Engaging fringe stakeholdersfor competitive imagination

Stuart L. Hart and Sanjay Sharma

Executive OverviewIn a connected world, remote groups at the fringe of a firm’s current operations can

find common cause, exerting increasing pressure and calling into question the firm’slegitimacy and right to operate—witness the recent debacles involving Monsanto, Shell,and Nike. Moreover, the knowledge needed to generate competitive imagination and tomanage disruptive change increasingly lies outside the organization, at the periphery offirms’ established stakeholder networks. Unfortunately, most companies still tend to focusmanagement attention only on known, salient, or powerful actors to protect theiradvantages in existing businesses. In recognition of these challenges, we develop theconcept of Radical Transactiveness (RT). RT is a dynamic capability which seeks tosystematically identify, explore, and integrate the views of stakeholders on the “fringe”—the poor, weak, isolated, non-legitimate, and even non-human—for the express purpose ofmanaging disruptive change and building imagination about future competitive businessmodels. RT consists of two complementary skills. First, by reversing the logic oftraditional approaches focused on managing powerful stakeholders, firms fan out toidentify voices at the fringe of their networks to both preempt their concerns andgenerate imaginative new business ideas. Second, by creating mechanisms for complexinteraction and empathy with those on the fringe, firms fan in to integrate and reconcilethis knowledge with existing know-how to design and execute disruptive new businessstrategies.

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In October 1999, under a swarm of global protest,Monsanto publicly announced that it would notcommercialize seed sterilization technology, apromising new product in its burgeoning portfolioof genetically modified seeds. CEO Robert Shapiroapologized for Monsanto’s behavior: “Our confi-dence in this technology and our enthusiasm for ithas, I think, widely been seen—and understand-ably so—as condescension or indeed arrogance.”1

With this admission, Monsanto’s vision for aglobal life sciences company had officially come toan end. This is especially striking when one con-siders that Monsanto had received full governmen-tal approval for all of its products and technolo-gies, broke no laws in pursuit of its strategy, andhad engaged its salient and important stakehold-ers in this process of change. What went wrong?

Between 1993 and 1998, Monsanto spun off itschemicals business and made $8 billion worth ofacquisitions in the area of agricultural biotechnol-ogy. Through its aggressive promotion of geneti-

cally modified (GM) seeds in the US (nearly 50million acres planted by 1998), the company in-creased earnings at a compound annual rate of15.5 per cent and grew total return to shareholdersby 285 per cent. Monsanto appeared to have suc-cessfully transformed itself from a low-margin pro-ducer of chemicals into a technology companywith a P-E ratio to match.2

Yet during this period of strategic transforma-tion, growth, and optimism, questions unantici-pated by Monsanto began to emerge about thepotential human health side effects and environ-mental consequences of biotechnology and the ge-netic engineering of seeds. “Frankenfoods,” as ge-netically engineered foods had come to be knownin Europe, were increasingly under attack by con-sumer groups, retailers, and non-governmental or-ganizations (NGOs). The backlash also began tomanifest itself in the developing world. Millions ofsmall farmers in India, for example, protested inthe streets against Monsanto based on fears that

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the company would force them to pay internationalprices by enforcing patent ownership of seed ster-ilization technology. This technology, dubbed the“terminator” by an NGO, would prevent farmersfrom propagating the seed from their own crops.

Smart Mobs versus Smart Globalization

How do we account for the rapid rise—and evenmore precipitous fall—of a major corporation likeMonsanto, which had done nothing wrong accord-ing to society’s legal and regulatory institutionsand had in fact transformed its business model toadd value to its customers while reducing environ-mental impact? Certainly the emergent nature ofbiotechnology had something to do with the prob-lems that Monsanto experienced. Indeed, an accel-erating pace of technological change appears tobe generating ever-faster cycles of creative de-struction.3

Yet there is something even more fundamentalat work here. The power of governments haseroded in the wake of globalization and the growthof transnational corporations with global supplychains that span several continents. Non-govern-mental organizations (NGOs) and civil societygroups have stepped into the breach, assuming therole of monitor and, in some cases, enforcer ofsocial and environmental standards.4 Today, forexample, there are more than 50,000 internationalNGOs compared to less than 20,000 only a decadeago.5

The power of governments has eroded inthe wake of globalization.

At the same time, the spread of the Internet andother information technologies has enabled notonly these groups but millions of individuals tocommunicate with each other in ways that wereunimaginable even a decade ago.6 Indeed, Inter-net-connected coalitions of NGOs and individu-als—smart mobs—are now making it impossiblefor governments, corporations, or any large insti-tution to operate in secrecy.7 The varied claims ofthese smart mobs have created a dynamicallycomplex business environment in which organiza-tions find it difficult to determine what knowledgeis relevant for managing strategic change; just asksenior managers at Shell, Nike, the World TradeOrganization, or the World Economic Forum.

Unfortunately, as the Monsanto case illustrates,most companies still tend to focus managementattention only on known, powerful, or “salient”

stakeholders—those who can directly impact thefirm.8 Even recent efforts at “radical transparen-cy”—the complete and truthful disclosure of anorganization’s plans and activities—appear inad-equate, since they entail reporting only what hasalready been decided or, in fact, accomplished. Yetin a world of smart mobs, firms cannot managestakeholders. Instead, swarms of stakeholdersself-organize on the net in chaotic and unpredict-able ways.

Groups at the “fringe” of a firm’s stakeholdernetwork can acquire an important voice in suchswarms. To avoid the wrath of the smart mob, ithas now become essential to proactively seek outthe voices from the fringe that had previously beenignored. In order to survive and compete for thefuture, firms must harness these voices to identifycreative new business models and opportunities.The tyranny of the smart mob can yield to a newform of what might be called smart globalization:growth via disruptive business models that ad-dress the social and environmental concerns offringe stakeholders.9

Increasingly, multinational corporations cannotknow in advance the knowledge that is requiredfor competing successfully. Indeed, the knowledgeneeded to generate unique and disruptive ideasoften lies outside the organization. Firms often donot know which stakeholders are salient and im-portant for generating the knowledge required forinnovation. Clearly, however, it is not practicallypossible to involve every stakeholder potentiallyaffected by a corporation in the decision process.

