Business Ethics 7 Discussion

As teams become increasingly important, particularly in organizations requiring complex problem solving, knowing how to manage teams has taken on a significant role for organizational leaders. Ethical leaders can increase the effectiveness of teams by supporting the team’s ability to make decisions, initiating the structure of the team, and assigning tasks if needed. Team members should be trained in effective team building skills to help them arrive at more ethical decisions while avoiding common pitfalls such as groupthink.

Leadership styles influence many aspects of organizational behavior, including employees’ acceptance of and adherence to organizational values. The most effective ethical leaders possess the ability to manage themselves and their relationships with others effectively, a skill known as emotional intelligence. Resonant leaders are emotionally intelligent leaders who demonstrate mindfulness of themselves and their own emotions, a belief that goals can be met, and a caring attitude toward others within the organization. Transactional leaders attempt to create employee satisfaction through negotiating, or “bartering,” for desired behaviors or levels of performance. Transformational leaders strive to raise employees’ level of commitment and to foster trust and motivation. Another leadership style gaining attention is authentic leadership. Authentic leaders are passionate about the company, live out corporate values daily in their behavior in the workplace, and form long-term relationships with employees.

The RADAR model stands for Recognize, Avoid, Discover, Answer, and Recover. An ethical leader can use this model to identify ethical risk areas, respond to ethical issues, and, if necessary, help the organization recover from ethical mishaps. First, an ethical leader must be able to identify or recognize issues having an ethical component. Next, the leader should seek to avoid having the ethical risk areas turn into ethical disasters by putting systems and controls in place to limit the opportunity for misconduct. Discovery involves proactively uncovering ethical risk areas that could lead to misconduct. Ethical audits are a good discovery tool. When an ethical issue or a misconduct disaster occurs, answering involves responding to the discovery of an ethical dilemma through communication both internally and externally. Finally, recovery involves fixing any weaknesses in the ethics program and developing improved ways of detecting misconduct.

Chapter Review

11-11cResolving Ethical Business Challenges

David Hannigan had come far since he started working at a subsidiary of Emper Corp., a manufacturer of automobile parts. He began as a line manager after graduating from UCLA four years ago. His skills at maintaining efficiency, his leadership, and his repartee with the factory workers soon gained the attention of management. Even the lowest factory workers seemed to respect David for his caring attitude and his ability to empathize with employees. While he made it clear he expected hard work, David had the ability to make every member of the factory floor feel like their contributions mattered. He shot up through the ranks and was recently promoted to Director of Personnel of this subsidiary when the previous director retired. In the entire history of the firm, nobody had moved through the ranks so quickly. David even received a letter of congratulations from the CEO of Emper Corp. after his promotion was announced. David was confident that within a few more years, he would be able to secure a high-level job at the corporate headquarters in Chicago.

A few months into his new position, David had lunch with a few key personnel from the company. One of them included Vice President Stanley Martin. Stan began the lunch meeting by praising all of them for their success. Later into his talk, he said, “You all know Emper Corp. wants to increase revenues and give big bonuses to as many employees as possible, but we need to become more efficient. That said, corporate decided the amount of automation in some of our factories, namely this one, needs to be increased.”

Jane Newton from the accounting department replied, “But the cost and accounting analyses we sent to headquarters showed it wouldn’t be profitable to make changes like that in this particular plant. Why did they pick this one?”

“Apparently,” replied Stan, “Top management wants to test robots and all the high-tech gadgets at one factory to see if they increase product quality and pay for themselves. They think that in the long run, stockholders will benefit from automation. Anyway, the decision has been made, and it’s our job to make it work. We’re going to have to sell the work force and the community on the decision.”

David knew what this meant. He replied, “That won’t be easy. Hundreds of people are going to lose their jobs, and we are the largest source of employment for this town.”

Stan’s reply was pleasant, yet forceful. “Some of the factory people will be able to stay on if they get additional training. We can convince the workers and the people in town that the decision was necessary, if we can show them accounting and cost information to justify the decision. If they see good, sound reasoning for the action, they’ll be less likely to resist and cause trouble. We all need to maintain productivity and efficiency until the new equipment is here. I want the accountants to work on a cost summary we can release to the employees and the town newspaper that shows why automation is a good idea.”

Jane spoke up once more. “But Stan, I already told you. The net present value and other analyses I did earlier show this plant would benefit from staying the way it is.”

Stan countered, “Jane, when you were working on the analyses, you said yourself that the benefits of automation are hard to identify and assign numbers to. You had to make several assumptions in order to do those analyses. If you change some of your assumptions, you can make the numbers look better. Try a longer useful life for the new equipment, or change some of the projected cost information. As soon as you have the new numbers, bring them to me to look at.”

He stood up and addressed each member at the table and said, “Remember, if you can pull this off, your yearly bonuses will triple your annual salaries.” Stan walked out of the room.

David felt uncomfortable about the situation. He could not understand why one of the company’s top leaders would advocate for such a massive change when the numbers clearly stated that automating the factory would cause more harm than good. He remembered hearing a rumor that Stan was under serious consideration as a candidate for a prestigious position at corporate headquarters. He wondered if Stan was trying to gain favor with those at corporate. Then again, this was mere speculation on his part. What David really worried about was what he was going to tell the employees.

Case 11: Zappos: Taking Steps towards Maximizing Stakeholder Satisfaction

11-1Introduction

Can a company focused on happiness be successful? Zappos, an online retailer, is proving it can. Tony Hsieh, CEO of Zappos says, “It’s a brand about happiness, whether to customers or employees or even vendors.” Its zany corporate culture and focus on customer satisfaction has made Zappos both successful and a model for other companies. Zappos has built a culture of integrity in all of its activities. The company provides an incredible example of managing ethics and social responsibility by addressing challenges and responding to stakeholder issues.

