Beyond Certification. Business model innovation for sustainability in food and agriculture

Posted on by Bart Doorneweert

“Sustainability certification, is that legit?” somebody recently asked me. “I don’t know”, I said.

Innovation for sustainability in food and agriculture is stuck. We had the hope over the last few years that sustainability certification of agricultural products might compel the market to deliver on sustainability by laying down the rules by which it should play. Although the scientific basis for the sustainability criteria that products should meet is sound, certification hasn’t proven itself to be the right vehicle for criteria adoption. The focus is all on the standard, and not on the business model.

The question of what lies beyond certification for effectuating sustainable development in agri-food markets is thus very much upcoming. It is being discussed more as brands and traders are becoming increasingly confident about acting in markets for sustainable produce.

Though there is no definition of “beyond certification”, there are some examples in the market to date that in my opinion illustrate facets of a “beyond certification” innovation agenda. They all concern business model innovations, which provide a more fruitful ground for adoption of sustainable production standards. Some broad brush illustrations:

Sustainability as part of integrated brand communication. In this case the brand becomes the standard, and vice versa. The brand’s narrative leads in voicing the responsibility that is taken for the products it markets. Rather that explicitly communicating the technicalities of sustainability impact, the narrative will more likely cover topics like the origin and quality of the product, or the history/artisanship of the producer. Examples of concepts that already apply this are for instance Nespresso (a Nestle coffee brand) and Innocent (a fruit smoothies brand). Both certify or verify their product ingredients through a third party certifier, but this is not directly communicated to the consumer. The only communication regards the overall brand experience of a top quality and responsible product.

Joint platforms of brands/retailers and producers for a differentiated market proposition. In this example producers and the marketing brand would jointly invest in creating a business model to which they both contribute brand value. A successful example of this is for instance the Naked Wines online wine retail platform. Naked Wines brings together wine aficionados and independent wine makers. The platform provides pre-finance for winemakers’ harvest and produce, in exchange for exclusive sales and marketing of their wines through the platform. So far Naked Wines has appeal with a subscriber base of 200.000 people worldwide.

Rewards to achievement of sustainability performance. This example relates to finding smart combinations between sustainability impact, and economic reward systems. The case of Guayaki Maté tea and reforestation, shows how shade-grown maté under the forest canopy improves quality, and is able to capture added value in the market. This value is captured both through improved tea quality, as well as through the convincing claim that can be made to consumers that increasing their consumption of maté will expand the rainforest.

Conclusion
Complements need to sought between certification and new combinations of value creation that make it commercially compelling to adopt more ambitious sustainability standards. This will come from creating new market-based value systems at the farm level, or at the marketing level, or more likely both at the same time. If we truly aim to fulfill our sustainability ambitions, then we will need to delve deeper into the value creating process to find these synergies that will proliferate a higher standard of production and living.

Tipping points, sustainability overhaul, and business model design

Posted on by Bart Doorneweert

When grand visions are presented on how business could develop sustainability into the mainstream, often the metaphor of Malcom Gladwell’s Tipping Point is used. The World Wildlife Fund’s (WWF) vice president of market transformation, Jason Clay, has worked out the most famous application of this theory to the domain of food and agriculture in relation biodiversity conservation. In short this work argues that there are 15 key commodities which impact biodiversity and that 70% of those key commodities are under influence of a limited group of 300-500 corporations. This fact underlies the foundation of the WWF’s theory of change for business enagement, where the WWF has selected to work on mainstreaming sustainability with the top 100 influential branding companies that control 25% of trade in key commodities. Through working with reputable brands, which have a high level of public exposure, WWF hopes to push the system to a tipping point in environmentally responsible global commodity production and trade by 2020.

In order to transform production practices for these commodities to be environmentally responsible, the WWF strategy proposes to work with product labeling backed by independent third party certification. The idea is that labeling will allow branding firms to profile themselves as responsible companies, and distinguish their value proposition from the conventional product. For farmers, the hypothesis is that environmentally responsible production practices, prescribed by certification schemes, entail lowering the use of costly pesticides and artificial fertilizers which burden the environment. In short, certification’s proposition is that the tipping point to mainstreaming sustainability will be reached by creating value for brands, and by reducing production costs for farmers.

Constraints in market transformation
This is certification’s promise, but the true effect is currently under much discussion. Research is working very hard on conducting impact evaluations on certification. Despite the fact that there is no convincing evidence yet of whether certification works or not, there are two tell-tale signs that certification alone won’t drive the system to its tipping point:

  1. certification is costly and the rate of return to producers is low. Certification entails making investments, changing management practices, and paying for auditing activities by expensive consultants. These are all costly activities. To stimulate producers to change their ways, the rewards of certification should be crystal clear, but the figures I’ve seen (unfortunately always off the record…) indicate towards a zero-to-no returns*.
  2. certification has to overcome this business model design flaw that currently contains most value capturing with the downstream corporations in the value chain. However, certification does not promote business model innovation to overcome this constraint in value distribution. To the contrary, certification schemes are designed in such a way that they can be used as a plug-in in existing business models.

Currently there is a very limited group of top tier producers for whom the value proposition of certification works through the existing business models of the top 500 companies. Consequently, these companies are competing amongst each other for sourcing from this top tier of producers, because they produce the highest quality, and are most productive.  Yet the value proposition of these existing business models is least attractive for the bulk of the producer population (generally consisting of smallholder farmers), which produces the lion’s share of the world’s food. We thus face the contradictory situation that the group which can contribute most to environmentally responsible production is excluded from the market under current business models, and that certification schemes have no power to reach out to these groups.

Business Model Design and experimentation
The WWF sustainability mainstreaming strategy is a valid one to follow. However it is confronted with operational constraints due to design flaws in the adoption of responsible practices by the agricultural population under operations of current agribusiness models.  It is evident that new agribusiness models need to be developed, which effectively integrate lower tiers of producers, and encourage them to up their game by allowing them to capture more of the value which is generated. Companies should be encouraged to purposefully experiment with business model innovations which could make certification practices work, rather than stick to their existing business models. Business model design should be employed to pivot new ideas, and validate what works and what doesn’t.

Business Model Innovation = Substantial Rewards
Just as in the oil and gas industry, where more difficult to capture oil and gas wells are becoming feasible to exploit in the wake of scarcity, it will also become rewarding to find ways of tapping into the productive resource of smallholder producers. Companies that succeed in innovating in profitable new business models that include lower tiers of producers will create a first mover advantage for themselves in the wake of the battle for agricultural commodities under a continuously growing world population.

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* In some cases producers are forced to stick to certification standards by making trade conditional on compliance, even is there are no returns. Under these conditions it is often more rewarding for producers to find creative ways of tricking the auditor into believing that they are complying to more responsible practices, rather than actually adopting them.

Acknowledgement: The farmer population pyramid and competition for the top tier farmers was shown to me by David Croft, sustainability director at Kraft Foods, during a business modeling workshop in 2011 on firm strategies and labor impact.

More on the WWF’s strategy of supporting big brands as presented by Jason Clay at this TED conference in 2010: