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WORKING PAPER SERIES

CSM/WWF Research Project:


The Business Case for Sustainability

FOOD & BEVERAGE


Sector Report
Aileen Ionescu-Somers
IMD 2003-9

Aileen Ionescu-Somers
Research Manager, CSM Project
Forum for Corporate Sustainability Management
International Institute for Management Development (IMD)
23, ch. de Bellerive, P.O. Box 915, CH-1001 Lausanne
Tel: +41 21 618 0389
Fax: +41 21 618 0641
E-mail: aileen.ionescu-somers@imd.ch

Copyright 2003 Ionescu-Somers


All Rights Reserved

TABLE OF CONTENTS
LIST OF FIGURES .............................................................................................................................. 4
1

RESEARCH OBJECTIVE AND FRAMEWORK .................................................................... 5


1.1

RESEARCH OBJECTIVES ........................................................................................................... 5

1.2

RESEARCH FRAMEWORK AND METHODOLOGY ...................................................................... 5

INDUSTRY AND COMPETITIVE ANALYSIS ....................................................................... 5


2.1

DEGREE OF RIVALRY ............................................................................................................... 5

2.2

BARRIERS TO ENTRY ............................................................................................................... 6

2.3

THREAT OF SUBSTITUTES ........................................................................................................ 6

2.4

SUPPLIER POWER ..................................................................................................................... 6

2.5

BUYER POWER ......................................................................................................................... 6

SUSTAINABILITY ISSUES AND THEIR ECONOMIC RELEVANCE............................... 7


3.1

RAW MATERIAL SUPPLY: LOOKING UPSTREAM ..................................................................... 7

3.1.1

Population Growth and Resource Depletion................................................................... 7

3.1.2

The Environmental Impacts of Raw Material Production............................................... 8

3.1.3

Water: A Scarce Resource............................................................................................... 8

3.1.4

The Social Impacts of Raw Material Production ............................................................ 8

3.1.5

Trade Barriers................................................................................................................. 9

3.2

OWN OPERATIONS ................................................................................................................... 9

3.3

LOOKING DOWNSTREAM ....................................................................................................... 10

3.3.1

Traceability and Health................................................................................................. 10

3.3.2

Long-Term Health Problems, Obesity and Diet............................................................ 10

3.4

STAKEHOLDERS ..................................................................................................................... 11

3.4.1

Deterrent stakeholder groups........................................................................................ 11

3.4.2

Promoter stakeholder groups ........................................................................................ 12

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3.5

3.5.1

Reputation Enhancement and Licence to Operate ........................................................ 14

3.5.2

Brand Value and Innovation ......................................................................................... 14

3.5.3

Attracting and Retaining Talent .................................................................................... 14

3.5.4

Value Drivers: Present and Future ............................................................................... 15

CORPORATE SUSTAINABILITY MANAGEMENT ........................................................... 15


4.1

CORPORATE GOALS AND ORGANIZATIONAL CULTURE ........................................................ 15

4.1.1

Corporate Vision ........................................................................................................... 15

4.1.2

Corporate Mindset ........................................................................................................ 16

4.2

SUSTAINABILITY STRATEGY DESIGN .................................................................................... 16

4.3

ORGANIZATIONAL STRUCTURE AND THE IMPORTANCE OF FUNCTIONS ............................... 17

4.3.1

Structure ........................................................................................................................ 17

4.3.2

Functions ....................................................................................................................... 18

4.4

VALUE DRIVERS .................................................................................................................... 14

PROCESSES AND SYSTEMS ..................................................................................................... 20

4.4.1

Issue Tracking ............................................................................................................... 20

4.4.2

Issue Mapping ............................................................................................................... 21

4.4.3

Issue Prioritization ........................................................................................................ 21

4.4.4

Integrating Issues into Strategic Decision-Making ....................................................... 22

4.4.5

Integrating Issues into Operations ................................................................................ 24

ASSESSMENT OF THE BUSINESS CASE, ITS POTENTIAL AND EXPLOITATION .. 27


5.1

NO RESOURCE = NO BUSINESS........................................................................................... 27

5.2

INTERNALIZATION OF COSTS ................................................................................................. 28

5.3

BUSINESS FOCUS UPSTREAM.............................................................................................. 28

5.4

FOCUSING DOWNSTREAM ..................................................................................................... 29

5.5

INDUSTRY AND STAKEHOLDER DYNAMICS........................................................................... 29

A DIAGNOSTIC TOOLSET FOR SUSTAINABILITY OFFICERS.................................... 30

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LIST OF FIGURES
Figure 3.1 The Main Food and Beverage Industry Barriers to Success in Sustainability Initiatives .... 12
Figure 4.2: Strongest Opposition to Implementing Sustainability Initiatives ....................................... 19
Figure 4.3: Business Functions that Can Most Effectively Promote Sustainability Performance ........ 19
Figure 4.4: Level of Collaboration of General Managers with Sustainability Officers or Departments .... 20
Figure 4.5: Potential for More Collaboration to Contribute to More Sustainable Business Practices....... 20

Figure 4.6: Sustainable Development Tools Used in Food and Beverage Companies ......................... 25

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1 Research Objective and Framework


1.1 Research Objectives
This chapter will examine aspects of the business case for sustainability (BCS) specifically
in the food and beverage sector. It focuses mainly on the economic relevance of
sustainability issues and on corporate sustainability management aspects such as corporate
missions or visions, organizational culture and structure, and barriers to the business case for
sustainability within the industry. This research provided the basis for the development of
diagnostic web tools for food and beverage sustainability officers to use when working on
their company-specific strategies, and to guide officers through best-practice options on how
to build and implement a company-specific business case for sustainability.

1.2 Research Framework and Methodology


The business case for sustainability focuses on opportunities which companies can take
advantage of to create economic value by improving environmental performance (for
example by increasing efficiency or reducing pollution) and social performance (for example
by engaging in community development) beyond compliance.
Here, we present insights on perceptions, attitudes and management approaches related to
the business case for sustainability of both sustainability and other management functions in
the food and beverage sector. These insights were gained as a result of:
1) 37 interviews with a broad spectrum of senior managers at ten leading food and
beverage companies, and a further ten interviews with stakeholders such as nongovernmental organizations (NGOs) and industry associations.
2) A questionnaire distributed to 17 sustainability or corporate responsibility officers
(71 per cent of whom were senior managers, and 64 per cent of whom were based in
mid-northern Europe).
3) A questionnaire distributed to 88 managers in a variety of management functions in
the sector. Of these managers, 44.4 per cent were in middle management positions,
and a further 42.9 per cent were in senior management positions; 36 per cent were
based in mid-northern Europe, 18 per cent in Nordic countries and 14.7 per cent in
North America.
The companies that took part in the interview research were Cadbury Schweppes, Chiquita,
Danisco, Danone, Diageo, Kraft, Nestl, Nutreco, Procter & Gamble and Unilever. All
statements made in this report are based on attitudes and perceptions of senior managers in
these companies.

2 Industry and Competitive Analysis


2.1 Degree of Rivalry
There are about 1000 major listed food and beverage companies worldwide. Due to mergers
and acquisitions, the food and beverage industry comprises an increasingly smaller number
of global international players, but still a large proportion of small and medium-sized
companies. A few large firms with similar market share dominate the top end of the market.
This provokes a significant struggle for market leadership, leading to intense rivalry in the
marketplace. The trend towards mergers and acquisitions in the industry demonstrates a
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drive to take market share away from competitors in slow growth areas such as developed
countries. Larger companies devote considerable resources and energy to increasing their
market share in developing countries, their main opportunity for growth. Given the
importance of these markets, sensitivity to sustainable development criteria in business
strategy development will increasingly be significant in the sector.
The industry is using options such as product differentiation, creative use of distribution
channels and exploitation of relationships with suppliers in order to move away from a
commodity-type market where no competing firm has a differentiation advantage. This
presents an opportunity to put sustainability, with the product differentiation advantages it
offers, more firmly on the agenda of food and beverage companies (refer to section 3.5.2 for
more details on brand differentiation and innovation).

2.2 Barriers to Entry


The considerable number of small and medium-sized companies in the market is an
indication that the market is relatively easy to enter. Government monopolies and proprietary
knowledge do not generally restrict market entry. In addition, in the food and beverage
industry, assets can easily be utilized to produce different products. Barriers to entry are
therefore relatively low.

2.3 Threat of Substitutes


The relatively widespread availability of close substitutes for food and beverage products is a
considerable competitive threat in the industry. In addition, the costs to retailers of switching
to a substitute product are low. The threat of substitutes typically impacts an industry
through price competition therefore companies lower costs. This then makes it difficult for
companies in the sector to raise prices except where there is a product differentiation
advantage. Major companies are reducing these threats by focusing on product
differentiation through perceived brand value or product innovations. Moreover, by
establishing brand loyalty, leading companies in the industry can increase barriers to entry,
thus making it more difficult for retailers to change to new competing products. This again
constitutes an opportunity in terms of moving sustainability further up the agenda in
companies.

