Research aims
This master thesis wants to analye the existent link between innovation and sustainability. In particular, the main aim is to investigate the role of stakeholders, and in particular of supply chain, in this relationship. The purpose is to demonstrate that investing in a sustainable supply chain means having positive returns in term of image and customers' loyalty, new technologies and new processes, which will be always more sustainable.
This research has particularly considered the coffee sector, its functioning and the behaviour some roaster companies.
Literature analysis
According to the OECD's Glossary of Statistical Items, “innovation activities are all scientific, technological, organizational, financial and commercial steps which actually, or are intended to, lead to the implementation of innovations. Some innovation activities are themselves innovative; others are not novel activities but are necessary for the implementation of innovations. Innovation activities also include R&D that is not directly related to the development of a specific innovation”1. The first one who noticed the importance of innovation was Schumpeter in the 40's, who has given the idea of a creative destruction yet.2In fact, he says that strategic innovation is an “evolutionary process of continuous innovation and creative destruction”.3
Another important definition of strategic innovation has been given by C. Markides, who said that “strategic innovation is as an act that breaks the rules of the economic game”.4 This rupture become more and more important for enterprises today, because they have always more competitors and also because the concurrence has become globalised. This is why strategic innovation should be attempted: successful innovations allow companies to stay ahead of the competition in term of cost, performance and development time to market the product. Furthermore, all these advantages can be translated into value to the customer and stakeholders of the companies, ultimately allowing the company to stay ahead of the competition. The theme of Strategic Innovation spans from creativity, to strategic orientation, cooperation, internal capabilities, strategic implementation and
environmental adaptation among many other areas.5 Due of this complexity, every company has to decide how to break the rules. In fact, the innovation takes place when a company identifies gaps in the industry and decides to fill them, thus it’s important to have a sort of process to do that. In this way, the gaps become the new mass market. There could be two types of pressures that force
1 See Organization for Economic Co-operation and Development (OECD), (2006), “Measuring innovation in OECD and non-OECD countries” in Human Sciences Research Council, Cape Town, South Africa
2 See Schumpeter J.A., (1942), “Capitalism, Socialism and Democracy”, Harper & Row
3 See Freeman C., (2009), “Schumpeter's buciness cycles and techno-economic paradigms” in Techno-economic
Paradigms, Essays in honor of Calota Perez, Anthem Press, New York, NY, pp. 125-144
4 See Markides C., (1997), “Strategic Innovation” in Sloan Management Review, Vol. 38, Spring, p. 10
5. See Sammut-Bonnici T., Paroutis S., (2013), “Developing a dominant logic of strategic innovation” in Management
companies to innovate: trajectories, that are technological advancement and changes in the economy, and actors, such as shareholders, suppliers, customers and competitors.
Innovations can be classified into two types: radical and incremental innovation. Both of them are important for the survival of companies, as they are complementary in the innovation strategies. The term “incremental” refers to the evolutionary nature of this type of innovation and usually it's a “step-by-step” innovation path because involves small improvements. With reference to a product or a service, incremental innovations enhance the productivity, the customer satisfaction, or increase a company's revenue, or differentiate a product in the markets.6 This type of innovation, however, is more often developed.
Radical innovations, on the other hand, occur infrequently but they are revolutionary. Normally, their benefits and rewards are very high. Such events concern a breakthrough in technology, process or usage and they change existing markets or create new markets.
Generally speaking, innovation requires top management commitment and involvement.
Management has to clearly have in their mind what type of innovation they are looking for and they have to be really convinced about the innovative work the enterprise is doing. What's more, top management can provide adequate resources for the strategic innovation process and also for breaking the walls between function departments. This fact is important because functional barriers are the bottlenecks that prevent and slow down the innovative process.
As Lendgren and Ailin proposed in their paper in 2008, the enterprises can use their five-phases innovation leadership model to implement Innovation Leadership. The first phase is represented by the identification of the task of innovation leadership, that is to say market, technology, network, production and processes.
The second phase is accomplished when the enterprise recognizes the field of its innovation leadership. Its leadership can be in the markets it exploits, in its technologies, in its networks, or in its competences, or finally in the different estimated and predetermined innovation process.
In the third phase, the enterprise has to pinpoint the success criteria for the company's innovation leadership task. These criteria are divided between short-term and long-term criteria. The most important factors on which the company should concentrate here are cost, time, performance, continuous innovation and improvement and finally learning.
During the fourth phase the enterprise has to identify the model of innovation leadership used in the company (the functions involved in innovation). It has also to establish not only the type of model but also the core of the model (i.e. the mission, the objectives) and the phases in the innovation process. The model must be comprehensive, versatile and it must consider both informal and formal innovation models. Only in this way, it will help the company to choose the innovation leadership
6 See Lendgren P. and Ailin M., (2008), “Conceptualizing strategic innovation leadership for competitive survival and excellence” in Journal of Knowledge Globalization, Vol.1, No. 2, Fall, p. 90
task, the innovation portfolio and the innovation leadership process.
