Sustainability in Coffee Production

Creating Shared Value Chains in Colombia

Andrea Biswas-Tortajada, Asit K. Biswas

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317450047
• Edition: 1
• Topic: Technology & Engineering
• Subtopic: Agriculture
• Index: Technology & Engineering

Coffee, as a commodity and through its global value chains, is the focus of much interest to achieve fair trade and equitable outcomes for producers, processors and consumers. It has iconic cultural and economic significance for Colombia, which is one of the world's major coffee producers for the global market. This book examines sustainable coffee production in Colombia, specifically the initiatives of Nestlé to create shared value.

It describes the transformation of the coffee landscape by the development of economically, socially and environmentally viable and dedicated supply chains. Suppliers have been encouraged to shift production and quality paradigms, in order to develop long-term and sustainable strategies for higher value and premium quality products. This has been partially achieved by establishing a robust partnership with the Coffee Growers Federation and other public, private and social actors, thereby taking control of the institutional architecture and knowledge base that exists in the country. The book provides an important lesson of corporate social responsibility and the creation of shared value for the benefit of farmers, corporations and consumers.

1
Why Creating Shared Value?

National and international development organisations, agencies and banks; non-government organisations; and even governments have begun to work with third parties to gain access to the financial, human and institutional resources they need to tackle poverty, malnutrition, underdevelopment, increasing inequality, environmental degradation and social upheaval. At once, consumers all around the world are looking at products in a more critical and holistic manner, preferring goods that can simultaneously satisfy their economic, social, environmental and ethical requirements. On their part, firms are seeking to stay profitable and expand their business over the long term. It has been assumed that the agendas followed by all these actors are mutually exclusive and are at odds with each other.

In fact, some believe private sector companies are prospering at the expense of the broader community, greatly disregarding the huge social, environmental and economic problems they cause. Businesses have been effectively disparaged. The narrow conception of capitalism under which many companies operate has curtailed their legitimacy, something especially true for large corporations. Multinationals are accused of manipulating sales prices, tax avoidance, supply chain mismanagement, harmful environmental practices, human rights violations, poor working conditions, murder of union officials, animal rights and welfare abuse, food safety disregard, chemical use, irresponsible marketing, supporting oppressive political regimes, etc. (Chandler, 2008; Sustainability Education Network, 2010; Ethical Consumer, 2013).

Enterprises are being subjected to closer and ever more exigent scrutiny from consumers, suppliers, shareholders, the media, special interest groups and the general public. These different groups want to know how firms build their supply chains, how are benefits and risks distributed amongst shareholders and stakeholders, what are the interactions with the local communities, and how they are becoming more socially responsible and responsive (Bright, 2008; UN Global Compact, 2010, 2013, 2014).

Gradually, a wider range of community issues has begun to gain attention with local and international civil society groups and the media. As public awareness on the impact the private sector can potentially have on public policy community affairs increases, companies are being urged to join other social institutions in improving the living conditions of society at large, especially of the poor and underprivileged (UN Global Compact, 2013, 2014; Falck and Heblich, 2007). The development sector is not staying behind.

In the foreword of the UN Global Compact 2013 Annual Report, United Nations Secretary-General Ban Ki-Moon recognised the work companies have put into ‘ingrain universal principles on human rights, labour, environment and anti-corruption in their management and operations’. To 2014, over 2,000 companies using Corporate Social Responsibility, Creating Shared Value, responsible capitalism or sustainable business models had signed up to uphold the standards listed in the United Nations Global Compact. This UN initiative encourages private sector firms and civil organisations from around the world to support good governance principles and adopt environmentally and socially sustainable practices.

In more affluent societies, consumers are looking at products in a more holistic manner than ever before. Quality, price, packaging, the company’s reputation, nutrition, wellness and lifestyle portrayal are some of the many factors that come into play when opting to purchase a given product. For many, the demand for goods and services goes well beyond the initial and mere satisfaction of needs and wants. Consumers are often trying to adopt consumption patterns and behaviours that can simultaneously make economically, socially, environmentally and ethically reputable claims.

