South West Airlines Case Analysis

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Impacts of Value Added, outline the goals and indicators for measuring development progress for a nation in which your selected corporation does business. Which ones are most important? How do they relate to the business of SOUTHWEST? Is the corporation working with integrity in this environment? Research the value adds the corporation is creating for the community and itself. What are the community reactions? How does this affect the corporation`s success? Cite at least two sources.

Social Value Added: A Metric for Implementing Corporate Sociai Responsibiiity
Despite the fact that "corporate social re- sponsibility," or CSR, is one of the hottest current cor- porate buzzwords— and an increasingly popular course sub- ject in many busi- ness schools—there is little consensus on what the concept actually includes. In part, this is be- cause the current reincarnation of the term is not a simple extension of past experience, but repre- sents a new confiuence of a number of previously independent trends.
In this article, we offer some background on CSR, including some of the more recent policy developments that have driven expansion of the concept. We then describe and illustrate a metric that AT&T has developed for measuring social value added. This metric has helped AT&T under- stand the advantages of implementing CSR activ- ities; we believe it could be of use to many other organizations as well.
Background: A Brief History of CSR
The idea that institutions have responsibili- ties to the broader society within which they function is clearly ancient. Business activities
© 2004 Wiley Periodicals, Inc. Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002Aqem.20036
have long been constrained by moral dictates (reli- gious edicts against usury, for example). Religious and civil authorities have often judged and controlled business
activity based on behavior, economic activity, and the hke (Epstein, 1987).
That this idea of reciprocal privileges and du- ties would extend to corporations as they began to evolve in their modern form is not surprising. The medieval merchant and craft guilds, and the subsequent royal charter trading companies, were entrusted with social expectations that reflected the ethical structure of their times.
Many of these implicit expectations bridged over with the advent of the truly modern firm, a creature of general incorporation laws under which any entity meeting statutorily defined cri- teria was able to incorporate. (The first of these laws was passed in 1811 by New York State.)
Even though the incorporation laws created a structure where responsibility to shareholders
Clair KrizovandBradAllenby
Environmental Quality Management / Winter 2004 / 39
AT&T`sSVAtoolhelpsquantify thevalueofEH&Sactivities
was paramount, this injunction has never pre- vented firms in virtually all countries from en- gaging in philanthropy, outreach, employee sup- port, and other activities that reflect a broader
the United Nations Charter established as a core purpose of the UN the promotion of relationships among states "based on respect for the principles of equal rights and self-determination of peo- ples," an approach confirmed in the subsequent Universal Declaration of Human Rights of 1948.
The subsequent evolution of human rights, and the rise of nongovernmental organizations (NGOs) dedicated to that cause around the world, has fundamentally changed the relationships among nation-states, firms, communities, and in- dividuals (Sassen, 1996).
Sustainable Development
The third element is the growth of the con- cept of "sustainable development," an effort to integrate environmental and economic develop- ment values.
The concept originally was popularized by the World Commission on Environment and Devel- opment (1987). Subsequently, the idea that cor- porations should be agents of "sustainability," in addition to their statutorily defined role as profit centers, has taken hold, and has been enshrined in the idea of the "triple bottom line," which states that firms should attempt to perform well not just economically, but also socially and envi- ronmentally.`
At least from a public relations perspective, the result of the sustainable development trend is certainly apparent: many global firms now pro- duce annual sustainability reports that are either in addition to or incorporate their previous envi- ronmental reports.^
Civil Society`s Reaction to Unethical Corporate Behavior
The fourth factor, of course, is a continuing reaction by civil society against perceived un- ethical behavior by firms. From the 1960s through the 1980s, reaction against corpora- tions tended to center on their involvement in
social role (Allenby, 1997). As the Committee Economic Development (1971) notes:
[B]usiness functions by public consent and its basic purpose is to serve constructively the needs of society—to the satisfaction of
Many global firms now produce annuai sustainability reports tbat are eitber in addition to or incorporate tbeir previous environmental reports.
society. Business has a responsibility for economic effi- ciency—the core responsibility. Out of that responsibil- ity comes a need to be sensitive to so- cial values and pri- orities when per-
forming the economic function.
Modern-Era Policy Developments
The firm`s historic responsibility to behave somewhat ethically has in the past few decades been significantly augmented by four additional policy developments, as discussed below.
Ttie Environmental Movement
The first factor is the increasing power of the environmental movement. This movement has a long history but exhibited a significant increase in activism and importance beginning in the late 1960s, especially in developed countries (Chou- cri, 1993).
The Human Rights Movement
The second factor is the human rights dis- course. This movement also has deep historical roots (in antislavery activities and child labor leg- islation, for example) but accelerated signifi- cantly in scope and scale after WWII. Article I of
40 / Winter 2004 / Environmental Quality iVIanagement
Clair Krizov and Brad Allenby
unpopular wars (e.g., tbrough production of na- palm) and on tragedies such as the Bbopal re- lease of toxic fumes from a cbemical facility, which killed thousands.
More recently, social disapproval has focused on the criminal mismanagement of large firms in the United States and Europe and disparities in pay between top executives and workers.
The Evolution of CSR
Taken together, the effect of this "perfect storm" of discourses, issues, and communities, and the rise of nongovernmental organizations as independent centers of perceived authority, has profoundly changed the governance structure within which firms conduct their business (Math- ews, 1997). Thus, not only is the meaning of CSR in the modern context less clear than it has been for centuries, but the governance structure within which CSR occurs is also increasingly undefined and ambiguous.
This has important implications. It may be relatively easy for parties to verify, and eventually agree on the validity of, financial or scientific data. But almost by definition, "social responsi- bility" is a matter of values as well as performance metrics. The question of "whose values" one sup- ports remains open and contentious.
