Engagement and the value chain

A quiet revolution is underway that is transforming business practice. For years we talked about the supply chain. Companies can do good and enhance profitability by converting their supply chains to value chains. To keep it really simple, I believe the key difference between these chains is that various parts of the supply chain seek to extract value creating winners and losers. The various stakeholders in the value chain seek to create value, and ideally, create shared value.

The graphic below contrasts the supply chain and the value chain. It deliberately polarises the two concepts to illustrate how the value chain can transform business. If you want a deeper understanding of the value chain, try Bob Willard’s blog. I am going to focus on giving some diverse examples to illustrate the how a value chain ethos can transform business and create multiple benefits.

Supply chain – parks and reserves

Going back two or three decades, most city councils in my country (New Zealand) had in-house parks and reserves departments. As financial reforms swept through the country, this function was contracted out. In the first years, the councils had a number of suppliers, but over time, using their power in the relationship, the contractors were encouraged to “sharpen their pencils” when tendering for contracts. While this was good for the ratepayers, as it drove down costs and the training infrastructure embodied in the old system was severely damaged. Now in a user pays age, staff employed by contractors, have to pay for their own training if they want qualifications.

The supply chain and value chain in gold

Here is an extract from Harriet Lamb’s Fighting the Banana Wars and Other Fair Trade Battles (page 170 – 171).

The most vulnerable people mining gold are getting ripped off, they earn absolutely nothing – and so work in the most appalling conditions…. the men go deep underground hacking out the ore. Kids as young as six then stands on a huge granite rock rolling it over the ore mixed with water and mercury, which gradually absorbs the gold.

 

Then these kids scoop it up with their bare hands into cut off plastic bottles and take it to their homes. There, on their kitchen stoves they evaporate the mercury, so releasing poisonous gasses, to leave the gold.

Mercury is incredibly toxic – just small amounts will kill over time. I imagine these children have to work, because their parents are busy doing the heavy work extracting the ore, and the financial returns are so poor. Do you think these people know that the price of gold has gone through the roof – probably not. I imagine that some of this gold goes to gold plating in the mansions of the opulent, or for rapper “bling”. These consumers would have no idea of the suffering they are complicit in (is that too harsh?).

The Fairtrade movement seeks to extract miners from the supply chain and embed them in a value chain. A major difference will be that those making the purchase will know the good that their purchase creates. Here is a video telling the story of Fairtrade and Fairmined gold. Note the children grinding the ore.

Walmart’s value chains

Earlier blogs have identified how Walmart is created shared value in supplier relationships with companies such as Peterbilt. The massive trucks Peterbilt sells to Walmart are at the heart of their strategy to reduce their emissions 100% by 2015. Peterbilt will benefit both from this long-term relationship with Walmart, and in creating technology to make their vehicles more environmentally friendly – probably opening up other markets.

Another value chain strategy is Walmart’s intention to reduce sugar and sodium content and eliminate transfats from the foods they sell. As they supply 25% of the food in the U.S., they benefit the consumer and the wider community by, hopefully reducing the burden on the health system. Here is Daniel Goleman commenting on the Walmart value chain.

Here are just three examples of the supply and value chain. Feel free to comment and add further examples.

image credit: http://www.officialpsds.com/Pac-Gold-Bling-Gun-PSD50321.html 

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Engaging stories: Fairtrade cotton

I mostly drink Fairtrade coffee, sometimes eat Fairtrade chocolate, but must confess, I don’t wear Fairtrade cotton. That will change now that I am reading Harriet Lamb’s Fighting the Banana Wars and Other Fairtrade Battles.

Struggling to stay above the poverty line

Harriet Lamb tells of cotton grower’s subsistence existence in Africa, where cotton supports about 10 million people. For countries such as Burkina Faso, cotton is the major export. Typically the growers live in villages that often don’t have direct access to drinking water, education and healthcare facilities – things we take for granted in the West.

African and other third-world cotton growers are enmeshed in the fabric of global trading dynamics. If they only had to contend with the vagaries of the weather and nature, and even the free market, they might be okay, but their problems are compounded by subsidies that wealthy countries pay their cotton growers. The U.S. Government subsidises their own cotton growers in response to falling cotton prices. When U.S. subsidies increased in 2001, U.S. growers responded by growing more cotton. Not, surprisingly, increased production saw the global price fall further. In 2005, the U.S. Government spent $4.7 billion on cotton subsidies, more than it spent on aid to Africa.