What is needed, therefore, is a new capabilityfocused on engaging the stakeholders necessaryfor managing disruptive change and creating com-petitive imagination. Rather than engaging onlyknown or powerful stakeholders concerning exist-ing businesses, such an approach instead seeks tosystematically identify, explore, and integrate theviews of those on the periphery or at the “fringe”—the poor, weak, isolated, non-legitimate, disinter-ested, and even non-human. Accordingly, we herepropose the concept of Radical Transactiveness(RT)—the ability to continuously acquire and com-bine knowledge from fringe stakeholders with rad-ically differing views in order to avoid stakeholderswarms and build the competitive imaginationthat will be necessary for future business success.

Toward Competitive Imagination

In the past, competitive advantage was basedlargely upon lowering cost or gaining differentia-tion in existing industries and businesses. In thefuture, competitive advantage will depend more

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upon the capacity to generate disruptive innova-tion and creative destruction through competitiveimagination.10 Indeed, a growing body of scholarlywork suggests the importance of Joseph Schumpet-er’s assertion over a half-century ago that “theproblem that is usually being visualized is howcapitalism administers existing [industrial] struc-tures, whereas the relevant problem is how it cre-ates and destroys them.”11 Over the past decade, ithas become increasingly clear that the importanceof disruption and innovation to corporate successhas been on the rise.

Foster and Kaplan, in their book Creative De-struction, demonstrate empirically that the baserate of the economy has been accelerating over thepast eighty years, with dire consequences for in-dustry incumbents: the turnover rate for the S&P500 has increased from about 1.5 per cent per yearin the 1920s to nearly 10 per cent today. This im-plies that the average number of years spent by afirm on the Standard & Poor’s Index has declinedfrom sixty-five years in the 1920s and 1930s (S&P 90)to ten years in the 1990s (S&P 500). By 2020, “morethan three-quarters of the S&P 500 will consist ofcompanies we don’t know today—new companiesdrawn into the maelstrom of economic activityfrom the periphery, springing from insights unrec-ognized today.”12

Thus, managing for continuity and efficiency,through cost or differentiation advantages in exist-ing industries and businesses, is no longerenough. In the future, competitive advantage willincreasingly shift to the capacity for exploration,disruptive innovation, creative destruction, andcorporate imagination.13 A firm’s competitive rateof innovation is an important determinant of itsprofitability due to the creation of a longer reve-nue-generating time horizon and the potential toacquire a dominant share of the market. More rad-ical innovations allow firms to reap higher profitsdue to longer competitor response times. There-fore, the potential for an increased rate of disrup-tive innovation is a key to competitive advan-tage.14

Sustained corporate performance will increas-ingly depend upon competitive imagination todrive innovation and creative destruction. Compet-itive imagination necessarily involves skills inharnessing “radical” perspectives from the outsideto provide insights into strategic futures. The pur-suit of competitive imagination thus requires anew approach of stakeholder integration—onewhich moves beyond the static “management” ofknown parties in the center of a network to thedynamic process of identifying and engaging ac-tors from the “fringe.”

Beyond Stakeholder Management

The central argument put forward by Ed Freemanin his path-breaking book Strategic Management:A Stakeholder Approach was that the firm shouldconsider in its strategic management process notonly those groups who can affect it but also thosewho are affected by its operations. Freeman ar-gued that consideration of the latter is importantbecause “the ensuing strategic managementmodel will be sensitive to future change.”15

Ironically, the resulting work on stakeholdermanagement has focused almost exclusively onthe former: primary groups that are critical to thefirm’s survival in its current business. These in-clude investors, employees, customers, suppliers,and the government, and others whose claims areconsidered powerful, urgent, and legitimate bymanagers.16 Indeed, the emphasis is on corporatestrategies for responding to those who control crit-ical resources, or are able to exert influence andcontrol information access by virtue of their posi-tion in a network.17 By doing so, it is argued thatfirms can gain competitive advantages in the formof customer loyalty, supplier relationships, loweremployee turnover, and improved reputation.18

Unfortunately, the management of stakeholderconcerns based on their control of critical re-sources or centrality in a network helps a firm dealwith threats from the environment only after theyemerge. Firms need to manage radical uncertaintyby acquiring knowledge from diverse and dis-persed heterogeneous stakeholders, many ofwhom may be adversarial, in order to prevent thesurprise emergence of such threats as those thataffected Monsanto.

Current approaches to stakeholder engagementare based on either resource dependence or moralarguments for managing stakeholders to achievecost reduction, differentiation, or legitimacy in ex-isting businesses. The potential for engagingstakeholders to understand “future change” or toresolve the radical uncertainty of constantly evolv-ing knowledge is not considered. Accordingly, thenext section develops the concept of RadicalTransactiveness. Such capability enables firms todeal with dynamically complex business environ-ments by engaging stakeholders from the fringe tomanage disruptive change and generate competi-tive imagination.

Radical Transactiveness

Radical Transactiveness (RT) is “radical” becauseit focuses on gaining access to stakeholders previ-ously considered extreme or fringe for the express

2004 9Hart and Sharma

purpose of managing disruptive change and cre-ating competitive imagination. RT is “transactive”because it seeks to engage the firm in a two-waydialogue with stakeholders such that each influ-ences and is influenced by the other. Interactionsamong diverse stakeholders extend the bound-aries of the firm, offering the possibility for learn-ing and growth not envisioned at the beginning ofthe process. RT thus allows a firm to understandthe complex and evolving issues that may poten-tially affect the basis of its future competitive ad-vantage.