The Eiements of Corporate Sociai Responsihiiity
LackofClear Definitions
As the above discussion suggests, a major problem regarding CSR is that there is no general agreement about its meaning from an opera- tional or a managerial point of view. Although somewhat dated, Friedman`s (1970) comment is perhaps more true now than it was then: "The discussions of the `social responsibilities of busi- ness` are notable for their analytical looseness and lack of rigor.... The first step toward clarity
in examining the doctrine of the social responsi- bility of business is to ask precisely what it im- plies for whom."
Almost all of the existing definitions of CSR still generally reflect vague concepts—desirable actions, socioeconomic welfare, activities beyond the firm`s direct economic or technical interests, ethical con- sequences, voluntarism, satisfaction of society, so- cial order, behaviors congruent with prevailing so- cial norms, human competence, responsiveness, beneficial rather than adverse affects, social legiti- macy—rather than operational terms. (Although some such standards do exist. They are codified in,
for example, antifraud safety laws.)
and worker health and
This lack of rigor is frustrating both from an academic perspec- tive (because such lan- guage fails to provide a basis for empirical re- search) and for compa- nies (because the gen- erality of the exhortations is difficult to translate into organizational behavior, or into design and operation of products and services).
A Changing Kaleidoscope of Issues
Of course, there have been efforts to put substance around the concepts—not through definitions, but through discussions around the definitions.
For instance, in the 1950s and 1960s, societal values noted in the literature included concerns with pricing policies; shady salesinducements; support of the arts; organizational pressures on employees; involvement in military production; antitrust activities and self-dealing; politics; wel- fare of the community; education; and the "hap- piness" of employees.
In the 1970s, other elements surfaced as major components of CSR: working conditions;
Social Value Added: A Metric for Implementing Corporate Social Responsibility Environmental Quality iVIanagement / Winter 2004 / 41
A major prohienn regarding CSR is that there is no generai agreement about its meaning from an operational or a managerial point of view.
product safety; environmental effects; fraudulent advertising; employment inequities; community- oriented programs; environmental conservation; labor policies; consumer transparency; fair treat- ment; protection from injury; poverty and urban blight; racial discrimination; pollution; urban decay; employment of minority groups and asso- ciated affirmative action policies; greater partici- pation in programs to improve the community; medical care; industrial health and safety; Third World dealings; employee whistle-blowing; dis- tributive justice; employee rights on and to the job; sexual harassment; affirmative action for women; and bribery of foreign officials.
hensive guide to CSR nor the assurance that all aspects of CSR will be equally weighted.
Input from Business-Oriented Research
Business-oriented research organizations, such as the Conference Board, have been very ac- tive in attempting to help companies understand the demands of the environment within which they are now operating. But here again, achieving a comprehensive approach has been difficult.^
Input from Socially Responsible Investment Funds and Groups
A relatively new source of input consists of the socially responsible investment funds and invest- ment indexes, such as the Dow Jones Sustainability Group Index, and special interest groups, such as the Council on Economic Priorities (CEP), which have begun rating corporations on CSR issues.
For instance, the CEP has rated corporations on their impact to the environment; support of minorities; advancement of women; contribu- tions to charities as a percent of income; treat- ment of workers; and family benefits, such as flexible work arrangements and paid leave (Council on Economic Priorities, 2000).
AT&T`S Sooiai Value Added Tooi
Making Sense of CSR
It is apparent from the above discussion that there is very little that firms do, or might do, that has not at one time or another been associated with CSR. This raises a number of risks: that firms will ignore the concept completely as being im- possible to operationalize; that firms and different stakeholders will come into conflict over claims regarding CSR because they may have different operational concepts about what CSR means; or that ideological conflict may negate otherwise de- sirable initiatives (in the latter case, the best can become the enemy of the good if companies re-
There is very iittie tliat firms do, or might do, that has not at one time or another been associated with CSR.
In the 1980s and 1990s, the CSR focus shifted toward still other issues: white- collar crime; business indictments for al- leged criminal acts; overcharging in de- fense projects; envi-
ronmental disasters; employee communications, training, and devel- opment; career-planning; retirement and termi- nation counseling; layoffs; redundancies; plant closings; stress and mental health; absenteeism and turnover; health and safety; employment eq- uity and discrimination; women in manage- ment; performance appraisal; day care; public policy; trade associations; flexible work hours;
unemployment programs; and employment of children, especially in developing countries (Ep- stein, 1987).
Input from NGOs
Civil society has also been an uneven source of prioritization regarding CSR. While NGOs fre- quently and visibly campaign on various aspects of CSR, the ad hoc and single-issue character of such organizations provides neither a compre-
42 / Winter 2004 / Environmantai Quality iVIanagement
Clair Krizov and Brad Allenby
fuse to implement CSR projects because it only draws NGOs to attack them). Some of these risks can be managed; others can only be accepted.
In evaluating its approach to CSR as that con- cept integrates with environmental and safety functions, AT&T`s environment, health, and safety (EH&S) group identified one risk to which it could respond, and which it could reduce: the risk that firms may regard CSR as mere philan- thropy and not as an economically justifiable ex- penditure of corporate resources.
In understanding this approach, it is useful to refer to a comment by Epstein (1987):
Business organizations and those who run them have a crucial role to play in achiev- ing that [good] world. The search for eco- nomic efficiency constitutes the core of the Science of Management, and efforts to achieve justice and peace by means of the sensitive and effective management of val- ues lies at the heart of the Art of Manage- ment. Together, these two endeavors can contribute to a society which is both ra- tional and humane, reasoned and civilized. The achievement of this duality within the American Business Civilization is what the corporate social policy process is all about.
