per vehicle produced, and (3) Water consumption per vehicle produced. It then adds three more measurements to create the core of its "group-wide environmental protection" program: Process wastewater, Solvent emissions, and CO₂ emissions.

If BMW can focus on only SIX top-level environmental metrics most important to its vision, perhaps this is a worthy aspiration for any organization. BMW has said "no" to a tremendous number of potential distractions to be able to say "yes" and devote appropriate attention to those six measurements.

Planet aspects and indicators in sustainability reporting

A note on terminology we will be using quite a bit in this course and in reference in CSRs:

Environmental aspect: Any means by which the organization directly or indirectly impacts the environment through the manufacture, transportation, use, or end of life. This could be anything from emissions from trucks idling at a loading dock to landfilled waste.

Indicator: A measurement of the extent to which an aspect impacts the environment, such as '50 tons of CO₂ generated per month 'or '450 gallons of hazardous waste generated per year.'

While there may be a seemingly infinite number of Planet aspects and indicators one could report in a CSR, there tends to be some level of uniformity on the generally most important aspect areas. Note that, while there may be best practices, there are no "required" units or means to state indicators in CSRs, even GRI-compliant ones. So, if you were compiling a CSR, you could choose to represent your energy consumption in BTU, joules, gigajoules, kWh... and potentially also index it to whatever baseline or other number you prefer. So, even if two companies state internal energy consumption in gigajoules, one could index to production ("gigajoules of energy consumed per 1000 cars produced"), while the other could index to a baseline ("gigajoules of energy consumed, compared to 2009 baseline"). So even if the aspect and core indicator are the same, they could be stated in drastically different ways.

Planet Aspects and Indicators in Corporate Sustainability Reports

Greenhouse Gas Emissions (GHG)

Solvent and Vapor Emissions

Waste and Byproducts

Energy Use

Water Use

Biodiversity and Habitat

Design for Sustainability

Lifecycle Analysis/Mapping

Beyond looking at the empirical measures or philosophies of sustainability, it can be highly valuable to examine the leaders (and failures) of sustainability in practice. The practice of sustainability has many component parts representing a very wide spectrum of ideas and material concerns, and with a seemingly infinite number of potential blends to be created in implementation:

The Emotional and the Rational

The Massive and the Minute

The Progressive and the Regressive

The Global and the Local

The Aspirational and the Tactical

A goal throughout this course will be therefore to understand both ends of the spectrum, map and distil the choices made by sustainability programs, and understand the opportunities created for the organization. As we understand more deeply, we may begin to understand how we can create spaces and niches for sustainability-driven innovation within any organization, and in an integrated and seamless way.

Below are three examples of initiatives within organizations leading the way in Planet-oriented sustainability initiatives, ranging from the billion-dollar Interface to the 47 employee Full Sail Brewing Co. From there, we will take a brief look into the component parts of each initiative, what Planet aspects they leverage, and how they uniquely create value for the organization.

Interface

Watch the following 16 minute video: The Business Logic of Sustainability. While it is not a "summary", it is a great story from an unlikely pioneer of sustainability.

Video: Ray Anderson: The business logic of sustainability (16:39)

The Insight

Ray Anderson's sustainability epiphany was the inspiration, and his position and conviction allowed him to apply significant resources to solving the problems of the carpet tile lifecycle. Regardless of whether it was guilt of a founder nearing retirement or the inspiration of a book, Ray Anderson devoted himself to creating a sustainable legacy.

The Opportunity

Creating an offering of "climate neutral carpet" to a primarily commercial building market. Importantly, the timing would be ideal, as this was happening when LEED, recycled materials, and sustainable sourcing in architecture were gaining significant headway. Interface would become the first sustainable carpet tile in a market where sustainable materials and surfaces were becoming a requirement.

GRI Planet Aspects

• Materials used by weight or volume(G4-EN1)
• Percentage of materials used that are recycled input materials(G4-EN2)
• Direct greenhouse gas (GHG) emissions (Scope 1) (G4-EN15)
• Extent of impact mitigation of environmental impacts of products and services (G4-EN27)
• Percentage of products sold and their packaging materials that are reclaimed by category (G4-EN28)

Vision

Significant, and with its foundations in Ray Anderson himself. While much of the original vision for infinitely recyclable, "climate neutral carpet" may have started with Mr. Anderson, it became a serious engineering, chemical, and logistical challenge to execute. It would be fascinating to learn if the profit and market share gains experienced were part of the early Interface vision, or if they turned out to be fortunate byproducts of what might have otherwise been considered a sunk-cost program. It would be an interesting learning experience to see what kind of test or Beta program Interface could have been established to understand the gains they were walking into for their nearly half a billion dollar investment.

The Interface Mission is extremely lofty, but one on which the company has done significant work and devoted significant resources to help make happen. Interface describes its Mission as:

"What drives us? A positive vision of the future and the determination to make it come true. The moral courage to do what is right, despite all obstacles. An abiding commitment to show that sustainability is better for business. We believe that change starts with us and is transforming Interface from a plunderer of the earth to an agent of its restoration. Through this process of redesigning ourselves, we hope to be a catalyst for the redesign of global industry."

Innovation

Significant. After the establishment of their original ReEntry process to recycle used carpet into 100% recycled carpet tiles, it tackled the issue of used commercial fishing nets washing up on shores worldwide. It not only developed a process to recycle this notoriously difficult material, but also partnered with the Zoological Society of London to establish a "community-based supply chain" by which communities in the Philippines could clear their beaches and reefs of the nylon nets while being paid for the material.

Storytelling

The Interface story has become one of the most hailed sustainability stories of the last 20 years, gaining attention everywhere from Forbes and the Wall Street Journal to Triple Pundit. The story of Interface has gone on to influence countless other businesses as to the possibilities of sustainability.

Achievement

Interestingly, Interface has not issued a CSR for some years, and is fairly limited on metrics. So despite spending millions on sustainability programs and gaining significant PR (as well as being a NASDAQ traded company), it does not disclose sustainability indicators.

Structure

Again, without a published CSR or real sustainability documentation, it can be difficult to evaluate the structure of their program.

The Secret

Most competitors (such as the Warren Buffet-owned Shaw Carpet) have closed the gap on recycled materials, and can offer the same level of recycled material. Interface has been able to hold much of its gains from its initial burst of growth as the first mover in recycled carpet.

Please watch the following 3:46 video.

Video: Worn Wear® Stories | Presented by Patagonia (3:46)

The Insight

In the face of increasing consumerism, immediate gratification, and disposable products, there is an opportunity to own a space around authenticity, durability, and modesty. Patches and repairs to an item of clothing should be considered a badge of honor from a life well lived.

The Opportunity

To own the space, and in the process, help justify the price premium of their well-constructed, sustainably sourced clothing. There is also an opportunity to distance themselves from other outdoor brands (i.e., North Face) which have lost their authenticity to some extent. Patagonia can provide information, materials, and support to those who seek to repair their clothing as opposed to throwing it out.

GRI Planet Aspects

• Extent of impact mitigation of environmental impacts of products and services(G4-EN27)

Vision

Patagonia Mission Statement: "Build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis."

"One of the most responsible things we can do as a company is to make high-quality stuff that lasts for years and can be repaired, so you don’t have to buy more of it. The Worn Wear® program celebrates the stories we wear and keeps your gear in action longer to take some of the pressure off the planet."

Innovation

Many companies tout the durability of their clothing, but very few actively give you the tools and support to repair their clothing. Fewer still promote purchasing fewer of their products in the headlines of their pages.

If any additional evidence is needed that they are serious about this, Patagonia actively promotes a Black Friday "Worn Wear Swap" at eight of its flagship locations where you can bring in your used Patagonia and swap with others. Not many stores would devote the largest retail day of the year to encouraging used clothing.

Storytelling

Everywhere. The initiative is excellent at not only unearthing stories, but in the process reinforcing the bond between a piece of clothing and an emotional or memorable experience. They have a dedicated blog for the Worn Wear program, and you can easily see how customers will wax poetic about the memories they have of their favorite Patagonia item (and furthermore, reinforcing the durability of Patagonia used for years in rough conditions).

Achievement

While it would be nice to have a metric (i.e., "200,000 Patagonia garments NOT sold since 2012"), the Worn Wear program is more of a message or social imperative than anything. Participation in the program does not involve the purchasing or signing up for anything, so it would be hard to measure. It does capture quite a bit of vicarious achievement through the rich stories shared by customers about the adventures of their faithful Patagonia jacket or shirt.

Structure

Very little, which is keeping with the Patagonia sustainability ethos of initiative- as opposed to metric-driven sustainability reporting. While they lack in structure, they far exceed in framework and execution. Patagonia has offered this statement as to why they do not have a structured CSR:

"The advantage to the reader/user of sustainability reports that follow the GRI framework is the ability to easily compare data from different companies. The disadvantage: a sustainability report, like an annual report, can be a dull read held forth in specialized language that clouds as much as it reveals. Because we recognize the advantages of easy comparability, we are investigating the possibility of importing data we collect for the Footprint Chronicles into a GRI framework (and with as much plain speaking as possible). Sustainability reports can be expensive for a company of our relatively small size to research and produce and can only supplement, not substitute, for the Footprint Chronicles. We want to continually raise rather than lower the quality of the conversation we’ve created with our stakeholders over the past years."

The Secret

The Worn Wear program does a fantastic job of justifying a premium price and deepening the brand experience through storytelling and authenticity. It's in keeping with the Patagonia platform of 'a consumer brand that rejects consumerism.'

Full Sail Brewing Co.

Watch the following 2:44 minute video on Beer, Water, and Responsibility.

Video: Full Sail Brewing: Beer, Water & Responsibility (2:46)

The Insight

If you listen to what Jaime says in the video, it would appear that their world-leading water efficiency not only stems from a belief of responsibility, but also in remaining a welcome member of the Hood River community (this is an example of securing "license to operate," a topic we will address in a later lesson).

There may certainly be some technical prowess and innovations beyond those Jaime mentions, considering Full Sail uses only about 25% of the water per barrel of major breweries, and about 60% of the water per barrel of the much-touted sustainable brewer, New Belgium Brewing. In fact, Full Sail was named "Craft Brewer of the Year" by Beverage World Magazine, for their “sustainable stewardship, quality, consistency and operational ingenuity.”

The Opportunity

As mentioned in a Dec 10, 2010 interview with Jen Boynton of Triple Pundit, we can see a great example of operational sustainability:

What’s your biggest sustainability challenge?

As a brewer, water and waste water are our biggest issues. That is why we are so committed to reducing our usage as much as we can. Water use also impacts waste treatment, energy use, truck hauls, etc.

Any new sustainability projects in the pipeline that have you excited?

We have just installed a new piece of brewing equipment called a Mash Filter, and it will save us nearly a million gallons of water yearly enabling us to lower our water to beer ratio. This savings also extends to the number of truckloads (~70) of material that won’t be coming and going from the brewery on a yearly basis. And I haven’t even got my arms around the savings in heating/cooling/electricity usage yet, but all will be reduced.

GRI Planet Aspects

• Total water withdrawal by source (G4-EN8)
• Water sources significantly affected by withdrawal of water (G4-EN9)
• Percentage and total volume of water recycled and reused (G4-EN10)
• Materials used by weight or volume (G4-EN1)
• Extent of impact mitigation of environmental impacts of products and services (G4-EN27)

Vision

From Boynton interview:

What are your plans for growth, if any?
We believe it is important to grow our business in an organic and sustainable way. We only look at opportunities that will allow us to build our business year after year. Because we are a small, independent brewery in a very competitive environment, we need to be sure that our business decisions are responsible and careful of our limited resources.

Innovation

While Full Sail's sustainability reporting is basic and informal, it certainly befits a small company. More importantly, Full Sail has invested its innovation dollars on equipment and infrastructure that will make a tangible difference in water consumption, namely the investment in the fairly exotic Meura mash machine mentioned in the video.

Storytelling

Full Sail marketing and CSR does not have the gloss or reach of a larger company with creative departments and dedicated sustainability staff, but Full Sail certainly makes up for that in substance and a great sustainability story of 'the little brewer who could.' They do quite a bit of storytelling around sustainability in their blog, as well.

Achievement

The fact that they are leading the world in water efficiency for a brewery is a major achievement, in and of itself.

Consider Full Sail to be a perfect case of a company NOT chasing the White Whale... water is important to the business, community and founders, so Full Sail has invested its full consideration and resources on minimizing impacts to the Hood River. They have certainly done well in that regard, and more importantly, they have set the standard and openly share their water conservation measures and advice with other brewers via "Ask Jaime."

Structure

Very little, but they do not have a formal CSR. Again, like sustainability, in a resource constrained setting, we must make choices, and Full Sail is spending it on improving performance as opposed to talking about the improved metrics.

The Secret

Leading the world in water efficiency, wholly-owned by its 47 employees, and holding more than 130 Gold Medals for its beers, Full Sail is an example of what successful sustainability in a small business can look like.

Credit: Frank Lloyd Wright, Architect, Drafting the Marin County Civic Center, 1958 or 1959 ... by sswj from Flickr is licensed under CC BY-NC-ND 2.0 DEED

“No house should ever be on a hill or on anything. It should be of the hill. Belonging to it. Hill and house should live together each the happier for the other..”

In the first three weeks of this course, we may think of ourselves as the architect surveying the site. Our goal is to understand the sustainability landscape, its functions, and as much nuance as possible at this point. By closely examining the sustainability landscape as it exists today, we may only begin to find interesting areas and niches upon which to build our initiatives. As we explore sustainability further, participate in discourse and discussion, and examine research techniques, the goal is to provide the tools by which you can identify specific opportunities and placements for the foundations of innovation. From there, we begin to understand, quite literally, the architecture of innovation and how to design.

Recapping, our goals for this lesson are to:

Summary

In this Lesson, our goal is to move from what may be more straightforward -- or at least semi-generally understood -- aspects of Planet from Lesson 1, and into the more esoteric. My intent in this Lesson, after showing the tremendous latitude organizations charitably extend themselves in Lesson 1, is to show you the even more amorphous People facet of sustainability. Where Planet aspects may have at least some anchor in the physical or empirical, People aspects rely on the definition and measurement of topics like worker engagement and happiness.

As we will cover in more depth in the second half of this course, it is essential in any measurement dealing with perception or emotion to pay special attention to research design and how questions are asked, as People-related aspects will deal with behaviors, perceptions, and survey results. If you have even a passing interest in the science of political polling, for example, you will very quickly see how selection bias, question design, and other factors can drastically influence outcomes. We will see how some organizations use this skew to their benefit.

In moving through this Lesson, my intent is to show you the second pillar of sustainability and all of the modern manifestations of it, but also to expose you to even more ill-defined aspects of Sustainability -- those which are made that much more malleable by the motivations of organizations.

Learning Outcomes

By the end of this lesson, you should be able to:

• discern People-centric metrics and initiatives within a Corporate Sustainability Report;
• evaluate an organization's approach to People issues through the lens of their stated Vision, Mission, and Values;
• discern strategies and tactics used in organizations with proactive approaches to People aspects;
• express how organizations engaging their workforces and communities benefit in tangible ways;
• articulate the value of the stakeholder engagement process.

Lesson Roadmap

Questions?

If you have any questions, please send them to my axj153@psu.edu Faculty email. I will check daily to respond. If your question is one that is relevant to the entire class, I may respond to the entire class rather than individually.

It takes two to speak the truth - one to speak and another to hear.

Institutionalized Listening

In essence, stakeholder engagement represents an organization actively seeking to engage and listen to those affected by its operations. Ideally, these discussions may have some applied structure or framework by which the groups may prepare, so that they may stay focused on the topic at hand, but should ideally be conducted without precondition. One could think of stakeholder engagement as being the model of frank, open, and honest dialogue.

While in theory, stakeholder engagement sounds quite simple, in practice, it can be difficult for an organization to be willing to pursue discussion with those who may be its most outspoken critics. In some cases, "outspoken critics" may be putting it quite gently, as those stakeholder groups may have been responsible for labor strikes, protests, negative PR, or other damage to the organization. In these cases, persuading management to engage those stakeholders who may have a history of adversarial relationships with your organization could prove even more difficult. Herein lies the importance of stakeholder engagement:

Your organization doesn't have to like it. In fact, it probably shouldn't.

In any organization, it is always easy to survey and talk to those with closer relationships with the organization, perhaps suppliers, industry groups, or lead customers. But, for the sake of both transparency and insight into potential opportunities, stakeholders "further away" from the organization, such as lost or lapsed customers, can represent a wealth of insight. Furthermore, few organizations are willing to go to this extent in research and stakeholder engagement, so the insights gleaned through these efforts may be that much more valuable.

If the organization truly seeks truth from a variety of outside perspectives, comfort is an unlikely result. Not many organizations are willing to make themselves vulnerable in this way, but the insights for both the sustainability program and potential innovations can be significant.

What are stakeholders?

As we go about the operations of our organization, stakeholders are those we affect, even into the outer rings of suppliers and into NGOs and other groups we may have little contact with.

From Krick, Forstater et al. (p.24):

Stakeholders are individuals or groups who affect, or are affected by an organisation and its activities. [(Freeman, 1984)]

There is no generic list of stakeholders for all companies, or even for a single company (these will change over time) – those who affect and are affected depends on the industry, company, geography, and the issue in question. New business strategies and changes in the business environment will often mean a new set of stakeholders. The box below highlights some of the broad groupings typically considered.

There are a number of different dimensions that you can consider when identifying stakeholders;

1. By responsibility: people to whom you have, or in the future may have, legal, financial and operational responsibilities enshrined in regulations, contracts, policies or codes of practice.
2. By influence: people who are, or in the future may be, able to influence the ability of your organisation to meet its goals – whether their actions are likely to drive or impede your performance. These can include those with informal influence and those with formal decision making power.
3. By proximity: the people that your organisation interacts with most, including internal stakeholders, those with longstanding relationships, those you depend on in your day-to-day operations, and those living next to your production sites.
4. By dependency: the people that are most dependent on your organisation, for example employees and their families, customers who are dependent on your products for their safety, livelihood, health or welfare or suppliers for whom you are a dominant customer.
5. By representation: the people that are through regulatory structures or culture/ tradition entrusted to represent other individuals; e.g. heads of a local community, trade union representatives, councillors, representatives of membership based organisations, etc.. .

The Five Stage Stakeholder Engagement Framework

Krick, Forstater et al. offer many excellent, practical resources in The Stakeholder Engagement Manual, centered around what they call the Five Stage Stakeholder Engagement Framework (p11).

Click here for a text description of the image above

The five stages of effective stakeholder engagement which come from 3 key areas: responsiveness, materiality and completeness.

• The five stages are:
  • Act, Review and Report: planning follow up activities, ensuring learning, reviewing the engagement, assuring your stakeholders,
  • Think Strategically: mapping stakeholders, identifying issues, setting strategic objectives, prioritizing,
  • Analyze & plan: reviewing progress, learning from others & identifying partners, learning about stakeholders, setting stakeholder objectives, defining margins of movement,
  • Strengthen Engagement Capacities: strengthening the ability to respond to an issue, developing internal skills, building stakeholders' capacity to engage,
  • Design the Process & Engage: Identifying the most effective engagement approach, designing the process.

Credit: Michelle Thulkanam. THE ROLE OF INTEGRATED COMMUNICATION (IC) IN STAKEHOLDER ENGAGEMENT. Semantic Scholar. February 1, 2014.

An Overview of the Stakeholder Engagement Tactics and Strategies

The Five Stage Stakeholder Engagement Framework may provide the intent and strategy of stakeholder engagement, but if those strategies aren't executed well in practice, the stakeholder engagement will fall short of its goals. Below, I have excerpted some key pages from Krick, Forstater, et al. to illustrate some of the tactics and checklists you could use to help guide your stakeholder engagement. Overall, it is a well-written instructional document covering a tremendous amount of practical concerns.

Stakeholder Engagement is an Important Concept on Two Fronts

A Core Mechanism of Sustainability

If transparency is a core precept of sustainability, then we can consider stakeholder engagement at the very foundation of it all. If we peel back all of the structures, reports, metrics, and missions in sustainability, what we are left with is an architecture built on stakeholder engagement. Here's why: a sustainability effort can only be as good as the stakeholder engagement upon which it is built.

There is a classic statement that holds true in many facets of both personal and organizational behavior, and that is the idea that 'it's not the original act that will get you in trouble, it's the cover up.' This is equally true of small children, public figures, politicians, and organizations. Honest, frank conversations with stakeholder groups may be extremely difficult, but will likely yield the foundational insights to improve... where ignoring stakeholder groups will only bring deeper scrutiny, more vocal criticism, and increased reputational damage. It would be overly idealistic to imagine that the types of long-term, untenable problems could be solved in the short term, but if nothing else, the organization may gain the perspective of these groups, and show that they are moving forward in best faith to become a more sustainable organization.

An Illustration

Credit: superfantastic via Creative Commons BY 2.0

Imagine a consultancy is tasked with the background research, stakeholder engagement and recommendations for the creation of a sustainability program for a European tobacco company. This firm undertakes the due diligence of creating a stakeholder list and engagement plan to interview and survey groups of stakeholders. They interview employees worldwide; tobacco co-ops and farmers, customers, retailers, supply chain partners, shareholders, and even the small union present at one of their facilities. By the time they are complete, they have an impressive battery of stakeholder interviews spanning 5 countries, and 120 stakeholders across almost 300 hours of interviews.

The tobacco company goes about prioritizing the concerns raised in the stakeholder engagement interviews, and begins its plans for the next ten years. It will audit working conditions at all of its global operations, assist the co-ops and farmers it works with to transition into water-efficient tobacco hybrids and less intensive farming practices, and begin a slew of other sustainability programs.

One problem: the stakeholder engagement chose to ignore what would be, by far, the most contentious stakeholder group: those who have suffered through a range of physical ailments from long-time tobacco use, and the families of those who have died. While these stakeholders could potentially be very hostile toward the tobacco company, they would likely be at the core of many of the most important sustainability issues facing the company.

By ignoring these groups or otherwise choosing comfort over truth, the tobacco company has essentially made itself even more of a target by publicly ignoring or otherwise minimizing those who have perhaps suffered greatly from the use of their products. Even in the modern era of cigarettes with massive warnings on every package, advertising limitations, and punitive taxes where we could consider customers to be well-apprised of the risks of smoking cigarettes, these are still essential stakeholder groups to include in any engagement effort.

A Core Mechanism of Insight, Innovation, and Research

In its purest form, stakeholder engagement is a type of ethnographic research (which we will be spending some time on later in the semester). Similarly to any ethnographic or insight research, the first goal of stakeholder engagement is not to argue, divert blame, explain circumstances, or present ideas. It is to listen and provide just enough structure and framework to the interview to keep it on topic. Even more than this, it is to listen enthusiastically, yet without bias. Ethnographic research is both a science and an art in and of itself, and we will devote a significant part of a lesson to it. We place emphasis on this tool because the stakeholder engagement effort we undertake to frame our sustainability program will also act as the foundational research for cognitive mapping and identifying potentially rich areas for innovation.

Deep stakeholder engagement efforts can be especially rich when compared to the information competitors or other organizations in your space may hold. Comparatively speaking, very few organizations have the budget or willpower to devote limited time and resources researching those who will absolutely not purchase their products. By far, the most common case is this: if a new product line is being launched and has only $50,000 for all consumer research, it will be spent researching perhaps three or four consumer segments of interest, perhaps across a few markets, or other constituencies related to selling or purchasing the product. It tends to be a tough sell for someone in an Insight or Research department to tell the Product Manager that they want to spend even a quarter (the shiny type, not the percentage) of the research budget to understand those who are not only unlikely to purchase, but who may be in polar opposition to even the idea of the product.  

In essence, part of stakeholder engagement is akin to understanding vegetarians' thoughts and feelings about their local steakhouse. While not the primary focus of the stakeholder engagement (or insight research), understanding those opposed to you can lead to some very interesting synthesis and opportunity for innovation (in the aforementioned example, if you have a group of ten thirty somethings going out for a celebration dinner, what are the chances that one (or more) of the ten is vegetarian or vegan? And how many times does this instantly eliminate a steakhouse from contention for that celebratory dinner? And what is the average check for a party of ten at a steakhouse? This is what insight and opportunity can look like.)

A True Story

I'd like to take a moment to share an experience that I think frames the realities, challenges, and potential of workforce training.

I had been interviewing the owners of a family-owned, second generation machine shop located in a scenic, but somewhat downtrodden, part of Pennsylvania. Literally started in a garage by its founder, Bill Sr., it had grown into a 50 employee shop, tidily kept and loaded with modern CNC equipment, mills, and exotic alloys. Based on more than 40 years of reputation, the shop had more business than it could handle–much of it coming from major manufacturing plants on the East Coast who appreciated their attention to detail, honesty, and speed. He had a deep pride in what he had built, and loved telling people that everything you were wearing–everything in the room– had been created by something a machinist had made, be it a plastic die for molding a monitor casing or the cutters for the glass on your iPhone.

Bill Sr. was a grandfatherly figure who happened to drop in while I was talking to his son, who now managed the shop. We talked about the beginnings of the business, the failures and successes, but you could tell he was a bit reluctant to talk about something, that he was holding back a bit. So as we got further into the discussion, I asked him if there was something bothering him. He looked at his rather significant boots, and back up at me, and said, "I can't believe what's happening with the kids today." This bear of a man was visibly hurt.

He told me about his disappointment about the closure of both the metal shop at the local high school, and the local vocational technical school. He told me about trying to keep kids interested in the trades by taking days away from the shop to speak at the schools, and inviting classes to the shop. He said that when he spoke to the classes, he offered a full scholarship to Machinist School to anyone willing to raise their hand, and he guaranteed he would hire them the day after they graduated. It was not an exaggeration or a parable–it was a contract.

Not a single student raised their hand. Year after year.

He was hurt because "working with your hands" was so looked down upon these days... that college was pushed by high school counselors as the only option, even for kids who shouldn't be in college. He talked about seeing people unemployed or on drugs in the local town, and couldn't help feeling that it was a tragedy. He wanted to provide the area and its families with what he knew were stable, well-paying jobs. He gestured with his head to the gleaming, 1940s Bridgeport vertical mill in the corner of the shop. "See that? That's the machine I fed my family with for 10 years. That's the machine that built my reputation, that's the machine that started this business."

We talked a bit more, and you could tell he was getting upset and tears began to well at his eyes. I felt for him, so I wanted to change the conversation a bit. "So, out of curiosity, what would one of those Machine School graduates make that day after they graduated?"

He took a deep sighing breath. "Eighty thousand dollars. They would start at eighty."

Workforce Development and Sustainability

Workforce training and development is one of those initiatives that has yielded benefits in a range of ways: from providing a reliable, well-trained workforce for the organization (3P: Profit), to providing opportunity for advancement and stable employment for the employee (3P: People), to enriching communities by helping to provide stable employment and living wages. This is also another one of the facets of sustainability where a financial case can be clearly demonstrated, and can warm the hearts of even the most metric-driven CFOs and VPs of HR. The more specialized the skill needed by the organization, or higher the impact of losing an employee, the more workforce development and training becomes a compelling strategy for the sustainability of the organization. 

Let's examine the current realities of workforce training in America, contrast it to the workforce training development model in Europe, and then look at an example of an American workforce applying and adapting the European model to create a sustainable "win-win-win scenario" between an organization, employee, and local community.

Current Realities of the American Workforce

From the "Pathways to Prosperity Project," Harvard University Graduate School of Education (Symonds et al., 2011) (emphasis is mine):

The “forgotten half” challenge has deepened with the growing importance of post-secondary education to success in the labor market. In 1973, nearly a third of the nation’s 91 million workers were high-school dropouts, while another 40 percent had not progressed beyond a high school degree. Thus, people with a high-school education or less made up 72 percent of the nation’s workforce. In an economy in which manufacturing was still dominant, it was possible for those with less education but a strong work ethic to earn a middle class wage, as 60 percent of high school graduates did. In effect, a high school diploma was a passport to the American Dream for millions of Americans.

By 2007, this picture had changed beyond recognition. While the workforce had exploded nearly 70 percent to 154 million workers, those with a high school education or less had shrunk to just 41 percent of the workforce. Put another way, while the total number of jobs in America had grown by 63 million, the number of jobs held by people with no post-secondary education had actually fallen by some 2 million jobs. Thus, over the past third of a century, all of the net job growth in America has been generated by positions that require at least some post-secondary education.

Credit: Symonds, William C., Robert Schwartz, and Ronald F. Ferguson. 2011. Pathways to prosperity: Meeting the challenge of preparing young Americans for the 21st century. Cambridge, MA: Pathways to Prosperity Project, Harvard University Graduate School of Education.

Workers with at least some college have ballooned to 59 percent of the workforce, from just 28 percent in 1973. Over the same period, many high school dropouts and those with no more than a high school degree have fallen out of the middle class, even as those who have been to college, and especially those with bachelor’s and advanced degrees, have moved up. The lifetime earnings gap between those with a high school education and those with a college degree is now estimated to be nearly $1 million. And the differential has been widening. In 2008, median earnings of workers with bachelor’s degrees were 65 percent higher than those of high school graduates ($55,700 vs. $33,800). Similarly, workers with associate’s degrees earned 73 percent more than those who had not completed high school ($42,000 vs. $24,300).

Going forward, these trends will only intensify. Although labor market projections, like all economic forecasts, are inherently uncertain, we are struck by the work of the Center on Education and the Workforce at Georgetown University. The Center projects that the U.S. economy will create some 47 million job openings over the 10-year period ending in 2018. Nearly two-thirds of these jobs, in the Center’s estimation, will require that workers have at least some post-secondary education. This means, of course, that even in the second decade of the 21st century, there will still be job openings for people with just a high school degree, and even for high school dropouts. But the Center projects that applicants with no more than a high school degree will fill just 36 percent of the job openings, or just half the percentage of jobs they held in the early 1970s. Even if the Center has overestimated demand for post-secondary credentials, the long-term trend is undeniable.

The message is clear: in 21st century America, education beyond high school is the passport to the American Dream. But how much and what kind of post-secondary is really needed to prosper in the new American economy?

The Georgetown Center projects that 14 million job openings—nearly half of those that will be filled by workers with post-secondary education—will go to people with an associate’s degree or occupational certificate. Many of these will be in “middle-skill” occupations such as electrician, construction manager, dental hygienist, paralegal, and police officer. While these jobs may not be as prestigious as those filled by B.A. holders, they pay a significant premium over many jobs open to those with just a high school degree. More surprisingly, they pay more than many of the jobs held by those with a bachelor’s degree. In fact, 27 percent of people with post-secondary licenses or certificates—credentials short of an associate’s degree—earn more than the average bachelor’s degree recipient.

Demand for middle-skilled professionals is exploding in the nation’s hottest industry, healthcare, which has added over half a million jobs during the Great Recession. Openings for registered nurses and health technologists—positions that typically require an associate’s degree—are expected to grow by more than 1 million by 2018. There will also be exceptionally rapid growth in such healthcare support jobs as nursing aide, home health aide, and attendant. Though such positions are still open to high school graduates, they are increasingly filled by people with some post-secondary education or a certificate. Similarly, over half of massage therapists and dental assistants now have a post-secondary certificate.

There will also be a huge number of job openings in so-called blue-collar fields like construction, manufacturing, and natural resources, though many will simply replace retiring baby boomers. These fields will provide nearly 8 million job openings, 2.7 million of which will require a post-secondary credential. In commercial construction, manufacturing, mining, installation, and repair, this kind of post-secondary education—as opposed to a B.A.—is often the ticket to a well-paying and rewarding career.

The European Apprenticeship Model

From the "Pathways to Prosperity Project," Harvard University Graduate School of Education (Symonds et al., 2011), emphasis is mine:

If you look at the U.S. secondary education system through a comparative lens, one big difference becomes immediately apparent: most advanced nations place far more emphasis on vocational education than we do. Throughout northern and central Europe especially, vocational education and training is a mainstream system, the pathway helping most young people make the transition from adolescence to productive adulthood. In Austria, Denmark, Finland, Germany, the Netherlands, Norway, and Switzerland, after grade 9 or 10 between 40 and 70 percent of young people opt for an educational program that typically combines classroom and workplace learning over the next three years. This culminates in a diploma or certificate, a “qualification,” as it’s called, with real currency in the labor market. In virtually all of these countries, vocational education also provides a pathway into tertiary education for those who choose to take it.

Upper secondary vocational education (or VET, as it is generally known) varies significantly in structure from country to country, but there are two basic models. The first, usually referred to as apprenticeship or the dual system, has students spend three or four days in paid company-organized training at the workplace, with the other day or two in related academic work in the classroom. Germany has the oldest and best-known apprenticeship system, which offers programs leading to recognized qualifications in about 350 different occupations. Switzerland also has a very highly regarded apprenticeship system. A second group of countries have opted for a model in which vocational education is mostly provided in school-based programs, although they all incorporate at least some work-based learning. These countries typically introduce students to a broad cluster of occupations (e.g., health care or IT) before narrowing the focus of training in the third year.

From a U.S. perspective perhaps the most important distinction among these countries is the age at which students are separated into different tracks. Germany and Switzerland have separate middle or lower secondary schools based largely on the school’s assessment of a student’s academic potential. This is a practice we deplore, and it is no surprise that the students in the bottom track German middle schools fare the least well in the labor market. Finland and Denmark, on the other hand, keep all students in a common, untracked comprehensive school up through grade 9 or 10, at which point students and their families, not the school, decide which kind of upper secondary education they will pursue. We believe this model makes much more sense for the U.S. to consider, but it would mean that we would have to be willing to abandon our reliance on the various forms of tracking, subtle as well as overt, that pervade much of our education system through the elementary and middle school years.

Despite their highly unattractive early tracking practices, there is much to learn from the German and Swiss apprenticeship systems. In many ways, they exemplify the new 3 “R’s” of much U.S. secondary school reform: rigor, relevance, and relationships. Thanks to high standards, those who complete a VET program have qualifications roughly equivalent to Americans who have earned a technical degree from a community college. As such, they’re prepared for more advanced studies in institutions of higher education, such as polytechnics and universities of applied science. The German federal states, which regulate education, are now working to improve access for such students.

In all of these apprenticeship systems employer organizations play a major role. They take the lead in defining occupational qualifications, providing paid apprenticeships or other work-based learning opportunities and (in collaboration with educators and trade union partners) assessing student performance and awarding certificates. In Germany, for example, they pay about half of the expenses associated with the system, contributing roughly as much as the government. Why are they willing to make such a substantial investment? Simply put, German employers believe that the best way to get a highly qualified workforce is to invest in the development of young workers, participate directly in their training and socialization at the workplace, and then hire those who have proven themselves to be productive at the end of the apprenticeship period. An added incentive is that apprentices can be hired for less than the standard wage, and terminated easily if they don’t work out. As a result, some studies suggest that the work and other benefits contributed by apprentices more than offset the costs to employers. No wonder roughly a quarter of German and Swiss employers participate in the dual system.

Strategic Advantages of Workforce Development

In creating a stable flow of reliable, highly-trained employees for itself, BMW has managed to bring a significant practice of their German plants to the US: apprenticeships. Combining the best of the American and German training models, potential employees are paid to be trained for what could be their position at BMW. During this process, BMW has access to see how a prospective employee performs and learns, and the prospective employee is able to see how they like the position and fit, as well. Importantly, with its more than 4,000 apprentices, BMW addresses a significant identified risk to its business.

From the BMW Sustainable Value Report 2013:

Despite diverse challenging economic conditions for the global automotive industry, the BMW Group was able to achieve very good results in 2013. This is mainly due to the commitment, creativity and expertise of our employees. We want to continue to make every effort to attract and keep the best people. Apart from the fixed and variable salary components, we also offer our employees a wide range of social benefits. Our employees are deployed according to their individual strengths and talents, which they can continue to develop by taking advantage of targeted, future-focused further education and training programmes.

At the same time, we still face challenges ahead. In Germany and other Western industrialised nations in particular, skilled workers will become increasingly scarce in the medium term. Demographic change is also having a considerable effect on the age structure of our workforce. It is therefore essential that we position ourselves on all relevant labour markets as an attractive employer, for all target and age groups. To achieve this we offer an attractive working environment that takes particular account of age and life phases. We constantly develop the skills of our employees to meet our high commitment to innovation.

Please watch the following 5:26 piece PBS did on BMW's apprenticeship program in its Spartansburg, SC plant:

Video: BMW plant in S.C. imports German apprenticeship program (5:26)

Creating Sustainable Working Conditions Worldwide

While some of us could associate "sustainable working conditions" with compensation, benefits, diversity and the like, I would like us to focus our attention specifically on working conditions at the most basic level: workers are not beaten, they have the right to leave and quit on their own accord, and they have an expectation of safe working conditions. Basically, sustainable working conditions are to ensure that people are treated as humans regardless of where they work. Unfortunately, even in this day, this is not happening worldwide, and we do see some striking occasions of history repeating itself. In many cases, the repetition we see are some of the struggles facing workers in the United States in the 1800s-1900s being relived today in places like China and Bangladesh.

Today, with the worldwide prevalence of the internet and nearly a quarter of the world's population owning smartphones, poor working conditions and worker abuses are far more likely to be captured in realtime and disseminated instantly to a worldwide audience. Informed and aware consumers are also more likely to place pressure on those international companies operating in these countries to improve working conditions, and, as a result, many of the sustainability efforts of garment and electronics companies with offshore operations place heavy emphasis on working conditions in their supply chains. As we will see in the specific case of Nike, the reputational damage is swift in action and lasting in impact.

Working Conditions: History Repeating Itself

1911: New York City, USA

Credit: Crowds gather to mourn Triangle fire victims the day after the tragedy, March 26, 1911 by Kheel Center is licensed under CC BY 2.0 DEED

From PBS:

It was the deadliest workplace accident in New York City's history. On March 25th, 1911, a deadly fire broke out in the Triangle Shirtwaist Factory in New York's Greenwich Village. The blaze ripped through the congested loft as petrified workers–mostly young immigrant women–desperately tried to make their way downstairs. By the time the fire burned itself out, 146 people were dead. All but 17 of the dead were women and nearly half were teenagers.

The workers in the Triangle Shirtwaist Factory were among the hundreds of thousands of New Yorkers who toiled in the city's garment factories at the time. They came from countries such as Italy and Russia in search of a better future, and all around them they saw the riches promised by the American Dream. New York was in its Gilded Age and the Triangle Shirtwaist Factory was not too far from the limestone mansions of millionaires and the elegant shops of the famed Ladies Mile. Two men who had achieved the dream were the wealthy owners of the thriving Triangle factory. Isaac Harris and Max Blanck, immigrants who had arrived from Russia only 20 years earlier, had become known as New York's "Shirtwaist Kings," and each owned fully staffed brownstones on Manhattan's Upper West Side.

[...]

When a tossed match or lit cigarette ignited a fire on the eighth floor of the building, flames spread quickly. Blanck and Harris received warning by phone and escaped, but the 240 workers on the ninth floor continued stitching, oblivious to the flames gathering force on the floor below. When they finally did see the smoke, the women panicked. Some rushed toward the open stairwell, but columns of flames already blocked their path.

A few workers managed to cram onto the elevator while others ran down an inadequate fire escape, which crumbled under the weight, crashing to the ground almost 100 feet below. The only remaining exit was a door that had been locked to prevent theft. The key was tucked into the pocket of the foreman, who listened to the women's cries for help from the street. Hundreds of horrified onlookers arrived just in time to see young men and women jumping from the windows, framed by flames.

In the days that followed, a temporary morgue near the East River was set up for families to identify the bodies of their loved ones. Nearly 400,000 New Yorkers filled city streets to pay tribute to the victims and raise money to support their families. The ensuing public outrage forced government action. Within three years, more than 36 new state laws had passed regulating fire safety and the quality of workplace conditions. The landmark legislation gave New Yorkers the most comprehensive workplace safety laws in the country and became a model for the nation.

2013: Savar, Bangladesh

Credit: Alamy. April 26, 2017.

From Manik and Yardley, 2013:

A building housing several factories making clothing for European and American consumers collapsed into a deadly heap on Wednesday, only five months after a horrific fire at a similar facility prompted leading multinational brands to pledge to work to improve safety in the country’s booming but poorly regulated garment industry.

By early Thursday, the Bangladeshi news media reported that at least 142 people died in the rubble of Rana Plaza, a building in Savar, an industrial suburb of Dhaka, the capital. Police officials put the death toll at 134, with more than 1,000 of 2,500 workers injured, many of them still trapped. Soldiers, paramilitary police officers, firefighters and other citizens clawed through the wreckage, searching for survivors and bodies.

Brig. Gen. Ali Ahmed Khan, head of the National Fire Service, said that an initial investigation found that the Rana Plaza building violated codes, with the four upper floors having been constructed illegally without permits.

“There was a structural fault as well,” General Khan added, noting that the building’s foundation was substandard.

The collapse followed a fire in November that killed 112 workers making shorts and sweaters for export and that led importers, including Walmart, to vow to do more to ensure the safety of factories where goods they sell are manufactured. The building collapse on Wednesday quickly revived questions about the commitment of local factory owners, Bangladeshi officials and global brands to provide safe working conditions.

The Bangladeshi news media reported that inspection teams had discovered cracks in the structure of Rana Plaza on Tuesday. Shops and a bank branch on the lower floors immediately closed. But the owners of the garment factories on the upper floors ordered employees to work on Wednesday, despite the safety risks.

Labor activists combed the wreckage on Wednesday afternoon and discovered labels and production records suggesting that the factories were producing garments for major European and American brands. Labels were discovered for the Spanish brand Mango, and for the low-cost British chain Primark.

Activists said the factories also had produced clothing for Walmart, the Dutch retailer C & A, Benetton and Cato Fashions, according to customs records, factory Web sites and documents discovered in the collapsed building.

[...]

“The front-line responsibility is the government’s, but the real power lies with Western brands and retailers, beginning with the biggest players: Walmart, H & M, Inditex, Gap and others,” said Scott Nova, executive director of Worker Rights Consortium, a labor rights organization. “The price pressure these buyers put on factories undermines any prospect that factories will undertake the costly repairs and renovations that are necessary to make these buildings safe.

The final death toll of the Rana Plaza accident would be more than 1,100.

Offshore, But No Longer Out of Mind

In some cases, what makes countries like China and Bangladesh attractive to low-cost offshoring are the same factors which can make them dangerous for workers: few environmental regulations, little concern for worker safety, lax enforcement, and little fear of worker litigation. Regardless of if a factory in one of these countries is complying with local regulations, it is becoming more and more common for companies to hold all factories in their supply chain–domestic or foreign–responsible to meet standards which may be far more stringent than any local law. The reason for these stringent standards is that the companies with offshore production are being made painfully aware of the tremendous financial and reputational risk of being associated with "sweatshops" or factories with substandard–or deadly–working conditions. In the case of Rana Plaza, brands such as Walmart, Benetton, and The Children's Place were linked to past or current production at the factory, and the public reaction was by no means positive.

Few brands want to have images of their logo and clothing tags associated with working conditions that left 1,100 dead. Needless to say, the primary and secondary reputational damage to a brand from such an occurrence could be significant.

Credit: Screenshot from video by Nathan Fitch and Ismail Ferdous on April 14, 2014.

An example of offshore facilities being held to newly stringent standards happened just after the Rana Plaza tragedy, when the Accord on Fire and Building Safety in Bangladesh and other international auditing initiatives specific to the garment industry in Bangladesh were created. In the case of the Accord, signatory companies from around the world agreed to support and help share costs for what would act as a private international regulatory body working within Bangladesh. Some notable signatories include Puma, Abercrombie & Fitch, Helly Hansen, and H&M. The Accord's primary charter is to audit, inspect, and report on the working conditions of factories in order to create CAPs, or Corrective Action Plans.

To provide some scope of the current working conditions present, in one inspection of 1,326 factories, it found a staggering 95,293 structural, electrical, and fire hazards. In the specific case of structural failure as happened in Rana Plaza, the Accord found that "Most buildings are not constructed in accordance with the structural design drawings. In just over 10% of the factories inspected, this resulted in an immediate requirement to reduce the loads in the building, such as storage, water tanks and other weight" (Accord, p.7).

Supply Chain Auditing Becoming the Norm

With the tremendous reputational risk of being associated with "sweatshops," intensive, unannounced supply chain auditing is becoming the norm in some industries, with consumer electronics, shoe, and garment production being among the most intensive. It would also seem that the responsibility is so serious that these companies do not rely on self-reporting or even local auditing capabilities... many go to significant effort and expense to execute all international audits with dedicated staff from headquarters to ensure valid, consistent inspection without potential for bribery or conflicts of interest.

We will delve more into this topic later in this lesson, specifically in examining the GRI aspects and indicators related to working conditions. As we will see in the case of Nike, there are many opportunities for companies to make real, deep, immediate impacts to improve working conditions if they commit to action.