2.4 Supplier Power


The negotiating power of producers in developing countries is low in the industry due to the
fragmented source of supply and overcapacity of many commodities (coffee is a good
example of this). This has significant implications for sustainable development in the
developing countries that produce the commodities, as producers are at the mercy of the
fluctuations of volatile commodity markets. The switching costs of changing from one
primary producer to another are low for global companies, thus increasing the vulnerability
of producers. In addition, although it is not the trend at the moment, the industry can
integrate backwards by owning its raw material production if the producers do not offer
satisfactory prices, although this works well only for multi-crop per year horticultural
production facilities. For commodities, there are too few crops per year to hedge risk and
companies tend to avoid this.

2.5 Buyer Power


Retailers purchase a significant proportion of output from the industry and buy in volume. In
developed countries, they are quite concentrated, leading to significant market share in the
hands of a few; and clearly there is an identifiable trend towards consolidation of this sector.
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Retailers thus have considerable influence on both the product and its price. However, there
are alternative sources of supply and the costs of switching to other products are low. Thus
retailers can shop around to obtain the lowest price, especially when raw material costs are a
high percentage of total costs (fresh foods). This leads to a significant trend to discount at
retail level. All of these factors can increase the power of retailers significantly over the
industry and producers. In developing countries, buyer power tends to be weaker as retailers
are generally more fragmented, although this is changing as European companies move to
expansion in these areas. The significance of retailers in promoting the business case for
sustainability is discussed in section 3.4.1.

3 Sustainability Issues and Their Economic


Relevance
In their daily operations, companies cause externalities (or external effects). These are the
environmental and social impacts of a companys activities that are often not reflected in
market prices (for example CO2 emissions). Externalities often become sustainability issues
(global, regional or local problems) on the company agenda when they lead to increased
pressure from stakeholders such as NGOs, customers and regulators. By integrating
sustainability issues into business strategy and focusing on the business opportunities they
bring, companies can create economic value through, for example, improved reputation,
brand value and risk management.
Our survey showed that a broad spectrum of managers from diverse business functions in
leading companies consider themselves to be either familiar or very familiar with the
concept of sustainable development (75 per cent). Given the frontline nature of the
industry, all levels of staff are exposed to sustainability issues affecting the sector. Over 80
per cent of managers surveyed felt that the concept of sustainable development would grow
in importance in the future.
Most managers surveyed indicated that the industry is slightly more affected by social than
by environmental issues; the sector has substantial impact on communities. In fact,
companies in the sector are faced with so many issues, both environmental and social, that it
is a challenge to establish a coherent sustainability agenda. In the next section, we focus only
on the key global issues in the value chain that, according to the managers we interviewed,
influence the strategic agenda for sustainability in the sector.

3.1 Raw Material Supply: Looking Upstream


3.1.1 Population Growth and Resource Depletion
World population will grow from 6 billion people today to 8.3 billion people in 2030, an
increase of nearly 40 per cent. The growth in demand for food and beverage products will
also increase; in fact, worldwide nutrition requirements are expected to double by 2025,
which will place significant demands on future agricultural productivity. The worlds
population is increasingly living in urban areas, and with economic progress, there is a shift
to a diet richer in meat, dairy and processed products. Consumers will seek a greater
diversity of food and beverage products in the future. However, the capacity of the worlds
food production system to meet the needs of increasing levels of population is limited.
Security of food supply is a major challenge in developing countries. Land available for
conversion to agricultural production is no longer plentiful. Production and productivity
increases are essential to ensure future global food requirements.
To manufacture processed food and beverage products, the industry is dependent on a
constant and long-term supply of high quality agricultural raw materials. The immediate
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threats to some natural resources, such as fish stocks, are having a major economic impact on
certain industries in the sector. Pressure on natural resources therefore affects the economic
sustainability of the industry as a whole. This pressure has forced some companies to
actively seek raw materials that have been produced in a more sustainable way in order to
ensure their continued availability in the future.

3.1.2 The Environmental Impacts of Raw Material Production


The greatest environmental impact of the industry is caused by agricultural production in the
supply chain. Companies in the sector do not tend to own land or produce raw materials
themselves, but are under growing pressure from retailers, consumers and regulators to
interface with and influence the agricultural methods that their suppliers use to grow raw
materials for food products. The main environmental effects are negative impacts of erosion,
soil degradation and loss of biodiversity and organic matter, abandonment and expansion
into other areas of natural habitat, deforestation, groundwater pollution and increased
residues due to accumulated pesticides and the use of agrochemicals. While these issues are
increasingly on the agenda of food and beverage companies, the industry is currently not
carrying the full environmental and social costs, which, if internalised, would have a
considerable impact on the final price of food products, thus impacting consumer choice.
The industry is facing a crisis. A niche of consumers considers that organic farming offers
them the necessary consumer choice to allow them to protect their health. According to most
managers interviewed, however, organic farming is not a sustainable alternative to
conventional methods of industrial production and cultivation, as the significant decrease in
inputs leads to a natural decrease in production, which they feel will not meet the demands of
an increasing world population. NGOs, by contrast, say that due to lack of economic and
political pressure, companies are not seeking the alternatives to conventional agriculture that
they must seek in order to ensure sustainable development.
The industry has a considerable impact in terms of transport and logistics, although relatively
little information is currently available on it. The use of locally sourced raw materials where
possible substitutes are available has the potential to alleviate this impact.

3.1.3 Water: A Scarce Resource


Agriculture which provides the raw materials for the food and beverage industry
accounts for 70 per cent of all fresh water used each year globally, with another 20 per cent
used by industry and 10 per cent used for domestic purposes. Since the worlds water
resources are under increasing pressure from drought, over-consumption and pollution, thus
placing an important raw material for the industry at risk, companies are placing more
emphasis on influencing suppliers to use water as efficiently as possible.

3.1.4 The Social Impacts of Raw Material Production


Raw material production in the industry implies either being present in rural areas in a
variety of regions or having an influence on sustainable practices in such areas. If the
company is dependent on a rural area for its own economic progress, it is in its long-term
interest to promote a sustainable local economy. For the local population, the company may
be the only viable means of employment.
A number of local social issues relate to traceability in the supply chain, especially in
emerging economies: child labour, slavery, employee rights and human rights as a whole.
Leaders in the industry have focused on what their managers refer to as ethical sourcing of
agricultural raw materials. Being able to prove, for example, that no child labour is used in
the complex supply chain loops of the food and beverage industry is a considerable
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challenge to the sector, but companies are nevertheless determined to achieve this
transparency as far as they can, since consumers are increasingly demanding it.

3.1.5 Trade Barriers


The purchasing policies of companies in the sector and their effect on the pricing and
sourcing of raw materials are issues of deep concern to NGOs working with rural
communities in developing countries. Most global companies procure their raw materials
from the global commodities markets. The enormous fluctuations in prices of raw materials
and the effects of low prices on production also constitute a business risk for the sector.
Many consumers and activists want local communities to receive a fairer share of the
economic benefits of the food they produce and are thus exerting considerable pressure on
the industry to change its approach to sourcing.
In addition, NGOs feel that the current protectionist agricultural policies of developed
countries (for example with the use of trade barriers and subsidies) require serious reform,
since they are detrimental to agricultural progress in developing countries. In fact, NGOs are
convinced that only a massive overhaul of taxes, trade incentives, subsidies and market
barriers in the farming sector will make a substantial difference in terms of promoting
sustainable development in the sector. When asked during interviews to determine the key
issue affecting the business case for sustainability in the future, managers also often
answered that a significant change in the way national governments subsidize agriculture to
make farming more productive will be decisive.

3.2 Own Operations


The food and beverage industry is not considered to be one of the big sinner polluters or
social rights abusers when it comes to its own operations. But because of regulatory pressure
and visibility and image considerations, companies tend to focus strongly on issues that
relate to the input/output ratio, (emissions into the air, water and soil, energy intensity,
recycling and waste management). Transport eco-efficiency in distributing products is also
growing in importance.
However, health and safety considerations (for example contamination of food) have pushed
the sector into the headlines several times in the recent past, with a focus on food preparation
and factory processing methods. Given the severe impact of such media attention on
companies public image and reputation, health, safety and traceability are vital issues for the
sector. Monitoring and recording the use of critical additives such as flavourings and colour
enhancers to maintain traceability is key.
At this level of production, the industry has again a vested interest in maintaining a secure
water supply for its own operations. Water consumption is intense: cooling and heating
systems and washing in food and beverage processing plants require vast amounts of reliable
and high quality water supplies. Almost all products in the industry are manufactured,
conserved and, eventually prepared by the consumer using water.
Packaging and recycling are key issues, given their considerable visibility and the potential
of these issues to affect a companys reputation. Some companies focus on optimization of
packaging; although managers say that marketing executives have a major influence on final
decisions (refer to section 4.3.2 for an account of the importance of the marketing function in
the promotion of sustainability issues).