Fashioning a Practical CSR Tool
Thus, the challenge as AT&T EH&S under- stood it was to integrate the science and art of management in a practical CSR tool—that is, without denigrating the social contributions of corporate CSR activities, demonstrate that they made sense from the company`s operational per- spective as well, and do so in an intellectually rig- orous and (if possible) quantitative way.
CSR anti the EH&S Mission
There are, of course, many things that organ- izations do that are not in a broad sense CSR, but
are required activities; compliance and remedia- tion are obvious examples.
At AT&T, however, as in many companies, the EH&S organization`s responsibilities do not stop at compliance. AT&T`s EH&S organization also pursues stakeholder management, which includes EH&S`s contribution to social responsibility.
Stakeholtier Management
"Stakeholders" is a very inclusive category. It includes employees; shareholders; communities around the world; individuals that come into contact with AT&T`s services in one way or an- other; NGOs (ranging from the responsible to the highly targeted and ac-
tivist); and govern- ment regulators and
AT&T`s EH&S organization also pursuesstakeholder management, which includes EH&S`s contrihution tosocial responsihiiity.
policy both and otherwise.
formulators, environmental
Each community may have its own in- terests in a company`s positions and actions, ranging from receiving funds to collaborating on policy initiatives to simply expecting responsible corporate behavior.
Thus, critical responsibilities of stakeholder management include stakeholder communica- tions; strategic planning to ensure that AT&T`s EH&S policies, direction, and performance align with external expectations; research regarding the social and environmental implications of AT&T, the telecom sector, and the service industry gener- ally; and support of the external EH&S community, including not-for-profit EH&S-related initiatives.
The stakeholder management function thus requires investment—investment that is clearly CSR in practice.
Social Value Added Tool
Traditionally, there are those who have con- sidered investments in stakeholder initiatives.
Social Value Added: A Metric for Implementing Corporate Social Responsibility Environmental Quality Management / Winter 2004 / 43
from supporting not-for-profit organizations and activities to the more traditional academic grant support, to be purely philanthropic—correspond- ing perhaps to Epstein`s Art of Management. AT&T, however, combines this Art of Manage- ment with the Science of Management by using an in-house-created Web-based tool, tbe Social Value Added (SVA) tool.
"SVA" was chosen as the designator because it tracked other metric systems—Consumer Value Added (CVA), Personnel Value Added (PVA), and tbe like—tbat were already used at AT&T. Tbe name tbus reduced the sense of change or inno- vation that would be associated with use of the
[(Sales - CGS - SGA) / Sales] X 100
wbere "CGS" is "cost of goods sold" and "SGA" is "selling, general, and administrative" expenses (in otber words, the general cost of running the business).
Eor EH&S-related initiatives, AT&T turns the ratio into the following:
[(Total benefit - Total cost) / Total benefit] X 100
Eacb of tbese components in turn is broken down into definable quantities, as described below.
• Total Benefit AT&T determines total benefit by calculating
(1) tbe potential retained, or gained, revenue as- sociated witb an EH&S-related initiative and (2) tbe estimated media value of AT&T EH&S-sup- ported initiatives.
AT&T converts tbe external exposure pro- vided by an EH&S-related initiative into a poten- tial retained, or gained, revenue figure. Tbe con- version is done by calculating tbe number of people exposed to the AT&T-supported initiative and then multiplying tbat number by botb tbe estimated percent of Americans wbo make tbeir purcbasing decisions based on a company`s EH&S record and by tbe estimated monthly telecom- munications services expenditures of tbe average American.
Tbe estimated media value converts tbe "free" publicity associated witb tbe EH&S-related initia- tive (sucb as mention of AT&T`s support of tbe ini- tiative in tbe organization`s membersbip newslet- ter or Web site) into a dollar figure. Tbe estimated media value is converted by using tbe Bacon Media Guide, a source tbat provides tbe estimated cost of a typical advertisement in a publication based on circulation size, or people exposed, and tbe num- ber of column incbes (or minutes, if tbe exposure is via television or radio). Tbus,
For several reasons, it made sense when considering how to construct an SVA tool to look at financial analogs.
tool. As a general rule,
dating back to AT&T`s adoption of Design for Environment in the early 1990s, we bave found tbat acceptance of cbange is directly proportional to tbe de- gree to whicb tbe
cbange can be made to appear nontbreatening and incremental to existing practices.
Using the SVA Tool
For several reasons, it made sense wben con- sidering bow to construct an SVA tool to look at financial analogs. Eor one, tbeir performance and strengtbs and weaknesses were generally known. Eor another, using such analogs gave a sense of fa- miliarity and gravitas to the new tool, since tbose using it respected tbe results of tbe financial cal- culation process.
Accordingly, tbe SVA tool measures AT&T`s EH&S-related initiatives based on tbe net oper- ating profit margin financial ratio, a ratio used by for-profit enterprises as an overall measure of operating effectiveness. Tbe ratio is calculated as follows:
44 / Winter 2004 / Environmental Quality iVIanagement
Ciair Krizov and Brad Alienby
Total Benefit = [(# of people exposed to tbe initiative) X (% of Americans wbo make purcbasing decisions based on a company`s EH&S record) X (estimated monthly spending by an American on telecommunications services)] + (estimated media value of tbe "free" publicity)
• Total Cost Total cost for an initiative is determined by
adding tbe estimated AT&T labor expenses asso- ciated witb tbe initiative, based on tbe time in- volved, to tbe dollars invested in tbe initiative, such as tbe dollar amount of a donation:
Total Cost = (AT&T labor cost) + (Dollars spent) Exhibit 1. Sampie SVA Caicuiation
Versatility of the SVA Tool
Exhibit 1 sbows an example of an SVA cal- culation using bypotbetical data. At AT&T EH&S, every investment (sucb as a donation) tbat is not de minimis in tbe portfolio bas sucb a calculation run on it.