Finally, in the fifth phase the enterprise describes the process of innovation leadership. Six main focus areas may be identified; those are product innovation, production innovation, process innovation, human resources management innovation, customer process innovation and network innovation leadership.
Corporate Social Responsibility may be seen as a factor of differentiation and it can help to innovate products and services. Just recently it has been realized the impact of companies’ activities on the environment, on the society as well as their possible deterioration. The path to sustainability started in 1987 with the work of Brundtland Commission and it continued with many international summits (Rio 1992, Kyoto 1997, Johannesburg 2002, etc.), but only in the 2000 enterprises adopted CSR policies, even if some of them had implemented some tools aimed to control environmental risks at the end of ‘90s, as the standard ISO 14001.
The first important concept to define is Sustainability. This is the ability to continue a certain behaviour indefinitely, and normally sustainability refers to environment, economy or society. So we can say that Sustainable Development have to conciliate environmental protection, economic growth and social fairness and is defined as the ability to respond to the need of present generation without compromising the capability of future generations to respond to their needs. Two are the key ideas in this definition: the concept of needs, that are to satisfy; the concept of the limitation, imposed by the state of technology and social organization on the environment's ability to meet present and future needs. Corporate Social Responsibility defines the concept that organizations have an engagement to take into account the interests of their customers, employees, shareholders, communities, and the environment in all aspects of their operations. McWilliams and Siegel define CSR “as actions that appear to further some social good, beyond the interests of the firm and that which is required by the law”.7
So Corporate Social Responsibility responds to the priorities of Sustainable Development providing strategies, management measures and behaviours able to modify the methods of management and audit.
Its implement is based on two complementary concepts:
– The stakeholders' theory (R.E. Freeman, 1984) that affirms that a company has to progress from a stockholders conception to a collaborating conception in which the company is constantly in contact with its stakeholders, toward which the enterprise has many obligations;
– The adoption of the Triple Bottom Line's logic (J. Elkington, 1997) in the companies. This
7. See McWilliams A., Siegel D., (2001), “Corporate Social Responsibility: a theory of the firm perspective” in
fact implies the social and environmental responsibility in addition to economic responsibility for the managers.
Another point of view about this topic is given by Lantos, who distinguishes three types of CSR: ethical, altruistic and strategic CSR.8 His vision originates from the four-part definition of CSR made in 1979 by Carroll, who suggested that corporations have four responsibilities: economic, legal, ethical and philanthropic. Economic responsibilities born because of the nature of the business: produce the goods or services that the society wants and to sell them at a profit. Legal responsibilities come from the rules issued by the society; these are laws and regulations under which firms are expected to operate, and the society expects that companies fulfill its economic mission within this framework. Ethical responsibilities are behaviours and activities that are not codified into law but nevertheless are expected by society's members (and that's why is so difficult for businesses to deal with). Finally, discretionary responsibilities are those about which society has no clear-cur message for companies, so they are left to individual opinion and discrimination; the decision to assume this type of responsibilities is regulated only by a desire to engage on social functions which are not compulsory, not required by regulations, and not even generally expected from businesses in an ethical sense9. Lantos argues that is difficult to distinguish between ethical and philanthropic dimension of CSR, this is why there are many uncertainties about the legitimacy and domain of CSR. In fact, philanthropic (or altruistic or humanitarian) CSR is done regardless of its impact on the bottom line but is used as a marketing tool to improve the company's image, as stakeholder groups continually demand to devote resources to CSR. Moreover, public wants the businesses to make social issues a part of their strategy. However many corporations make use of philanthropic CSR because it may help to achieve the firm's financial obligations. So, social responsibility is a balancing act between economic, social and ethical performance and between various stakeholders’ interests. The three types of CSR are based on their nature (required vs. optional) and their purpose (for stakeholders' good, the firm's good, or both). Consequently, we can define ethical CSR like something that “is morally mandatory and goes beyond fulfilling a firm's economic and legal obligations,..., even if the business might not benefit from this”10. Finally, a very important type of CSR is the strategic CSR. In fact, with this type of responsibility, good actions are accomplished for business as well as for society, so philanthropic reasons are added to profit motivations, and vice-versa. It originates a win-win situation in which both the company and one or more stakeholder groups take advantage.