This case examines how the company’s focus on stakeholder happiness contributed to its success. First, we examine the history of Zappos, its core values, and unique business model. Next, we analyze its corporate culture and how it influences its relationships with employees, customers, the environment, and communities. We then look at some of the challenges the company faced and how it plans to move into the future.

11-2History

In 2000 entrepreneur Tony Hsieh became the company’s CEO. Hsieh, 26 at the time, was an early investor in Zappos, having made $265 million selling his startup company to Microsoft in 1998. Hsieh was not initially sold on the idea of an Internet shoe store, but he could not help but become involved. After becoming CEO, Hsieh made an unconventional decision to keep Zappos going, even selling his San Francisco loft to pay for a new warehouse and once setting his salary at just $24.

In 2009 Amazon bought the company for $1.2 billion. Although Hsieh rejected an offer from Amazon in 2005, he believed this buyout would be better for the company than management from the current board of directors or an outside investor. Amazon agreed to let Zappos operate independently and keep Hsieh as CEO (at his current $36,000 annual salary). Hsieh made $214 million from the acquisition, and Amazon set aside $40 million for distribution to Zappos employees. After the acquisition, the company restructured into 10 separate companies organized under the Zappos Family. Zappos was able to keep its unique culture and core values.

11-3Core Values

Zappos has 10 core values that guide every activity at the company and form the heart of the company’s business model and culture.

· Deliver WOW through service.

· Embrace and drive change.

· Create fun and a little weirdness.

· Be adventurous, creative, and open-minded.

· Pursue growth and learning.

· Build open and honest relationships with communication.

· Build a positive team and family spirit.

· Do more with less.

· Be passionate and determined.

· Be humble.

These core values differ from those of other companies in several ways. In addition to being untraditional, the core values create a framework for the company’s actions. This is exemplified in the company’s commitment to its customers’ and employees’ well-being and satisfaction.

11-4Zappos’s Customer-Focused Business Model

The Zappos business model is built around developing long-term customer relationships. Zappos does not compete on price because it believes customers want to buy from the business with the best service and selection. The company strives to create a unique and addicting shopping experience, offering a wide selection of shoes, apparel, accessories, and home products, free shipping to the customer, free shipping and full refunds on returns, and great customer service. Everything at Zappos comes down to customer service, exemplified by its tagline “Powered by Service.”

11-4aShopping and Shipping

Zappos strives to make the shopping experience enjoyable. The website is streamlined for an easy shopping experience. Products are grouped in specialized segments, with some (like outdoor products) on their own mini-sites. Customers view each product from multiple angles thanks to photographs taken at the company’s studio, and Zappos employees make short videos highlighting the products’ features. Zappos analyzes how customers navigate the site to improve features, adapt search results, and plan inventory.

The spirit of simplicity, innovation, and great service extends to Zappos’s inventory and distribution systems as well. Zappos has one of the few live inventory systems on the Web. If the Zappos website displays an item, it is in stock. Once the company sells out of an item, the listing is removed from the website. This reduces customer frustration. Its inventory and shipping systems are linked directly to the website via a central database, and all its information systems are developed in-house and customized to the company’s needs. Its warehouses operate around the clock, which allows it to get a product to the customer faster. Fast shipping creates an instant gratification similar to shopping in a physical store.

Most companies have a negative view toward returns, but Zappos has the opposite mentality. It sees returns as the ability to maintain customer relationships and to increase its profits. Zappos offers a 100 percent satisfaction guaranteed return policy. If customers are not satisfied with a purchase, they can return it within 365 days for a full refund. The customer prints a prepaid shipping label that allows all domestic customers to return the product for free. This return policy encourages customers to order several styles or different sizes and return the items that do not work out.

While this strategy seems expensive, it actually works to Zappos’s advantage. The average industry merchandise return rate is 35 percent, but the company’s most profitable customers tend to return 50 percent of what they purchase. The customers who have the higher return percentages are the most profitable because they experienced Zappos’s customer service and return policy, which creates loyalty to the company. These customers are likely to make purchases more often and to spend more on each purchase. This is what helps make Zappos so successful.

11-4bCustomer Service

What makes the Zappos business model unique is the company’s focus on customer service. The company established a method of serving customers and handling their issues distinctive from the rest of the industry. Zappos believes great customer service is an opportunity to make the customer happy.

Customers are encouraged to call Zappos with any questions. The number is displayed on every page of the website. According to Hsieh, Zappos encourages people to call the company because more interaction with customers increases their personal connections with the organization. Customer service representatives actively use social media sites such as Facebook and Twitter to respond to customer issues. Zappos also offers an app for customers to download. To encourage them to use the app, Zappos offers users 1-day free shipping simply for downloading the app to their devices.

Another key aspect of its customer service model is that nothing is scripted. Zappos employees have free rein in their decision making and are expected to spend as much time as they need to “wow” customers. They help customers shop, even on their competitors’ websites, encourage them to buy multiple sizes or colors to try (since return shipping is free), and do anything it takes to make the shopping experience memorable.

Zappos believes great customer experiences encourage customers to use the store again. In addition, its long-term strategy is based on the idea that great customer service will help it expand into other categories. While around 80 percent of company orders come from shoes, the markets for housewares and apparel are much larger. The company says it will expand into any area it is passionate about and meets customers’ needs.