Transparency is Not Always a Choice

As turnover happens in an organization, inevitably information on salaries and benefits will become public, perhaps within the halls of the organization itself, and sometimes in more public venues via lawsuits or online salary aggregation sites like glassdoor.com. There are quite a few sites online now dedicated to anonymous sharing of company and salary information, and salaries of specific positions are made public, whether the organization wants it or not.

If stepping away from our 'sustainability lens' for a moment, compensation is a fundamentally complex and emotionally charged issue. For example, if one person comes to an organization and did a better job negotiating salary and benefits, does that create an imbalance somehow, or is that just smart business? Should a company founder or CEO have their compensation evaluated differently if they personally took on the risk of funding their fledgling company with their own money? Should a private, family-owned company be held to the same executive compensation transparency standards as a NYSE-listed corporation required to disclose salaries and compensation?

Therein lies an example of the decisions and arguments of sustainability, and as we will see, sometimes our job is to find that razor-thin line of being transparent, but also protecting the interests of the organization. While beating the drum of "transparency at all costs" sounds lovely in the spirited and hypothetical chatterings of a dinner with friends, the conversation with your boss, your boss's boss, or your boss's boss's boss will likely be quite different when you tell them you want to make their, their executives, and the Board's compensation public. Your friends may be buying you dinner for a while after that.

But, as we see in many cases in sustainability-related concerns, sometimes, being transparent will not be your choice. It may be someone else's.

B Corporation Guidelines for Compensation and Benefits

While quite a few sustainability standards delve into the aspect of compensation to varying degrees of detail, B Lab (the central hub of Certified B Corporation) offers a balanced view of compensation topics to be considered in their Impact Assessment. Formed as a straightforward set of assessment items, it asks questions in clear, unambiguous terms. While some standards may offer more open language and include somewhat undefined terms like "income equality," the B Corporation Impact Assessment is clear and decisive. This can be quite helpful for organizations to take the initial steps toward transparency and disclosure, and can seem quite a bit less intimidating than standards that may allow an organization to define an item themselves.

Especially in smaller, private companies, the need to take first steps and achieve modest successes in a sustainability program can not be underestimated, and the B Corporation Guidelines are especially well suited to these types of organizations. Their Impact Assessment also captures a Pareto-like slice of aspects and indicators, allowing it to deliver the majority of a meaningful sustainability assessment of an organization using a minimum of the aspects of a more widely scoped reporting standard, such as GRI.

Below is a brief look at the "Compensation & Wages" and "Worker Benefits" sections of the B Corporation Impact Assessment, as we can use it to scope the discussion with a bit more focus as opposed to speaking in general terms.

B Corporation Impact Assessment: Compensation & Wages

Metric	Impact Assessment Question	Weighting Assigned by B Lab
	Is an hourly living wage paid to all full-time, part-time, and temporary workers and independent contractors (excluding interns)?
	What % above the living wage did your lowest-paid hourly worker receive during the last fiscal year?
	What multiple is the highest compensated individual paid (inclusive of bonus) as compared to the lowest paid full-time worker?
	By what percentage has the company's total wages (excluding executive management) increased in the last fiscal year? Total wages are wages (including bonuses) paid to all employees during the last fiscal year.
	Have you acquired or referenced a compensation survey of your industry in the past three years?
	Based on referenced compensation study, how does your company's compensation structure (excluding executive management) compare with the market?
	In the last fiscal year, the company's bonus plan represented what % of the company's salary base (when calculating, exclude executive bonuses and salaries)?
	What % of non-executive, full-time employees participated in the company's bonus plan in the last fiscal year?

Worker Benefits

Metric	Impact Assessment Question	Weighting Assigned by B Lab
	Is health insurance offered to all full-time employees and their families?
	What % of paid health insurance premiums for individual coverage do full-time workers receive?
	What % of paid health insurance premiums for family coverage do full-time workers receive?
	At what juncture do your part-time/flex-time employees qualify for full-time health care benefits?
	Is there an Employee Retirement Plan (e.g., Pension, Profit Sharing, 401(k) available for all full-time tenured workers (tenured defined as with the company for greater of 2 years or life of the company)?
	What is the minimum number of paid vacation days / sick days / personal days / holidays offered annually to full-time tenured workers?
	What is the minimum number of days of paid maternity leave offered to full-time tenured workers?
	What is the minimum number of days of paid paternity leave offered to full-time tenured workers?
	What is the severance (excluding employees terminated with cause) offered in practice and in writing to all full-time tenured workers?
	What additional benefits are offered to full-time tenured workers? [list of insurances and other benefits]

If you are interested to see what responses to a full Impact Assessment looks like, here are Method's responses to the B Lab Impact Assessment Questionnaire.

An Original Innovator in Compensation: Ben & Jerry's

Ben & Jerry's was an early innovator on a variety of sustainability issues, but they were especially so on the issue of worker and executive compensation, and specifically living wages and indexing executive compensation to that of employees. It is a model which quite a few other companies have adopted over the years including Whole Foods, which we will visit later in this Lesson. While Ben & Jerry's may have innovated in compensation, we have seen that admirable compensation practice fall by the wayside as the company matured and was then purchased by Unilever. Consider the progression of compensation practices over the years, as captured below:

From "Passing the Scoop," Claudia Dreifus's interview of Ben Cohen and Jerry Greenfield, as they were seeking a new CEO to succeed Ben. The New York Times, 1994:

Q: Your company used to have a salary system where the highest-paid employee made no more than five times the lowest-paid one. It's been in the press that you've increased your own salaries.

JERRY: We went from a salary ratio of 5 to 1 to 7 to 1. The top salary moved from $100,000 a year to $150,000 year. Ben and I are not at the top salary within the company. The president of the company, Chuck Lacy, is. Ben and I earn $132,500. In order to get this new C.E.O., we are not going to restrict ourselves. I expect that we will be paying compensation at the low end of market rates for a C.E.O.

From Edwards, 2011, in describing compensation in the years immediately preceding Ben & Jerry's sale to Unilever:

Ben & Jerry's once, admirably, had a 5 to 1 rule limiting the pay of its CEO -- $81,000 -- to the company's lowest paid worker. It required the CEO to raise the pay of his employees to create a pay raise for himself. Ben & Jerry's abandoned that rule in 1994 when the company couldn't find anyone to replace Ben Cohen upon his retirement.

During the 1990s, the 5 to 1 rule became a 7 to 1 rule, lifting the CEO's salary to $150,000.

By 2000, the CEO's pay rose to 17 to 1, or $504,848, not including stock options.

At that point, Ben & Jerry's was acquired by Unilever (UL) and the company stopped disclosing details about its CEO's pay. The board of directors no longer discloses its compensation either, even though board chairman Jeff Dossier claims he is "dedicated to creating a more just world." The compensation of current CEO Jostein Solheim is now a secret. That's less disclosure than is offered by Ben & Jerry's larger corporate parent.

Note that the 17:1 ratio was before the sale to Unilever, and that it did not include stock options. In the case of many executives, stock options are a massive portion of compensation, and many would consider the exclusion of options to be, at best a misstep, and at worst, a designed deception.

Then, Ben and Jerry's was sold, and the founders received their just compensation for their years of risk and work:

From Edmonson, 2014:

But the company eventually grew beyond the managerial abilities of its board, and after years of struggling, they were forced to sell to Unilever, the world’s second-largest food company. Co-founder Ben Cohen walked away from the deal with $41 million, and Jerry Greenfield got $9.5 million.

Working the numbers based on the 17:1 executive compensation ratio in place in 2000 before the sale, Ben's compensation that year would have been 1380:1, and he may have also walked away with options and other evergreen clauses. In many cases as we will see, the early ideals of sustainability create the "halo effect" for a brand, but the actual practices may erode or be hidden from view over time.

In the practice of sustainability and innovation, this is an omnipresent struggle: that we not only strive to create and live out ideals in organizations, but continue to grow the ideals over time as the organization grows. Unfortunately, as we will see throughout this course, companies that lived high ideals that faded over time may be subject to more criticism than than companies that never lived out high ideals in the first place (see "The Jilted Lover Effect"). Sustainability is certainly not without risk.

As we will try to cultivate throughout our time together, we will need to set aside our personal, idealistic passion for sustainability to also be able to judge situations, decisions, and business cases through an impartial, unbiased lens. It is through those optimist/realist lenses that we will be able to see the potential, as well as the potential risks. Sometimes, we will play the "short game," and other times we must take a longer view, and it is important to be able to take detached views at times. Companies may live by their ideals, but they can also die by those ideals.

So we may see both the idealist, passionate view that Ben & Jerry's "sold out" from their original ideals, but also the realist view that for the business to remain sustainable as it grew from a two-man operation into a powerhouse brand, finding a CEO capable of taking the reigns for sub-market compensation would be very difficult. Discussion of the finer points of compensation ratios becomes a bit moot if a sub 17:1-compensated CEO were to run Ben & Jerry's into bankruptcy.

Click for text description.

Figure 11: Initial Detection of Occupational Frauds

As Figure 11 demonstrates, tips are consistently the most common detection method for cases of occupational fraud by a significant margin, which has been an observed trend since we first began tracking this data in 2002. Management review and internal audit follow tips, which was also true for the 2010 and 2012 reports.

Initial Detection of Occupational Frauds

Detection Method	2010 (%)	2012 (%)	2014 (%)
Tip	40.2	43.3	42.2
Management Review	15.4	14.6	16.0
Internal Audit	13.9	14.4	14.1
By Accident	8.3	7.0	6.8
Account Reconciliation	6.1	4.8	6.6
Document Examination	5.2	4.1	4.2
External Audit	4.6	3.3	3.0
Surveillance/Monitoring	2.6	1.9	2.6
Notified by Law Enforcement	1.8	3.0	2.2
IT Controls	0.8	1.1	1.1
Confession	1.0	1.5	0.8
Other	N/A	1.1	0.5

Figure 13: Source of Tips

It is well known that employees are a valuable source of information for discovering potential fraud, and Figure 13 shows that employees were the source of almost half of all tips that led to the detection of fraud. Occupational fraud has a negative impact on an organization, including those who work for it, which might explain why employees so often step forward. At the same time, there is often a risk of backlash for whistleblowers, which might explain why a substantial amount of tips came from anonymous parties (14.6%).

The fact that more than half of all tips involved parties other than confirmed employees emphasizes the importance of cultivating tips from various sources. For example, many employers circulate a whistleblower policy or fraud hotline information to employees only, but our data indicates that it is also advantageous to educate vendors, customers, and owners/shareholders on how to report suspicions of fraud.

Source of Tips

Source	Percentage of Tips (%)
Employee	49.0%
Customer	21.6%
Anonymous	14.6%
Vendor	9.6%
Other	6.5%
Shareholder/Owner	4.3%
Competitor	1.5%

Figure 14: Impact of Hotlines

The presence of a reporting hotline had a substantial impact on the initial fraud detection method in the cases we analyzed. Tips were the most common detection method for organizations with and without hotlines, but the benefit was much more pronounced in organizations with them (see Figure 14).

For organizations without hotlines, the reduced detection through tips resulted in other forms of detection being more prominent. Several detection methods tend to be associated with higher median losses and increased median duration. Some of these less-effective means of detection - by accident, notification by law enforcement, and external audit - were more than twice as common in organizations without hotlines.

Impact of Hotlines

Detection Method	Organizations With Hotlines (%)	Organizations Without Hotlines (%)
Tip	51.0%	33.3%
Internal Audit	15.2%	13.2%
Management Review	14.6%	17.7%
Account Reconciliation	5.1%	7.9%
By Accident	4.2%	9.5%
Surveillance/Monitoring	2.9%	1.7%
Document Examination	2.0%	6.4%
External Audit	1.3%	5.2%
Notified by Law Enforcement	1.3%	2.7%
IT Controls	1.3%	0.9%
Confession	0.6%	0.9%
Other	0.3%	0.7%

Credit: 2014 Report to the Nations on Occupational Fraud and Abuse. 2014 Global Fraud Study. Initial Detection of Occupational Frauds, figure 11. Source of Tips, figure 13. Impact of Hotlines, figure 14. Association of Certified Fraud Examiners. (https://www.forensicaccounting.com.au/wp-content/uploads/2015/01/2014-report-to-nations.pdf)

Although many of the cases in which we are interested may not necessarily be considered "fraud," it could be expected that the same reporting and whistleblowing mechanisms unearthing fraud within the organization would similarly unearth any potentially damaging issue facing the organization.

A Brief View of Organizational Practices to Facilitate Whistleblowing

Credit: From Ravishankar, 2003:

Steps for Creating a Whistleblowing Culture

Create a Policy

A policy about reporting illegal or unethical practices should include:

Formal mechanisms for reporting violations, such as hotlines and mailboxes.

Clear communications about the process of voicing concerns, such as a specific chain of command, or the identification of a specific person in the organization, such as an ombudsman or a human resources professional.

Clear communications about bans on retaliation.

In addition, a clear connection should exist between an organization's code of ethics and performance measures. For example, in the performance review process, employees can be held accountable not only for meeting their goals and objectives but also for doing so in accordance with the stated values or business standards of the company.

Get Endorsement From Top Management

Top management, starting with the CEO, should demonstrate a strong commitment to encouraging whistleblowing. This message must be communicated by line managers at all levels, who are trained continuously in creating an open-door policy regarding employee complaints.

Publicize the Organization's Commitment

To create a culture of openness and honesty, it is important that employees hear about the policy regularly. Top management should make every effort to talk about the commitment to ethical behavior in memos, newsletters, and speeches to company personnel. Publicly acknowledging and rewarding employees who pinpoint ethical issues is one way to send the message that management is serious about addressing issues before they become endemic.

Investigate and Follow Up

Managers should be required to investigate all allegations promptly and thoroughly, and report the origins and the results of the investigation to a higher authority. For example, at IBM, a long-standing open-door policy requires that any complaint received must be investigated within a certain number of hours. Inaction is the best way to create cynicism about the seriousness of an organization's ethics policy.

Assess the Organization's Internal Whistleblowing System

Find out employees' opinions about the organization's culture vis-à-vis its commitment to ethics and values. For example, Sears conducts an annual employee survey related to ethics. Some questions are: Do you believe unethical issues are tolerated here? Do you know how to report an ethical issue?

Understanding Definitions and Usage in Society

As a stand-alone term as used in sustainability and in reference to organizations, what I will refer to as the more formally defined "capital-D" Diversity tends to activate entire constellations of ideas for people, many of which are arranged around concepts of race, gender, sexual orientation, age, religion, and others. The University of California, Berkeley offers forth a definition of Diversity, which captures the essence of most definitions of Diversity you will see across a range of organizations, from universities to NGOs to corporations:

Diversity refers to human qualities that are different from our own and those of groups to which we belong; but that are manifested in other individuals and groups. Dimensions of diversity include but are not limited to: age, ethnicity, gender, physical abilities/qualities, race, sexual orientation, educational background, geographic location, income, marital status, military experience, parental status, religious beliefs, work experience, and job classification.

Now, consider the broader, strict definition of "little-d" diversity as found in the Merriam-Webster Dictionary and as we could apply to virtually any topic, from the diversity of species in a wetland to a diversity of thought:

the quality or state of having many different forms, types, ideas, etc.

We could argue that in 2015, the popular use is far more weighed toward Diversity as referred to in the Berkeley definition. Consider the Google Ngram results from more than 20 million scanned books spanning more than 200 years as to the relative use of the forms of "diversity" in English-language books published in any country from 1850-2008. I have added the terms "sustainability," "African-American," "disability," and "equality" to provide some insight into the use of associated terms:

And for a measure of comparison across use in other languages, the relative use of "diversity" in books published in other languages:

We will revisit the importance of the popular use of the term, how it relates to organizational framing, and how it can relate to our sustainability efforts, in a moment.

Exploring How People Understand and Frame Diversity

Take a moment to consider the concepts of "diversity" and "risk" within an organization. If you happen to have a piece of paper around, just take thirty seconds to jot down a few ideas or concepts that you may associate with these two words. You don't need to do some profound meditative thinking, just whatever associations come to mind.

To bring a few more perspectives into the discussion, on a Saturday afternoon, I posed the following question using an online survey tool to 123 American adults representing a range of socioeconomic factors:

"If you owned a business, what would you consider the #1 risk of NOT having diversity in your organization?"

The online research is by no means meant to be a scientific poll, but instead to act as a very quick and inexpensive way to understand sentiment, space, and short verbatim responses on a given topic. Of course, as the topic becomes more specific and technical, the participant criterion becomes more finite and selection becomes more rigorous... but for open topics where we desire a volume of free associations and quick inputs, this structure can be invaluable. We will be covering research design in far greater detail as we discuss Beta testing in later lessons.

Below are the results, represented as a cognitive map. Click/drag will move you along the map, and Ctrl+mouse wheel while you are over the map will allow you to zoom in/out.

As we will also explore in later lessons, we are looking for our innovation concepts to have some level of "background resonance" from which we can build. In this case, note the high prevalence of open "little-d" diversity themes and unprompted links to organizational prosperity and innovation, while it would appear that the blue path may deal more with the negative frames for not having diversity as 'the risks of discrimination.'

When we are "pencil sketching," we can begin to see a theme that could merit further research and which can serve as the very early nucleus of a message/strategy: There are already some very rich associations and links made between diversity and innovation, even when we are asking a very open, non-directed question. If we were seeking to understand what pathways and messages on diversity we wanted to include in our sustainability mission, for example, our next step would be to delve into all of those positive associations in far more depth using other research methodologies.

How could this be of strategic interest? If we were a media company, we might want to explore how diversity can reinforce creativity, a core facet of our operation. We could use this in focusing our efforts in recruiting new talent, in reinforcing our strategic position on diversity, or in setting diversity aspects and indicators. Perhaps if we wanted to create a unique cause for our agency to support, it could be to support the importance of diversity for creativity to middle schoolers.

Sometimes, in research, like in land exploration, the goal is to understand the entire landscape so that we may even begin to understand what could be of interest. To do so, sometimes one needs to take the highest vantage point possible to provide the widest view.

Organizational Frames for Diversity

Just as we seek to understand the thoughts and frames individuals have for Diversity, we can also consider the embedded frames which influence how an organization views Diversity... and ultimately, the types of actions they may choose to take, if any. At times, Diversity is used in a superficial way within organizations and sustainability programs without consideration of the deeper, long-term and more strategic implications of diversity. As we delve more deeply into our research and analysis this semester, we will begin to understand how organizations frame this, and other aspects of sustainability, and how it can affect innovation.

Consider three potential frames or perspectives on Diversity within the organization:

Diversity As an Essential Basis of Innovation

Throughout the semester, we will explore methodologies and processes to gain insight, and ultimately, to find opportunities from which we can innovate and create. We will see that having diversity of thought and perspective on a team is a core need for innovation, and that innovation thrives when built from diversity. But, consider that this is "diversity," not "Diversity." For an organization to truly operate that third frame above, "Diversity as core strength," it must seek and embrace diversity wherever it can: diversity of experience, diversity of color, diversity of perspective, diversity of belief, diversity of sexual orientation, diversity of education, diversity of approach. (This is also a driver as to why this course is structured around cases and discussion: so that we may all benefit from the discourse and diverse viewpoints afforded by our unique experiences and personalities.)

The following is from Stephanie C. Hill, now a President at Lockheed Martin, recounting her experiences as a integrated-product team leader... and a young African-American woman:

Perhaps the most important outcome of my experience as team leader was that it helped me evolve my understanding of diversity into a broader concept of inclusion. Diversity of age, gender, skin color, ethnicity, and more—the attributes of a diverse workplace that are the first to come to mind—is often visible and easy to identify and requires focus to engage and develop. The presence of diversity that you can see is often an indicator of an inclusive environment that embraces diversity of thought. A team dynamic that opens the door to inclusion will elicit ideas that spring from varied professional, educational and social experiences.

It's a truism that the best teams are greater than the sum of their parts. I believe that is only true when those parts are diverse. When everyone looks the same, acts the same and thinks the same, is it any wonder that they often fail to embrace—or even produce—innovative and unconventional ideas?

Underscoring Ms. Hill's experience is an interesting body of research by Van der Vegt and Janssen (2003) titled, "Joint Impact of Interdependence and Group Diversity on Innovation" that works to underscore that it is diversity of thought, experience, and behavior–not simply demographic Diversity–which functions to help drive innovative thinking in groups. Emphasis is mine:

Third, our results showed cognitive and demographic group diversity to be significantly interrelated. This provides some initial empirical support for a “trait-approach” to group diversity in which objective demographic differences are presumed to affect interaction and performance only in so far as such diversity is directly linked to differences in such underlying attributes as knowledge, skills, values, and beliefs (McGrath et al., 1995). Nevertheless,the modest relationship between demographic and cognitive group diversity found in this research suggests that we must be careful in equating both types of group diversity. Apparently, team members’ perceptions of cognitive diversity are influenced by other factors as well. More research that examines the exact relationships between demographic and cognitive group diversity as well as the antecedents and consequences of cognitive group diversity is clearly needed. Nevertheless, although cognitive and demographic group diversity were only modestly related, they were found to have similar moderating effects on the relationship between interdependence and innovative behavior. This does suggest that it is indeed the diversity in knowledge, values, and skills, resulting from demographic differences, that potentially promotes individual innovative behavior in work teams.

An Example of Diversity Driving Innovation

OXO, the now ubiquitous housewares and utensils company, was founded by the retired Sam Farber while he watched his arthritic wife in pain as she used a metal-handled peeler. Built on the foundation of Sam's diverse experiences and age, OXO would begin with a peeler design, turn a profit in year one, and grow at a compound annual growth rate of 30%+ every year from 1991 to 2004. Sam Farber would unveil the newly minted OXO Peeler at the the 1990 Gourmet Products Show, and would go on to sell for three times the price of the incumbent metal handled peelers found in most kitchens.

Please watch the following 5:07 video made by the design house that worked with Sam Farber, addressing the importance of real people–and "the extremes"–in design.

Video: Objectified: Smart Design OXO Good Grips Story (5:07)

Significant Variation in Organizational Emphasis

People aspects and indicators are highly varied in CSRs worldwide, with what is probably the most variation of any of the 3Ps. Some companies have tremendous emphasis on People aspects and address not only concerns internal to the organization, but also the entire supply chain. These organizations also tend to have a very high level of stakeholder engagement, not only as an input for the creation of People aspects and indicators, but many times, as an output of the creation of those aspects and indicators. For example, if an organization annually polled and surveyed the labor union at their manufacturing sites to address an important People aspect for their sustainability program, the very act of collecting that data and engaging union members would be a significant act of stakeholder engagement.

As we will see in our exploration of Nike in our case this week, sometimes the high level of attention to People aspects may also be the result of past negative incidents. Occurrences such as episodes of major PR damage, labor strikes, or NGO investigation tend to nudge organizations to pay more attention to those aspects in the future.

At the other end of the spectrum lie some of the same companies actively chasing "the White Whale of Sustainability" in regard to Planet aspects. Perhaps because of a superficial understanding of sustainability (i.e., "greenwashing") or perhaps because they wish to take a somewhat more passive approach to sustainability, these organizations will have a tendency to do one of two things with People aspects:

1. Include a few, somewhat generic aspects and indicators for employees. The scope of these efforts will tend to be as passive as possible, perhaps a short employee survey with no open-ended questions, or maybe a staged employee picture with a single statistic. We can not consider it meaningful stakeholder engagement when the effort itself is superficial, and the only stakeholder group engaged receives paychecks bearing the signature of the CEO of the organization in question.
2. Completely ignore People aspects and indicators. Typically, this is a symptom of a "greenwashed" sustainability effort.

People Aspects and Indicators in Sustainability Reporting

People Aspects and Indicators in Corporate Sustainability Reports

Employment

Occupational Health and Safety

Diversity and Equal Opportunity

Diversity and Equal Opportunity

Aspect of Diversity and Equal Opportunity	GRI G4 definition	Example/Presentation of the indicator as presented in CSR
Composition of governance bodies and breakdown of employees per employee category	G4-LA12 Report	Click on image to view a larger version. Text Version of Ethnicity by Gender Table

Equal Remuneration for Women and Men

Supplier Assessment for Labor Practices

Labor Practices Grievance Mechanisms

Child Labor, Forced or Compulsory Labor, and Assessment

Supplier Human Rights Assessment

Local Communities

Public Policy

Compliance

For this examination of sustainability innovation leaders, we are going to examine three companies and how they can help people through social enterprise and focus on People. Think of this as an examination of three strata of People as opposed to three examples:

• Greyston Bakery - We begin by looking at People on the local scale, and how a company can actively transform a community and the lives of those within it.
• Patagonia - We continue by looking at Patagonia's approach to supply chain sustainability and how they can affect workers worldwide through sustainable sourcing and supply chain innovation.
• CyArk and Iron Mountain - We close by looking at how a unique partnership has the potential to play a role in world history for generations to come. It's also an example of how every company can have a unique slant on sustainability and how it ties to their core business.

Greyston Bakery

Please watch the following 6:55 video.

Video: Greyston Bakery | Ben & Jerry's (6:55)

The Insight

Much of the insight of the very creation of Greyston is owed to its founder Bernard Tetsugen Glassman, a former McDonnell Douglas aeronautics engineer turned Buddhist priest and Zen master. The original Greyston insight from Roshi Glassman was that a profitable venture could be used to fund a non-profit for social good, in this case, to provide housing to the homeless.

The Opportunity

To take on their mission to change lives as both an input and an output of the Greyston process, the organization takes a very practical approach: making the best brownies and cakes possible, efficiently and profitably.

Proof of their approach of conventional means to unconventional ends? Their longtime CEO, Julius Walls Jr.: "Most of our customers had zero awareness of what Greyston was. They just thought we made great cakes" (Stewart, 2003).

GRI Planet Aspects

• Programs for skills management and lifelong learning (G4-LA10)
• Breakdown of employees per employee category according to gender, age group, minority group membership, and other indicators of diversity (G4-LA12)
• Percentage of operations with implemented local community engagement (G4-SO1)

Vision

As elegantly stated in their materials, "We don't hire people to bake brownies, we bake brownies to hire people."

From "Our History": "In the 1980s, our founder, Roshi Bernie Glassman recognized that employment is the gateway out of poverty and towards self-sufficiency. In 1982, he opened Greyston Bakery, giving the hard-to-employ a new chance at life. His open-door policy offered employment opportunities regardless of education, work history or past social barriers, such as incarceration, homelessness or drug use."

Innovation

There are many innovations at play, but one is found in the combination of what may be seen as two pretty common enterprises: a 501(c)3 for economic renewal and a profitable bakery. The foundational innovation of Greyston lies in the coupling of those two enterprises and the radically simple approach to hiring: show up, get a number, and you get a job when your number is called. No questions asked.

Storytelling

Rich, authentic storytelling, as we can see from the video. Although Greyston appears to be a bit more of an ingredient brand at this point (Ben & Jerry's, private labeled cakes at restaurants), it would appear that their story may get more play publicly as their brownies and cookies are now carried through Whole Foods.

Achievement

They do a nice job at capturing some of the basic metrics of their entrepreneurial and social successes thus far: 30,000 lbs of brownies per day, 300 units of affordable housing created and funded, 2,200 Yonkers community members served, 500,000 Whole Planet brownies sold through Whole Foods (with 1% of sales going to the Whole Planet Foundation for microcredit loans), community training programs, gardens, clinics, free daycare, and more.

Structure

They have a brief, but very impactful and well-structured 2014 Annual Report.

Interestingly, in service of capturing the entire story of achievement, they cite savings realized by both the County and local government because of Greyston initiatives.

The Secret

Greyston's elegance and effectiveness is in its simplicity. In essence, it is a charitable enterprise which does not rely on your charity in purchasing its products, as it asks nothing but for its baked goods to be considered against all others.

It is no wonder Greyston's founder is a Zen master.

Patagonia (Footprint Chronicles)

Please watch the following 1:40 video.

Video: The New Footprint Chronicles - Patagonia's supply chain examined (1:40)

The Insight

Elevating the sustainable supply chain, telling stories around it, and making it a core differentiator.

The Opportunity

To continue to extend Patagonia leadership in sustainable sourcing and practices, a core tenet of their brand. There is also an excellent opportunity to help justify the (sometimes significant) Patagonia price premium on every product page.

GRI Planet Aspects

• Percentage of new suppliers that were screened using labor practices criteria (G4-LA14)
• Total number and percentage of operations that have been subject to human rights reviews of impact assessments (G4-HR9)

Vision

Patagonia Mission Statement: "Build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis."

In speaking specifically on The Footprint Chronicles, We promote fair labor practices, safe working conditions and environmental responsibility throughout the Patagonia supply chain." Also, from the video, "We wanted to make it easy and engaging for customers to learn about our products, and more about the suppliers that make them for us."

If you nest or link those three statements, it is possible to connect the tangible, customer-facing cues all the way up to the highest-level Mission of the company. This is essential to connect tactics to strategies, and we will be exploring and mapping how we can make this happen two lessons from now.

Innovation

I'd like to make something amply clear here, and a theme we will revisit throughout the course: "innovation" does not always mean that you have to create Cold Fusion or cars that run on water. Innovation can be, at times, as simple as having the willpower and vision as a company to do something others do not, can not, or will not. This program is a perfect example. Many companies with solid sustainability programs might rate or refer to suppliers anonymously, far fewer will mention suppliers by name... and then there's Patagonia, calling out the specific suppliers who are used to create the product right there on every product page.

Storytelling

Revealed in layers. Patagonia reveals the core information about the suppliers at the first level, on the product page, with a few notes about what the supplier does and why Patagonia partners with them. At the second level is The Footprint Chronicles Map, where they list all of their suppliers with a bit more information and talk about initiatives and standards used for suppliers. Finally, one could read their sustainability report (of sorts), Environmental and Social Initiatives, for the fully granular data and content.

This mechanism is effective because it does not foist massive amounts of supplier information on the valuable real estate of the product page. It instead tells a brief story, and links to a microsite/landing page delving into the topic and Patagonia's approaches.

Achievement

Patagonia addresses supply chain successes fully in its CSR, but the achievement specifically for this program is having the willpower and vision to add it to the product page. That, in and of itself, is an achievement.

Structure

Much like Greyston's Zen-like simplicity, Patagonia's structure for this initiative is as transparent and honest as it is simple: if a supplier is used for this garment, they are listed. They do not limit it to a special subset of products, or a sub-branded 'Patagonia Platinum': it's on every shirt, every pack, every wetsuit.

The Secret

It's another fantastic, yet subtle mechanism to reinforce why you pay more for Patagonia. In a world of seemingly infinite options, and with REI, EMS, Arcteryx, and other competitors a click away, constant reinforcement of brand and message is essential.

CyArk and Iron Mountain (Partnership to document world heritage sites)

Please watch the following 5:14 video.

Video: Cyark Technology & Iron Mountain (5:14)

Summary

Also, a great tour of the Iron Mountain facility, and some of the priceless archives it holds.

The Insight

For a company that archives important documents, objects, and data in an ultra-secure mine (Iron Mountain), there could be an excellent opportunity to partner with a non-profit working to capture something which can not be physically archived: digital versions of some of the world's most important archeological and cultural sites.

The Opportunity

To do a service to humankind while doing a service to your brand.

GRI Planet Aspects

Percentage of operations with implemented local community engagement (G4-SO1) [One could consider this far more ranging than local community].

Vision

From the Iron Mountain partnership page:

CHALLENGE:
Ensure the data used to document world heritage sites remains safe, secure and available for future generations.

SOLUTION:
Innovative technologies and services from Iron Mountain, Crossroads Systems and Spectra Logic.

VALUE:

Innovation

Much of the innovation is in the partnership and the fact that the various providers partnered to supply CyArk with a solution to fit their unique needs.

Storytelling

There are certainly stories to be told, and many are indeed told effectively. It does feel that given the importance of the CyArk project, some of the materials on this partnership initiative spend far too much time talking about the companies as opposed to the importance of the project, etc. This may simply be a function of the audience, but it feels there is more opportunity to tell stories.

That said, the core story of CyArk and Iron Mountain can be that of a very compelling partnership, and one tightly tied to the core missions of both companies.

Achievement

Perhaps a little weak. It appears that after the initial partnership blast, CyArk has recorded all of the achievement and progress toward its goals on its pages, but Iron Mountain has stepped back a bit. This may simply be the tempo of business moving onto new messages, but given the potential for telling rich stories about their sustainability partnership and core business, perhaps Iron Mountain is leaving some value behind.

Structure

This is a story-driven initiative program, and while captured in Iron Mountain's sustainability report, it isn't necessarily highly structured. Iron Mountain mentions a paragraph on CyArk's mission, and that is essentially the extent of it. This is Iron Mountain's first CSR, so they absolutely had other concerns on which to concentrate, but like the other facets, it would seem that there is additional value to be taken away from what they have already done with the program.

The Secret

It's hard to overestimate the halo value of Iron Mountain being able to say that they 'are entrusted with the digitized versions of the world's most important sites... for posterity.' Might make you a touch more comfortable sending them your legal documents to archive for seven years.

• Manage growing data volumes in a secure, cost-efficient manner
• Protect mankind’s cultural heritage
• Focus more time and resources on mission goals

Credit: Panoramic Supercell, Throckmorton, TX by Kelly DeLay is licensed under CC BY-NC 2.0 DEED

A timid person is frightened before a danger, a coward during the time, and a courageous person afterward.

There is no room for timidity or passivity in approaching People aspects of sustainability. You can't purchase "negative PR offset credits" or "worker happiness credits" like you can with carbon emissions, you can't expect a consultant to come in and "fix" things as you might with a facility energy audit. The fact that you are dealing with human beings, from customers to NGOs, to employees domestically and abroad, makes this element of the 3Ps very different from Planet or Profit.

Furthermore, addressing People aspects and indicators is an exercise in fluidity, and you may find that because we are dealing with people, perceptions from completely unrelated issues can influence behavior. Have a product recall? You may see increased media scrutiny of your organization and its treatment of workers. Have a multi-year run of prosperity in the organization and experience associated stock value increases? You may find stakeholder groups which were previously friendly beginning to question executive compensation. Conversely, if you are known as a good partner in the community, you may find NGO discussions having a far more positive tone.

People aspects of sustainability are also an interesting microcosm of society, and tap into what can be some fairly polarizing topics. And, by "fairly polarizing," this does not equate to "makes for lively dinner conversation." This equates to the fact that you may be one of the people in the mix of stakeholder engagement, or talking with NGOs not at all happy with your organization or the fact that you personally make a living from an organization with which they fundamentally disagree. You could, in fact, be the lightning rod in those polarizing discussions.

From the hands-on, physically (and frankly, emotionally) exhausting effort needed for robust stakeholder engagement, to initiating community engagement, to establishing grant programs and worker training programs, these efforts are all as ambitious as they are difficult. As we will explore in later Lessons, this difficulty is many times rewarded with your organization gleaning insights which can act as a significant platform for innovation. Where competitors may be performing focus groups with placid participants paid to attend and kept happy with snack food, robust stakeholder efforts will allow us the the ability to not only "get out front" of potential issues, but also to understand rich opportunities for innovation.

Recapping, our goals through the end of this Lesson are to:

• discern People-centric aspects and initiatives within a Corporate Sustainability Report;
• evaluate an organization's approach to People issues through the lens of their stated Vision, Mission, and Values;
• discern strategies and tactics used in organizations with proactive approaches to People aspects;
• express how organizations engaging their workforces and communities benefit in tangible ways;
• articulate the value of the stakeholder engagement process.

To these ends, this week's case will focus on two of the world's most recognizable brands, both of which have suffered significant reputational damage from People issues. In Nike's case, most of the damage was suffered in the 1990s, while, it could be argued Apple continues to bear reputational damage from People issues as of the time of writing. We will discuss not only the strategies each company used to approach their respective People issues and how it relates to their stated Vision, Mission, and Values, but also the tactics which they use to execute those strategies.

Summary

My intent in covering the Profit pillar of sustainability third is very specific:

In Lesson 1, we begin in Planet, the first and only sustainability aspect most people tend to think about (and therefore think that they know), and show the tremendous breadth in how organizations define and measure.

In Lesson 2, my intent is to move you a little more into the 'deep end' of Sustainability, into the even more esoteric and complex People aspects. This is where hopefully you are able to see how much research and understanding is needed to understand the actual content of a CSR before we can evaluate it. For example, how could we possibly speak intelligently about how two organizations compare on "Worker Satisfaction" if we are solely reliant on their own metrics and data, and one obfuscates and the other misattributes?

In this Lesson, my intent is to snap you back into the aspect of Sustainability the public always takes for granted, but yet, is what allows an organization to take on its noble purpose at all. Even in the case of a pure charity, if operating expenses outstrip the ability to fundraise or otherwise generate funding, insolvency awaits.

For me, personally, Profit is the most exciting pillar in many ways, as it is what allows an organization to expand on their VMVs. Perhaps more than simply a 'nice to have' or a 'mission stimulant,' it is the oxygen of the organization.

The other aspect I hope to develop in this Lesson is that many 'nuts and bolts' organizations have done wonderful things in terms of waste reduction, product development, lifecycle, and efficiency under the auspices of "profitability." These organizations do the yeoman work of sustainability without sometimes even realizing it.

Learning Outcomes

By the end of this lesson, you should be able to:

• discern the material aspects for a sustainability program and their importance;
• evaluate an organization's approach to Profit issues through the lens of their stated Vision, Mission, and Values;
• argue the relationships between sustainability, profitability, and long-term strategy of an organization;
• differentiate sustainability-centric product offerings and strategies (revenue positive) from sustainability programs;
• articulate the role of risk mitigation and regulatory compliance in sustainability.

Lesson Roadmap

Questions?

If you have any questions, please send them to my axj153@psu.edu Faculty email. I will check daily to respond. If your question is one that is relevant to the entire class, I may respond to the entire class rather than individually.

What Was Once Intangible Now Becomes Immediate

In discussing sustainability with colleagues–or frankly anyone, after discovering you work in the field of sustainability–you may find two questions tend to be asked in one form or another:

• "Where is all of this sustainability stuff coming from?"
• "What does it mean to our organization?"

In both cases, materiality is a significant part of the answer, and there are two definitions of materiality which are equally important in stating our case: the formal Supreme Court definition of materiality in reference to financial reporting, and the functional definition of materiality as applied to each organization. Both are extremely important for shaping sustainability within the organization, and these two cores of materiality tend to be invaluable in explaining sustainability to anyone from a classroom of 10-year-olds to your organization's leadership (which may have strikingly similar attention spans!).

What is fascinating about the two cores of materiality is that they tend to capture much of the essence of sustainability as practiced in organizations today, as the Supreme Court definition captures the external requirement, and the functional definition tends to capture internal imperatives and what makes the sustainability program unique to the organization. For this reason, materiality is also what makes the practice of sustainability so varied from one organization to another, as there is no standard "sustainability playbook" an organization can dust off and execute. For example, an excellent sustainability program for Nike would, at best, be a poor fit for Ford.

The Formal Supreme Court Definition of Materiality

In 1976, the U.S. Supreme Court rendered a judgment in TSC Industries, Inc. v. Northway, Inc, creating a more defined definition of what information should indeed be considered material in financial disclosures, especially for publicly traded companies.

In summary, the case dealt with a merger between National Industries and TSC Industries where there had been some intermingling of board members and a significant share of company stock had traded hands before a merger vote, but this interaction was not disclosed to shareholders. In the case, Northway, a TSC shareholder, argued that the various pre-merger intermingling of TSC and National could have been construed as a conflict of interest, and would have caused them to therefore vote against the merger.

The earlier definition of materiality, as interpreted by the Court of Appeals in this case and recalled in the Supreme Court judgment was that, "...material facts include all facts which a reasonable shareholder might consider important." The Supreme Court believed that this Court of Appeals interpretation of material information was far too broad, and in a unanimous decision, Justice Thurgood Marshall penned an extremely important line in the Case Opinion:

...there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available.

This simple line would, in time, be the sentence that launched a thousand sustainability programs. This line is why sustainability programs are no longer "optional" for publicly traded companies, and why those publicly traded companies, in turn, "push down" sustainability requirements and audits into their suppliers. What those third-party suppliers do–for example, manufacturing shoes with child or indentured labor–is indeed a risk and material concern for the company purchasing from that supplier.

The Sustainable Accounting Standards Board (commonly referred to as SASB in text, pronounced 'sass-bee'), a 501(c)3 created to help create uniform standards for materiality disclosures (and chaired by Michael Bloomberg), further illustrates the point, bridging the Supreme Court finding with existing required disclosures for public companies (SASB, 2015):

Disclosure of material sustainability issues is important to investors, companies, regulators and the public for the following reasons:

• The SEC already requires disclosure of material issues in the Form 10-K, 20-F and other filings in use by investors.
• Institutional investors have a fiduciary duty that requires them to consider material issues.
• Companies have limited resources, and must therefore focus on disclosing and managing the performance of material issues.
• The potential for negative social and environmental impacts of operations can present high costs to investors, companies and society.

The Functional Definition of Materiality

GRI offers a short explanation of materiality principle as applied to an organization's sustainability program, stating it as aspects that "Reflect the organization’s significant economic, environmental and social impacts; or Substantively influence the assessments and decisions of stakeholders" (GRI, 2013). While this is certainly accurate, I tend to favor the more picturable definition of the GRI Materiality Tests:

In defining material Aspects, the organization takes into account the following factors:

• Reasonably estimable sustainability impacts, risks, or opportunities (such as global warming, HIV-AIDS, poverty) identified through sound investigation by people with recognized expertise, or by expert bodies with recognized credentials in the field
• Main sustainability interests and topics, and Indicators raised by stakeholders (such as vulnerable groups within local communities, civil society)
• The main topics and future challenges for the sector reported by peers and competitors
• Relevant laws, regulations, international agreements, or voluntary agreements with strategic significance to the organization and its stakeholders
• Key organizational values, policies, strategies, operational management systems, goals, and targets
• The interests and expectations of stakeholders specifically invested in the success of the organization (such as employees, shareholders, and suppliers)
• Significant risks to the organization
• Critical factors for enabling organizational success
• The core competencies of the organization and the manner in which they may or could contribute to sustainable development

Capturing Materiality: The Materiality Matrix

To set the boundaries of what aspects and considerations an organization considers specifically material to their operation, they create a materiality matrix. What is interesting about this chart or table is that it bridges the two cores of materiality in a rather illustrative and easy to understand format. We will do a bit of comparative analysis in a moment, but I'd like to briefly cover the process underlying the creation of a materiality matrix.

The organization begins by creating a full list of issues and aspects it faces, doing so both by internal meetings and external stakeholder engagement. These issues could range from minor concerns raised by an NGO to aspects which could potentially trigger the Supreme Court definition of materiality insofar as the omission of the information could alter "the total mix of information made available." Each aspect's materiality is then rated according to two standards, arranged on the X and Y axis:

In the X axis, usually referred to as "Organizational relevance" or "Organizational impact," the organization rates the importance of a given issue to its operations and viability. The act of creating this evaluation tends to be voted and argued by a broad team representing the various functions of the organization from marketing to EHS. Some companies are extremely scientific in this regard, creating weightings for the various functions based on their knowledge of each specific issue at hand, while other organizations essentially throw the issues up on the wall and vote to create a rank order.

In the Y axis, usually referred to as "Stakeholder concern" or "Stakeholder relevance," the organization then engages external stakeholder groups to understand how they would rate the importance of a given aspect.

Interestingly, there are issues which organizations consider a significant risk given their knowledge of operations, but which stakeholders may have no idea of, and vice versa. This is what makes materiality matrices so powerful, as they represent the entire field of issues and aspects to be considered, in turn guiding them toward the most important for both the organization and stakeholders.

Similarities and Differences in Materiality: An Example in Chocolate

To illustrate how varied material issues can be in similar organizations, let's examine the materiality matrices of four of the world's leading chocolate companies: Mars, Nestle, Hershey, and Ferrero. As we will explore in later lessons, comparative analysis of materiality matrices is an excellent way to unearth shared issues and opportunities for innovation, as well as revealing aspects an organization may be ignoring that its peers are addressing.

Materiality Matrices

Ferrero Materiality Matrix - Click on image for larger version	Hershey Materiality Matrix - Click on image for larger version
Mars Materiality Matrix - Click on image for larger version	Nestle Materiality Matrix - Click on image for larger version

As covered in the "areas of potential interest" link in the exercise above, when a company lists its organization-wide strategic and tactical needs in a tidily prioritized form, it acts as a beautiful opportunity to innovate, find entry points, identify needs, and even to deepen relationships.

Here's the metaphor I would like to use: Imagine if you were a contractor, and you could freely walk into every house in town, and every owner had clearly marked their construction needs (i.e., "energy savings," "new paint," "child safety improvements") along with how important each project was to their family. Not every project would fit your expertise or strategy, but you could imagine that maybe... perhaps... it might be possible to find some opportunity there.

Needless to say, we will be exploring how to leverage materiality in innovation and creating offerings in later Lessons.