Figure 1 depicts the difference between “core”stakeholders—those visible and readily identifi-able parties with a stake in the firm’s existingoperations—and “fringe” or peripheral stakehold-ers. Whereas core stakeholders gain a seat at thetable by virtue of their power, legitimacy, or theurgency of their claims, fringe stakeholders aretypically disconnected from or invisible to the firmbecause they are remote, weak, poor, disinter-ested, isolated, non-legitimate, or non-human.They may be affected by the firm but have little, ifany, direct connection to the firm’s current activi-ties. However, fringe stakeholders may holdknowledge and perspectives that are key both toanticipating potential future sources of problemsand to identifying innovative opportunities andbusiness models for the future. For example,

Hewlett-Packard’s “Living Lab” in the village ofKuppam in India was established to learn the pos-sibilities of information technology and Internetuse by the rural poor in developing countries. Thiseffort is intended to help H-P imagine and designthe products and services of the future.19

By opening communication channels to previ-ously untapped sources of intelligence, RT helpsthe firm maintain a dynamic alignment of its strat-egy with the changing environment. Knowledgeand learning from fringe stakeholders signal to thefirm the investments it should make in appropriateresources and capabilities, allowing it to generatenew value-creating strategies.20 For example, Hin-dustan Lever Limited (HLL–Unilever’s Indian sub-sidiary) requires its managers to spend six weeksliving in rural areas to generate knowledge aboutthe hygiene needs and practices of the rural poor.This knowledge has resulted in new product ideas(such as a combined soap and shampoo bar) andpromotional programs (such as street theatre) forrural markets. These innovations have also beenadopted by Unilever subsidiaries in Brazil andother developing countries.

By integrating the concerns of diverse and dis-tant stakeholder groups, RT also holds the poten-tial to improve relationships and build a fund ofgoodwill with diverse stakeholders, thereby avoid-ing the wrath of the smart mob. Such goodwill not

FIGURE 1Stakeholders: Core and Fringe

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only enhances the firm’s legitimacy in its currentbusiness but also, more importantly, enables it toaccess knowledge from adversarial or marginalstakeholders at the fringe. RT consists of two sub-capabilities: (1) the ability to extend the scope ofthe firm (fan out); and (2) the ability to integratediverse and disconfirming knowledge (fan in).These two phases are similar to the concepts ofidea generation (divergence) and idea evaluation(convergence) described in the traditional prob-lem-solving literature21 (see Figure 2).

Fan-Out: Extending the Scope of the Firm

Imagining future sources of competitive advan-tage requires divergent thinking by managers toidentify the unmet needs of both existing custom-ers and new, yet-to-be-served markets. Divergentthinking is also necessary to envision new, disrup-tive technologies and business models that enablethe firm to deliver functionality to existing andnew consumers faster, better, or cheaper than com-petitors can.

Knowledge that can inform such innovation isnot only constantly evolving but is also widelydispersed outside the firm within stakeholdergroups that may neither be important, salient, norsituated centrally in a firm’s network. As the H-Pand HLL examples above show, these stakeholdersare often at the unseen periphery of the firm’sstakeholder network, such as the urban homeless,the rural poor in developing countries, or evennon-human (e.g., endangered) species and na-ture.22 The ability to include distant voices from the

fringe of an organization’s stakeholder network en-ables a panoramic view of a firm’s changing ex-ternal environment. This helps the firm understandconcerns of distant stakeholders affected indi-rectly via its upstream supply chain or down-stream disposal of its spent products. To be effec-tive, however, “fanning out” requires the reversalof traditional stakeholder management models.There are two primary avenues for extending thescope of the firm: networking from the core to theperiphery, and putting the last first.

Networking From the Core to the Periphery

By identifying parties immediately beyond thecore of salient stakeholders, firms can follow thenetworks of each of these stakeholders to the pe-riphery. For example, when Shell-UK Plc. decidedto dispose of its Brent Spar oil-drilling platform inthe North Sea, it consulted with a wide variety ofstakeholders in the U.K. (including Greenpeace-U.K.). However, it was forced to abandon its planunder pressure from Greenpeace-Germany, whichwas not considered a stakeholder at the time of theinitial decision. By looking at Greenpeace-U.K.’sstakeholder network, Shell-U.K. could have identi-fied Greenpeace-Germany as a concerned stake-holder and become aware of the pressure it couldbring to bear on other German stakeholders suchas the church, trade unions, small businesses, andfinally the German government that voiced its ob-jections formally to the British government.

Similarly, by looking beyond farmers in theUnited States to the processing and retail facilities

FIGURE 2Radical Transactiveness

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they sold to and the end-consumers that eventuallybought from these retail outlets, Monsanto couldhave identified groups that had concerns aboutgenetically modified foods. Some special interestgroups may self-organize spontaneously at laterstages to express their concerns regarding corpo-rate actions, and so they cannot be identified at theoutset. However, a firm with an ability to continu-ously network to the periphery will be able to iden-tify and engage such groups as they evolve, beforethey become militant or unwilling to interact withthe firm.

Exhibit 1 lists the steps that a firm should follow

for networking from the core to the periphery. Thecosts of such networking are outweighed by thepotential benefits of preserving corporate reputa-tion and operating legitimacy, and avoiding costlyproject delays that adversarial stakeholderswarms may cause. Stakeholders usually attacklarge, highly visible firms with corporate reputa-tions and brand images to protect.23 For such firms,usually industry leaders in size and profits, spend-ing a million dollars on reputation preservationand operating legitimacy usually represents lessthan one-tenth of one per cent of revenues, a frac-tion of what they would normally spend on productand corporate advertising.

Putting the Last First

A second approach to fanning out is to begin at thefringe by “putting the last first.”24 This requires aconscious effort to completely reverse the rules ofstakeholder saliency by identifying actors who arepowerless, non-legitimate, isolated, or disinterestedwith respect to the focal firm. It is extremely difficultfor managers in existing businesses to identifyfringe stakeholders such as the rural poor, urbanshantytown dwellers, or advocates for nature’srights. However, placing managers in operating con-texts that are the opposite of their current contextsopens them to hearing stakeholder voices from theperiphery. This requires investments such as H-P’s“Living Lab” in Kuppam, India or HLL’s placing of allemployees in poor rural areas for six-week stints.