The company considers word-of-mouth marketing to be the best way to reach new customers. With over 75 percent of purchases made by repeat customers, it is evident that the Zappos mission to “provide the best customer service possible” works well for the company. Zappos has also engaged in forms of buzz marketing to spread the word. At one of the annual “Life is Beautiful” festivals in Las Vegas, Nevada, Zappos developed a Porta Party. This Zappos-branded mobile restroom included 40-inch waterproof television monitors, a “selfie station,” and prizes such as gum, whistles, and glow sticks given each time the user flushed. This fun and unusual public relations initiative was a hit among consumers and fit in well with the firm’s zany culture.

11-5Transparency

Transparency is a critical part of the Zappos model. Transparency is an ethical principle that involves maintaining open and truthful communication. Employees receive detailed information about the company’s performance and are encouraged to share information about the company. Zappos believes employees should develop open and honest relationships with all stakeholders in the hope this will assist in maintaining the company’s reputation. Hsieh uses Facebook and Twitter to share information with employees and customers (he has 2.84 million followers on Twitter). When Zappos laid off 124 employees in 2008, Hsieh announced the decision via Twitter and later blogged about it. Although some companies hesitate to open themselves to public criticism, Zappos feels it has nothing to hide. In fact, most of the public posts on its social media sites are praise from customers.

11-6Zappos Insights

The Zappos business model is so successful the company offers tours and workshops. Its three-day culture camp costs $6,000 and teaches participants about the Zappos culture and how to develop their own successful corporate cultures. The company also created Zappos Insights, an online service that allows subscribers to learn more about Zappos’s business practices through blogs and videos. These programs have high profit potential for the company because they are built on what Zappos already does best.

11-7Corporate Culture

11-8Work Environment

Zappos is famous for its relaxed and wacky atmosphere. Employee antics include nerf ball wars, office parades, ugly sweater days, and donut-eating contests. The headquarters feature an employee nap room, a wellness center, and an open mic in the cafeteria. Other quirky activities include forcing employees to wear a “reply-all” hat when they accidentally send a company-wide email. This environment isn’t just fun; it’s also strategic. According to Zappos, “When you combine a little weirdness with making sure everyone is also having fun at work, it ends up being a win-win for everyone: Employees are more engaged in the work that they do, and the company as a whole becomes more innovative.”

11-8aHiring and Training

The key to creating a zany work environment lies in hiring the right people. The job application features a crossword puzzle about Zappos and asks potential employees questions about which superhero they’d like to be and how lucky they are. They may also check how potential employees treat people like their shuttle driver. Zappos is looking for people with a sense of humor who can work hard and play hard. Potential employees go through both cultural and technical interviews to make sure their character fits with a high-integrity company. However, even Hsieh admits finding great employees is tough. He believes pursuing too much growth at once harms the company if the organization starts caring more about the quantity of new employees rather than the quality. Zappos gets approximately 30,000 job applications annually.

All new employees attend a five-week training program that includes two weeks on the phones providing customer service and a week filling orders in a warehouse. To make sure new employees feel committed to a future with the company, Zappos offers $2,000 to leave the company after the training (called “The Offer”). Amazon has adopted a similar practice.

Even after the initial training is over, employees take 200 hours of classes with the company—covering everything from the basics of business to advanced Twitter use—and read at least nine business books a year.

11-8bBenefits

Another aspect of Zappos that is unique is the benefits it provides to its employees. The company has an extensive health plan that pays 100 percent of employee medical benefits and on average 85 percent of medical expenses for employees’ dependents. The company provides employees with dental, vision, and life insurance. Other benefits include a flexible spending account, prepaid legal services, a 40 percent employee discount, free lunches and snacks, paid volunteer time, life coaching, and a car pool program.

Zappos determined that the pay structure and the process for employee shift signups were inefficient for the company’s needs. With Hsieh’s encouragement the company adopted scheduling software called Open Market. Under this new system, call-center employees would be given 10 percent time flexibility to pursue their own projects. Employees could decide when to work, but the compensation system was revamped to mimic the surge-time pricing of popular ride-sharing service Uber. With this compensation system, call-center employees working during periods of high demand would receive higher pay. In other words, Zappos’s hourly compensation for its call-center employees would be based on demand. Zappos hopes to expand this system to all departments eventually. For seniority-based jobs, this system holds risks. For instance, seniority-based incentives also take into account company loyalty, camaraderie with coworkers, and dedication that are also important to work productivity. However, Zappos believes the system works well for its call-center employees because many employees are employed for shorter periods.

11-8cWork-Life Integration

One of Zappos’s core values is “Build a positive team and family spirit,” so the company expects employees to socialize with each other both in and out of the office. In fact, managers spend 10–20 percent of their time bonding with team members outside of work. Zappos outings include hiking trips, going to the movies, and hanging out at bars. Hsieh says this increases efficiency by improving communication, building trust, and creating friendships.

Along with creating friendships, employees are encouraged to support each other. Any employee can give another employee a $50 reward for great work. Zappos employees compile an annual “culture book” comprising essays on the Zappos culture and reviews of the company. The culture book helps employees think about the meaning of their work and is available unedited to the public. This is based on the principle of transparency.

As with its customers, the foundation of Zappos’s relationships with its employees is trust and transparency. The company wants its employees, like its customers, to actively discuss any issues or concerns that come up. Hsieh does not have an office; he sits in an open cubicle among the rest of the employees. He believes “the best way to have an open-door policy is not to have a door in the first place.” Zappos’s management is open with employees by regularly discussing issues on the company blog.