8 See Lantos G.P., (2001), “The boundaries of corporate social responsibility” in The Journal of Consumer Marketing, Vol. 18, No. 7, pp. 595-605
9 See Carroll A.B., (1979), “A three-dimensional conceptual model of Corporate Performance” in The Academy of
Management Review, Vol.4, No. 4, p.500
10 See Lantos G.P., (2001), “The boundaries of corporate social responsibility” in The Journal of Consumer Marketing, Vol. 18, No. 7, pp. 595-605
Strategic CSR is born in the mid-80s and is expected to grow further in the next years. It is implemented because it usually results in long or long-long run gain, even if the company often entails sacrifice in the short-run. In fact, some of the most successful companies are also among the most socially responsible, with some examples being the Body Shop or Ben and Jerry's. There are also some corporations that do strategic CSR by providing charitable good deeds. As a result, people feel grateful and indebted to the organization, and reciprocate in various ways, for example giving it their business, recommending it to others, looking more favourably on the firm, turning their loyalties toward it, and so on.
Moreover, companies were afraid of doing publicity about their sustainable acts because their efforts may appear insincere, but then they understood that today sustainable products and services are more and more important for consumers and that there is a real demand of these products. Nowadays they do publicity and some governments encourage this activity too (i.e.: in the US there is the Ron Brown Award for leadership that is won by companies whose programs improve the wellbeing of employees or enhance the communities in which they live and work).11
To understand who is implied in this mechanism, Wood explains in her article “Corporate Social Performance revisited”12 in 1991 that business and society are interwoven and that they are not distinct entities, as for instance society has some expectations for appropriate business behaviour and outcomes. People basically have expectations towards three different entities, which are:
– all businesses because of their roles as economic institutions; – particular firms because of what they are and their activities; – managers as moral actors within the firm.
Thus, we can distinguish three levels of analysis: institutional, organizational and individual. From these we can derive three corresponding principles of corporate social responsibility.
The first principle is the principle of Legitimacy: society assigns legitimacy and power to business and in the long term the company who does not use power in a manner which society considers responsible will tend to lose it. This principle defines the institutional relationship between business and society and specifies what is expected by every business13.
The second one is the principle of Public Responsibility, for which companies are responsible for outcomes related to their primary and secondary areas of involvement with society. So, there is an area of primary involvement, behaviours and transactions that derive directly from the firm's specialized functional role; and another domain, the area of second involvement, in which there are impacts and effects not intrinsic to the character of the organization but generated by its primary
11 See Jones D., (2001), “Alcoa, Merck, UPS win leadership awards” in USA Today, 23 May, p. 6B
12 See Wood D.J., (1991), “Corporate Social Performance revisited” in The Academy of Management Review, Vol. 16, No. 4, pp. 695-699
13 See Davis K., (1973), “The case for and against business assumption of social responsibilities” in Academy of
involvement activities. This assumption circumscribes a business's responsibility to those problems related to the firm's activities and interests, without defining a too-narrow domain of possible action14.
The last one is the principle of Managerial Discretion and it says that managers are moral actors and for this reason they are obliged to exercise such discretion as is available to them, toward socially responsible outcomes, within every field of corporate social responsibility15.
It has been seen that strategy and corporate social responsibility programs may be intertwined. Sustainability may be a business opportunity, an investment for the future, and a pathway to innovation and creative thinking. Therefore, the relation between organizational innovation capability and corporate sustainability has an important function for firms to establish their
competitive advantages. Hilke affirms that companies sustainability-oriented and with sustainability in their innovation process show evidence of value creation, such as the development value of products new to the market and cooperation value with stakeholders.16 However, stakeholders are fundamental for innovation and for the relation between strategic innovation and corporate social responsibility. In fact, if a company’s key stakeholder has a positive attitude and positive
perceptions on innovative product development, the company will hold esteemed insights on its future growth and evolution.
With regards to this topic, Lai, Lin and Wang demonstrate that especially stakeholders in
environmental affects the corporate innovation capability and that the latter affects in its turn the Corporate Sustainability17. After having developed corporate innovation capability with R&D aid and having influenced the organization’s innovation environment through a contest, the enterprise can combine strategy with CSR. In this way, the company can pursue long-term sustainability, so having a strategic Corporate Social Responsibility should be the top priority for managers in terms of the next step for both firms and society. We should say that strategic CSR can be seen as an organizational goal and as a valuable activity.