An example is the Biotechnology Advisory Panelset up by DuPont to consciously seek divergentviews from the periphery to help it formulate amore robust strategy for biotechnology develop-ment. The company has purposefully sought to in-clude a diversity of stakeholders from India, Africa,and Latin America in its deliberations. It has alsoinvited in environmental advocates such as theformer head of Greenpeace International to pro-vide divergent views on the issue. Exposing seniormanagers and business leaders to radically differ-ent perspectives has resulted in significant modi-fications and improvements to the company’sapproach to and strategy for biotechnology com-mercialization. New ideas have been generated forfuture business models in accordance with thecompany’s push to move away from productsbased upon petrochemical feedstocks and intoknowledge-intensive businesses with a biologicalbase.

As another example, managers of Excel Indus-tries (one of India’s largest chemical companies)spend time in poor villages to generate radicalnew ideas and innovations starting from the bot-

Exhibit 1: Networking from the Core tothe Periphery

Objective: Stakeholder identification and issue intelligence todevelop knowledge about stakeholder concerns in order toprevent the formation of adversarial swarms.

Process:1. Training of boundary spanners (marketing, procurement,

communications, new business development, and facilitymanagers) in life cycle assessment (LCA) to help themunderstand how the operations of the firm, its suppliers,and customers can create negative environmental (e.g.,waste, pollution, and biodiversity) and social impacts(e.g., inequitable wages, poor working conditions,depletion of community economic capacity and culture).

2. Boundary spanners in each unit, facility, or SBU engagecore stakeholders including suppliers, customers,distributors, local communities, NGOs, and governmentagencies to identify further networks of these corestakeholders and the possible negative social andenvironmental impacts of the operations of eachstakeholder in the network. They follow this networkoutward via stakeholder engagement and “snowballing”to identify the remotest stakeholders affected by thefirm’s supply chain and consumption/disposal ofproducts.

3. A corporate department (sustainable development, newbusiness development, or communications) coordinatesinformation from boundary spanners to develop anongoing list of fringe stakeholders and their concerns.

4. A corporate task force (including operating and facilitymanagers) develops strategies for communicating with,and addressing the concerns of, these stakeholdersbefore they connect with media, labor unions, politicalforces, or other powerful stakeholders that can raise theprofile of an issue or concern.

5. Boundary spanners in the firm will implement thesestrategies in collaboration with core stakeholders suchas suppliers and distributors. Actions may involvechanges in products and services, procurementspecifications, recycling and take back of products afterconsumption, improvement in wages and workingconditions at contractors’ facilities, and the adoption ofpollution prevention and control practices by suppliers.

Costs: Training, managerial time (research, engagement, andcoordination), travel, and other forms of operating slack.

Benefits: Preserving corporate reputation, legitimacy, andoperating freedom, and preventing costs of delayedprojects.

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tom up by serving the unmet needs of the fringe.The CEO of Excel Industries asked his managers toavoid prejudices and biases by stating, “Who areyou to adopt a village? Go and be a part of it. Letthe village adopt you.”25 Exhibit 2 identifies theactions that firms can undertake to put the lastfirst. Once again, the costs in terms of managerialtime and effort are likely to be a fraction of what alarge firm would normally spend on research anddevelopment to generate new ideas and innova-tions.

These two approaches to extending the scope ofthe firm might have enabled Shell-U.K. and Mon-santo to anticipate the major incidents that dam-aged their reputations and affected their opera-tions. Fanning out might also have identifiedcreative new strategies for the firms to pursue thatmight have avoided the problems in the first place.

For example, Greenpeace-Germany’s concernsdid not emerge suddenly. The organization hadbegun to voice its discomfort early and openlyregarding Shell-U.K.’s plans to dispose of the BrentSpar oil-drilling platform in the North Sea. Simi-larly, consumer groups in Europe were quite vocal

about their concerns relating to the uncertain ef-fects of Monsanto’s genetically modified foods.Other stakeholder groups on the fringe includedmillions of small farmers in developing countriessuch as India. Regrettably, neither Shell nor Mon-santo allowed these voices from beyond the core oftheir stakeholder networks to reach decision-makers. Shell adopted the classic stakeholdermanagement model that involved proactivelyidentifying all the salient stakeholders (includingGreenpeace-U.K.) which were immediately af-fected by, or could have an impact on, the BrentSpar decision. The company consulted extensivelywith these stakeholders to arrive at its decision.Yet, the issue proved to be much bigger and morecomplex and extended beyond just the U.K.

Monsanto followed a similar process of stake-holder management that included consulting withits immediate customers (farmers), regulators, andconsumer groups in the U.S. Despite efforts by thecompany’s Sustainable Development Sector (a newunit established by the CEO) to access voices ofdistant stakeholders, the business decision-makersdid not consider consumer groups in Europe or smallfarmers in developing countries as relevant, legiti-mate, or powerful, even if their claims seemedurgent.

Indeed, putting the last first might have enabledMonsanto to develop a different business model thatmet the needs of all its stakeholders. The greatestproblems with agricultural productivity and povertyexist among the millions of small farmers in thedeveloping world. Therefore, it might have been pos-sible for Monsanto to focus product development onimproving the nutritional quality, pest resistance,and water tolerance of tropical crops such as cas-sava, rice, and sweet potatoes, among others, thatdominate in the developing world, rather than theincremental productivity improvement of industrial-scale corn, cotton, wheat, and other crops which aredominant in the developed world.

Extending the scope of the firm, by reaching outand seeking knowledge from fringe stakeholders,enables managers to suspend disbelief and acceptinformation that disconfirms the existing sharedmental models in the firm. Such knowledge can begenerated only when managers escape from oldideas and information that confirm the existingdominant logic of the organization. Effective “fan-out” thus does not look for solutions to problemsbut, rather, focuses on asking the right questions ofthe right stakeholders to understand dynamic andcomplex problems that can affect future survivaland competitiveness.

Exhibit 2: Putting the Last First

Objective: Identify business contexts that are the reverse ofthose in which the business currently operates that cangenerate imagination and ideas about potential newproduct and business innovations.

