In a recent New York Times column, author Steve Lohr gives a clear synopsis of the case made earlier this year in the Harvard Business Review for a new form of capitalism, dubbed "shared value," that can potentially unleash innovation and growth.
Lohr rightly establishes shared value's roots in corporate social responsibility initiatives, and in more recent (and for me, overwrought) propositions like "triple bottom line" and "sustainability" that aim to address environmental, social, and economic issues. Shared value, he explains, gives these ideas new teeth by "emphasizing profit-making not just as a possibility (in addressing such ills) but as a priority." Lohr goes on to describe the concept as, "a more sophisticated form of capitalism," in which "the ability to address societal ills is integral to profit maximization instead of treated outside the profit model."
Lohr goes on to illustrate how shared value is already being pursued by companies like G.E., where an effort to apply new technologies to reduce energy consumption across a range of industrial and consumer products has increased sales by $8 billion over five years. IBM’s well-publicized Smart Cities program and an Intuit service that delivers accurate, timely market pricing information to India's farmers are also cited.
Each of these examples is laudable and encouraging. And each happens to come from a high-tech leader. For me, it begs the question: How can companies not in the everyday business of technology pursue shared value?
The answer lies in a total focus on improving quality, and never being satisfied, no matter how well the market, the critics and even your own stakeholders say you're doing. Companies with reputations based on quality can justify higher prices, and in doing so, create value that can be shared with all stakeholders and the world at large. There is value for end users in greater and lasting satisfaction or utility, value for supply chain actors in the power to realize higher margins, value for ownership in higher profits through charging higher prices, and value for society when the weakest economic actors involved in production are treated equitably.
This construct holds up even in a weak economy, and applies well beyond luxury goods marketers. Apple's business is built around quality of user experience, and the last time I checked, iPad 2's and iPhone 4's were still selling at full price. Early on, Verizon Wireless understood a high-quality network’s power to attract and retain customers. The company invested heavily to build a superior network, earned a reputation for it, and continues to command a premium price for those wishing to access it.
Once a total commitment to quality is made, the question becomes: How much of the value created through that effort actually gets shared, especially with a supply chain's weakest players?
It's a question our company grappled with for many years. Consistently achieving industry-best quality has always been paramount at illy, but buying green coffee the traditional way, indirectly through third parties (even from trusted, long-term partners), is hit or miss. About 25 years ago, our late chairman, Dr. Ernesto Illy, found a way to align our interests with those of the most vital, but paradoxically, also the weakest actors in the coffee supply chain: farmers. He instituted a direct purchase model that pays farmers a substantial, guaranteed premium over market prices and ensures a profit on all the coffee purchased by illy in exchange for meeting our strict and ever-evolving quality requirements.
Quality doesn't happen by accident, so from the start, we invested in farm owners willing to make a total commitment to it with training in environmentally sound growing methods at no cost, and in ongoing monitoring to assess quality. We also provide education on sound business management, helping farm owners establish lasting enterprises.
Dr. Illy's model literally remade Brazil's reputation from a solely high-volume supplier to high-quality producer. Other coffee roasters started buying from farms we purchased from, and then from entire regions where we instituted the quality-centric model. The economic and social lives of Minas Gerais and other remote parts of Brazil markedly improved. Farmers typically reinvest healthy portions of the premium they earn back into their farms, and some owners have substantially increased their land holdings over time. Many farmers have proven civic-minded, sharing their financial success with their communities.
The Brazil model did indeed produce consistently high quality, and we soon brought the program to every country where we source coffee. Over the next decade, our reputation for quality grew, and along with it, our availability from 40 to 140 countries. Today, 100% of our purchases are direct from the producer, and we are creating and sharing value with farmers across Central and South America, Africa, and Asia.
The leading industrial standards arbiter DNV recently awarded illy its first Responsible Supply Chain Process certification, specifically citing the effectiveness of our quality-centric approach and its applicability to broader agribusiness and industry.
Where else are we creating and sharing value? First, with consumers, who appreciate a superior coffee experience. Next, with our retail and hospitality partners, who are able to realize the higher margins justified by better quality. And ultimately, we reinvest a substantial portion of our price premium back in higher-quality purchases from our farmers.
Shared value is not just a series of empty words or a catchy phrase. Experience is already proving that when it is pursued the right way, everyone wins.
[Image: illycaffè]
Greg Fea is President and CEO of illycaffè North America and the General Manager and Global Commercial Director of illycaffè S.p.A.