Owl Have You Know

Season 2, Episode 14

In this special episode, get to know David Droogleever's story and why hosting a podcast is an act of building self-trust. Rice Business alum and guest host Scott Gale '19 finds out why joining the Navy was everything David expected and more, and why he starts every day by asking an important question: “Which frog do I eat first?” Check out the episode to find out what that means.

Subscribe to Owl Have You Know on Apple Podcasts, Spotify, Youtube or wherever you find your favorite podcasts.

Owl Have You Know

Season 2, Episode 13

Aruna Viswanathan '01 joins host David Droogleever to discuss her pivot from engineering to tech investing and entrepreneurship, provide essential tips for beginner investors and talk about AlphaX Decision Sciences, the energy AI software company she co-founded.

Subscribe to Owl Have You Know on Apple Podcasts, Spotify, Youtube or wherever you find your favorite podcasts.

By Professors Douglas Schuler and Laura Marie Edinger-Schons of the University of Mannheim, originally published in The Conversation

Many companies in the U.S. and elsewhere have been quick to sever ties to Russia – going well beyond applying the sanctions ordered by their governments.

IKEA, Nike and H&M are temporarily closing their Russian stores. Disney, Sony and Warner Bros. paused the release of new films in Russia. Apple, Samsung and Microsoft stopped selling their products there. McKinsey, Ernst & Young and many other top accounting and consulting firms said they are leaving the Russian market – possibly for good.

In all, over 300 companies have announced plans to close stores, reassign staff or stop selling products in Russia since the invasion began on Feb. 24, 2022, according to a running tally by Yale management professor Jeffrey Sonnenfeld. Most recently, McDonald’s, Starbucks and Coca-Cola joined the list on March 8, 2022, announcing they would close stores and cease sales.

In some ways, these decisions fit in with a recent trend in which companies have increasingly staked out public positions on often controversial social and political issues, such as restrictions on trans rights and ability to vote. As business professors who study why companies engage in activism, we feel the same factors that have driven those decisions to speak out are at work over Ukraine.

But we also believe Ukraine stands out for one important reason: For many of these companies, it may have been one of the easiest stands they’ve ever taken – even if there is a financial cost.

Taking a stand

Corporate sociopolitical activism – the technical term we use – entails companies making public declarations or taking actions about significant social or political issues that extend beyond their core business.

Until relatively recently, companies rarely took stands on social or political issues.

That didn’t really change until the 2000s, when LBGTQ rights were under attack and major companies such as Walmart spoke out against bills that would have allowed discrimination.

Since then, there’s been a surge in companies taking proactive stands on issues ranging from climate activism and racism to abortion and voting rights.

For example, in the wake of the murder of George Floyd by police in Minneapolis in 2020, hundreds of CEOs signed a pledge against racial discrimination and created an organization dedicated to diversity, equity and inclusion. In 2021, the CEOs of Dell, American Airlines, Southwest Airlines and AT&T spoke out against a Texas bill aimed at making it more difficult for citizens to vote.

Others have taken more decisive action. Uber and Lyft said they would pay to defend their drivers if they got sued under a Texas law that allows anyone to sue a person who helps someone get an abortion. And in 2016, PayPal and the NCAA pulled business from North Carolina after the state passed a bill limiting LGBTQ protections.

Surveys show today’s consumers expect companies to live up to the values they espouse in their press releases, and big corporate groups such as the Business Roundtable even began urging companies to focus on creating value for everyone – not just shareholders.

More specifically, research has identified three major factors that typically drive a company’s decision to pursue corporate activism: employee beliefs, consumer pressure and the CEO’s personal involvement or conviction.

It’s not always clear what is driving corporate decisions to suspend operations in Russia, but it seems as if all three factors are at play.

IKEA, for example, cited the support and security of its workforce in announcing its “pause” in Russia and a donation of 20 million euros for humanitarian assistance for those displaced by the war. After a #BoycottMcDonald’s began trending on Twitter to protest its presence in Russia, the fast-food chain said it was temporarily closing its stores there. And Tesla CEO Elon Musk agreed to provide Ukraine with free satellite internet after a Ukrainian official requested it on Twitter.

But ultimately, the decision whether or not to sever a relationship with a country – even if temporarily – is very different from taking a stand on an anti-trans measure.

Even so, the speed with which U.S. and other Western companies have abandoned Russia is something we’ve never seen in our lifetimes. And it suggests the decision was likely a no-brainer.

For one thing, Russia’s invasion has been met with widespread revulsion in the West. And even before the war, the public’s perception of Russia in Western countries was very low.

One post-invasion poll found that 86% of Americans saw the invasion as unjustified – with broad bipartisan agreement – and another showed that half of the respondents would compare the actions of Vladimir Putin with those of Adolf Hitler.

And governments including those like Germany that have close commercial ties to Russia have strongly condemned its actions and joined unprecedented sanctions. About 80% of Germans said they approved of their government’s decision to sanction Russia and export weapons to Ukraine – or said it didn’t go far enough.

