It takes two to tango (Episode Two)

Are you familiar with the process companies have to go through when selling products? Last time I heard about it was in my Marketing class (yes, I do realize I keep posting stuff that I studied in that particular class!). Anyway, the act of selling can be divided into four stages. In the first one, awareness, consumers are aware of the existence of a product. Then there’s interest: companies raise customer interest by emphasizing product’s benefits. In the third stage, desire, customers must be convinced that they want the product because it will meet their needs. Finally there’s action, and customers are stimulated to purchase. Some people think there should be one more stage, satisfaction, in which the customer is satisfied and therefore becomes loyal to the product or brand and recommends it to other people.

That is the companies’ perspective… but what about the purchase process we follow as customers? This time we can mention five steps. First we identify the problem, the need that we want to satisfy. Then we find information about possible products that could be suitable, and evaluate the different alternatives. The fourth step corresponds to the decision of purchasing, and the final one to our behavior once we acquired the product.

As you can see, there is a certain correspondence between these two processes. If a customer is evaluating different products, it’s because he or she knew they existed in the first place. The decision of purchasing is obviously linked to the idea that the product will get the job done. And of course, if the product was indeed what the customer expected -or more-, he or she might tell others about that positive experience. All these concepts can be applied to any product or service, no matter what benefits it provides or how expensive it is… of course, depending on the type of product, consumers will give more or less thought to each stage of the purchasing process, and companies will spend more or less resources on the different steps of the selling process.

These posts are devoted to green products, and as I told you in the first episode there’s not enough information about them… and information happens to be a cornerstone here! Think about it: no information in the first stages means people don’t know that the product is being sold. Supposing customers are aware that the product exists, no information about its features and advantages means customers cannot tell whether it is suitable for solving their problem or not, and therefore if they want to buy it or not. Bottom line: companies develop and produce green goods, but “knowledge barriers” prevent them from being sold.

I invite you to read the upcoming posts and find out more about lack of information in every stage, and what companies are doing in order to remove these barriers… as always, I’m willing to listen to your comments!

It takes two to tango (Episode One)

Last year I was with a couple of friends when we came across a photography exposition by Yann Arthus-Bertrand. It was a series of pictures taken from the air, showing landscapes from all five continents… perhaps you found it in your city too, it’s been all around the world. This photographer is part of a foundation called GoodPlanet, that seeks to rise public awareness of social and environmental issues to which we are all exposed. Some of the pictures had comments related to sustainable development, and one of them caught my attention: it said that if everyone on Earth had the same lifestyle as people in the Western World, we would need at least two extra planets to sustain ourselves.

So-called green-issues and climate change have been hot topics for a while… NGOs were the firsts rising their voice, then Governments and companies started to show their concern. If you are not part of a nonprofit, a government officer or an executive there’s one role you cannot escape from: you are a consumer. Regular people are becoming more and more aware of these kind of issues, and the way their consumption habits affect the environment and the use of resources. In fact, according to a 2007 McKinsey survey of near 8.000 people in eight countries (*), 87% of consumers worry about the environmental and social impact of the products they buy. Yet, no more than 33% of those same consumers said they were ready to buy green products or had already done so. Indeed, if you look at the supply side of the equation, most of the green goods on the market have very thin shares.

We have people that at least show concern for the environment on the one side, and companies producing green goods on the other side… that should be enough for the most basic model of economy, right? What is lacking, then? Apparently, information -the third essential element for the perfect market model-: a 2007 Climate Group study discovered that two-thirds of US and British consumers cannot name a single green brand. This implies that companies don't do enough by producing environmental friendly goods or reducing the carbon footprint in their operations.

I kind of like the writing-in-episodes way of posting, so I’ll try to analyze this phenomenon in a couple of entries. And by the way, since one of the main inspirations for these posts was that comment on the photo exposition, I’ll use the pictures that I liked the most as illustrations :)

(*) Brazil, Canada, China, France, Germany, India, the United Kingdom, and the United States.

Wake up and smell the coffee (Final Episode)

As you might remember, the idea of telling you about the Starbucks case was born while I was studying for my Marketing Final. The way this company heard what their customers had to say first when they were worried about the lack of green growing practices, and then about how significative the results from the Chiapas Project were, seemed to me one of the clearest examples of the two-way communication between companies and society that is becoming more and more frequent.

Through the four episodes you saw that the process of getting involved, although rewarding, was long, complex and quite expensive. Now, did Starbucks do it only out of good will? Of course not! Ok, they were commited to sustainability and made it very clear in the principles for their mission statement… but there’s more to it. And I have two quotations to prove it:

“If only one company in the industry is doing the right thing, it’s not going to solve the problem, so for the good of the industry and the good of the world you need to have the whole industry doing it.” Glenn Prickett, Vice president of CI

“75% to 80% of customers reward corporations that are perceived to be good corporate citizens; 20% punish those that are not.” Senior vice president of CSR at Starbucks (I don’t have their name, sorry!)