As we will be devoting the majority of this course to understanding how we can innovate and leverage opportunities in sustainability, I would like to take this section to provide two readings examining correlations between high performing sustainability programs, increased organizational profitability over peers, and leading management processes.

The first reading is jointly authored by The Boston Consulting Group and MIT Sloan Management Review, and reflects survey results from more than 1500 executives and high-level managers, and in-depth interviews with more than 50 thought leaders. It has quite a few interesting insights into sustainability's benefits to the business model and profitability, but below is one which nicely illustrates the ties between shareholder return and sustainability efforts.

Credit: Maurice Berns, et al. “Finding from the First Annual Business of Sustainability.” MIT Sloan. September 9, 2009.

Sustainability Efforts Could Influence All the Levers That Companies Use to Create Value Click to view a text version

The potential impact of sustainability efforts includes:

• A stronger brand and greater pricing power
• Greater operational efficiencies
• More efficient use of resources
• Supply chain optimization
• Lower costs and taxes
• Enhanced ability to attract, retain, and motivate employees
• Greater employee productivity
• Improved customer loyalty; lower rate of churn
• Enhanced ability to enter new markets
• More potential sources of revenue
• Lower market, balance-sheet, and operational risks
• Lower cost of capital
• Greater access to capital, financing, and insurance

This is a shorter piece, centered on one, rather in-depth analysis of long-term performance. RobecoSAM, the auditing firm known for its international Sustainability Yearbook rankings, examined the sustainability profile of more than 500 companies a year over a 13-year dataset to create a five-level tier of their approach to sustainability. From Leader to Laggard, they then evaluated the financial performance of those companies over the same period. Below is a central finding of that research:

Credit: Alpha from Sustainability by RobecoSAM, Sustainability Yearbook

Sustainability can Outperform Click to view a text description

The results of the statistical analysis are shown in the graph. The green line tracks the cumulative outperformance of Portfolio 1 "Sustainability Leaders" versus the overall sample of the companies. The black line tracks the cumulative underperformance of Portfolio 5 " Sustainability Laggards" versus the broader sample. The turquoise line tracks the outperformance of an investment strategy that consists of maintaining the sustainability leaders on a long position and short-selling the sustainability laggards.

Financial Benefits are Known, But Difficult to Unlock

Credit: Garage Door Handle by Sascha Kohlmann is licensed under CC BY-SA 2.0 DEED

To the public at large, the concept of sustainability tends to be associated with the color green, but those in the sustainability profession know far better that our work on a daily basis is dominated by the color gray.

Sustainability is one of those ventures which requires broad-based cooperation within an organization to have a chance of succeeding, but it can be difficult to know what that looks like. Metrics and surveys can reflect far more positive outcomes than are actually happening within the organization, and can signal far more progress than is actually taking place. Why? Because time and time again, experience and research tells us people are notoriously bad at self-reporting and predicting behavior, even when acting with the best of intentions. In fact, self-reporting is so poor in its performance of actual behavior that there are a few consumer research methodologies designed to use shifts in self-reporting after a distraction exercise –not the actual self-reported scores themselves–to measure sentiment. More on that later.

In talking to practitioners, it tends to be stories and episodic experiences more than survey results that signal the program is moving in the right direction:

"The product development team brought us into the early-stage design criteria last week."

"Legal has started to give sustainability a seat at the table in identifying risks to the organization."

"We've really started getting support from the business units on lifecycle analysis."

What is especially unique about sustainability's shade of gray is that even though it tends to have formal support at the C-suite level, sustainability programs tend to face a unique set of goals and constraints:

• Dedicated headcount tends to be very low. In 2013, a year that Caterpillar made $55.7B and had somewhere around 118,000 employees, it had three–three –dedicated sustainability employees.
• Because dedicated headcount is low, sustainability programs tend to use employees and resources that "report to someone else."
• Sustainability budget for initiatives is many times formed at the individual project level, and therefore fluid.
• Success can be heavily dependent on how many business units are willing to proactively share.
• It ties to virtually every function within a business, so it does not have a single fixed role.
• It may be perceived in some organizations as a hindrance more than a help (for example, the work required for ISO 14001).
• Without conscious work and lobbying, it probably does not have revenue or sales applied to its work.

In its State of Sustainable Business Survey 2014, BSR and GlobeScan surveyed more than 700 experienced sustainability professionals about a range of topics, but the question relating to sustainability leadership challenges underscores the point at hand:

Credit: De Groot, Chrisitine. “What do businesses think of their CSOs?.” GreenBiz. January 27, 2015.

Click to view a text version

The image is a line graph titled "Most Important Leadership Challenges, 2011–2014 (% of total mentions)". The graph plots the percentage of total mentions of various leadership challenges over the years 2011 to 2014. The vertical axis represents the percentage from 0 to 75, and the horizontal axis represents the years 2011 through 2014. There are eight colored lines representing different challenges.

• The topmost line, in red, indicates "Integration of sustainability into core business functions", which has a consistent percentage in the 60s with a final annotation at 63%.
• The second-highest line, also in red but slightly darker, represents "Greater transparency", showing a slight decrease over the years and ending at 29%.
• Other lines representing challenges such as "Convincing investors that sustainability enhances value", "Planning for the long-term", "Public advocacy for policies that promote sustainability", and "Developing enduring partnerships with non-traditional partners", show fluctuations between approximately 10% and 25%.
• The lines for "Setting ambitious sustainability targets" and "Going beyond regulations" remain consistently below 15%.

Of all the potential challenges facing a working sustainability program, it isn't a challenge of resources, it is a challenge of integration of sustainability into the core of the business. But the question then becomes, if we know all of the acknowledged benefits of a robust sustainability initiative to the organization, how then can it be a question of integration? It would seem that the answer to that question is sometimes related to sustainability's broad reach, making it difficult to integrate deeply into only a handful of functions... there is so much to be done that the programs end up taking very finite people resources and try to do too much.

In going beyond rote integration and looking at motivations, actions, and organizational frames for sustainability, we may also consider that there is no one type of integration. In fact, one of the types of organizational integration of sustainability actively works to erode the reach of the program.

Compartmentalized Sustainability

Chances are many new sustainability programs, even with significant support from management, will function in a compartmentalized way for a significant period of time. Despite best efforts, many sustainability efforts may never leave a place of compartmentalization. What is meant by compartmentalized sustainability is, literally, sustainability is a discrete function within the organization, and that function is overwhelmingly isolated to a special set of specific initiatives.

For example, if a large customer of the organization has their own sustainability program and supplier reporting requirements and sends an 80 page questionnaire to be completed, chances are it will land on the desk of the person with "sustainability" in their title to decipher and complete. Speaking with colleagues at publicly traded companies, and especially those supplying raw materials or components, completing these surveys is a 20-hour a week effort for someone on their staff to complete the basic surveys and requires more time and information gathering to answer first-time questions.

Needless to say, completing these surveys can be a significant time drain, and can have a consequence of preventing the sustainability folks in an organization from taking on their own proactive projects. So, the program has a difficult time gaining the necessary reach within the organization to affect change or institute proactive work.

Infused Sustainability

To achieve the types of financial and organizational benefits described earlier in the readings in this Lesson, sustainability is not a role, it is a core function of the organization, and lives everywhere. In these types of organizations, the number of people with "sustainability" in their title may be the same as organizations with compartmentalized sustainability, but the role of sustainability becomes one which is far more about enabling others internally.

When sustainability is infused, it may have been originally shepherded in by a passionate founder or CEO, but it tends to be perpetuated by a genuine value for being a sustainable organization and one which succeeds and leads. So while the intent and basic knowledge of sustainability may be throughout the organization, there is typically the need for resources to provide more insight, find resources, and tie it all together. This is the role of the sustainability team: to assist the rest of the organization in their infused sustainability efforts and act as keepers of central information and strategy.

Naturally, the next question is something like, "OK. So how does one infuse sustainability into the organization?" Well, there's certainly no single or easy answer to that question. Otherwise, that 63 % of organizations having trouble integrating sustainability into the organization would have likely found the solution long ago.

I will say this: Many of the methods and philosophies we will employ in creating sustainability-driven innovations in this course can just as easily be applied within an organization as to create an offering. Furthermore, showing–not telling–what sustainability can bring to the organization through the creation of new offerings can go a long way to get people in an organization interested in what they can do, as well. We have seen this first-hand.

So, in understanding how this all ties back to Profit as a 3P imperative in the organization, it is important to consider that infused sustainability reinforces the profitability and prosperity of the organization just as much as the profitability of sustainability-related offerings can work to create infused sustainability within the organization. It really is a cycle of prosperity... or at least a "chicken or egg" arrangement.

Lean: Sustainability's Blue-Collar Brother

In understanding operational efficiency for many of the world's corporations, two systems of thought tend to predominate: the Toyota Production System (TPS, more broadly known as "Lean") and Six Sigma.

Although Lean and Six Sigma are systems used to create, hone, and, over time, optimize virtually any process or system, it is important to note that a central concern of each is the elimination of waste. While sustainability may deal with the longer-term ramifications of overuse and waste, as well as other wide-ranging implications, this expression of sustainability on the plant floor is as elegant and brutally efficient in intent as it is in execution: Waste costs measurable amounts of money. Period. There is no nuanced interpretation, no delicate interpretive dance of language to be had here, which is perhaps why the application of these systems are so popular with CFOs and operations management alike.

Underscoring some of their shared underpinnings, Lean and Six Sigma share essentially the same definitions of waste:

Click here to expand a text description

Definitions of the 8 wastes in the Lean Six Sigma are described as the following:

• Inventory is the excess products and materials not being processed.
• Talent is understanding people's talents, skills, and knowledge.
• Waiting is the time wasted waiting for the next step in a process.
• Motion describes the unnecessary movements by people (e.g., walking).
• Defects are the efforts caused by rework, scrap and incorrect information.
• Transportation is the unnecessary movements of products and materials.
• Overprocessing makes more work or higher quality than is required by the customer.
• Overproduction is production that is more than needed or before it is needed.

Credit: Laux, Chad and Rohit Sabharwal. “The Application of Lean Six-Sigma in Food Security and Food Safety: A LSS strategy for Small Holder Farmers.” 2018.

In consideration of what is a shared prescription of two of the dominant efficiency systems in the world, let's consider the sustainable underpinnings of the eight wastes and the types of aspects related to each waste:

Especially in regard to sustainability's efficiency imperatives, we may find that the Lean/Six Sigma waste principles as practiced today are far more advanced and prescriptive than any GRI report or sustainability management system when it comes to the overall consideration of all types of waste. Where GRI may be far more focused on the defined wastes and setting indicators, Lean/Six Sigma takes a more holistic view in opening the facility to see the less obvious, but equally erosive, wastes.

Furthermore, and of key interest for our efforts in creating sustainability-driven innovation, is that the last 30 years of heavy worldwide adoption of these management systems presents us with ample numbers of cognitive "hooks and anchors" from which we may build a platform. For anything from beginning a sustainability initiative internally to creating a B2B offering, the philosophies of sustainability may already be deeply embedded in the organization already: they call them Lean/Six Sigma.

As we will cover in coming Lessons, our goal then is not to unnecessarily create new ideas (which is difficult, and frankly, expensive), but to build on and extend the thoughts, feelings, and frames that already exist in the in the minds of customers.

Caterpillar's Use of Six Sigma in Supply Chain Sustainability

Caterpillar is arguably one of the foremost adherents to this efficiency thinking, applying Six Sigma at very high levels throughout not only its organization, but the organizations within its supply chain. In a sense, this push functioned as a very proactive effort on the part of Caterpillar to drive efficiency and waste reduction in its suppliers and to allow its suppliers to work together to find ways to become more efficient. A few highlights from a Gillett, Fink, and Bevington piece in Strategic Finance about Caterpillar's use of Six Sigma:

In addition to its own use of 6 Sigma, the company has taught its suppliers and dealers about the benefits of using the technique to refine the entire sales model. Caterpillar has introduced 850 suppliers worldwide to 6 Sigma, which has created more than 1,000 supplier Black Belts to help run the projects. One supplier that said it was interested in the Caterpillar 6 Sigma methodology allowed Cat to consult and transform the business. When implementing 6 Sigma, Caterpillar used facts and data to show the results the supplier could expect, so it didn’t take long for the supplier to totally buy in to the methodology.

Dealers have also taken on the 6 Sigma commitment. More than 165 dealerships have produced more than 1,000 Black Belts to help with projects. Dealers find it amazing that they can share their projects with one another on a Caterpillar website that depicts best practices among the dealers. Even though each dealership is run as a separate business, 6 Sigma has helped give all of them a common feel across the world. Not only are dealerships learning about projects that need to be done in their business, but they’re following the steps of the process and learning which projects to do first. Just as Caterpillar embraced the methodology, dealers have also accepted the idea of making 6 Sigma a top-down methodology that pushes the training and concept down to the workers at the lowest level.

While Caterpillar's Six Sigma push started in 2001, a full four years before it would issue even its first sustainability report, the links between the two efforts are readily evident: In both the CAT approach to Six Sigma efficiency and its sustainability efforts, the drive for waste reduction and efficiency is coming from a very directed and structured approach, one which has its roots in operations.

The intermingling between Six Sigma, operations, production, and sustainability at Caterpillar becomes even more evident when examining the Critical Success Factors statement of its Sustainability Vision, Mission, Strategy:

Critical Success Factors

Culture. Create a culture of sustainability in all our business units and in all our daily work.

Progress: We promote our employees’ awareness and understanding of sustainability. We continue to foster a corporate culture of transparency, disclosure and engagement.

Operations. Champion our sustainability principles and contribute to 2020 aspirational sustainable development goals.

Progress: The Caterpillar Production System provides the recipe for efficiency and excellence in our facilities. We actively encourage employees to conserve resources and be more efficient. Operating in a more efficient and sustainable manner will reduce impacts on people and the environment, and help us and our customers save money.

Business Opportunities. Identify and pursue business growth opportunities created by sustainable development.

Progress: We are actively embedding sustainability throughout our Caterpillar brand portfolio, our new product development process and our technologies. Our business leaders continue to drive growth in sales of products, services and solutions that help customers meet their sustainability challenges. We utilize 6 Sigma methodologies to focus our work and drive measurable benefits.

For one of the world's foremost manufacturers, it would appear a significant portion of Six Sigma enables its sustainability goals, and vice versa. In these types of operations, operating from a place of infused, organization-wide sustainability, it can be very difficult, if not impossible, to determine where "sustainability" ends and "operations" begins.

Perception of Diminishing Financial Returns in Sustainability Projects

The advent of Lean/Six Sigma adoption in organizations worldwide has also brought with it requisite continuous improvement efforts that analyze virtually every important process and material on a priority-weighted basis. In some cases, the organization undertakes intensive exercises to unearth inefficient processes, then the group elects to engage on the improvement of a handful of those processes by creating task forces. What this has meant for many organizations is that the most inefficient or wasteful areas of the business were likely identified years ago, have received one or more cycles of continuous improvement efforts, and perhaps even the efforts of outside consultants or experts.

This leaves many organizations today in a situation where the cost and effort to take on the next level of new efficiency projects can't be justified by financial measures alone, or cases where the waste is so small as to be inconsequential. In these projects, it isn't even necessarily that the capital needed is an issue, but it tends to be more of a problem of lacking return on investment and overly long payback periods. Many organizations have found themselves in a place where the progress of these higher-level tiers of efficiency projects become dependent on larger trends over time, which may include factors such as:

• Change in fuel or energy costs (i.e., lighting and machine upgrades become more cost effective, or alternatively, less expensive freight opens waste-to-energy as an option)
• Increased material costs (i.e., increased cost of wasted materials)
• Increased cost of disposal (i.e., waste material becomes prohibitively expensive to treat or landfill)
• Change in regulations (i.e., increased regulation requires a different approach, or alternatively, loosened regulations open options before prohibited)
• Significant changes in technology
• New business entries (i.e., a waste-to-energy site opens 30 miles away, making transportation viable)
• et cetera

What we may therefore see is a period of "efficiency stagnation," where the organization may have new efficiency projects queued based on earlier identification, exploration, and scoping (i.e., continuous improvement efforts), but is waiting for something to change to make those programs viable. Unfortunately, those changes don't always work in favor of progressing efficiency, as we have seen some of the same free market forces and commodity prices which helped establish widespread industrial recycling, for example, regress as supply increases. Essentially, recycling's own popularity in industry has made it more difficult for recycling companies to profit, in some cases.

The below is a summary image from a bit of research I did with 304 facilities in the US in 2013, exploring the state of waste minimization. Note the 40+ point drop in adoption rates for the more established "classic" forms of recycling/waste reduction projects to some of the "next level" projects.

Click here for a text description of the above image

Image describes current and future waster minimization projects: Plants begin their efforts with easier to handle projects such as recycling scrap metal, paper and cardboard, batteries and electronics, oils and coolants, and bottles and cans. However, when considering the more difficult tasks such as chemical substitution, absorbent recycling, and rental bag reduction, many plants claim to have plans to begin to accomplish these in the future and less are actually implementing those tasks currently.

Credit: Andy James, wastemin.com (website no longer hosted)

An Opportunity for Innovation

What is important for us to note is that this potential stagnation in efficiency projects is not due to a lack of interest on the part of organizations, nor is it due to a lack of capital. Needless to say, an engaged organization with money to spend makes for a fertile ground for opportunity and innovation.

And while we may think that those larger trends cited earlier are the only external tailwinds that can spur an organization to pull an efficiency project from the queue, we must consider an opportunity in the information itself: The fact that these projects are contingent on some external change also signals they are contingent on an organization 1) knowing an external change has happened and, 2) having at least a passing understanding of the interactions between different factors.

Organizations are, by nature, resource constrained. Even the most sustainability- and efficiency-minded organization does not have time to continuously check the state of the art of every process, material, and resource under their purview. So, while a project may have been placed in a queue, it may not be because of the actual state of the situation, but simply the organization's perception of the situation at a given point in time. They may have had limited information on new options or processes, they may have had an incomplete understanding of the situation itself, there may have even been conflict of interest issues in displacing existing vendors or suppliers. Nonetheless, the issue with getting these efficiency projects out of the queue and into action may be as much about quality of information as it is about the actual project to be enacted itself.

Allow me to illustrate:

A few years ago, in talking to plant managers, I started seeing a bit of a trend. When discussing their waste minimization programs and what projects to take on, the discussion always revolved around pounds or tons of waste, but very, very rarely around density. The conversation would go something like this:

Me: "So what's next for your waste minimization program? Have anything on the radar?"

Plant Manager: "Well, we were looking at recycling waste X, but based on our tonnage to the landfill, it looks like it would cost us 10% more to have it recycled."

Me: "What kind of density is it and do you know what you're paying in dumpster rental?"

Plant Manager: (pause) "All I know is that we are paying $90/ton for tonnage, and I haven't dug any deeper because the recycling was more expensive."

It was prevalent enough of a problem I created an Excel-based tool which would allow someone to input ALL of the data related to landfilling a waste, including dumpster rental, tonnage, pull fees, and density (either extrapolated or pulling from EPA-accepted densities of 100 industrial wastes) to understand the full cost of disposal, by prorating all costs by either weight or density. So, if a dumpster was filled with something fluffy, like Styrofoam peanuts, the tonnage would be very inexpensive, but it would be burdened with the full cost of dumpster rental, etc, (which, incidentally, could easily cost twice as much as tonnage). In the case of a heavy material, like brick, it would bear the appropriate costs of tonnage, but only a prorated portion of dumpster rental. It would allow the same calculations for recycling the material, including the cost of any necessary machinery or additional labor.

In the end, it would also calculate payback periods and create an executive summary, as well as calculating cost benefit of source reduction of a waste.

So, only after seeing the full picture, could a facility make the right decision. And in many cases, accounting for the full, real financial burden of landfilling ended up swaying cases heavily toward recycling options. In one example, a recycling program savings had been accounted at $26,000 a year using flawed calculations... with the calculator, those actual savings were shown to be closer to $110,000. In fact, in some test cases, neglecting density could skew actual cost to dispose of some materials by nearly 300%.

In two years, more than 3,000 facilities worldwide of all sizes would use this tool to evaluate the actual costs of landfilling v. recycling to get programs 'out of the queue.'

Why do I mention this?

Because a flawed understanding of just one fundamental portion of the efficiency equation has the ability to keep countless programs on the shelf... and, by bringing new information or insight to the table, those programs can be moved forward in a meaningful way.

Some Liabilities are Not Recorded on any Balance Sheet

As we continue to discuss the third of the 3Ps, Profit, we may tend to think of those affirmative actions an organization takes which help it turn a profit, therefore helping it remain solvent and sustainable in the long term. This is certainly true. But it is also important to consider how a byproduct of sustainability efforts can invisibly affect an organization's bottom line by reducing or eliminating the costs of regulatory compliance.

Not many organizations have a clear picture of what exactly having to comply with a given regulation costs the organization every year, in terms of productivity, additional capital and equipment, handling areas and disposal contractors, additional training for employees, record keeping requirements, or any other factors. It may be a fun exercise for an otherwise bored actuary to take on, but it is a bit pointless for most operations: why go through the significant complexity of the calculation when the end result remains that the facility still has to comply with the regulation?

In an increasingly competitive international marketplace, operating a business exempt from regulations which may hinder the speed or profitability of peers could be a strategic strength. Unfortunately, the way for some organizations to operate without regulatory oversight is not to reduce the substances or practices being regulated, but to simply conduct those operations overseas in a region with little or no meaningful regulation to start with.

The Hidden Costs of Compliance

So while very few organizations would have a reason to calculate the incremental cost of every environmental or labor regulation they are subject to, in some cases, isolated regulations may be accounted for if they affect operations in a significant way. Despite a concerted effort to understand the cost of complying with a given regulation, evidence shows that organizations may still significantly under-account for the costs of regulations.

In one examination of plant-level financial data of 55 steel mills, Joshi, Krishnan, and Lave (2001) found each was significantly lacking in capturing the total cost of complying with a specific set of new regulations. Emphasis is mine:

The results indicate that visible costs, as reported by these firms’ accounting systems, identify only a minor portion of the overall costs associated with regulatory compliance. For firms in the integrated mill sector, a $1 increase in visible environmental operating expenditure is associated with an increase of $9.23 in total cost (at the margin), of which $8.23 is hidden, and embedded in accounts other than "regulatory costs." Similarly, for firms in the mini-mill sector, an increase of $1 in the visible environmental operating expenditure is associated with an increase in total cost of $10.68 (at the margin), of which $9.68 is hidden. Thus, considering only the visible costs of environmental regulation will seriously underestimate the effect of regulation on cost and profit.

We also conducted structured interviews with corporate-level executives and plant-level accountants from seven steel firms to validate our econometric estimations and to gain insight into such questions as: are the managers aware of the large hidden costs of environmental regulation? What are the reasons for the large hidden costs? What types of decisions are large hidden costs likely to affect? We found that the managers are aware of these hidden costs but seriously underestimate their magnitude. The managers cited several reasons why the accounting system does not identify all environmental costs: difficulty in separating the environmental portion of the incremental costs of materials, utilities, and overheads; problems of aggregation across plants and functional departments; and complexity in separating environmental component of costs of process changes that have multiple objectives.

Our finding that the steel industry suffers from large hidden costs has implications for the design of costing systems in industries facing significant environmental regulations. Gross under-estimation of hidden costs is likely to lead to sub-optimal decisions in managing these costs. Hidden costs may distort variance analysis, contribute to product mis-pricing, and lead to inappropriate product mix, plant closure, and investment decisions. Our interviews reveal examples of these effects. We conclude that managers have under-estimated the magnitude of hidden costs, and our results suggest that they should reconsider the costs and benefits of updating standard costing systems to better track environmental costs.

In addition to the costs of compliance at the Federal level, we can not forget about the highly variable state regulations. Levinson(2001) created a model to index state environmental compliance costs, and found that the variation in compliance costs between states was significant:

Expenditures on pollution abatement in 1994 ranged from 0.5 percent of GSP in Nevada, to 6 percent in Louisiana. While much of this difference is accounted for by differences in the two states’ industrial compositions, the industry-adjusted index for the most expensive state (Maine) remains 1.7 times the national average, and 4.13 times as large as for the least expensive state (Nevada).

A more personal story of the hidden cost of environmental regulation is provided by Drew Greenblatt, President of Martin Steel in a piece he wrote for Inc.(2013):

When I testified before Congress last winter about the impact of regulatory excess on business, a Congressman posed this question: Don’t the total benefits of environmental regulation offset their cost? After all, the Office of Management and Budget has estimated the regulatory benefits exceed the costs by as much as 16 to 1. Other estimates have found even higher benefit-to-cost ratios, he said.

But the analysis omits one major question: How do you calculate the opportunity cost of thousands of small businesses like mine whose employees are focusing on regulatory paperwork and agency communications instead of serving and finding customers? I’m not sure how those costs are being measured. Is it by the amount of federal employee time and resources put into the effort? Or by the amount of time my employees are filling out forms? (By the way, according to that study that the congressman referenced, the benefits of EVERY agency’s rules outweighed the costs. And the more rules an agency had, the greater the benefits over the costs. Who knew?)

My company’s success relies partly on our ability to reach the 95 percent of consumers who live outside the U.S. But unnecessary paperwork impedes that mission. While we need only three minutes to fill out the requisite form when we ship to Canada or Mexico, it takes us 20 minutes per form when shipping to a non-NAFTA country. If that happened on rare occasion, no big deal, but multiply that step hundreds of times a year and it becomes a mountain. A few years ago, we took a photograph of two Martin Steel employees standing beside the cartons that held our files to respond to government regulations. The stack was three feet taller than they were--and would be even higher today.

Every Risk is an Opportunity for Innovation

As we begin to merge from understanding the pure frameworks and philosophies of sustainability and into the process of layering understandings of how to find opportunities in sustainability, we will continue to revisit and reinforce those earlier frameworks and philosophies. In this case, I'd like us to do a little bit of that now, in consideration of our discussion of regulatory risk and the hidden costs of compliance.

In each of the three examples above–the poor accounting of the cost of compliance by steel mills, the tremendous variance of the cost to comply with state environmental regulations, and the Martin Steel example of compliance paperwork–we need to realize one important point before moving on:

This is why impartiality will be so important in our work together this semester. Do you have a personally-held belief on the situation in each of the examples above as being unjust or overstated, oppressive, regressive, or progressive, believing that regulations go too far or not far enough? Save it for the kitchen table.

When we are talking about finding opportunity for innovation, we have to be able to turn off that biasing part of our brains to be able to recognize the underlying needs of the situation at hand. Those needs may not necessarily fit our organization's competencies, or perhaps they do, but we first need to be able to see without bias:

• Steel mills could use a good accountant and consulting firm to help them capture regulatory costs more appropriately, or a software package to help in creating uniform assumptions of environmental costs. According to the findings of the paper, it's fairly safe to say there are at least 55 steel mills who could potentially need the product.
• The huge variation in state compliance costs offers similar opportunities, from consulting to software to clearinghouses of data to assist in financial projection. I would be curious how organizations with nexus in many states would account for the differences in state compliance costs, if they do.
• Mr. Greenblatt's example of NAFTA v. Non-NAFTA paperwork sounds like a problem many companies could have, and one which occurs with high volume. Are there automation steps, software packages, or regulatory fast-tracks to be benefited from?

Also note that being able to evaluate a situation impartially first does not mean that you suppress your beliefs, ethics, or otherwise... exactly the opposite. It simply means that the first operation is to see, and the second is to layer in our personal perspectives and experiences. Interesting developments and discussions can happen at that confluence of the impartial and the reapplication of our personally-held philosophies. It sounds esoteric, but we will begin to see it in our case discussions as the semester progresses.

Regardless of the needs and potential opportunities created from the need to comply, Porter and van der Linde offer an interesting perspective, and one which relies on data as opposed to a blindly-held belief:

We are currently in a transitional phase of industrial history where companies are still inexperienced in dealing creatively with environmental issues. The environment has not been a principal area of corporate or technological emphasis, and knowledge about environmental impacts is still rudimentary in many firms and industries, elevating uncertainty about innovation benefits. Customers are also unaware of the costs of resource inefficiency in the packaging they discard, the scrap value they forego and the disposal costs they bear. Rather than attempting to innovate in every direction at once, firms in fact make choices based on how they perceive their competitive situation and the world around them. In such a world, regulation can be an important influence on the direction of innovation, either for better or for worse.

[...]

A few studies of innovation offsets do go beyond individual cases and offer some broader-based data. One of the most extensive studies is by INFORM, an environmental research organization. INFORM investigated activities to prevent waste generation-so-called source reduction activities-at 29 chemical plants in California, Ohio and New Jersey (Dorfman, Muir and Miller, 1992). Of the 181 source-reduction activities identified in this study, only one was found to have resulted in a net cost increase. Of the 70 activities for which the study was able to document changes in product yield, 68 reported yield increases; the average yield increase for the 20 initiatives with specific available data was 7 percent. These innovation offsets were achieved with surprisingly low investments and very short payback periods. One-quarter of the 48 initiatives with detailed capital cost information required no capital investment at all; of the 38 initiatives with payback period data, nearly two-thirds were shown to have recouped their initial investments in six months or less. The annual savings per dollar spent on source reduction averaged $3.49 for the 27 activities for which this information could be calculated. The study also investigated the motivating factors behind the plant's source reduction activities. Significantly, it found that waste disposal costs were the most often cited, followed by environmental regulation.

In this installment of leaders, we will be covering two companies and a philosophy:

• We'll start with Packsize, a unique on-demand box creation system for shipping and fulfillment operations, especially those which are e-commerce centric.
• From there, we'll transition from discussing the negatives of shipping air to the positives of rebuilding heavy iron when we take a look at Caterpillar's Remanufacturing operations.
• And we'll close with a talk from Michael Porter, a leader in business strategy and long-time Harvard business professor, who is discussing the power of profit for social good.

Since Profit is usually covered in depth in public financial filings like 10K (and not GRI), I will be using VISAS to discuss the innovations and how the companies communicate the innovations more so than the sustainability reports.

Packsize

Please watch the following 3:26 video.

Video: Packsize: Packaging for all business types (3:26)

The Insight

Shipping boxes are loaded with inefficiency: either you inventory a tremendous number of different sized boxes and pay a high price per box due to low volumes, or you limit the number of sizes and waste money and material on void filler (i.e. Styrofoam peanuts) and pay unnecessarily high shipping costs due to empty volume. Packsize is a machine that creates perfectly-sized boxes on-demand as an order is fulfilled. Very little, if any, void fill is needed, and shipping costs are reduced significantly.

The Opportunity

With the advent of major online retailers and e-commerce being a major area of growth, parcel shipments reach new records virtually every year. During the holiday season in 2014, FedEx saw a 9% increase in shipments to 290 million, and UPS an 11% increase to 585 million. Despite this massive growth over the past decade, the box itself had remained unchanged and inefficient.

Furthermore, one has to question the sustainability of brands shipping massively oversized boxes, as well as how much they are wasting on those boxes.

Vision

Not terribly inspiring, but accurate:

"We are the global leader in On Demand Packaging®. With Packsize as your packaging company, making boxes is easier than printing labels. Smarter packaging means fewer planes, fewer trucks, and less material."

Innovation

The patented software and equipment is the real star of the Packsize offering. They hold multiple patents for the machinery, and it provides speeds sufficient to meet the demands of even high-volume shippers like Staples and REI. It is smart enough to size boxes exceptionally well and with minimal waste. Furthermore, a little bit of business model innovation in that the machines are leased for $1 per year to companies, with Packsize making its money on the cardboard supply (and therefore, actual usage).

The technology, while simple in concept, is a game-changer.

Storytelling

Very little on the emotional side, though Packsize does share some case study videos from satisfied companies. It also does a nice job with some white papers on use cases.

Achievement

They do leverage their client list heavily in most materials, and it speaks volumes: Staples (the world's second largest online retailer), Rubbermaid, GE, Crutchfield, REI, Andersen Windows, and more.

Structure

For what sustainability materials they do have, structure is lacking. It is mostly trivia on packaging waste more than covering how many tons of GHG are prevented from correctly-sized boxes, etc.

The Secret

They're a company making what is a highly sustainable product and using sustainability buzzwords, but they might not really understand sustainability.

Caterpillar Reman

Please watch the following 4:18 video.

Video: Caterpillar Remanufacturing Overview (4:18)

The Insight

It all actually started as a favor in 1973. Ford, a major customer, asked Caterpillar to supply it with rebuilt truck engines. "It was something we had to do," according to Steven L. Fisher in a 2005 Bloomberg article.

The real insight would come when Caterpillar realized how profitable the remanufacturing division could be.

The Opportunity

To make profit multiple times on the same Caterpillar part while providing customers with outstanding service and a factory warranty. An engine connecting rod can be rebuilt up to seven times during its life, and CAT Reman will turn a profit on every single one of those "seven lives" while keeping that iron out of a scrap yard or landfill.

To give you a feel for the size of the Remanufacturing division, it remanufactured 500,000 tons of equipment from 2004-2014, and revenue is predicted to grow at at roughly 20% annually.

Vision

From "The Benefits of Remanufacturing":

GOOD FOR CUSTOMERS
Cat remanufactured parts and components provide same-as-new performance and reliability at fraction-of-new costs—while reducing the impact on the environment. And over-the-counter availability gives customers more options at repair and overhaul time. The results are maximum productivity and lower costs.

GOOD FOR BUSINESS
The remanufacturing program is based on an exchange system where customers return a used component (core) in return for our remanufactured products. Reman options are one more way we support our customers and help lower owning and operating costs.

GOOD FOR THE ENVIRONMENT
Caterpillar is a global leader in remanufacturing technology, recycling more than 120 million pounds of end-of-life iron annually. Because we are in the business of returning end-of-life components to same-as-new condition, we reduce waste and minimize the need for raw material to produce new parts. Through remanufacturing, we make one of the greatest contributions to sustainable development—keeping nonrenewable resources in circulation for multiple lifetimes.

Innovation

While the program may seem straightforward, the logistics of returns, fulfillment, and refunds, let alone the thousands of remanufacturing processes themselves, are daunting. Caterpillar is famously tight-lipped about its manufacturing processes, but to be able to resurface and rebuild parts with service lives in the tens of thousands of hours is an engineering achievement, however it is accomplished.

Storytelling

Caterpillar gives the Reman division significant airtime in both its Sustainability Report as well as its core marketing, sharing stories of both success and satisfied customers.

They are especially proud of the fact that their "take back" percent, that is, the percentage of parts that are returned for remanufacturing, hovers between 93% and 95%.

Achievement

They capture achievements in a few different ways throughout their CSR and marketing materials, and all are illustrative: lbs of EOL material remanufactured and placed back into service, % of total parts remanufactured, etc.

Structure

They do a solid job of making sure that the emphasis they place on the Reman program in their sustainability program is reflected in their sustainability goals in a meaningful way. In fact, two of their nine major sustainability performance measures are Reman specific indicators.

The Secret

Caterpillar now considers remanufacturing in the product design process so that it may become ever more efficient... and profitable.

Michael Porter

Please watch the following 16:24 video. If the video is not displaying on the page, please view it on the Ted website. A transcript is available on the external site as well.

Video: The case for letting business solve social problems (16:24)

Overall

While I do find that Porter makes quite a few good points in this lecture, I tend to be more of a fan of his writings on the topic (namely his paper you read on the last page).

Pie charts displaying the color balance of Van Gogh paintings

Credit: Buxton. Aurthur. “New website - art, design, print and workshops all featured!.” February 8, 2017 (rotated)

"I haven't got it yet, but I'm hunting it and fighting for it, I want something serious, something fresh—something with soul in it! Onward, onward."

Finding our Palette

The intent of our last three Lessons on the 3Ps–Planet, People, and most recently, Profit–is not just to lay the foundations of our understanding of sustainability as it is practiced today, but to get a feel for just a fraction of what our "palette" might look like. Not that we are necessarily even sketching at this point, but we are beginning to immerse ourselves in what is available to us in creating sustainability-driven innovation. By looking at the underpinnings as well as some leaders in each realm, we may begin to see how others have used their palettes and the deliberate selections they have made in creating their works. As we have seen, each organization will have various strengths, competencies, and economic moats, all of which may be leveraged in creating innovation works which are sustainable, defensible, and ownable for the brand.

In understanding Profit, we understand one of the essential components of any innovation we seek to create in the sustainable space. Realistically, if we seek to create businesses and opportunities from these innovations, Profit, or more appropriately, the potential pathways to profit, will be of significant concern. Even for NGOs and non-profits, it is undeniable that the revenue must be there to be able to do further good works, whatever they may be. In our own thoughts and in discussions with others, we must remember that for sustainability to be truly sustainable, there must be profit. Whether a specific initiative or a sustainability program as a whole, the profit or value must be evident. Otherwise, that initiative or program is living on charity and borrowed time.

Adding Depth and Theory to our Work

My hope is that as we progress through our time together, you will begin to find your voice and your philosophies and begin to refine your approaches to both innovation and sustainability. I have personally known innovators of all types:

• the extremely deliberate, experiment-driven engineer
• the brilliant and emotional artist
• the impatient and anti-authoritarian rogue
• the precise and organized project manager
• the identifier (and funder) of innovation in others

...and they are all equally effective in their own ways. What you may find is that you may work one way in your daily work, but when you engage in innovation and emergent work, you tend to take a different approach. Great, go with it, and I hope that we will see that approach and flair–whatever it may be–in your writings and discussion.

While we have spent the course thus far primarily immersing ourselves in the "colors" of sustainability, the close of this Lesson marks not necessarily a transition as much as the addition of another dimension of our work: theory and analysis. We will begin to not just discuss current and emerging trends, but to dissect innovations and break them into their component parts so that we may understand them more deeply. Specifically, in the next Lesson, we will examine the available tools for finding opportunities in sustainability, in essence, identifying clusters of interest.

If you're wondering about the lead image on this page, it represents the percentage of colors van Gogh used in his 28 most famous works. You may see a bias toward his trademark rich yellows, golds and browns, but in the act of abstracting color and taking a more critical approach, we see he also used quite a bit of varied color in his pieces.

This lies at the core of what we will be doing next, going beyond admiring the works and into understanding how they are created and composed.

Summary

Where we have been doing some amount of tablesetting or precursor in the first three Lessons, this week we will begin into what I consider the beating heart of modern Sustainability: Understanding realities versus fabrications.

The reason I place so much emphasis here is that having a well-informed and nuanced understanding is what will allow you to find opportunity if developing a new offering. Conversely, if you are in an organization in the Corporate Sustainability function, you will be able to understand how your program actually delivers, how it can be improved, how it can better deliver on the organization's VMV, and potential weaknesses.

I say this in all seriousness: Without the ability to research and understand the actual performance of a sustainability program, one is nothing more than a 'Public Relations Parrot,' broadcasting sustainability words and stories without any real caring for the actual underlying performance or improvement. And frankly, my hope by this point in the course is that I have helped to show you the range of ways CSRs can warp and hide realities.

Now, we will learn how to very specifically prosecute our own research in service of understanding Sustainability. We will be able to differentiate 'hidden gems' of sustainability from those which are essentially over-hyped PR efforts.

Learning Outcomes

By the end of this lesson, you should be able to:

• critically evaluate sustainability filings and stated strategies through the lens of an organization's stated mission, vision, and values;
• articulate the role GRI plays–and does not play–in an organization's sustainability reporting;
• analyze filings through omission, indicator, narrative, and commission analyses;
• propose public sustainability filings as a platform for innovation and competitive advantage;
• discern what the major filings do–and do not–require an organization to do to comply.

Lesson Roadmap

Questions?

If you have any questions, please send them to my axj153@psu.edu Faculty email. I will check daily to respond. If your question is one that is relevant to the entire class, I may respond to the entire class rather than individually.

Finding Areas of Opportunity

In finding areas of opportunity, undertaking competitive intelligence or understanding trends, for decades the perennial resource was to pore through public filings, most notably a company's last five years of 10-K reports. These reports provide a comprehensive view of a company at a point, its financial health, areas in which it may be investing through either acquisitions or R&D efforts, and management's view of risks which could have a significant bearing on the success of the company.

Remembering the importance of materiality in publicly traded companies and their disclosures to investors, these 10-Ks act as a bit of a "truth serum" in many ways, laying bare many statements and facts which a company would otherwise be reluctant to disclose. For example, Section 1A of the 10-K is a significant disclosure of "Risk Factors" the organization faces. Here is an excerpt from the risk factors section of Tesla Motors' 2014 10-K:

If we fail to manage future growth effectively as we rapidly grow our company, especially internationally, we may not be able to produce, market, sell and service our vehicles successfully.

Any failure to manage our growth effectively could materially and adversely affect our business, prospects, operating results and financial condition. We continue to expand our operations significantly in North America as well as in Europe and Asia. Our future operating results depend to a large extent on our ability to manage this expansion and growth successfully. Risks that we face in undertaking this global expansion include:

• finding and training new personnel, especially in new markets such as Europe and Asia;
• controlling expenses and investments in anticipation of expanded operations;
• establishing or expanding sales, service and Supercharger facilities in a timely manner;
• adapting our products to meet local requirements in countries around the world; and
• implementing and enhancing manufacturing, logistics and administrative infrastructure, systems and processes.

We intend to continue to hire a significant number of additional personnel, including manufacturing personnel, design personnel, engineers and service technicians. Because our high-performance vehicles are based on a different technology platform than traditional internal combustion engines, we may not be able to hire individuals with sufficient training in electric vehicles, and we will need to expend significant time and expense training the employees we do hire. Competition for individuals with experience designing, manufacturing and servicing electric vehicles is intense, and we may not be able to attract, assimilate, train or retain additional highly qualified personnel in the future, the failure of which could seriously harm our business, prospects, operating results and financial condition.

In fact, this is only one of fifty-eight specific, named risks to the business along with nine more common stock risks Tesla presented in its 10-K in this year. This is not uncommon for 10-Ks.

A Deeper Examination of a Single Stated Risk

For example, let's consider just one of the implications from that single Tesla risk statement [emphasis is mine]:

Because our high-performance vehicles are based on a different technology platform than traditional internal combustion engines, we may not be able to hire individuals with sufficient training in electric vehicles, and we will need to expend significant time and expense training the employees we do hire. Competition for individuals with experience designing, manufacturing and servicing electric vehicles is intense, and we may not be able to attract, assimilate, train or retain additional highly qualified personnel in the future, the failure of which could seriously harm our business, prospects, operating results and financial condition.

Now, consider the following:

Tesla U.S. Unit sales CYTD through June 2023

Credit: IvyPanda. 2022. "Tesla Motors Marketing Strategy (2013-2016)." December 8, 2022.

• In its second year of production, Tesla would already create a significant market share lead in the large luxury segment
• Delivered 33,000 units in 2014, a 47% increase over 2013
• Forecasts 50% unit growth again in 2015
• Doubled its number of workers in one year, from 5,859 in 2013 to 10,161 in 2014
• Preparing to release a $35,000 Model 3 in 2017, which, if current Federal incentives are extended, will equate to a MSRP of $27,500

So, we have Tesla in dire need of technicians, facing explosive growth, and selling cars loaded with new to the world technologies... and a technician training pipeline completely unprepared and lacking leadership.

Two of the major automotive training institutes, WyoTech and Universal Training Institute, have courses ranging from core automotive technician training to "Motorsports Chassis Fabrication," but not a single course for hybrid or electric vehicle service.

Furthermore, it took ASE (The National Institute for Automotive Service Excellence, the major technician testing and certification body in the US) until 2015 to have even a single tech certification for hybrid or electric vehicles. Consider that Toyota has been selling the Prius in Japan since 1997 (the US since 2001), and the number of alternative fuel vehicle models sold in the US is rapidly approaching 200.

Click for text description.

The bar chart depicts the number of Alternative Fuel Vehicle (AFV) and Hybrid Electric Vehicle (HEV) model offerings by various automobile manufacturers over a range of years from 1991 to 2012. The x-axis of the chart lists the years in intervals of 3 to 6 years. The y-axis quantifies the number of models, ranging from 0 to 200 in increments of 50. Each bar represents a year and is composed of segments of different colors, each corresponding to a specific manufacturer as indicated by the legend on the right. The colors ascend from the bottom of each bar to the top and represent manufacturers such as Acura, Audi, and Ford, among others. Notably, the bars show an overall increase in model offerings over time, with significant growth occurring after 2006, which results in taller bars filled with a diverse array of colored segments as more manufacturers introduce models.

The image presented is a horizontal, clustered bar chart depicting the number of Alternative Fuel Vehicle (AFV) and Hybrid Electric Vehicle (HEV) model offerings by various automobile manufacturers over a range of years from 1991 to 2012. The x-axis of the chart lists the years in intervals of 3 to 6 years. The y-axis quantifies the number of models, ranging from 0 to 200 in increments of 50. Each bar represents a year and is composed of segments of different colors, each corresponding to a specific manufacturer as indicated by the legend on the right. The colors ascend from the bottom of each bar to the top and represent manufacturers such as Acura, Audi, and Ford, among others. Notably, the bars show an overall increase in model offerings over time, with significant growth occurring after 2006, which results in taller bars filled with a diverse array of colored segments as more manufacturers introduce models.