We also have spare a thought for the U.S. taxpayer here. The Government’s subsidies distort the market and impoverish parts of Africa, impelling Western governments to provide aid – so the U.S. taxpayer pays twice – through cotton subsidies and through aid. And it is even more crazy when the US subsidises Brazilian cotton farmers as part of a free trade deal. Unfortunately the Africans don’t have a free trade deal! The Fairtrade story, teaches us that aid is less necessary when factors influencing global markets are more carefully managed for all stakeholders.

Minimum prices

Fairtrade’s main mechanism for creating better returns for growers is a minimum price. This provides a buffer for growers and with the troughs in the market cycles eliminated, growers and their communities get the cash they need to raise living standards. Typically communities will invest additional income into clean and local water supplies and education.

As important as the material improvements, is the contribution the Fairtrade ethos brings to village life. For example, Fairtrade work to raise the status of women, through the agency of additional income and education. This video about Fairtrade cotton in Cameroon features the benefits to women. One of the women outlines the benefits:

The Fairtrade standards insist that women are in the group. The men had difficulty accepting this at first but slowly they realised that it could work. And now they own their own land… they are independent. They work their land, they go and receive their money alongside the men and this motivates others to get involved as well.

Commodity price increases

Recent spikes in commodity prices around the world have ameliorated the distortions created by subsidies. Demand for cotton has increased, as more people join the middle class, cotton production decreases and discerning consumers learn to favour natural textiles. This chart from the Index Mundi website, show the cotton price over the last fifteen years, revealing the sharp recent spike.

What I don’t know, is the impact this spike has had on third world growers. When commodity prices rise, growers don’t necessarily benefit. Has Fairtrade been able to ensure a fair share of the benefits get to those that need it most? And does it make you feel better about paying more money for a pair of jeans?

Engagement explosion

If you consider the relatively recent development of stakeholder engagement, its fair to say that there has been an engagement explosion. Edward Freeman first articulated stakeholder theory in his 1984 book Strategic Management: A Stakeholder Approach. It took a decade or so to emerge from obscurity and the concept had to survive criticism from those that saw it as a threat to the status quo – the primacy of the shareholder.

Engagement’s advantage is that it is organic in nature. People engaging become networked and engaging with others, opening further possibilities for engagement. Thus grow is exponential.

Fair trade

The growth of the Fair Trade movement is impressive. Harriet Lamb’s book Fighting the Banana Wars and Other Fair Trade Stories reveals explosive growth in Fair Trade sales.

The Fair Trade movement is a great example of the growth of engagement networks. The great achievement of fair Trade is in connecting the polar ends of the supply chain, the producer and the consumer. Before Fair Trade came along, most of us gave little thought to the origin of the bananas, or coffee or chocolate we consumed. But through the advocates of Fair Trade promoters we have learned that growers of these crops are often exploited by distribution and marketing systems. We have learned, for example that young people in African countries work as slaves on cocoa farms. Some of us know that coffee grown in the canopy of tropical forests creates great coffee in conditions that supports the ecosystem and is supported by that system. We don’t personally know the growers, but we learn that the Fair Trade system enables some of the money we pay for our coffee to help provide education for their families.

The Fair Trade example is just one example of the conversion of supply chains to value chains. I haven’t accessed product information using quick response (QR) codes with a cell phone, but the technology is there to provide more information about products and the people involved in their production, collapsing the supply chain and connecting producers and consumers.

The Internet   

The red line in the above graph shows the explosive growth of the Internet. We are still too close to the advent of this remarkable technology to fully appreciate the impact it is having on human interaction. I recall when I was writing my first book in the late nineties, I came across the Grameen story. I found Muhammad Yunus’s email address and asked his permission to use his story. He responded next day and a few days later the relevant chapter was written. More recently, I was able to connect with John Elkington through Twitter and ask for an endorsement of the revised edition of my book. He graciously agreed. Living at the bottom of the world, in New Zealand, I have been able to make connections that would have either been much more laborious or impossible in earlier times. Like many of you I engage with people in online communities across the globe. My potential to connect has exploded. Distance has been nullified and social levels flattened.

These are just two examples of greater engagement and connection and notice that they have happened in less than two decades. Profound changes are happening that will radically transform business and society for the better. I would be interested to know how greater engagement is happening in your life.