1.2 Building the Business Case for your Sustainable Sourcing Strategy

Some companies aspire to be leaders in this area of sustainable sourcing but others may have only a foot on the first step of the ladder. Whatever the case, it is important to be clear about where you want to play as a company before you start, and thus develop a strategy that fits that specific level of ambition.

For example, companies may actually decide not to play a leadership role but to rather be early or late adopters. They may even decide to only move when forced by regulation. How they decide where to play  will depend on factors related to risks and opportunities involved in taking action, such as level of threat around the resource, their clients’ demands and market drivers (does the market demand or reward sustainability?), their governance (whether public or private), their competitive behaviour, level of stakeholder pressure and senior leadership’s vision and values.

Diagram 1: Where to play? Copyright Christof Walter Consulting 2012, all rights reserved.

The above figure maps some strategies depending on whether the underlying driver is mainly cost avoidance or creating value; and whether the company  approaches sustainability in a more reactive or proactive way. The size of the orange arrow indicates the extent to which sustainability is integral to each position .The point is that companies should take a conscious decision about which position is most appropriate for them, depending on the above-mentioned factors.  In general, companies tend to position themselves in one of four arenas:

  • Companies seeing sustainability as compliance will typically take an assurance approach and will concentrate on regulated issues like food safety, labour standards and statutory reporting to investors.
  • Companies viewing sustainability as corporate social responsibility (CSR) typically aim at demonstrating to shareholders and the public that the company does all it should (due diligence), within its current business model (licence to operate).
  • Companies using sustainability as a brand differentiator actively employ sustainability credentials to support their brand (corporate or product brand).
  • Companies adopting sustainability as a business not only integrate sustainability into how they operate but also view it as both a pre-condition and business strategy for creating value and growth.

It is also beneficial to consider your company's approach as dynamic; whatever your current positioning is, you are on an incremental path towards an increasingly  proactive role in assuring sustainable sourcing of your agricultural raw materials. The diagram below, developed by Peter Senge is self-explanatory in this respect.

Whatever strategic approach you choose, and looking at it from a business and economic logic perspective, you will still need to find the right place for sustainable sourcing of agricultural raw materials within your company’s  “Smart Zone”. What do we mean by that? In the graphic below, you see the correlation between sustainability and economic performance. Note that at the start of the curve in the diagram, we are in an area of activity beyond compliance where social, environmental and economic value is being harvested. Initially, as companies exploit what we often call the “low-hanging fruits”, economic, environmental and social performance all increase at a good rate of return on investment (ROI).  

Moving along the curve, the company will reach a zone where the ROI pay back starts to decrease if further voluntary environmental and social improvements are carried out. Here, building the business case logic can get more demanding. Allocating capital and resources to projects that are not as profitable as other competing projects within the firm then becomes much more of a challenge. In an ideal world where benefits are truly quantifiable, corporate decision-makers will weigh up the benefits and drawbacks of each and every project brought to their attention. Therefore, the business case for sustainable sourcing must draw on as many economic arguments  as possible in order to hardwire it. This will make it robust and capable of being sustained as long as possible before the inevitable crossover point is reached where the investment simply becomes pure philanthropy. The business logic argument must include both quantifiable and qualitative or non-quantifiable arguments. Part of the art of building business cases is to not only convincingly demonstrate the financially positive but also the non-quantifiable benefits. Example 2 just below about Revitalising Lipton brand provides an excellent example of how managers built a business case for a sustainable sourcing activity around tea.

Example 2. Revitalising the Lipton Brand

Starting in 2005, Unileverset an ambitious objective to make Lipton brand 100 per cent environmentally and socially sustainable, as well as to convert other tea brands such as PG Tips.

How did Unilever build the business case for this significant move? The company carried out a brand imprint exercise to fuel brand innovation and create competitive advantage by integrating social, economic and environmental considerations to the Lipton brand. The exercise, involving brand developers, supply managers, corporate responsibility executives and Unilever managers from diverse functions, helped Unilever to conclude that sustainability could be an excellent attribute enabling the company to engage in a positive dialogue with consumers and harvest enhanced brand value.

Market research was also showing that sustainability was a growing concern of consumers in key markets and that it could potentially be turned into an effective differentiator factor when effectively communicated to consumers.

To retain credibility with consumers, Unilever opted to have the tea plantations they used for their brands independently certified. They sought a partner to provide third-party certification using the following assessment criteria: recognition by consumers, capacity and flexibility to certify large and small suppliers, ability to work with local organizations to train employees, and ability to recruit and train teams of regional auditors. Unilever chose the Rainforest Alliance (RA), a US-based international non-governmental organization with a mission of conserving biodiversity and ensuring sustainable livelihoods. RA certification requires standards to be met in the areas of worker welfare, farm management and environmental protection.

Top decision-makers at Unilever raised questions about how costly this exercise would be, how quickly the conversion could be carried out, and what Lipton expected to get in return on the income side. For example, how could Unilever pay a premium to growers for sustainable tea while keeping the retail price unchanged? If consumers were not ready to pay more for sustainable tea, did this mean that the additional cost would need to be absorbed in the margin, thus reducing profitability? The solution lay in the predicted growth in market share: additional supply chain costs could be recovered through that growth.

Unilever publicly announced two ambitious targets that would ultimately impact world tea markets: 1) Lipton Yellow Label and PG Tips tea bags sold in Western Europe would be certified sustainable by 2010, and 2) all Lipton tea sold globally would be certified by 2015.

The partners decided to start with the “lower hanging fruits”.  In Kenya, some of the bigger suppliers already had relatively good sustainability standards in place. This enabled rapid certification of some large tea estates. However, working with smallholders in other countries was a greater challenge, primarily due to differing levels of complexity. This ruled out a “one size fits all” approach. Supply bases were often fragmented. Legal frameworks varied considerably.  The partners adapted their approach according to different contexts, but also developed a support network of local partnerships with experienced organizations. For example, in Argentina they teamed up with Imaflora, a local not-for-profit promoting conservation. Imaflora helped them build the capacity of some 6,500 loosely organised farmers to apply best practice in agriculture, something that previous they had no knowledge of.

As soon as certified Lipton tea started to appear on shop shelves in Europe, Unilever kicked off its consumer campaigns. With an established link between this mainstream brand and certified sustainable tea, marketing managers observed an increase in both sales and market share. The certified brand appealed to new constituencies of consumers – for example, in Italy, it attracted younger customers. Enthusiastic about the first market signals, Unilever teams in Japan, Australia and the US introduced the certified brand ahead of schedule, thus accelerating market expansion.

The Ethical Tea Partnership (ETP) and the RA decided to collaborate in 2009, further building industry capacity to handle certified sustainable production. A domino effect took hold as other tea producers began to certify their own brands and there was a surge in demand for certified sustainable tea.

Unilever learned that, while the initiative they had undertaken was challenging, identifying the right partners and adapting to local contexts are vital success factors. Moreover, Unilever showed that implementing a mainstream sustainability initiative is possible, while also reaping financial and reputational benefits.

Source: Ionescu-Somers, A, Braga, T., & Seifert, R., Unilever Sustainable Tea Part 1 Leapfrogging to Mainstream and Unilever Sustainable Tea Part 2, Reaching out to smallholders, http://www.idhsustainabletrade.com/idh-publications

Overall, firms will seek to find the maximum benefit focus area (see the graphic below) that will ensure optimum financial performance and economic success, whilst reducing the environmental impact of their business activities and increasing the positive impact on social well-being.  The activity of sourcing agricultural raw materials lends itself particularly well to achieving all three objectives if it carried out in a strategic and well planned way.