Process:1. Staff managers (Sustainable Development or New

Business Development) conduct research around issuesof climate change, biodiversity, social equity, ecosystempreservation, human rights, etc., to identify stakeholderjurisdictions that are the reverse of their own contexts.The focus would be on those regions and communitiesthat have been heavily disrupted by globalization andindustrialization, communities with explodingpopulations and associated migration to urban areas,lack of education, mobility, communications, basichygiene, and nutrition.

2. Make it possible for previously ignored or unheardvoices to enter the company by inviting reaction,response, or suggestions from the public at large aroundspecific issues through telephone access, email, oronline dialogue.

3. Create an inventory of potential sites and contexts wherelearning can take place for generating ideas for newbusiness models that are sustainable in terms ofeconomic potential, zero pollution, or biodiversity andecosystem disruption, and enable capacity building inlocal communities.

Costs: Training, managerial time, travel and other forms ofoperating slack.

Benefits: Generating radical new ideas for products andservices and business models.

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Fan In: Integrating Diverse and DisconfirmingInformation

Once the firm’s boundaries have been expandedand divergent thinking has opened up the firmboth to new concerns and emerging opportunitiesfor the future, the challenge then becomes one ofintegrating this diverse and disconfirming infor-mation into practical, useable strategies. Havinginitiated contact with these stakeholders, manag-ers need to build bridges so that intense informalconversations can begin. The transfer of tacit orunwritten knowledge residing in people and theirtraditions requires intense interaction; it cannot betransferred in large group meetings or during for-mal negotiations. Practical strategies emerge onlyafter the apparent contradictions between knowl-edge from fringe stakeholders and the currentbusiness model have been reconciled. This oftenrequires a reframing of a firm’s dominant logic.

HLL’s transformation is a striking example of sucha reframing. For several decades, the company’s hy-giene products were adaptations of Unilever’s inter-nationally popular brands, successfully targeted atupper- and middle-class segments of the market.Nirma, a small upstart operation, entered the marketin the early 1980s with disruptive products priced ata fraction of HLL’s products. Within a short period,Nirma moved up-market from lower-income to mid-dle-income markets, seriously eroding HLL’s marketshare and profits. After struggling unsuccessfully fora decade via price competition and advertising, HLLdecided to extend itself into poor rural villages thatwere not even targeted by Nirma. Insights gainedfrom these radically different markets helped HLLreframe its product-innovation logic from adaptinginternational brands to developing products from thegrassroots for poor consumers and moving them up-market to its traditional consumers. This strategy notonly helped HLL gain back market share from Nirmabut also opened up new markets and helped HLLmeet the needs of its traditional markets better.

There are two primary avenues for integratingdiverse and disconfirming information into practi-cal new strategies: generating complex interac-tions and reconciling contradictions.

Generating Complex Interactions

Just as living in a different country allows managersto better identify appropriate product/service modifi-cations in established international markets, spend-ing time in homeless shelters, rural areas in devel-oping countries, or areas where nature has beendepleted or devastated provides a radically differentphysical and mental context to spark the imagina-

tion. To be able to absorb knowledge from fringestakeholders, however, especially those that are ad-versarial or peripheral to the firm’s current opera-tions, managers need to empathize with differencesin perspectives. Empathy depends upon deep listen-ing and complex interactions with those possessingdivergent perspectives.

As we have seen, HLL generates complex inter-actions by requiring all company employees tospend six weeks living in rural villages and ac-tively seeking local consumer insights and prefer-ences as they develop new products.26 The com-pany has also created an R&D center in rural Indiathat focuses specifically on technology and prod-uct development to serve the needs of the poor andsources raw materials almost exclusively from lo-cal producers. HLL uses a wide variety of localpartners to distribute their products and also sup-ports the efforts of those partners to build addi-tional capabilities. By developing local under-standing and empathy, and experimenting withco-development through new partnerships, HLLhas been able to generate substantial revenuesand profits from operating in low-income markets.Indeed, by the late 1990s, low-income markets rep-resented more than half of HLL’s business.

In contrast, Nike’s failed attempt in the late 1990s toproduce an athletic footware product for the boominglow-income populations in China and other develop-ing countries can be traced, at least in part, to a lackof complex interaction and empathy.27 Based upon arelatively low price point ($10–15 per pair), the“World Shoe” was designed as a product that couldappeal to the masses who could not afford Nike’stop-of-the-line products. In China, Nike relied exclu-sively on its existing contract factory network to pro-duce the product, utilized the firm’s established in-country channels to distribute the World Shoe, anddid not develop a context-specific marketing plan forthe product. In fact, the World Shoe was displayedside-by-side with the $150 Air Maxx in upscale retailoutlets in Beijing and Shanghai. Relying on familiarpartners and the existing business model for high-end athletic footware products resulted in the WorldShoe struggling to meet its sales goals. The initiativewas terminated in 2002.

As Exhibit 3 suggests, operating managers as wellas R&D/product development managers should be-gin intense interactions with fringe stakeholdersonly after suitable cultural and ecosystem sensitivitytraining. They should then immerse themselves inradically different contexts to transfer tacit knowl-edge about the needs of consumers that they do notcater to with existing products. As a result, they willcome to understand the potential for, and feasibilityof, applying innovative technologies to develop new

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business models and products. For example, Procterand Gamble has launched a pilot venture in ruralNicaragua to help its managers generate creativeideas by immersing themselves in a context wherethe company currently has no presence, infrastruc-ture, or partners. By doing so, they avoid having thevoices from the fringe contaminated by the dominantlogic of the marketing model used to serve their ex-isting markets. As the HLL and P&G experiencesdemonstrate, the costs in managerial release timeand travel for generating complex interactions are afraction of what a large firm spends on marketingresearch and product development in establishedmarkets.

Reconciling Contradictions

Nike was unable to reconcile the apparent discon-nect between its current business model and theneeds and requirements of the new, low-income con-sumer it was trying to serve. In fact, designing andproducing a lower-cost shoe using the existing busi-ness system meant, paradoxically, that Nike failed toreach its target customer. Thus, integrating diverseand disconfirming information into strategy requiresreconciliation of seemingly conflicting perspectives.Competitive imagination is sparked only when theorganization commits to resolving the contradictions

created by the disconfirming information introducedby fringe stakeholders.