However, this positive work environment comes with the expectation employees will work hard. Employees are evaluated on how well they embody the core values and inspire others; Zappos fires people who do great work if they do not fit with the culture of the company. This helps maintain a culture of integrity. The organization wants employees to be dedicated to the firm and believes appropriate conduct will not occur unless employees share the same visions and values of the organization.

11-8dZappos’s New Structure

11-9Corporate Social Responsibility

Zappos takes an unconventional approach to corporate social responsibility (CSR) and philanthropy. Many companies have CSR programs dedicated to a certain area or cause such as education, but Zappos prefers to support a variety of programs based on the needs of communities and the interests of employees.

11-9aPhilanthropy

Zappos is involved in a variety of philanthropic efforts. Programs include donating shoes and gifts as well as giving gift cards to elementary school students. Zappos donates money to organizations such as the Shade Tree, a nonprofit that provides shelter to women and children, and the Nevada Childhood Cancer Foundation. The company even partnered with Britney Spears to hold an event at the zoo to raise money for the foundation. Zappos also has a donation request application available on its website.

11-9bSustainability

Another area on the company’s blog is a section on sustainability. Here, the company highlights new products that are organic or manufactured using environmentally friendly procedures. The postings also list ways customers can live more sustainable lifestyles, including tips on how to throw an eco-friendly party and green product recommendations.

11-9cRecognition

In addition to being the number one online shoe retailer, Zappos has been recognized for its innovative business practices. The company appeared on several prestigious lists including Fortune’s Best Companies to Work For for eight consecutive years, Fast Company’s 50 Most Innovative Companies, BusinessWeek’s Top 25 Customer Service Champs, and Ethisphere’s World’s Most Ethical Companies. The company continues to get recognized for its efforts in creating an environment and business model that encourages transparency and strong relationships among all stakeholders.

11-10Ethical Challenges for Zappos

Like any company, Zappos faced some challenging business and ethical issues in the past. When these issues occur, Zappos handles situations in a professional and efficient manner. However, the transparency at Zappos makes some business and ethical issues more complex as the company strives to solve problems while keeping its stakeholders informed.

11-10aLaying Off Employees

Zappos is known for its commitment to its employees, but the company faced hard economic times that demanded tough decisions. In October 2008, Sequoia Capital, a venture capital firm that was a controlling investor in Zappos, met to discuss the problems presented by the economic downturn and its effect on their portfolio companies. Sequoia Capital instructed Zappos to cut expenses and make the cash flow positive. As a result, Hsieh made the difficult decision to lay off 8 percent of employees. This was not a desired event but was required by Sequoia Capital.

Zappos strived to handle the layoffs in a respectful and kind manner. Hsieh sent an email notifying employees of the layoff and was honest and upfront about the reasons behind the decisions, even discussing the move on Twitter. Employees who were laid off received generous severance packages, including six months of paid COBRA health insurance coverage. Because of the company’s honesty and transparency, employees and customers were more understanding of the tough decision Hsieh and Zappos had to make.

11-10bAcquisition by Amazon

Shortly after the acquisition, Hsieh issued a statement about why he sold Zappos to Amazon. In the statement, Hsieh discussed the disagreement between Zappos and Sequoia Capital over management styles and company focus. Specifically, Hsieh said, “The board’s attitude was that my social experiments might make for good PR but that they didn’t move the overall business forward. The board wanted me, or whoever was CEO, to spend less time on worrying about employee happiness and more time selling shoes.” Hsieh and Alfred Lin, Zappos’s CFO and COO, were the only two members on the board committed to preserving the company’s culture. The board could fire Hsieh and hire a new CEO who focused more on profits.

Hsieh decided the best way to resolve these issues was to buy out the board, but he could not do this on his own. After meeting with Amazon CEO Jeff Bezos, Hsieh committed to a full acquisition, as long as Zappos could operate independently and continue to focus on building its culture and customer service. Many customers were concerned Amazon was not a good fit for Zappos, but Hsieh addressed those concerns, stating Amazon and Zappos have the same goals of creating value for the customer but different ways of how to do it. He also assured customers Zappos would continue to maintain its unique corporate culture. Although consumers were not pleased with the acquisition, they at least understood why it occurred. Moreover, Hsieh’s commitment to his beliefs and management style resonated with consumers.

11-10cMore than Shoes Campaign

To bring awareness to the fact Zappos sells more than just shoes, Zappos created a marketing campaign in 2011 designed to catch people’s attention. The company released several advertisements that featured people who appeared to be naked doing daily activities such as running, hailing a cab, and driving a scooter. The creative advertisements had certain parts of models’ bodies blocked off with a box that said “more than shoes.”

11-10dTechnical Difficulties

Also in 2011 Zappos experienced some technical difficulties that resulted in delays and problems in customers’ orders and shipments. Zappos upgraded one of its processing systems, and in the process many orders were deleted or delayed. Some orders had the incorrect shipping information, and products were shipped to the wrong location. Although this upset several customers, Zappos handled the problems and reassured customers that it would get them their merchandise as soon as possible. The company also offered different perks, depending on the circumstances of each customer experience.

11-10eTheft of Customer Information

In 2012 hackers broke into Zappos’s computer system, and the company had to respond to the theft of 24 million customers’ critical personal information. The stolen data included customers’ names, email addresses, shipping and billing addresses, phone numbers, and the last four digits of their credit cards. Zappos immediately addressed the situation by sending an email to customers notifying them of the security breach. Zappos assured customers the servers containing their full credit card information were not hacked. Its next move was to disconnect its call center, reasoning that the expected amount of calls would overload the system.

