Corporate Social Responsibility (CSR), sustainability and green business are all integral to current business terminology. Managers have access to a huge number of studies that suggest consumer interest in responsible business practices. During the summer of 2014, Nielsen found that 55% of consumers are willing to pay more if a company is committed to responsibility, while according to Accenture and UN Global Compact, 27% of European consumers always or often note sustainability in their purchase decisions. In light of such findings, CSR activities would seem an obvious strategic path to improved financial performance, either in the form of increased margins or through attracting new customers. Most large hotel chains, among other companies, report on a wide range of actions as part of their annual CSR reports. But reality is usually complex, and responsibility is no different.
Despite the apparent positive consumer perceptions of responsibility, financial gains through CSR remain elusive. Over several decades of research, academics have not reached a conclusion on whether good social and environmental performance leads to better financial results. Most researchers, including within the hospitality industry, suggest anything between a neutral and mildly positive relationship, but the mere result that responsibility normally does not reduce financial performance is of little value to managers choosing CSR investments. While good business ethics have clear intrinsic value, and ethical business conduct must be followed under any circumstances, full strategic commitment to corporate responsibility would require evidence of improved business performance. This would, in turn, validate the findings according to which consumers are willing to favour responsible companies.
Why does the stated consumer interest in responsibility not convert into increased sales? The hospitality industry, particularly the tourism side that represents discretionary consumer spending, could provide people with an ideal opportunity to prefer responsible services. Yet this does not seem to be the case. One reason for the discrepancy between survey results and observed actions is likely the human tendency to answer surveys in a way the respondents would like to behave, or think they should behave, even when in reality they act differently. This phenomenon, known as social desirability bias, is a challenge in all market research that touches sensitive topics, such as ethics. However, this may be overemphasized as the sole reason to reject survey results. After years of consulting and academic research in the field of CSR, I question its role as the only explanation for the discrepancy.
Other than social desirability, what might contribute to consumers not acting in line with their stated preferences? For the past few years I have approached this question in my research from an economics perspective of demand and supply. For a product or a service to be successful, demand must exist for it; this demand may be latent. Latent demand is defined as a desire for a non-existing product or service. Recognizing the characteristics of latent demand can be difficult. Consequently, this requires thorough market research and the gains for discovering such characteristics can be enormous. Pure luck apart, no company achieved greatness without studying and understanding the needs of potential customers. Yet when responsibility is included in a business offering, it is often based only on reporting standards, CSR models and preferences of the individuals involved in the work. While this may provide great value to society, if consumer demand for responsibility is not met, the company will not benefit.
The question for business managers thus becomes what their potential customers mean by responsibility, if and when they indicate an increased willingness to pay for it. Do company CSR actions match the perception of responsibility held by potential clients? Is the demand latent, and if so, how can a company supply the right aspects of responsibility? It is possible to answer these questions with systematic market research, with a great upside potential to gain new sales and increased profits; but these can only be achieved if the supply of CSR is meaningful to potential customers.
About the author:
Henri Kuokkanen holds an MSc in Economics (Helsinki School of Economics) and is a PhD candidate at Leeds Beckett University. He is a full-time Research Fellow at Glion Graduate School, where he also teaches revenue management and corporate social responsibility. His industry experience includes treasury and business control management in the global telecoms industry. Before joining Glion, he was a partner in a consulting company focusing on transforming corporate social responsibility (CSR) into a competitive advantage. His main field of research and PhD candidacy encompasses the role of CSR in tourism and hospitality, in particular the business potential that responsibility offers from a consumer perspective. He has also published in the area of revenue management, with a focus on the potential the discipline can offer in tourism destinations. Mr. Kuokkanen heads the Applied Business Projects (ABP) for Glion’s online MBA program and he is co-responsible for the campus-based commissioned student research partnerships with leading international hospitality companies.