So, innovation for sustainability is really important nowadays. Szekely and Strebel define this type of innovation as “the development of something new, be it intentional or not, that improves
performance in the three dimensions –i.e. environmental, economic and social- of sustainable development”18. Innovation can be generated for technological changes, for change in process,
14 See Preston L.E., Post J.E., (1975), “Private management and public policy: The principle of public responsibility” in Englewood Cliffs, NJ: Prentice-Hall
15 See Carroll A.B., (1979), “A three-dimensional conceptual model of corporate social performance” in Academy of
Management Review, Vol. 4, pp. 497-505
16 See Hilke E.J.B., (2010), “Corporate sustainability and innovation in SMEs: Evidence of theme and activities in practice” in Business Strategy and the Environment, Vol. 19, No. 7, pp. 417-435
17 See Lai W.H., Lin C.C., Wang T.C., (2015), “Exploring the interoperability of innovation capability and corporate sustainability” in Journal of Business Research, Vol. 68, pp. 869-870
18 See Szekely F., Strebel H., (2013), “Incremental, radical and game-changing: strategic innovation for sustainability” in Corporate Governance, Vol.13, No. 5, p. 468
operating procedure and practices, business models, systems and thinking. Considering the integrate approach, it should be important for enterprises to balance all three dimensions of sustainability (economic, environmental and social). Conventional new products and services development reflections (i.e.: quality, durability and price) need to be integrated with environmental and social considerations during the design phase. Therefore, adopting this type of approach can help firms to avoid directional risk and benefit from their strategic innovation for sustainability. The essential elements of this approach include identifying and filling knowledge gaps and building capabilities, making sustainability a part of everyday activities and building bridges with the organization. To conclude, we ascertain that today many more companies view CSR initiatives as real opportunities for more efficient management of their human resources. It helps also the supply chain to obtain improved competitive advantages and that they are adopting CSR approaches in order to ensure efficiency, encourage innovation, and create continuous organizational growth. In this environment, innovation will also include the identification of more efficient methods of doing business, as well as finding new types of products or services that may have not occurred to a business that has no CSR programs in the first place. So, if managed properly, CSR can provide a company with a positive return on the investments made to this end. The CSR process can also deliver a framework in which such innovations can be recognized and then exploited to the company’s advantage. In particular, the role of stakeholders in the CSR- Strategic Innovation relationship has acquired more importance in the last years. The first one who studied the importance of considering
stakeholders in CSR programs was Freeman in 1984. In his stakeholder theory, he stated that firms can financially benefit from taking into account the concerns of their stakeholders (composed of a set of individuals and organizations) and not just of their shareholders19. Generally speaking, the logic is that CSR enhances the trustworthiness of a firm and thus gives a boost to relationships with important stakeholders, which decreases transaction costs and so results in financial gains; in this way, CSR can differentiate firms’ products, reduces its operating costs and serves as a platform for future opportunities20. In 1986, thanks to the study Corporate Social Performance in Canada by the Royal Commission on Corporate Concentration21, it became clear that Corporate Social
Responsibility topic was linked with the management of a corporation’s relationship with its stakeholder groups. Even if the term stakeholder management wasn’t in use at that time, it became evident that all the studied corporations had relationships with different groups or constituencies and that these relationships were either being managed or not being managed, for better or worse. The relevant outcome to the research program was that the data collected and analyzed
19 See Freeman R., (1984), “Strategic Management: A stakeholder perspective” in Boston: Pitman
20 See Barnett M.L., (2007), “Stakeholder influence capacity and the variability of financial returns to Corporate Social Responsibility” in Academy of Management Review, Vol. 32, No. 3, p. 796
21 See The Royal Commission on Corporate Concentration, (1977), “Corporate social performance in Canada”, Study No. 21, Ottawa: Ministry of Supply and Services
corresponded with the concepts and models of stakeholder management, rather than with the concepts and models of corporate social responsibilities, responsiveness and performance22. Another important model in order to explain the role of stakeholders in the increasing efficacy of CSR is the stakeholder influence capacity: it is defined as “the ability of a firm to identify, act on, and profit from opportunities to improve stakeholder relationships through CSR” and it depends on its previous stakeholder relationships23. Briefly, the acts of a company and the responses by its stakeholders regarding CSR are so much path dependent that different companies achieve different results from CSR that are based on their unique history. This shows that deficiency of building investments in stakeholder relationships can limit the capacity of future profitable CSR
opportunities. If the firms communicate an evidence of their effects on social welfare, the effects of an act of CSR on stakeholder relations and stakeholders influence capacity will be amplified. What’s more, our cognitive representations about someone or something are hard to change once established, so each stakeholder’s reaction to an action of CSR by a firm is conditioned on his or her cognitive representation of the nature of that corporation; for this reason, we can say that stakeholder influence capacity moderates the effect of an action of CSR on stakeholder relationships. The company must define, consult and engage its stakeholders in its program to ensure that its activity is seen as relevant to the business and to its stakeholders. They also find out that the best received corporate community involvement programs are those with an intuitive link between the business and the initiative24. Another important factor is coherence: any mismatch between a company’s words and its actions can destabilize its credibility. Companies have to be consistent in devoting their responsibilities to different parts of the business and among their
business partners, even if some of these operations are out-sourced to far suppliers, or then they can lose in reputation, as showed by the example of Nike. So, great emphasis is to be put on the value that can be created by interactions between firms and primary stakeholders. These interactions have to be especially relational rather than transactional, because these ones can be easily duplicated and thus offer little potential for competitive advantage. Therefore, this fact implies that investing in stakeholder management may be complementary to shareholder value creation and may actually contribute to create a basis for competitive advantage, since important resources and capabilities may be created and can differentiate a firm from competitors.