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3.3 Looking Downstream


3.3.1 Traceability and Health
Globalization of world trade and its impact on the way companies move goods and services
around the globe has contributed to the increasing vulnerability of the food industry to risks
of various food scares and public suspicion. With global telecommunications systems,
companies are more exposed to risk since an event in one part of the world is quickly
reported in another. The media target food and beverage companies when health and safety
issues related to its products emerge, even if the company is not directly responsible. As a
result, consumers increasingly expect product safety and traceability, but it is much more
difficult to access than, say, 20 years ago. In fact, NGOs openly state that the increased flow
of goods has led to less transparency, not more.
The sector has experienced many crises in the last few years related to food scares, such as
dioxin found (for example, in chicken or beverages), or serious meat production problems
(BSE or mad cow disease, scrapie, and foot and mouth disease). The once trusting
European public have realised that food can actually be harmful to health; and as a result,
demands more transparency. In the future, consumers are likely to place more pressure on
food and beverage companies to label products in terms of ingredients, country of origin and
even cultivation methods.

The Case of Genetically Modified Organisms (GMOs)


In Europe, due to activist and consumer pressure, many companies in the food and beverage sector have been
forced to take a position on the issue of GMOs. The debate around GMOs in plants has created growing public
scepticism concerning the food processing industry, leading to public pressure not to release GMOs into the
environment, due to inadequate scientific understanding of the environment and health impacts of GMOse. NGOs
such as Greenpeace recommend that food and beverage labels indicate the presence of genetically engineered
ingredients and that genetically engineered crops be segregated from conventional ones. The EU has introduced
plans for tough laws on labelling genetically modified foods. With consumer preference in mind, many leading
companies in Europe have excluded GMOs from the supply chain. In the US, companies are not under the same
pressure, as public opinion is more receptive to GMOs.

3.3.2 Long-term Health Problems, Obesity and Diet


The noticeable increases in levels of obesity, alcoholism, chronic dietary deficiencies and
allergies to many of the common ingredients in processed foods are becoming important
issues on the sustainability agenda of food and beverage companies. The publication in 2000
of a World Health Organization (WHO) report1 on preventing and managing obesity, now
called a global epidemic, was a clear indication that obesity is a major global health issue.
Legislators in the US are looking at introducing bills requiring food service operators to
display nutritional information on menus and product packaging.
In addition, the labelling and marketing to children and young people, in particular, of high
fat and low nutritional value products and of alco-pops has come under scrutiny. Obesity
lawsuits filed against a fast-food company in the United States have alarmed the foodprocessing sector as a whole and raised the spectre of the litigation challenges currently

Obesity: Preventing and Managing the Global Epidemic. World Health Organization Technical

Report Series 894, Geneva, 2000

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facing the tobacco industry. As a result, some managers interviewed stated that obesity is the
single biggest sustainability issue on their corporate radar screens.

3.4 Stakeholders
A range of stakeholders have a vested interest in the initiatives of food and beverage
companies, including NGOs, consumers, producers, suppliers, retailers, community
organizations, local communities, central and local governments, other multinationals,
shareholders and trade associations. Here, we focus on those stakeholders that, according to
managers interviewed, play the most deterring and promoting roles when it comes to
sustainability action in companies.

3.4.1 Deterrent stakeholder groups


Two very powerful stakeholders tend to dominate the discussion on the rate of progress on
tackling sustainability issues in the sector: customers (retailers) the transmitters to the
industry of consumer pressure and opinion and shareholders.
Because of their purchasing power and therefore their influence on revenue, customers and
consumers are clearly the most important stakeholders for the sector. Food and beverage
companies strive to satisfy changing consumer expectations. Their objective is to meet an
emerging demand for healthy, quality food by delivering products with a perceived higher
value than the price that consumers pay. This is a strong driver in pushing sustainability
further up the industry agenda. As one senior marketing manager in a leading company
pointed out, What is niche today, is mainstream tomorrow, and being ahead of the trend is
key in order to ensure long-term sustainability of the business.
Due to the change in consumer patterns brought about by globalization, consumers in
developed countries expect greater choice and quality of food products at ever-decreasing
prices. Although a companys sustainability agenda is quality driven, it must clearly take
account of what people are prepared to pay. Currently, managers say, if sustainability
initiatives lead to a more expensive product, consumers will not pay that premium, with the
exception of those attracted to niche markets such as organic food. Thus retailers, the
transmitters of consumer pressure to the industry, are not putting food and beverage
companies under enough pressure to push the sustainability agenda. One NGO officer
pointed out, however, that beyond social and ecological aspects, the question of labelling, a
prerequisite for consumer freedom of choice, is not currently being adequately addressed by
the industry. In his view, only if consumers know exactly what they are buying will it be
possible to make an informed consumer choice (thus placing the necessary pressure on
retailers). Without such information, consumers will simply buy the product that is perceived
as most value for money.
Discounting or the cutting of prices that retailers offer to consumers has dramatic effects on
the scope that companies have to push sustainability in the supply chain. Although some
retailers in the UK have played a strong role as drivers of sustainability, this is more the
exception than the rule. In Germany, for example, in spite of its culturally green image,
interviewees singled out retailers as being particularly prone to levels of discounting that
have severe effects on the scope of the sustainability agenda in companies. Overall,
managers reported customers lack of interest as the most significant barrier to progress with
sustainability initiatives (20 per cent of all responses see Figure 3.1). However, the
potential power of consumers to bring about radical moves in companies is demonstrated by
the consumer and activist pressure on retailers, which led European companies to adopt their
current position on GMOs.

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Lack of interest
from customers
20.0%

Other
1.7% Managers' mindset
15.0%

Managers' lack of
knowledge/
expertise
18.3%

Opposition or lack
of interest from
investors
11.7%
Organizational
culture
10.0%

Absence of
appropriate tools
and processes
18.3%

Regulation (e.g.
subsidies, low
environmental/
social standing)
5.0%
N = 60

Figure 3.1 The Main Food and Beverage Industry Barriers to Success in Sustainability
Initiatives
European managers interviewed felt that US consumers are complacent about environmental
and social practices, count mainly on federal and state agencies to look adequately after their
interests and have a certain inherent faith in corporations. In their view, US agencies are
largely concerned with food safety, and US corporations with risk reduction; therefore few
comprehensive approaches to sustainability exist.
According to those interviewed, the overall focus on the ethical behaviour and social
responsibility of companies will increase in the future. The momentum for this will be
transmitted through retailers as they gradually become more aware of the power they have to
induce suppliers to change.
Progressive companies involved in our research see sustainability as an opportunity to add
value while maintaining value for shareholders, and thus not reducing their capacity to
compete. Managers do not perceive the role of capital markets in driving sustainability as
significant, although according to our survey, 28.6 per cent of food and beverage managers
expect this to increase very much in the future, while 52 per cent expect that the markets will
react a little more positively. The current lack of shareholder interest constitutes a major
barrier to getting issues on the sustainability agenda, particularly of less progressive
companies, in spite of new trends to include standards of corporate ethical and
environmental governance. Financial managers interviewed felt that the interest of
institutional investors in sustainability has shifted positively over the last 10 years, but has
again slowed down due to current economic difficulties. Overall, sustainability officers
interviewed believed that the potential for showing shareholders that the economic bottom
line is enhanced due to sustainability has not yet been fully exploited.