• Title: AFV and HEV Model Offerings, By Manufacturer
• Y-axis labels: Number of Models, at intervals from 0 to 200.
• X-axis labels: Years ranging from 1991 to 2012.
• Legend with manufacturer names and corresponding colors:
  • Acura: Blue
  • Audi: Yellow
  • Bentley Motors: Orange
  • BMW: Burgundy
  • Buick: Purple
  • Cadillac: Green
  • Chevrolet: Brown
  • Chrysler: Grey
  • Coda Automotive: Aqua
  • Dodge: Light Green
  • Fiat: Magenta
  • Fisker Automotive: Light Purple
  • Ford: Pink
  • General Motors EV: Olive
  • GMC: Dark Grey
  • Honda: Gold

enter credit here

If the tech sector took the same glacial approach to training as the auto sector has in training on hybrid and electric technology, today's students would be prepared to enter a market... using Windows 98. (If you don't know what Windows 98 is, consider it was released in 1998... a time then you had to actually go to a store to buy physical software contained in a highly-protected plastic security box and AOL was a very successful company.)

I offer this analysis not as some massive proponent of Tesla, electric vehicles, or any other cause, but as an impartial view of the opportunity laid before us through a brief analysis of public filings. I believe you will find that as we become proficient in the critical analysis of financial and sustainability filings we will find insights few others may have. For example, as of the time of this writing, I was unable to find a single article or blog post written about the coming demand for electric vehicle and hybrid technicians, but literally hundreds on the explosive growth of Tesla and electric vehicles.

If we are to view ourselves as innovators, investors, and leaders concerned with sustainability, we must become proficient at finding and discerning opportunity–wherever it may be.

Critical Analysis of Filings as a Defensive tool

As we will examine in this Lesson and in much of the course from this point, "innovation" is far too often coupled with the idea of revolutionary, new-to-the-world offerings. What we will see is that the opportunities for innovation we find may be quietly incremental, but will still have the potential to lead the market and fill important sustainability needs. Upon hearing "sustainability-driven innovation" many may think of "Tesla," but we will see that much of the opportunity may look more like 'training technicians to meet Tesla's emerging needs in an exploding electric vehicle market.' In this case, the defensive facet from our critical analysis comes into play when considering there are frankly tens, if not hundreds, of major national automotive training schools which could have been training on this technology years ago.

Consider also other defensive positions from this type of analysis: your organization may be an existing supplier to a publicly-traded company, and you should therefore be first in line to read every 10-K and CSR they release. Every one of these filings will represent opportunity for incumbent suppliers to grow based on the stated needs of the company... or potentially find themselves at risk to newly identified needs and trends. Just as Tesla discusses risks in its 10-K, it also discusses supplier relationships, needs, and other issues important to the success of the company. Especially in the case of sustainability filings, it will identify specific needs and struggles... all of which would be an excellent opportunity for an existing supplier to deepen their relationship.

Understanding a Common Failure in Creative and Strategic Work

Please allow me to tell you a story, one which has been repeated time and time and time again in some of the most respected companies and creative agencies in the world; unfortunately, it is also a central weakness in sustainability as it exists today.

Far too often, in a campaign brief, business case, or frankly any strategic document, people enjoy hearing themselves speak. These words may be anything from the elaborate strategic designs of a visionary creative director, to the fevered attempts of a manager to make a mundane product launch plan seem interesting. Regardless of the cause, for some reason, strategy brings out a certain overstated, semi-Shakespearian manner of speaking in those writing the brief.

These presentations tend to go something like this:

"We seek. We strive. We live. People every day are looking for something. Searching for something they are missing. Searching for a piece of themselves. It happens to us all. It defines the human condition.

In our campaign, we will fill this deep yearning in our customers' lives. We will craft a physical tether–a link–representative of their connections to their family AND their possessions. Possessions which help them reach their family. We will blanket them in the comfort and security of being able to find keys and live their lives without uncertainty.

Behold: KeySeekr. The yellowest keychain in the world.

We will build the yellow color of our KeySeekr high-visibility keychain into the next Tiffany Blue. The campaign will secure our position in the lives of key-minded individuals and create an unbreakable bond of trust and an indelible mark on their lives. In our "Secure Yellow" campaign, we will show people that they will find the key to happiness... and it will be on a KeySeekr keychain."

Vision is an essential component of innovation and any new effort, and it is always a struggle to keep the vision alive. Perhaps the KeySeekr product and campaign may indeed deliver on those lofty goals. It is not ours to judge, but to understand. There may be, in fact, reams of research and insight work the KeySeekr team undertook that led them to this campaign platform (alternatively, not).

Regardless of the product or campaign, what we need to understand is how that vision will make its way into the actual customer experience: campaign messages and tactics, design cues, interactions, store atmospherics. And then, without any biasing influence or priming, we want to hear customers reflecting.

How This Strategic Failure Presents Itself in Sustainability-Driven Innovation

Sustainability, by its very nature and intent, is highly aspirational. There aren't too many fields where the crux of your job is to 'make things better for the community and workers, the planet, and our company.' Similarly, when we seek to create truly sustainability-driven innovations, much of the same aspiration and good intentions are at play, as well... we are seeking to create offerings that make the world a better place while allowing us to provide for ourselves and our families.

But. The stronger the aspiration and vision is, the higher the potential to be disconnected from various stark realities:

• Perhaps the strategy is beautiful and relevant and the product delivers, but it costs 4000% more than similar products while delivering marginal sustainability benefit.
• Perhaps the deeply aspirational goals of your program are not shared by the overwhelming majority of customers.
• Perhaps the sustainable vision of the team is not yet feasible given current technological constraints.

These stark realities come in a wide range of forms in sustainability, and this is why our critical analysis is so important: so that we may see if an organization is truly delivering on an especially set of goals, or if it is simply a veneer of good copywriting and design.

A Mechanism to Visualize and Map these Strategic Failures

The Clouds and Roots Model is intended to help us take those lofty aspirations and anchor them in the realistic and tactical experiential cues of our offering or program. What is interesting is that with some practice, you may find that this model can be applied to virtually any creative challenge... from logo design to redesigning a room in your home. It is indeed that flexible.

This may all sound a bit esoteric at the moment, but I promise it will not only make sense as we use it, but that we will use this model in very tangible, practical ways as we create and test offerings.

In any case, we can map continuity in strategy by linking three elements:

The Clouds: The aspirational and emotional end benefits we seek to create.

• This may directly tie to the Vision, Mission, and Values of the program, the emotional experience we want the customer to have from our offering, or the aspiration for the brand.
• Regardless of the intent, the cloud is about big ideas. Things we are passionate about as an organization or as people.
• Much of the aspiration we feel in sustainability can be located here... the ideas around making the world better, and 'doing well by doing good.'
• In many cases, the Clouds tend to be neglected or poorly defined because we tend to focus on executional details and creating 'what's in the box.'

The Trunk: The unifying theme or idea.

• The trunk is the idea that brings it together. The central theme. The first idea you want people to say when describing the offering.
• This may be a theme which is used only internally at the organization, or a customer-facing tagline.
• It acts as a path for perception, if you will. It is clearly defined in the middle, but diffuses at each end. This allows room for people - customers - to interpret and enrich with their own interpretations.
• Like a tree, the strongest campaigns have a single, straight, direct "trunk." You may have variations or riffs or extensions, but the goal is that everything anchors back into the main theme.
• In reality, the trunk is the most difficult to create, but the most beneficial. It can be difficult to select just one central theme or idea on which to execute.

The Roots: The tangible and tactical design cues, messages, and other experiential details.

• This is what the customer will actually experience, from store atmospherics to product packaging to service features.
• Just as in root systems, there could be hundreds, if not thousands, of experiential details if you get very granular. Every one creates meaning and provides "nourishment" to the vision.
• Ironically, in actual fieldwork and research, the most granular or "gritty" details are those which impress people the most.

Just as a brief example and to show some versatility, let's imagine we wanted to create a strategy for the first two minutes of a customer's experience at a nature-oriented spa.

Clouds - These high-level thoughts and feelings could include peace, tranquility, connectedness, separation from the "real world," safety, physical and emotional comfort, relaxation.

Trunk - "Be isolated together in a natural space." When many nature lovers speak of their most cherished - and relaxing experiences outdoors, they had a common theme of intense isolation, and yet, strong connection to themselves and their partner.

Roots - Water threshold entry, remove shoes before entry. Heated and cooled surfaces. "messy" materials like sand, pebbles. Scent design. No computers. Limited bookings and partitioned entry to provide continuous feeling of isolation. Location and siting to fit.

Then comes the true test of the strategy: live testing with real people. This is where virtually all organizations stop short... and why so many strategies fail. The elegant strategy that seemed so perfect in the meeting room is interpreted in completely unintended or unexpected ways by customers.

Through beta testing and consumer research, we will attempt to directly overlay customers' perceptions onto the model we create. In an unbiasing way, we will show a group of customers our offering in beta form and understand how they "redraw" the model. They may spontaneously share stories and feedback that directly tie to the intended emotional outcomes, they may perceive the product as having absolutely no tie to what we believed was the central idea, they may not understand the campaign at a basic level.

Our work is to continue to refine until the research shows that customers are, without our bias or influence, perceiving the offering as intended... and if it is a compelling proposition for them.

Using GRI's Uniformity to Reveal Differences in Strategy

As we have seen through our examinations of GRI-filed aspects thus far, it offers a diverse and somewhat exhaustive view of a company's sustainability initiatives and performance. While GRI aspects are most commonly captured and noted within a company's CSR and not separated out into a stand-alone filing, examining the differences between GRI aspects can be interesting to help us find spaces of potential opportunity and unearth the strategies of others.

What we should also consider is that GRI aspects are not dictated to be stated in one form or another, so organizations can cite drastically different figures and indicators for the same GRI aspect. While this can make superficial analysis a bit more difficult, it tends to be very illuminating for deeper analysis, as it can show some level of an organization's engagement and intent in one aspect or another. GRI-compliant CSRs are certainly more uniform and more easily comparable than unstructured CSRs, but there is still significant variation.

There are many potential analyses we could perform on GRI filings, below are a sample of the types of analysis you can perform with GRI filings, as well as the strengths and limitations of those analyses. My hope in providing these is that we may begin to see the wide range of insights we can glean from just one type of filing, and how these insights may help us to establish the wireframe for innovation (our next Lesson).

Four Types of GRI Analysis and Their Roles

Omission analyses can be extremely effective in unearthing "bare threads" and generating leads for further research. As a group, these analyses tend to be a bit more difficult than other types of analysis simply because you will be examining gaps in data and not the data itself, per se. Where you could create grids and calculations of what data is present in filings and use it as a framework for comparison, in examining omission, you will be closely considering what is NOT in the filing.

These analyses tend to be especially valuable when considering if a company is trying to hide something or bury signs of an emerging strategy; they will most likely ignore it and hope it goes unnoticed.

In GRI reports, a given aspect may share the same name, but the indicators an organization elects to use in measuring the aspect can be wildly different. In indicator analyses, consider that "peers" may be organizations with similar offerings, of similar revenue, or even of similar stature across industries. Where omission analysis relies on more direct, almost forensic peer comparisons, indicator analyses can be especially valuable when considering those more liberal interpretations of "peers" because they can help illustrate how outright leadership or true innovation manifests itself.

These tend to be more qualitative analyses, centered around how well the organization explains its actions or how it may state an indicator in one way or another. These can be interesting in that seeing narratives with qualifiers or which seem to be opaque can signal areas of further exploration.

The polar opposite of Omission Analyses, these seek to understand exactly what actions the organization has actually taken and what commitments they have executed.

Understanding the Wide-Open Landscape

In our earlier discussion of mining GRI-compliant CSRs to frame potential opportunities, we found the GRI framework provides some structure to how an organization reports their sustainability aspects and indicators, but is by no means a rigid set of definitions. Think of GRI as a set of guardrails for an organization, keeping it within some roughly defined boundaries. By comparison, we will see 10-K filings as a set of rails, allowing very little deviation by comparison.

Keeping those metaphors in mind, we could consider the unstructured CSRs as a wide open field. There are no rules, there are no criteria or standards to abide by, allowing organizations to refer to anything from a single page of PR to a full report as a "CSR." Understandably, this leads to a significant variance in data presented and how it is stated. So, our methods of analysis must flex accordingly to allow us to glean as much insight as possible within a given field of CSRs.

Of note in our discussion of structured (GRI, etc.) and unstructured CSRs: There is perhaps a misconception that GRI-compliant reports are superior in content and transparency to non-structured reports. This is not necessarily true for a few reasons:

• Application levels vary significantly. GRI has six-letter grade Application Levels for filings, ranging from C to A+. Especially at the lower, non-audited levels of filing, the aspects an organization is required to report on can be a bit of a low bar to meet. Furthermore, only A and A+ require an organization to report on all aspects, meaning they could conceivably ignore swaths of topics and indicators and still be considered GRI-compliant.
• GRI is not prescriptive. If there is a common misconception about many of the leading standards in sustainability, it is that they are prescriptive and in some way evaluate the quality of an organization's efforts. This is not true. GRI and ISO 14001 are reporting standards, requiring disclosure of philosophies, processes, and measurements (GRI), or processes, decisions made, and documentation (ISO). You may conclude that organizations making the effort to file a high-level GRI application do indeed have robust sustainability programs, but we will see this is not necessarily always the case.
• Transparency is not mandated. Even if an organization does file a high level GRI report, this still does not necessarily mean they have disclosed everything in a full and transparent manner. Like a good lawyer, they may simply use the interpretations of GRI aspects in such a way to be of maximum benefit to the organization, and not necessarily provide full disclosure.
• Organization size is a factor. There is some level of stratification of organization size in regard to filing standard selection. Many of the large, multinational corporations file with GRI because they are highly advanced and already reporting much of the information to shareholders. Mid-cap organizations are a mix of lower-level GRI, B Corp, and unstructured. Small-cap and non-profits tend toward B Corp and unstructured.

We have seen the level of Patagonia's sustainability work in prior lessons, and they not only do not file a GRI-compliant CSR, they don't file a CSR at all. They have addressed their rationale in response to the question, "Does Patagonia publish a Corporate Social Responsibility (CSR) report or social audit?" [emphasis is mine]:

Patagonia as yet has not published a CSR or Sustainability Report that follows the guidelines of the Global Reporting Initiative (GRI) or other framework used by other companies.

We are committed to co-responsibility for decent treatment of workers throughout the supply chain. We publish our factory list online. You can access social audit report results for factories that make Patagonia clothes through the Fair Labor Association (FLA) website (we are an accredited member of FLA; they randomly audit a sampling of our factories every year). Our newly redesigned Footprint Chronicles site also includes social audit results from our supply chain.

To report on environmental responsibility, the Footprint Chronicles looks at some of the environmental impacts in our supply chain. The Footprint Chronicles allows us to talk about critical social and environmental stories with all our stakeholders – customers, the press, suppliers, employees and students – in unspecialized, everyday language. We give priority to the issues that challenge us the most – or that our stakeholders regard as a challenge and ask us to address. We highlight failures and ongoing challenges as well as incremental successes.

We inform our customers and the public on our progress in social and environmental responsibility in other ways too – in the Corporate Responsibility section of The Footprint Chronicles, in our annual Environmental Initiatives booklet, in the Environmentalism section of our website, and on our blog, "The Cleanest Line." We feel these are exciting, interesting, interactive and transparent methods to show our commitment to human rights, environmentalism and ethics.

In early 2012, we became the first company in California to become a Benefit Corporation (B-Corp) with the State of California. This certification process requires annual reporting.

The advantage to the reader/user of sustainability reports that follow the GRI framework is the ability to easily compare data from different companies. The disadvantage: a sustainability report, like an annual report, can be a dull read held forth in specialized language that clouds as much as it reveals. Because we recognize the advantages of easy comparability, we are investigating the possibility of importing data we collect for the Footprint Chronicles into a GRI framework (and with as much plain speaking as possible). Sustainability reports can be expensive for a company of our relatively small size to research and produce and can only supplement, not substitute, for the Footprint Chronicles. We want to continually raise rather than lower the quality of the conversation we've created with our stakeholders over the past years.

Patagonia's sustainability reputation is well known, but many other organizations filing unstructured CSRs may not be as well known. Unfortunately, for some organizations lower in supply chains, its customers may require GRI reporting simply because it is well known and these customers do not have the resources to deeply understand an unstructured CSR. So they require what is standardized and accessible.

Philosophies for Finding Opportunity in Unstructured CSRs

While the examination of GRI-compliant CSRs may feel more like forensic accounting or auditing, finding opportunity in unstructured CSRs tends to have a less methodical, more aggressive approach. I would describe it as almost a feeling of legal discovery or journalism, as it is far less process-driven and more about considering overarching storylines and finding leads. We all have our own approaches and preferred tactics, but I will say this: When dealing with unstructured CSRs, it can be useful to stay loose and step back from the CSR often to consider the larger story and strategy. Because there are fewer clear points of comparison, unstructured CSRs can have a tendency to lead you where they want to go.

You may find that adaptations of the GRI analyses covered earlier can certainly be adapted and applied to the research of unstructured CSRs, but here are a few philosophies to consider:

• What information surrounds the CSR? In our search to unearth strategies in the CSR, it can be useful to compile non-CSR information from the same period, anything from press releases to LinkedIn posts to interviews. We want to understand where an organization is moving strategically, how sustainability fits, and our opportunity.
• What is the organization's context? If a local dairy created a 10-page unstructured CSR, it would be both rare and commendable... if Ben & Jerry's did the same, it would be both out of character and highly questionable. Because the breadth of circumstances and complexities is so wide with unstructured CSRs, we must always be conscious of context. For example, if we are an organization attempting to strengthen a strategic relationship with a customer based on its sustainability goals, we must consider that a smaller company may not have the resources to share all of its sustainability goals in a CSR, let alone pursue them all at once. If we seek to strengthen our relationship with PepsiCo, there is probably a high probability that staying within the stated goals of their CSR will serve us well, as those goals have likely been through rounds of refinement and expertise.
• What are they proud of? This may sound a bit odd, but where does the company seem to get a little twinkle in their collective eyes? What do they seem especially proud of? Do they have a pet project or product line? In engaged organizations taking on innovative projects, it can be hard for them to suppress their own excitement, especially in interviews and PR. This is also true for sustainability reports. Where do they tell the most stories and put the most effort?
• What might they not be talking about? Are there omissions from the discussion that would otherwise seem obvious? Are there areas which you might expect to warrant considerable attention in the CSR which seem to be glossed over? There may be something more to the story. If an automotive manufacturer issues a 120-page CSR and there are two sentences on fleet fuel mileage, chances are something is off.
• Are there embarrassments? Are there areas where the organization has come under scrutiny from customers, mass media, social media, or NGOs? Did they address it in the CSR, and if they did, how did they address it? There are some fairly inspiring examples out there of organizations taking embarrassments head-on in CSRs, and there are also some which completely ignore anything negative. We can learn from both.
• How do they compare to peers? Because two peers may have significantly different levels of unstructured filings, we need to take a more holistic view. Does the company's level of strategy and intent in sustainability generally match, trail, or exceed other initiatives in the organization? Are they a young program showing great promise and innovation in what they are able to do, or are they generally floundering? When examining drastically different peers, we need to find some way to normalize to gain a better view.
• Where are the over- and understatements? Is the report loaded with overstatements and greenwashing, or does the filing have a certain feeling of "duck feet"... that is, a serene and somewhat understated public appearance with furious effort not visible to the casual observer? The companies that tend to have that duck-like appearance may have far larger strategies and plans in the works, while those overstating tend to have far less happening beneath the surface. (If you are curious about where the 'duck foot metaphor' comes from, here is an example of the source material.)

As we begin to be able to critically analyze both GRI-compliant and unstructured CSRs, we will be able to understand not only the spaces in which we wish to innovate, but also the strategies and tactics that true innovators undertake to find opportunity to grow sustainability as a core business imperative. Much as in our earlier example of Van Gogh's color theory, our goal is to be able to deconstruct the work of others so we may be able to find our own philosophies and construct our own ideas. Being able to deconstruct sustainability filings will be a centerpiece of this effort.

Understanding How Organizations "Push Down" Strategies

As we seek to understand the landscape of organizations, actions taken, and underlying strategies, supplier scorecards can help us to understand the steps actively taken to "push down" their sustainability strategy into the supply chain. This tends to be an excellent measure of how far along the sustainability path an organization is, as it tends to be the more advanced that have rigorous supplier sustainability scorecards, with the most advanced being those that integrate sustainability measures into the core of their supplier ratings. When those scores determine how much business a given supplier may receive and how protected they are from supplier trimming efforts, it takes on a very different feel than an "optional" supplier sustainability scorecard.

If you are unfamiliar with supplier scorecards, there are a range of manifestations as wide as you could imagine. The common thread is that the intent of supplier scorecards is to help an organization understand key supplier relationships and high performers, and similarly, to signal low performers that could be eliminated from the supplier list. Ultimately, it is up to the organization to dictate what they include on a supplier scorecard depending on their needs and emphasis, and could include anything from on-time delivery measures to ratings of responsiveness.

Why this is so important to us is that by understanding what is on a supplier scorecard and what the organization emphasizes, we can gain a view of the "scoring rubric" of what the organization holds most important. We understand what is important to the organization by understanding what they make important to suppliers. In most cases, these scorecards are an excellent barometer for how true an organization is to their stated strategy.

In many cases, for those organizations which have not added sustainability reporting requirements to supplier scorecards, we can see the paths already being established in GRI reports. Some organizations will clearly state their timelines for supplier sustainability requirements in their GRI filings, while others may allude to the fact that they will seek and measure supplier sustainability efforts in the near future.

While the specifics tend to not be public, here are a few samples of what organizations have to say in regard to supplier sustainability requirements:

PPG's supplier sustainability requirements:

PPG expects suppliers to evaluate and maintain sustainable processes and raw material sources throughout their supply chain and supplier base. PPG's preferred supplier criteria includes vendors that demonstrate world-class sustainability practices and marked improvements regarding their respective organization’s sustainability within the markets they serve. PPG will foster and maintain a sustainability culture with our suppliers, encouraging these suppliers to innovate and develop new products requiring less intensive material and energy consumption, along with leveraging their collective strengths to meet PPG’s sustainability goals.

WPP's supplier sustainability requirements:

Selecting preferred suppliers
We evaluate all potential new suppliers against a set of business requirements before they can become a WPP supplier. These include assurance of supply, quality, service, cost, innovation and sustainability. Our sustainability criteria cover six areas: policy, senior responsibility, materiality and issues identification, reporting, supply chain and anti-bribery and corruption.

Alcatel-Lucent:

Sustainability is increasingly a key consideration in the way we select and manage our suppliers. For example:

• Suppliers must have a "satisfactory" sustainability rating to become a preferred production supplier.*
• General or product/service-specific sustainability requirements are integrated into suppliers’ bids and tenders, and account for a portion of the total scoring and selection criteria.
• Sustainability performance is one of the eight areas of the supplier scorecards used during business reviews with our suppliers (see section 4.2).
• * "Preferred" suppliers are those sources for a given purchasing family that we consider first for new projects. Our objective is to concentrate our spending on these suppliers. Preferred suppliers take priority for incorporation into new designs and must be used for purchase orders whenever possible.

Siemens:

Sustainability requirements – as a guiding principle for our supply chain management – are an integral part of all relevant supplier management processes – such as supplier selection, supplier qualification and evaluation, and supplier development. We require all of our suppliers to comply with the principles of our Code of Conduct for Siemens Suppliers, which include, besides others, respect for the basic rights of employees, strong safety and health and environmental protection standards as well as zero-tolerance on corruption and bribery. We also require them to support its implementation in their own supply chains. We have established and continually further develop a risk-based system of appropriate processes to enable us to systematically identify potential risks in our supply chain. It consists of sustainability self-assessments by suppliers, risk evaluation conducted by our purchasing department, sustainability questions within supplier quality audits and sustainability audits by external auditors. To further encourage sustainable business conduct throughout our entire global supply chain, we are committed to building our suppliers’ competence and intensifying knowledge transfers related to sustainability.

Frames for Sustainability: "Active Reward" Versus an Emerging "Passive Detriment"

The "Active Reward" Frame

During our time together this semester, we have examined organizations that lead in sustainability across a range of concerns, from community involvement to profitability to waste reduction. What we may see in these organizations–and many of those leading in sustainability–is they share a very active approach to sustainability, and one which is highly biased toward seeing the rewards of sustainability.

Let's briefly examine the titles statements of leading sustainability reports I chose at random. Emphasis is mine:

• "Local Citizen: Making Sustainable Progress Possible One Community at a Time" - Title of Caterpillar's 2014 Sustainability Report
• "Creating Shared Value" - Title of Nestle's 2014 Sustainability Report
• "Finding the Upside" - Title of Abbott Laboratories 2014 Global Citizenship Report
• "At the BMW Group, we believe that sustainability means investing in our future." - Headline of BMW Chairman Dr. Norbert Reithofer's Letter in BMW's 2014 Sustainability Report
• "Enhancing personal well-being," "Building stronger communities," "Protecting the environment" - Coca-Cola's definitions of their 2020 Sustainability Commitments
• "Reaching Further" - Title of Biogen Idec 2013 Sustainability Report
• "Making Progress, Driving Change" - Title of Unilever's 2013 Sustainability Report

The "Passive Detriment" Frame

What we may begin to see with the emergence of sustainability requirements in suppliers is a new frame for sustainability–one where there will be a very tangible and significant detriment to the organization if they take a passive approach to sustainability. In essence, the integration of sustainability requirements in supplier scorecards will begin to establish new frames for sustainability:

• 'We will lose preferred supplier status if we do not perform on sustainability criteria.'
• 'Not reporting on sustainability will close doors to potential new business.'
• 'Our core business will suffer if we do not meet (company's) supplier criteria and are dropped.'
• 'If we do not meet the criteria, X% of our revenue will be at risk.'

While enterprising and innovative organizations will continue to see the more positive and benefit-oriented "Active Reward" sustainability frame, organizations which are passive will begin to see the negative effects of inaction.

We can only imagine what the passage of a carbon tax would do for the creation of a "Passive Detriment" frame in organizations.

Rounding Out Our Understanding

I'd like to start out not by laundry-listing the non-sustainability-oriented sources of information which may be of interest to us, but instead examining what we seek to gain from those additional sources of information.

Whether we seek to understand opportunities to deepen relationships with customers, niches within which to innovate and create offerings, or to understand the competitive space, sustainability filings can only reveal part of the overall picture. In fact, while examining only sustainability reports may not actively hinder our research, we may find that our insights lack a certain depth because they rely only on the sustainability viewpoint. I firmly believe that as you gain experience researching or performing fieldwork, you do indeed develop an almost unconscious feel for when the insights are well-developed. I like to say that at a certain point, the insight takes on a certain "bite"... that it stands alone, has a certain crispness of information, and exudes power and verve. It may be hard to explain, but a significant goal of this course is to help develop that feel for when insights have "bite" in yourselves and your colleagues.

(If you ever want to test if your insight really has bite, try to create a one-page infographic centered on it. Something about the infographic format condenses thought and forces interest while adding some narrative... while bad infographics are instantly boring.)

In our efforts to provide a full, unbiased view of the desired topic, it can be beneficial to integrate other sources of research, some which we have briefly before, and some of which may be a bit less conventional. Regardless of the corroborating sources of information, it can be useful to "triple source" to provide a full view of the question at hand.

Triple Sourcing to Help Validate and Deepen Understanding

Far too often, research becomes an effort of finding information that confirms a frame or narrative we already hold. In fact, the clearinghouse of seemingly all initial understanding, Google, tends to underscore this tendency for confirmation (and sloppy research). What may begin as a search for "Ford sustainability" returns an overwhelming set of results, so we may lense it with "Ford sustainability leadership" or "Ford sustainability award."

The most significant liability in any research is that our initial beliefs may cloud or bias our extraction of source information, which will in turn cloud our results and the insights we create. Unfortunately, the effect is especially pronounced as the timelines for research are condensed and searches become even more directed and biased, as we seek to find substantiating information that won't stray from the developing narrative. (If you would like to see this at work on a daily basis, you may notice many media outlets citing Tweets in-line in otherwise journalistic pieces. They support the story's narrative because these supporting "sources" for seemingly any story are only a fraction of a second away.)

Triple sourcing is a quick mechanism which can help us to avoid not only our biases, but also instances of a single statistic or story (usually PR-oriented) potentially coloring our substantiating research. How it works is that we match our primary source for a given piece of information with two secondary sources to test the primary source. This is designed to be in initial screen, as deeper research will likely go far beyond three sources, but it can be very helpful.

Source 1: Primary Source

This is the initial finding of the information you will potentially include in your research. For the sake of argument, let's assume one of the "big three" sources of initial information we will tend to use will be: a GRI-compliant sustainability report, an unstructured CSR, or a company's 10-K filing.

Source 2: Contrarian or Third-Party Source

The goal of this source is specifically to test your primary source. So, if your initial source provided a glowing take on a company's sustainability efforts, your goal for Source 2 is to find third-party information specifically refuting that original source. This is where you may consciously search for biased information, and furthermore, you will consciously slant your search for this source in hopes of unearthing contrarian views or other information. Your goal is to find any information that may bring the first source into question, or otherwise provide depth.

Source 3: A "Voiced" Source of Information

While a voiced source may come from anywhere, I tend to favor those who are not in PR or Communications from the organization. Where the greatest information tends to come from is someone actively working with the area in question, be it an engineer, product manager, or otherwise. Industry publications tend to be excellent for this, as they tend to concentrate on areas of expertise, and not so much on PR posturing. What you are looking for in this source is specifically someone from the organization talking about the topic in question in an unscripted way.

So, if you found an interesting story on worker safety at an organization in their CSR, the ideal would be to find a Safety Manager talking to EHS Today about the tactics the company uses to create such a stellar safety record. What we are looking for is ground-level substantiation of the original source, or otherwise to see any disconnects or "overstatement" in the CSR, for example. The CSR could talk about "a new, proprietary machine safety system reducing injuries" while a safety engineer talks about adding $50 of acrylic sheets to danger areas to prevent people from sticking their fingers in machines at the wrong time.

One note on finding voiced sources: If you see strikingly similar wording between the sources, chances are they're scripted or PR. They may be accurate and valid for our research, but just know that they may be prepared statements.

Some Non-Sustainability Sources of Supplemental Information

Financial Filings, Namely 10-K or Equivalent

As mentioned earlier, these tend to be centered on the shareholder and financial interests of a publicly-traded company, but we see increasing airtime for sustainability information, especially in the Risks section. Where 10-K can be especially valuable for us is in testing if the assertions made in the sustainability filing in fact make it to SEC filings. If the sustainability report alludes to climate change as a major long-term risk to the organization's operations, we would certainly expect to see that fact addressed in the 10-K risks.

General Media and Reporting

Open reporting on a topic is, and will likely remain, a viable source for information. This is certainly no surprise.

Blogs (with significant additional substantiation)

This is a surprise to some, but really should not be. Here's why: they live and die by the posts they publish. Can they be sensationalist or overstated? Absolutely. Can they be expertly written and researched? Absolutely. But, here is where all of that should net out for us: blogs can do very real, very substantial damage to brands, and I would argue that blogs are quite close to NGOs for the potential they can have to disrupt the otherwise normal flow of a sustainability program. The last boycott you read about may have all started with a blog post. Organizations should ignore at their own peril.

For this reason, blogs can also be an excellent media for those contrarian sources we seek in triple sourcing.

PR

PR tends to be interesting no so much for what it can reveal, but for what it may confirm. If you think of PR as the 'sanctioned stream of consciousness' of an organization, it can be interesting to see what themes are carried from CSR or other sources and into PR. Those that do make it have been formally sanctioned by management in the organization as noteworthy and able to be shared at one point or another. This is interesting to us as we may see developing themes in the CSR which are then not part of PR conversations they otherwise would be.

Industry Interviews

As I mentioned earlier, these can sometimes fly under the PR radar at an organization because they may be related to industry groups, whitepapers, and other discussions. Having someone not speak from "the teleprompter" while talking about issues important to the organization can be especially interesting to us in research and finding opportunity.

LinkedIn and Posted Openings

Finding where people are moving positions and seeking headcount can be a great way to color research or provide another viewpoint. If the company offers a one-liner on their excitement on the new sustainable offering but you see that there are 12 openings posted for product management and support in for that product line, something may be afoot. Similarly, LinkedIn resumes can signal where internal expertise is moving within an organization to support emerging businesses.

Anywhere Else

Quite literally, anything can potentially be a source of information. From asking a customer service representative when a new product release is happening (gauging if the message has been formalized across the org and if there has been training) to researching the filings of related companies or suppliers for shared themes, some of the least-common sources can be the most valuable.

Credit: Vincent van Gogh - Beach at Scheveningen in calm weather (1882) by Botaurus from Wikimedia (Public Domain)

“As you can see, I am immersing myself in color—I've held back from that until now; and I don't regret it.” -Vincent van Gogh to Theo van Gogh, September 3, 1882 in speaking of a sketch of this work, The Beach of Scheveningen

Analyzing How Others Have Used Their Palettes

In this Lesson, we are quite granular in the analysis of whatever sustainability source material may be laid before us. With highly structured filings, we are able to have highly structured analyses, and with less-structured filings and information, we take a more blended and philosophical approach to extract as much meaning as possible. We are quite literally immersing ourselves in the colors of sustainability to find areas of opportunity on which to innovate. Our research is rarely a finite, directed highway, but far more often an exploration of winding and converging paths through which we find areas of interest. Many times, these areas represent opportunity.

As we have discussed before, there is this perception that creative people create. They lock themselves in rooms and somehow exude these brilliant thoughts onto their respective canvases, and that those who rely on weaknesses like "analysis" or "deconstruction" or "comparison" somehow fall short.

One would never conceive that van Gogh, arguably one of humanity's most important artists, actually thought about his work or analyzed his own creative process, correct? His letters show otherwise.

Here is an excerpt from later in the letter noted above, referring to another sketch of a wooded area:

Painting it was hard graft. There are one and a half large tubes of white in the ground — yet that ground is very dark — in addition red, yellow, brown ochre, black, terra sienna, bistre, and the result is a red-brown that varies from bistre to deep wine-red and to pale, blond reddish. Then there are also mosses and an edge of fresh grass that catches the light and sparkles brightly and is very difficult to get. There at last you have a sketch which — whatever may be said about it — I maintain has some meaning, says something.

While making it I said to myself: let me not leave before there's something of an autumn evening in it, something mysterious, something with seriousness in it.

However, because this effect doesn't last, I had to paint quickly. The figures were done with a few vigorous strokes with a firm brush — in one go. I was struck by how firmly the slender trunks stood in the ground — I began them using a brush, but because of the ground, which was already impasted, one brushstroke simply disappeared. Then I squeezed roots and trunks into it from the tube, and modeled them a little with the brush. Yes, now they stand in it — shoot up out of it — stand firmly rooted in it. In a sense I'm glad that I've never learned how to paint. Probably then I would have learned to ignore effects like this. Now I say, no, that's exactly what I want — if it's not possible then it's not possible — I want to try it even though I don't know how it's supposed to be done.

Summary

In this Lesson, we will be spending our time learning some practical and tactical means by which we can understand "space." Understanding space and where peers and competitors function is a bedrock concept in terms of understanding opportunity and potential differentiation.

In my experience and observation, much time and effort is wasted in trying to create "synthetic innovation," whether a product, service, or campaign. What I specifically mean by "synthetic innovation" is a syndrome of which people struggle to create something in the ether, without meaningful stimuli or underlying rationale, attempting to alloy raw creativity and mental horsepower into something new. Ironically, it is the type of innovation on display when you ask a child to "invent something," and they mash together a few nearby concepts to create something new to the world. Perhaps "Unicorn toothpaste" or "Corgi saddles."

If you consider real, successful innovation in the sustainability space (or any space), they very commonly take the form of a stepwise and logical improvement on an existing concept. Even if that improvement is 'new to the world,' I would argue it is many times still anchored in some existing function or translating function from another domain. I challenge you to take the most innovative new service or product and reverse engineer it: The magical success of Uber becomes a 'decentralized taxi service with driver ratings,' and there were actually quite a few smaller iterations of that concept long before Uber. Airbnb is basically 'decentralized hotel service with host ratings' a la Uber for hotels, and so on.

So, with the goal of improving our 'tool set of innovation' during our time together in this course, this week we will spend time understanding the building blocks of differentiation. By understanding those building blocks and how they are combined, we can then rearrange the blocks and add meaningful innovation, as opposed to failing around to create differentiation around an effort of questionable value.

We could spend millions in advertising and marketing to cement your reputation as 'the world's foremost Corgi saddlery,' but you might be less than satisfied with the financial performance of that endeavor.

Learning Outcomes

By the end of this lesson, you should be able to:

• frame the importance of "expanding from center" to create sustainability-driven innovation, strategic integration, and brand equity;
• articulate White, Gray, and Black space and how each can be of strategic interest;
• deconstruct sustainability strategies and Corporate Sustainability Reports into White, Gray, and Black areas for innovation;
• conduct research to gain detailed understandings of White, Gray, and Black spaces.

Lesson Roadmap

Questions?

If you have any questions, please send them to my axj153@psu.edu Faculty email. I will check daily to respond. If your question is one that is relevant to the entire class, I may respond to the entire class rather than individually.

Everything Begins From Center

From the most logical product line extensions to the most out there innovation, one should be able to connect it directly back to the overall Mission of the organization, its core competencies, and what it stands for... the organization's center, if you will.

In practice, organizations, especially those with strong brands and connections with customers, tend to underestimate how much license customers will give to these more out there innovations and extensions of offerings. Why? Because many organizations aren't actually well acquainted with how customers perceive their brand and what they do for the customer, both at the functional and emotional levels.

This disconnection from center can happen in a few different ways within an organization:

• Experience and expertise far beyond that of customers. Like any expert, people who are immersed in a given field have far more attuned senses and abilities to perceive and describe the offering. Experts simply have higher engagement and more experience, which breeds an assumption that many customers may be far more advanced than they are.
• High self-involvement. In another words, the fact that you feed your family selling paperclips does not mean that customers share that same high level of involvement with your products.
• Focus on shallow experience. If you work at Porsche and believe that Porsche makes only two-seat sports cars, you have created a very finite set of bounds on what you do. If you believe that you build the purest, most refined, and exciting vehicles in the world, other options are open to you. We will talk a bit more about this, but if you see your company as making only what's in the box, it places very specific bounds around what you do.

Over time, a company may touch with how they are perceived, a construct which can shift significantly over relatively short periods of time. In fact, those organizations may have never had a clear understanding of what their center was to begin with. This has everything to do with innovation and sustainability for us, as understanding the space in which your organizations and others operate in an unbiased way can be a tremendous starting point and anchor for innovation.

A Simple Metaphor for Why Center is Important to our Efforts

Think of the center of what your organization and brand represents in the minds of customers as a fixed pin attached to a heavy brick. Every innovation and new offering adds a rubber band and a new pin. Chances are that your company has an array of products and services close to your center pin. Forays further away from that center require strong pins, otherwise the tension is simply too much, and the pins simply break or pull out. Those far out pins may, in time, sprout their own supporting pins, and so on.

If you have enough pins and bands pulling in one direction, over time, the brick will move along in the same direction and re-find center. John Deere is one example: the man was originally a blacksmith who found a new way to make plows... which then became a tractor company... which then became an agricultural (and merchandising) giant. If the product creates enough tension, the company will come along with it.

Our goal is to gain an understanding of where the pins and bands are located, and to understand current boundaries. This will give us some feel for the landscape within which we will be working, and some feel for where the current boundaries lie. We won't consider these limits, per se, because a very significant innovation can instantly break the current boundaries of any organization. For example, if Lockheed Martin has indeed found a way to create compact fusion, they will instantly transcend any current association people may have with their organization. 'Unlimited energy for the world' is a pretty strong band and pin for any organization.

If you've ever seen a cognitive map, they look a lot like an overhead view of these pins and bands, and work much in the same way. If you haven't worked with cognitive maps in a rigorous way before, we will be doing exactly this in a few Lessons.

How Centers May Change Over Time

There are a few ways organizations can lose center over time. This may sound like a branding problem, and it certainly is... but it is also a foundational concern in developing new offerings. Unless you are a startup company, you will have existing thoughts and frames held by customers and the public at large about your organization. For better or worse, these existing thoughts and frames will affect perception of the new offering, just as your existing thoughts and frames about a person will affect how you perceive their new endeavors.

We will be diving into consumer research methodologies next week and cognitive mapping the week after, so we will indeed have tools to be able to find center for any organization in significant detail. But for the rest of this Lesson, we want to understand a concept related to an organization's center, one which defines much of how it will view and approach new offerings: White, Gray and Black Spaces.

A Misperception of Innovation

There is a certain facet or theme of innovation that seems to dominate all others, and this is innovation as a new to the world, disruptive, revolutionary achievement.

Here is a representative sample of the types of endeavors typically associated with innovation, from a Washington Post year in review:

• NASA's Orion spacecraft
• Apple Watch
• ZMapp (treatment for Ebola)
• Lockheed Martin's aforementioned fusion concept
• Samsung Gear VR (virtual reality)
• Uber and the sharing economy
• Heartbleed (computer virus)
• HP Sprout (3D manipulation suite)
• Google's cancer detecting pill

This is certainly part of innovation, but in practice, innovation tends to be far more quiet, incremental, and purposeful. Where the persona attached to the revolutionary and disruptive innovation may be rockstar, the majority of innovation may be far closer to engineer or scientist. Innovation in practice is a rigorous and methodical endeavor.

So where there is a misuse, or at least popular misappropriation of the term innovation, pairing sustainability with it tends to have a multiplying effect... not only must your innovation be revolutionary and completely new to the world, it must also save the world at the same time. Tidal power generation and residential solar cogeneration and the like. While these are certainly important projects, what is important to us is that there are far more opportunities to innovate than those massive undertakings. Incremental progress is progress nonetheless, and many organizations large and small have the opportunity to participate.

White, Gray, and Black Spaces

In our efforts to understand sustainability-driven innovation of others in order to create our own, it is important that we create an understanding of the incumbent offerings and organizations already occupying the spaces we seek to explore. These organizations may be existing competitors well known to us in the core business, we may be exploring new ventures into other competitive spaces, or we may be creating completely new spaces. In each case, there may be a compelling strategy for us to create and frame our sustainability-driven offerings, but it is important that we understand the space in which we will be working.

In the following pages, we will discuss the three types of spaces and examine the strengths, weaknesses, and strategies of each.

The Wide Open Spaces of Innovation

White spaces are exactly as they sound. These are indeed those new-to-the-world offerings that have the potential to truly disrupt the category, and potentially, an industry. While these may be the prototypical "innovations," there is one slight problem: incredibly smart people and organizations go decades without creating a single truly white space innovation, if ever. Consider that while there were 615,243 patents issued in the US in 2014, the vast majority of those patents do not come to commercial fruition, let alone become truly viable white space innovations.

White Space Innovation

Defining Characteristics:

These innovations are defined by the fact that they are often radical departures from the established, and may indeed signal a revolutionary change, even if in a small niche. While this revolutionary development may be in a category already established (e.g., biodiesel, computing), the means of creation may be a significant departure from any successful venture before it (e.g., biodiesel from algae in under an hour, quantum processors).

These innovations also have a tendency to have three things in common: long development times, elevated costs, and specialized knowledge. I purposely use the word "tendency" here because there will always be those white space innovations driven by a chance occurrence, or a single genius in a garage somewhere. There will always be those people and organizations that can capture lightning in a jar.

Pros:

• If successful, these innovations define the space in which others will operate
• Early acceptance by market can drive growth and further separation from peers
• Early success may draw in further talent and ideas
• Intellectual Property protections and proprietary technology
• Appealing to venture capital and investors
• Differentiation is unavoidable

Cons:

• Unless a wide technological or developmental moat, competitors will likely follow
• Patent protection only covers so much
• Potential for significant development cost
• Potential for significant development cycle time
• Unreliable pipeline of innovation
• Unsuccessful market entry can prove financially damaging

Best Utilized By:

Any organization that can craft a true white space innovation should utilize it to the fullest, but some organizations are better positioned to create them in the first place. Organizations with a significant in-house braintrust, ample resources, and the financial wherewithal to invest in long-term, potentially fruitless research tend to have the edge in creating these types of sustainability-driven innovations. In many cases, we are talking about large corporations, universities, labs, and the like as being the hotbeds of whitespace innovation, although many small "spin offs" are incubated by these larger enterprises every year.

Examples of White Space Innovation

Pacific Northwest National Laboratory's Work Into Algal and Biomass-Derived Fuels

The PNNL is doing some astounding stuff around biofuels. In one case, seemingly overnight, they produced research about WWII stories of canvas tents being digested in order to find an aggressive fungus to digest rough biomass for efficient use in biofuel creation.