As we have seen above, the role of stakeholders is really important for the companies and suppliers, among the others, have deserved more and more interest in the last years. In fact, firms started to
22 See Clarkson M.B.E., (1995), “A stakeholder framework for analyzing and evaluating Corporate Social Performance” in The Academy of Management Review, Vol. 20, No.1, pp. 92-99
23 See Barnett M.L., (2007), “Stakeholder influence capacity and the variability of financial returns to Corporate Social Responsibility” in Academy of Management Review, Vol. 32, No. 3, p. 803
24 See Dawkins J., Lewis S., (2003), “CSR in stakeholder expectations: And their implication for company strategy” in
observe the importance of their suppliers on the impact they had on their bottom lines and their role on innovation capacity. Also customers started looking to suppliers as an influential factor for their purchasing decisions. For these reasons, many studies have been done about the role of suppliers in firms’ sustainability.
In “Social sustainability in selecting emerging economy suppliers”25, the definition of socially sustainable supplier selection is given. This concept is defined as “the degree to which firms’ supplier selection processes ensure that supplier organizations do not violate the social standards common in Western countries”, such as the exploitative and dangerous working conditions, the child labors, etc. In particular, firms’ supplier management policies are less ambiguous because of the continuous heightened media reporting and the increasing legal requirements for client
information. Aside from the consumer social pressures, there are also other elements that influence the choice of a sustainable supply chain: the pressures exerted by the government and the pressures by employees. If a company adheres to some high quality standards in the field of supply chain, it can obtain remarkable benefits. First of all, it has been observed that this type of firms have normally supplier organizations that handle complicated business processes, which can only be achieved through effective management systems and strong planning capabilities, so it leads to have stronger strategic capabilities. Secondly, firms like that seem to have a better buying reputation, so companies are perceived more competent, reliable and innovative. This is a good thing also towards those clients who want a green supply chain because in this way they can identify themselves with the enterprise. Finally, enterprises that have a green supply chain normally require to the purchasing function to examine more closely the suppliers and interact with them. This leads to increased acquirements regarding the capability to evaluate and cooperate with suppliers from emerging regions. Firms are required to move beyond simple inspections of the offer terms they receive from emerging economy suppliers and to more intensively understand the business situation in the respective supply regions. Thus, a cross-functional perspective and a greater involvement is needed. For these reasons, socially sustainable supplier selection is positively related to the extent of
organizational learning in supplier management.
In their study, Lintukangas et al. proved with a regression analysis that the preservation of a firm’s reputation is highly related to the level of green supply management. In fact, the clients’ increasing environmental, ecological, and ethical attention and requests to save energy, reduce pollution and waste, and assure consumer safety have put pressure on firms, which now seriously consider their ecological and ethical values. Customers drive corporations in their future decisions and is
important to have an integration, in terms of the knowledge of customer needs, between different functions of a company from marketing to supply management.
25 See Ehrgott M. et al., (2010), “Social sustainability in selecting emerging economy suppliers” in Journal of Business
Furthermore, the image and brand of the firm are more and more at stake by the supply chain today. There are some risks linked with the supply base and they include: the use of toxicant materials and fabrics in end-products, the use of child labor, sub-standard working conditions in a low-cost country, and more. That’s why firms need to expand their ethical awareness and green programs over the supply network from the buying customer to the country of origin or to the last rank supplier. What’s more, consumer awareness of green requirements puts great pressure on a firm’s supply management to meet the end-customers’ wants, and higher is the level of supplier
relationship management capability in firms higher is the adoption of green supply management26. Today, the role of risk management in supply chain management is more and more crucial, and above all the risks related to global supply chain management and how to manage and mitigate risk realization. Many types of risks have been identified regarding the supply base: risks arising from the process, control, demand, supply, and environment; risks related to disruption, price, inventories and schedule, technology, and quality; what’s more, dependency on suppliers has been
demonstrated to be an influent attribute affecting the supply risk; finally, environmental risk as a form of carbon dioxide emission from transportation in deliveries have caused serious attention. What is quite clear is that the firm's environmental commitment has an influence on green supplier evaluation and buying capabilities. In fact it has been seen that the main obstacles to effective green supply management are the high cost of environmental programs, a lack of standards and auditing, uneconomical recycling, and a lack of a management commitment, purchase awareness and supplier awareness. To improve these aspects requires wider knowledge and interaction between various stakeholders and relational capabilities, and it is a difficult skill to achieve. To conclude, we can say that the ability to manage supplier relationships and management's attempts to strive for transparent supply chain contributes to customer satisfaction. Hence, gain can be generated by increased sales and customers' trust and loyalty. The management of high-volume-buying companies should reflect about sustainability risks against low prices of non-green purchases and understand the long-term efficacy of green supply management practices on a firm's reputation and profit. This necessitates a huge change of mindset from cost-effective economy to long-run sustainable development of a company27.
