Twenty years ago Dianne Vaughan coined the term ‘normalisation of deviance to explain the Space Shuttle Challenger disaster, . It describes how seemingly small choices, made in the context of daily decisions repeated over time, “can camouflage a cumulative directionality that too often is discernible only in hindsight”. We know how that ended for the Space Shuttle.
The ACCC v. Woolworths case just finalised in the Federal Court provides us a modern local example of this effect.
In brief, Woolworths engaged in a coordinated program called ‘Mind the Gap’ to systematically demand payment from suppliers to fill a hole in its December 2014 half year results. Category managers from Woolworths systematically called suppliers and demanded payment outside of any supply agreements. Suppliers who pushed back were deemed ‘problem suppliers’, escalated up the chain of command and in some cases threatened with repercussions. There was no quid pro quo.
In his finding for Woolworths, the Federal Court judge found the practice was ‘consistent with the ordinary nature of retailer and supplier relationships and common practice in grocery retailing’.
Really? How did we arrive at a situation where this sort of behaviour has become common practice? Normalisation of deviance.
Obviously over time it has become custom and practice for the supermarkets to use every avenue to squeeze money out of their suppliers. The major supermarket chains – Coles and Woolworths – can because of their market power[i]. They control around 75% of the supermarket sales in Australia.
None of us would argue against a robust commercial negotiation. And each decision on its own was undoubtedly rationalised as a reasonable commercial approach. But in aggregate we end up at a place that is simply indefensible.
But somehow it is now deemed acceptable for Woolworths to simply ring a supplier and demand money so that they can fill a hole in their profit performance. This has no more legitimacy than the school yard bully.
Of course, we shouldn’t single out Woolworths. They aren’t alone in their abuse of market power. Rio Tinto recently moved to unilaterally extend payment terms for suppliers to 90 days. Rio since recanted, but left open the possibility that they would continue to pursue this approach as contracts were renewed. One might wonder whatever happened to the quaint notion that suppliers could reasonably expect payment within 30 days? By the same process that Woolworths felt it perfectly reasonable to demand payment of cash for no reason other than to boost their profits, it has become acceptable for major mining companies to impose 60-day payment terms upon suppliers. Why? Because they can.
There are at least three clear issues created by this sort of market behaviour.
Firstly, it invites greater regulatory controls. The outcome of the Woolworths case has been described as a pyrrhic victory[ii] as parliament considers the ‘effects test’. And it is difficult to argue that self-regulation is a reasonable control mechanism given this sort of behaviour.
It also tears away at whatever vestiges of trust the business community have with the public. When we have such obvious examples of market abuse, how can business imagine it will be trusted by the community? And perhaps more importantly, why would business expect politicians to make the case on behalf of business in policy debates.
But finally, perhaps the most significant issue is the extent to which it tears at the fabric of the very companies that abuse their position. Work offers a sense of identity, a sense of connection: “our sense of dignity and self-worth depends on being recognised by others through our work. Without work, we deteriorate”[iii]. How do you imagine the employees of these firms feel when the companies they are identified with are exposed for their behaviour? People I have spoken to in these firms are embarrassed by their company’s behaviour.
The leaders of firms need to hold themselves and their people to a much higher standard of responsibility. Woolworths defended itself saying ‘it didn’t do anything illegal’. Rio defended itself with the assertion that they were simply following what others did in the market place.
These should not be the standards we hold ourselves to. Imagine a corporate mantra: founded with pride in 1924; no worse than average.
What should you do? Well, these are deep cultural traits we need to build into our companies. This is a long haul journey. But you could begin the journey by initiating these three practices:
- Ask your executive teams: where do you feel exposed? What areas might cause us embarrassment if we had to explain our choices in public?
- Ask your lower level managers: what decisions have we made that cause you a sense of embarrassment? Are we doing things you would find uncomfortable to explain to your friends?
- Ask people who are in your extended external network: does this sound reasonable to you? How would you feel if you were on the other end of this decision?
These are not simple issues. I don’t pretend they are black and white. But beware incremental decisions that in their own right look reasonable, but in aggregate are difficult to rationalise.
Remember, it is easier to live by your values 100% of the time than it is to live by them 98% of the time.
DDB ... a strategist's view
[i] Professor Michael Porter’s ‘five forces’ model describes factors that make industries attractive based essentially on the control of power. In the context of supermarket retailing the dominant power resides with the major retail chains.
[ii] For Woolworths only: it’s hard to see it as a victory for anyone really
[iii] Michael Macoby: Strategic Intelligenc