Point Source Power

In a 2013 study, the U.N. found that 6 billion people worldwide have access to mobile phones, a full 1.5 billion more than have access to toilets. Craig Jacobson, Co-Founder of Point Source Power, recognized that many in the world have the need to charge a cell phone, but may be without accessible means to do so. To fill this need, he went about creating a thermal fuel cell with a probe that can be placed into a cooking fire, and which charges either a spare battery or a cell phone directly. It is not only a fascinating development, but one which is built at a bare minimum cost in order to be affordable to those in third world countries.

Please watch the following 3:05 video.

Video: Point Source Power (3:05)

Stonyfield / WikiPearl Edible Packaging

There are a few interesting innovations at play here, but it will remain to be seen if the technology, design, and taste is truly up to the rigors of the supermarket, or if this product will live and die as some sort of novelty. Please review the article titled "Stonyfield tests package-less froyo."

Incremental Innovation and Refinement

Gray space innovations are those where there may be some incumbent product or service, but it may be an unestablished or immature market. This is where meaningful improvements to the offering or a small handful of differentiators can be enough for an organization to enter the competitive fray and explore.

Gray Space Innovation

Defining Characteristics:

These innovations are defined by the fact that they many times represent incremental innovation. This may be manifested by the organization developing a new set of attributes, a new delivery method, new cost structure, or other innovations. We will explore these in more detail when we cover the ten types of innovation in a few lessons, but the key for gray space innovation is remembering that they are built on incremental innovation.

One misconception, perhaps driven by the interpretation of white space innovation as the "true" innovation, is that gray space innovation is not really "innovation." What is ironic about this is that many of the most famous innovations in any realm, were not white space innovation, but in fact, gray space innovation. Some examples? From Henry Ford's assembly line (actually Samuel Colt's) to Apple's computer mouse (actually Xerox), these innovations may be refined and popularized by one organization, but have their roots in the white space innovations of others. Much of technology, including smartphones, tend to exhibit gray space innovation. A new system or way of operation here, a new sensor there, a revised interface.

Pros:

• "Fast follower" or incremental approach to innovation allows accelerated cycle times
• Typically lower development cost than white space innovation
• Reduced need/cost to market an already semi-established concept
• Ability to position offering against an incumbent
• Allows a sort of "a la carte" combination of innovations in one offering
• Builds on existing market successes and preferences
• Reduces the number of unknowns in creating the offering around pricing, features, etc.

Cons:

• Intellectual property protections may not offer total coverage
• Requires some level of differentiation or education of the market (like most products)
• Not as wide of a technology or competence moat to discourage competitors
• Potential to be derivative and confusing for customers
• May enter a market already dominated by the originator or another incumbent
• Requires some speed in development, lest your offering becomes obsolete before hitting the market

Best Utilized By:

Many organizations. This is perhaps the most common and versatile space for innovation, as it allows any organization to leverage its specific strengths while evolving a concept. An organization with an especially strong brand can elect to leverage this fact by popularizing its take on an offering, while an organization with especially efficient organization may elect to come into the market as the low-cost player by leveraging its strengths.

Examples of Gray Space Innovation

Apple's Vision for the Xerox GUI and Mouse

Sometimes, gray space innovation comes down to seeing potential in the offerings of others that even they can't. A pure example of what this can look like is Steve Jobs' visit to Xerox PARC. Xerox saw the GUI and mouse, at best, as an overpriced curiosity, Jobs saw it as a potential revolution in computing. (The most important segment begins at 6:26)

Video: How Steve Jobs got the ideas of GUI from XEROX (6:26)

Nest Thermostat

While there had been thermostats, touchscreen thermostats, even smart thermostats before it, Nest brought the most intelligent features and best design into one product. Central to the Nest concept is its ability to learn from the habits of those in the home, as well as the ability to leverage "the internet of things" to become even more efficient and seamless (for example, relying on the motion sensors in Nest smoke alarms to know when the home is occupied or not, or looking at the weather forecast and adjusting behavior).

While the Nest modus operandi for gray space innovation is to take very boring, "dumb" things and make them smart and sustainable, we can only imagine the developments now that Nest Labs is owned by Google. Please watch the following 2:11 video.

Video: How the Nest Learning Thermostat Learns (2:11)

Tesla Powerwall

This is an example of a fairly straightforward concept, packaged elegantly, sold brilliantly, and benefiting from tremendous efficiencies of scale. Battery backups for homes, and even home-built power cells to capture solar energy, have been around for years, but, like Nest, Tesla is making it interesting and feasible for the common homeowner. If you wonder about Tesla's ability to make battery backup interesting, consider that they booked $800 million of preorders in the first week, on track to surpass the iPhone for one of the most successful new product launches in recent history. Please watch the following 4:00 video.

Video: Tesla’s Powerwall Home Battery: The Stuff Worth Knowing (4:00)

Taking On All Challengers, Head On

Think of black space innovation perhaps as a continuation of gray space innovation, just more intense (thus, our stroll further down the color spectrum). Black space innovation is when the space is already crowded with incumbents, but your organization has the ability to innovate and differentiate the offering by leveraging multiple organizational strengths: efficiencies of scale and manufacturing, logistics, distribution, brand, vertical integration, and more. In many cases, this happens when a large player enters the space, but can also be when a smaller organization is able to outmaneuver the competition or otherwise bring its unique strengths to bear.

Regardless of the mechanism or organization, black space innovation is all about the application of significant amounts of leverage; not just a handful of innovations, but entire constellations of innovation.

Black Space Innovation

Defining Characteristics:

These innovations are typically defined by the fact that they are already crowded spaces, and the attempt for one company to bring enough leverage to bear that the market aligns behind them. In order to do this, it requires a significant effort on a variety of fronts, as an incremental innovation would likely not justify the organization entering the competitive fray.

Pros:

• Entry into more mature space allows many unknowns to be revealed by market
• Greater potential for research and learning
• Even lower cost to market or educate into a more mature space
• High potential to leverage the organization's full portfolio of strength

Cons:

• It may be more efficient to merge or acquire an organization already in the space
• Brand may not translate well into the new space
• Competitors may be able to adapt more quickly than your organization
• If leveraging size, potential for high startup cost
• Unsuccessful market entry can prove financially damaging

Best Utilized By:

Typically larger or more established organizations, or those organizations which elect to consciously and actively sit on the sidelines of innovation until the time for entry is appropriate. While "actively sitting on the sidelines" may sound like an oxymoron, it is important to realize that an insights or market intelligence team at a large organization could be performing more consumer and competitive research than those actually actively participating in the market at the time.

Examples of Black Space Innovation

IKEA LED

While there are quite a few established players in the LED market, namely Cree and Philips, IKEA has consciously committed to use its size, scale, efficiency, and brand to take LED to the next level. While it could have struck a supply agreement, it instead elected to start from scratch and commit to taking on the manufacturing of its bulbs. We will be covering the IKEA LED case in a bit more detail later in this course, but it is an example of a large company consciously electing to enter a fairly mature and crowded market. Please watch the following 1:27 silent video.

Video: Design Power of LED. Music only, no speech. (1:26)

Veta La Palma Aquaculture

As related in this compelling talk by Chef Dan Barber, Veta la Palma has taken a drastically different approach to aquaculture by making it sustainable, and its fish some of the world's best. In this case, Veta la Palma is not just taking on a group of tangible competitors, but instead, it is challenging an entire method of farming and going to market with fish. Veta la Palma is doing things drastically different in service of a drastically different product and in a drastically more beneficial way.

Please watch the following 18:55 Ted Talk "How I fell in love with a fish" by Dan Barber.

Video: How I fell in love with a fish (5:26)

A Story

Credit: Freshly painted speed bump for slowing traffic near school by kataklinger is licensed under depositphotos.com Standard License.

I once guest judged an Entrepreneurship capstone course at a major university, a multidisciplinary effort between business, engineering, and design schools. The intent of the course was for these teams to work together to create an innovative product release from start to finish, including financials, marketing sizing, working prototypes using 3D printing, etc. It was an impressive program with impressive students.

While they spent the day trotting out their presentations like proud parents, I began to see a microcosm of an issue I have seen for years, over and over again, in both the private and public sector. Simply put, in the scope of innovation, new product development, or campaign development, research is seen as somewhere between a speedbump and a roadblock.

The teams that day were no different in composition than many you might see on a lean innovation team: a couple of marketers/researchers, a finance guy, engineers, and designers. Because the teams were "on the clock," there was usually a brainstorming session to develop an idea, followed by the marketing people doing some superficial research while the designers and engineers started on "the real work." In any organization, this is played out in similar ways: budgets and time are constrained, so there is a push to get to the prototype as quickly as possible. Getting to Beta quickly will be a significant goal, but this speed should by no means be because initial research was under resourced or ignored.

So, what is the pattern? That the first step the teams took were to revert to something a member was passionate about, then back filling the research to confirm the chosen direction. This is no different than a creative director executing concepts and animatics based on "gut" or any team looking to use the research to "confirm" instead of "explore." I can absolutely tell you that this syndrome is in no way limited to college students. It is everywhere.

I can also tell you that when research is an afterthought used to confirm pre-Beta offerings, it typically ends up in one of three ways:

1. It confirms a decent, but sub-optimal product. This may seem acceptable until considering that the product tested at Beta and the next iteration may be drastically different.
2. The results are ambiguous, and the team elects to ignore warning signs and emphasize the positive. The offering fails at Beta.
3. The results are so negative they can not be denied. The effort grinds to a halt, and may have to restart from scratch. The team may be disbanded.

Examples of Tactics to Analyze WGB Spaces

In our studies thus far, we have worked from the coarse analysis of examining areas of opportunity and merged into increasingly fine-grained analysis. We have also worked on understanding the foundations of sustainability, to the strategies and tactics organizations use in sustainability, to the critical analysis of public filings, to understanding the overall opportunities in those filings and the competitive context of those opportunities. We are now analyzing the early phases of how organizations may be able to leverage those opportunities.

Let's follow this flow for the earlier example of the opportunity Tesla's growth presents in regard to training and licensing technicians on all-electric drivetrains. At this point, we have roughly scoped the opportunity and it is of interest to us. Now, we want to understand the context within the opportunity exists, specifically how it is a White, Gray, or Black space, and how the organization may be equipped (or not) to move the idea to the next step.

While tactics to understand WGB spaces can be wildly different–from ethnography to forensic accounting–here are the types of questions that would further narrow the scope to understand the space. Let's imagine we are an independent automotive training institute curious about the opportunity of training techs to service Teslas.

Competitive Intelligence

What organizations currently operate in this space? We may be surrounded by other highly-competent automotive training institutes, as well as the potential that others have entered the electric technician training space from other vectors. Perhaps Tesla itself is training all technicians, or another training institute has a well-rounded offering of courses on servicing all-electric drivetrains. We would want to explore all other organizations in the space, regardless of if we would consider them a competitor or not.

How dedicated are these organizations to the space? Are they investing, divesting? In understanding the other organizations functioning in the electric technician training space, we would want to gain some initial understanding of their commitment to the initiative. Do they have 85 courses dedicated to conventional drivetrains and only one for electric drivetrains... or did they just complete the construction of a new hybrid and electric training building on their campus? Many initiatives are taken on and abandoned, or proven not viable for another organization... we would want to understand those organizations and what those trajectories may have looked like.

What organizations would we expect to operate in this space? While not as widely embraced by the market, Nissan has the all-electric Leaf... how were those technicians trained? By Nissan? By a contractor in the US or abroad? Did a training institute create a course specifically for the Leaf? Furthermore, if we were to imagine those organizations that might be interested in this opportunity, who would we expect to see?

Are there any indications of other organizations seeking to enter the space? Part of the answer to this question might be revealed in critical analysis, but are there signs that any organizations–large or small–are interested in the space? Are any organizations having success in related spaces (i.e., training technicians on hybrid drivetrains) that could set the framework for an entry?

Patent and trademark search. Are there any recent patents, trademarks, or other intellectual property filings showing that an organization might be interested in the space? If a trademark search showed "The electric drivetrain experts" as being filed by another training institute three months ago, that would be something to follow up on and understand at greater depth.

Are there any indications of resource movement into the space? An interesting one here can be looking into any changes in title or any postings to LinkedIn, for example. While official organizational communication channels may be tight-lipped, someone may decide to give an interview that perhaps they shouldn't have or post something to their profile page that can signal organizational moves behind a new offering. In this case, if the Director of Training Curriculum posted that his current work includes exploring electric drivetrain technology, we would want to know that.

Expert Analysis

Are there any failed past initiatives in the space? Much can be learned from false starts and failures. Experts in a given field (covered by a non-disclosure agreement, of course) who have been around and connected in all the right places could probably advise as to some of the challenges and failed initiatives of the past.

Known pitfalls or limits to technology that have hindered other efforts in the space? Perhaps organizations have attempted to train technicians on electric drivetrain systems, but were unable to secure drivetrains to allow students to work hands on. Perhaps the electric drivetrains present potentially lethal voltage that could kill an untrained technician, therefore making the training of these technicians a liability minefield. Again, consulting with subject matter experts can help to understand the overall story quickly.

Any other general knowledge on the space? Are there similar models for technician training that just don't apply in this case? Perhaps, to avoid investing in training on short-lived technologies, a rule of thumb is that training institutes require 3 million units of a technology to be on the road before considering adding a course. At this point, we are trying to quickly and effectively reduce the number of assumptions we hold about the space and the opportunity, and speaking with subject matter experts can be an excellent way to do this.

Initial Mapping of Organizational Strengths Onto the Space

How do the organization's strengths and relationships map onto this space? Consider this a 'back of the napkin' analysis, but think about the leverage your organization can bring into the space. Perhaps your training institute is well-positioned to add electric drivetrain courses, but is lacking any relationships or expertise in the electric drivetrain space. Perhaps your training institute is slow to respond but has the scale and connections to enter the space quickly and significantly.

How quickly can the organization add needed competencies, and at what cost? In looking at this initial map of strengths, we would seek to consider if the needed competencies could be gained with a consultant or subcontractor, for example. Marketing and reaching potential customers in new spaces may not be a strength, but is a competency that can be easily added, while finding the full-time trainers who know the intricacies of all-electric drivetrains may be a far greater challenge requiring full-time employees.

Credit: Sunflowers. Vincent van Gogh : the sketchbooks, 2013, p. 61, May-July 1890. Amsterdam (Vincent van Gogh Foundation). Public Domain.

"I now consider myself to be at the beginning of the beginning of making something serious."

Understanding Composition and Space

In this Lesson, we begin to merge from researching the techniques and decisions of others, to beginning to frame what our own work may look like. It is still very early, the "beginning of the beginning," as van Gogh stated it, but we are starting to make decisions at this point, even if we do not necessarily realize it.

As we go through the process of understanding the WGB space and doing base research, we are already beginning to understand how our innovation may be composed, and the spaces available to us. We will understand if the space in which we will focus is entirely new and a blank canvas, or if it already has elements in place. In this early process of understanding the space, we are already beginning to think about the innovation.

Staying Loose

There are two descriptors that I remember from earlier in life, which seemed odd at the time, but, in later life, I realized are stunningly accurate. The first is that a basketball coach once remarked that, while effective, I had "a wrestler's jumpshot." He wasn't far off, as I was a shotputter and therefore had an arm motion more suited to throwing a 16lb iron ball than a 2lb leather one.

The second descriptor is that my sister, an outstanding artist, once remarked that my sketches looked like they had been drawn by "an overcaffeinated engineer on a deadline." When I had the occasion to ask her what this meant, she remarked that I was incredibly tight, that my sketches were far too formal, I was overly focused, and that physically, all of my movement was coming from the fingers instead of the wrist and arm. "You're trying to draw one perfect line instead of drawing multiple lines to find the overall composition... you need to loosen up your hand, your eyes, and your head."

We need to remember that we are sketching at this point. We can't become invested in our ideas, and we need to stay loose and sketch out spaces that interest us, then quickly evaluate what we see. Any attempts at perfection are wasted at this point, and, more importantly, make us more resistant to throwing something away and starting new if we have to.

Similar to loose sketches and composition, this is a phase of the work which can benefit from the occasional break. In its full form, critical analysis and WGB space research tends to be quite exhaustive, so make sure to take breaks and perhaps take on some small, one- or two-day projects to allow you to refresh yourself a bit. For example, if I have a very tight, detail-oriented project, I will take on something iterative and loose... and vice versa.

Understanding the Space for Ourselves

To refresh ourselves, our goals specifically for this Lesson are to:

• frame the importance of "expanding from center" to create sustainability-driven innovation, strategic integration, and brand equity;
• articulate White, Gray, and Black space and how each can be of strategic interest;
• deconstruct sustainability strategies and Corporate Sustainability Reports into White, Gray, and Black areas for innovation;
• conduct research to gain detailed understandings of White, Gray, and Black spaces.

To this end, this week's Case is designed to accomplish two things: 1) to allow us to identify and research WGB spaces for ourselves, and 2) to encourage us to keep ourselves loose while we are in the sketching phases of our work.

Summary

So where we have understood the overall innovation landscape and slowly increased our factor of magnifcation over the past five weeks, this week we continue in our highest magnification, but now we begin experimenting.

If we have created an innovation using the tools covered thus far, we have hopefully identified something which is in a fruitful vein, fits organizational strengths, and appears to have at least some potential to create value and impact. So we're off to a good start.

This week, we add to the toolset means by which we can quickly understand if we have created something with promise. The intent is to understand -- in a concise way and with minimal relative expense -- if the concept has 'legs.' Are we seeing the kind of spark of innovation in the market that we would expect? Are there weaknesses? Are there other veins of richness being identified in research which may be of even greater value than the initial concept?

We are now entering the phase of development where the concept is initially revealed to some sample of the public, and an initial view of what value the concept actually delivers into the market.

If we have done our due dilligence up to this point and indeed ended up inventing the next 'Corgi saddle,' now is exactly when we need to find out: before we have spend considerable time, effort, and resources on bringing the concept to fruition.

Learning Outcomes

By the end of this lesson, you should be able to:

• create a well-structured plan for insight research as a basis to substantiate innovation opportunities;
• discern the strengths and weaknesses in various research methodologies, as well as the stages of concept development in which they are most appropriate;
• articulate the insight mindset, as opposed to a "project ownership" mindset.

Lesson Roadmap

Questions?

If you have any questions, please send them to my axj153@psu.edu Faculty email. I will check daily to respond. If your question is one that is relevant to the entire class, I may respond to the entire class rather than individually.

A Common Conflict

Allow me to tell you a tale, one which has been disguised to protect the innocent.

I had the occasion to be a party to some research on "highly designed" vitamin bottles some years ago.

In this case, these vitamin bottles were not designed by some local or regional design firm, but were four designs crafted by literally a rock star of the design world. He has been on covers of major magazines, TED Talks, the whole bit. Let's call him Jacques.

These prototype bottles were 3D printed–before 3D printing was a thing–and were delivered to the test site, by hand, in four separate aluminum briefcases. They were unveiled with reverence usually reserved for ancient artifacts and the like, as they were extracted from their custom cut foam liners with white cotton-gloved hands. The cost just to build the prototypes could have bought a decent house at the time. (This is not an exaggeration, as I had momentary thoughts of absconding to Mexico with four aluminum briefcases and their precious cargos.)

They were indeed "highly designed."

So, these bottles were then sent through usability testing with the exact types of customers who would be using these "highly designed" bottles in the real world. People poked and prodded at them, which is terrifying if you are responsible for the prototypes' well-being (they indeed had a full-time handler), and rather entertaining as the observer.

There was one design called "Oval," which was a short, squat bottle with what looked like a blunted and flared 3" diameter "crown" on top. If you twisted the crown, a little port would raise from the center of the top of the crown, and this little port had a slot exactly the width of a vitamin, plus 1 mm. If I were to estimate the production cost of this tiny mechanical marvel, it would have been in the $15 range. Just for the bottle. By general retail packaging cost rule of thumb, that would have made a garden-variety bottle of drug-store vitamins around $150. (By the way, the bottle was single-use).

A funny thing happened as person after person used the vitamin bottles. Each thought they were on a hidden camera show.

Here's why: The design would dispense 10-15 vitamins at a time through that tiny slot as if they were shot out of a Lilliputian cannon. Many times they landed loudly on the glass tabletop as they were ejected.

From here, people did what they would naturally do, which is try to put the aforementioned vitamins back into the bottle. With any conventional bottle, this entails the usual 'hand cup and shake' maneuver. Not so with this "highly designed" bottle.

In this case, the participants would place the pills carefully back onto the tiny crown, daintily pushing them round and round in the hopes that one would fit into the tiny slot and drop back into the bottle. What was hilarious was that, for older participants, this typically entailed holding the bottle about 5 inches from one's eyes, and poking with all the gentle intent of trying to make a ladybug walk more quickly down a set of tiny stairs.

So, one might think that the design house would have received the message that the prototype *might* need a little refinement for usability.

Some weeks later, the research findings were presented, with Jacques in attendance. The researchers brought video and verbatim quotes of the encounters, as well as offering their own ratings, based on the participants' encounters, on a variety of facets. Without saying as much, it was clear the designs, in the presented iterations, scored between a C and an F- in the eyes of the participants. (The scores were actually presented on a soft scale, using descriptors instead of letter or percentage grades.)

Remember that by "participant" we are referring to a significant cross-section of the people who could conceivably be in the sweet spot to purchase this bottle. If you are prone to capitalistic dreaming, replace "participant" with "wallet with feet."

Jacques grew more and more agitated as the researchers presented, until, about 10 minutes in, he leapt up screaming, "Who are you? Who are you? You have no idea what you are talking about! You have no idea about design! These people (pointing at participant video frozen on the screen) are idiots! You chose them to insult me! I will not have this!" With this, he stormed out of the room, and his Senior Handler scurried after him. This left Junior Handler 1 and Junior Handler 2 in the room, who looked helpless for a couple minutes as the presentation continued, until they both decided to leave as well. Jacques was never heard from again.

Truths of Research, Creative, and Innovation

As we begin to test early-phase innovations, we indeed will have at least three personas or roles at play within ourselves, namely, the researcher, the creator, and the innovator. It is a conflict that really plays out no differently within each of us as it does between people, but when it happens internally, it is quiet and especially dangerous.

Here's what can happen, and we see it time and time again:

1. You do the research and critical analysis, and find a space for sustainability-driven innovation that is exciting both for yourself and the organization.
2. You get early buy-in, early project is greenlighted.
3. You then take ownership of this fledgling innovation, both operationally and emotionally.
4. There are no clear answers, so you have some initial research performed on the early-phase prototype.
5. The research has warning signs interspersed with promising findings.
6. Warning signs are not heeded or minimized due to emotional engagement.
7. The offering suffers significantly in Beta (or in the market).

There is also a pervasive belief in the "creative genius" archetype, one that tells us anyone who is truly "creative" should be able to lock themselves in a room and just create. This is what we pay creative or innovative people to do, correct? To work in "genius isolation" and rely on only their flawed personal perspectives to create offerings which will be sold to hundreds of thousands, if not millions of individuals? We should believe in creative genius, but great research can make average people perform like creative geniuses.

I would suggest a shift in mindset as we embark into the joint acts of creating and trying to find flaws in our creations.

The Insight Mindset

The following are a few mantras I have relied upon over the years and tend to come back to when in the thick of research and gathering insights.

• Real artists love constraints. Igor Stravinsky was once quoted as saying, "The more constraints one imposes, the more one frees one's self. And the arbitrariness of the constraint serves only to obtain precision of execution." Rest assured, many constraints will be revealed as we research the offering, from cost to timing. These are simply design constraints working to focus and refine the offering to better fit the market.
• Every result is a victory, and brings us closer to truth and innovation. It can serve us very well to take the "detached scientist" approach in all of our innovation work, but especially in early phase research. Those who are over-protective of the offering see negative results or feedback as a defeat, those who take the detached scientist view see every valid result, positive or negative, as valuable. Taking this view is actually extremely freeing, as it allows you to concentrate more on ultimate success rather than being temporarily "right."
• Save emotion for when it is a strength, not a weakness. Much of this comes down to introspection, but know when you are getting in your own way, or when you are trying to make excuses for the findings.
• If you aren't failing, you're either lying or not trying. Many of the greatest inventors in history failed miserably for years before finding success. If you are attaching your personal pride and ego to the success of a first draft offering, you're going to see failure as terminal, as opposed to a gateway.
• Untested intuition fuels ego and little else. Everyone wants to be "the guru" or "the rainmaker," with knowledge and experience so vast that they can predict the future. They don't exist. If you want the offering to fail, go with untested intuition.
• Sometimes creation is destructive. You may find that the second prototype is vastly different than the first, and so you have to start over. You may also find that the new offering cannibalizes the first. It's OK. Remember that innovation is neither clean nor a defined path.

All Failures are Human in Origin

There was a famous automotive engineer and designer named Carroll Smith, whose fastidious attention to detail has won his teams major victories at virtually every level. I do not use the term "fastidious attention to detail" lightly: he has written a 224-page book devoted solely to nut and bolt selection.

There is one phrase he is most famous for: "There is no such thing as material failure. All failures are human in origin." He argues that the role of the engineer is to account for everything from metal porosity to poor machining to the tendencies of the driver, and if a component fails in a crucial moment, the responsibility lies on a human–not an inert material.

While this is certainly a compelling platform for engineering, his statement may be adapted and applied to consumer research, as well. Research methodologies do not fail, research design is typically where the failure lies... and humans are responsible for this. As we will see, each methodology has strengths and weaknesses, and it is our responsibility to not only account for those, but to be smart about research design.

How do we tend to fail in consumer research design?

• Asking too many questions. The survey that goes on for 40 minutes? Not only will few participants complete the survey, the validity of those who do complete drops off a cliff as they get bored and disengage. Open-ended questions become one-word answers, at best.
• Asking the wrong level of question. Using a survey to ask people deep or emotional questions and expecting them to write tomes of explanation is not going to happen.
• Not accounting for self-reporting bias. Humans are notoriously bad at self-reporting even the most basic behaviors. Asking people hypothetical questions about hypothetical products purchased with hypothetical money held in a hypothetical bank account can be a very dangerous path if not structured with high levels of statistic validity.
• Poor participant selection. This is one which is a perennial failure, as there is a bias to select groups who are more engaged with a product or current customers because they are easier to obtain. Ever consider that much academic research relies on 18-22 year old undergraduates as the core participant pool?
• Poor participant screening. Especially online, people can say virtually anything if they think it will make them eligible for the research. This can lead to very dirty data.
• Poor segmentation. Neglecting groups of interest, or not appropriately weighting one segment or another, can significantly distort the research findings. You can even have ironclad statistical significance... but with the wrong customers.
• Imprecise or confusing questions. "Have you or have you not encountered questions which are not designed to illuminate, but appear to be designed to obfuscate a straightforward answer?"
• Survey fatigue. Much like the Tragedy of the Commons, researchers who are inconsiderate of participants and oversurvey will reduce the chances of those people participating in research in the future. This is a very real problem when you are dealing with limited pools of participants to begin with.
• ...and others

Note that none of the above are methodological failures, but failures on the part of the researcher. While professionals and professors alike devote their lives to the art and science of research design, in our case, we will be looking to perform quick–but "clean"–research which can be built upon. In essence, we will seek to perform research which will not be thrown away after a month, but which may be built upon to create a research narrative which accompanies our revisions to the offering over time.

A Spectrum of Options

In the following pages, we will examine a few methodologies and techniques especially well-suited to testing early-phase ideas, messages, and offerings.

When discussing the realities and underpinnings of these research techniques, we will consider how each fits into a few different spectrums:

• Speed. How long does it take to go from zero to final findings?
• Cost. Where does the methodology fall on the cost spectrum? Do you have the ability to do a battery of projects on your offering and the offerings of competitors, or is it a more involved and limited scope "deep dive" to explore an idea?
• Level of insight. Are the insights provided by the findings likely more toward the shallow and superficial or deep and subconscious?
• Verbatims. Does the methodology provide brief participant sound bytes or deep transcripts?
• Remote/In-person. Can you start the research from your office and monitor results in real-time, or does the research require face-to-face interaction with participants?
• Ideation. What are the chances participants will come up with related ideas or concepts to your offering during the course of the research?

I will also share some experiences with the methodologies and applications of technologies you may find interesting. Some methodologies may be timeless, but there are ways you can deploy the methodologies which can also produce dividends for the research and generally make things more efficient.

A Classic Research Methodology

Surveys are the most used, and unfortunately, the most abused research methodology. It is the least common denominator, in that everyone from 5th graders to college professors can use it, but it takes a significant amount of thought to structure a valid, scalable survey.

There was a time in the lifespan of this classic technique when participants felt "special" when asked to complete a survey that their opinion mattered. JD Power and Nielsen were masters of this, and Nielsen became famous for its technique of enclosing a crisp dollar bill in every survey mailed to create a sense of obligation on the part of the recipient.

With the advent of the internet, online surveys have become incredibly pervasive in our daily lives. To understand just how pervasive surveying is, I decided to count how many surveys I was presented with while going about my usual business on a Saturday. The final count? Fifteen, including three on shopping receipts. (I was fortunate in that CVS was an early errand that day, so I had an ample 24" receipt/scroll upon which to record the day's findings.)

Consider also that this survey overload is a reinforcing cycle: researchers receive fewer responses to surveys, so require higher number of survey sends (impressions) to reach the level of validity they require. Now multiply this escalation in survey sends by thousands upon thousands of companies, researchers, and media, all of which are in a similar situation. In essence, we have our own miniature Tragedy of The Commons in survey research, in that it is a race to deplete what is an openly-accessible, but finite resource: attention.

From USA Today, January 7, 2012, "For some consumers, surveys breed feedback fatigue":

"Survey fatigue" has long been a concern among pollsters. Some social scientists fear a pushback on feedback could hamper important government data-gathering, as for the census or unemployment statistics.

If more people say no to those, "the data, possibly, become less trustworthy," said Judith Tanur, a retired Stony Brook University sociology professor specializing in survey methodology.

Response rates have been sinking fast in traditional public-opinion phone polls, including political ones, said Scott Keeter, the Pew Research Center's survey director and the president of the American Association for Public Opinion Research. Pew's response rates have fallen from about 36 percent in 1997 to 11 percent last year, he said. The rate includes households that weren't reachable, as well as those that said no.

The Associated Press conducts regular public opinion polling around the world and has seen similar trends in response rates. There's little consensus among researchers on whether lower response rates, in themselves, make results less reliable.

Keeter attributes the decline more to privacy concerns and an ever-busier population than to survey fatigue. But the flurry of customer-feedback requests "undoubtedly contributes to people putting up their guard," he said.

This has become a very real problem in consumer research, so we must get creative in how we first contact participants, continue the research relationship, and how we survey in the first place. We will discuss this a bit more in a moment, but in some cases, it can be helpful to take non-traditional approaches to find, approach, and continue relationships with your participant pool.

Duke University Initiative on Survey Methodology

In regard to pure survey design, Duke University has an excellent set of condensed Tipsheets to help you create well-structured surveys. They have examples throughout to help explain not only the problem and solution, but also what the question looks like in practice.

• Improving Respondent Recall
• Question Wording
• Response Scales
• Sensitive Questions

These Tipsheets cover the major points you need to pay attention to in any survey design, and are a great resource to bookmark. If you happen to have staff helping to write or deploy surveys, it can be useful to point them to the Duke Tipsheets to not only help them do a better job in adding questions to the survey, but also in reviewing the other questions.

Eleven Common Mistakes in Survey Design

Beyond the prescriptions of the Duke Tipsheets, there are quite a few common survey mistakes that happen in the field, and anyone can have significantly negative outcomes for the survey results and completion. These mistakes are not limited to just the less experienced, they happen all the time to experienced research designers.

What can make mistakes especially damaging is if they happen early in a series of surveys. So, for example, let's imagine you seek to create a "survey narrative" over time, building a robust set of baseline data on a core set of questions. If you commit an especially egregious mistake, such as omitting what would be a very common response to one of the questions, it not only distorts the results of that survey, but every survey that contains that question. You may have built 3 years of baseline data, but the results may be in question because of one carried miscue from the first survey.

Mistake #1: Survey Too Long

In a short-attention, low-engagement context, lengthy surveys are a liability. Participants will start to offer superficial, single word, or repetitive answers, or might abandon the survey altogether. Especially in the case of research pools you intend to survey over time, abandons can reduce the chance that your participants will opt in to the next round of survey. Furthermore, long surveys can skew results invisibly through attrition of participants, as we likely do not desire responses from only those who can devote 50 uninterrupted minutes in the middle of a workday.

Solutions: If you have a survey over 10 minutes, strongly consider carrying content to another survey or otherwise splitting the survey. Regardless of timing of the survey, one of the first things to do before the participant begins is to be clear about average completion time (i.e. "Average time required: 7 mins"). This creates not only an expectation on the part of the participant, but a type of implied contract. In the end, it is also common courtesy and good research practice. If you have stimuli integrated into the survey, such as animatics, videos, or prototypes, you can stretch the 10 minute boundary, but you still need to be conscious of (actual) time to complete.

Quite a few of the online survey tools have a feature you can enable to chart progress (as a percentage or bar chart) at the top of the page. This can allow someone to know where there are in the survey, generally allows better pacing, and can reduce opt-outs.

You may also have success gaining participants by using especially short survey length as a selling point. For example, a 'one-minute survey,' or even a 'one question survey.' There are a few mechanisms for continuance with a willing participant you can then use, such as an opt-in for future surveys in the future.

Mistake #2: Questions Too Long

Multiple clause questions with multiple modifiers are confusing to participants, and can lead to dirty data without you ever knowing it. There is no mechanism for you to know your results were skewed.

Solutions: Even in highly-educated participant pools, simplicity and clarity are paramount. Chances are, multiple clause questions can be worded more simply, and if they can't be, you will need to split the question. Save the lawyerly questions for the courtroom, counselor.

It can also be a great practice for larger surveys to include a simple mechanism to allow the participant to "flag" questions. You can add this as a cell at the bottom of the survey page, and some survey software allows it as a pop-in tab from the side of the survey page. Either way, the goal is for a participant to let you know they found the question confusing and to perhaps put a sentence of why.

Mistake #3: Survey Hard to Internalize for Participants

This is a classic issue that often goes unnoticed or unchallenged. These are surveys wherein each question is voiced in the third person, and using impersonal language and referring to "one" or "it" question constructions. For example: "It has been argued that one could tie a shoe with one hand. Agree or disagree." These types of constructions add a layer of interpretation for the participant, and may move their answers from their personal thoughts and feelings and into the hypothetical. For example, for the shoe tying, am I being asked if I can tie a shoe with one hand, if someone else conceivably could, of if I am aware of the argument.

Solutions: Be direct and personal. Your participants' responses are only valid in reference to themselves, not the thoughts of feelings of others or hypothetical "ones" hovering somewhere in the ether. Replace "one" and "it" with "you." If the more personal approach to these questions seems casual, it's because it is. If you prefer your surveys to sound clinical, yet be unclear and ineffective, that is entirely your prerogative.

Mistake #4: Survey Poorly Vetted

This tends to be more of an overall issue, and can range from typos and awkward questions to a lack of logical flow through the survey.

Solutions: Use a group of peers or "pre-deploy" your survey to a small group of live participants and contact them immediately after. This is especially easy to do on the web, as you can watch survey completions come in as they happen, and call the participant to ask if all of the questions made sense and if there are any suggestions they would have. The goal here is to take just a handful of live, unprompted survey participants and intercept them immediately after taking the survey.

Mistake #5: Choppy or No Flow

Surveys should feel like a good interview for participants, having a logical flow and seamlessly working from one question to the next. Choppy surveys tend to feel like being interviewed by a 4th grader: The questions in isolation may be valid, but it feels like you are being barraged with unlinked questions flowing from a stream of consciousness. This seems to be a more stylistic concern, but it can indeed confuse and detach participants from the survey.

Solutions: Don't be afraid to use "chapters" or breaker pages to allow your participants a bit of a break and to shift gears. So, if I were transitioning from a series of questions about demographics and into asking about experiences with the product category, I would insert a blank breaker page, and note something like, "Your Experiences With [Category]: In the following section of this survey, we would like to understand your thoughts, feelings and experiences with [category]. By [category], we are referring to products that [definition of the category to make sure all are on the same page]. It can be helpful to take a moment to think of specific times you have used (category) in the past to help you remember. Please restrict your answers to your experiences, and not the experiences of others."

Generally, the goal is to start with the more simple and straightforward background questions, and build on the questions until the most complex or emotionally charged are at about the 80% completion mark. The last 20% of the survey tends to act as a "cool-down" and reflection, capturing any closing remarks, feedback, or narrative responses. As a rule of thumb, if there is a chronological flow to the actual experience being examined (i.e., first impressions, use, disposal), the survey should mirror it.

Mistake #6: Incomplete Answer Choices

There are few faster ways to lose a well-intentioned participant than to run them through two or three questions that do not allow them to answer as they intend. Essentially, the participant realizes that they will not be able to express their thoughts, and there is therefore no reason to complete the survey. They abandon the survey.

Solutions: The simplest way to resolve this problem is simple: always include open-ended "Other" as a selection. Not only will it allow you to capture the responses, but "Other" responses can be a hotbed for new thinking and unexpected answers.

Having an internal review and a limited "pre-deploy" of the survey will also help you avoid many incomplete answers.

Mistake #7: Limited Variation in Questions

Having thirty Agree/Disagree questions in a row is not a terribly engaging survey for participants.

Solutions: Before writing any questions, list the topics you seek to address in your survey. It may help to arrange them in outline format to create chapters, but the overall goal is to avoid general line-listing of topics that breed uninspired questions. While you do not need to balance the types of questions in your survey, it can be helpful to give it a read-through with an eye toward the question type to make sure you have some variation.

Mistake #8: Swapping Axes or Scales

Having four of five questions with the scale arranged left to right, and the fifth with the scale reversed can lead to some unintended answers and the dirty data that comes with this confusion or omission.

Solutions: While it can occasionally be useful to add a "check question" to make sure that a participant is not running through the survey and clicking in the same place every time, varying question types does the same function. Having thirty Agree/Disagree questions in a row necessitates a check question or an axis reversal, but you shouldn't have thirty of the same question type in a row to begin with. One way or another, you shouldn't need to do axis reversals.

Mistake #9: No Open-Ended Components

Too often, expediency in calculation overrules the thoroughness of results. People tend to lean toward questions that can be calculated and tallied for this reason, or that they do not know how to treat or score open-ended questions.

Solutions: Although there are a wide variety of ways you can compile and summarize open-ended responses, remember that just because you capture data does not mean that you have to instantly undertake calculations and manipulations. So, for example, if you have twenty questions ready to go and five open-ended questions you aren't sure how you're going to score, deploy the survey. As long as you are able to capture the open-ended responses, that information does not have a shelf life.

Mistake #10: No Filters or Branches

The researcher does not include filter questions and decision points in the survey (i.e., asking a group different questions based on their response to an earlier question). For this reason, the questions are either inaccurate for a large proportion of participants, or the logic and structure of the overly-broad questions are so convoluted it becomes difficult to read. Either way, the end result is not good.

Solutions: I would argue that one of the most useful functional benefits of online survey tools is the ability to introduce filter questions to create a branched survey. Use it. Not having branches and filter questions when they are needed is usually a sign of a poorly executed survey, an inattentive researcher, or generally sloppy research by thinking that you can send everyone every question, and they will answer them all.

If you want to check for the need for filters and branches in your survey, try taking the survey acting as a member of any different groups of participants. If the survey is all about understanding your thoughts about a product trial, and you have the potential that a handful of people receiving the survey have not yet used the product, include a filter question to separate that group and ask them questions specific to their experience, why they haven't used the product yet, etc.

Mistake #11: Timing Mistakes

When surveys are related to an experience the participant had with a prototype, for example. And there is a two-month lag because the researcher waited until everyone in the beta group had received their prototype. The participant has had the prototype on the shelf for one and a half of those two months and has forgotten all of their first impressions and reactions.

Solutions: Lay out the project timing before you begin. If there are going to be any significant lag times between the experience you seek to understand and survey deployment, either split the beta groups and survey them separately, or simply include the survey file with the prototype itself. I tend to be a heavy proponent of including the survey right along with the product/offering being tested, as it tends to make participants more attentive to the experience and remind them to think and record their thoughts and feelings.

It is also possible to send a survey too soon in regard to understanding experiences, as you can send the survey before the participant has even received the product.

Selected Tools for Survey Research

While the best practices for survey design and question structure are the same regardless of how you deploy the survey, there are a few different approaches we may use to fit our research needs. Some offer almost instantaneous results by using massive pools of participants, while others allow you the flexibility to deploy surveys very quickly and effectively. For the sake of this discussion, I am going to assume we are already aware of our ability to survey via hard copy, phone, and other conventional means, especially for "nearfield" groups like customers.

In testing spaces and potential offerings, these tools can be used to deploy anything from surveys to a closed beta group of customers, to conducting wide-open public polling to gauge how many are familiar with a topic.

For example, I work with a charity benefiting children with Neurofibromatosis Type 1 (NF1), of which there are as many sufferers as multiple sclerosis worldwide (about 3MM). I wanted a quick gauge of awareness to test a hypothesis as I was setting up a messaging and branding platform, so I did a quick online awareness test with 500 American adults. The findings were that MS awareness was around 94% in American adults, while NF1 was less than 3%. Should I have needed ironclad results, I could have taken the next steps, but for my purposes, a sample of 500 was ample for my needs. Best of all, I had the responses within 30 minutes.

Here are a few tools and where they tend to fall on the survey spectrum:

• Survey Monkey, Question Pro, and other online survey suites. If you've never used any of these, they're usually chock-full of features, inexpensive, well-developed, and can do an acceptable job of performing basic summary calculations. You basically build the survey, and deploy a link to each participant that allows them to log into to the stand-alone survey pages.
• Wufoo: This is a relatively new tool, but it allows you to take similar functionality and embed it into existing websites and pages. This can be useful if you seek to understand an online experience while the participant is on that page, for example.
• Amazon Mechanical Turk: Still in beta, Amazon Mechanical Turk (or, mTurk) is a massive clearinghouse for what they call "human intelligence tasks" or "HITs." In essence, it is a marketplace for people to do very small tasks, such as completing surveys. This audience is worldwide, but because there are so many people participating already, you can use the included screening tools to find the type of audience and demographics you are looking for. The jobs are priced just as any free market would be, in that you could post a ten question survey job for $.05, and if it is perceived as low pay for the amount of work, people just won't complete the job. I tend to use mTurk for very early, public opinion-type testing when I need a same-day read on something, especially if I would like an international component.
• PickFu, Survata, and others: These are more conventional online panels where you can set the demographics, psychographics, and other criteria for those you would like included in your survey. In most cases, these people have already registered and been confirmed with the online panel service, so you can feel more comfortable in the knowledge that validity is usually quite good.
• Google Consumer Surveys: While many might defer to the massive pool of potential participants and the Google name, I have found that this service has one major flaw: it uses something akin to Google ad serving logic to embed your survey as an interrupter in articles, YouTube videos, etc. For them to access the media, they have to answer your question. Needless to say, you're getting a lot of low interest, and frankly angry people. Many times, people will either answer out of spite ("I just want to read this article!"), enter a string of random letters, or click whatever they need to get to the media. It's a great interface and a great idea, but the deployment mechanism has been a significant issue in regard to response quality.

A Goal for any Research: Creating a Narrative Over Time

Especially in the case of surveys, we want to not think of "a point in time" or a "snapshot," we want to think of a continuous line of research that needs to tell a story. If we want to understand shifts in perception over time in a closed group, for example, we need to pay attention to details like making sure we ask the same questions in the same order to help make sure our narrative is not skewed or interrupted.

The "snapshot" frame for research tends to lead to fractured efforts without an overarching structure or goal, and online surveys especially can worsen this condition with their instant feedback.

It may seem a bit esoteric at this point, but we will work on it in the Case this week a bit, as it is important to be able to build the entire narrative and understanding of the offering or topic. Isolated, unlinked efforts can be more confusing or distracting than they are worth.

Putting a Net Into the Collective Stream

Creating an early prototype of an offering or a concept to be tested is hard enough, as there are many variables at play. From messaging to features to pricing and more, much of the offering may still be yet to be determined. It is indeed a fun, creative endeavor, but the same possibilities which you identified in WGB analysis can be daunting to pare down.

What we should seek to do at this point is to try to not necessarily eliminate variables altogether, but to try to limit the variables to series of ranges. Gerald Zaltman, Professor Emeritus at Harvard University, used to refer to this type of thinking as, "Understanding the direction in which the wind is blowing, but not yet concerning ourselves with exact wind speed."

For practical purposes, we do not want to test 200 concepts or prototypes, but we we want to put our best thinking into perhaps five concepts.

