Sustainability’s Unintended Consequences (Or, the Domino Effect): Certification Bites Back

Caught without Power

The 2010 calendar year was just beginning, and Peter Redmond found himself once again contemplating Walmart’s sustainability efforts in fisheries. He could hardly believe that almost four years had passed since he and his team had boldly pledged in February 2006 that Walmart would “source all wild-caught fresh and frozen fish for the North American and UK market from fisheries that meet the Marine Stewardship Council’s (MSC) independent environmental standard within the next three to five years.” With the target date of 2011 rapidly approaching, Peter not only wondered whether Walmart would reach its stated goal but also questioned whether his team had set the right goal in the first place.

The good news: As of the beginning of 2009, 49 percent of Walmart’s wild-caught seafood was MSC certified. Walmart was halfway to its goal. With three years to go, Peter and his team had felt a sense of accomplishment and relief. Further, the MSC had grown in stature and influence from a little-known certification agency to one of the fastest growing in the environmental community. More importantly, members of the global fishing community had become more aware of the negative consequences of their historic fishing techniques. Real innovation was taking place to improve the long-term viability of global fisheries. Peter was pleased to have played a small role in these advances.

The bad news: Peter and his team had not anticipated some of the outcomes of their widely heralded pronouncement. By going public and placing Walmart’s considerable market power behind a single certification agency, Peter had changed the dynamics of seafood procurement. Specifically, MSC had used its newfound power to raise the cost of certification. Of greater importance, MSC had begun to impose needless and costly practices on members of the fishing community. Dissatisfaction with MSC was on the rise. The net result was that prices to the consumer were going up more than necessary. Peter wondered what he and Walmart could do to restore balance to the fisheries’ sustainability ecosystem.

Organizing for Sustainability at Walmart

Walmart’s quest to go green began on October 24, 2005, as Lee Scott, Walmart’s president and CEO, announced that Walmart would use its size and scope to promote sustainable practice up and down the supply chain. True to Walmart culture, Scott had issued a call to action. He had invited its entire global supply chain to make sustainability a priority.

Leadership at Walmart quickly learned that success required complete buy-in within the organization as well as across supply chain partners. This awareness led Walmart’s leadership team, headed up by Andy Ruben, VP of strategic planning and sustainability, to launch an approach called Sustainability 360 in February 2007. Sustainability 360 called for decision makers to take a holistic view of the business, inside and out, and find ways to make a difference everywhere.

The power of Sustainability 360 emerged from engaging everyone in the Walmart community. This idea was communicated widely via Figure 2.7, which showed that Walmart’s worldwide network consisted of over 6,000 stores, 60,000 suppliers, and 1.5 million employees. Further, over 100 million customers visited a Walmart store somewhere in the world every week. If each person that touched the Walmart community shared his or her best ideas for doing business sustainably, Walmart would not just become more innovative and competitive but could also help change the world.

Source: Walmart Sustainability Report, 2009.

Figure 2.7: Sustainability 360

To ensure that Sustainability 360 came to life, Walmart set up 14 Sustainable Value Networks (SVNs) consisting of employees, suppliers, government agencies, academics, and non-governmental organizations (NGOs). Such a broad constituency promised to create both a collective center of knowledge and a reservoir of passion. Figure 2.8 depicts the organization used to bring the participants and their best ideas together. By 2009, 12 SVNs—each aligned to one of Walmart’s three core sustainability goals—were fully functional. 1

  1. To be supplied 100 percent by renewable energy.

    • Greenhouse Gas Network

    • Alternative Fuels Network

    • Sustainable Buildings Network

    • Logistics Network

  2. To create zero waste.

    • Waste Network

    • Packaging Network

  3. To sell products that sustain our resources and the environment.

    • Agriculture and Seafood Network

    • Wood & Paper Network

    • Jewelry Network

    • Textiles Network

    • Chemicals Network

    • Electronics Network

Source: Walmart Sustainability Report, 2009

Figure 2.8: Walmart’s Sustainability Value Network Structure

Members of each SVN met regularly in person or via conference calls. Depending on the idea under consideration, suppliers’ suppliers might even be invited to participate so that change could be pushed all the way up the supply chain. An early effort focused on mapping value creation up the chain to find the root causes of environmental damage and costs. Mapping made hidden connections visible, enabling members of the SVN to carry out fact-based discussions and removing emotion, which enabled blameless autopsies and evoked more rigorous out-of-the-box thinking. The goal was to brainstorm ideas to manufacture, source, deliver, and sell products in an environmentally friendly way while saving customers money so that they can live better.