While Zappos has a reputation for delivering customer service that is unmatched by any competitor, some customers were unhappy with how Zappos handled the hacking. Many customers were upset by their information being hacked, but the situation was made worse by the company’s action of disconnecting its call center. Although this situation caused problems for Zappos and blemished its customer service record, the company has worked to restore its reputation.

11-11The Future of Zappos

Ethical leadership is a key factor in the success of any company, and for Zappos having Tony Hsieh as a leader is a strong indicator for future success. Hsieh expressed that he will do whatever it takes to make his employees, customers, and vendors happy. The future for any company looks bright when its leadership is committed to such strong values. However, Zappos needs to make sure it continues to focus on its stakeholders and its long-term vision with or without Hsieh.

Ultimately, Zappos intends to continue to deliver happiness to its stakeholders. Hsieh says, “At Zappos, our higher purpose is delivering happiness. Whether it’s the happiness our customers receive when they get a new pair of shoes or the perfect piece of clothing, or the happiness they get when dealing with a friendly customer rep over the phone, or the happiness our employees feel about being a part of a culture that celebrates their individuality, these are all ways we bring happiness to people’s lives.”

Chapter Review

11-12aQuestions for Discussion

1. Does Zappos effectively focus on stakeholder happiness, and how does this approach affect the ethical culture?

2. Has Zappos developed long-term relationships with customers and employees that provide a competitive advantage in the purchase of shoes and other products?

3. Has Zappos effectively managed ethical risk, and what are potential ethical risks in the future?

· Ed Frauenheim, “Jungle survival,” Workforce Management, September 14, 2009, 88: 1018–1023

· Tony Hsieh and Max Chafkin, “Why I Sold Zappos,” Inc., June 2010, 100–104

· Jeffrey M. O’Brien, “Zappos Knows How to Kick It,” Fortune, February 2, 2009, 159 2: 54–60

Chapter 12: Sustainability: Ethical and Social Responsibility Dimensions – Reading

Chapter Review

12-8aSummary

Sustainability from a strategic business perspective is the potential for the long-term well-being of the natural environment, including all biological entities, as well as the mutually beneficial interactions among nature and individuals, organizations, and business strategies. Sustainable development involves meeting the needs of the present without compromising the ability of future generations to meet their own needs. Sustainability includes the assessment and improvement of business strategies, economic sectors, work practices, technologies, and lifestyles while maintaining the natural environment. Sustainability falls into the social responsibility domain of maximizing positive and minimizing negative impacts on stakeholders.

The protection of air, water, land, biodiversity, and renewable natural resources emerged as a major issue in the twentieth century in the face of increasing evidence that mankind was putting pressure on the long-term sustainability of these resources. Global sustainability topics include atmospheric issues, including air pollution, acid rain, and global warming; water issues, including water pollution and water depletion; and land issues, including land pollution, waste management, deforestation, urban sprawl, biodiversity, and genetically modified organisms. By being proactive in addressing these issues, companies can reduce their environmental impact and generate a reputation as an eco-responsible company.

The most influential regulatory agency that deals with environmental issues and enforces environmental legislation in the United States is the Environmental Protection Agency (EPA). The EPA was created in 1970 to coordinate environmental agencies involved in conducting environmental research, providing assistance in reducing pollution, and enforcing the nations’ environmental laws. A significant number of laws were promulgated to address both general and specific environmental issues, including public health, threatened species, toxic substances, clean air and water, and natural resources. Some of the most important environmental laws include the Clean Air Act, the Endangered Species Act, the Toxic Substances Control Act, the Clean Water Act, the Pollution Prevention Act, the Food Quality Protection Act, and the Energy Policy Act. LEED is a certification program that recognizes sustainable building practices and strategies. Alternative energy sources also have a major impact on many stakeholders. Some of the major alternative forms of energy include wind, geothermal, solar, nuclear, biofuels, and hydropower.

Better environmental performance can increase revenue in three ways: through better access to certain markets, differentiation of products, and the sale of pollution-control technology. Good environmental performance also reduces costs by improving risk management and stakeholder relationships, reducing the amount of materials and energy used, and reducing capital and labor costs.

Green marketing is a strategic process involving stakeholder assessment to create meaningful long-term relationships with customers while maintaining, supporting, and enhancing the natural environment. However, some companies desire to obtain the benefits of green marketing without the investment. Greenwashing involves misleading a consumer into thinking a good or service is more environmentally friendly than it really is. While it might seem to be helpful to a firm, companies discovered engaging in greenwashing may suffer reputational damage.

Case 12: Lululemon: Turning Lemons into Lemonade

12-1Introduction

Lululemon Athletica is an athletic apparel company intended for individuals with active lifestyles. The organization has deep roots in the yoga community and is one of the few businesses to offer apparel for this specific market. Lululemon is based in Vancouver, British Columbia, Canada, and operates its clothing stores in numerous countries throughout the world. The apparel store offers product lines that include fitness pants, shorts, tops, and jackets for activities such as yoga, running, and other fitness programs. It operates in three segments. These segments consist of corporate-owned and corporate-operated retail stores, a direct to consumer e-commerce website, and wholesale avenues. The company operates more than 350 stores predominantly in the United States, Canada, Australia, New Zealand, and Singapore. Lululemon has grown rapidly in the last 20 years and is expected to continue its growth strategy well into the foreseeable future. It has also established a subsidiary geared toward youth called Iviva Athletica.