Mexico’s largest cement company, Cemex, pro-vides an instructive example.28 Cemex has achievedextraordinary profitability through a shrewd strategyof targeting developing countries such as Bang-ladesh, Egypt, Indonesia, Thailand, and others inLatin America. The poorest residents of these devel-oping countries represent a special opportunitysince they are currently inadequately served, if atall. Moreover, sales to the poor tend to be less subjectto volatility based upon macroeconomic conditions.Cemex embarked on a strategy of learning how totap into the enormous market of low-income custom-ers in developing countries by first studying how todo business with the poor in Mexico.

Poor, do-it-yourself homebuilders in urban slumsand shantytowns often take four years to completejust one room and thirteen years to finish a smallfour-room house. This is because banks and otherbusinesses will not engage with poor residents ofinformal settlements where the legal status of theirproperty ownership is murky. Haphazard designcombined with material theft and spoilage con-spire to make home construction for the poor acostly and risky proposition. To reach this market,Cemex had to reconcile these contradictions bycreating a new business model. Through its pro-gram called “Patrimonio Hoy,” Cemex formed sav-ings clubs that allow aspiring homebuilders tomake weekly savings payments. In exchange, Ce-mex provides material storage and architecturalsupport so that homes can be well designed andbuilt in sensible stages. The result is that partici-pants in the program build their houses threetimes faster, with higher quality, and at two-thirdsthe cost. Patrimonio Hoy has been growing 250 percent per year and has enrolled more than 20,000poor families since its inception. The goal is toreach one million families in Mexico in five years.

Other examples point to the significance of cor-porate-level initiative in this regard. To help rec-oncile contradictions and leverage learning, Du-Pont has designated a senior executive to serve aspoint person for all new initiatives in the companyaimed at the fringe. In this way, efforts of individ-ual project teams can be better coordinated andexperience more effectively diffused. Similarly,Unilever has created an international committee totransfer and adapt innovations such as HLL’s prod-ucts and promotion programs to other countriesand markets.

As Exhibit 4 shows, reconciling contradictionsinvolves incubating disruptive innovations in atransactive mode with fringe stakeholders. At thisstage, radical new ideas and business models

Exhibit 3: Generating Complex Interactions

Objective: Close interaction with fringe stakeholders withinremote contexts to generate new product ideas andbusiness innovations, and to transfer tacit knowledge.

Process:1. Cultural sensitivity training of managers for the contexts

identified by “putting the last first.”2. Based on the inventory of interesting contexts identified

by putting the last first, R&D managers andline/operating managers such as production engineersand product development managers travel to thesejurisdictions for 2–4 weeks to immerse themselves inthese cultures, to understand consumer needs andfunctionalities required, and to explore the feasibility ofnew approaches for meeting customer needs in aradically different, innovative, and sustainable manner.

For example, an American coal-based electric utility will findit hard to imagine future growth trajectories, disruptiveinnovations, and radical business models in distributedsolar power generation without immersing itself in acontext where centralized gigantic grids of fossil-fuel-basedpower generation do not exist. The new products andbusiness models may be applicable not only to theseremote contexts but may also be adaptable to the firm’scurrent context.

Costs: Training, managerial time, and travel.Benefits: Generating competitive imagination for future

growth of the firm.

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identified in the previous steps are operationalizedand implemented. Such implementation takes intoaccount the concerns of remote stakeholders af-fected by the firm’s operations to anticipate needsand prevent the creation of adversarial swarms.

The integration of diverse and disconfirming in-formation is a creative process involving the de-sign of new products and business models to servepreviously invisible needs. This step focuses onthe articulation and implementation of practicalsolutions to the problems and opportunities iden-tified in the “fan-out” stage. The challenge is thusto link both stages of the RT approach together intoa coherent process for new strategy formulationand implementation.

Putting It All Together

The creation of the Grameen Bank in Bangladeshprovides an excellent example of the approach inaction.29 Over twenty years ago, Muhammad Yunas,then a professor of economics at Chittagong Univer-sity in Bangladesh, conceived the idea of a bankfocused on offering “micro-credit” loans to the poor-est of the poor. This business concept was developedas a direct result of personal interactions that he hadwith poor people in rural villages and shantytowns.Most bankers assumed that laziness or lack of com-petence were the reasons that so many lived in ab-

ject poverty. As a result, they focused their attentionon more affluent customers. But Yunas was person-ally motivated to understand what the poor felt theyneeded in order to change their lives for the better.Much to his surprise, he discovered by travelingthrough villages and through extended personal in-teraction that they were, for the most part, energetic,motivated, and knew exactly what they needed tomove forward. In almost every case, this involvedgaining access to small amounts of credit to launchor expand small enterprises. Grameen Bank was es-tablished to serve this need.

To succeed, it was necessary for Grameen to turnmost of the established assumptions about banking(e.g., loan size, need for collateral, contractual en-forcement) upside down by focusing on making verysmall loans to poor women based upon a “peer lend-ing” model where small groups of loan recipientsbecame mutually responsible for each other’s credit.The bank’s sales and service people visit villagesfrequently, getting to know the women who have theloans and the projects in which they are supposed toinvest. In this way, lending due diligence is accom-plished through trust-based interaction and ex-change, rather than the mountains of paperwork andlegal documentation characteristic of conventionalbanks. In fact, the individual loan amounts are oftensmaller than the document-processing charges ofmost financial institutions.

By the late 1990s, Grameen was lending in ex-cess of $250 million each year to more than 2.3million poor customers in over 40,000 villagesthroughout Bangladesh. Even more amazing, itachieved a 95 per cent repayment rate, the highestof any bank on the Indian subcontinent and indeedmuch higher than banks in the United States. Atleast in part due to the Grameen experience, therehas been a global explosion of institutional inter-est in microlending over the past decade, includ-ing recent entry into this domain by financial gi-ants such as Citigroup.