In developed countries, around 30 per cent of buyers are particularly interested in developing a good understanding of and stand on sustainability issues, the current trade system, rural policies, the workings of the coffee sector, etc. A much smaller number of people, around 5 per cent, of people who claim they are aware of social and environmental issues, rely on those values to make purchasing decisions. This wide ‘attitude-action’ or ‘values-behaviour’ gap suggests sustainable consumption is driven by factors other than just moral concerns. For sustainability advocates, most of the members of the middle classes, cost–benefit considerations, socio-economic context, larger consumer trends, marketing campaigns, the media and general consumption behaviours are as important as values and norms (Kennedy et al., 2009; Young et al., 2009 in Kolk, 2012).

The interplay of affluence, consumption behaviour and the growth of a more development-aware socio-economic group has important considerations for sustainability. Each year and until 2030, the World Economic Forum (WEF) has estimated that at least 150 million people will be entering the middle-income bracket (2014). These more affluent and engaged consumers are becoming progressively more concerned with the impacts their consumptive decisions may have on sustainability, the environment and the quality of life of those working in the different steps that ultimately transform raw materials into finished products. They are thus using their purchasing power to push companies to deliver goods and services in a socially responsible and accountable manner, generate positive community dynamics and have neutral environmental impacts. Important as they are in advocating in favour of sustainable agendas, present and future consumers are not the only ones stewarding initiatives to change consumption patterns and make them more sustainable.

Corporate Social Responsibility initiatives can be used as proxies to measure this change in behaviour amongst private sector companies. A 2008 McKinsey & Co. survey found that 90 per cent of the companies engaged stated they had increased their CSR activities from what they were five years ago. More firms began including environmental, social and governance-related issues into business strategies (Bright, 2008). Talks of sustainability and responsibility have gone past boardroom walls to begin permeating corporate goals, missions, visions, statements, press releases and public relations. It can be confidently inferred that since that survey was published, similar activities have grown in number and scope.

Amongst the numerous actual and potential benefits companies can reap by embracing CSR, CSV and the myriad of terms referring to symbiotic business– society relations are increased trust, public reputation and market value. Investment communities are gradually factoring in environmental stewardship, social responsibility and good governance in their calculations of a company’s long-term value. Additionally, firms can also expect to enlarge their growth potential from the implementation of ‘green’ innovations and ‘base of the pyramid business ventures’ (Guthrie, 2014). In general terms, it seems that acting ethically, responsibly and sustainably raises a company’s internal and external profile. It helps build corporate reputation, boosts employee satisfaction and dedication and contributes towards gaining customer trust and loyalty (Ethical Corporation, 2014). It also prevents supplier failure and improves supply chain management. For Nestlé, this is actually one of the main reasons its two largely successful coffee brands have engaged in sustainability-oriented initiatives.

Internal and external pressures alike are persuading firms to implement behavioural changes, including strengthening their supply chains and making their operations economically, socially and environmentally sustainable. Companies naturally want to grow and be continuously profitable over the long term. A difference worth noting is that the activities they carry out and decisions they take in the pursuit of profitability are being increasingly put under regular and punctilious scrutiny by people inside and outside the firm itself. For example, company employees are emerging as corporate agents of change.

Company employees are also consumers, thereby playing dual roles in pushing for sustainability. Many workers are interested in equal measure in consuming goods that are responsibly produced and in being part of a company that manufactures goods and delivers services sustainably (Falck and Heblich, 2007). These roles as workers, consumers and members of society widen the fronts from where sustainability demands are coming. Acting responsibly and sustainably is thus becoming a way for firms to attract and retain human capital.

Additionally, outside actors, especially civil, non-governmental and not-for-profit organisations are becoming part of the global environment in which firms operate (Kytle and Ruggie, 2005). Communities hosting factories, supplying raw materials and providing labour are demanding firms to do good and to consider their demands, needs and be mindful of the challenges they face. All of these new dynamics are shifting power relations and creating new and greater connectivity avenues among stakeholders.

Competitive imperatives are thus undergoing a significant transformation. Companies are gradually listening to, considering and actively addressing social risks, issues, problems and impacts of corporate decisions, sourcing models and factory operations. Building a competitive edge is urging firms to modify their corporate strategies. They are creating blueprint plans for sustainability, sustainable growth and sustainable profitability. Growth models are beginning to incorporate the management of social uncertainties and mitigation of negative externalities. They are also paying closer attention to their supply and value chains.

Firms have increasingly realised that they are closely linked to the destiny of a vast network of supplying farmers, employees, ancillary firms and society at large. It is important to outline the reasons why a company would self-interestedly look after this extended group of stakeholders. Societal and environmental problems can create economic costs in the firm’s value chain. Externalities inflict internal costs on the firm.