Store growth and expansion into other countries has allowed Lululemon to achieve financial success with revenues of $2.3 billion. While financially stable, the organizational structure has seen changes with the hiring of a new CEO. Lululemon hired Laurent Potdevin in early 2014 hoping to appoint a worthy and experienced industry professional. The company also wanted to distance itself from negative headlines circling around former CEO Denis “Chip” Wilson. Potdevin was once the CEO at Toms and has worked in the industry for over 20 years.

There is no question that Lululemon has seen great success in recent years. From its conception in 1998, the organization has grown tremendously in markets across the globe. However, Lululemon’s success has also been tainted by controversy, negative publicity, and questionable ethical decisions. This case will detail the issues and controversies circling this organization and identify how Lululemon has managed these issues. In addition, we provide information regarding the positive ethical decisions that have been made throughout Lululemon’s history.

12-2Background

The first store opened in November 2000, in the beach area of Vancouver, British Columbia. The store was intended to be a community-gathering place for individuals to discuss health topics like dieting, exercise, and cycling. However, the store was so popular and busy that satisfying the customer became nearly impossible. The business grew quickly as products were popular among customers and the staff was eager to learn, expand, and challenge themselves. While the company initially focused on women as the target market, it has since expanded with products for men. For instance, its ABC pants, short for anti-ball crushing and made from sweat-wicking and stretchy material, became a top-selling item.

From the beginning, Lululemon had a strong mission that embraced a healthy and active lifestyle. Inspired by author and philosopher Ayn Rand, Chip Wilson modeled Lululemon with the intent that involves “elevating the world from mediocrity to greatness.” The company adopted the following mission statement: “Creating components for people to live longer, healthier, fun lives.” Lululemon tries to reflect this in its corporate culture. Store managers, for instance, are provided with much control over the operations of their stores, and Lululemon operates with a decentralized corporate culture. Lululemon employees are recruited and hired based on their level of commitment and how well they fit into the corporate culture. To bring its mission statement to fruition, Lululemon refers to its employees as “educators” to acknowledge the crucial role they play in helping customers to obtain a healthy and active lifestyle.

Lululemon stores today are focused heavily on community involvement and interaction with local enthusiasts. Nearly all stores host in-house events on a nightly or weekly basis, with classes ranging from beginner and advanced yoga to goal setting and self-defense workshops. Events and workshops generally occur after store hours on the salesroom floor after racks and products have been moved.

Unlike many stores, Lululemon does not offer discounts but sells approximately 95 percent of its products at full price. It also sells its products at higher prices than its competitors, reflecting the value of Lululemon’s products. Lululemon operates on the concept of scarcity to encourage customers to buy immediately. Its store shelves often have fewer products than the shelves can hold, and many products have quick life cycle times such as six-week life cycles. Customers are therefore encouraged to purchase the product before it is gone, which is thought to be a major influence in Lululemon’s success. In fact, even secondhand clothes for Lululemon sell for large amounts of money. Fans are willing to pay hundreds of dollars over the original store price to acquire limited-edition Lululemon products on sites like eBay.

In order to anchor its mission statement, Lululemon has adopted seven core values: quality, product, integrity, balance, entrepreneurship, fun, and greatness. These values serve to motivate employees and guide their decisions.

12-3Ethical Risks and Challenges

Despite Lululemon’s strong mission statement and core values, Lululemon has faced much controversy over its history. Founder and former CEO Chip Wilson has also been criticized for controversial statements he made, which eventually helped lead to his ouster as Chairman of the Board. There have also been questions regarding whether Lululemon’s corporate culture—with its strong emphasis on greatness and competitiveness—is necessarily healthy for employees.

12-3aFounder Chip Wilson

Lululemon founder Chip Wilson is thought of by many as a man with unorthodox opinions. Although Wilson has not been CEO since 2005, he has been known to do things without informing top management, such as printing out Lululemon tote bags with the phrase “Who Is John Galt?” from Ayn Rand’s Atlas Shrugged. A former CEO at Lululemon felt pressured by Wilson to attend the Landmark Forum, a leadership-development training program which Wilson highly supports. However, after the new CEO Laurent Pontdevin took over, he emphasized that the firm would no longer exert as much pressure on employees to attend the Landmark Forum if they had no interest. Wilson has done other controversial actions that generated concern from Lululemon’s board.

Much of the controversy around Chip Wilson centers on his statements. For instance, in a 2009 interview with Canada’s National Post Business Magazine, he admitted to having chosen the company name because “it’s funny to watch [Japanese] say it.” Wilson also stated on a blog his opinion that the rise in divorce rates and breast cancer among “Power Women” was due to a combination of smoking, taking birth control pills, and the additional stress which came from taking on the career responsibilities once held mostly by men. He attributed Lululemon’s growth as stemming from the coming together of “female education levels, breast cancer, yoga/athletics, and the desire to dress feminine.”

Another highly controversial statement of Chip Wilson’s involves his opinions regarding child labor laws. Wilson argued that “third-world children should be allowed to work in factories because it provides them with much-needed wages.” He claimed this can help lead citizens of these countries out of poverty. The practice of child labor is a hot-button issue in the Western world because of the poor working conditions and rampant abuse worldwide. This support of child labor has angered critics, who believe Lululemon might be exploiting children in developing countries. They argue that providing children with more education is much more likely to lift them out of poverty than having them earn low wages at a dangerous job. Lululemon founder Chip Wilson would continue to make controversial statements, eventually leading to his resignation as Chairman of the Board.

