Download Based on the work of Michael Yaziji, 2004

Building a Sustainable, Profitable Business
Jan van der Kaaij
Copyright 2003 © by IMD International, Lausanne, Switzerland
Not be used or reproduced without permission
The General Manager’s Performance Dilemmas*
Sustainability
Dilemmas
Growth
Profitability
Profitable Business Growth
From “Good to Great” hedgehog concept:
*Based on the Work of Professor Bala Chakravarthy
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Purpose of the Session
•
To use our increased understanding of world demographics, markets and trade
politics to identify and build sustainable, profitable businesses.
•
But first…the basics of coffee
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The Coffee Value Chain
Retailer Consumer
Producer
Coyote
Exporter
Dealer
Roaster Wholesale
Out-ofhouse
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Coffee Plantation
•
Arabica coffee is planted from 300 m
up to 1,600 m over sea level
•
The higher, the more acidity, the
better
•
Microclimates and soil have impact
on quality
•
A tree enters full production in his 4th
year
•
The coffee tree has usually three
flowerings
•
After the flowering, the plant needs
rain
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From Flowers to Black Gold
•
Each cherry contains two coffee beans
•
From blossom to cherry = about 7 months
•
1 worker harvests 1 – 2 bags of 46 kg per
day
•
After picking the pulp is removed
•
Fermentation, washing and drying
•
Weight loss from Roasting = about 25%
•
The roaster blends coffee from different
origins before roasting
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Historical Coffee Prices
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Assignment Questions
•
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It is now 1985 and you have seen the opportunities on the
supply side. How do you propose Nico and Frans proceed in
terms of:
•
Supply chain and distribution
•
Own brand or hallmark
•
Pricing, margins, payment to farmers
•
International expansion
Case: 20 years Max Havelaar
“Building a Sustainable Business”
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Max Havelaar: Setting the scene
Decisions taken:
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•
Hallmark (after a long struggle with Ahold)
•
Pricemodel based upon the minimum requirement of Mexican
farmers
•
Consumerprice: 1,97
•
Farmercost: 0,65
Max Havelaar
UCIRI
What Happened Between 1985-2000?
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•
Hard battle with the local coyotes
•
Improved living conditions (schools, medication,…)
•
Slowly building up processing capacity (de-stoning,packing,…)
•
Other cooperatives triggered by the success (Prodecoop,
Nicaragua)
•
Max Havelaar launched as a hallmark
•
Farmer prices with a guaranteed price floor
•
Fair Trade organizations launched throughout Europe and the US
•
New products such as bananas and orange juice
•
Market share stagnates at 3%
Concrete Results After 15 Years
•
183 coffee cooperatives in 24 countries around the globe
•
17 countries commercialize Fair Trade coffee
•
Additional payments to coffee producers amounted to 50 million euro
(Netherlands only)
•
Sales volume stagnated at 3 million kilos per year (Netherlands only)
•
Brand-awareness of 90%
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After 2000: From Hallmark to Brand
•
Decision was made to change from hallmark to brand in the
Netherlands
•
Former competitors joined forces to create one brand
Old positioning
New positioning
http://www.maxhavelaar.nl/maxgenieten/
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Current Challenges
•
A Global Coffee Crisis!
•
Price war in the Dutch supermarkets
•
Price pressure increases price gap for Max Havelaar
•
Good consumer intentions are not always translated into actions
•
Emerging new “sustainable” initiatives such as Utz Kapeh and
CCCC.
Market Fair Trade Coffee
Is brand sympathy equal to marketshare?
100%
90%
55%
25%
3%
7%
Market
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Potential Buyers
45%
Penetration
Buying behaviour
Brand
Awareness
Brand
Sympathy
Intention to buy Marketshare
Marketshare
The Coffee Crisis: Confusion
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•
NGO’s increase pressure on top-brands.
•
Many “sustainable” initiatives in the marketplace.
•
NGO’s such as Oxfam and the lobby organization ICO appeal to
G8 and European Union.
•
Prices remain low due to structural overcapacity.
•
Structural solution requires major steps from Governments,
NGO’s and industry.
Building a Sustainable, Profitable Business…
What is the annual net retail value of Fair Trade Products in Europe?
€ 400 million
How much did Max Havelaar NL contribute to farmers in 20 years?
€ 55 million
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QUESTIONS ?
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Assignment Question
•
It is now January 2004 and you have seen the the actual
development of Max Havelaar as well as the changes in the
global coffee trade.
•
Why should the following players be concerned about fair trade:
NGO’s such as Oxfam
EU and its member countries
• Max Havelaar
• P&G, Albert Heijn, Sara Lee, Nestlé
•
•