3.4.2 Promoter stakeholder groups


Other stakeholders provide a counterbalance, exerting pressure on the industry to accelerate
action on sustainability issues. They include governments, regulators, NGOs and employees.
To a much lesser extent, the industry dynamic itself contributes to promoting sustainability
action in companies. Pressure from governments and regulators was initially the principal
driver for sustainability action. And sustainability officers interviewed at best-practice
companies confirmed that regulatory pressure was useful in the earlier stages of promoting a
business case for sustainability, but is now less of a driver for those that are more progressive
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in the field. Companies take the view that as long as all players conform to legal
requirements, regulation does not put them at a competitive disadvantage. We deduct from
our research that in future, legal requirements related to food safety, particularly in the
European Community, will intensify and remain an important driver of sustainability action,
particularly for the laggards in the industry. According to our survey, sustainability officers
generally consider regulators as relatively proactive when it comes to pushing the
sustainability agenda in companies. The survey also indicated that managers in food and
beverage companies generally have a more positive view of the role of regulators than
managers in other industries. Leading companies are applying a conscious beyond
compliance approach.
NGOs and the media are often responsible for damaging the reputation of companies. In fact,
our survey revealed that, according to managers, NGOs or media campaigns that support
them exposed over two-thirds of the cases that damaged their company reputation in the
previous three years. NGOs are particularly effective at creating a sense of urgency about an
issue, by forcing it on the company agenda and thus prompting companies to act earlier than
they otherwise would. Companies will generally take rapid action when strong brands, on
which their image relies, are exposed. Food and beverage multinationals are thus strong
strategic attack points for NGOs. When confronted by NGOs, many of the leaders in the
sector have gone from a defensive stance to a proactive stance of dialogue and sometimes
partnership, depending on the issues. There are examples of very effective partnerships
between companies and NGOs that are further developed in the toolset that resulted from
this research.
In dealing with NGOs, companies come up against a number of obstacles. There are many
NGOs to interface with on the diversity of issues included under the label sustainability.
NGOs are perceived as being better equipped to deal with sustainability issues because of
their ability to speak with one voice and focus on single issues, whereas food and beverage
multinationals find sustainability issues a challenge to manage because of the fragmented
and decentralized nature of the industry and the sheer number of issues that can be brought
to their attention. Companies find the nature of activism difficult to understand; in cases
where cross-sector partnerships have been put in place with NGOs, it is sometimes difficult
for managers to accept that the NGO may work with the company on some agendas and go
against it on others. The sector perceives the media as siding with NGOs and being
imbalanced and sensationalist in its approach to the issues.
Employees can play an active role in promoting sustainability action. The level of influence
in developing countries can depend on how much support the government of the country
gives to unions. This stakeholder group is increasingly important in emerging markets,
precisely where food companies see the future growth of their markets. In general,
employees have a major impact on how society perceives a company, since job losses and
the way employees are treated are often highly newsworthy subjects that expose the
company to a loss of reputation.
Sustainability officers surveyed generally gave a positive assessment of the industrys own
contribution to sustainability. Competitors have increasingly adopted a united front on the
issues facing the food and beverage industry today (GMOs, water, obesity). Leading
companies view sustainability activities as giving them a certain degree of first mover
advantage, which enables them to distinguish themselves from other companies, thus giving
them an economic advantage. NGOs interviewed, however, seemed less convinced of this
dynamic. Our research indicates that companies that have taken the decision to be more
sustainable look at the leaders in the industry and learn from them. As an example, many
bilateral initiatives exist through industry associations. In terms of sustainability issues, the
leading companies in the industry compare themselves to peers generally in other industries
rather than looking at their competitors.
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3.5 Value Drivers


There are a number of underlying factors, or value drivers, that also prompt companies to
take sustainability action because of their potential to promote the business case for
sustainability. For example, the cost savings involved in increasing resource efficiency has
contributed in a significant way to driving a business case for sustainability in food and
beverage companies, since it is directly related to the productivity of resources. However,
managers perceive reputation enhancement, licence to operate and brand value as having an
even greater impact on the economic value of companies in the sector.

3.5.1 Reputation Enhancement and Licence to Operate


In a global economy, food and beverage companies face huge risks to their reputation, which
can have an impact on their economic value. Consumers perceive that a multinational
company has a role in society and that it must maintain standards that are suited to the social
fabric in which it operates. The politics surrounding food supply and the focus a company
gives to the role of business in society play important roles in determining a companys
ability to continue operations (licence to operate). Some of the leading companies have a
heritage of driving social responsibility. Going public on a sustainability strategy commits a
company heavily, since there is pressure to provide credible evidence of leading
sustainability practices and consistency internally at all locations, leading to a considerable
loss of credibility and reputation if the company changes course. If licence to operate is
jeopardized in this way, it is directly linked to share price and the success of business
operations.

3.5.2 Brand Value and Innovation


The brand is a food and beverage companys most important asset; whatever tarnishes its
image has a negative effect on whatever premium the brand brings. Therefore product and
brand value directly affect the commercial viability of companies in the sector. Over 84 per
cent of food and beverage managers surveyed felt that either brand or reputation is very
important to the company.
The association of value with a brand is key to brand differentiation and thus competitive
advantage, and this is even truer when a company name is tied tightly to a brand. In todays
competitive environment, product concepts are being expanded beyond technical or physical
performance, leading to product differentiation, sometimes using sustainability or corporate
responsibility concepts. The relationship between the consumer and the brand thus becomes
more than a functional transaction. The public wants to know what is behind a brand and the
extent to which its values align with their own. Marketing managers interviewed said that the
brand reflects the responsibility of a company and has to be perceived by the consumer as
trustworthy and healthy. This relates to a number of corporate practices that are directly
linked to sustainable development. When a product meets sustainability criteria, the media
receive the product positively. Given the enormous budgets companies devote to marketing,
this heavy investment is thus somewhat alleviated. Although companies largely do not
quantify this benefit, there is a clear business case for sustainability involved in retaining
brand value.

3.5.3 Attracting and Retaining Talent


The desire of employees to match business practices with their personal values is also seen
as a strong driver for sustainability action. Employees have an underlying desire to be good
citizens, to work with an internal sense of satisfaction and pride and will accept and protect
core values that relate to this desire. Attracting and retaining talent in a competitive business
14/30

environment is strongly in the economic interest of any company: hiring and keeping top
quality staff adds value to the company. However, interviewees described this as a weak
value driver because when jobs are no longer abundant in the marketplace, fewer employees
can make choices based on these criteria.

3.5.4 Value Drivers: Present and Future


Sustainability officers interviewed did not perceive value drivers as difficult to identify.
Those that are most relevant are clearly economically relevant to the sector. However, they
stated that it is sometimes difficult for managers to see and understand drivers it is a
challenge to define what needs to be done from a business perspective succinctly and in a
language that they understand. Some value drivers have the disadvantage of not always
being easily measured and, given that managers stated that in companies what gets
measured gets done, it is thus a challenge for the sustainability agenda to be pushed down
through the company.
Sustainability officers said that that they expect the concept of sustainability to be better
defined in future, and thus better understood by both society and companies. Managers
believe that the whole sector will move gradually away from an environmental impact focus
to a discussion based on research and development, resource and competence management.
Recognition of reputation and licence-to-operate value drivers will be enhanced as a result.
Managers also say that brands will be more part of reputation management than today. With
better tracking and tracing systems, managers believe that there will be increased branding
on the food producers side, or sometimes dual branding (retailer and producer). If this
happens, the company that is producing will be reaching out to consumers directly, and thus
reputation and image building will be even more important than before.

4 Corporate Sustainability Management


4.1 Corporate Goals and Organizational Culture
4.1.1 Corporate Vision
Food and beverage companies are such an integral part of society that their potential
strategic role as corporate citizens emerges rather naturally from everyday operations that
provide them with deep insights on consumer trends. Not surprisingly, the visions or
corporate purposes of major companies in the food and beverage industry are inspired by the
objective of meeting consumer preferences and needs for products that improve the quality
of their lives, while building sales and profit, creating wealth for employees, communities
and investors, and also fulfilling the companys responsibility as a corporate citizen. Clearly,
visions and purposes that are centred in this way on consumer lifestyle and quality of life
provide a strong background for a sustainability strategy, as long as consumers are pushing
in the right direction, which we have nevertheless seen is not always the case. However,
raising and sustaining the quality of life in the places where they do business is key to the
long-term survival of food and beverage companies. Progressive companies focus on longterm value creation as part of their corporate vision.
The examples of corporate purpose statements, corporate values and corporate principles
examined in the leading companies in the sector align well with sustainability strategy in
general, since they are often based on a history of innovative leadership inspired with goals
and a vision expressing concern and respect not only for consumers but also for employees
and communities.

15/30

4.1.2 Corporate Mindset


The organizational culture, or corporate mindset, greatly influences the success factors
involved in rolling out a sustainability strategy. One officer described sustainability as an
iterative process (learning by doing). An open, consensus-building organizational culture
lends itself to such a process. Too often, sustainable development initiatives come top down
from corporate initiatives rather than bottom up from operating companies and thus
ownership of the activity is often not firmly in place.
Interviewees felt that northern European cultures lend themselves well to consensus-driven
sustainability approaches, which may explain why these countries are also perceived as
leading the field in corporate sustainability. In the United States, by contrast, where topdown approaches are more common, sustainability is not embraced as easily. One US-based
company included in the research chose to base its corporate responsibility strategy on
European examples, as its management perceived Europe as having better practice globally.
The view from the sector in Europe is that the US is less internationally aware and more
inwardly focused when it comes to sustainability issues.
Sustainability officers interviewed felt that sustainability issues and their implications for the
business need to be more clearly defined in the mindsets of the people working in
companies. A lack of such an understanding greatly upsets the continuous feedback
mechanisms necessary for early identification of issues. Many interviewees said that
managers running businesses have a focus on their brand and are confronted with many
initiatives. Thus, unless sustainability is integrated into the business (by establishing targets
and incentives), it is unlikely to become a priority. Time and resources are pull factors that
create, if not active opposition, passivity and inertia in managers faced with what is
perceived as an extra management burden. There is often scepticism about the added value
of sustainability action, with fear of high costs and little or no return. If the push for
sustainability action should come, as many managers in the sector believe, from business
units, it is important that these units understand the link between sustainability activities and
their business results. They have to be convinced that the company will simply not have
customers if the company does not act in a sustainable way, and that thus sustainability is
important for the bottom line. An example of how this is being donein the supply chain is
examined in section 4.4.5.2.