AT&T`s SVA tool allows social value added to be calculated in wbatever way facilitates an orga- nization`s analysis of its investments. SVA can be calculated:
• for AT&T EH&S`s investment portfolio as a wbole;
Category: Aii DateRange:01/01/03- 12/31/03 OrgCodes:
AT&T`s Sociai Vaiue Added (SVA) Report List
#of Est Est. Est. Est. Est. Vaiueof SVA
Time Column wlAT&T Exposed Value Labor Inch Referenced
Omin 0 0 0 $0 $38
Omin 6.5 0 350 $0 $125
Cost Potential of Media Audience
$5,038 $0 $0
$125 $105 $65
Avoidance Benefit $0 $0
$0 $170
Profit Margin
-$5,038 NA
$45 26.47%
Contributions- 0.75 hrs Monetary ABC Organization• River Cleanup• Donation Pubiicity-Agenda
andPrograms ABCOrganization • 2.5iir3
River Cleanup • Newsietter Pubiicit)
Note: All figures are hypothetical.
Estimated Totai Benefit

for an EH&S-supported organization`s invest- ment portfolio as a wbole;
Coverage Timeto TVRadio Size orPromos People Market Valueof Dollars EstTotal Revenue Valueof Cost Est.TotalNetVaiue Operating
#of Invites
•Estimated Revenue Potential of Audience: (350 peopie exposed) X (3% of Americans make purchasing decisions based on a company`s EH&S Performance) X ($10 estimate of monthly spending by Americans on teiecommunications services each month) = $105
•Estimated Vaiue of Media: (6.5 column inches) X ($10 ad cost in pubiication of similar circuiation) = $65 •Estimated Total Benefit = $105 + $65 = $170
Estimated Totai Cost
•Estimated Labor Cost: (2.5 hours) X ($50 per hour) = $125 •Dollars Spent: ($0 spent) = $0 •Estimated Totai Cost = $125 + $0 = $125
SVA: [[($170 Totai Benefit) - ($125 Totai Cost)] / ($170 Total Benefit)] X 100 = 26.47
Sociai Value Added: A Metric for Implementing Corporate Sociai Responsibiiity Environmentai Quality iVIanagement / Winter 2004 / 45
• • •
by issue (e.g., safety, telework, water, or air policy); by activity category (e.g., contributions, dues, exhibits, research support, or awards); or
by individual project.
have taken the initiative to develop and deploy this tool tends to reassure internal critics (who might otherwise be highly critical of more intu- itive approaches to the donation and grant port- folio) that EH&S is taking a responsible and ra- tional approach to managing that portfolio.
Finally, it must be remembered that this tool reflects the value of a CSR investment to the firm and is a reflection of the firm`s interests. It does not capture the value of the investment to other communities or to society as a whole. While this means that the tool is necessarily limited, it also has the advantage of not requiring that differ- ences in ethical or political values be quantified and calculated, a problem that many broader ap- proaches may have.
Firms, NCOs, regulators, and others will no doubt continue to struggle to define and imple- ment CSR for a long time. The history of CSR is ambiguous, intimately tied as it is to the evolu- tion of capitalism and market economies. It may become more so in periods of rapid economic, so- cial, and cultural change.
This confusion and disorder may be discon- certing, but it is most likely healthy, in that it encourages organizational and institutional in- novation, and the development of new ap- proaches that offer the promise of better inte- gration of economic, social, and environmental values and goals.
The SVA tool discussed here is certainly no panacea, but it is perhaps an aid in understand- ing and implementing CSR in today`s firm.
1. Previous articles in this journal have applied the triple-bot- tom-line approach to issues such as telework and the evolution of the netcentric firm (see, e.g., Allenby & Richards, 1999).
2. It would be unfair to the large number of firms that produce such reports to cite only a few. AT&T`s online report at http://www.att.com/ehs/ is not atypical, however. Some are more elaborate, and a few companies have outside parties "validate" their reports, an approach originating primarily in Europe (BS 7750 and the EMAS methodology being exam- ples). Given the nascent state of the art, the lack of standard-
The SVA tool also allows the firm to establish the activity category and EH&S-related issue at the level of detail desired. For instance, an activ- ity category may be "monetary contribution" or "service contribution," and the issue can be spe- cific (as in air, water, industrial ecology, or recy- cling) or just overall "environment."
There are several important points worth not- ing about this relatively simple methodology. An obvious one is that SVA is calculated for a point- in-time. In other words, the SVA tells AT&T the effectiveness of its investment in the EH&S-re- lated initiative as of a certain date.
Additionally, it must always be remembered that,especiallyinasbroadanarenaasCSR,atool like the SVA calculator is only one input to the deliberative process. Stakeholder contributions and academic grants are provided for many rea- sons, only some of which are captured and quan- tified by any such tool.
While the SVA tool does provide AT&T with a means of prioritization by allowing comparison of an EH&S initiative`s total benefit and total cost prior to making an investment, it is never the only factor upon which such decisions are based (although it may make the difference in close decisions).
This is an important qualification to keep in mind, especially when SVA numbers are used within corporate communities, such as the CFO organization, that are accustomed to operating on a fairly quantitative basis. AT&T EH&S has found an interesting "halo effect" as we have used this tool, however. The very fact that we
46 /`Winter 2004 / Environmental Quality Management
Clair Krizov and Brad Allenby
ized metrics and methodologies (and thus incomparability among different reports) and the expense involved, it is not clear to many firms what external validation accomplishes.