Chip Wilson later challenged the board, claiming that the current board was not aligned with Lululemon’s core values. He released this statement at the June 2014 shareholders meeting and voted against the board’s chairman and another director. Both men were reelected. A few months later, Wilson sold half of his 27 percent stake to private equity organization Advent International, who in turn received two board seats on Lululemon’s board. With less of a stake in the firm, Wilson’s impact on decision making at the organization is likely reduced.

12-4Misleading Advertising

Lululemon responded by refuting the claims of The New York Times. It cited independent tests performed the previous year. It also responded to the accusations by stating that a lab in Hong Kong had performed different tests on the product throughout the year, all of which confirmed that the products contained everything that it advertised.

However, Canada’s Competition Bureau challenged Lululemon, not due to the content of the VitaSea product but rather the company’s claims about the product’s health benefits. The bureau believed that these claims of health benefits from seaweed were unsubstantiated and ordered Lululemon to remove all such labeling.

12-4aCorporate Culture

As mentioned earlier, Wilson founded his company based upon the values of Ayn Rand. The notion of striving for greatness resonated with Wilson after having read Rand’s book Atlas Shrugged at the age of 18. Since then, he has utilized the concept as a way to market his brand. This idea of “greatness” contributes to a competitive organizational culture. Wilson admits that the firm tries to hire employees with Type A personalities, or those with more competitive personalities who are concerned with achievement and personal improvement. New hires read books selected by Chip Wilson that he felt were critical to personal development. Employees are also required to write out their goals for the next 10 years, which are then posted in Lululemon stores. Employees are encouraged to exercise regularly and remain close-knit.

Some have questioned how this competitive culture obsessed with greatness fits in with the yoga tradition based on Buddhist and Hindu philosophies. Both ideologies promote the notion of ridding one’s self of the Ego. The Ego is seen as a source of suffering, and Buddhism is based on the absolution of suffering. Enlightenment is achieved when the Ego has been successfully removed. There are specific postures used to accomplish this, and it can take years of practice. On the other hand, one of the criticisms of Lululemon goes back to Ayn Rand’s teachings and their promotion of “rugged individualism,” the elevation of mediocrity to greatness, and the relentless pursuit of happiness. Despite it being a business, some believe that these “individual” teachings do not belong in the yoga clothing industry because they directly contradict the Vedic philosophy that underlies yoga. Others have claimed that Lululemon’s corporate culture is almost “cultish” in its style. When Lululemon donated $750,000 to the Dalai Lama Center for Peace and Education, it received both praise and criticism. While the Dalai Lama Center’s chairman cited the company’s generosity, critics believed the Dalai Lama should not be associated with a profit-making organization. However, the company claims that the donation fits well with its vision of mind-body-heart.

In March 2011, an employee of a Lululemon store located in Bethesda, Maryland, was brutally murdered by her coworker after hours. It is believed the employee had observed the coworker trying to steal clothing from Lululemon. After the store closed, the coworker lured the employee back into the store and brutally murdered her. She then attempted to make the scene look as if two masked men had broken in and harmed them. After the truth was revealed, the coworker was sentenced to life in prison without parole.

Lululemon and many others attribute this brutality as a random act of violence. However, those who describe the corporate culture as “cultish” and “competitive” argue that the culture creates an environment where employees are pressured to live up to company standards. Although this in itself is certainly not the reason for the murder, critics have sometimes charged Lululemon with having an unethical corporate culture promoting competition over collaboration.

12-4bToo-Sheer Yoga Pants

A major ethical problem for Lululemon occurred in March 2013, when it released black Luon yoga pants that become sheer when the wearer would bend over. The company instituted a massive recall which comprised 17 percent of all the women’s pants sold in their stores. Even more damaging, The New York Post released a statement from a customer who claimed that she had to demonstrate the sheerness of her yoga pants by bending over in the store so the associate could check. Lululemon immediately released a statement saying that such conduct was not company policy and that they would accept returns from customers with no questions asked.

The recall resulted in large shortages, which impacted financial results and drove the stock price down. The company lost $2 billion in market value. Certain styles of Lululemon pants have also been accused of pilling, which occurs when fiber in the pants balls up. After the recall of the too-sheer yoga pants, investors attempted to sue Lululemon, claiming that they purposefully hid defects in the pants. However, the lawsuit was dismissed the next year.

The scandal resulted in the resignation of CEO Christine Day. A few months later, in November 2013, Chip Wilson defended his product by suggesting that women’s bodies are to blame for the fabric’s sheerness and their tendency for pilling. He also claims that many women buy pants that are too small for them, which wears them out. When questioned about whether Lululemon is truly a clothing retailer for everybody, Wilson stated that the product is appropriate for all sizes but that some people simply misuse the product. Critics viewed this as a sexist comment, exacerbating the issue at hand. Perhaps in an attempt to make a joke, a store in Bethesda, Maryland, featured a poem on its window: “Cups of Chai, Apple Pie, Rubbing Thighs.” A photo of the poem was shared on Twitter. The company apologized and the poem was removed. In the midst of consumer outrage, Wilson stepped down as Chairman of the Board.

12-4cCustomer Privacy

Lululemon is known for wanting to avoid collecting large amounts of customer information through big data techniques. Instead, it desires to have a close and open relationship with customers. One of the ways it does this is by listening to customers as they shop in the store. Lululemon takes customer complaints or concerns seriously and will attempt to make decisions based on this information.

Although this emphasis on listening to the customer is an important part of Lululemon’s customer relations, some people believe Lululemon takes it too far. A less well-known ethical risk that the company practices is the training of retail employees to eavesdrop on their customers. Lululemon prefers this to spending money on marketing software that tracks purchases or sending out survey requests. Christine Day, the former CEO, used to spend much of her time in retail stores, pretending to be a customer, in order to listen to complaints and observe shopping habits. When she was with the company, she had stores set up their clothes-folding tables next to the fitting rooms so employees could better overhear any complaints. Whether these practices are smart marketing techniques or infringements on privacy is ambiguous.