4.2 Sustainability Strategy Design


Overall, our survey revealed that over 60 per cent of managers at food and beverage
companies perceived that there is a high level of integration of sustainable development into
strategies and operations (while, interestingly, 76 per cent of sustainability officers believed
that this was the case), with a further 30 per cent indicating that they felt it was fairly well
integrated. However, few food and beverage companies interviewed have formulated a
comprehensive sustainability strategy per se, although the leading companies tend to have a
strategy around certain key sustainability issues. Environmental and social strategies tend to
be approached in the leading companies as true business strategies, and not only a reflection
of corporate responsibility.
When developing a corporate strategy, companies review their overall growth goals, identify
where future markets will be, and review global trends. Future markets for food and
beverage companies will be from an emerging consumer base in the developing world
these are consumers with aspirations to a better quality of life, but with currently much less
purchasing power than consumers in developed countries. Some 4 billion people are at the

16/30

bottom of the pyramid (see Hart and Prahalad2 who illustrated this potential in one of the
reference articles on this subject).
This represents a huge business opportunity for the sector. But how can it strategically be
exploited? It requires new and creative ways of thinking and acting in companies. The
research identified a few extremely innovative efforts in the sector to build new business
models based on serving the poor, but in general, the growth strategies of even the leading
food and beverage companies are only beginning to focus on rethinking ways of creating,
manufacturing, distributing and marketing new products (disruptive technologies) in
emerging economies. Managers in the sector say that developing countries are much more
attuned to the concept of sustainable development, given their level of development. This
provides a remarkable opportunity to get sustainable development objectives increasingly on
the agenda.
Comment from a sustainability officer at a leading company:
The focus for design of our sustainability strategy was to ascertain how the businesses could best contribute to
sustainable development. Strategically, this led the company to create a focus in its sustainability actions on a
number of areas of global importance upon which it could have most influence and around which the company
could build some long-term initiatives.

In difficult economic times, sustainability action is scrutinized, as is every other factor that
impacts the company bottom line. Sustainability managers interviewed felt strongly that if
companies have integrated sustainability programmes into their strategic plans, it is less
likely that they will be removed from the strategic agenda, given the credibility risk to the
company of withdrawing them.

4.3 Organizational Structure and the Importance of


Functions
4.3.1 Structure
Organizational structure varies enormously from one organization to another in the industry
however, a few common denominators can be identified as providing an optimum
backdrop for building and promoting a business case for sustainability.
The corporate headquarters of food and beverage multinationals generally takes on the role
of central policy setting and strategic overview. Operational responsibilities are often
decentralized. Corporate managers felt that sustainability actions are most successful when
implemented by operational units; however, given the decentralized structure of most
companies in the sector, obtaining an overview of progress in these areas is problematic.
Business units for global companies in the sector are split into geographic markets in order to
maintain a local focus, but glue is mostly provided through a global business overview
(strategy, innovation, business development) at the corporate headquarters. These functions
often facilitate the overview of progress in areas of sustainability. In general, managers
suggested that the key to successful issue identification was communication between

Hart, Stuart L. and C.K. Prahalad. The Fortune at the Bottom of the Pyramid. Strategy and

Business, First Quarter, 2002

17/30

business and strategy groups. For example, in some companies, strategy groups inform the
sustainability or corporate responsibility committee on issues and vice versa.
Companies have chosen various ways of locating responsibilities for sustainability issues in
their organizations and this can also be very company-specific. Sometimes the sustainability
function is located in the public relations department, sometimes in innovation departments.
A very interesting trend is to see the sustainability champions in the supply chain
departments being responsible for pushing the key sustainability agenda in the company
this is occurring in more than one leading company. In general, companies tend to appoint a
strategic coordinating committee to lead from the centre, with overall responsibility for the
identification of issues. The group is usually cross-functional, with the involvement of
different business units and unions, and with an appropriate geographical representation.
This group decides whether issues should be addressed at a group or business unit level.
The strategic coordinating committee nominates issue groups or owners of the most
important issues (for example for human rights or ethical trading). Like the coordinating
committee, these issue groups also have a diverse membership. In this way, companies
create nets and goalkeepers for these nets as appropriate. Through the creation of teams,
companies can work in a matrix structure that allows, for example, staff in the markets to
talk to global functions, thus ensuring a cross-pollination of issues and agendas. Information
gathered in one market is thus transferred to another more easily, facilitating maximum use
of knowledge in the organization; one leading company referred to this process as search
and spin.
To optimize the application of a sustainability strategy, some companies have set themselves
an objective of having an organizational structure that makes it easy for information to flow
across the enterprise and around the world. This makes it more possible to put in place an
early awareness system to learn directly from stakeholders and consumers as early as
possible, and to commercialize good ideas and innovations quickly. The company culture
thus provides an opportunity for individuals to pick up issues at market level and elevate
them to the appropriate level. In order to avoid some issues being kept at a national level too
long, radar mechanisms are can be put in place to ensure that issue identification at market
level is channelled up and out quickly enough.
On the operational level, some companies have concentrated on building a network of
sustainability champions at senior level scattered throughout the organization but
positioned in the business units. This increases ownership of any initiatives by the business
units and ensures that questions such as budget and resources for sustainability initiatives are
addressed in the context of business strategy.

4.3.2 Functions
Most sustainability officers interviewed felt that for a business case for sustainability to be
successful, the CEO and members of the executive board needed to take distinctly proactive
roles on sustainability issues. As the driving force behind the sustainability strategy, the
CEOs of the leading companies are often publicly vocal on a number of the sustainability
issues that their company is focusing on. One manager commented, Without top
management support, it would not be possible to drive a sustainability strategy throughout
the organization, but this in itself is not enough for success.
Support for sustainability initiatives varies widely among different business groups,
commercial activities and individuals in the sector. Functions that are focused to a large
extent on the business margin (sales and profits targets) generally see sustainability as a
high-risk strategy. Even in the most progressive companies, a significant barrier identified is
what was often referred to as the second layer of business managers under the CEO who
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are oriented towards profitable growth first and foremost. Then, throughout the organization,
the old guard, a community of hard-line sceptics can often delay the roll-out of the business
case for sustainability. Translating the difficult concept of sustainability into the language of
such managers is often the greatest challenge.
Senior managers interviewed felt that since younger executives often grew up with
sustainability concepts in their everyday lives, they were more prepared to take on the
integrative aspects implied by sustainability in their work. Women were also seen as being
generally more open to these concepts.
Some business groups or profit centres in the companies are difficult to access. According to
our survey, nearly 30 per cent of managers felt that finance and control functions present the
most opposition to implementing sustainability initiatives, followed closely by marketing
and sales (25 per cent) and manufacturing operations (over 15 per cent). The last group often
reacts to initiative overload and finds fitting sustainability actions into its tough target setting
a burden, and yet this business group is regarded as the one that can most effectively
promote sustainability performance.
Other
0.5%

Other
11.1%

Finance/Control
6.0%

R&D
6.9%
Manufacturing
15.3%

HR & Corp Staff


6.9%

Finance/Control
29.2%

Corp Staff
5.6%

Top Management
2.0%
R&D
21.1%

Marketing/Sales
16.6%

HR
0.0%

Manufacturing
22.6%

Corp Staff
15.1%
HR
8.0%

Marketing/Sales
25.0%

HR & Corp Staff


8.0%

N = 72

Figure 4.1: Strongest Opposition to Implementing


Sustainability Initiatives

Figure 4.2: Business Functions that Can Most


Effectively Promote Sustainability Performance

According to our survey and interviews, sustainability officers in the food and beverage
industry perceive R&D, marketing/sales executives and buyers of raw and semi-processed
materials as key functions to be convinced of the business case for sustainability, as they
have considerable influence over product design and sourcing, important aspects affecting
sustainability strategy. Currently, however, these functions do not have sustainability on
their agenda and to a large degree do not realize the extent to which their work can impact
the sustainability model of the company; therefore lack of knowledge is a significant barrier
in these cases. Raising awareness of the business case for sustainability potential in these
functions can go a long way towards ensuring its ultimate implementation.
Marketing and sales executives generally do not yet see ways of using sustainability in brand
communication and other functions identify them as having set approaches to their way of
doing business that make it difficult to move forward with a progressive and innovative
sustainability agenda. Sustainability officers see the development of an understanding of the
corporate reputation value driver as something that may help to bridge this current reality.
However, developing this understanding is a time-consuming process, and marketing
managers have a swift turnaround time in their positions (three years on average), with
tightly set deadlines and objectives. This is often a barrier to a change of mindset.