3. An idea of the difficulty of understanding and implement- ing CSR can be obtained simply by considering just a few of the publications the Conference Board has prepared over the last few years for its members. A partial list would include "The expanding parameters of global corporate citizenship" (1246- 99-CH); "Company programs for resisting corrupt practices: A global study" (1279-00-RR); "Perspectives on a global econ- omy: Are poor nations closing the gap in living standards?" (1263-00-RR); "Innovative public-private partnerships: Public safety initiatives" (1253-99-RR); "Doing good and doing well: Making the business case for corporate citizenship" (1282-00- RR); "Global corporate ethics practices: A developing consen- sus" (1243-99-RR); "Consumer expectations on the social ac- countability of business" (1255-99-RR); "The link between corporate citizenship and financial performance" (1234-99- RR); and "Building the corporate community economic devel- opment team" (1205-99-RR). And this list doesn`t even include the flood of studies that have responded to the recent Enron, MCI-Worldcom, Ahold, and Parmalat frauds. Moreover, other business organizations—notably the World Business Council for Sustainable Development—have been equally prolific.
Allenby, B. R. (1997). Environmental constraints and the evo-
lution of the private firm. In D. J. Richards (Ed.), The indus- trial green game: Implications for environmental design and management (pp. 101-116). Washington, DC: National Acad- emy Press.
Allenby, B., & Richards D. J. (1999, Summer). Applying the triple bottom line: Telework and the environment. Environ- mental Quality Management, 8(4), 3-10.
Choucri, N. (1993). Global accord: Environmental challenges and international responses. Cambridge, MA: The MIT Press.
Committee for Economic Development. (1971). Social re- sponsibilities of business corporations. New York: Author.
Council on Economic Priorities. (2000). Shopping for a better world. New York: CEP Books.
Epstein, E. M. (1987). The corporate social policy process: Be- yond business ethicscorporate social responsibility and cor- porate social responsiveness. California Management Review, 29(3), 99-114.
Friedman, M. (1970, September 13). The social responsibility of business is to increase its profits. New York Times, pp. 122-126.
Mathews, J. T. (1997). Power shift. Foreign Affairs, 76(1), 50-66.
Sassen, S. (1996). Losing control: Sovereignty in an age of globalization. New York: Columbia University Press.
World Commission on Environment and Development (The Brundtland Commission). (1987). Our common future. Ox- ford, UK: Oxford University Press.
Clair Krizov is Executive Director of Environmental and Social Responsibility at AT&T and is a doctoral student at the Georgia Institute of Technology Public Policy School.
Brad Allenby is former Environment, Health, and Safety Vice President at AT&T, and a professor at Arizona State Uni- versity in the Ira A. Fulton School of Engineering, Department of Civil and Environmental Engineering.
The opinions expressed In this article are the authors` and not necessarily those of any organization with which they are associated.
Social Value Added: A Metric for Implementing Corporate Social Responsibility Environmental Quality Management / Winter 2004 / 47

Do Consumers Care about Ethics? Willingness to Pay for Fair-Trade Coffee
Consumers` buying behavior is not consistent with their positive attitude toward ethical products. In a survey of 808 Belgian respond- ents, the actual willingness to pay for fair-trade coffee was measured. It was found that the average price premium that the consumers were willing to pay for a fair-trade label was 10%. Ten percent of the sample was prepared to pay the current price premium of 27% in Belgium. Fair-trade lovers (11%) were more idealistic, aged between 31 and 44 years and less ``conventional.`` Fair-trade likers (40%) were more idealistic but sociodemographically not significantly different from the average consumer.
The purpose of this study was to investigate to what extent consumers were willing to pay for the fair-trade attribute when buying coffee, and how consumers differed in terms of their willingness to pay. First, we will describe fair trade within the context of ethical consumer behavior. Sub- sequently, the research questions used in our study will be examined.
Consumers can express their concern about the ethical behavior of com- panies by means of ethical buying and consumer behavior. In general, the ethical consumer feels responsible toward society and expresses these feel- ings by means of his or her purchasing behavior. Doane (2001) defined ethical consumption as the purchase of a product that concerns a certain ethical issue (human rights, labor conditions, animal well-being, environ- ment, etc.) and is chosen freely by an individual consumer. There are several dimensions of ethical consumer behavior. Some forms of ethical consumption benefit the natural environment (e.g., environmentally friendly products, legally logged wood, animal well-being), while others benefit peo- ple (e.g., products free from child labor, fair-trade products). Cutting across this distinction, ethical consumption may benefit people or the environment close to home (e.g., some types of green products or organic food), or
Patrick De Pelsmacker ([email address removed by system]) is a marketing professor at the University of Antwerp. Liesbeth Driesen was a researcher at the Ghent University. Glenn Rayp ([email address removed by system]) is a professor in international economics at the Ghent University.
Financial support of the University Development Cooperation of the Flemish Interuniversity Council is gratefully acknowledged. The authors wish to thank the participants of the 33rd European Marketing Academy (EMAC) conference for their useful comments and suggestions. All remaining errors are ours.
The Journal of Consumer Affairs, Vol. 39, No. 2, 2005 ISSN 0022-0078 Copyright 2005 by the American Council on Consumer Interests
conversely in a faraway part of the world (e.g., fair-trade products or legally logged wood). Consumers can translate their ethical concerns by means of buying products for their positive qualities (e.g., green products) or by boycotting products for their negative qualities (e.g., not buying products made by children). Boycott campaigns against Nike because of alleged labor abuses and Nestle ́ because of the infant formula issue are among the most- cited examples of the latter (Auger, Devinney, and Louviere 2000; Carrigan and Attalla 2001; Creyer 1997; Shaw and Clarke 1999; Strong 1996). Consumers can decide to consider one or more ethical attributes when buying products.