Think of the internet as this seemingly infinite stream of customers and information, but in which we have a limited view of the individuals or their thought processes at any one time. What we seek to do with message or proposition testing is to place a sampling net into the water and see what ends up in the net. If eight of our ten sampling nets come up empty time after time again, we know we can stop sampling in that area of the stream for the time being and focus our efforts on the two sampling net regions which did show some promise.

So, how can we do this? By using the massive sample sizes of the internet and pay-per-click advertising to act as our sample nets.

First, a primer on Google AdWords/Pay-Per-Click advertising. Please watch the following 3:24 video.

Video: Learn The ABCs of AdWords (3:24)

This tutorial provides a view into what the AdWords interface looks like, and some of the practical concerns when starting out. It is really quite straightforward to get started with AdWords, and there are many tutorial resources, but there is an entire profession devoted to the art and science of PPC advertising. Our goal in this early phase research is not to engage in advanced e-commerce, but simply to conduct a small, highly focused and controlled market test to help us focus our research efforts. Please watch the following 12:00 video.

Video: How to Set up a Google Adwords Campaign (12:00)

Early-Phase Message or Proposition Testing With Google AdWords

Step 0: Go rogue.

Have you ever wondered why so many great innovations and companies are born from garages? Innovation is messy and emergent. It's loud, it's chaotic, and it's definitely not tidy and clean and neat. Therefore, it isn't something people generally want taking place in the house. This also holds true when testing early-phase concepts.

Think of the core brand of your organization as "the house." We don't want to disrupt that when creating offerings, so we want to find a space away from the house in which we can work without disrupting the house. This is why we do our testing and creation in safe places which won't be a nuisance. Call it "going rogue" or "working in the garage," but we need to provide some isolation and insulation when creating and testing.

Step 1: Group your messages or propositions.

If you have thirty interesting messages or propositions from survey research or ideations, try to group them into five or so groups or topics at this point. For example, if you have some very powerful customer quotes from an earlier survey, group them into "Customer Quotes," and if there is a highly differentiated attribute that has been well-received in surveys, you could have a "Lead Attribute" group, and so on. Our goal here is to condense all of the different ideas as tightly as we can, so that we may then see which theme appears to show the most promise.

Step 2: Create PPC versions of the lead message or proposition.

For each theme you have identified, create four or five different variations of each. These will be your AdWords ads. These will provide us with some very early indicators of what message or proposition may be the most interesting to customers in a live environment. While there is an entire science behind conversion and what makes customers buy, consider each click on your research ad as a "vote." We are still quite far away from selling anything, but a click is the first step a potential customer could take to show interest. If customers don't even show interest by clicking, they could never take the next step, no matter how appealing it may be.

Step 3: Select keywords for your ads.

This can get very, very complex. The easiest way is to use the same keywords for all of your ads to eliminate that variable, and Google will show suggested keywords directly on the page as you begin entering a few. We (i.e., a consultant) can worry about dialing in keywords in the live campaign, but at this point we want to keep things simple.

Step 4: Create a landing page to capture information.

At this point, you don't have a product to sell, but yet you're testing in the live market. How do you get around this? Land any of the Adwords clicks on an information gathering page, because they were interested in the proposition, and we would want to potentially interview them. For this reason, our AdWords ad can link to a page that asks the visitor to "sign up to receive more information" or "sign up if they would like to be part of a beta test." This signup should be the first thing on the page, and it may indeed be the only thing.

Remember, we probably do not want to disclose the organization at this point, lest competition catch wind of our early phase projects. So our goal is for interested people to sign up for more information, and we may then fold them into the research.

Step 5: Closely monitor every metric possible.

By understanding the number of clicks each "mini-proposition" receives compared to the total number of impressions for the ad (known as Clickthrough Rate or CTR and expressed as a percentage), we may have some very early window into messages that may show more promise than others. If we see that Message A receives 80% more clicks than Message B over the span of two weeks, we may pencil in that Message A is what we will use as our headline in subsequent testing. This is a very simplistic view of analytics, but the nice part is that analytics are forever: they will be captured, and you can filter and refine them however you may prefer at a later date.

Step 6: Repeat, repeat, repeat.

As our research and offering progresses, so too can our PPC advertising testing. As we will see later in the semester, PPC will be a cornerstone of our beta testing, as it will help to drive traffic into our microsite, from which we will refine the offering even further.

Advantages to Using Pay-Per-Click Advertising for Early Phase Message/Proposition Testing

Some may consider the use of a commercial online advertising tool to be a bit removed from more "pure" research techniques. I would argue that "pure" research techniques are pure because they are theoretical, and that our goal as researchers at this point is to quickly understand if the offering has merit, and what customers find most attractive about the offering.

Here are a few ways PPC message testing can play a valuable part in your early-phase research mix:

• It is incredibly fast. You can set up a campaign and start testing messages in under an hour.
• It can be instantly revised or discontinued. Want to try a different message or variant? Change it in 5 minutes and push it live instantly. Very, very few other media allow you that kind of flexibility.
• It allows you to test the message/proposition with those interested in related terms at that moment. If I want to understand how a new sustainable beer growler proposition is received, I do not have to rely on mass media: I can expose people actively searching for "beer," "sustainable beer," and other related keywords at that time. In essence, I can make the stream to be sampled as wide or as narrow as I want, and dip the sampling net in at any time.
• It offers massive impressions/sample size at minimal cost. Depending on keywords used, you can have data from hundreds of thousands of ad impressions in a few days. You pay only per click (not impression), and you may very likely find that your cost per click is $2 or less. Dollar for dollar, this can be extremely effective research.
• It levels the playing field to an extent. Visually, all of the ads at the top of Google pages are text, and have the same length constraints. There are no special fonts or room for flashy animation, and large companies can not buy larger ads to crowd others out. This allows an almost clinical type research, in that the entire market is using the same constraints for stimuli. This would be akin to a magazine requiring all advertisers use the same font and number of characters on a white page for their ads.

A Common Choice of Less-Experienced Research

Focus groups tend to be one of the "go to" choices for early-phase consumer research, many times because the methodology is common, and resources, such as facilities and moderators, are generally easy to locate. I would argue that focus groups are not well suited to the needs of early-phase innovation research, the type which we would be prone to conduct.

I've spent thousands of hours both "behind the glass" and "in the room" in research facilities conducting fieldwork of various types, and have had the occasion to both observe and participate as a member in focus groups. Even in the well-moderated sessions, I tended to come away thinking about how skewed the discussions tended to become, and how much I would have wanted to interview the participants one-on-one.

The effect of the focus group format on validity of findings as opposed to one-on-one depth interviews have received quite a bit of scholarly attention, and papers have been written exploring methodological issues with focus groups. This abstract from Boateng (2012) summarizes the findings of the overall body of research:

The efficacy of Focus Group Discussion as a qualitative data collection methodology is put on the line by empirically comparing and contrasting data from two FGD sessions and one-on-one interviews to ascertain the consistency in terms of data retrieved from respondents using these two data collection methodologies. The study is guided by the hypothesis that data obtained by FGD may be influenced by groupthink rather than individual respondents' perspectives. A critical scrutiny of the data that emanated from the two organized focus groups discussion departed quite significantly from the data that was elicited from the one-on-one qualitative interviews. The difference in responses confirms that FGDs are not fully insulated from the shackles of groupthink. It is recommended, among others, that though FGD can stand unilaterally as a research methodology for nonsensitive topics with no direct personal implications for respondents; researchers should be encouraged to adopt FGD in league with other methodologies in a form of triangulation or mixed methodological approach for a more quality data, bearing in mind the central role occupied by data in the scientific research process.

Furthermore, in my experiences, the group discussion format of focus groups tends to elicit the following behaviors, each of which has its own way of biasing or eroding the findings. (If the group is composed of 18-35 year-old males and females, multiply the biasing factor by 3):

• The Domineer. In a group setting, the domineer will tend to overtake the discussion, at times even acting as a deputy moderator. In rare cases, or with an inexperienced moderator, this person can take the discussion entirely off the rails, but the more common form tends to be that of steering the discussion.
• The Silent One. The polar opposite of The Domineer, this person will simply withdraw from the discussion (sometimes in response to The Domineer). In the research field, these participants are known as "Facility Wallpaper," as they tend to generally blend into the background, and will eat every available snack.
• The Genius. A close relative of The Domineer, this behavior will also result in overtaking conversations, but typically in very unrelated or odd tangents. This personality tends to want to be right in any discussion, or otherwise prove to be the most knowledgeable.
• The Critic. If testing prototypes, everything will be "horrible" or "dumb." While specific criticism is a primary goal of research, the critic will tend to wilt when asking for specifics of the criticism. This makes the feedback especially hard to analyze.
• The Lovefest. The opposite of The Critic, this person will love everything. If a brand is presented, they will go on at (unrelated) length about the brand and how they love everything they do. This person will not react specifically to the stimuli at hand, and tend to work in generalities.
• The Impractical Inventor. If you blended The Domineer, The Genius, and The Critic, you have The Impractical Inventor. Upon seeing a prototype, they will devise Rube Goldbergian solutions, or the idea that your packaging can be 'fixed' with 3D printing. Cost, practicality, or the current technology available to man are of no concern. Will derail the group into a wild ideation session.
• The Ad Exec. The blend of The Genius and The Critic, and cousin to The Impractical Inventor. This personality type will devise slogans in the meeting, and will probably be the one to add comments and revisions to your nicely mounted $300 ad concept boards with a Sharpie while you aren't looking.

My overall point with this example is that, much like any social gathering with people who do not know each other, when you get 8-12 people in a room in a single conversation, people "overact" or take on personality traits they otherwise would not. Impromptu caucuses will form before your eyes, as people with similar thoughts will band together.

I offer the following as a humorous example of some of the exhibited traits you might see in a focus group. Interestingly, the morning after this Saturday Night Live sketch aired, the consumer research world exploded in agreement and story as to how realistic "Linda" was! Please watch the following 6:49 video.

Video: Taste Test - SNL (6:49)

Where do focus groups "fit"?

If we break apart some of the research "jobs" we would likely need in evaluating ideas or early-phase concepts, the role of the focus group becomes more and more niche.

Exploring the space broadly.

Surveys do a better job at understanding the overall space than focus groups, and are far less expensive. Furthermore, you are receiving "clean data" in a survey, unbiased by social pressures of the group or groupthink.

Exploring the space deeply.

Individual interviews will give you far more depth than any focus group, while allowing the interviewer to explore topics and ideas of interest.

Prototype or usability testing.

Observation and ethnography will tell you more about use phase in real application. Individual interviews will tell you more about initial impressions of a prototype in a controlled environment, free from group biases.

Concept testing.

Message or proposition testing in a live environment will provide far more realistic, specific, and practicable information.

This leaves us with focus groups being used as ideation sessions to generate ideas and creative. Needless to say, in these applications, focus groups may have far more in common with the SNL skit than you might like.

A Versatile Combination

Also referred to as individual interviews, IDI (in-depth interviews), or one-on-one interviews, the depth interview methodology may seem quite straightforward but can take years to do well. Luckily for our efforts, the depth interview is also one of the most accessible types of research: it is simply one person guiding the discussion and asking questions, and the interviewee responds. For this reason, many depth interviews tend to be quite conversational and natural in format, as this will also allow the participant to discuss the topic freely. The truly adept depth interviewers take it a level further, eliciting specific stories and experiences from the participant and using various probes to explore ideas further.

Dr. Kelly Page offers a nicely composed overview of depth interview techniques:

There are a few additions and points of emphasis I would make to the slides:

• Natural conversation is essential. For this reason, you want to practice the same cues you would in any engaged conversation: eye contact and active listening. Furiously jotting notes or reading questions do nothing but reinforce it as an interview, and not a conversation, and your findings may suffer.
• Be a great listener. The best interviewers use the fewest words and are incredibly nonbiasing. They do not "color comment" or prod the interview along. I can tell you I have conducted 1.5 hour interviews with participants and probably uttered no more than a paragraph of words after the initial introductions.
• Stories are extremely valuable. If we are interviewing someone about their experiences using a prototype, you want to hear short stories about their experiences. Hearing "I had a little bit of trouble with the instructions" is good, but hearing a participant specifically discuss how the instructions gave them trouble is the goal.
• Interviewer similarity. I very much tend to fall on the side of dissimilar interviewers, unless the topic is highly sensitive. Some of the most compelling interviews I have ever witnessed or taken part in were people being interviewed on topics of which the interviewer had no knowledge or experience. Vegetarians interviewing people about their thoughts and feelings on a steakhouse concept. A 20-something Venezuelan woman interviewing men about the baseball experience and relationships with their fathers. Why does it work? Because the participant assumes the interviewer knows nothing and assumes nothing. This is a recipe for an excellent interview, as we can gain an understanding of the entire experience.
• Be playful. Again, bring a childlike curiosity and assume nothing. Have fun. What you will many times realize is the meaning you assumed the participant would have for a very basic concept or response was very different than yours.
• Avoid interviewing from behind a desk. Tactically, the office desk interview is challenging: there are distractions and interruptions, they are in a place of total comfort (and power), and the body positioning is adversarial instead of conversational. You want to either walk/sit alongside the participant, or sit at a 90 degree angle. Sitting facing each other tends to feel forced and more like a job interview than a conversation.
• Transcription. If you are serious about doing analysis, don't rely on notes, have a transcript made. I would strongly recommend against trying to type it yourself, as even the professionals can't type fast enough to keep up with the speed of speaking, so there is significant fast forwarding and rewinding (they use foot pedals). The easiest way? The upper levels of voice recognition software (less than $300) usually allow you to load an MP3 and create a transcript in a few minutes directly from the audio file. Bear in mind, it won't have paragraphs or perfect punctuation, but it does an exceptionally good job of capturing the words in a very fast and cost effective way.
• Skype. Face-to-face depth interviews involve traveling to the locations, or setting up multiple interviews in one location, but Skype or other video conferencing suites can be an excellent option. Participants do not need to leave their home or office, and you do not have to travel to different locations. Does it offer the full experience of being physically present? No, it does not... but it's also significantly less expensive and more efficient.

Pairing Observation with Depth Interviews

Observing the participant interacting with or reacting to a concept can be an invaluable way to gain unfiltered insights. While observation may be conducted as a methodology by itself or paired with many other research techniques, it is especially potent when paired with depth interviews. This potency comes from the fact that the interviewer may first depth interview the participant on the topic or offering category, learning about their experiences, thoughts, and feelings. After understanding the participant's thoughts and feelings about the general topic, they may then be exposed to the offering or prototype being tested to provide full feedback.

There are three major types of observation you will most commonly see when researching early-phase concepts or offerings:

Covert Observation.

Covert observation is exactly as it sounds: You are observing a behavior or interaction without the participant knowing it, either by camera or by blending into the surroundings in a public space. Only after you have observed the behavior fully do you reveal to the participants that you have been observing them.

In practice, covert observation tends to be limited to occasions when you can actually locate a camera somewhere to see how a group of participants might interact with a machine, for example. In a sense, proposition and message testing acts as a form of covert observation in that you are watching online behaviors, preferences, and analytics to create your findings.

Overt Observation - Detached.

Detached overt observation is similar to covert observation with the exception that you let the participant know you will be observing them, and then retreat to a detached vantage point to watch their behaviors. Overt detached tends to be a bit limiting in that participants may act a bit differently if they know they are being watched or recorded from afar, especially if they are the only participant.

Overt Observation - Narrative.

Also sometimes referred to as "side-by-side" observation, this is when you not only tell the participant you will be watching them, but when you stay just behind them or by their side and ask them to narrate the experience. This is especially potent in usability or refinement studies, where participants may first try to interact with the product in an unguided way, then asking the researcher questions afterward. If they are operating from an "insight mindset," overt narrative observation is especially beneficial for designers and those most involved in the offering, as it allows them to see the experience through the eyes of the participant.

Much of the value of the pairing of depth interviews with observational research is that it provides the researcher with a frame of reference for the participants' experiences from which to better understand the observational portion. For example, if the participant talked about their electrical engineering degree and expertise in solar energy in the depth interview, and then had trouble understanding and interacting with the solar controller offering being observed, that should stand as a significant warning sign that an experienced lead user is having trouble understanding the product. If only using the observational research, one could think that the older gentleman was just not technologically savvy or otherwise try to fabricate some backstory to explain their trouble interacting with the offering.

Credit: Joris Dik, Koen Janssens, Geert Van Der Snickt, Luuk van der Loeff, Karen Rickers, and Marine Cotte. “Visualization of a Lost Painting by Vincent van Gogh Using Synchrotron Radiation Based X-ray Fluorescence Elemental Mapping.” Analytical Chemistry 2008 80 (16), 6436-6442 DOI: 10.1021/ac800965g

I long so much to make beautiful things. But beautiful things require effort—and disappointment and perseverance."

Research, Truth, and Disappointment

In this Lesson, we have started to move from the theoreticals of strategy and into the realities of research and testing and learning things about the offering that no other organization in the world may know. It is these specific research efforts which can create meaningful organizational knowledge of the kind which is not found in textbooks or the boilerplate slide decks of consultants. The early-phase research you conduct on an offering is unique to your organization. At this point in time, it is likely no one holds more practical knowledge on this specific offering than your team.

But, many times, the first round of research will result in more unknowns than when you first started. As the unknowns expand, it can be easy to lose sight not only of the core proposition and strategy of the offering, but the research itself. In view of the overall project, the research phase can be both exciting and depressing for many of the same reasons: you are finally gaining real data on the offering, but rarely are all signs wildly positive. There are areas of further research, areas which are still unclear, and some of these areas may be crucial to the viability of the offering. It can indeed feel as if the research is being dragged down further and further into the unknown.

Take a breath.

You'll be fine.

Remember the Insight Mindset. Chant it if need be. But, remember that things shouldn't be clear at this point. Promising projects will have more questions than answers in early phases. Every result is a victory, and brings us closer to truth and innovation. The only way to continue to gain results and data is to continue to research and try to find the overall storyline of the offering.

Which brings us to the van Gogh at top. That portrait of a woman is not superimposed over the painting of a grassy meadow, van Gogh actually painted "Patch of Grass" over the portrait of the woman. This would not be the only time van Gogh would paint over complete works, in fact, it is estimated that up to a third of his known works are painted over his earlier works.

Even as a frustrated and resource-constrained artist in need of more canvasses on which to paint, in his letters, van Gogh would go on to say:

"I've just kept on ceaselessly painting in order to learn painting."

He saw it not as a destruction of earlier works and efforts, but an act of continuous learning and evolving his craft. We should all aspire to be able to destroy our earlier works while embracing it as an opportunity to learn.

Creating a Path Into the Unknown

To refresh ourselves, our goals specifically for this Lesson are to:

• create a well-structured plan for insight research as a basis to substantiate innovation opportunities;
• discern the strengths and weaknesses in various research methodologies, as well as the stages of concept development in which they are most appropriate;
• articulate the insight mindset, as opposed to a "project ownership" mindset.

To this end, this week's Case will pick up where we left off last week, and will take the next step by framing the types of insights we seek to gain in our initial research effort.

Summary

In continuing our quest to create, vet, and deploy meaningful innovation, this week we focus our efforts on a very specific and very powerful strategy and tool for our effort: Means-Ends Chains and cognitive mapping.

Equal parts innovation strategy, research validation, and foundational marketing in our use case, Means-Ends Chains (MEC) quite literally can reveal the landscape into which your innovation fits and if it is delivering maximum potential.

While MEC is rather intuitive in concept and people tend to feel that they grasp it easily, it is a practice which can yield significant dividends from diligent effort. It can reveal gaps in thinking between intent and delivery of the concept, which is our overall intent at this point, as we need to know if the concept can potentially fail not because the strategy/brief is unsound, but if somehow that strategy was not translated or delivered to the market.

Much like consumer research, if there is a gap in the offering, we need to be both precise and diagnostic about that gap, and equally precise in filling it.

Learning Outcomes

By the end of this lesson, you should be able to:

• create a cognitive map to find strategically potent areas of white, gray, and black space in the minds of the customer;
• deconstruct ideas and strategies to understand if they reflect full Means-Ends Chains and sustainability thinking;
• identify pathways of potential interest and innovation.

Lesson Roadmap

Questions?

If you have any questions, please send them to my axj153@psu.edu Faculty email. I will check daily to respond. If your question is one that is relevant to the entire class, I may respond to the entire class rather than individually.

The Hierarchy of Needs

For the purposes of this discussion, in the beginning, there was Abraham Maslow. Maslow was an American psychologist who, in 1943, would publish one of the most influential psychological journal articles of the last 100 years: "A Theory of Human Motivation." In this piece, he would lay out his case for the "Hierarchy of Needs," which is commonly referred to as "Maslow's Hierarchy" today.

Maslow's Hierarchy is elegant in its simplicity: It delineates universal human needs, beginning with the most fundamental physiological needs at the bottom, and progressing to the most abstract at the top:

Maslow's Hierarchy of Need by Factoryjoe is licensed under CC BY-NC-ND 2.0

Click here for a text description

1. Physiological Needs (Red Layer):
   • This base layer represents fundamental biological requirements, including breathing, food, water, sex, sleep, homeostasis, and excretion.
2. Safety Needs (Green Layer):
   • The second level emphasizes security and stability, encompassing employment, resources, morality, family, health, and property.
3. Love and Belonging (Blue Layer):
   • In the middle layer, we find social needs related to friendship, family, and sexual intimacy—essential for a sense of belonging.
4. Esteem (Yellow Layer):
   • The fourth layer focuses on self-esteem, including elements like confidence, achievement, respect from others, and respect for others.
5. Self-Actualization (Purple Layer at the Top):
   • The apex represents the pinnacle of human potential. It includes aspects like morality, creativity, spontaneity, problem-solving, and acceptance of facts.

Remember that this pyramid illustrates how these needs build upon each other, with basic physiological needs forming the foundation. As individuals satisfy lower-level needs, they can progress toward self-actualization.

The hierarchy is used in many contexts today to explain any number of psychological phenomena, and it has been adapted for use in everything from management to motivation to marketing. Some of the applications of Maslow's Hierarchy may be a bit of a stretch from his original vision, but to provide some feel for the influence Maslow still holds on psychology and other fields, below is a graph of the use and citation of the more important psychologists in recent history. I have also included "Kardashian" for some frame of reference. (Bear in mind, thankfully, that this chart shows incidence of the terms in books and journal articles.)

Nonetheless, in the scope of meaningful reference and use, Maslow's work is in some fairly-rarified territory:

Why do we care about Maslow's Hierarchy to kick off a Lesson centered on insight-driven innovation? Because in the First World, much of our lives are not spent on the literal act of daily subsistence, but on pursuits higher on the pyramid. So, while Maslow's hierarchy does an excellent job of explaining human needs, many of our efforts are centered around wants.

Most interestingly: Consider how sustainability manifests itself in Maslow's Hierarchy. What you may commonly see is that sustainability has this somewhat odd tendency to function at the bottom-most (Physiological) and top-most (Self-actualization) levels. What I refer to is that even the word "sustainability" refers to that bottom level, addressing long-term viability. This can be either from a human perspective (i.e., addressing the continuation of life as we know it at the most basic level) or the organizational perspective (i.e., addressing the continuation of the organization as we know it at the most basic level).

But, then, as we have addressed in the Clouds and Roots Model, and as we will address further in the Lesson, sustainability is very much about self-actualization for many people and organizations. What I refer to there is that the person or organization is extremely aspirational about sustainability, how sustainability refers to their own personal philosophies, and evaluating how we define and evaluate "success."

What we have is this combination of sustainability operating at the two farthest levels of the Hierarchy, which can make it very difficult to craft a coherent strategy for the innovation we are moving through research and development. This is not a trivial concern, as the strategy shapes the research, which refines the strategy, which drives the messaging.

It's a very interconnected web of the offering we are trying to understand and refine here, and far too often, messaging is considered an afterthought. The effort is centered on "what's in the box," which is then passed over to marketers and merchandisers later. We absolutely can not divorce or defer the strategy and messaging from our research, as quite literally, messaging shapes how customers experience the offering, and how they perceive the offering we are researching. Messaging has so much power that it can quite literally change how the brain processes signals from taste receptors, for example. (More on that later.)

Introduction

Although Means End Chain thinking has been around for quite some time, it began to receive elevated attention and application in academic journals in the 1980s, with significant contributions by Olson, Reynolds, and Gutman. Unlike some tools and methodologies which fall into and out of favor, the Means-End Chain (MEC) is a classic model, and one that has grown in popularity and refinement over the years.

The thinking behind the Means End Chain is quite simple: That we, as humans, may think that we "hire" a product or service to do a tangible "job" for us, but that there are very important emotional drivers underlying all of it. It may seem a simple rationalization that we choose one product over another only because of "what's in the box"... but this, at best, is only part of the story.

Ultimately, the most important decisions we make about products and services are the decisions we do not realize we are making, as they are emotional and subconscious. To give you some frame as to how important the subconscious** is to the purchase decision, Gerald Zaltman of Harvard is popularly quoted as stating that around 95% of decision making takes place in the subconscious. (**See "A note on terminology" at the bottom of this page.)

When taken in isolation, the connections between the products we buy and the ultimate end benefits we seek from them may seem quite detached and ridiculous.

For example:

• We buy a soft frozen dairy food to comfort us in times of distress.
• We buy machines that transport us more quickly than others to reassure our feelings of masculinity.
• We purchase expensive forms of ethanol from different countries and drink them from the comfort of our sofas in order to feel worldly.
• We buy new shoes that are already scuffed and worn to allow us to feel more authentic and soulful.
• We buy the brands of our parents and grandparents when we want to feel nostalgic and connect to the past.

While many innovation development cycles tend to take a heavy focus on product attributes and "what's in the box" early in the development cycle, pushing forward our understanding of the deeper and more emotional associations customers have with a prototype offering can bear significant dividends. From Zaltman [emphasis is mine]:

The insights offered by methods that probe the unconscious mind are relevant at all stages of the product life cycle. For instance, when introducing a radically new product, it is necessary to understand how consumers currently frame their experience of the problem addressed by the new offering. That is, no matter how radical a new product is, it will always be perceived initially in terms of some frame of reference. It is essential that this frame be understood, especially if it is an inappropriate one, detrimental to early trial of the product. For a mature product, insights about the category or a specific brand can lead to modifications that will extend its life and sustain its economic value to the firm. One firm with a very "tired" brand explored consumers' hidden thoughts and feelings and discovered a relevant, basic emotion that had been overlooked by all brands in the category. They were able to connect this emotion with their brand giving it a major sales boost. Other firms use the hidden treasures of the unconscious mind to identify new product opportunities.

The Means End Chain

There are quite a few different versions of the Means End Chain that have been born and refined by various professors and practitioners, and some with quite a few levels of classification and nuance. These granular models may be well suited to applications which require a very high level of resolution, but, in practice, are likely overcomplicated for our purposes. For this reason, the four-level Means End Chain is more than enough for our purposes, and will allow us ample resolution to understand our concepts.

A few notes on the Means End Chain itself:

• Think of them, quite literally, as sequential "chains" (we are actually going to visualize some in the next page).
• The MEC starts as very tangible and concrete at the Attribute level (i.e., there is no interpretation) and is extremely interpretative and personal at the top.
• We can not "jump" levels of the MEC. If a level is not apparent, you may be thinking of two levels as one (i.e., collapsing a Benefit and a Psychosocial Consequence).
• At the moment, start at the Attribute level and work upward. It's easier to get started that way (we will be working from the top down when talking about designing experiences).
• It is not a 1:1 relationship at any level, so many Attributes could create one Benefit, or many Psychosocial Consequences could lead to one Emotional End.

Revealing the Means End Chain Through Laddering

What is useful to the interviewer is that much of the Means End Chain may be revealed through effective in-depth interviewing, which we covered in the last Lesson. If you have done a good job interviewing, chances are that you will be able to recreate a significant portion of the interview's thoughts as MEC, from which you can then do further analysis.

While Means End Chains may make perfect sense in a static model, in my experience, much of being able to identify MEC during a live interview (i.e., "out in the wild") depends on:

1. A concerted effort to listen for and elicit MEC in the interview.
2. A significant amount of practice.

There are some specific interview techniques referred to as "Laddering" which are designed to specifically elicit the most valuable MEC, which are chains that are robust, descriptive, and complete from Attribute to Emotional End. The following article gives some specific examples of these techniques and what they look like in a live interview.

**A note on terminology: Let me elaborate on that "subconscious" point for a moment, and help make sure that we understand the difference between subconscious and unconscious thought. When we say that there are subconscious drivers in decision making, we are not lapsing into some far flung decision of "triggers," "buy buttons" and subliminal messaging, but instead referring to those drivers which we do not actively think about, but can be revealed through research and interview. For example, we see the subconscious at play on those commutes home where we have little recall of the trip, and seemingly just "appear" at home. We did not require some intense amount of cognitive processing during the trip, and we can recall the trip itself in hindsight, and so it is just below our active consciousness: it is subconscious.

Mapping a Participant's Means End Chains

While one Means End Chain is certainly an interesting view, we want to be able to understand the experience of the offering across multiple test users to see what is working about the offering, what isn't, and areas of potential interest. To do this, we will combine the Means End Chains of test users onto a single view called a Cognitive Map.

Cognitive maps are called this because they quite literally end up looking like maps, and are designed to illuminate pathways of thinking from one concept to another, as well as highlight those areas which are more commonly traveled.

For the sake of providing a picturable example for us to work with, let's say the offering is a new native grass seed your company has identified which is extremely drought tolerant, low growing, and low maintenance.

At this point, you have interviewed ten users whom you sent the seed to last year, and they have now used and lived with the lawn for a full four seasons. You had done some other, shorter user testing with the grass seed that spanned either a single season, and invited testers to a lawn which had already been planted with the seed to understand their thoughts, and the results had been promising, but it is the full-year test cycle which you believe is most interesting–and crucial–to the potential success of the new seed offering.

We will imagine you are relying not only on your notes taken during the interviews, but also audio recordings (or, even better, transcripts from those recordings).

We will start by writing down the MECs used by one participant, and for simplicity and readability, we'll try to keep attributes near the bottom of the page, and emotional ends near the top. We'll use lines to not only connect the chains, but also between concepts the participant associated so we don't have to write the same attribute multiple times.

Here's an example of what a very simple map from one of those participants could look like. Take a few moments to look at the map without the red text, and then take a look at the layer with red text to see what the participant verbatims might look like for each link.

As you work through mapping, remember that it is the participant's MEC and thoughts we are mapping... NOT yours. So if they make associations that are "wrong" or don't mention something, don't make the associations for them. In the above example, even though there could be a link between "native species" and "grass grows slowly," we didn't add it because the participant didn't make that connection. This is important because by adding in your own knowledge and "over-mapping," you would be skewing the overall picture.

Creating the Overall Map by Building Consensus From the Individual Maps

After compiling the cognitive maps for each participant, we have a deep, but still somewhat unpolished view of the information. This is because we will have the knowledge from taking a very rigorous approach to the interviews and understanding their content, but yet we do not yet have a fully formed analysis showing the consensus across participants. This view will be provided by the overall map, which is also sometimes referred to as a "hierarchical value map."

Without specialized programs, the easiest way to create the final map is to "standardize" similar concepts and enter each linkage into Excel. The purpose of standardization is to make sure we don't have two different names for the same concept in different maps (e.g., "Native species" in one map and "Species that are native" in another), and to allow us a final chance to refine or collapse our list of concepts.

After we have the final list of concepts, it is a matter of putting each pair into Excel and keeping a tally of the number of times participants connect the two concepts. For example, we would have "Native species" in Column A and "Doesn't die in drought" in Column B, and we would keep count of the times we see that connection in the individual maps in Column C.

From here, it is a matter of setting a threshold for those concepts and linkages that will make it to the overall map. If we sort the linkages from most common to least common, we would probably look to eliminate the bottom 10% or so from a map covering ten participants, or otherwise to try to eliminate those concepts which are outliers. From here, you are left with a list of the concepts and linkages for the final, overall map, and it is a matter or redrawing the map from this list, perhaps also noting the number of times a linkage or concept was mentioned by participants.

Here is what the overall map from our native turfgrass research could look like, after we have built and formatted it. It can be useful to create two versions of the map, one as a "pure" view with just concepts and links, and the other with line weighting according to how many participants made each connection. I have included both as examples:

While it does take some effort, the overall map is a valuable tool to provide a deep, rigorous, and yet, simple view of our ten test participants and their thoughts and feelings about the native turfgrass. You will find that the overall map also provides a very valid basis from which to compare future revisions of the offering, definitively showing how your revisions have affected the deep perceptions and associations held by customers.

The value of mapping does not end there, as we may also use the map as a strategic framework to drive further ideation, as we will see in our next topic.

Using Cognitive Maps to Their Fullest Extent

After going through the rigor of interviewing early adopters or a test sample of customers, eliciting Means End Chains, and mapping each interview, it could be easy to consider the Overall Map to be a "summary" to capture what was said in interviews. And the tendency can then be to believe that one "has a handle" on the interviews and analysis from the individual interviews, and to therefore skip this final step. That would be a misstep, as you would be leaving an opportunity for significant strategic learning behind:

1. You are literally looking at the consensus thoughts and connections your customers make about the offering.
2. This map can be used as the "baseline" from which you can build subsequent learnings in the future.
3. It is a lasting document you will find yourself using regularly early in the offering.
4. It is an excellent way to educate others in your organization, as well as a very efficient way to get partners and agencies up to speed.

The process of creating the map will be illuminating, as those involved most in the offering will start to see "what made it" onto the map, and what fell short. You will see concepts that weren't anywhere on the organization's collective radar appearing en masse, and some associations which you had hoped for nowhere to be seen. You will find the participants seem to have almost premeditated levels of attention to some innocuous details, and other concepts will be so in line with strategy that some in your organization will accuse you of witness tampering. This is perfect. Why?

Importantly, you will see opportunities to add concepts or reframe adjacent thoughts and feelings that users already have as opposed to trying to create new thoughts in less-related spaces. Think of refining strategy and messaging as being similar to remodeling a home. You will be presented with the existing blueprint of the home (the Map), and will find that some of the parts of the structure may be more easily adapted or modified than others. For this reason, it is typically more efficient to maximize spaces in the existing structure or add on than it is to build a completely new room detached from the house.

We see this idea represented in the words of Gerald Zaltman from our last topic: "...no matter how radical a new product is, it will always be perceived initially in terms of some frame of reference." Moving highly embedded frames can take tremendous effort and require years of work, but we may be able to reach the same ends using different means, so to speak.

Types of Map Ideation

To illustrate these points, here are examples of a few analyses and strategies you can use on your Map:

What concepts were UNDERWEIGHTED compared to our expectations?

Despite marketers' and product developers' best efforts, there will be attributes, benefits, and associations that users just didn't "get." Depending on your cutoff threshold, these concepts may make the Map, but at a far lower level than anticipated.

In this case, perhaps you expected that "Well adapted, hardy" and "Don't need to patch, reseed" would have been much more strongly linked. Maybe users just didn't see that as a concern, or maybe these users haven't had problems with die-off before. From there, you could do some quick survey work to understand if the broad market even considers die-off a problem, or if you're trying to market to a problem that doesn't really exist.

Implication: This is more of a "first pass" question to ask yourself to get started, as it tends to be the most obvious analysis.

What concepts were OVERWEIGHTED compared to our expectations?

Sometimes, concepts or associations make the map that would have been completely unexpected to your team, and sometimes concepts you thought would be minor turn out to quite prevalent.

For example, perhaps "Can enjoy surroundings, weather" could fall into that group, as the link you saw as most important may have been straight from "I mow less" to "Save time." But time and time again users would talk about the fact that 'the times when the grass is growing so fast you have to mow every two days are also some of the most beautiful to be outside, especially late Fall and early Spring.'

There is also a prevalent connection from "Questions from neighbors" to "I'm an early adopter, leader" which you may have expected, but not with that level of potency that makes it one of the three strongest associations on the Map.

Needless to say, these are the types of insights and nuances that can mean the difference between a generic and truly resonant strategy.

What links would we like to REINFORCE or ADD?

At this point, we can go beyond general acknowledgement of concepts which may be underweighted and begin to specifically discuss those concepts we will seek to strengthen in the minds of users. The key at this point is to not concern ourselves with the tactics of how we will strengthen the desired concepts, but instead the pure consideration of what we want the Map to look like in the end. Later, we can use this as the framework by which to refine the offering, tune messaging, change the overall use experience, and more.

In this case, perhaps we really want to own the idea of "Can enjoy surroundings, weather" because it is not only strategically potent for us, but it is emotionally potent for users who are generally "outdoorsy" anyway. But, if we look at the weighted Map, all of the paths to that concept are happening at a low level, and furthermore, the connection to the attribute level (i.e., the seed we are selling) is equally weak. So, we may seek to reinforce the path from "Grass grows slowly" to "Can enjoy surroundings, weather," and add a link from there to the already potent "More time for family/kids."

Reinforcing concepts that are already present on the Map–even at a low level–is significantly more efficient and resonant than trying to create entirely new ideas or regions of thought. For this reason, the moves you take to reinforce links tend to be among the most beneficial.

What links would we like to ERASE?

On the other side of the spectrum, when we start actively talking about strategic goals, there will be concepts and links which we wish to minimize or eliminate altogether.

We have something interesting here, and that is a little bit of a duality around "Light green color." About half of the users associated this with "Not as attractive," which is certainly a problem for us. BUT, "Light green color" is also a prime pathway to "Questions from neighbors" (because the grasses do look so different), which then triggers a tree trunk of a link to "I'm an early adopter, leader." If we seek to use this to our advantage, we want to own the light green color, and reinforce it as a point of pride. (For example, did you know that the native grasses of Europe, such as Poa Trivialis, are lighter green by nature, and that Europeans overwhelmingly prefer this color over the darker–water and fertilizer hungry–Kentucky Bluegrasses and Perennial Ryes that Americans are conditioned to?)

What are the most strategically interesting PATHWAYS?

At this point, we take a little wider strategic view and create pathways, from Attribute to Emotional End, we think are differentiated, ownable, and important to customers. Remember the Clouds and Roots: We need to limit these paths and leverage them as strongly as we can. If users make other associations naturally, that is excellent... but we need to own one or two paths in the minds of customers.

Take a look yourself for other pathways you think could be of interest.

Where do we potentially have WHITE, GRAY, OR BLACK SPACE opportunities?

As a final check, we want to look at the Map for any potential areas of WGB space opportunity.

For example, if I really wanted to take a stand against the lawn industry Black Space, I could use "I am a responsible neighbor" as a wedge issue of sorts. The platform could be to turn the "keeping up with the Joneses" curb appeal competitions from a badge of pride into something not to be proud of. I would cut humorous ads showing people manicuring their lawns while their kids sat on the driveway, and make a point of encouraging people to look past those who have the "greenest lawn" and to those who have the safest lawn for my kids to play on.

If I'm thinking White Space, maybe I do a little bit of research into the environmental impacts of a high maintenance lawn, from the carbon footprint to the impacts on water and air quality. The results could be surprising, and could be used to gain support of NGOs.

We will be doing some mapping and strategy work this week, and my hope is to be able to help you see how Maps can be used to drive and refine innovation in an rigorous way.

Proto-Messaging in Early Research

There is sometimes the belief that to be "pure" research, it cannot be tainted by the hand of messaging or marketing in any fashion. At best, this notion is somewhat idealistic, and ignores the importance of messaging to the product experience itself.

While it may be facile to say that what is in the box and what is on the box are completely separate in the mind of the consumer and are able to be tidily compartmentalized, this is rarely the case. In fact, it can be quite difficult at times to separate messaging from the customer's perception of the use experience. We will cover a body of research that underscores this in a few moments.

So while we are conducting these interviews to understand perceptions of the offering, it can be exceptionally valuable to include very early phase messaging, or "proto-messaging," if you will. Think of the goal of including a proto-message in your interview as trying to provide a very faint pencil sketch of the message, from which the user can add their interpretations, colors, and extensions. This is very much in keeping with our goals for the interviews in the first place, which is for us to say as little as possible, and gently guide participants through their own thoughts. There is one expert in the interview in regard to the use experience, and it isn't you.

The challenge in creating this "sketch", when including this proto-message in the interview, is that one wants to provide the basest of statements to react to. For this reason, we want to purposely avoid imagery, design, or visual stimulus, instead keeping to black text on a white page. In essence, the message should read as somewhat sterile, but not unfriendly, and should avoid buzzwords, brand names, etc.

Here's how we could include a proto-message in our interviews on the native grass experience:

In the last 15 minutes of the interview, you would give the participant the proto-message, and probe as you have during the rest of the interview. We would want to be especially attentive for any new ideas or associations that didn't arise in the interview of native grass.

A sample statement:

"At [Company], we want to redefine what a "healthy lawn" looks like. We believe that a healthy lawn starts with the seed, one which is adapted and native to your location. After that, nature does the rest. Not "nature and a few hundred pounds of chemicals every year," not "nature and tens of thousands of gallons of irrigation." Just nature.

Lawns are a sanctuary for families, and a place for us to be close to nature... not a science lab. Artificially dark, chemically augmented, nitrogen addicted lawns that require constant attention and bleed chemical runoff into our streams aren't the answer, but neither are lawns that look messy and unkempt.

Our goal is to redefine the American lawn by using American grasses to create healthy, beautiful, natural, and low maintenance lawns. We hope you'll join us."

We would also want to understand the participant's thoughts about anything in the proto-message that didn't "fit" their experiences, or things they didn't understand. Again, we want to use it as a stimulus and understand how they interpret it.

Research on Sustainability-Specific Messaging Challenges

While messaging can meaningfully influence the user experience and their interpretations, there is some evidence that customers will also layer in their interpretations of the company's motivation for making a sustainable or socially beneficial product.

In the following research, we see that customers will make evaluations about whether sustainability benefits were intended or unintended by the company, as well as how the performance of the product may be affected by attempts for a company to make a more "green" product. It offers four well-structured experiments, with findings that can very directly affect our work in creating sustainability-driven offerings.

Here is the Abstract, to give you a preview of the paper itself [emphasis is mine]:

Many companies offer products with social benefits that are orthogonal to performance (e.g., green products). The present studies demonstrate that information about a company’s intentions in designing the product plays an import role in consumers’ evaluations. In particular, consumers are less likely to purchase a green product when they perceive that the company intentionally made the product better for the environment compared to when the same environmental benefit occurred as an unintended side effect. This result is explained by consumers’ lay theories about resource allocation: intended (vs. unintended) green enhancements lead consumers to assume that the company diverted resources away from product quality, which in turn drives a reduction in purchase interest. The present studies also identify an important boundary condition based on the type of enhancement and show that the basic intended (vs. unintended) effect generalizes to other types of perceived tradeoffs, such as healthfulness and taste.

A Succession of Little Things

"My view on this is as follows: the result must be an action, not an abstract idea. I think principles are good and worth the effort only when they develop into deeds, and I think it's good to reflect and to try to be conscientious, because that makes a person's will to work more resolute and turns the various actions into a whole. I think that people such as you describe would get more steadiness if they went about what they do more rationally, but otherwise I much prefer them to people who make a great show of their principles without making the slightest effort to put them into practice or even giving that a thought. For the latter have no use for the finest of principles, and the former are precisely the people who, if they ever get round to living with willpower and reflection, will do something great. For the great doesn't happen through impulse alone, and is a succession of little things that are brought together."

As Lesson 7 comes to a close, I'd like to take a moment to cover a common thread which infuses our time together, and that is that when it comes to innovation, details make the difference. Whether it is finding an opportunity, understanding the space, or creating Means End Chains and Cognitive Maps, many do not realize the amount of time, thought, and rigor it takes to create a new "innovation." This is just as we see in van Gogh's letters: The famously impulsive and eccentric artist best known for cutting off part of his own ear in a fit of frustration was extremely concerned with detail and process.

But, also, just as in van Gogh's passage, "principles are good and worth the effort only when they develop into deeds." We can have the utmost concern about the steps we take in research and rigor, but we must never forget the end goal: This is all in service of creating the most compelling offering possible. We must never find ourselves lost in the process and doing something without knowing exactly and specifically why. Interviewing users and creating MEC and Maps could certainly fall into this category, as one could simply go out and feel that they need to "talk" to some customers, and therefore don't give the interviews or analysis proper attention. Because the desired result of those interviews is muted or lost, interviewing customers simply becomes a minimally engaged "checkoff" in a process of which we have lost sight.

If there is a single methodology or mechanism which time and time again helps to refine and progress the strategy of any organization, is it a well-executed Cognitive Map. It is a simple, yet powerful tool, and one I promise you will find myriad uses and adaptations for over time. I hope to be able to further your experience with both Means End Chains and Cognitive Maps in this week's exercise.

Just as a painter considers every brushstroke in service of the larger image, so too must we remember that our attention to detail is in service of the larger, more meaningful end.

"... the result must be an action, not an abstract idea."