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Problems arise with including sales and marketing executives in strategic coordination
groups in charge of overseeing sustainability strategies. The reason given for this was that
since the industry does not associate specific brands with specific issues, marketing
executives easily drop out of the equation because of their direct association and
preoccupation with brand. This is clearly a problem that needs to be addressed in the sector
in order to promote a business case for sustainability downstream.
According to sustainability officers, any sustainability strategy that is not accompanied by a
comprehensive communications strategy will almost certainly fail. The communications or
external relations director can take the role of coordinating the communication effort and
roll-out and is thus viewed by sustainability officers as a key element to success in driving
the business case for sustainability through the organization.
Employees can be encouraged by their line managers to participate in sustainable
development initiatives. However, often the direct supervisor constitutes a barrier to change.
In these cases, a solution is to educate line managers about the behaviours that the company
prefers. Leading by example is one of the most important forms of managerial support for
managers in any company.
According to our survey, there is considerable scope for sustainability officers to work more
closely with various management functions, and to use these opportunities to promote the
business case for sustainability internally. Overall, 56.5 per cent of managers felt that there is
a certain level of ad hoc collaboration with the sustainability department in their company,
while 29 per cent felt that they worked with this unit on a day-to-day basis. However, 57 per
cent felt that more collaboration with the companys environmental or sustainability officers
would contribute positively to sustainable business practices in the company.

N/A
0.0%

Very much
5.2%

No, we do not work


together
14.5%

Not at all
10.3%

A little
27.6%

N/A
0.0%

Yes, on an ad-hoc
basis
56.5%

Yes, on a day-today basis


29.0%

Much
29.3%
Fairly
27.6%

N = 58

N = 62

Figure 4.3: Level of Collaboration of


General Managers with Sustainability
Officers or Departments

Figure 4.4: Potential for More


Collaboration to Contribute to More
Sustainable Business Practices

4.4 Processes and Systems


4.4.1 Issue Tracking
Companies in the sector have often put issue management systems in place as a result of
incidents involving defensive confrontations with stakeholders. This is clearly more reactive
than it need be. The more affected a company has been by a major issue in its past, the more
it appears to treat the potential risks of issues seriously and the higher it places responsibility
for issues in the company hierarchy. For effective issue tracking, companies put in place
radar mechanisms to ensure that information in the markets is transmitted around the
network. The company then builds knowledge that will help to develop a way to implement
strategic thinking. Managers said that asking individual sites to be generally proactive and
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report back on their issues does not work and is unrealistic; requests have to be structured
and specific, for example, asking all sites how they collaborate or interact with local
stakeholders. To be effective, leaders in the industry say that every market should have its
own responsibility to look after the corporate affairs agenda and identify whether strategic
issues need to be addressed, thus allowing a continuous strategic action agenda based on
value creation to be set up.
Comment from a strategy executive:
We looked at the corporate affairs strategy, starting with identifying issues common to all markets and then
going on to the big issues that prevent managers from reaching financial targets. We asked, What would ease the
licence to operate? of each strategic area head. In the last year, every market looked at public policy,
stakeholder dialogue and how it is addressing corporate citizenship. The benefits? Greater awareness of the
positive things being done within the company people have addressed corporate responsibility differently. In
this way, we build strategic alternatives to reach our goals.

Managers felt that more resources need to be dedicated to defining a best-practice framework
to flag the status of issues at an early stage, and to developing issue-tracking tools. Issue
tracking is currently carried out at different levels in companies, using a variety of
approaches such as stakeholder dialogue, networking, accessing external expertise and
holding risk management reviews. Using tools such as print and visual media, the Internet,
surveys and database mechanisms are also increasingly part of this process.

4.4.2 Issue Mapping


Once issues are identified, companies assess their relevance and strategic fit with their value
drivers. The company thus builds an internal awareness of the business activities that are
relevant to each issue. Rather than producing a detailed quantification of their sustainability
efforts, companies in the sector tend to create a matrix with a prioritization of resources and
efforts, particularly regarding social issues. In general, if the risk is high for the business, it
will be rated high on the companys agenda. At this level, sustainability issues are
considered business risks.
A number of data management tools are used to inform the mapping process, such as the
continuous measurement of material, energy and waste flows and emissions, as well as more
ad hoc environmental impact assessment tools. Companies benchmark internally and with
other industries or companies in order to assess the relative significance of an issue. For
example, during the recent debates on obesity in the US (litigation against fast-food
companies), the sector drew parallels with the tobacco industrys experiences with litigation.
Environmental performance indicators are more commonly used than instruments and
processes to monitor social issues (for example level of staff turnaround, gender balance,
amount invested in communities) mainly because the latter are more difficult to assess.
Companies are increasingly looking towards standards such as AA1000, SA8000 for
guidance in this regard. In general, sustainability managers said that for a more effective
mapping and prioritization effort, more information and better tools on how you measure
intangibles are required (for example for measuring the impact of relationships with NGOs
and so on).

4.4.3 Issue Prioritization


Formal mapping of issues is often not required for prioritization, since some of the issues can
be assessed informally. Companies use risk assessment processes (internal and external) to

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prioritize their efforts. Business units submit these to the corporate function, which assesses
them in terms of a more holistic and long-term big picture. Risk assessment tools include:

Qualitative and quantitative assessments

Parameters such as probability forecasts and assessment of consequences

The review of risks results in a prioritization leading to a risk register, which later operates
as a tracking tool.
Auditing systems look at already identified critical risk issues and establish whether action
plans are in place and are being implemented, sometimes leading to a reprioritization of
efforts with regard to the identified risk.
Priority issues identified are integrated into strategic decision-making processes. Managers
interviewed generally felt that the way issues are tracked, mapped and prioritized needs to be
more transparent and more thoroughly understood in their companies. Managers indicated
that the industry is not quick enough in identifying the real issues and that there should be
more anticipation, leading to early action being taken to develop strategies to deal with
issues.
Managers also felt they were not sufficiently aware of how issues are being mapped and
prioritized on the agendas of peer groups and competitors. Some managers perceived this as
a threat that could eventually disadvantage the competitiveness of their company.

4.4.4 Integrating Issues into Strategic Decision-Making


Leading companies in the sector tend to focus their attention on sustainability issues in areas
that are most relevant to their business and where they can have most influence and impact.
To convince management in their company of the business case for sustainability, most
sustainability officers currently rely on presentations and papers outlining concepts and
plans. The business case for sustainability emphasis is also more focused on the concept and
value drivers behind sustainability initiatives than on a fully completed business case with
figures to back up the proposals. When presenting to management, sustainability officers
avoid referring to costs, but rather place the emphasis on product differentiation,
competitiveness and investment to cut costs in the medium term.
Implicitly, most CEOs in the leading food and beverage companies recognize a strong
business case for sustainability based on reputation and licence to operate value drivers
without a need for much further quantification. Putting a value on reputation loss, for
example, is a challenge that the sector has not tried to address. Some managers feel that more
work should be done in this area, based on the rationale that if it has been possible to value a
brand, therefore why should it not be possible to value reputation?
Comment from a strategy and business development executive:
It is hard to prove that sustainability adds value but it is clear that not paying attention to it destroys value, and
rather rapidly. It is not always possible to translate the impact of non-action into money terms. It has more to do
with vision and the fact that if you do not do it, business value is at risk.