Is ethical consumption growing? Evidence of a growing market for eth- ical products is often inferred from the results of opinion polls. According to a study by Hines and Ames (2000), 51% of the population had the feeling of being able to make a difference to a company`s behavior and 68% claimed to have bought a product or a service because of a company`s responsible rep- utation. On average, 46% of European consumers also claimed to be willing to pay substantially more for ethical products (MORI 2000). However, there are differences as to the reported willingness to pay a price premium for different types of ethical products. For instance, American consumers agreed with a price increase of 6.6% for green products (The Roper Orga- nization, Inc. 1990), while French consumers wanted to pay 10%-25% more for apparel not made by children (CRC-Consommation 1998). With these studies in mind, one could expect a high demand for ethical products. How- ever, the opposite seems to be the case. Most of the ethical labeling initia- tives with respect to, for instance, organic food, products free from child labor, legally logged wood, and fair-trade products, often have market shares of less than 1% (MacGillivray 2000).
One of the main reasons for this discrepancy is the attitude-behavior gap. On the one hand, consumer perceptions and attitudes clearly influence behavior, as conceptualized and tested in several models of ethical con- sumption behavior (Ferrell and Gresham 1985; Hunt and Vitell 1993; Shaw and Clarke 1999; Vitell, Singhapakdi, and Thomas 2001). On the other hand, it is well documented that attitudes alone are generally poor predic- tors of buyer behavior (Cobb-Walgren and Ruble 1995), especially in the social marketing area (Shaw and Clarke 1999). While some consumers refuse to buy products with an unethical background (Crane 2001), the majority of people evaluate product attributes jointly in making purchase decisions. Price, quality, convenience, and brand familiarity are often still the most important factors affecting the buying decision (Boulstridge and Carrigan 2000; Carrigan and Attalla 2001; CRC-Consommation 1998; Norberg 2000; Roberts 1996; Tallontire, Rentsendorj, and Blowfield
2001). Dickson (2001) identified four segments of consumers based on the importance they attach to various product attributes of clothes. She found that only one segment, containing 16% of their sample, attached a lot of importance to the no-sweat label. The other three groups were qualified as nonusers. Moreover, often the attitudes and intentions toward ethical prod- ucts are measured without explicitly taking the higher price of these prod- ucts into account (Browne et al. 2000). Other explanations for the discrepancy between attitudes and ethical buying behavior can be the lack of availability of ethical products, disbelief of ethical claims, and lack of information (Carrigan and Attalla 2001; Mielants, De Pelsmacker, and Janssens 2003; Roberts 1996).
What could explain the attitude-behavior gap? In attitude research, people often give socially desirable answers. Ulrich and Sarasin (1995) somewhat cynically claimed not to do any research and not to ask the public any ques- tion on this subject because the answers are never reliable and often useless, if not misleading. Especially in situations in which respondents want to make a good impression on the researcher or want to conform to social norms, attitudes measured tend to be more positive than actual behavior (King and Bruner 2000). Moreover, attitudes are traditionally measured by means of explicit attitude measures, mostly self-reported paper-and-pencil tasks. Respondents are not always able and willing to report their attitudes and con- victions accurately, especially in the case of socially sensitive issues such as ethical consumption behavior (Greenwald and Banaji 1995; Maison 2002).
If one wants to study the importance of the ethical attribute in buying decisions, a number of factors have to be taken into consideration. First of all, measuring explicit attitudes is not the most valid method to predict eth- ical buying behavior. Instead, measures that are closely related to the actual purchase behavior are called for. Second, a lot of buying behavior is based on multiattribute decision making in which the ethical attribute may or may not be important. In estimating the (intended) buying behavior, consumers have to be confronted with realistic multiattribute buying situations. Third, one reason for the attitude-behavior gap is the price factor. The measure- ment of (intended) buying behavior has to take the willingness to pay into account. Finally, not all consumers are equally likely to buy ethical prod- ucts. Moreover, depending upon the characteristics and the preferences of individual consumers, different ethical dimensions may result in differen- ces in willingness (not) to buy products incorporating ethical values. Bird and Hughes (1997) claimed that the willingness to purchase goods based on ethical credentials is limited to a minority of shoppers.
Several studies have tried to identify the socially responsible consumer in terms of demographic characteristics. Anderson and Cunningham (1972)
found that younger consumers were more socially conscious, while the effect of their education level was not clear, and income was of no rele- vance. Dickson (2001) found that age, income, and employment status was not discriminating between socially conscious consumers who attach a lot of importance to no-sweat labels on apparel and those consumers who do not. Although in the same study it was stated that no-sweat buyers were more often female, most studies concluded that ethical buying behavior was not influenced by gender (e.g., MORI 2000; Sikula and Costa 1994; Tsalikis and Ortiz-Buonafina 1990). In his extensive literature review, Roberts (1995) found that people who did not buy from businesses that discriminated against minority groups or women were mainly women with a median age of 47 and slightly lower incomes but concluded that demographics were not very significant in identifying the socially respon- sible consumer. Other studies concluded that the ethical consumer was a person with a relatively high income, education, and social status (Carrigan and Attalla 2001; Maignan and Ferrell 2001; Roberts 1996).