The positive results can also stimulate the management to invest continually in innovation linked to the firm's green supply chain and to never stop financing researches and the developing of new products.
Coffee sector analysis
26 See Lintikangas K., Hallikas J., Kähkönen A., (2015), “The role of green supply management in the development of sustainable supply chain” in Corporate Social Responsibility and Environmental Management, Vol. 22, pp. 321-333 27 See Lintikangas K., Hallikas J., Kähkönen A., (2015), “The role of green supply management in the development of sustainable supply chain” in Corporate Social Responsibility and Environmental Management, Vol. 22, pp. 321-333
Almost 20-25 million families (mostly smallholder farmers) in more than 50 developing nations produce and sell coffee, and a lot of them are facing significant difficulties because of the fall of the price of coffee. Since 1970, prices have decreased a 3% per year in average for arabica coffees and 5% in average for robusta. Nicaragua gives a great example of the impact of these reductions: between 1998 and 2001 poverty rates increased by more than 2% among the farmers in the coffee sector. In many of these countries, coffee weighs for at least 20% of the total export profits, so about 100 million people are directly touched economically by the coffee trade, as can be seen in some evaluations28.
Due to the volatility of prices and their fall, roasting companies had to adapt their technology to increase the use of less qualitative coffee, as Robusta, and this fact goes to the detriment of the quality of the products. The more concentrated roasting firms’ sector permit also to reduce the use of stocks, in a just-in-time logic, favoring indirectly the big international operators in detriment to the little local producers. What’s more, every phase of the supply chain is becoming more and more specialized, so economies of scale are possible.
Nowadays, the first two enterprises, Nestlé and Philip Morris/Kraft, control the 57% of roasted coffee and soluble markets; the first five enterprises control the 87% of the market; only Nestlé dominates the soluble market with the 50%. The concentration of the sector and the high market power for the roasting firms contributes to reduce the add value minority interest of the cultivators. In fact, researches about the value chain done by Talbot in 1997, by OXFAM in 2002 and by Kaplinky in 2004 demonstrate that the value added share that remains in producer countries is diminishing constantly. The producers, in fact, get between 1% and 4% of the final price of the coffee. The quota of the final retail price obtained by producing countries is diminished, and this decline is due to two factors. The first one is that the roasters and retail industries have made profits by developing new products and by taking advantage of various value-adding activities (i.e.:
marketing, branding, differentiation and by adding flavors in the coffee drinks); the second factor is that the non-coffee components incorporated in the retail price of coffee have grown and now represent a much more significant share of the final retail price that the coffee itself. The “coffee crisis” is also menacing the social fabric of communities that lean heavily on coffee cultivation for their sustenance. The fact that the coffee cultivation is becoming more and more technical poses threats to its environmental sustainability. This is bad news for growers, but not for the large corporations who dominate the roasted coffee trade, which have been establishing record profits. To deal with these problems, the last International Coffee Agreement was signed in 2007. It's the seventh Agreement since 1962 and it was agreed by the 77 Members of the International Coffee
28 See Lewin B., Giovannucci D., Varangis P., (2004), “Coffee markets: New paradigms in global supply and demand” in Agriculture and Rural Development Discussion Paper 3, Agriculture&Rural Development Department, World Bank, Washington D.C.
Council. It was formally adopted by the Council through Resolution 431 and entered into force definitively in 2011. This Agreement reinforces the International Coffee Organization's role as a body for intergovernmental consultations, help international trade through enhanced transparency and access to relevant information, and encourage a sustainable coffee economy for the benefit of all stakeholders and particularly of small-scale farmers in coffee producing countries.
One of the goals of this Agreement is to encourage Members to develop sustainable coffee sector in economic, social and environmental terms. ICO is promoting awareness of the need for sustainable coffee economy. This is done by making stakeholders in this sector attentive of the danger to sustainability posed by negative economic conditions for producers, and recommending measures such as quality, promotion and diversification to maintain balance in the world coffee market. The Organization also promotes sustainable development and poverty reduction in producing countries through activities which have as their principal beneficiaries the coffee producing countries of Africa, Asia, Latin America and the Pacific region. To survive and gain in this hyper-competitive sector, differentiated products are requested.