Firms want to reduce the economic and social risks of producer failure at any stage of the production process, supply chains and marketing. Securing reliable and sustained access to raw materials at competitive rates is crucial to remain profitably in business over the long term (Porter and Kramer, 2006, 2011). Most consumer goods in the world require raw agricultural materials of one sort or the other. These inputs are mostly purveyed from small farmers, working their plots of land at subsistence levels. It is they who are responsible for underpinning local, national and ultimately global supply chains. The absence of supply chains simply means no business in the same way that constrained growth of those procurement steps has negative repercussions for present and future corporate growth potential.

More importantly, the antagonism that places business and people on opposite sides of the development scale is being put into question. Business people, academics, society, stakeholders and shareholders are increasingly thinking about who and what are companies for. Partial and ambitious answers alike have emerged in the form of new business propositions and models that help firms earn their legitimacy. Businesses are enlarging the number of groups they engage with and deepening the way in which they serve them. This process has called the attention of a diverse and growing number of stakeholders and shareholders. It has also spearheaded the emergence of an increasingly vast body of literature that looks at the role private companies are playing in fostering development, new community engagement dynamics, socially focused business models, etc.

Academia, think tanks and business-oriented consulting firms have begun to pay closer attention to the merits, demerits and potential of initiatives such as Corporate Social Responsibility, Creating Shared Value and Responsible Investment to name just a few. These analyses usually revolve around one key issue: the motivation behind a company building stronger ties with its surrounding community and with actors other than its shareholders.

Procuring the amount and quality of beans it requires to satisfy the growing demand for coffee in the world is proving gradually more difficult. For expansion to be possible and sustainable for many years into the future, coffee producers need to be able to grow sufficient good quality coffee. To do that, they need to sustain a prosperous life at the same time.

When a company supports peasants to be more productive, the benefits are not only for the farming communities or local agricultural systems to reap. Multinational business themselves stand to gain a great deal from investments in physical, human and financial capital incurred to improve practices in the agricultural sector. These actions are in fact an imperative if companies want their supply chains to be robust, reliable, expandable and long lasting. For Nestlé, articulating these needs and demands has taken the form of ‘Creating Shared Value’, a term coined by Michael Porter and Mark Kramer.

These two scholars defined the term as the ‘policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates’ (2011: 66). This ‘Big Idea’, published in an article titled ‘How to reinvent capitalism – and unleash a wave of innovation and growth’ in the Harvard Business Review, has generated a prolific debate about the validity of this and other models in which societal and corporate businesses intersect, notably Corporate Social Responsibility.

It should be noted that as conceived by Porter and Kramer, and implemented by Nestlé, Creating Shared Value has to be embedded in the company’s corporate culture and be treated as integral to corporate strategy. This enlarges the firm’s notions of success, urging the private sector to engage in important development debates in order to define and enhance its competitiveness, and simultaneously create economic value and societal benefits within the spheres it operates. This new way of doing business builds upon the notion that social improvement and progress do not thwart corporate growth and profitability, but rather they are mutually reinforcing processes. Moreover, this corporate proposition not only recognises that public priorities, social needs and private goals overlap, but also creates market opportunities in areas otherwise perceived as structural challenges and risks to business.

At its top managerial and leadership level, the company has for some years fully internalised its role as a development stakeholder and partner, firmly cementing its view that development is good for business in the same way that business is good for development. Known as ‘Creating Shared Value’ (CSV), this business proposition acknowledges that economic growth, social development and environmental protection can only be achieved through collaborative processes that involve the private, public and civil sectors of society (Porter and Kramer, 2006, 2011). It is also about making the private sector grow and prosper, but with a purpose, as the Inter-American Development Bank (IDB) puts it (2013a).

For Nestlé, CSV has become the way it builds and harnesses interdependent relations with farmers, consumers, shareholders and the community at large to grow as a company and build better-off communities. This framework enlarges the intersection of business profitability, social progress and environmental sustainability. Other firms seeking to tighten the relationship they have with society have named their strategies differently: Corporate Social Responsibility, Responsible Capitalism, Sustainable Capitalism, Sustainable Business Development, etc. Many other similar concepts can be found in academic works, corporate mission statements and the media. All these terms seems to have a common genesis. They have emerged from external pressure from costumers and interest groups; internal needs to mitigate supply chain risks and increase employee satisfaction; workers’ desire to articulate their roles as employees and community members; genuine corporate efforts to have more amicable relations with society; as well as from personal ideals, individual ethical commitments.