However, demographics alone are not sufficient to define and identify the ethical consumer. People`s values appear to have a significant impact on their ethical consumption behavior. Values are abstract principles that reflect an individual`s self-concept (Dickson 2000). They are enduring beliefs that a given behavior or outcome is desirable or good. As such, val- ues serve as standards that guide our behavior across situations and over time. Values are often part of our personality system and determine specific attitudes. Anderson and Cunningham (1972) found that dogmatism, conser- vatism, status consciousness, cosmopolitanism, personal competence, and alienation were related to ethical consumer behavior. In addition, Roberts (1996) and Dickson (2001) stressed the importance of psychographic var- iables such as relevant attitudes, values, and personality characteristics. The Roper Organization, Inc. (1990) and Cowe and Williams (2000) segmented consumers in terms of their degree of ethical concern. Similarly, Fritzsche (1995) concluded that the values of people behaving ethically were signi- ficantly different from the values of people behaving unethically, and in Roberts` (1996) study, perceived consumer effectiveness, liberalism, and alienation appeared to have a significant impact on ethical consumption behavior. In addition, Dickson (2000) studied the relevance of personal values in the context of socially responsible buying behavior.
One of the best-known instruments to comprehensively measure a per- son`s value system is the Rokeach Value Survey (Rokeach 1973). The Rokeach Value Survey contains a set of 18 terminal values that relate to ``end states of existence`` and another set of 18 instrumental values relat- ing to ``modes of behavior.`` Some studies have tried to identify ethical
values within the Rokeach scale and their effect on ethical behavior (Fritzsche 1995; Nonis and Swift 2001; Sikula and Costa 1994). Dickson (2000) used 12 Rokeach Value Survey terminal values in her study of apparel-buying behavior. Two basic dimensions could be defined: macro- societal (socially centered) and microsocietal (self-centered) values. To an extent, the former predicted attitudes toward business intentions. However, no systematic attempt has been made to relate consumers` value systems to ethical buying behavior.
In this study, the importance of a fair-trade label in the coffee-buying decision was investigated. In a broad sense, ``fair trade`` can be described as an alternative approach to trading partnership that aims for sustainable development of excluded and/or disadvantaged producers. It seeks to do so by providing better trading conditions, raising awareness, and campaigning (Krier 2001). In the broadest sense, the concept incorporates environmental as well as social issues. Littrell and Dickson (1999) developed a continuum of business practices, from minimum to maximum fair-trade practices. Apart from paying fair wages in a local context and providing a safe and clean workplace (mainstream business), they defined maximum fair-trade prac- tices as also encompassing the development of sustainable businesses, empowerment of artisans, fostering well-being, establishing political and social justice, and developing equitable trade.
In a narrow sense, fair trade is defined based on its best-known compo- nent: fair prices for the products of farmers in developing countries. In essence, fair trade means buying products from farmers in developing countries on terms that are relatively more favorable than commercial terms and marketing them in developed countries at an ethical premium (Bird and Hughes 1997). This higher price to the consumer is warranted by the higher price that farmers receive for their products and by the fair-trade control mechanisms in the trade channel (for an extensive description of fair-trade mechanisms, see, for instance, Littrell and Dickson [1999] and Krier [2001]). Companies generally demonstrate their fair-trade behavior to con- sumers by means of marketing fair-trade brands or by means of cooperating with fair-trade organizations that accredit their fair-trade products and allow them to market these products using a fair-trade label. Fair-trade organiza- tions, on the other hand, go through considerable efforts to convince com- panies to comply with fair-trade rules and sell fair-trade products. For instance, in April 2000, after a year-long campaign by the human rights organization Global Exchange, Starbucks decided to carry fair-trade coffee in its 2,300 stores (Straus 2000).
Fair-trade buying is a specific type of ethical consumer behavior. Based on the dimensions defined earlier, for a U.S. or a European consumer fair-trade
consumption means buying items for their positive quality of supporting people in faraway developing countries. The question is to what extent con- clusions from empirical research on other types of ethical consumption behavior also hold for fair-trade buying. Fair trade is an issue of particular concern for the ethical consumer. Based on a qualitative study amongst ethical consumers in the United Kingdom, Shaw and Clarke (1999) con- cluded that fair trade was the most important issue of ethical concern in consumer behavior (as compared with, for instance, environmental issues and vegetarianism). Fair-trade brands, or fair-trade labeled products (espe- cially coffee), are also reasonably available. However, the relative impor- tance of a fair-trade label in the purchase decision of consumers has not yet been studied.
In this study, conjoint measurement (see hereafter) was used to confront consumers with realistic multiattribute choice decisions. Instead of study- ing their attitudes or preferences, their willingness to pay was measured. As such, the importance of the price factor was explicitly taken into account. Furthermore, willingness to pay is assessed as a measurement of buying intention that can be considered a realistic proxy for actual behavior. A fair-trade coffee label needs to be efficiently monitored and subjected to third-party certification in order to become credible. This implies additional costs and a price premium for the consumer. Indeed, fair-trade coffee is more expensive than non-fair-trade coffee. Based on the willingness to pay for this label, the size of the potential fair-trade coffee-buying popu- lation was estimated.
As is the case with ethical consumption in general, not everyone is equally likely to buy fair-trade products. For instance, Littrell and Dickson (1999) found that buyers of cultural (ethnic) fair-trade products were demo- graphically quite homogeneous and consisted of highly educated, well-off Caucasian women in their forties. A large proportion of them were teachers, health professionals, and social workers. Idea Consult (2002) concluded that the Belgian fair-trade consumer is relatively highly educated and has a rel- atively high income and social status. In addition, personal values appear to play a role in fair-trade buying behavior. For instance, Littrell and Dickson (1999) found that buyers of cultural fair-trade products attached more importance to altruism, equality, peace, and a beautiful and environmentally secure world, and less importance to inner-directed values such as self- respect and inner harmony. In this study, consumers are segmented accord- ing to their willingness to pay for different coffee attributes (including the fair-trade attribute). The consumer segments are then defined based on sociodemographic characteristics and their terminal and instrumental values.