Creating Our Own 'Succession of Little Things'

To refresh ourselves, our goals for this week's Lesson are to:

• create a cognitive map to find strategically potent areas of white, gray, and black space in the minds of the customer;
• deconstruct ideas and strategies to understand if they reflect full means-ends chains and sustainability thinking;
• identify pathways of potential interest and innovation.

To these ends, this week's effort will have us creating and working hands-on to create a draft Cognitive Map, and then examining strategically interesting spaces within.

Summary

My intent in this course is to be eminently practical and purpose-driven in honing our innovation toolset, and this week is no different. Similarly to our intent to understand very tactically and specifically what makes innovations work& and the spaces of opportunity, this week we will specifically overlay a framework created by Larry Keeley to understand if there are additional grounds for innovation in our concept.

I see Keeley's model as another of those seemingly simple -- but very powerful -- means by which we can understand and hone our thinking, especially when used in this general phase of creating our innovation concept.

What can be especially powerful about this overlay is that it has a tendency to expand thinking beyond 'concept-level' and more into 'platform-level.'

Learning Outcomes

By the end of this lesson, you should be able to:

• discern the ten types of innovation and how they may be blended;
• assess how the ten types of innovation may be paired with white-gray-black space thinking to unearth potential innovation platforms;
• integrate the ten types of innovation onto Cognitive Maps to provide additional strategic opportunities.

Lesson Roadmap

Questions?

If you have any questions, please send them to my axj153@psu.edu Faculty email. I will check daily to respond. If your question is one that is relevant to the entire class, I may respond to the entire class rather than individually.

Introduction

In understanding innovation centered around how the organization creates, structures, or times revenue flows from the offering, consider how flexible this form of innovation can be to the organization. In many cases, profit model innovation can be achieved with the same product or service, but delivered with what may be a more beneficial model for the customer.

From The Ten Types of Innovation:

"Innovative profit models find a fresh way to convert a firm's offerings and other sources of value into cash. Great ones reflect a deep understanding of what customers and users actually cherish and where new revenue or pricing opportunities might lie. Innovative profit models often challenge an industry's tired old assumptions about what to offer, what to charge, or how to collect revenues. This is a big part of their power: in most industries the dominant profit model often goes unquestioned for decades."

Profit Model Innovation in the Sustainability Space

Saint John's University: Sustainable Revolving Loan Funds

Consider that profit model innovations are not always strictly limited to the accounting definition of "profit," but can extend to innovation in how funding is structured. Saint John's University has an interesting approach (Sustainable Revolving Loan Fund) to how it funds sustainability projects at the University, one which balances the more immediate savings with a "snowball effect" for overall sustainability spending,

SJU has set aside a sum of money that will be used to grant zero interest loans to projects with cost savings. The cost savings will pay back the loan until 120% of the loan is paid off. As the fund grows, more and larger projects can be initiated. There are a multitude of ways we can decrease consumption of energy and products. The results are decreased operating costs and a more sustainable campus. Since part of sustainability is equity, anyone can submit a proposal and it will be reviewed. Projects will be audited and results will be posted to prove the viability and legitimacy of the fund. A committee of faculty, staff, administration, and students will govern the fund.

Solar City

In the case of Solar City, what is now the largest residential solar in the country, the profit model innovation has a few different facets, as they offer four distinct options to homeowners, ranging from leases to power purchase agreements (their most popular option). In this case, they install panels for free on your home and you pay a low rate to Solar City based on the electricity you use. Interestingly, this option is made possible by the fact that Solar City, as a business, can depreciate the solar panel assets (where a homeowner can't), as well as collecting what is currently a 30% Federal investment tax credit for solar panels.

So, while Solar City may introduce some element of uncertainty into their business with what equates to a subsidy loophole (which could close for them at virtually any time), it would seem that the hope is that they use this boom period to take as much market share as possible. You could consider that this strategy is working, as they are rapidly approaching a juggernaut 40% market share number.

From the customer side, all of this results in what can be significant savings, little to no upfront cost, and the pride of going solar. Wade Michels, a stock analyst, wrote an interesting article (What I learned..." recounting his experience with Solar City, both as a customer and potential investor. Here is what the cost options looked like for him:

The main reason SolarCity owns its market (its share is equal to its next 14 competitors combined) is its various Power Purchase Agreement plans. I asked my consultant: Who came up with this great idea? She says it came from Elon Musk. I'm sure you've heard of him, he has some pretty cool ideas for batteries, electric cars, and space.

The first option was the "Pay as you go" plan. This plan is popular because it requires no money down and would reduce the price of my energy by about 41.5%. My new estimated average electric bill would be about $50 less per month and I would save nearly $24,000 over 20 years. Obviously, with no upfront costs, I would be cash flow positive from day one.

The second option was the "Pay only for what you produce" plan. This required a $3,125 investment, but cut the price of my energy by 51%. Over 20 years, I would have saved nearly $29,000 and I would have gotten my money back by the fourth year.

But in my opinion, the smartest way to go is the "Full pre-pay plan." In this scenario, you pay for the amount of power your system will produce up front. It would have cost me only $0.066 per kWh, compared to the $0.188 I currently pay my electric company. That's a savings of 66% and I would save about $125 per month. My initial investment of $10,000 would be recovered by year six, and over 20 years, I will have saved more than $36,000.

Uber

In one of the more disruptive innovations in the last decade (just ask a taxi driver), Uber's innovations in bringing ridesharing to the masses have been not only to make it flexible, but to adjust the cost of a ride in real time, based on local supply and demand. Needless to say, the ability to increase the cost of a ride according to demand makes the Uber price model quite interesting, as Uber receives a share of the cost of every ride. Please watch the following 1:38 video.

Video: Ublyup - Uber Dynamic Pricing (1:38)

Introduction

In understanding innovation synthesized between multiple parties collaborating, consider the ability of network innovation to help widen your organization's capabilities, or to help launch a program quickly. In many circumstances, organizations may be hesitant to collaborate due to perceived risk, but consider that much of this may be mitigated with honest conversation and well-structured non-disclosure agreements.

From The Ten Types of Innovation:

"Network innovations provide a way for firms to take advantage of other companies' processes, technologies, offerings, channels, and brands–pretty much any and every component of a business. These innovations mean a firm can capitalize on its own strengths while harnessing the capabilities and assets of others. Network innovations also help executives share risk in developing new offers and ventures. These collaborations can be brief or enduring, and they can be formed between close allies or even staunch competitors."

Network Innovation in the Sustainability Space

Wendy Schmidt Oil Cleanup XPRIZE

Although it was lost in much of the continuing news coverage of the Gulf Oil Spill, a scant three months after the Deepwater Horizon accident began and the same month the well was stopped, XPrize launched a $1.4 million open competition to improve oil spill cleanup technology at sea. No matter how unconventional the means, it's hard to argue with the end: A little more than a year after it was launched, the Oil Cleanup XPRIZE resulted in "quadrupling what had been the current industry rate of surface oil recovery."

If you're unfamiliar with XPRIZE, their mission is as elegant as it is specific:

Founded in 1995, XPRIZE, a 501(c)(3) nonprofit, is the leading organization solving the world’s Grand Challenges by creating and managing large-scale, high-profile, incentivized prize competitions that stimulate investment in research and development worth far more than the prize itself. The organization motivates and inspires brilliant innovators from all disciplines to leverage their intellectual and financial capital for the benefit of humanity. XPRIZE conducts competitions in five Prize Groups: Learning; Exploration; Energy & Environment; Global Development; and Life Sciences. Active prizes include the $30 million Google Lunar XPRIZE, the $10 million Qualcomm Tricorder XPRIZE, and the $2.25 million Nokia Sensing XCHALLENGE.

Below is a brief look at the process and the Elastec/American Marine team that would go on to take the Oil Cleanup XPRIZE. Please watch the following 6:19 video.

Video: Team Elastec/American Marine--Wendy Schmidt Oil Cleanup X CHALLENGE (6:19)

DeepWater Desal / Data Center Co-Location Project in Monterey Bay

While the project overall has been relatively quiet in the news, the proposed DeepWater Desalinization project is an interesting example of teaming two facilities with complimentary needs. The DeepWater Desal plant chose the location because of both demand and the fact that it would have easy access to the end of the Monterey Submarine Canyon just offshore. The ability to place the water intake more that 100 feet undersea is valuable to mitigate any impacts on what is one of the US's most valuable marine environments.

But, the access to deep water has the drawback that the water is very cold, which is not desirable for desalinization... so the goal is to co-locate a 150mW data center in the complex. Data centers have tremendous cooling needs, so the plant will first route the cold water to the data center to provide server and infrastructure cooling, and then the warmed water will then flow through for desalinization. Considering Monterey Bay is only about 75 miles to the heart of Silicon Valley's data center demands–and the area already is in need of its own data infrastructure–the project appears to be a win all around. Please watch the following 3:02 video.

Video: DeepWater Desal aiming to build desalination plant in Moss Landing (3:02)

Freightliner, et al. / Department of Energy Supertruck initiative

While there have been some other "tractor trailer of the future" initiatives, the Freightliner joint venture is not a showpiece: It is what they believe to be the future of their company.

This effort represents the best of network innovation with almost 50 companies, suppliers, and universities coming together on the project, including MIT, Oak Ridge National Laboratory, Walmart, A123 Systems, and Michelin. Because they believed the truck, trailer, and all systems needed to work in full concert toward the unified goal of efficiency, the team had the foresight to fully involve those organizations and suppliers holding expertise in the respective areas. As could be expected for what would be a worldwide initiative, the needs for communication and open collaboration are considerable, and this is perhaps at the very heart of why this initiative was so important in the first place: Experts in respective areas need to be networked in meaningful ways if they are to solve the "big" problems. (This is not unlike the XPRIZE philosophy, as well.)

The result of taking a network innovation approach? A 115% fuel efficiency improvement while in actual use on public roads. The implications for transportation would be significant, to say the least.

If you'd like to see what HTML5 can do, give their Supertruck initiative site a look (after allowing a few seconds to load). Quite a compelling use of the technology. Please watch the following 4:17 video.

Video: Freightliner Supertruck: Amerika's 'truck of the future' (4:17)

Introduction

Structural innovations can take many forms, but when you peel them all back, they tend to have one characteristic in common: commitment. While the book calls out some of the more tactical facets of structural innovation, the roots of structural innovation begin in an organization taking a stand to differentiate.

If you have a finance background, think of companies with the classic "wide moat" profile. At some point in their history, they aligned significant resources behind one vision, and, in the process of doing so, created a seemingly insurmountable separation between themselves and peers. Think of Caterpillar, for example, a classic wide moat business and structural innovator. As we will see, while you may not associate Whole Foods with a "wide moat" profile, some of their early decisions have indeed created structural innovations which would be difficult for competitors to replicate.

From The Ten Types of Innovation:

Structure innovations are focused on organizing company assets–hard, human, or intangible–in unique ways that create value. They can include everything from superior talent management systems to ingenious configurations of heavy capital equipment. An enterprise's fixed costs and corporate functions can also be improved through Structure innovations, including departments such as Human Resources, R & D, and IT. Ideally, such innovations also help attract talent to the organization by creating supremely productive working environments or fostering a level of performance that competitors can't match.

Structure Innovation in the Sustainability Space

Whole Foods Culture of Transparency

Here's about as structural an innovation an organization could have internally, so much so that one could imagine it would be virtually impossible to "retrofit" onto an existing organization: The salaries and bonuses of every employee at Whole Foods are available to be "looked up" by other employees. Co-founder John Mackey instituted the program very early in the life of the company, taking a stand to eliminate office politics and personal agendas in favor of making goals visible and attainable. I'd like us to focus on this very specific aspect of Whole Foods structural innovation, as opposed to taking the book's more broad view of their 'culture' as the structural innovation.

John Mackey's logic as stated to Business Insider is quite elegant:

Whole Foods co-CEO John Mackey introduced the policy in 1986, just six years after he co-founded the company. In the book, he explains that his initial goal was to help employees understand why some people were paid more than others. If workers understood what types of performance and achievement earned certain people more money, he figured, perhaps they would be more motivated and successful, too.

"I'm challenged on salaries all the time," Mackey explained. "'How come you are paying this regional president this much, and I'm only making this much?' I have to say, 'because that person is more valuable. If you accomplish what this person has accomplished, I'll pay you that, too.'"

Pittsburgh's Department of Innovation and Performance

The City of Pittsburgh has taken a rather unique structural innovation approach through their creation of a Department of Innovation and Performance in February 2014. While the creation of the Department itself is certainly a structural differentiator, consider that Debra Lam, the Chief Innovation & Performance Officer, is one of only six executive-level positions in the city. Add in the factor that CIOs still aren't terribly common in the corporate world, let alone government, and we have the makings of a structural innovation for the City of Pittsburgh.

The description of the Department of Innovation and Performance platform:

We live in an age of infinite possibilities. The Department of Innovation & Performance (I&P), created in February 2014, reflects Mayor Peduto's vision for the Next Pittsburgh and our team's role in fostering a culture of accountability and innovation at levels and sectors of society. I&P aims to transform Pittsburgh into a world-class city through not only managing information systems and delivering technology, but by pursuing data-driven decision-making, creating sustainable solutions, and driving quality performance.

While technology is an important component to this, it is not the only end goal. There is no silver bullet, fancy platform, or expensive software that can magically transform the City. The City's greatest asset is us, its people, and our commitment to collaboration and better serving the City government and its residents.

Beyond servicing the City and its departments and agencies internally with strategy and hardware, I&P has a wider external component. We work to better service all residents of Pittsburgh by closing the digital divide, fostering entrepreneurship and innovation, improving access and application of information, and empowering neighborhoods, especially vulnerable communities. We want citizens to better utilize their resources and have the information to make better decisions and take action.

To underscore the importance of enabling innovation in the Next Pittsburgh, the Department takes responsibility for keeping the concept of a fresh, innovative Pittsburgh at the forefront of minds, as well. It has created an Innovation Community Map as just one tactic to help reinforce what will be a long-term strategy.

Introduction

Process innovations are arguably one of the most evolved forms of innovation, in that they have roots in literally hundreds of years of product and service development. From the cotton gin to the assembly line, process innovation is a classic form of innovation, as well as one which typically allows the organization intellectual property protection, and therefore, some level of defensible differentiation over time.

From The Ten Types of Innovation:

Process innovations involve the activities and operations that produce an enterprise's primary offerings. Innovating here requires a dramatic change from “business as usual” that enables the company to use unique capabilities, function efficiently, adapt quickly, and build market-leading margins. Process innovations often form the core competency of an enterprise, and may include patented or proprietary approaches that yield advantage for years or even decades. Ideally, they are the “special sauce” you use that competitors simply can't replicate.

“Lean production,” whereby managers reduce waste and cost throughout a system, is one famous example of a Process innovation. Other examples include process standardization, which uses common procedures to reduce cost and complexity, and predictive analytics, which model past performance data to predict future outcomes–helping companies to design, price, and guarantee their offerings accordingly.

Process Innovation in the Sustainability Space

MBA Polymers Revolutionary Recycling Separation Process

The world of recycling and waste minimization is one which feels to continuously be on the edge of a revolutionary development but is many times fraught with frustration. Regardless of the constraints and struggles on the part of the recycler, all paths lead to the classic problem on the demand side of recycled plastics: There are relatively few applications for black, low quality, downcycled plastics, which are typically problematic in molding and processing. These are the types of plastics that are downcycled into parts like automotive wheel well liners and fairings (if you open the hood of your car and see a black, "swirly" finished plastic, this is low grade, downcycled plastic.) Like all supply and demand balances, if all plastics are recycled into black, low-quality plastics of limited marketable use, the price per ton is going to be suppressed.

Needless to say, if plastics can not only be recycled and repelletized by type, color, and other properties, it would represent a revolution in recycling and plastics. This is what MBA Polymers can do, and has roughly 60 patents to cover the process by which it does so.

From an excellent Pop Sci article on Mike Biddle:

"But by the time he saw Puckett's film, Biddle had quietly achieved what most thought impossible: He had discovered how to separate certain mixed plastics completely. This was no mere down-cycling. Biddle could take the plastic from, say, a laptop, reduce it to its purest form, and sell it back to a computer company to make another laptop. What's more, at his facility in Richmond, California, Biddle could produce recycled plastic with as little as 10 percent of the energy required to make virgin. In a world where people use 240,000 plastic bags every 10 seconds, where passengers on U.S. airlines consume one million plastic cups every six hours, where consumers in total discard more than 100 million tons of plastic annually, closing the loop on production and recycling could reduce global dependence on oil, the source material for virgin plastic. It could conceivably influence not only the price of oil, but global flows of trade as well. And it could dramatically reduce the wholesale smothering of communities across Asia and Africa with hazardous e-waste. If Biddle could convince people to give him waste rather than dump it around the globe, he could conceivably change the world."

Please watch the following 10:51 video. If the video is not displaying on the page, please view the video on the external site. The transcript is also available on the external site.

Video: We can recycle plastic (10:51)

Vortic

I had the pleasure of judging an entrepreneurship competition at Penn State when Vortic, as a business venture, was but a glimmer in the eye of a team of upperclassmen, but even then, their focus, determination, and innovation was quite evident.

Vortic's core business is taking a uniquely stylish (and patent pending) approach to watchmaking, by upcycling century-old pocketwatch movements into beautiful, Corning Gorilla Glass-faced watches. Because of the variation of these old pocketwatches, they created a proprietary case design and fit process for each individual movement, which is then 3D printed and machined individually.

Their decidedly high-end and high-tech approach to upcycling resulted in their Kickstarter reaching its $10,000 goal within 12 hours, eventually landing at $41,035. Since then, the popularity of their watches means that you now have only the opportunity to purchase a backorder slot for your own Vortic... starting at $1,395.

Please watch the following 8:35 video:

Video: How Watches Are Made: Vortic Watch Co. (Fort Collins, Colorado) (8:35)

Introduction

Product Performance innovation is another classic (and rather broad) form of innovation, as it covers those innovations that allow you to outperform competitors on the attribute or benefit level. As the authors briefly allude to, attributes in and of themselves are difficult to defend. As we have seen in our work with means end chains, strategy comes from chains of meaning and are therefore highly defensible. When unidimensional, "one-trick pony" brands are surpassed by competitors on that "one trick," it can be extremely hard to recover. In fact, it could be argued that a competitor can simply leverage all of your past marketing to slingshot past you on that attribute. Product performance is certainly a core type of innovation, but one which must be used judiciously.

From The Ten Types of Innovation:

Product Performance innovations address the value, features, and quality of a company's offering. This type of innovation involves both entirely new products as well as updates and line extensions that add substantial value. Too often, people mistake Product Performance for the sum of innovation. It's certainly important, but it's always worth remembering that it is only one of the Ten Types of Innovation, and it's often the easiest for competitors to copy. Think about any product or feature war you've witnessed–whether torque and toughness in trucks, toothbrushes that are easier to hold and use, even with baby strollers. Too quickly, it all devolves into an expensive mad dash to parity. Product Performance innovations that deliver long-term competitive advantage are the exception rather than the rule.

Still, Product Performance innovations can delight customers and drive growth. Common examples of this type of innovation include: simplification to make it easy to use an offering; sustainability to provide offerings that do no harm to the environment; or customization to tailor a product to an individual's specifications.

As evidenced throughout this Lesson, we might tend to disagree with Keeley and the other authors who take a narrow view of sustainability and represent it as only a part of product performance. Sustainability can infuse strategy everywhere, open entirely new opportunities, and represent new spaces for innovation in many cases.

Product Performance Innovation in the Sustainability Space

Toyota Prius

It may seem like almost a lifetime ago, but there was a time when hybrid drive technology, first commercialized by the Toyota Prius, was downright revolutionary. Toyota had enough of a product performance advantage, and perhaps more importantly, committed to the Prius' success, that the Prius model continues to account for about half of all hybrids sold in the US, with Toyota owning nearly 64% of the US hybrid market.

Please watch the following :50 Prius commercial.

Video: Toyota Prius - Commercial (:50)

FLIR One

FLIR has dominated the worldwide thermal imaging market for decades, typically selling highly specialized imaging solutions for thousands or tens of thousands of dollars each. FLIR describes their approach to core markets as such:

Pioneers in thermal imaging, we were founded in 1978, originally providing infrared imaging systems that were installed on vehicles for use in conducting energy audits. Today our advanced systems and components are used for a wide variety of thermal imaging, situational awareness, and security applications, including airborne and ground-based surveillance, condition monitoring, navigation, recreation, research and development, manufacturing process control, search and rescue, drug interdiction, transportation safety and efficiency, border and maritime patrol, environmental monitoring, and chemical, biological, radiological, nuclear, and explosives threat detection.

What FLIR accomplished with the FLIR One was taking technology that was overwhelmingly inaccessible to the average consumer and making it available (first) as an add-on hardware component for the iPhone for around $200. While there was an initial early adopter "gadget geek" audience that knew FLIR, it eventually began to gain traction as a wider audience that recognized that the FLIR One could have far greater and more practical applications.

One of those applications is the ability to bring thermal imaging's application in energy auditing to the forefront. While professional energy audits might rely on thermal images of the interior and exterior of the home generated from one of FLIR's $10,000 units, more DIY-inclined homeowners began to realize that they could do ongoing energy audits using the FLIR One as they build, retrofit, or remodel their homes.

Please watch the following 9:51 video. Energy use application begins at 5:24 in the video.

Video: FLIR ONE Thermal Camera Unboxing and First Images (9:51)

Introduction

Product system innovations are those which have a unique way of retaining customers over time, as they create deep and tightly interwoven connections with the user.

Even in creating product system innovation, we can consider creating open product systems (think Google's android, or IFTTT, which we will examine in a moment) or closed product systems (think Apple's elegant connectivity between its devices... and only its devices).

From The Ten Types of Innovation:

Product System innovations are rooted in how individual products and services connect or bundle together to create a robust and scalable system. This is fostered through interoperability, modularity, integration, and other ways of creating valuable connections between otherwise distinct and disparate offerings. Product System innovations help you build ecosystems that captivate and delight customers and defend against competitors.

Product bundling, or taking several related products and selling them in a single package, is a common example of a Product System innovation. In the twenty-first century, technology companies in particular have used this type of innovation to build platforms that spur others to develop products and services for them–including app stores, developer kits, and APIs. Other Product System innovations include extensions to existing products, product and service combinations, and complementary offerings–which individually work just fine on their own, but are far better together (even ones as humble as peanut butter and jelly).

Product System Innovation in the Sustainability Space

IFTTT

First off, please know IFTTT is pronounced "ift" as if you are saying "gift" without the "g"... hopefully, this will save you improvising pronunciations that may sound somewhat like an angry cat.

If you're not familiar with IFTTT, it stands for "if this, then that," and is at the core of "the internet of things" you hear about. In essence, IFTTT is an open platform that allows connecting different apps and devices to each other to be used as triggers. These "if this, then that" statements are called "recipes," as they allow you to combine different devices, trigger and action ingredients, at will. Many of these recipes can be used in smart homes, and there are many ways IFTTT can be used to make smart devices in your home even smarter and more efficient.

For example:

IF my iPhone is farther than 20 miles from my home, THEN automatically turn the Nest thermostat in my home to Away Mode, thereby saving energy.

IF my Adam soil sensor shows soil moisture below a certain point, THEN to send my neighbor a text to check on my garden, as she is an expert gardener and can tell if it needs some water while I am away (instead of automatically triggering my drip irrigation from the soil sensor).

IF the summer evening forecast is to be less than 70 degrees, THEN change the color of my Philips Hue smart led bulb to a certain shade of blue to remind me to open the windows.

IFTTT is now the connecting logic hub for devices from Apple, Amazon (Alexa), Google (Nest, et al.), Samsung (Smartthings) and hundreds of others, so it is a massive system with amazing potential for making many facets of life more efficient and sustainable.

While this video covers the "Works with Nest" platform, all of the interactions they cover can be accomplished with IFTTT today. Please watch the following 4:12 video.

Video: Introducing Works With Nest (4:12)

Canadian Refillable Beer Bottle

It may seem simple, but the Canadian refillable beer bottle product and service system begins with the Canadian beer industry agreeing in 1992 to unify on an Industry Standard Bottle (ISB 341ml AT2), a specific design, which can be refilled up to 16 times before being recycled. Although the Canadian brewers had partnered on refill programs since 1927, the AT2 can be given much of the credit for making the system efficient and modern.

This seemingly simple unified system approach to collecting and refilling beer bottles has resulted in Canada having a tremendously successful and beneficial program.

From the wonderfully detailed article by Isabel Teotonio at the Toronto Star:

The Beer Store, co-owned by Labatt Brewing Company, Molson Coors Canada and Sleeman Breweries, will take back anything it sells at its 447 Ontario locations: bottles, caps, cans, cases, kegs, plastic bags. About 94 per cent of all containers and 99 percent of all refillable beer bottles are returned.

The Beer Store's deposit return system began in 1927. Since then, it has recovered 75 billion beer bottles.

In 2007, the province introduced the Ontario Deposit Return Program and The Beer Store expanded its recycling program to accept containers purchased at the LCBO and wineries for a refundable deposit of 10 or 20 cents.

That first year, 63 per cent of containers were recovered. By 2012, the return rate was 81 per cent.

The fact that all of these beverage containers aren't being created from scratch is a boon to the environment — and wallet.

According to a TBS report, in 2011 both The Beer Store and the Ontario Deposit Return Program diverted 454,478 tonnes of beverage alcohol containers from Ontario landfills, saving 2.9 million gigajoules of energy, and avoiding 205,090 tonnes of greenhouse gas emissions, the equivalent of removing 40,210 cars off the road for a year.

Keeping those containers out of garbage bins and blue boxes saved Ontario taxpayers about $40 million in waste management costs. Please watch the following 1:26 video.

Video: A day with a beer bottle (1:26)

While the article notes some of the reasons why refillable bottles fell out of favor in the US–transportation to increasingly distant breweries being one–we can hope that the surging market share of craft and local breweries may bring back a renaissance of the refillable glass bottle.

Introduction

In considering how organizations can innovate in the support and supplemental servicing of their primary offer, remember that the definition of "service" may actually be quite wide. Because of the potential breadth of this innovation, it is one which we many times see tightly overlapping other innovations, especially Customer Engagement.

Consider also the case of "halo services," those services which may be infrequently used by customers, but are invaluable to the brand and word of mouth of a company. One classic example of the halo service? Herrod's Department Store in London, which has a motto of "Omnia Omnibus Ubique"–"All Things for All People, Everywhere"–and which has cemented that reputation with myriad stories of being able to source anything for its customers. One of their latest offerings is being able to buy gold "off the shelf," up to and including a 12.5kg bar (Harrod's bank) (value of about 500,000 Euros).

From The Ten Types of Innovation:

Service innovations ensure and enhance the utility, performance, and apparent value of an offering. They make a product easier to try, use, and enjoy; they reveal features and functionality customers might otherwise overlook; and they fix problems and smooth rough patches in the customer journey. Done well, they elevate even bland and average products into compelling experiences that customers come back for again and again.

Common examples of Service innovations include product use enhancements, maintenance plans, customer support, information and education, warranties, and guarantees. While human beings are still often at the heart here, this type of innovation is increasingly delivered through electronic interfaces, remote communications, automated technologies, and other surprisingly impersonal means. Service can be the most striking and prominent part of the customer experience, or an invisible safety net that customers sense but never see.

Service Innovation in the Sustainability Space

AmazonSmile Program

A bit of an unexpected bonus in the service department is the AmazonSmile program, which donates .5% of all of your purchases made through smile.amazon.com to the charity of your choice. It really is that simple, as all of the products, prices, and navigation of the site is identical, the only difference is that the Amazon logo changes to the AmazonSmile logo, and "Supporting: [your chosen charity]" appears below the search box.

From the program's About page (Amazon Smile):

"AmazonSmile is a simple and automatic way for you to support your favorite charitable organization every time you shop, at no cost to you. When you shop at smile.amazon.com, you'll find the exact same low prices, vast selection and convenient shopping experience as Amazon.com, with the added bonus that Amazon will donate a portion of the purchase price to your favorite charitable organization. You can choose from nearly one million organizations to support.

[...]

The AmazonSmile Foundation will donate 0.5% of the purchase price from your eligible AmazonSmile purchases. The purchase price is the amount paid for the item minus any rebates and excluding shipping & handling, gift-wrapping fees, taxes, or service charges. From time to time, we may offer special, limited time promotions that increase the donation amount on one or more products or services or provide for additional donations to charitable organizations."

For those already making a significant amount of purchases through Amazon, it is a seamless way to donate to their favorite charity. Please watch the following 1:26 video.

Video: Amazon Smile Video (1:26)

Subway Symphony & Heineken

Not every service has to be directly linked to the product offering and can instead be a service acting to reinforce what the brand stands for. In the case of Heineken's partnering with Subway Symphony, we could consider it more as a 'service to all subway goers'... and one which could also generate tremendous goodwill (and PR value) for Heineken. Imagine the conversations generated on the first day when subway travelers heard the change.

It is an attempt for Heineken, a brand overwhelmingly associated with youth, cities, and technological hipness, to partner with an organization to reinforce their identity and generate goodwill.* Please watch the following 2:35 video.

Video: LCD Soundsystem's James Murphy Makes Subway Sounds (2:35)

*The feasibility of the program at all may be quite slim, as the MTA notes about James Murphy and the Subway Symphony program:

"We have heard from him, and as we've told him many times, we cannot do it. The tones are an ADA element for the visually impaired, and we won't mess with them — much less take turnstiles out of service and risk disabling them for an art project. (It would be a very cool project, don't get me wrong, but we can't mess with turnstiles that handle 6 million customers a day for it.)

[…] As a condition of filming [the promo ad] in the subway, we made them acknowledge that we can't and won't do it."

Perhaps the ADA compliance could be met by other means, but it may be difficult to satisfy the requirements if the tone is an aural identifier.

Introduction

Channel innovation is another type which is far-reaching and frequently triggered with other types of innovation. When we examine channel innovations, consider not just the core offering, but also complimentary products or offerings which may undergo channel innovation as a byproduct of other innovations. A very basic example could be that the advent of the automobile allowed myriad channel innovation in the delivery and fulfillment of non-automobile related products, such as milk, ice, or beer. In a more modern example, we may someday see channel innovation in the delivery of emergency medical supplies as a byproduct of the advent of the modern drone.

From The Ten Types of Innovation:

Channel innovations encompass all the ways that you connect your company's offerings with your customers and users. While e-commerce has emerged as a dominant force in recent years, traditional channels such as physical stores are still important— particularly when it comes to creating immersive experiences. Skilled innovators in this type often find multiple but complementary ways to bring their products and services to customers. Their goal is to ensure that users can buy what they want, when and how they want it, with minimal friction and cost and maximum delight.

Channel innovations are particularly sensitive to industry context and customer habits. Flagship stores can be an extremely valuable Channel innovation, creating signature venues that showcase a firm's brand and offerings, while pop-up stores may be useful for a short, sharp splash at the holidays. In contrast, selling directly through e-channels or other means can reduce overhead costs, maximizing margins and cost advantage. Or you might pursue indirect distribution or multi-level marketing, either of which recruits others to shoulder the burden of promoting and/ or delivering an offering to the end customer.

Channel Innovation in the Sustainability Space

Vermeer BP714 Block Press

While a block press may sound terrifyingly uninteresting to the majority of us, Vermeer has created a tool born from the sustainability efforts of the Vermeer Charitable Foundation which allows those in need to create incredibly strong bricks on site using soil and a small amount of water and cement. This makes structurally-reliable buildings a possibility in places where the transportation of building materials–let alone brick–would have been virtually impossible in the past.

So we could consider the true innovation of the Vermeer BP714 to be that it changes the channel through which building materials can be acquired by those in remote or desolate villages.

From an Equipment World profile on the machine:

"The BP714 takes these materials and presses them into 4″x14″x7″ blocks that when cured nearly rival the strength of traditional concrete block. It cranks out three blocks a minute which are stacked and cured for 28 days. The blocks have an interlocking design so you don't need mortar to secure them. There are also cavities designed into the blocks for running rebar, roof tie downs, electrical conduit and plumbing. The blocks don't have to be fired to cure, so kilns and all the energy they require are not needed.

According to Terry Butler, operations manager for Vermeer, the Vermeer Charitable Foundation provided the impetus behind the project and currently has four projects going on around the globe. The foundation also supported the creation of a separate entity called Dwell Earth, which provides technical support and ancillary equipment necessary to set up and run a portable block plant."

Please watch the following 5:40 video.

Video: VermeerPress (5:40)

Kiva Microfinance

In developing countries, small business loans can be scarce, and those available may have obscenely high interest rates of 90% and higher annually. Needless to say, this can put small business owners in developing countries under the influence of what amounts to predatory loan rates. The goal of Kiva, and most microfinance, is to circumvent that predatory lending channel of finance altogether and allow small business in developing countries to thrive with reasonable loans.

While in existence for decades, microfinance, or the practice of small peer to peer lending, gained significant traction in 2006 when the founder of Grameen Bank, Muhammad Yunus, won the Nobel Peace Prize "for their efforts to create economic and social development from below."

Kiva is one of the most popular peer-to-peer, not-for-profit microfinance operations now, though it may seem that there could be a shift in coming years as for-profit microfinance has begun to appear in Mexico and other countries.

Please watch the following 5:05 video.

Video: The Power of Kiva (5:05)

Introduction

Think of a brand not as a static "thing" (and please, especially not a logo), but as a living, breathing persona which builds character, associations, and friends over time.

Compelling brands, like people, have a way of building this positive karma over time, and also, like people, attract those who share their interests or admire some quality in them. There are those people who you have a transactional relationship with, and those with which you proudly choose to associate. For a wide variety of reasons, from hiring top talent to corporate culture to long-term profitability, you want to be in that latter group.

Within innovating brands, the tactics can be virtually anything, and we may find an increase in brand equity (a la "karma") as a byproduct of virtually any positive innovation, and especially those which also happen in the sustainability space. In fact, it can be extremely difficult to separate what a brand stands for and its sustainability efforts, and I would argue that you shouldn't be able to.

From The Ten Types of Innovation:

"Brand innovations help to ensure that customers and users recognize, remember, and prefer your offerings to those of competitors or substitutes. Great ones distil a “promise” that attracts buyers and conveys a distinct identity. They are typically the result of carefully crafted strategies that are implemented across many touchpoints between your company and your customers, including communications, advertising, service interactions, channel environments, and employee and business partner conduct. Brand innovations can transform commodities into prized products, and confer meaning, intent, and value to your offerings and your enterprise.

Brand innovations include extensions that offer a new product or service under the umbrella of an existing brand. Alternatively, they might make a company stand for a big idea or a set of values, expressing those beliefs transparently and consistently. In business-to-business contexts, Brand innovations aren't limited to the final manufacturer or the consumer-facing producer of a product; branding your components and making customers aware of their value can build both preference and bargaining power."

Brand Innovation in the Sustainability Space

Shinola Watches

In the midst of Detroit's long bankruptcy, Shinola helped to reinvigorate a trade which has been long dormant in the United States: watchmaking.

The sustainability slant in this profile comes from the fact that Shinola did not just create a homebase in Detroit, it built full operations including marketing and operations, and, more importantly, had its watchmakers Swiss-trained in how to assemble watches. To say this is an investment in worker training would be an understatement, and you could consider that after receiving that training, you have a group of employees who are trained in a very valuable skilled trade, not just for Shinola, but for themselves.

Shinola is partially owned by Bedrock Manufacturing Company, LLC (co-founded by the founder of Fossil Watches) which also purchased storied outdoor outfitter Filson a few years ago, so we can certainly see that there is long-term strategy underlying the Shinola brand.

Please watch the following 3:06 video.

Video: A Visit To Shinola Detroit (3:06)

Seaqualizer

In the case of the Seaqualizer, it is starting its brand's life in a fairly fortuitous place at the intersection of government, NGOs, and sportsmen, and was actually hatched as part of a WWF crowdsourcing competition.

From Millie Kerr's article, "The Seaqualizer Gives Doomed Fish a Fighting Chance":

Hoping to find innovative solutions to the problem, the World Wildlife Fund launched the International Smart Gear Competition in partnership with industry leaders, scientists, and fishermen. As sophisticated as the competition sounds, its solutions aren't being made in a James Bond-esque lab: According to WWF, most are being pioneered by the people closest to the problem—fishermen themselves.

One of the most innovative tools to come out the competition is the SeaQualizer. Created by two fishing buddies from South Florida, this hydrostatic descending device returns victims of bycatch to their native depths. Unlike fish caught in shallow lakes, many deep-water dwellers won't survive if you simply toss them back, because as they ascend toward the surface, changes in pressure wreak havoc on their internal organs. By the time you reel them in, they're experiencing barotrauma and will only pull through with assistance.

Fishermen historically helped bycatch recompress by venting, a process that involves puncturing the fish's swim bladder to release the gas that built up during ascension. It's as barbaric as it sounds and often leads to injury or death, but until around four years ago fishermen had no alternative—in some places, venting was even required by law.

Jeffrey Liedermen and Patrick Brown, the duo behind the SeaQualizer, had heard about an interesting alternative: descending devices that lower fish to appropriate depths—no stabbing required. But early descenders lacked precision. Some were crates fishermen manually lowered to the seafloor; others required the user to constantly tug on the line. Liedermen and Brown saw an opportunity and took to Brown's parents' garage to build a solution.

The Seaqualizer is so effective that its use has drawn endorsements from both the World Wildlife Fund and NOAA, which "reopened portions of the Pacific after testing the efficacy of descending devices in partnership with the Sportfishing Association of California and WWF."

While the product may have opened the door, the brand has a tremendous opportunity to capitalize on the opportunity to become a responsible brand and a staple on boats worldwide. Perhaps, we will see a day not far in the future when day charter deep sea fishing tours will not only use this product, but proudly tout "We use SeaQualizer" on its materials.

Please note the first couple minutes of this NOAA video on the joint effort show fish with barotrauma, and so have bulging eyes and the occasional stomach swell. Just to be aware. Please watch the following 3:57 video.

Video: Recompression Devices: Helping Anglers Fish Smarter (3:57)

Introduction

Customer Engagement is another type of innovation which can be quite far-reaching strategically and overlap with many other innovations. From driving relationships between customers by creating sharing communities to creating engaging store atmospherics that make shopping a more active experience, Customer Engagement innovation takes many forms.

Themes which you may tend to see within Customer Engagement are authenticity and knowledge. Authenticity is a highly desired, but somewhat scarce, resource for any organization, and having authentic interactions with customers can be valuable to the brand and the business. Knowledge can also be a core ingredient in these interactions, as those most valuable customer engagements tend to involve the exchange of information or ideas... and don't be surprised if the organization is on the receiving end of knowledge from customers, in many cases.

From The Ten Types of Innovation:

Customer Engagement innovations are all about understanding the deep-seated aspirations of customers and users, and using those insights to develop meaningful connections between them and your company. Great Customer Engagement innovations provide broad avenues for exploration, and help people find ways to make parts of their lives more memorable, fulfilling, delightful–even magical.

Increasingly, we see these innovations taking place in the social media space, as many companies move away from “broadcast” communications toward delivering more organic, authentic, and mutual interactions. We also see companies using technology to deliver graceful simplicity in incredibly complex areas, making life easier for customers and becoming trusted partners in the process. However, as ever, technology is only a tool. Even simple gestures like elegant and intuitive packaging can extend and elevate the experience customers have with a company— long after the point of purchase.

Customer Engagement in the Sustainability Space

MIT Trash | Track

Created from a joint initiative between MIT, Waste Management, Qualcomm, Sprint, and The Architectural League NY, Trash | Track sought to understand and visualize the paths 3000 items took from Seattle to their final destinations. The results have been used in classrooms and as conversation starters on hundreds, if not thousands of sites over the years, engaging people in discussions which may have never had a topic statement or stimulus in the past. The Trash | Track project certainly delivered in that aspect.

Where the Trash | Track project may have stopped short was in understanding the paths and the implications of those travels or pushing the discussion further... in essence, taking the next step to understand what can be improved in what they call the "removal chain" and undergoing, quite literally, the accounting of those items. For example, are there closer accumulation points for e-waste than Florida? When accounting for its travels cross country, is e-cycling that item still an intelligent decision? Please watch the following 2:18 video. Note that there is no narration in the following video.

Video: Trash | Track (2:18)

Cheng Concrete Exchange

Fu-Tung Cheng has been a renowned architect in Berkeley, California for decades, and had been using concrete countertops in his designs for years. In 2004, he built on his architectural and design experiences with concrete to create Cheng Concrete in 2004, a combined training/product company for concrete countertops. In doing so, his core model was one that would serve contractors, designers, and DIY equally by making the necessary components and most importantly, knowledge, well-packaged and available to the masses.

Instead of relying on private-labeled, pallet-sized shipments of specialized concrete mix (which would have been a nightmare on multiple fronts), Cheng Concrete packages and ships only the colorants and added components necessary to add to your locally-sourced concrete. Combined with the knowledge support of others, you will have a countertop or surface which will outlive your kitchen, if not your home, but is readily recyclable locally.

Where Cheng Concrete engaged customers was not only in opening this emerging interior material to the masses of homeowners, but also in highlighting designs and how they are created, both online and in print. If you search "concrete counter" on YouTube, you have more than 43,000 results, and much of this popularity is due to Fu-Tung Cheng's engagement of homeowners more than a decade ago. Please watch the following 4:10 video.

Video: Make a Concrete Barbecue Surround with CHENG Outdoor Concrete Mix (4:10)

But to Be Untangled in the Real World

Credit: Van Gogh - Ein Paar Schuhe4 by Mefusbren69 via Wikipedia Commons is public domain

"And I can't work without a model. I'm not saying that I don't flatly turn my back on reality to turn a study into a painting — by arranging the colour, by enlarging, by simplifying — but I have such a fear of separating myself from what's possible and what's right as far as form is concerned. [...] But in the meantime I'm still living off the real world. I exaggerate, I sometimes make changes to the subject, but still I don't invent the whole of the painting; on the contrary, I find it ready-made — but to be untangled — in the real world." - Vincent van Gogh to Theo van Gogh, October 5, 1888.

As we have addressed throughout our time together, some fatal flaws in innovation efforts are those which work without a "model," that is to say those efforts which are artificially synthesized as opposed to being found and untangled in the real world.

The Ten Types of Innovation is a readily accessible framework to help us better refine and hone our strategies by further forcing us to apply a strategic lens. If we think of the Cognitive Map as representing the context in which our innovation will function–'the real world model'–then the Ten Types allow us to further refine and untangle our strategy.

Through taking on and truly engaging in the process of researching, mapping, testing, and crafting our initial strategies, we may begin to 'untangle the real world.' Perhaps most importantly, we will take what is, for some, a random and sporadic process of innovation, and instead understand where we are taking risks and where we are not. This may seem like a trivial detail, but it allows us a far more detailed and strategic view of our landscape.

For example, we may elect to choose what is a relatively gray space, and what is already a well-established path on the Map, and approach the initiative using a completely unique set of innovation types (e.g., Amazon's early days as an online bookstore). We may choose to take on what is a white space, build a substantially new path on the Map, and apply more time-tested and proven innovations (e.g., selling and marketing a product innovation through an existing model).

In each case, because we are able to layer the models, we know where we are being aggressive and taking risks, and where we are being a bit more conservative. Knowing that our innovation will likely go through rounds of refinement in the market, knowing how we can "twist the dials," so to speak, allows us paths for intelligent refinement.

Creating Meaning in the Real World, From the Real World

To refresh ourselves, our goals for this week's Lesson are to:

• discern the ten types of innovation and how they may be blended;
• assess how the ten types of innovation may be paired with white-gray-black space thinking to unearth potential innovation platforms;
• integrate the ten types of innovation onto Cognitive Maps to provide additional strategic opportunities.

To these ends, this week's assignment will build on our last two weeks' efforts to create another view by which we may 'untangle the real world.'

Summary

When translating a purpose-driven sustainability concept, at a certain point, translation into a mature program must happen. A significant part of that translation depends on the organization, its capabilities, and its competencies. While you may eventually be able to hire outside consultants and allocate extensive resources, you will likely find that the fastest path to an initial concept is in leveraging the org's existing resources. In reality, this can many times come down to resourcing the concept via the 'beg, borrow, acquire' approach, as you may not have the time or resouces to go external at this point. Whether tapping into someone's time and expertise or gaining access to specific tooling or equipment, some favors may be needed in early-phase development.

In leveraging any platform, strategy, or concept, a significant aspect in success will be how it integrates into the framework of the organization itself. One program may be a wonderful, logical fit for an organization and experience an easy transition and launch, where translating that same program into a different organization may be a poor fit which will not come to fruition regardless of resourcing.

The overarching purpose of this Lesson is to take the concept into the next step of development and help you to understand the interface between concept and organization.

Learning Outcomes

By the end of this lesson, you should be able to:

• discern the functional and cultural competencies of the organization;
• deconstruct an organization to understand core competencies and how they may be leveraged in innovation platforms;
• create and modify strategies depending on organizational contexts.

