Building a Sustainable Profitable Business Jan van der

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 2 File name

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 3 File name

The Coffee Value Chain Retailer Producer Coyote Exporter Dealer Roaster Wholesale Out-ofhouse 4 File name Consumer

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 4 th year • The coffee tree has usually three flowerings • After the flowering, the plant needs rain 5 File name

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 6 File name

Historical Coffee Prices 7 File name

Assignment Questions • 8 File name 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” 9 File name

Max Havelaar: Setting the scene Decisions taken: 10 File name • 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? 11 File name • 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% 12 File name

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/ 13 File name

Current Challenges 14 File name • 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.

The Coffee Crisis: Confusion 15 File name • 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 G 8 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 16 File name

QUESTIONS ? 17 File name

Assignment Question • It is now January 2004 and you have seen 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 18 File name

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! 20 File name

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 21 File name

General Wrap-Up 22 File name • Mc. Kinsey recommendations to the coffee crisis • Triple Bottom Line • Branding • Partnering with an NGO

Mc. Kinsey and the Coffee Crisis 23 File name • 200 interviews, 10 weeks of work pro bono to provide advice to Techno. Serve. • Techno. Serve is an international not-for-profit organization that works to provide business solutions to poverty among coffee producers. • Mc. Kinsey 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 24 File name

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. ” 25 File name

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. ” 26 File name

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 27 File name Industry Average Maximum Value Level of Environmental And Social Performance

NGOs and the Smart Zone Examples of NGO Campaigns: 28 File name • Genetically modified crops (Monsanto, Aventis) • Labor standards (Nike, Adidas, Kodak, Disney) • AIDS drugs patents and pricing in South Africa (Merck, Glaxo. Smith. Kline) • Animal rights (Revlon, KFC) • Environmental impact (Shell’s Brent Spar, etc. ) • Globalization and market power (Mc. Donalds) • 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 29 File name Matching with Stakeholder Expectations Action Plan • Events • Lobby • Employee programs • Publications • PR Creation of Tangible “Products” & Benefits

Benefits of NGO Campaigns Ø Money Ø Employee morale Ø Market share and market size Ø Rules of the game Ø Cross-product impact Based on the work of Michael Yaziji, 2004 30 File name

Firms and Industries at Risk Offering life-saving or life-threatening products: Ø Fashion, media, alcohol, pornography, gambling, etc. Generating large externalities: Ø Extraction, heavy manufacturing, electrical power, waste management, chemical, etc. Having high power in supply-chain or market: Ø Ø Pharmaceuticals, health care, arms, tobacco, etc. Confronting changing social mores: Ø Having high brand awareness: Retail, clothing, food and beverage, automotive, media, finance. Using new technologies: Ø Genetic engineering, personal-data collection. Doing business in different regions with differing ethical or social expectations: Ø Virtually every multinational, particularly those operating in both developed and developing countries. Wal*Mart, Microsoft, etc. Based on the work of Michael Yaziji, 2004 31 File name

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 32 File name

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 33 File name Based on the work of Michael Yaziji, 2004

Challenges of Partnering Risks going in: ØDivulging sensitive information. ØAttracting closer scrutiny. ØLegitimating potential future “opponents. ” Process hurdles: ØInitial distrust. ØConflicting values. ØDifferent processes. Based on the work of Michael Yaziji, 2004 34 File name

Conclusion of Session 35 File name • 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 1980 s. 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. 36 File name

Further Recommended Readings 37 File name • 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 21 st Century Business, John Elkington. • Harvard Business Review, The Virtue Matrix: Calculating the Return on Corporate Responsibility, Roger L. Martin.