You are the Marketing Director for Procter & Gamble
How do you deal with pressure from NGO’s and advocacy groups?
1. See article in handout.
2. Read assignment: 5 minutes.
3. Buzz groups (3-4 people): 15 minutes
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Building a Sustainable, Profitable Business
The Max Havelaar Coffee Case WRAP-UP
Jan van der Kaaij
Copyright 2003 © by IMD International, Lausanne, Switzerland
Not be used or reproduced without permission
Building a Sustainable, Profitable Business
•
Why should you care?
•
Why not just focus on profit and growth?
•
Sustainability is for the next generation or at least does not help my
quarterly results!
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Conclusions Max Havelaar
•
You can be profitable, grow the business, and do it in a sustainable
way.
•
Ignoring industry responsibility creates space for innovative niches
filled in by outsiders.
•
When a major player adopts higher standards, it can fundamentally
reshape the business it is in (Albert Heijn and Utz Kapeh, Nike and
child labor)
•
An NGO can become a big catalyst in a major market.
•
The same NGO’s can become obsolete once the major players take
their responsibility.
•
Behavior of a brand or corporation is an integral part of its’ customer
value (Ben & Jerry’s, P&G)
•
Lowest price raw material purchasing can become counter-productive
when the supply chain is structurally imbalanced
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General Wrap-Up
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•
McKinsey recommendations to the coffee crisis
•
Triple Bottom Line
•
Branding
•
Partnering with an NGO
McKinsey and the Coffee Crisis
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•
200 interviews, 10 weeks of work pro bono to provide advice to
TechnoServe.
•
TechnoServe is an international not-for-profit organization that
works to provide business solutions to poverty among coffee
producers.
•
McKinsey recommended:
1.
Increase consumption (to be done by the International Coffee Organization
(ICO) and Coffee Industry).
2.
Support specialty coffees (to be done by NGOs and banks).
3.
Promote diversification (to be done by NGOs, Banks and the Private
Sector).
Sustainability As Part of Business
•
The triple bottom line principle
•
not only cash but also social capital and environmental resources
should be considered
•
Avoid depletion of resources; Sustainability implies zero negative
impact on the environment
•
Social systems are not infinitely elastic
People, Planet, Profit
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Is It a Niche or Mainstream?
“Ecomagination is a key part of GE's overall growth strategy.
By 2010, we hope to generate $20 billion of revenue from
ecomagination offerings.”
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Some others…
“A company can only practice sustainable development if it is constantly
aware of the social, economic and ecological dimensions and consequences
of its corporate activities. For Volkswagen, sustainability and responsibility to
society mean the ability to develop solutions for economic, environmental
and social problems. “
“The Body Shop Values Mission commits the Company to the pursuit of
social and environmental change. Our Trading Charter defines the
principles by which we will trade in order to deliver profits with principles.”
“Through sustainable development we integrate the economic,
environmental and societal aspects of our business to achieve sustained
financial success, safeguard our environment and develop our reputation as
partner and provider of first choice for all of our stakeholders.”
“The three P’s of sustainable development (People, Planet and Profit) are
key to all of DSM’s activities. Respect for people, valuable partnerships and
good corporate citizenship are DSM's core values.”
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Sustainability: How Far Do You Want to Go?
Economic
Value
Generated
Visionary
Defenders
Believers
Volcafe, Starbucks ?
“The Smart Zone”
Fair Trade?
Sara Lee?
Source: Prof. Ulrich Steger, IMD/ Between-us
Compliance
Level
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Industry
Average
Maximum
Value
Level of Environmental
And Social Performance
NGOs and the Smart Zone
Examples of NGO Campaigns:
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•
Genetically modified crops (Monsanto, Aventis)
•
Labor standards (Nike, Adidas, Kodak, Disney)
•
AIDS drugs patents and pricing in South Africa (Merck, GlaxoSmithKline)
•
Animal rights (Revlon, KFC)
•
Environmental impact (Shell’s Brent Spar, etc.)
•
Globalization and market power (McDonalds)
•
Lending practices (ABN AMRO/Banco Real Microfinance)
Social Responsibility and Branding
Selection
of causes
Sustainability
Themes
• Fit
with brand
• prepared to set up
joint programs
• Effectiveness
• Fit with stakeholders
•Fit with brand
• Fit with business
principles
Stakeholders
• Employees
• Clients
• Investors
• Suppliers
• General Public
• Governments
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Matching with Stakeholder Expectations
Action Plan
• Events
• Lobby
• Employee
programs
• Publications
• PR
Creation
of Tangible
“Products” &
Benefits
Benefits of NGO Campaigns