Lesson Roadmap

Questions?

If you have any questions, please send them to my axj153@psu.edu Faculty email. I will check daily to respond. If your question is one that is relevant to the entire class, I may respond to the entire class rather than individually.

Competitive Sustainability

There is a tendency in many organizations to view sustainability as a pastime of sorts, sitting at the fringes of the business and functioning by itself. In the organizational body, sustainability is viewed as the appendix: nice to have, little tangible function or value, and easily removed.

In our time together, we have explored the role of sustainability as infused throughout the organization, and as representing meaningful opportunity for the organization on a myriad of different fronts. If we truly believe that sustainability represents significant opportunity, we should adopt the view that, like all of the other core operations of the organization, sustainability must perform and continue to improve. To do so, sustainability must be viewed as competition.

In broaching this topic in some groups, there is an instant and quite visible recoil from some members of the audience at the very thought of sustainability being competitive, as though the very act of bringing competition into the discussion hints at a corrupt and nefarious plan to actually make money for the organization. For shame, for shame.

Here is the rough logic trail we could propose:

• The more value sustainability brings to the organization (whether financial value, brand value or otherwise), the more resources it will receive from the organization (be they access to other departments, budget, etc).
• The more resources sustainability efforts receive, the more sustainable works they may undertake.
• The more sustainable works undertaken, the more ultimate good they will do.

In seeing sustainability as a core function of the organization, it should be treated as such. Sustainability must be measured, goals must be set, and it should receive a level of metrics commensurate with any other function in the organization.

Just because we view sustainability with a competitive frame does not cheapen it or mean there are winners and losers... it simply signals that we want to do as much good with the program as possible. Sustainability is a competition with ourselves to become better, and to do so we know that we must track performance and take a competitive mindset.

Competencies, Advantages, and the Competitive Frame for Sustainability

As we have seen in understanding and creating sustainability-driven strategies, much of the effort depends on understanding the opportunity and fitting the need. We can think of understanding and leveraging organizational competencies as expressing yet another level of "fit" for a strategy.

For example, if we identified two potentially compelling strategic paths on a map, organizational fit and competencies would be the next filter we would apply. Imagine one of the paths relies heavily on engineering and new product development expertise, where the other relies on high-level marketing and the ability to message over time effectively to educate the market. The logical step would be to evaluate how those needs match the competencies of the organization and its partners, and to do so, we must take a competitive approach to how we can best execute on sustainability.

In this Lesson, we will move our innovation effort forward by gaining a precise view on how a specific organization may execute a strategy, and the resources potentially needed to do so. Where our work up to this point has been to understand the opportunity and create the strategy, we are now entering the feasibility and execution phase of our effort. In the real world, organizations do not all have the same levels of competency in the same skill sets, so as we seek to execute on our vision in the real world, we must consider organizational strengths, weaknesses, and other factors that can affect feasibility.

In executing sustainability-driven innovations, your organization will inexorably have advantages other organizations executing the same effort would not... this is not something to be lamented, it is the competitive frame that we must embrace if we desire do the most good possible in the most effective ways.

An Essential Component of Execution

In considering innovation, what will become readily apparent is there is a very bold line separating the strategy of innovation and the execution of innovation.

Where we may spend significant time and effort understanding the space, finding areas of opportunity, and honing potential propositions, at a certain point, we must begin transforming those thoughts and ideas into beta offerings to test. Although we may have been unconsciously selecting and honing opportunities with an eye toward our organization's competencies, this Lesson addresses considerations in organizational context. In transforming our thoughts and strategies into a tangible offering, we could consider this Lesson as bridging from the "what" to the "how."

To consider, from a detached and insight-minded perspective, the organizational context and competencies in actually being able to execute the strategy is to consider the realities of the road ahead.

As we layer the organization into our innovation strategy, our goal will be to find strategies where our organization will provide even more of an advantage over other organizations that could execute on the strategy. We need to give our offering as much of a chance to succeed as possible, and leveraging competencies, capabilities, and resources already woven into the organizational DNA will increase our odds of success even more.

Eleven Organizational Competencies

In taking an independent eye toward organizations' competencies, it can be helpful to not consider mission statements and corporate releases, but what the organization has actually and tangibly executed on recently. This is important as there is a tendency for organizations to define themselves by works from prior decades, as opposed to competencies it may have developed recently.

When considering organizational competencies, think not of what the organization brings to the market or how it behaves, but of those highest-level traits which enable the organization to do those things in the first place.

From David Ulrich and Norm Smallwood, "Capitalizing on Capabilities":

Organizational capabilities emerge when a company delivers on the combined competencies and abilities of its individuals. An employee may be technically literate or demonstrate leadership skill, but the company as a whole may or may not embody the same strengths. (If it does, employees who excel in these areas will likely be engaged; if not, they may be frustrated.) Additionally, organizational capabilities enable a company to turn its technical know-how into results. A core competence in marketing, for example, won't add value if the organization isn't able to spark change.

There is no magic list of capabilities appropriate to every organization. However, we've identified 11—listed below—that well-managed companies tend to have. (Such companies typically excel in as many as three of these areas while maintaining industry parity in the others.) When an organization falls below the norm in any of the 11 capabilities, dysfunction and competitive disadvantage will likely ensue.

Talent:
We are good at attracting, motivating, and retaining competent and committed people. Competent employees have the skills for today's and tomorrow's business requirements; committed employees deploy those skills regularly and predictably. Competence comes as leaders buy (acquire new talent), build (develop existing talent), borrow (access thought leaders through alliances or partnerships), bounce (remove poor performers), and bind (keep the best talent). Leaders can earn commitment from employees by ensuring that the ones who contribute more receive more of what matters to them. Means of assessing this organizational capability include productivity measures, retention statistics (though it's a good sign when employees are targeted by search firms), employee surveys, and direct observation.

Speed:
We are good at making important changes rapidly. Speed refers to the organization's ability to recognize opportunities and act quickly, whether to exploit new markets, create new products, establish new employee contracts, or implement new business processes. Speed may be tracked in a variety of ways: how long it takes to go from concept to commercialization, for example, or from the collection of customer data to changes in customer relations. Just as increases in inventory turns show that physical assets are well used, time savings demonstrate improvements in labor productivity as well as increased enthusiasm and responsiveness to opportunities. Leaders should consider creating a return-on-time-invested (ROTI) index, so they can monitor the time required for, and the value created by, various activities.

Shared Mind-Set and Coherent Brand Identity:
We are good at ensuring that employees and customers have positive and consistent images of and experiences with our organization. To gauge shared mind-set, ask each member of your team to answer the following question: What are the top three things we want to be known for in the future by our best customers? Measure the degree of consensus by calculating the percent of responses that match one of the three most commonly mentioned items. We have done this exercise hundreds of times, often to find a shared mind-set of 50% to 60%; leading companies score in the 80% to 90% range. The next step is to invite key customers to provide feedback on brand identity. The greater the degree of alignment between internal and external mind-sets, the greater the value of this capability.

Accountability:
We are good at obtaining high performance from employees. Performance accountability becomes an organizational capability when employees realize that failure to meet their goals would be unacceptable to the company. The way to track it is to examine the tools you use to manage performance. By looking at a performance appraisal form, can you derive the strategy of the business? What percent of employees receive an appraisal each year? How much does compensation vary based on employee performance? Some firms claim a pay-for-performance philosophy but give annual compensation increases that range from 3.5% to 4.5%. These companies aren't paying for performance. We would suggest that with an average increase of 4%, an ideal range for acknowledging both low and high performance would be 0% to 12%.

Collaboration:
We are good at working across boundaries to ensure both efficiency and leverage. Collaboration occurs when an organization as a whole gains efficiencies of operation through the pooling of services or technologies, through economies of scale, or through the sharing of ideas and talent across boundaries. Sharing services, for example, has been found to produce a savings of 15% to 25% in administrative costs while maintaining acceptable levels of quality. Knowing that the average large company spends about $1,600 per employee per year on administration, you can calculate the probable cost savings of shared services. Collaboration may be tracked both throughout the organization and among teams. You can determine whether your organization is truly collaborative by calculating its breakup value. Estimate what each division of your company might be worth to a potential buyer, then add up these numbers and compare the total with your current market value. As a rule of thumb, if the breakup value is 25% more than the current market value of the assets, collaboration is not one of the company's strengths.

Learning:
We are good at generating and generalizing ideas with impact. Organizations generate new ideas through benchmarking (that is, by looking at what other companies are doing), experimentation, competence acquisition (hiring or developing people with new skills and ideas), and continuous improvement. Such ideas are generalized when they move across a boundary of time (from one leader to the next), space (from one geographic location to another), or division (from one structural entity to another). For individuals, learning means letting go of old practices and adopting new ones.

Leadership:
We are good at embedding leaders throughout the organization. Companies that consistently produce effective leaders generally have a clear leadership brand—a common understanding of what leaders should know, be, and do. These companies' leaders are easily distinguished from their competitors'. Former McKinsey employees, for instance, consistently approach strategy from a unique consulting perspective; they take pride in the number of the firm's alumni who become CEOs of large companies. In October 2003, the Economist noted that 19 former GE stars immediately added an astonishing $24.5 billion (cumulatively) to the share prices of the companies that hired them. You can track your organization's leadership brand by monitoring the pool of future leaders. How many backups do you have for your top 100 employees? In one company, the substitute-to-star ratio dropped from about 3:1 to about 0.7:1 (less than one qualified backup for each of the top 100 employees) after a restructuring and the elimination of certain development assignments. Seeing the damage to the company's leadership bench, executives encouraged potential leaders to participate in temporary teams, cross-functional assignments, and action-based training activities, thus changing the organization's substitute-to-star ratio to about 1:1.

Customer Connectivity:
We are good at building enduring relationships of trust with targeted customers. Since it's frequently the case that 20% of customers account for 80% of profits, the ability to connect with targeted customers is a strength. Customer connectivity may come from dedicated account teams, databases that track preferences, or the involvement of customers in HR practices such as staffing, training, and compensation. When a large portion of the employee population has meaningful exposure to or interaction with customers, connectivity is enhanced. To monitor this capability, identify your key accounts and track the share of those important customers over time. Frequent customer-service surveys may also offer insight into how customers perceive your connectivity.

Strategic Unity:
We are good at articulating and sharing a strategic point of view. Strategic unity is created at three levels: intellectual, behavioral, and procedural. To monitor such unity at the intellectual level, make sure employees from top to bottom know what the strategy is and why it is important. You can reinforce this sort of shared understanding by repeating simple messages; you can measure it by noting how consistently employees respond when asked about the company's strategy. To gauge strategic accord at the behavioral level, ask employees how much of their time is spent in support of the strategy and whether their suggestions for improvement are heard and acted on. When it comes to process, continually invest in procedures that are essential to your strategy. For example, Disney must pay constant attention to any practices relating to the customer-service experience; it must ensure that its amusement parks are always safe and clean and that guests can successfully get directions from any employee.

Innovation:
We are good at doing something new in both content and process. Innovation—whether in products, administrative processes, business strategies, channel strategies, geographic reach, brand identity, or customer service—focuses on the future rather than on past successes. It excites employees, delights customers, and builds confidence among investors. This capability may be tracked through a vitality index (for instance, one that records revenues or profits from products or services created in the last three years).

Efficiency:
We are good at managing costs. While it's not possible to save your way to prosperity, leaders who fail to manage costs will not likely have the opportunity to grow the top line. Efficiency may be the easiest capability to track. Inventories, direct and indirect labor, capital employed, and costs of goods sold can all be viewed on balance sheets and income statements.

In considering these eleven competencies in your organization, consider forcing yourself to take a rigorous approach to detach your perspective a bit:

• What evidence do you have that your organization has this competency?
• What are three or so recent projects or initiatives completed that substantiate this belief?
• Choose three others in your organization and ask them to similarly identify and substantiate their position on competencies. Do they match?
• Ask a customer or partner the same question. Are they symmetrical with the other opinions?

As we move through our layering of organizational context and competencies onto our strategy, it will be essential that we are working from an unvarnished view of realities.

Realities and Feasibility

Please allow me to be blunt: sustainability departments are not defined by being flush with resources or headcount (and even then, they may actually be a shared department, such as "sustainability and EHS").

To put it in perspective, Caterpillar, a $56 billion company, has three people in its sustainability area. In essence, each sustainability staffer at CAT is therefore responsible for the sustainability activity of 12 L.L. Bean's worth of revenue (quite literally, "a hill of Beans").

Make no mistake, there are very large and respected organizations in sustainability doing wonderful work with one or two dedicated staff (who, in turn, tap freelancers, consultants, partners, interns, or any passersby on the street wearing a Patagonia jacket who happens to make eye contact). More often than not, this pattern is a hallmark of sustainability as it exists in the organization: The best programs are many times decentralized and infused throughout the organization, and therefore, are quite lean in dedicated staff.

In some cases, the creation and execution of our sustainability-driven innovation may fall onto other functions, such as product development, marketing, HR, or other classically less constrained departments. But they, too, face the constraints of the organization, be they budgetary, attentional, or otherwise.

Although we may be experimenting and ideating and "playing in the white space," as some point, we must consider the realities of the organization if we are to select, create, and roll out our offering in the most effective manner. These realities may be considering the highest level competencies of the organization (as we saw in our last topic), or the most nuanced and personal constraints. In small organizations, a retirement or turnover in a core position may cause some level of reevaluation of strategy, as an initiative which was once feasible is now considerably less so.

Incorporating Both Broad and Narrow Views of Available Resources

We will go through the rigor of lensing and evaluating an opportunity according to capabilities, competencies, capacity, and constraints later in this Lesson, but, philosophically, the goal should be to place names (internal or external to the organization) next to those resources we will likely need to launch the Beta offering. If we are unable to resource a needed item internally or externally, it is not necessarily a red flag, but we must consciously consider the implications.

For example:

• If you were to create a lean team that would allow the offering to go to Beta (with data and conviction), who specifically would you need?
• What amount of time (in hours) would be required of each of those people?
• What outside competencies or firms are needed?
• Do you realistically have the budget to engage those firms for a Beta?
• What constraints do you face, either in knowledge or capacity?
• Are there hard skills (e.g., a certified engineer) that would be likely be required for Beta?

Remember, our goal is for our Beta to prove or disprove the viability of the offering, and create an extended list of assumptions to be tested... not to create the final product. You may find that a freelancer may fill the need for your internal copywriter, a prototype may fill in for the final product for photography, or that you can use a graduate student as opposed to a licensed engineer for initial calculations.

If Beta offerings are designed to be lean, and sustainability, as a practice, is perennially lean, you can imagine what a sustainability-driven beta could potentially face. So, for that reason, we need to have a realistic view of, quite literally, the amount of begging, borrowing, stealing, and cajoling we may need to do to bring the offering to beta.

Hard v. Soft Competencies

In our consideration of organizational competencies in the earlier topic, "Identifying Competencies," you'll note that "innovation" itself is listed as a single of the eleven competencies.

Innovation:
We are good at doing something new in both content and process. Innovation—whether in products, administrative processes, business strategies, channel strategies, geographic reach, brand identity, or customer service—focuses on the future rather than on past successes. It excites employees, delights customers, and builds confidence among investors. This capability may be tracked through a vitality index (for instance, one that records revenues or profits from products or services created in the last three years).

But, consider what may be a more traditional definition of "competency" in an organization, those based in product and differentiation. We may call these "hard competencies," as they are highly tangible, quite evident within the organization, and well-recognized by those external to the organization.

From "The Core Competence of the Corporation," by Prahalad and Hamel:

At least three tests can be applied to identify core competencies in a company. First, a core competence provides potential access to a wide variety of markets. Competence in display systems, for example, enables a company to participate in such diverse businesses as calculators, miniature TV sets, monitors for laptop computers, and automotive dash-boards—which is why Casio's entry into the handheld TV market was predictable. Second, a core competence should make a significant contribution to the perceived customer benefits of the end product. Clearly, Honda's engine expertise fills this bill.

Finally, a core competence should be difficult for competitors to imitate. And it will be difficult if it is a complex harmonization of individual technologies and production skills. A rival might acquire some of the technologies that comprise the core competence, but it will find it more difficult to duplicate the more or less comprehensive pattern of internal coordination and learning. JVC's decision in the early 1960s to pursue the development of a videotape competence passed the three tests outlined here. RCA's decision in the late 1970s to develop a stylus-based video turntable system did not.

Few companies are likely to build world leadership in more than five or six fundamental competencies. A company that compiles a list of 20 to 30 capabilities has probably not produced a list of core competencies. Still, it is probably a good discipline to generate a list of this sort and to see aggregate capabilities as building blocks. This tends to prompt the search for licensing deals and alliances through which the company may acquire, at low cost, missing pieces.

When considering the more traditional definition of competency in an organization, we can begin to see where an organization with expertise in "hard competencies" may function as such without the ability to actually innovate in those same competencies. For example, consider a long-term market share leader in a given industry, defined by its portfolio of products, and perhaps launching one major product rollout every three years. While this organization may absolutely be a powerhouse in its domain of expertise and loaded with core competencies that allow that advantage, it may not have "innovation competencies."

While we examine the organization's competencies, it is important to layer both the "soft competencies" (such as Leadership and Speed) with the "hard competencies" (such as domain expertise). If we do not consider both hard and soft competencies, we may neglect to understand how the organization may be fully leveraged in the innovation offering.

The purpose of adding this lens to our consideration of organizational competencies is to help us understand not just general "competencies" within the organization, but specifically those soft and hard competencies which we may leverage in service of taking our offering to Beta.

Introduction

Our consideration of organizational competencies is not simply background information, we can actively add it to our strategy and consider it in our Cognitive Map for the offering.

Although this discussion of organizational competencies may appear to happen rather late in the innovation process, it is by no means an afterthought or to be given short consideration. There are a few, very purposeful reasons why we choose to hold what is an examination of organizational strengths and weaknesses:

1. It tends to constrain–not open–our views. If we identify twenty potentially interesting strategies early in the process, and then begin to cull them based on what the organization's competencies are, we may be inadvertently short-circuiting the innovation process by bringing constraints into the process too early. If our goal is to innovate in the sustainability space, we should consider each potential strategy by its own merits before we begin trimming and prioritizing.
2. It leans toward the tactical and executional, instead of the strategic. Layering constraints and practicalities also tends to draw one into the execution of an idea or offering, as opposed to the strategy or ideation of the same.
3. It represents feasibility for the organization at a point in time. This is especially important because if an opportunity is significant enough, the organization will likely stretch to expand its competencies. So, when considering competencies at a given point in time, it neglects the ability for the organization to grow and adapt around opportunity.
4. It does not represent the competencies of external partners. In all of this discussion, we are considering the organization internally. While this represents the core of how the innovation offering will be created, it also does not account for the essentially unlimited scope of competencies an organization can subcontract or add. If an organization is weak in marketing, it finds an ad agency or marketing consultancy; if an organization is weak in fulfillment, it finds a logistics firm.

So, as we begin to go through the rigor of layering the organization's competencies onto our Map, do not consider a gap in competencies to be a reason not to pursue a strategy, but a signal that additional competencies will need to be added for the offering to be successful.

In the following, we will consider some organizational scenarios, examine how they may influence our interpretations of the Map, and what they may signal for those involved. Remember there are many different strategies and tactics which we can use, and the below are sample narratives that an organization could consider.

Scenario #1: The Marketing Powerhouse

In this case, both the rewards and barriers are potentially high. If an organization sought to tap what is a new constellation of concepts centered around "Can enjoy surroundings, weather," "More time for family/kids," and "I am a good dad/mom," it would have to be acknowledged that there would be a heavy marketing/storytelling need to gain traction. While any organization could take the rogue position and attempt to own this space in the minds of customers, we could consider this strategy may be best served by those with heavy ad spend, high marketing competency, and a strong brand.

Click for text description

Here we see a subset of attributes from the image "Map of 10 test user interviews after one year with native grass X, cutoff n = 2."

The subset includes concepts centered around the following topics:

• Can enjoy surroundings, weather,
• More time for family/kids, and
• I am a good dad/mom

and includes the following attributes:

• I am a good dad/mom
• More time for family/kids
• I feel smart
• I'm an early adopter, leader
• Can enjoy surroundings, weather
• Save time
• I mow less

Scenario #2: The Upstart/Startup

If we are considering a potential strategy for a new, perhaps small organization, we would likely be well served by tapping existing concepts as opposed to trying to create spaces and educate the market. In this case, the story would be clear: Native grass X is easy to care for because it is well adapted, so it does not require the chemical and herbicidal inputs that the seed from the neighborhood "big box" would.

By taking this strategy in a smaller startup, we would embrace the position of a sustainable "fighter brand," taking a clearly defined position against the incumbent lawn products companies. When in startup mode, we have to consider the ability to own the message against far more well-funded companies, so the goal is to chisel out a niche and own it.

Click for text description

Here we see a subset of attributes from the image "Map of 10 test user interviews after one year with native grass X, cutoff n = 2."

The subset includes concepts centered around the following topics:

• Native grass X is easy to care for
• Does not require chemical and herbicidal inputs
• “Fighter brand”

and includes the following attributes:

• I am a responsible neighbor
• No insecticides/chemicals
• No mold/fungus problems
• No insect problems
• Well adapted/hardy
• Native species

Scenario #3: The Product Expert

Some organizations are especially competent on the product knowledge side, perhaps boasting especially deep technical and product knowledge. In this case, let us imagine the organization has a couple PhDs in plant biology who can represent that deep knowledge. Let's also assume this product expertise approach is one taken on the other seeds and products in the portfolio (i.e., why they have two PhDs on staff).

In this case, the strategy could embrace that knowledge and tell the story of the attributes and what makes the seed different. In this case, we could take what could be a negative attribute ("Light green color"), and own it as a badge of pride, of sorts. Our goal here could be to leverage the knowledge competency already in the organization to make our early adopter customers "experts," as well, knowing that they will be answering questions from neighbors, etc.

In this strategy, we could also elect to leverage the fact that there is indeed less information about "native grass X" as a lawn seed, and therefore it is that much more important to rely on a company with expertise and experience to help you.

Click for text description

Here we see a subset of attributes from the image "Map of 10 test user interviews after one year with native grass X, cutoff n = 2."

The subset includes concepts centered around the following topics:

• Early adopter customers are "experts"
• Important to rely on a company with expertise and experience to help you

and includes the following attributes:

• I feel smart
• I’m an early adopter, leader
• Harder to get advice, info
• Native species
• Grass grows slowly
• Questions from neighbors
• Light green color

Scenario #4: The Social Leader

In the case of an organization (or non-profit) with an especially strong social pull or presence, we should elect to take a strategy which leverages this competency and reach as much as possible.

The strategy here could be a fairly pure sustainability play, one which talks about how wasteful lawns are (CHG needed to create fertilizer, water intensity, etc.), and then compares this resource intensity to that of a native grass. Similar to "droughtshaming" that happened in the midst of the California droughts, we could elect to go even further as part of "lawnshaming," while also reinforcing that a beautiful lawn can be had in a far less wasteful manner.

This strategy could also highly leverage Instagram, Twitter, and other social channels to support those converting their lawns, by showing how much less effort and material it takes to maintain, etc. It is one destined for infographics, shares, and bringing the wasteful lawn to light.

Click for a text description

Here we see a subset of attributes from the image "Map of 10 test user interviews after one year with native grass X, cutoff n = 2."

The subset includes concepts centered around the following topics:

• Lawns are wasteful (CHG needed to create fertilizer, water intensity, etc.)
• “Lawnshaming”
• Beautiful lawns can be had in a far less wasteful manner
• How much less effort and material it takes to maintain
• Leverage Instagram, Twitter, and other social channels

and includes the following attributes:

• Pride in doing the right thing
• I set a good example
• I’m an early adopter, leader
• I protect the environment
• Native species
• Questions from neighbors
• Not as attractive
• Light green color

Scenario #5: The Lean Operation

If we are in an organization which embraces the "fast follower" approach to the product offering and gaining as much leverage as possible as quickly as possible, we may elect to pursue a strategy built around an almost accounting-based approach. This is one which could leverage a tactic such as an online calculator to calculate time and financial savings from converting an existing lawn to native seed, for example.

In its purest form, an approach a lean operation could elect to take would be to take the concept path with the highest current use/potential/traffic, and see if it can capture some percentage of revenue. This is not necessarily a strategy which is especially appealing to those most concerned with brand building, but it is one which is an obvious strategy, and one which could allow rapid growth in market share.

In essence, it is a similar bite-sized and elegant approach to strategy, just a larger niche: "Tired of mowing your lawn all the time? Mow 40% less with native grass x."

Click here for a text description

Here we see a subset of attributes from the image "Map of 10 test user interviews after one year with native grass X, cutoff n = 2."

The subset includes concepts centered around the following topics:

• Online calculator to calculate time and financial savings from converting an existing lawn to native seed
• Take the concept path with the highest current use/potential/traffic, and see if it can capture some percentage of revenue

and includes the following attributes:

• I mow less
• No fertilizer needed
• Grass grows slowly
• Native species

Balance, Nuance, and Patience

I'm writing to you in great haste, I assure you that there's a lot involved in compositions with figures, and I'm very busy. I assure you that there's a lot involved in compositions with figures. ... It's like weaving... you must control and keep an eye on several things at once.”

Up until this point in the creation process, our focus has primarily been on spaces of opportunity, how they may be leveraged, and understanding as much as possible so that we may make the most informed decision. At this point, we are transitioning into the actual execution phase of innovation, considering tools and resources at our disposal, and how they may shape our strategies.

In doing so, the need for balance and "keeping an eye on several things at once" becomes paramount to the innovation process, as this begins a period where there can be a tendency to fall into the rush of execution, especially given the time and effort spent in all of the preliminary research up until this point. Just after this point, you (and your organization) may feel compelled to get a Beta into the market as soon as possible, which is certainly understandable.

I mention this "pull" now because we are now in (or rapidly nearing) the point in the process where we are likely down to three or so potential "Tier 1" strategies or a tightly defined space, and we may have been responsible to present those to management or other areas in the organization to be vetted, approved, etc. What works in your favor is that you likely have deep research and have found some appealing short- and long-term opportunities... yet, this same fact can also work against you, as the more appealing the strategy, the more excited and impatient all involved become. While you may have been able to get away with the classically sheepish insight line, "We're exploring some interesting opportunities," those opportunities are now likely "out in the open" in the organization, and the clock begins ticking.

This is dangerous namely because it can have the tendency to close you from opportunities not within the current capabilities and competencies of the organization, as going outside the current competency footprint of the organization to find partners, resources, suppliers, and agencies to work with you on an emergent project can, in and of itself, be daunting. The greater the pressure of the pull, the more apt we are to revert to those lower-hanging strategies we know the organization can execute currently.

There is absolutely nothing wrong with this, but we need to have a level of consciousness and awareness as to the strategic decisions we make and why. If we consciously make the decision to pursue shorter-term, more near-field strategies, that is certainly a valid strategy - - as long as we do so in a well informed and purposeful way.

The Weaving of Strategy

This is indeed also the point which, in my opinion, differentiates the basic strategies from the great. Basic strategies tend to be a bit of an awkward fit, those which are not conscious of context, fit, or how well they may be executed in practice. These are the impractical, the carbon copies, the generic. These are the strategies which may sound lovely on a white sheet of paper, but meet very real limitations in practice.

On the other hand, the great strategies are those which, to the casual observer, are almost insultingly simple. You may explain them in a sentence or two to the unacquainted in your organization, and you may be met with a blank stare and something along the lines of, "We should have been doing this five years ago." Those are indeed some of the best strategies, as they fit, reinforce, and leverage the organization as it stands today while creating the trajectory of what the organization desires to be tomorrow.

No strategy for innovation can truly be great without a deep understanding of the organization, for it is the organization which acts to provide form and context to the strategy. Needless to say, one can only imagine that if the organization has this much influence on the strategy, that the actual tactics of executing the strategy–be the product design, messaging, marketing, or otherwise–are that much more dependent on the organization.

For all of these reasons, we are now entering the "weaving" phase of our offering and strategy, as we will be simultaneously considering strategies, tactics, offerings, messaging, research design, and more as we enter Beta. Needless to say, like van Gogh's letter to his brother, "you must control and keep an eye on several things at once."

Luckily for us, the goal is not to get it right on the first try, but to iterate and test the offering until we do.

Adding Another Layer of Depth To Our Strategy

To refresh ourselves, our goals for this week's Lesson are to:

• discern the functional and cultural competencies of the organization;
• deconstruct an organization to understand core competencies and how they may be leveraged in innovation platforms;
• create and modify strategies depending on organizational contexts.

To these ends, this week's assignment will closely examine how our strategies may be woven in different ways depending on organizational context.

Summary

One of the most common pitfalls of new concept introductions is a hidden overreliance on basic stated preference measures. For reasons unbeknownst to me, stated preference and "willingness to pay" surveys have become what appears to be a default choice in new concept efforts.

Part of the overreliance may be due to the fact that stated preference surveys are incredibly straightforward to deploy for a basic user. You design a little experiment, perhaps you create a little intercept survey in a public place, read a brief and show a prototype, and then ask 'if you would buy,' and likely, 'how much would you expect to pay.' Then the basic user compiles results in a few bar charts, and shows management that '70% of people surveyed (n=102) said that they would buy the concept.'

There is a foundational issue, and it only degrades from there: most people, if willing to participate in a survey, will significantly skew to the high (positive) side. In cases where the moderator is physically attractive, the skew can be even more severe.

The reality is that even with the best of intentions and soundest research design, raw verbatim responses of intent tend to be a poor indicator of actual purchase behavior.

This Lesson is designed to point out the shortcomings of stated preference methodologies, how to design to understand consumer preference, and ways to capture purchase preference and intent in your concept development.

Learning Outcomes

By the end of this lesson, you should be able to:

• articulate the strengths and limitations of the stated preference methodologies;
• discern where stated preference methodologies are most valuable;
• evaluate concept development scenarios for best fit with the various stated preference methodologies;
• describe the types of insight each methodology can reveal.

Lesson Roadmap

Questions?

If you have any questions, please send them to my axj153@psu.edu Faculty email. I will check daily to respond. If your question is one that is relevant to the entire class, I may respond to the entire class rather than individually.

Cross Examining the Witness

Stated preference methodologies are not necessarily a cleanly and distinctly defined set of research tools, they are instead unified by the fact that they rely on gleaning insight, quite literally, from a test audience's "statements." Most commonly in our application, this test audience will be one or more groups of target customers whom we think could create the foundation of the purchase and use of our final offering.

As we will see in the following lesson, the questions underlying stated preference models can sometimes take on the feel of a courtroom examination on paper, and one could consider the goals to be somewhat similar at times. Stated preference models will sometimes ask the participant several very similar questions in hopes of finding any inconsistencies. They may ask what could be considered confusing or overly hypothetical questions in hopes of revealing your inclinations.

These mechanisms are by design, and lie at the heart of stated preference models, as they tend to be highly dependent on very specific research design and statistical analysis. We will be asking the witness batteries of related questions, and then statistically analyzing the results across a statistically significant number of witnesses.

Flawed Recall

One of the weaknesses of stated preference methods is, indeed, that they rely on statements as opposed to actions. These methods rely on not just the participant's recall of their own actions (which are famously biased and subject to post-rationalization), but on their hypothetical decisions on hypothetical products presented in isolation and purchased with hypothetical money participants hypothetically have.

You can perhaps see but a glimmer of a methodological weakness here.

If participants' self reporting was indeed highly accurate, consider the extension of the concept: products and businesses utilizing these methodologies in their offering research would indeed never fail, as there would be no financial risk or uncertainty. They would but simply send out batteries of surveys, and have consumers tell them exactly how much revenue they can expect.

If that were the case, the below would never happen to a company like Apple, the world's 5th largest corporation, upon the release of the Apple Watch:

The fact that one of the most touted product releases from Apple in the past decade (2014 revenue: $183 billion) is struggling to create the same level of interest of a far more limited product from a company .04% the size of Apple (Fitbit estimated 2014 revenue: $754 million), or that sales have dropped 90% since release week, is likely something that Apple did not forecast.

And make no mistake, Apple is arguably one of the most successful companies on the planet, especially in regard to innovation, supply chain, forecasting, and new product rollout.

Biased Witnesses

Sustainability-driven innovation specifically faces a unique set of obstacles in stated preference research, and that is the social pull of sustainability creating positive social approval bias in participants. In essence, what this means is that if someone sees sustainability as socially desirable, they will likely self-report their willingness to engage in sustainability-related behaviors and purchases that they actually would partake in "in the real world." In considering the tremendous social influence sustainability can have on people, this is a very real research concern for us in developing sustainability-driven offerings.

To provide some context for how much influence this may have, consider the influence of social approval bias in something as simple as reporting how many fruits and vegetables you consumed the day before.

From "Effects of social approval bias on self-reported fruit and vegetable consumption: a randomized controlled trial" by Miller et al. [emphasis is mine]:

Methods

A randomized blinded trial compared reported fruit and vegetable intake among subjects exposed to a potentially biasing prompt to that from control subjects. Subjects included 163 women residing in Colorado between 35 and 65 years of age who were randomly selected and recruited by telephone to complete what they were told would be a future telephone survey about health. Randomly half of the subjects then received a letter prior to the interview describing this as a study of fruit and vegetable intake. The letter included a brief statement of the benefits of fruits and vegetables, a 5-A-Day sticker, and a 5-A-Day refrigerator magnet. The remainder received the same letter, but describing the study purpose only as a more general nutrition survey, with neither the fruit and vegetable message nor the 5-A-Day materials. Subjects were then interviewed on the telephone within 10 days following the letters using an eight-item FFQ and a limited 24-hour recall to estimate fruit and vegetable intake. All interviewers were blinded to the treatment condition.

Results

By the FFQ method, subjects who viewed the potentially biasing prompts reported consuming more fruits and vegetables than did control subjects (5.2 vs. 3.7 servings per day, p < 0.001). By the 24-hour recall method, 61% of the intervention group but only 32% of the control reported eating fruits and vegetables on 3 or more occasions the prior day (p = 0.002). These associations were independent of age, race/ethnicity, education level, self-perceived health status, and time since last medical check-up.

Using Research Intelligently

That said, there is not a research methodology in existence which does not have significant flaws or limitations. The key for us is to understand the limitations of each methodology and be intelligent in the use of additional research methods to create a well-rounded understanding of the offering.

There are a few significant functional advantages to stated preference methodologies:

• They are time and cost efficient.
• You do not need to have a final product, making it useful for testing product renderings or even concept statements.
• You can change or modify proposed offerings and retest.
• It can provide a useful set of boundaries to guide your decision making in later phases.
• When statistically significant, findings can provide an initial "gate" for the offering development process.

Mining the Minds of the Domain

Expert judgments, a stated preference methodology, rely not on a volume of opinions of those in the target market, but instead elicit the opinions and judgments of experts who may have decades of experience in domains related to the offering. These experts could range from economists to subject matter experts to innovation experts to pricing strategists, but a key to the expert judgment methodology is to interact with these experts in a very structured and methodical way.

Expert judgments can be valuable not only in that they may be an excellent "jump start" to your team's body of knowledge about the emerging offering, but the experts may offer a depth of experience in a subject matter your team may never have (or need to have). In expert judgment, these subject matter experts may help you to understand the space, the opportunity, potential competition, market acceptance of similar offerings in the past, pricing, and other practical concerns from many different perspectives.

That said, as we will see in a moment, we must always be conscious of the limitations of expertise.

Structuring Expert Judgments

As we just addressed, effective and more formal expert judgment analysis does not start with a phone call and end with some scrawled notes. Expert judgments may be presented in ways to increase the probability of direct and highly focused judgments.

The following excerpt captures some practical and philosophical considerations in eliciting expert judgments, from "Structured Decision Making" by Gregory, Failing, et al.:

In an ideal world, uncertainties are reduced quickly and efficiently with research, monitoring, or modeling, and information is provided in time to aid decision making. However, it is not always possible to conduct new research to address key uncertainties, and it is seldom possible to eliminate them even with new research. In such cases, decision analysis suggests the elicitation of subjective technical judgments. There is well-established literature on the methods that are required for eliciting defensible and transparent judgments in the face of significant uncertainty and on the opportunities and limitations for using such judgments as aids to improved management (Morgan and Henrion, 1990; Keeney and von Winterfeldt, 1991).

The steps associated with best practice in structured expert judgment include:

• Identify multiple experts based on an explicit selection process and criteria, and include experts from different domains and disciplines of knowledge (e.g., science versus local knowledge).
• Clearly define the question for which a judgment will be elicited, making sure that the question separates (as much as possible) technical judgments from value judgments.
• Decompose complex judgments into simpler ones. This will improve both the quality of the judgment and, to the extent it helps to separate a specific technical judgment from the management outcomes of that judgment, its objectivity.
• Document the expert's conceptual model. Not only will this help the quality of the judgment and its communication to others, but it will create a clear and traceable account that will facilitate future peer review.
• Use structured elicitation methods to guard against common cognitive biases that have been shown to consistently reduce the quality of judgments (Morgan and Henrion, 1990).
• Express judgments quantitatively where possible. The use and interpretation of qualitative descriptions of magnitude, probability or frequency vary tremendously among individuals. This seems likely to be amplified in a cross-cultural setting.
• Characterize uncertainty in the judgment explicitly, using quantitative expressions of uncertainty wherever possible to avoid ambiguity.
• Document conditionalizing assumptions. Differences in judgments are often explained by differences in the underlying assumptions or conditions for which a judgment is valid.
• Explore competing judgments collaboratively, through workshops involving local and scientific experts, with an emphasis on collaborative learning.

Methods for eliciting probabilistic judgments include:

Fixed value methods. Estimate the probability of being higher or lower than a selected value–what is the probability that abundance (or price or nitrate loading) will be greater than 1000?

Fixed probability methods. Estimate the value associated with a specific probability. "Tell me the abundance (or price or nitrate loading, etc.) that you think has only a 5% chance of being exceeded."

Interval methods. Estimate probabilities associated with intervals. Usually it's useful to focus on medians and quartiles. Elicit the upper and lower extremes (usually using a fixed probability of 5%). Choose a value of abundance so that there is an equal probability that the true value lies above or below the value. This is the median. Then divide the lower range into two bins so that there is an equal probability that the true value falls in either bin. Then do the same for the upper range.

Knowing the Limitations of Experts

As the intrepid innovator trying to launch a new, sustainability-driven offering, it can be quite easy to be minimized by any one (or all) of the experts you engage. For this reason, it is always useful to not feel intimidated, but instead channel your lack of expertise into understanding the expert's position on your offering. Not only will the knowledge be useful in understanding more about the judgment and rationale the expert has applied in evaluating your offering, it will help you understand if the expert's experience falls more toward being a practitioner or a philosopher/lecturer.

Professor Philip Tetlock of the Wharton School has done some incredibly interesting long-term research of the predictive power of experts, and if they indeed are able to predict future outcomes any better than a non-expert person (or the classic example of 'the dart-throwing chimpanzee').

The following is an introduction into arguably his most publicized research regarding the classification and study of "fox" and "hedgehog" experts. Please watch the following 3:57 video.

Video: Everybody's an Expert: Fox vs. Hedgehog Personalities (3:57)

In continuing our brief discussion of Tetlock's research into expertise, the following passage is from "Overcoming Our Aversion to Acknowledging Our Ignorance" by Gardner and Tetlock.

In the most comprehensive analysis of expert prediction ever conducted, Philip Tetlock assembled a group of some 280 anonymous volunteers—economists, political scientists, intelligence analysts, journalists—whose work involved forecasting to some degree or other. These experts were then asked about a wide array of subjects. Will inflation rise, fall, or stay the same? Will the presidential election be won by a Republican or Democrat? Will there be open war on the Korean peninsula? Time frames varied. So did the relative turbulence of the moment when the questions were asked, as the experiment went on for years. In all, the experts made some 28,000 predictions. Time passed, the veracity of the predictions was determined, the data analyzed, and the average expert's forecasts were revealed to be only slightly more accurate than random guessing—or, to put more harshly, only a bit better than the proverbial dart-throwing chimpanzee. And the average expert performed slightly worse than a still more mindless competition: simple extrapolation algorithms that automatically predicted more of the same.

Cynics resonate to these results and sometimes cite them to justify a stance of populist know-nothingism. But we would be wrong to stop there, because Tetlock also discovered that the experts could be divided roughly into two overlapping yet statistically distinguishable groups. One group would actually have been beaten rather soundly even by the chimp, not to mention the more formidable extrapolation algorithm. The other would have beaten the chimp and sometimes even the extrapolation algorithm, although not by a wide margin.

One could say that this latter cluster of experts had real predictive insight, however modest. What distinguished the two groups was not political ideology, qualifications, access to classified information, or any of the other factors one might think would make a difference. What mattered was the style of thinking.

One group of experts tended to use one analytical tool in many different domains; they preferred keeping their analysis simple and elegant by minimizing "distractions." These experts zeroed in on only essential information, and they were unusually confident—they were far more likely to say something is "certain" or "impossible." In explaining their forecasts, they often built up a lot of intellectual momentum in favor of their preferred conclusions. For instance, they were more likely to say "moreover" than "however."

The other lot used a wide assortment of analytical tools, sought out information from diverse sources, were comfortable with complexity and uncertainty, and were much less sure of themselves—they tended to talk in terms of possibilities and probabilities and were often happy to say "maybe." In explaining their forecasts, they frequently shifted intellectual gears, sprinkling their speech with transition markers such as "although," "but," and "however."

Using terms drawn from a scrap of ancient Greek poetry, the philosopher Isaiah Berlin once noted how, in the world of knowledge, "the fox knows many things but the hedgehog knows one big thing." Drawing on this ancient insight, Tetlock dubbed the two camps hedgehogs and foxes.

The experts with modest but real predictive insight were the foxes. The experts whose self-concepts of what they could deliver were out of alignment with reality were the hedgehogs.

It's important to acknowledge that this experiment involved individuals making subjective judgments in isolation, which is hardly the ideal forecasting method. People can easily do better, as the Tetlock experiment demonstrated, by applying formal statistical models to the prediction tasks. These models out-performed all comers: chimpanzees, extrapolation algorithms, hedgehogs, and foxes.

But as we have surely learned by now—please repeat the words "Long Term Capital Management"—even the most sophisticated algorithms have an unfortunate tendency to work well until they don't, which goes some way to explaining economists' nearly perfect failure to predict recessions, political scientists' talent for being blindsided by revolutions, and fund managers' prodigious ability to lose spectacular quantities of cash with startling speed. It also helps explain why so many forecasters end the working day with a stiff shot of humility.

Is this really the best we can do? The honest answer is that nobody really knows how much room there is for systematic improvement. And, given the magnitude of the stakes, the depth of our ignorance is surprising. Every year, corporations and governments spend staggering amounts of money on forecasting and one might think they would be keenly interested in determining the worth of their purchases and ensuring they are the very best available. But most aren't. They spend little or nothing analyzing the accuracy of forecasts and not much more on research to develop and compare forecasting methods. Some even persist in using forecasts that are manifestly unreliable, an attitude encountered by the future Nobel laureate Kenneth Arrow when he was a young statistician during the Second World War. When Arrow discovered that month-long weather forecasts used by the army were worthless, he warned his superiors against using them. He was rebuffed. "The Commanding General is well aware the forecasts are no good," he was told. "However, he needs them for planning purposes."

This widespread lack of curiosity—lack of interest in thinking about how we think about possible futures—is a phenomenon worthy of investigation in its own right. Fortunately, however, there are pockets of organizational open-mindedness. Consider a major new research project funded by the Intelligence Advanced Research Projects Activity, a branch of the intelligence community.

In an unprecedented "forecasting tournament," five teams will compete to see who can most accurately predict future political and economic developments. One of the five is Tetlock's "Good Judgment" Team, which will measure individual differences in thinking styles among 2,400 volunteers (e.g., fox versus hedgehog) and then assign volunteers to experimental conditions designed to encourage alternative problem-solving approaches to forecasting problems. The volunteers will then make individual forecasts which statisticians will aggregate in various ways in pursuit of optimal combinations of perspectives. It's hoped that combining superior styles of thinking with the famous "wisdom of crowds" will significantly boost forecast accuracy beyond the untutored control groups of forecasters who are left to fend for themselves.

Other teams will use different methods, including prediction markets and Bayesian networks, but all the results will be directly comparable, and so, with a little luck, we will learn more about which methods work better and under what conditions. This sort of research holds out the promise of improving our ability to peer into the future.

Brochet's Research into Flawed Expert Judgment

One of my favorite examples to illustrate the role of marketing and the imagined consumption experience also happens to dually serve the role of mitigating the weight of expert opinion: Frédéric Brochet's body of research into the wine consumption experience, beginning with his dissertation. In a complimentary vein to Tetlock's research into foxes and hedgehogs, the following video summarizing two of Brochet's studies (indexed to play from 3:10 to 7:06) helps to illustrate that expertise may not always lie with the "experts."

Video: The Trouble with Experts (39:00)