This leads us to the question of whether quantification of the economic value of


sustainability would help convince sceptical strategic decision-makers of the business case
for sustainability. Food and beverage companies have tried to quantify sustainability
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benefits, but in an incomplete way. Quantification is subject to doubts and criticisms and,
managers felt, sometimes provokes more debate than it resolves.
Measurement tools to increase transparency are regarded as powerful support tools, since
they allow for a quantifiable argument for the business case for sustainability. Few today
would dispute the efficiencies achieved and costs saved by quantifying environmental
compliance, applying targets and then measuring continuous improvement; these tools are
extensively used by the industry. However, measuring the social dimensions of sustainability
is considered much more of a challenge. Managers felt that expressing a value for some
issues, such as child labour, should not even be tolerated by a corporate responsibility
approach.
The following points illustrate the view of managers in the industry with regard to
quantification:
The more it is measured over time, the more sustainability means to people within the
company.
Although the same rigorous assessment procedures should be applied to sustainability
projects as to other projects, both tangible (economic impact) and intangible
(relationships with stakeholders), sources of value have to be looked at.
Measurement without the belief is not compelling. The added value of sustainability
action is not always economic; there are issues that are not measurable in money
terms, and justification for involvement is not always quantifiable it is often simply
the right thing to do, based on best practice and pending legislation. Making the link
between the investment and the return on investment is thus exceedingly difficult.
Quantification makes decision-makers go by short-term numbers, whereas in fact the
benefits of sustainability are much greater in the longer term. Thus, measurements in
the same short-term snapshot as financial performance will never be equal and be able
to tip the balance.
In a ten-year perspective, there is never a single reason for a given sustainability
action, but a network of reasons.
Sustainability officers in the sector nevertheless believe that if they can show, with numbers,
that sustainability action is having an impact on profitability, there is a powerful argument to
promote a business case for sustainability. However, it is interesting to note that once senior
business managers are convinced of the business case for sustainability based on the
reputation and licence to operate value drivers, they are less convinced of the need for
quantification than the sustainability officers themselves.
Leading companies in the sector push issues into strategic decision-making primarily by
using the following methods:
Scenario building helps to build momentum around an issue, by making strategic
decision-makers face the consequences of doing nothing about a given issue (for
example by showing the impact on share price of NGO activism around a given issue).
Success stories and pilot projects show strategic decision-makers the relevance of an
issue to the business and can be very instrumental as learning tools to prove business
case potential. In the food and beverage industry, pilot projects for cash crops in the
supply chain are proving to be the most effective way of showing decision-makers the
business case for sustainable sourcing and that sustainability can be integrated into the
business without cost and still produce benefits.

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If a single issue is very significant, then a focused strategy is articulated and a strategic
action plan related to the issue is developed as a matter of priority. Position papers are
established on the most important issues. Traceability is an example of an issue that gathered
so much momentum that it quickly became integrated into the strategy of many companies.

4.4.5 Integrating Issues into Operations


Comment from a strategy officer:
What you basically need to implement a strategy is a framework, people aware and motivated to deliver it,
systems in place and an effective target setting process.

Generally speaking, the way corporations apply sustainability is seen as being a matter of
stages of cultural and economic development, as affluent nations are perceived as being
more interested in meeting corporate responsibility standards while the less affluent are
mainly striving for rapid growth. However, if multinationals establish a principle in one
country, it is applicable in another. Dual standards are perceived as a risk for the company.
Therefore, the way a business case for sustainability is built for a company does not vary
from country to country. However, there are significant national differences in the way the
business case for sustainability is implemented locally. Issues in developing countries are
interpreted differently to those in the developed world.
Europeans are motivated to urge corporations to act in a sustainable manner. In Europe, there
is a fairly uniform desire to meet certain standards, but when it comes to implementation,
there are again differences. Northern European and Scandinavian countries are seen by most
players in the industry as being the strongest when it comes to implementation.
4.4.5.1 The Framework
For successful issue integration into operations, most companies work within an agreed set
of policies and management systems. Central to this are statements of principles, and values
that provide a framework within which to operate. According to our survey research, 26 per
cent of managers perceived the most important tools related to sustainable development as
being documents laying out corporate values, policies and standards that take account of
sustainable development issues. This shows the importance the industry accords to having
the right corporate mindset and values in order for sustainability initiatives to be successful;
these create an operational framework within which the business case for sustainability can
be promoted throughout the organization, rolling it out to every manager and employee
around the world.

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Business teams, task


forces to resolve conflicts
and push improvements
on an operational level
11%

Other
2%

No initiatives whatsoever
0%

Coordination committee
discussing and pushing
strategic decisions at
corporate level
11%
Management
development
11%
Reward and punishment
systems
1%
Corporate values,
policies and standards
that take account of these
issues
26%

Measurement tools to
increase transparancey
20%

Tools measuring resource


allocation
10%
Strategic planning and
accounting procedures
that take account of these
issues
8%

N = 218

Figure 4.5: Sustainable Development Tools Used in Food and Beverage Companies

Most sustainability officers felt that the message on the business case for sustainability must
come from top management first and foremost, before being pushed through to all levels of
the organization. However, they also felt that employees should first have a basic
understanding of the concepts before trying to reach them. Developing this understanding
takes time. One strategy officer remarked, A corporate message on sustainability has
general themes but the message has to be received in a way that is relevant and modified
based on region or country; otherwise it is not going to be effective. Operational units have
an important role in developing and transmitting this message.
In the early stages of development of a corporate sustainability strategy, some companies
rely on the attitude and persuasive power of the senior staff member responsible for
sustainability or corporate responsibility to drive the business case for sustainability. Having
this function report directly to the CEO gives the entire organization the message that
sustainability is being taken seriously. This also gives sustainability exposure at the highest
level (shareholder and board meetings, for example).
However, leading companies do not view this as sufficient for successful implementation in
business operations. One experienced manager put forward the view that building and
implementing the business case for sustainability cannot be separated; sustainability is a
matter of learning by doing, through a process of iteration and interaction. The most
innovative examples of learning by doing can be found deep in the supply chains of global
companies. One of the most effective ways of creating a network of sustainability
champions is to use pilot demonstration projects and to get people in the company working
on sustainability issues in their businesses. In this way, it becomes possible to speak the
language of the business to engage in the process. Pilot projects or focused actions
effectively introduce the concepts of sustainability in a hands-on way, so that people can
better understand how they can personally contribute. By being able to point to success
stories, the business case for sustainability is immeasurably enhanced on an operational
level.
4.4.5.2 Sustainable Agriculture
The leaders in the industry have recognized the need for a change of mindset and for the
food industry to speak out on the challenges posed by agricultural production systems. They
are currently experimenting with pilot sustainable agriculture projects using key crops such
as tea, coffee, palm oil and other cash crops. By using local partners know-how to jointly
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develop sustainable agriculture best-practice guidelines for farmers, and by then providing
information to those who shape the market (such as other producers, buyers, processors and
consumers), the objective is to gradually create market mechanisms that favour sustainable
practice. Analysing the business case for sustainable agriculture initiatives, and creating the
right tools and instruments to implement them and roll them out to pilot markets, is a timeconsuming initiative for those championing the cause. One officer said that he had been
engaged in a two-year process of promoting the business case for sustainable agriculture and
gaining buy-in from a network of identified future champions throughout the business.
However, this time investment pays dividends in terms of gaining buy-in to the business
relevance of sustainability in organizations.
Companies running pilot projects say that it is necessary to ensure ownership by a project
leader, who later becomes an ambassador of sustainability in the organization, and to
devote adequate budget and resources to these initiatives. By setting up pilot projects, it is
possible to introduce and test the key performance indicators necessary to define the relevant
sustainability issues and measure the success of the pilot initiatives.
Case Study
One company has encouraged purchasing managers to use value chain analysis to examine what values for
consumers and other stakeholders are being created in the supply chain and at what cost. The focus is on how the
creation of these values can help differentiate the product from other products. This has given valuable insights
into redesigning the value chain in order to decrease costs and source materials in a more sustainable manner.
Purchasing managers participating in hands-on workshops realized that redesigning the value chain provides
more cost saving possibilities than cost increases. There is a significant pay-off from these initiatives; buyers
generally have a good understanding of local issues and once they are engaged and convinced of the concepts
and their application, they can ensure that these principles are communicated and applied throughout the value
chain.
By sharing best practices like these through initiatives such as the Sustainable Agriculture Initiative (SAI) a
food industry platform to support the development of sustainable agriculture companies are reaching a
common understanding of threats to the future of the industry and are putting together synergies on supply chain
management on a non-competitive level. In this way, overall standards will improve and a set of international
standards for sustainable agriculture can eventually be introduced. This will not happen unless leading
international companies share their experience and knowledge in open and transparent dialogue.

4.4.5.3 Training Approaches


Sustainability officers interviewed did not consider that specific management courses on
sustainability issues are an effective means of rolling out business case for sustainability
messages internally, since with generic training modules, it is difficult show managers
specifically how sustainability is directly relevant to their work. Conversely, officers
interviewed felt that corporate training should primarily aim to reinforce values in managers
minds. Companies also use the train the trainer concept to build sustainability awareness
and integrate it into business operations. Presentations to supervisory functions on
sustainability approaches and strategies have also proved effective.
For pilot project management or labour relations, there are specific new training
requirements to train managers in informal skills such as conflict resolution, dialogue and
facilitation.
4.4.5.4 Mainstreaming Sustainability
Clearly established targets can help business units to put sustainable practice in place.
Managers interviewed felt that agreeing targets for different businesses to implement a
number of practices was key to the successful roll-out of the business case for sustainability,
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thus ensuring that sustainability action plans become an integrated part of the business
model.
Sustainability managers pointed to the importance of focusing on concrete activities with
measurable objectives. Some companies include goals based on sustainable development in
their goal setting and management appraisal process (MAP). In others, sustainability is part
of the managers balanced scorecard. Incentive and reward systems are thus linked to
performance in sustainability or corporate responsibility just like other business areas.
However, although there is an awareness of the value of doing this in the sector, few
companies, including leading companies, have moved towards such an integrated approach.
Managers say that this is due to the decentralized character of management structures in the
sector. However, leading companies consider that this issue has to be further addressed as a
matter of priority in future management reviews.
Case Study Into the Mainstream
One company designed a tool that defines 130 observable, measurable practices in areas of company or group
responsibility covering a wide range of criteria, including a mix of true business practices and social issues.
Operating units evaluate themselves in relation to these practices. The programme tracks progress in practice,
encouraging cooperation and cross-functional initiatives within and across operational teams. The sustainability
officer commented, Mainstreaming the practices by doing simple things every day is the key to business
integration. The tool helps in the identification of the values and links them to the business, thus making them
accessible to everyone in the company. The system works because it is integrated into the business. Managers feel
that it is a performance tool.