To do this, producers have to distinguish their products by origin, defined process or particular characteristics, such as superior taste or few imperfections. These can be traded through more profitable channels that the typical one, and include Geographic Indications of Origins, gourmet and specialty, organic, faire trade, eco-friendly or shade grown and other certified coffees. These
segments are important because of their increasing rates and their potential social, economic, or environmental advantages for farmers. Besides premium price, there are many other persuasive arguments for encouraging the differentiated segments due to their positive externalities, for example the growing use of rural labor and organizational improvement, the crop diversification and the lower input costs minimize financial risk, a better natural resource management and biodiversity preservation, a diminished risk due to better drought and erosion resistance, the crop resilience to unfavorable weather, and a fewer health risk due to potential mismanage of
agrochemicals29. Two other factors are important too in the today’s coffee markets, which are quality and consistency. The latter is becoming an increasing critical competitive factor. In order to prosper in this new business context, coffee producers must understand the
characteristics and the nature of these structural changes, and also their governments must be quick in designing favorable business environments to allow them to successfully conform to the new necessities of the marketplace and to help them potentially shape it. Considering that agriculture progressively takes on industrial characteristics, these organizations necessitate also to create closer relationships and direct linkages with buyers and roasters to adequately respond to market demand
29 See Lewin B., Giovannucci D., Varangis P., (2004), “Coffee markets: New paradigms in global supply and demand” in Agriculture and Rural Development Discussion Paper 3, Agriculture&Rural Development Department, World Bank, Washington D.C.
and organize integrated value chains in order to guarantee the sustainability of each member. To exit from the coffee crisis, the International Coffee Organization (ICO) established in September 2001 a Quality Committee with an instruction of suggesting standards and procedures for the revocation from the market of low quality coffee. The general goal of the program is, in the short term, to decrease the supply of exportable coffee, therefore rising price. In the longer-term, the program means to raise the global quality of coffee exports. The success of the program in the long run to large extent will rely on cooperation from importing countries. An always more copious group of producers and coffee firms are trying to organize strategies that are independent of commodity pricing and the exchanges. A lot of them, as well as some that are households names, are adopting standards or developing purchasing criteria that transparently link their purchase to beneficial socioeconomic and environmental effects in developing countries. These emerging trade paradigms may give producers other ways to catch the long-term value of sustainability by
associating superior prices to demonstrable ameliorations in both quality of coffee and to more sustainable and trade practices. They are also compatible with a complicated demand situation: indeed today there are structural changes in demand both at the consumer level and at the industry level. These changes include “stagnant overall growth in the traditional major importing countries, increased demand for soluble coffee, increased demand for differentiated and higher-value
products, new technology allowing greater fungibility in coffee supplies, and geographic-generational shifts in the popularity of different types of coffee products”30.
In this situation, standards have a more and more important role. In fact, standards communicate information about the attributes of a product and these latter can be classified depending on the flexibility by which they can be measured. Standards system can be classified in 3 categories: mandatory, voluntary and private. The first type is when the standards are fixed by governments with regulations; they may influence trade flows by placing technical requirements, testing, certification and labelling procedures on imported goods; governments can strengthen through ex post accountability rules that allow punitive compensation to be conferred to the buyer in case of non-compliance, or they can adopt ex ante measures (i.e.: requiring information or banning a product). In Europe ex ante measures are fundamental in regulations, while in the U.S. ex post liability is more common.
The second type of standards system is the voluntary one that born from a formal coordinated process where key participants in a market or sector seek consensus. The International
Standardization Organization (ISO) has established over 7000 voluntary standards. Some of these are introduced as a response to consumer request or NGOs initiatives and also sectorial
30 See Lewin B., Giovannucci D., Varangis P., (2004), “Coffee markets: New paradigms in global supply and demand” in Agriculture and Rural Development Discussion Paper 3, Agriculture&Rural Development Department, World Bank, Washington D.C.
organizations can create voluntary standards that apply to their members. These standards are usually verified by third-party auditing.
Finally, the third type of standards is the private ones, which are developed and monitored internally by single enterprises.