12-5Positive Ethical Practices

This manifesto clearly shows the backbone of Lululemon and the way it does business. The manifesto strives toward providing greatness to the people that use Lululemon products. The higher prices Lululemon charges are a sign of excellence and the belief that it is selling more than just clothing to the customers. It is a belief that the customer is buying a lifestyle that comes with the Lululemon brand and the set of values that Lululemon is conveying in the manifesto. As a result, Lululemon has gained a large following and clientele that believe in its products.

12-5aContributions to Communities

Lululemon takes its responsibilities to communities seriously. It recognizes that community involvement will not only help gain new customers but also promote its mission of creating a healthier lifestyle. For these reasons, Lululemon holds free weekly yoga classes taught by fitness professionals. Lululemon shoppers who have attended the free yoga classes can get a 15 percent discount on their purchases.

Additionally, while the practice of secretly observing customers might be controversial in some ways, it also demonstrates Lululemon’s commitment toward meeting customer needs. Lululemon believes that customer relationships are not based on technology but rather on more basic marketing techniques like simply talking with the customer. The Lululemon culture encourages employees to establish strong connections with their customers, which is why the company emphasizes that its employees are “educators.” By listening carefully to customer concerns as they shop, Lululemon gets an immediate picture of problems that the company can address. For instance, one time when the CEO was in a Lululemon store she overheard many complaints that a certain type of knit sweater had sleeves that were too tight. Based on this information, she canceled future orders. It is clear that Lululemon is willing to make quick product changes in response to customer feedback.

Lululemon also contributes to local charities throughout its communities. In many communities, Lululemon empowers customers by offering the clientele the opportunity to suggest organizations and charities to receive donations. Lululemon’s program allows for up to eight local charities to receive donations. This shows its commitment to its local communities and willingness to give back as much as possible, while still maintaining a healthy bottom line. Lululemon’s efforts display a stakeholder mindset as it makes decisions that benefit its shareholders, clients, local neighborhoods, and nearby businesses.

12-6Relationships with Employees

As mentioned before, Lululemon strives to get its employees inspired. Employees must develop their personal goals, which are then hung in the stores. To encourage healthy living and incentivize employees, the company offers staff free fitness classes. It also tries to help employees find the right balance between family and work. Lululemon frequently sends merchandising tips to sales employees and encourages them to take responsibility and ownership of the store.

Lululemon believes in hiring managers internally, which motivates lower-level employees because they know they have a good chance of becoming a leader. Approximately 70 percent of Lululemon managers are internal hires. Employee satisfaction at Lululemon appears to be high; in exit interviews, 90 percent of employees claim they would recommend to their friends to work at Lululemon.

Lululemon also offers its employees unique perks. It frequently sanctions events such as group hikes or exercise sessions to help its employees bond with one another. After a year of employment, Lululemon sends employees to the Landmark Forum, a three-day self-improvement program at a cost of approximately $500 per employee. (Some have criticized the Landmark Forum and Chip Wilson’s endorsement of it, while others claim the experience transformed their lives.) Lululemon has also created the “Fund a Goal” program for high-performing employees. This incentive pays for these employees to achieve one of the goals on their list. In 2017 Lululemon was ranked as number 76 on Forbes list of America’s Best Employers.

12-7Conclusion

Lululemon focuses much of its efforts on the legacy that it will leave behind (the legacy it is creating now for future generations). Throughout the years, Lululemon has created a culture of promoting a healthy lifestyle, which can be achieved through healthy eating, yogi tradition, and in-store fitness classes. The company stresses a culture in which employees, customers, and other stakeholders can achieve greatness. As a result, the organization has seen rapid success and growth during the last decade. However, the company has been hit by a number of scandals, requiring it to rebuild its reputation and adopt new leadership.

In addition to these ethical issues, Lululemon and its competitors seem to be facing a slowdown in the apparel and athletic wear industry. This slowdown has investors concerned. CEO Laurent Potdevin maintains that the slower sales were the result of a drab product assortment that consumers did not find aesthetically appealing. He believes Lululemon is well on its way to correcting these issues, including releasing more colorful clothes in the future. Whether this will help jumpstart sales again has yet to be determined. Lululemon must also be vigilant as its success has attracted major competitors like Nike and Under Amour into the industry.

The changes that Lululemon has implemented demonstrate that the organization is willing to make difficult decisions to do the right thing. If Lululemon continues to put stakeholders first and refuses to deviate from its values, it is likely to avoid similar ethical issues in the future. A strong values-based corporate culture will help Lululemon remain a successful company with a reputation for both ethical behavior and quality products. In addition, most companies the size of Lululemon have an effective ethics and compliance program to help build an ethical culture. Based on past issues that the company has faced, it appears that it is time to embrace a more proactive approach to managing ethics and social responsibility.

Chapter Review

12-8aQuestions for Discussion

1. How has Lululemon handled various ethical issues that it has faced over the last few years?

2. How has the ethical culture of Lululemon impacted its relationship with customers and employees?

3. To avoid negative publicity and ethical challenges, what steps should Lululemon take to improve its stakeholder relationships?

Chapter Review

12-8bSources

· Suzanne Kapner and Joann S. Lublin, “Lululemon Founder Shrinks Role, Clears Way for New CEO,” The Wall Street Journal, December 10, 2013, B1–B2