Ultimately, the Russian market is just not that big for companies in the U.S, such as Apple and Disney. For others, such as McDonald’s, which has been in Russia since 1990 and has about 850 locations there, days of pressure finally persuaded company officials they had to pull out.

On many hot-button social issues like trans rights and gun control, the general public is split almost right down the middle, meaning taking a stand could alienate a lot of consumers.

But on the issue of Russia’s invasion of Ukraine, many companies likely were more worried about the risks to their reputation were they to do nothing. With so many other companies pulling out, it likely seemed better to explain to shareholders and customers back home why they’re leaving than why they’re staying.

Douglas Schuler, Associate Professor of Business and Public Policy, Jones Graduate School of Business at Rice University and Laura Marie Edinger-Schons, Professor of Sustainable Business, University of Mannheim

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Based on research by Vikas Mittal

When it comes to choosing an electricity provider, researchers found that customers who had reliable service tended to stick with their current company. More surprisingly, so did those with unreliable service. 

Many customers with spotty service stuck with unreliable providers because they found it easier to maintain the status quo. Even those who were often left in the dark valued the familiarity they had with their current provider. Despite the inconvenience of frequent power outages, they felt uncomfortable with change.

In another study, concertgoers waiting in line to buy tickets exhibited similar inertia. They stayed put in a long queue even after finding out the performer wasn’t one they liked. They stuck with it, not wanting to lose out after investing time in the endeavor. 

It’s often the same for executives, who are prone to this so-called status quo bias, or a tendency to stay with a certain course of action regardless of its likelihood of success or failure. Consider a recent study in which senior executives participated in a strategy simulation to divvy up resources for a series of projects and initiatives. 

Half of the executives received no input before making their choices. The other half were given prior year’s budget. The second group ended up allocating resources much like they had the previous year, even though there was little correlation with market conditions and the potential for future returns. 

Many senior executives who set budgets, initiatives and priorities stubbornly stay with their initial priorities, often throwing good money after bad. But this tendency to stick with the status quo can seriously damage a firm’s strategy planning and execution. When executives stay put, they often continue allocating resources to the same initiatives, which increases costs even as revenues stagnate. As more and more initiatives are added to the strategy plan, it becomes more complicated to execute. 

Executives stay put or even ramp up resources to multiple initiatives for a variety of reasons. For one, there’s comfort in what’s familiar. A project or initiative that has persisted for five or ten years is easy for an executive to understand. Analyzing an initiative that is already in place requires less time and mental effort than starting and evaluating a brand new endeavor. 

Executives, like some investors, also succumb to loss aversion, or a tendency to take even bigger risks for an existing initiative to prevent further losses. They hope more money can revive the failing endeavor. It’s a tendency that researchers have found in a variety of settings. For example, long-shot bets at race tracks often balloon toward the end of the day as gamblers look to recoup their losses from earlier in the day.

Finally, executives fall victim to resource dependence. They’re reluctant to give up valuable resources — money and people — that will be allocated elsewhere. Many executives therefore find themselves using budget-based planning to maintain the status quo. They make only tiny changes to the prior year’s budget and keep most initiatives. 

In our research, we found one company’s senior executives and frontline employees whittled down its 27 initiatives to 19 that should be discontinued. Yet, when executives from different functions, including marketing, HR, sales and finance, were then asked which of those 19 should ultimately be eliminated, the executives couldn’t agree on a single one.

One study found that firms with a high level of complexity in their operations and strategy lost an average of 13% to 15% in value. Multiple complex company initiatives were in part to blame for General Electric’s falling stock prices from 2008 to 2018. 

Sticking with the status quo also makes executives more vulnerable to the planning fallacy, where people underestimate the cost of proposed initiatives while overestimating the benefits. There is a solution, however, for executives who want to change course.
To thrive, executives need to purposefully narrow their focus and dedicate resources only to projects that create the most customer value. This requires senior executives to shift their mindset and view customers as the biggest source of value for their company.

CEOs have to be steadfast, and sometimes even ruthless, in cutting initiatives that their senior executives might cling to. One way to ease into this is to evaluate all initiatives at the 50% complete mark. If a project is truly creating customer value, then it continues. If not, it’s scrapped. 

Former ExxonMobil CEO Lee Raymond instructed his corporate-planning team to identify 3% to 5% of the company’s assets to dispose of each year. Divisions could keep assets only if they could prove their value. To use a similar approach, CEOs should first create measurable criteria to assess the success of initiatives and projects. Next, CEOs should insist that initiatives not meeting the criteria be scrapped.

When one manufacturing equipment distributor we studied took this tactic, they had dramatic success. After ranking 65 company-wide initiatives by their potential increase in customer value, they found that 10 of those initiatives lifted the company’s value by 71%.

Among those 10 initiatives, five alone boosted value by 61%. Executives funneled their resources into just those five, putting 14 initiatives on hold and dropping 46 projects entirely. Not only did they save $15 million from felled initiatives, they ultimately boosted growth due to a laser-focused customer strategy. 

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Vikas Mittal is the J. Hugh Liedtke Professor of Marketing at the Jones Graduate School of Business and author of “Focus: How to Plan Strategy and Improve Execution to Achieve Growth.”