However, this distinction is becoming progressively fuzzy. Although voluntary standards are not compulsory by rule, some of them have become so and this means that they are required if economic agents want to compete globally (i.e.: ISO 9000). The distinction between private and voluntary standards is also to some extent discretionary because many private enterprises borrow parts of voluntary standards. However today adherence to voluntary and/or private standards is increasingly a pre-condition for the admissibility of products by consumers and/or distributors. Contemporary food consumers in high-income countries want complete information on a product so that they can make individual choices in relation to personal conviction and taste predilection. In these circumstances, consumer protection is not just a problem of food safety, but also of giving trustworthy information to facilitate consumer choices. Therefore, the management of standards may be seen as a question of competition and/or cooperation between the actors of a value chain.Rather than just being simply a technical instrument to reduce transaction costs associated with asymmetry of information, they should be considered as a strategic tool of value chain coordination. What’s more, those who control standards have power over users, so the technical approaches used today in understanding the impact of sustainability standards on developing country trade need to be harmonized with political economy approaches.As markets for
differentiated coffees grow, there is a greater need for consumers to understand the complex (and sometimes confused) verification or certification processes that are used for the standards-oriented coffees. In this situation, the legitimacy of third-party certification is an essential market instrument that can prevent indiscriminate use of these practices. What’s more, deficiency in improving
standards transparency and in supporting third-party verification could also damage one of the few niches in which small coffee producers have the opportunity to be competitive in a profitable global trade. This is particularly important as various organizations, including corporations, are promoting their own independent principles and standards. Coffee operators in consuming countries are concerned in sustainability issues in four ways, in particular they may:
1. Buy and/or sell third-party certified coffees (i.e.: fair trade); 2. Contribute to projects in favour of coffee growing communities;
3. Promote their own mission statements, codes of conduct and sourcing guidelines that include environmental and/or social parameters;
4. Adopt codes of conduct or sourcing guidelines that have been written by sectoral organizations, public or private fora and NGOs.
There is an increasing number of private companies which adopt codes of conduct and sourcing guidelines that are not verified by third parties (i.e.: Starbucks, Nestlé). So, there are some problems and some positive points in these initiatives. They are admirable because they open up market channels for selling sustainable coffees and they also give opportunities for suppliers to follow a learning curve to fit higher standards. Their main limitations are deficiency of external monitoring and auditing, less transparency than third-party certifications, constrained participation in the decisions about standards and guidelines by farmers, and inconstancy in provisioning material incentives to producers. The big amount of initiatives also indicates that there will be inevitably different definitions and procedural guidelines for “sustainability”, which without any doubt add confusion in the marketplace. Finally, these systems are less prone to address the power relations among actors in the coffee value chain that third party initiatives.
However, in some ways these initiatives allow to convey value added to the producers and so they still operate in a redistributive mode and thus can have a corrective role with the regard to increased transfer of wealth downstream in supply chain.
Enterprises analysis
After having analyzed the previous bibliography and the present situation of the coffee sector, the thesis focuses on some big coffee operators. In particular, I consider the following enterprises: illycaffè s.p.a, Lavazza, Starbucks, Segafredo (Massimo Zanetti Beverage Group), Nescafe and Nespresso (Nestlé), Millstone (Folgers Coffee), and finally Maison du Café, Senseo and Café do Ponto (Jacob Dolwe Egberts).
After having done a general framework about these companies, I focus particularly on their innovation and sustainability aspects.
I based my research on their economical reports, on their sustainable value reports (for the enterprises that have one) and on some interviews I managed to some manager.
I used also some economical indicators to analyzed how much these enterprises care about these topics. For example, I utilised the investments on R&D/net profits and the investments on
sustainability/net profits to understand if the communications about innovation and sustainability that these companies do really correspond to the their practical, economical and “ethical” decisions. I focus especially on their relationships with their supply chain and I distinguished a scale from the enterprises that don't have special programs for the supply-chain to the enterprises that have
obtained standards about supply chain and that have a strong relationships with them. To conclude, I found out that are 4 types of companies:
1. The enterprises that don't communicate on sustainability nor on green supply chain and that really don't have special programs for these topics;
that have some programs on them;
3. The enterprises that communicate on sustainability and their supply chain, but are not consistent about these topics. For example, they just sign a chart but they don't do controls and don't make huge investments on it,
4. The enterprises that communicate on sustainability and their supply chain and that really have some special programs and care about these topics.
I found out that the third type of companies are very common. They take advantage of the new sensibility of the consumers about these social and environmental problems, but they are not really involved in controlling and developing new ways solve these problems and to create a win-win situations.
Considering the second type of companies, they normally are afraid to be considered as “exploiters”. In fact, they don't want to appear as entities that have economical benefices from sustainable projects.
Finally, the fourth type of companies are the entities that create a win-win situation. In fact, they have understood the new needs of consumers but also of the producers. Therefore, by making investments on the sustainability of their supply chain, they can exchange with the producers and they have the possibility to innovate on their process and ways to do the products.
For these reasons, it is more and more recommended to the companies to invest on sustainability and to better communicate on this aspect. They can be more innovative and they could applicate a premium price on their products. In this way, the better quality of their products can be recognised by everyone.
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