The SVN structure was selected over the creation of a “Corporate Social Responsibility” division in order to take sustainability innovation to the people closest to the day-to-day action. By getting more people involved, more ownership would emerge, helping to ensure a change in the very fiber of the Walmart culture. Only then would practical solutions to real problems emerge consistently over time.

Caught in MSC’s Net

As Peter and his team had originally pursued a sustainability strategy for wild-caught fresh and frozen fish, they had evaluated many options—none of which seemed to promise the breakthrough results or the “better way” they were looking for. Among these options was certification. But certification seemed limited in two ways. First, certification would not deliver high-impact cost savings or visibility for Walmart. Second, certification offered only minimal promise to change worldwide fishing practices. However, the team had not found any option that was more applicable or more promising.

As the team sought a partner to help implement a certification program, the only viable option appeared to be the Marine Stewardship Council (MSC). The MSC, however, was a rather small and obscure organization that had gained a little traction in Europe but had no meaningful presence in North America. Efforts to find additional options yielded no credible partners. Unless Walmart wanted to design and launch its own program—an offer fraught with public relations danger—the MSC was the only ship plying the seven seas. Despite the prospective challenges, Peter had decided to set a bold goal for himself and for Walmart. Within five years, Walmart would buy 100 percent of its wild-caught fish from MSC-certified suppliers.

Peter had hoped to use Walmart’s $400 billion in sales and its commensurate buying power to encourage change in the global fisheries supply chain. He had not considered the possibility that Walmart’s very size and its very public pronouncement could prove to be a long-term detriment to the business case his team had built. That is, at Walmart, a “valid” business case meant that any initiative had to meet three objectives:

  1. Align with current corporate strategic goals.

  2. Support one or more of the three sustainability aims.

  3. Deliver a 10 percent increase in comparative sales vis-à-vis the previous year.

In essence, a sustainable business case had to deliver positive environmental results without increasing costs to the consumer. However, by aligning the entirety of its wild-caught seafood program to a single certification council, Walmart had created a quasi monopoly. The result: costs increased substantially.

A careful analysis identified three sources of increased costs. First, the cost of certification had gone up dramatically. Depending on the nature of the fishery, assessment by an authorized third-party assessor could cost from $15,000 to $120,000. 2 Since certification lasted only five years, these costs were recurring.

Second, to become certified, a fishery had to demonstrate that it meets three criteria:

  • Fishing activity is sustainable over time; that is, fishing can continue indefinitely without overexploiting resources.

  • Fishing operations minimize environmental impact, yielding a sustainable ecosystem.

  • The fishery meets all local, national, and international laws and has established the processes and systems needed to respond sustainably to changing circumstances. 3

For most fisheries, achieving these standards required substantial investments in capital improvements over a lengthy period of time. The certification process thus raised the costs of doing business. Further, it precluded many fisheries from qualifying to do business with Walmart until certification was achieved. This reality produced a negative incentive for some fisheries to actually seek certification since they could not benefit from selling to Walmart during the transition period.

Third, since relatively few fisheries were certified, the potential emerged for suppliers from certified fisheries to hold Walmart hostage. In other words, certification conveyed supplier power, enabling companies from certified fisheries to charge a premium for their fish.

Now that the unintended consequences of a decision made four years earlier were becoming clear, Peter wondered what the Agriculture and Seafood SVN’s next steps should be. Without backtracking on their widely publicized goal, it seemed that Peter and Walmart had become caught in a net they had helped to weave. How could Walmart regain control of its destiny and costs in the wild-caught seafood marketplace? Equally important, how could Walmart preserve the trust and support of its customers by assuring them that the fish they buy comes from a well-managed and sustainable source?

Questions

  1. Redmond’s team has shown a proclivity to employ certification programs. What are the pros and cons of pursuing a certification program?

  2. Should companies like Walmart manage sustainability on a project-by-project basis, or does an opportunity exist to manage a corporate-wide program using a portfolio model? What are the potential benefits of using a portfolio approach?