It is beyond the scope of this book to make a categorical statement as to whether CSV is the theoretically more robust model to simultaneously pursue business, social and environmental goals. Other interesting topics not discussed here have to do with the criticisms made to CSV as a concept. Many authors have persuasively engaged in that debate and can substantiate their claims with a robust body of work. Crane and colleagues (2014) have published some of the most vehement responses to the conceptual proposition made by Porter and Kramer (2006, 2011). These scholars see ‘Creating Shared Value’ as unoriginal and overlooking the tensions between social and economic goals. They find the way the term was conceived and developed by Porter and Kramer as naive about the challenges of business compliance and gives corporations a shallow role to play in society. They see it as a ‘reactionary rather than transformational response to the crisis of capitalism’ (2014: 131).

The analysis and debate required to reach any conclusion would probably require writing a few volumes on the issue. The vastness and diversity of the corporate world is such that academicians, managers, stakeholders, NGOs and the society at large cannot afford making sweeping generalisations. And yet, categorical statements about the validity, truthfulness and relevance of concepts such as CSR, CSV, responsible capitalism and sustainable business development are all too often found in academic works and widely held narratives. Instead, this case study focuses on the way a large transnational company has gradually amassed a deeper understanding of the links that tie its prosperity to and with society and the environment. More specifically, the arguments presented here are concerned with understanding why and how, through the implementation of its CSV strategy, a large company like Nestlé has become so actively involved in revitalising the coffee sector in Colombia. For example, as notions of corporate success have been enlarged, the company is taking part in rural development processes where new knowledge, capacities and connectivity can create new wealth.

It cannot be stressed enough that CSV is certainly not a panacea for social problems, development constraints, environmental degradation and poverty. What it can do, nonetheless, is to reorient the way a company can do different things and do things differently to reassemble supply chains in a way that is more environmentally sustainable, socially responsible and economically profitable. If implemented with the input from multiple and diverse stakeholders and shareholders, companies can mitigate social conflicts, environmental degradation and disadvantageous economic conditions for the communities they rely on.

Looking into a sustainable and profitable future, Nestlé is seeking to establish a vast community of interests with the different groups it interacts with. These include shareholders, workers and their families, unions, different levels of government, regulators, media, consumers, distributors, suppliers, nongovernmental organisations and groups representing the food industry and customers (Nestlé Colombia, 2013b). If all stakeholders recognise and capitalise on the fact that public priorities, social needs and private goals largely intersect, economic value and societal benefits can be simultaneously created.

As a business model, CSV urges the company to develop a comprehensive understanding of its contributions to and impacts on society. It thus requires forging interdependent company–supplier–worker–community–shareholder– customer relationships that can simultaneously lead to improved community welfare and economic success. To successfully do business in Colombia, Nestlé has joined and worked alongside many public, private, social and academic institutions to further advance health, wellness, nutrition and living conditions for consumers and suppliers alike. The company has already established many of the key partnerships it relies on to operate a successful business. Yet, as this study will show in later sections, it will prove to be a challenging task to find partners that share this philosophy and can consequently support its long-term goals.

By adopting CSV as a corporate strategy, Nestlé has had to open up and use all the avenues available to foster intensive dialogues with its multitude of stakeholders and communities of interests. The resulting conversation is leading the company to take ever-greater responsibility for the social, environmental and economic implications of its value chains. This is naturally shifting governance dynamics in local, national, regional and global value chains as well as in local communities.

To redefine its position within society, Nestlé will have to position itself as a proactive, resourceful and innovative development stakeholder and partner. As this book discusses in later sections, its commitment and actions, large and small, are alrea...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Acronyms, abbreviations and definitions
• List of figures and tables
• Foreword: shared value from coffee
• Preface
• Acknowledgments
• 1 Why Creating Shared Value?
• 2 The world’s beverage of choice
• 3 The shared C in coffee and Colombia: complexity
• 4 Nestlé in Colombia
• 5 From farm to cup: the Nescafé Plan
• 6 Quality, productivity and sustainability: the AAA Sustainable QualityTM Program
• 7 Lessons learned: future challenges and opportunities
• 8 Further thoughts
• Postscript
• Epilogue
• Bibliography
• Index