Money

Employee morale

Market share and market size

Rules of the game

Cross-product impact
Based on the work of Michael Yaziji, 2004
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Firms and Industries at Risk
Offering life-saving or life-threatening
products:

Fashion, media, alcohol,
pornography, gambling, etc.
Generating large externalities:

Extraction, heavy manufacturing,
electrical power, waste
management, chemical, etc.
Having high power in supply-chain
or market:


Pharmaceuticals, health care,
arms, tobacco, etc.
Confronting changing social mores:

Having high brand awareness:
Retail, clothing, food and
beverage, automotive,
media, finance.
Using new technologies:

Genetic engineering,
personal-data collection.
Doing business in different regions
with differing ethical or social
expectations:

Virtually every multinational,
particularly those operating
in both developed and
developing countries.
Wal*Mart, Microsoft, etc.
Based on the work of Michael Yaziji, 2004
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Leveraging the Upside: NGO Partnerships
Gaining Competitive Advantage through Partnerships with NGOs
Unique Strengths of NGOs:
Legitimacy
Awareness of social forces
Distinct networks
Specialized technical expertise
Based on the work of Michael Yaziji, 2004
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Leveraging NGO Partnerships
NGO Resources
Legitimacy
Awareness of social forces
Distinct networks
Specialized technical expertise
Benefits for Companies
Head off trouble
Accelerate innovation
Foresee shifts in demand
Shape legislation
Set industry standards
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Based on the work of Michael Yaziji, 2004
Challenges of Partnering
Risks going in:
Divulging sensitive information.
Attracting closer scrutiny.
Legitimating potential future “opponents.”
Process hurdles:
Initial distrust.
Conflicting values.
Different processes.
Based on the work of Michael Yaziji, 2004
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Conclusion of Session
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•
The triple bottom line methodology helps us find ways to make
profitable growth sustainable.
•
It is hard to keep this focus in the face of short-term pressures
and purely financially oriented practices of others.
•
This pressure can be addressed by:
•
Including social responsibility in your corporate strategy;
•
By working with people (e.g., employees, suppliers, distributors,
shareholders, governments and even NGOs) who support this
approach; and
•
Thinking about how to turn it into a competitive advantage rather
than a cost.
Recent Developments
•
Monday May 10, 07:44 PM
Nestle: fair trade? Nestle has reportedly decided to enter the ethical coffee market.
•
Nestle [NESN.VX] is reported to be planning the launch of an ethical coffee product to capitalize on growing consumer
concerns about production methods, particularly the plight of coffee growers in the developing world. This will make Nestle a
competitor of Fairtrade products, though given Nestle's patchy record in this area the move could yet backfire.
•
Nestle has over the years been something of a focus for campaigners against the alleged unethical production methods and
policies of multinational corporations, so it may come as something of a surprise to hear that the Swiss company is
considering launching an ethical coffee product.
•
Although the branding of this product remains undisclosed, a report in the Independent on Sunday suggests that Nestle has
no intention of working with the Fairtrade Foundation which oversees the certification of Fairtrade products. What was initially
a niche market appealing to consumers prepared to make an effort to adhere to their principles has now burst into the
mainstream. Cafe Direct for example buys beans directly from growers in the developing world and pays them more than the
standard market price. The company's sales grew by 20% over the past year.
•
The goods have to undergo stringent checks to ensure that they conform to the Fairtrade standards, and that their sale does
indeed benefit producers in the developing world. In a recent report, Nestle criticized the Fairtrade Foundation's approach,
claiming that paying producers more than the market price for their coffee encouraged them to increase their production,
resulting in an imbalance between supply and demand.
•
Sales of Fairtrade coffee keep growing, and so-called compassionate consumerism is on the march. However, the movement
has changed since the media frenzy that surrounded it in the 1980s. Paradoxically, the Fairtrade phenomenon surfs a wave of
egocentrism. What has catapulted Fairtrade products into the mainstream are not the altruistic principles of those with whom
the idea originated, but the more widespread desire amongst consumers to make themselves feel and look good.
•
Nestle is keen to capitalize on this opportunity, but its entry into the ethical goods marketplace independent of the Fairtrade
Foundation may well end up undermining trust in such products.
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Further Recommended Readings
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•
Harvard Business Review, The Competitive Advantage of
Corporate Philanthropy, Michael E. Porter and Mark R. Kramer.
•
Cause Related Marketing, Who Cares Wins, Sue Adkins.
•
Cannibals with Forks: The Triple Bottom Line of 21st Century
Business, John Elkington.
•
Harvard Business Review, The Virtue Matrix: Calculating the
Return on Corporate Responsibility, Roger L. Martin.