While it is not a deliberate application of RT, wecan learn much from the Grameen experiencewhen it comes to engaging fringe stakeholders forcompetitive imagination. The approach taken wasquite different from conventional models of strat-egy and stakeholder “management.” First, the fo-cus was on “fanning out” to work with distant andmarginal stakeholders to identify opportunities fornew business concepts, rather than to protect orlegitimate existing business practices. Second,trust-based interaction on complex issues enabledthe bank and its stakeholders to confront the con-flicts and contradictions implicit in their own ini-tial views and positions. Thus, through mutuallearning and growth, the integration of diverse

Exhibit 4: Reconciling Contradictions

Objective: Incubating, operationalizing, and implementingradical innovations and new business models.

Process:1. Coordination and exchange of information in

organizational committees that are horizontally (SBUs,functional areas, geographic locations) and vertically(cut across corporate hierarchies) diverse.

2. Incubation of new innovations and business models bysetting up task forces consisting of operating managers,R&D engineers, and staff managers, some of whom haveexperienced the radically different stakeholder contexts.

3. Ongoing transactiveness with stakeholders in radicalcontexts to test and refine ideas for products, services,and business models to ensure that stakeholder needsare met and their concerns regarding negative socialand environmental impacts taken care of.

4. Organizing and facilitating stakeholder dialoguesinvolving line managers, product developers, andtechnologists in collaboration with fringe stakeholderrepresentatives to develop a specific new productconcept, market, or situation.

Costs: Coordination of task forces and ongoingtransactiveness or engagement with stakeholders.

Benefits: Generating disruptive innovations in products,services, and business models while addressing theeconomic, social, and environmental concerns ofstakeholders at the fringe and preventing the creation ofadversarial swarms.

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and disconfirming information afforded the possi-bility of “fanning in” to identify strategies andopportunities that did not exist previously.

Together, the capabilities of stakeholder “fan-out” and “fan-in” reinforce each other. By integrat-ing knowledge from fringe stakeholders, RadicalTransactiveness has the potential to challengefundamental business models and frames of refer-ence, leading to new bases of competitive advan-tage. This capability also helps the firm engagestakeholders in an ongoing two-way dialogue thatenables it to anticipate and respond to their con-cerns instead of experiencing unanticipated con-flicts such as those faced by Monsanto.

From Transparency to Transactiveness

Radical Transactiveness helps firms cast a wider,more inclusive net in order to generate competitiveimagination about possible future products, ser-vices, markets, and business models. As such, itcomplements other approaches to business cre-ativity such as increased employee diversity, lat-eral thinking, and conventional R&D and technol-ogy management. For example, in recognition ofthe disruptive innovations which have emergedfrom HLL and other grassroots initiatives, Unileverhas begun adding managers from these develop-ing-country subsidiaries to its board of directorsand top management committees at the head of-fice. Such diversity is now paying dividends in theform of increased innovation in conventional R&Dand product development.

The RT framework proposes that firms should “fanout” to identify fringe stakeholders by following thelinkages of existing stakeholder networks to the pe-riphery, going beyond the traditional logic of stake-holder salience to consciously seek out remote stake-holders that are non-legitimate, non-urgent, andpowerless. Networking from the core to the peripheryhelps to identify emergent stakeholder concernsin order to prevent the formation of adversarialswarms. Putting the last first reverses the logic of theestablished business and seeks to generate imagi-nation and ideas about unmet needs, potential newproducts, and business innovations.

The capability of “fanning in” requires buildingthe managerial capacity for empathizing with di-verse and disconfirming stakeholder perspectives;understanding the culture, thought processes, andlanguage of distant stakeholders; and acquiring thecapability to reconcile the contradictions betweenthe existing business model and the views of fringestakeholders. By generating complex interactions,firms can develop the intimacy and trust needed forhonest two-way exchange to occur between manag-

ers and those on the fringe of the company’s estab-lished stakeholder network. To convert this insightinto practical business strategies, however, the con-tradictions between current reality and the needsand requirements of the new context must be recon-ciled.

RT helps the firm avoid unanticipated conflictswith Internet-connected smart mobs that haveemerged over the past decade. It also aids in theidentification of new strategies for a smarter form ofglobalization which seek from the outset to addresssocial and environmental problems. This meanscomplementing capability in radical transparencywith Radical Transactiveness. Radical transparencyinvolves going beyond statutory requirements to afull and open disclosure of the firm’s current activi-ties, strategies, and impacts. This has become in-creasingly commonplace over the past decade.30

Radical transparency is targeted primarily at man-aging core stakeholders—those who can directly af-fect the current business by virtue of their power,urgency, or salience. It promotes license to operateby seeking “permission” from those interests andgroups that might otherwise withhold resources, ap-proval, or legitimacy.

Unfortunately, in a globalizing and intercon-nected world populated by tens of thousands ofNGOs and activist groups, it becomes increasinglyperilous to depend upon radical transparencyalone. The experiences of organizations such asMonsanto, Nike, Shell, and the World Trade Or-ganization demonstrate that fringe stakeholders atthe periphery with no direct connection to the or-ganization’s activity can have a significant impacton its ability to execute. Moreover, future compet-itiveness depends increasingly on the creative de-struction of existing business models via disrup-tive innovations that are at the same time sociallyand environmentally responsible.

In short, it appears inevitable that all large firmswill eventually have to adopt RT approaches toensure survival by engaging stakeholders that arecurrently below their radar screens. The questionis which firms will preemptively develop this ca-pability as the path to competitive imagination forthe future.

Endnotes1 Shapiro, R. 1999. Address to the Greenpeace Business Con-

ference, October 6th. Online at: http://www.monsanto.com.2 The description is from Simanis, E., & Hart, S. 2000. The

Monsanto Company: Quest for sustainability. Washington, DC:World Resources Institute.

3 Foster, R., & Kaplan, S. 2001. Creative destruction. New York:Currency.

2004 17Hart and Sharma

4 Korten, D. C. 1995. When corporations rule the world. WestHartford, CT: Kumarian Press.

5 Union of International Associations, 1999.6 See: Florini, A. (ed.) 2000. The third force: The rise of tran-

snational civil society. Washington, DC: Carnegie Endowmentfor International Peace; Tapscott D., Ticoll D., & Lowey, A. 2000.Digital capital: Harnessing the power of business webs. London:Nicholas Brealey.