In summary, this study investigates the following research questions (see also Figure 1):
1. What is the relative importance that consumers attach to a fair-trade label in their coffee-buying decision, compared with other attributes? Can segments of consumers be defined based on their relative will- ingness to pay for different coffee attributes? What is their willing- ness to pay a price premium for the fair-trade attribute? The narrow definition of fair trade (a fair price for products of producers from developing countries) is used.
2. Towhatextentaretheconsumersegmentsdifferentintermsofdemo- graphic characteristics and personal values?
RESEARCH METHOD Composition of the Sample
This study is based on a sample of Belgian consumers. At the crossroads of the Latin culture, with Roman Catholic roots, and the German and Nordic culture, with Protestant roots, in a strongly internationalized econ- omy where companies share a level-playing field, because of the absence of strong national brands, the Belgian consumer market has in many aspects a profile similar to that of the Europeon Union (EU). Concerning the ethical
Research Model
Instrumental & Terminal Personal Values
Coffee Product Attributes (Fair-Trade Attribute)
Willingness- to-pay for Coffee Product Attributes (Fair-Trade Attribute)
Sociodemographic Characteristics
aspects of consumption, the European survey by MORI (2000) points to results for Belgium that are very similar to the European average with respect to attitudes toward social responsibilities of firms, the importance a firm`s commitment to social responsibility in buying intentions, as well as in the supplementary willingness to pay for environmentally or socially responsible products. This finding was corroborated from our exploratory survey of the market share of fair-trade coffee. The 1% market share in Belgium is similar to the market share of fair-trade coffee in France (0.9%) and Germany (1%) and is midrange between the market share in Switzerland (5%), the Netherlands (3%), and Denmark (2.5%) on the one hand, and Norway (0.8%) and Finland (0.4%) on the other.
In this study, we surveyed the total administrative and academic staff of Ghent University, which is one of the largest universities in Belgium (26,000 students) and one of the largest employers in the city of Ghent and the surrounding region. Concentrating the survey on a central spot where people gather from a large area allowed us to obtain a diversified sample in a cost-efficient way and to better monitor the data collection process. More importantly, it allowed us to quantitatively and qualitatively improve the response motivation by appealing to collegiality and by conduct- ing the survey (for its major part) using the university`s intranet in a more respondent-friendly way (e.g., without bothering people when they are at home or busy, etc.). Several positive implications of the use of the Internet are reported (Orme and King 1998). The use of the Internet significantly reduces the costs of the survey, respondents can be reached more quickly, and the response rate is higher. Finally, to further encourage participation to the survey, 25 book vouchers were divided among the respondents.
An e-mail was sent to 4,664 staff members with an e-mail address, and 891 questionnaires were completed, of which 779 were useful (i.e., com- pleted the majority of the questions). The remaining 550 staff members without an Internet account were approached by mail. A total of 62 staff members responded, of which 55 questionnaires were useful. Hence, the response rate of our survey was 16%, i.e., double the average survey response rate in Belgium (8%). Twenty-six respondents gave inconsistent answers for the conjoint analysis (in the sense that they showed no prefer- ence for any of the eight proposed product profiles) and were eliminated from the sample. The final sample was composed of 808 respondents. Table 1 shows the composition of the sample. As could be expected, due to the specific university context, younger and better-educated re- spondents were overrepresented compared with the total Belgian or EU pop- ulation. In the analysis, we verified to what extent this affected our main results.
Description of the Sample
Gender Male
Female Age
24 or younger 24-30 31-44 Older than 45
Education High school Higher education
Sample Percentage (N 1⁄4 808)
46 54
8 50 27 15
16 84
The Outline of the Survey
As mentioned above, in order to minimize the social desirability bias when questioning issues of ethical consumption (fair trade in this case), we used a conjoint measurement of the price consumers were willing to pay when facing a coffee-buying situation in a supermarket (where most coffee types are available and which is the usual shopping place of the large majority of Belgian consumers). In a conjoint analysis, consumers are asked to indicate their preference (in this case their willingness to pay) for products with varying characteristics. By simulating real marketplace situations, conjoint analysis realistically models day-to-day consumer deci- sions and has a reasonable ability to predict consumer behavior. Consumers show their preferences by making trade-offs between different attributes of a product (Carroll and Green 1995; Green, Krieger, and Wind 2001; Green and Srinivasan 1978). These trade-offs can be decomposed into part-worth utilities and importance weights for each product attribute. In this way, the importance of different attributes or criteria in the consumer`s evaluation of the product can be studied (Green, Rao, and Desarbo 1978).
Based on an exploratory group discussion with 12 coffee consumers of varying age, gender, and education, we determined the relevant coffee attributes and their appropriate levels as follows:
d Brand: manufacturer brand and private label. Manufacturer brand was presented as ``Douwe Egberts`` (Sara Lee), which is the market leader in Belgium, with a market share of about 50%. Private, or supermarket, label was presented as an enumeration of supermarket brands, which account in Belgium for another 25%-30% market share. The remaining market share represents smaller and more specialized coffee brands.
d Blending: 100% Arabica beans and a blend of Arabica and Robusta beans. A coffee is considered of high quality when the blending is 100% pure Arabica beans.
d Flavor: dessert, decaffeinated, and mocha. In Belgium, coffee manu- facturers mainly focus on three flavors.
d Package: ``warm`` and ``cold.`` Consumers can be attracted to a type of coffee because of the exotic or warm appearance of the package. Therefore, a cold and a warm level of packaging were developed from the perception of the aforementioned exploratory group of consumers. A cold package consisted of a picture in blue and white. A warm pack- age was brown and red showing a cup of freshly made coffee.
d The presence or absence of a fair-trade label.
Based on these attributes and their levels, 48 descriptions of coffee types were possible (2

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