4.4.5.5 Communications Strategy


Managers felt that it was essential to have a good internal communications strategy going
hand in hand with the sustainability strategy. There are a number of tools that can be used to
promote the strategy internally, such as intranet/internal websites, business reviews and
corporate news bulletins. Running site- or function-specific events to raise awareness has
also proved effective. Sustainability officers experience of the intranet as a communications
tool was mixed; they felt that it provides information effectively but is not an effective
interactive communication tool, and that sustainability champions in the operational and
business units will be far more effective in promoting the business case for sustainability
internally. Building internal alliances is thus regarded as a key success factor for roll-out.
Sustainability implementers whether they be sustainability officers or champions in the
businesses strategically identify who needs to be convinced internally in order to get a
project through the organizational hierarchy. In companies where such a network is
operating, these key decision-makers are kept involved permanently and on an ongoing
basis.

5 Assessment of the Business Case, Its Potential


and Exploitation
5.1 No Resource = No Business
The simple equation no resource = no business is the strongest economic argument
possible for the promotion of sustainable practices in the food and beverage industry.
Compared with other industries examined in this research project, this is clearly the most
pronounced and solid business case. To remain economically viable, the industry and its
suppliers have to manage natural resources in such a way that they do not decrease the raw
material base they are drawing on significantly. With some threats, such as the imminent
disappearance of a natural resource being used by the industry (for example some fish
species), there is a clear business case for sustainability based on business risk within a tight
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time perspective of five years, which is well within the time horizon of most business
managers. Such immediate threats can be used as models to analyse similar risk with bigger
bottom-line effects such as agriculture. However, in areas such as sustainable agriculture or
social performance, the time horizon expands again, and benefits are less easily perceived by
managers unless they are defined more succinctly by sustainability officers.
Consumers in the developed world are more concerned than ever before about how their
food is produced. Food and beverage companies can only connect with the consumer if they
pursue sound environmental and social practices that take account of the way raw materials
are grown, while preserving biodiversity and protecting water supplies. The challenge will
lie in the balancing act between sustainability action and sustained economic growth.
Leading companies feel that sustainability can be achieved in some areas without any impact
on profitability, and in other cases by saving costs. However, there appear to be limits to the
business case for sustainability in the sector without substantial external political and
economic pressure being applied on the industry, as it is currently simply not in the
immediate economic interest of companies to move towards sustainability more rapidly.

5.2 Internalization of Costs


Nevertheless, there is significant potential to further exploit a business case for sustainability
based on economic arguments in certain specific business areas in order to reach difficult
targets such as and the hard-line sceptics in companies who are sometimes at senior
management (thus decision-making) level. All in all, the industry considers that the
connection between sustainability initiatives and the company bottom line implies
engagement in complicated and expensive research, and managers do not generally
recognize or accept the need to do so. However, the current policies of companies in the
sector, even the leading companies, do not allow external costs to be allocated where they
should be allocated. For example, by ensuring that all external costs are reflected in the cost
of raw materials, the business case for sustainability in the supply chain would be greatly
enhanced. In this chapter, we have seen that value chain analysis can be used effectively to
support the business case for more sustainable sourcing within conventional agricultural
systems, and this is further developed in the toolset emerging from this research. Internal
communication and integration of sustainability action into business strategy could benefit
from more quantitative research in these areas.

5.3 Business Focus Upstream


To create a robust business case for sustainability, leading companies are focusing on
enhancing activities where an impact can be made, and where a direct link can be made to
the business product. The sustainable agriculture pilot projects being carried out in the
supply chain by such companies focus on opportunities to create value in areas of strategic
business concern and introduce measurable indicators of sustainability performance. Thus
the link between business performance and improved company performance becomes very
close. The creation of these values will also help with product differentiation, enabling a
company eventually to demand a price premium for its products or to gain in terms of brand
loyalty.
Being able to share and exploit best practice and win-win success stories is a key
component of both building and promoting a business case for sustainability. Managers say
that the business case for sustainability is greatly enhanced by providing very specific
examples where breakthroughs in sustainability initiatives were achieved with either positive
or neutral impact on the bottom line. The business case for sustainability should not
necessarily assume higher profits, sales or margins. To show that sustainability initiatives
have benefits with virtually no costs is very compelling. Providing proof that profit can at
least be maintained while the company strives to be sustainable is an effective business
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argument in itself. Raising awareness in the company that sustainability can be about gaining
major reputation and brand value benefits from little or no additional investment needs to be
a key part of the communication strategy around the business case for sustainability. While
work being done in these areas will greatly enhance the business case, there is no doubt that
the most progressive companies in the sector are themselves in a research and development
phase with the pilot projects and value analysis; it remains to be seen whether the
experimental practices in the industry will move into the mainstream, although current
indications are positive.

5.4 Focusing Downstream


Although business cases for sustainability in leading companies are currently mainly focused
upstream on the supply chain there is also potential to work on downstream efforts. The
price of raw materials is small compared with the processing and marketing costs of the final
product. As sustainability is essential for the long-term security of the supply chain, it should
ultimately be conceivable to sell the concept to consumers. However, research tends to show
that the relation between consumers wider concern for environmental and social issues and
their buying habits is weak. Companies are in an experimental phase with pilot projects and
do not wish to risk credibility by using these pilots to market brands just yet. However, if
these efforts can eventually be used to build a bridge between products and consumers
concern for the future of the planet, consumers may even be prepared to pay a premium.
Companies seek new businesses and new marketplaces in order to remain profitable.
Innovation through sustainability can contribute to building up critical mass in the markets.
By creating high-quality added value products, brand values and consumer trust can be used
in marketing and selling products. This should lead to non-traditional approaches to
managing the marketing value of a brand, using solid arguments based on scientific fact
putting forward an absolute benefit that consumers value. Once a companys initiatives in,
for example, sustainable agriculture, are successfully communicated to consumers,
confidence in the companys food supply chain will increase; this in turn will affect
profitability.
Engaging sales and marketing staff at an early stage of development of a sustainability
strategy, for example by including them in strategic coordination committees, task forces or
issue groups would go a long way towards breaking down the lack of knowledge that
prevents these officers from exploiting the concept of sustainability to its fullest extent. In
general, awareness building and education on sustainable development will eventually
change the way food and beverage companies relate to the consumer. Radical innovation
based on sustainability concepts should go beyond experimental projects as a result.

5.5 Industry and Stakeholder Dynamics


Leading companies state that they are not involved in sustainability programmes for
monetary reasons, but rather because they present an opportunity for the company to
establish a leadership position in the industry. It is thus important for companies to document
what they are doing that is better than their competitors. By establishing such leadership
positions, companies are convinced that laggards will eventually follow, thus reducing the
risk of competitive disadvantage due to investment in sustainability action. In this way, the
dynamics of the industry will eventually join forces with external pressure to change the face
of sustainability in the industry today. NGOs say that leaders in the industry must join with
trade initiatives to support changes to the economic and political framework within which
the industry is operating in order to take a major step forward. Otherwise, in their view, the
business case for sustainability clearly has its limits under the prevailing economic scenario.

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6 A Diagnostic Toolset for Sustainability Officers


The principal purpose of the research presented here was to use the empirical evidence to
design a diagnostic toolset that leads sustainability officers through a process of verification
of the economic rationale for the business case for sustainability in their company. A set of
interactive web tools designed for the food and beverage industry helps to systematize a
concept that is poorly understood and often lacks a coherent framework in companies. The
food and beverage industry web tools can be found on the following website:
http://imd.ch/research/projects/bcs. The web tools help sustainability officers to identify
barriers to sustainability action within the organization and provide solutions (best-practice
options) to overcome them that are based on economic reasoning. This facilitates priority
setting and allows sustainability officers to focus on key issues, value drivers and barriers.

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