7 Reingold, H. 2002. Smart mobs: The next social revolution.Cambridge, MA: Perseus Publishing.

8 Mitchell, R. K., Agle, B. R., & Wood, D. J. 1997. Toward atheory of stakeholder identification and salience: Defining theprinciple of who and what really counts. Academy of Manage-ment Review, 22: 853–886.

9 See, for example, Gupta, A., & Westney, D. E. (eds.) 2003.Smart globalization. San Francisco: Jossey-Bass; Stiglitz, J. 2002.Globalization and its discontents. New York: W. W. Norton;Coyle, D. 2001. Paradoxes of prosperity: Why new capitalismbenefits all. New York: Texere.

10 See, for example, Foster & Kaplan; Christensen, C. 1997.The innovator’s dilemma. Boston: Harvard Business SchoolPress; Hamel, G., & Prahalad, C. K. 1994. Competing for thefuture. Boston: Harvard Business School Press; Hart, S., & Mil-stein, M. 1999. Global sustainability and the creative destruc-tion of industries. Sloan Management Review, 41(1): 23–33.

11 Schumpeter, J. A. 1934 (Reprinted in 1962). The theory ofeconomic development: An inquiry into profits, capital, credit,interest and the business cycle. Cambridge, MA: Harvard Uni-versity Press.

12 Foster & Kaplan, 14.13 March, J. 1991. Exploration and exploitation in organiza-

tional learning. Organization Science, 2(1): 71–87; Christensen;Hart & Milstein; Hamel, G. 2000. Leading the revolution. Boston:Harvard Business School Press.

14 Kerin, R., Varadarajan, P., & Peterson, R. 1992. First-moveradvantage: A synthesis, conceptual framework, and researchpropositions. Journal of Marketing, 56 (October): 33–52; Bowman,D., & Gatignon, H. 1995. Determinants of competitor responsetime to a new product introduction. Journal of Marketing Re-search, 32 (February): 42–53.

15 Freeman, R. E. 1984. Strategic management: A stakeholderapproach. Boston: Pitman, 46.

16 See Clarkson, M. 1995. A stakeholder framework for ana-lyzing and evaluating corporate social performance. Academyof Management Review, 20: 92–117; Mitchell, et al.

17 Frooman, J. 1999. Stakeholder influence strategies. Acad-emy of Management Review, 24: 191–205; Rowley, T. 1997. Mov-

ing beyond dyadic ties: A network theory of stakeholder influ-ences. Academy of Management Review, 22: 887–910.

18 Berman, S., et al. 1999. Does stakeholder orientation mat-ter? The relationship between stakeholder management mod-els and firm financial performance. Academy of ManagementJournal, 42: 488–506; Hillman, A., & Keim, G. 2001. Shareholdervalue, stakeholder management, and social issues: What’s thebottom line? Strategic Management Journal, 22: 125–139.

19 For a detailed description, see Dunn, D., & Yamashita, K.2003. Microcapitalism and the megacorporation. Harvard Busi-ness Review, August: 46–54.

20 Eisenhardt, K., & Martin, J. 2000. Dynamic capabilities:What are they? Strategic Management Journal, 21 (Special is-sue): 1105–1121; Teece, D., Pisano, G., & Shuen, A. 1997. Dynamiccapabilities and strategic management. Strategic ManagementJournal, 18: 509–533.

21 Diesing, P. 1962. Reason in society. Urbana, IL: University ofIllinois Press.

22 For examples of each of these, see: Collins, D. 1996. Servingthe homeless and low-income communities through business &society/business ethics class projects: The University of Wiscon-sin-Madison Plan. Journal of Business Ethics, 15(1): 67–85; Pra-halad, C. K., & Hart, S. 2002. The fortune at the bottom of thepyramid. Strategy � Business, January (26): 1–14; Starik, M. 1995.Should trees have managerial standing? Toward stakeholder sta-tus for non-human nature. Journal of Business Ethics, 14(3): 207–217.

23 Spar, D. L., & La Mure, L. T. 2003. The power of activism:Assessing the impact of NGOs on global business. CaliforniaManagement Review, 45(3): 78–101.

24 For an in-depth discussion of this concept, see Chambers, R.1984. Rural development: Putting the last first. London: Longman.

25 Srivastava, H., and Venkateswaran, S. 2000. The business ofsocial responsibility: The why, what and how of corporate socialresponsibility in India. India: Books for Change.

26 See Rodriegez, M. 2002. Reinventing the wheel: HindustanLever in India. Barcelona, Spain: IESE.

27 See McDonald, H., London, T., & Hart, S. 2002. Expandingthe playing field: Nike’s world shoe project. Washington, DC:World Resources Institute.

28 See Herbst, K. 2002. Enabling the poor to build housing:Pursuing profit and social development together. Changemak-ers.net Journal, September.

29 See Counts, A. 1996. Give us credit. New York: Times Books.30 Witness the explosion of standards and reporting initia-

tives over the past decade (e.g. The Global Reporting Initiative,The Global Compact, ISO 14000, SA 8000, etc.).

Stuart L. Hart is the S.C. JohnsonChair of Sustainable Global En-terprise at Cornell University’sJohnson School of Management.He is also professor of strategicmanagement and founder of theCenter for Sustainable Enter-prise at the University of NorthCarolina’s Kenan-Flagler Busi-ness School. He received hisPh.D. from the University ofMichigan. His research interestscenter on strategy innovationand change. Contact: slh55@cornell. edu and slhart@unc.edu.

Sanjay Sharma is a professor ofpolicy at Wilfrid Laurier Univer-sity, Canada. He received hisPh.D. in management from theUniversity of Calgary. His re-search focuses on the develop-ment and deployment of organi-zational capabilities, opportunityframing of strategic issues, andstakeholder engagement to gener-ate proactive corporate sustain-ability strategies and competitiveadvantage. His managerial expe-rience includes sixteen years insenior positions in multinationalcorporations. Contact: ssharma@wlu.ca.

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