Maybe I haven’t recovered from the Finals but to me this sounds a lot like Marketing 101: anyone else perceives positioning strategies over here? It’s not cold hearted at all, though, we have a perfect win-win situation: CI found a wonderful partner for their program to work, farmers improved their way of living by at the same time conserving the environment, and Starbucks created yet another differentiation driver in the specialty market industry, rising the bar for its competitors.

The whole point of this last post was to show that any form of corporate responsibility is not equivalent to charity at all. Companies don’t spend money by enhancing the way they operate, they invest it… and if they work hard enough and make CSR part of their core business, repayment eventually happens.

Wake up and smell the coffee (Episode Four)

Are you wondering what happened once the Chiapas project was implemented? In the first year of the collaboration Starbucks bought two containers -a little less than 35.000 kilogrames- of shade-grown coffee from the cooperatives, at prices significantly higher than the prevailing market price in the area. The company announced the introduction of this new variety in a small news conference, and the executives were surprised when they found out that the press was very interested in their actions.

Last year I attended a talk where the speaker said “If your company is going green, expect cynisism”. Well, this happened when Starbucks made their announcements: people thought that two containers were nothing compared to the thousands of tons the company purchased every year. They kind of had a point… still, it was just the first outcome of the project! However, Starbucks executives heard what their customers thought and decided that in order to show their commitment was significative, the production bought from Chiapas’ farmers had to be way higher.

By 2002, purchases of shade-grown coffee increased to nearly 700.000 kilogrames; the coffee was offered in bags in US stores, and by the end of that same year it would be sold in the stores to be opened in Mexico City. The project in Chiapas resulted in a 40% average increase in farmers’ earnings, and a 100% growth in the cooperatives’ international coffee sales.

Starbucks went one step further after the success with the Chiapas project: based on the expertise they had gained through the process, they developed a set of purchaising guidelines to extend the scope of their actions towards conservation and fair livelihoods for farmers. The concept was to create positive changes within the global coffee community, not by replacing existing supplier realtionships, but by developing sustainable practices throughout the value chain. The principles were designed along with CI, and reviewed by a wide range of nonprofit groups and coffee-system stakeholders.

Under Starbucks’ new system, suppliers of any size or location could earn up to 100 points for performance in three sustainability categories: environmental imacts, social conditions and economic issues. If a supplier met all the criteria, it would become a prefferred supplier and its coffee would have priority in Starbucks’ purchaising queue. A producer’s performance had to be verified by a competent third party.

That’s all the info I wanted you to have… maybe now you can see why I divived it into several episodes! Next will be the last one, and I’ll give a personal point of view on why Starbucks got involved in the Chiapas project. Stay tuned!

Wake up and smell the coffee (Episode Three)

So far I’ve told you about Starbucks’ motivations for changing its purchaising policies and how they partnered with CI... this episode will be about how the project actually worked.

Back in the beginning, the Chiapas project offered technical assistance for improving growing techniques and coffee quality. CI also provided organizational assistance to the farmer cooperatives so that they would be able to market their coffee more effectively and efficiently. In order to be part of the program, farmers and cooperatives had to sign an agreement with CI. According to the degree of achievement of targeted farm improvements agreed upon between CI and each farmer, and upon meeting Starbucks quality standards, producers would gain the right to sell an increasing percentage of their crop to Starbucks for its premium prices.

There were two main practices that had to be implemented so as to remain in the program: no trees could be cut down on the farms or the Reserve, and no coffee pulp could be thrown into the rivers. Other criteria included the planting of shade trees, the conversion of coffee pulp and other organic matter into compost for fertilizing coffee plants, the payment of fair wages and the sheltering of hired farm laborers. The precise standards were tailored to each farm’s context and translated into a work plan agreed to by the farmer and against which performance was evaluated.

Additionally, CI provided training courses in the villages to the farmers, cooperative managers and technicians on organic farming methods, tree planting and pulping methods, and quality control. Business planning and management courses were given for the cooperative leaders. Further more, CI tried to select one model farm in each community as a demonstration site for best practices.

On the Starbucks side quality was a major issue, therefore they had to be very clear on the standards to be achieved. They informed them to CI, who sampled and graded every lot delivered by a farmer up to the point where every single bag could be traced. Farmers received feeback on any corrective actions that would improve quality.

In August 2000 the partnership was extended for an additional three-year period, with Starbucks contributing US$600.000 and four key elements to focus on:

• Extending CI’s and Starbucks’ work with farmers to promote conservation in a wider range of global biodiversity hot spots.
• Supporting the introduction of a year-round product line that reflected Starbucks’ commitment to alternative environmental agriculture and socioeconomic improvements in certain coffee-growing regions.
• Developing coffee-sourcing guidelines that incorporated sound environmental management practices and provided fair conditions to farmers.
• Seeking to engage other leaders in the coffee business in a collaborative effort to articulate industry-wide guidelines for environmental and social quality.

We're getting really close to the ending of this case; soon I'll tell you more about the outcome of the project... in the meantime, I'm really looking forward to hearing your impressions!

Wake up and smell the coffee (Episode Two)

In their effort to promote sustainable coffe plantations and fair payment to farmers, Starbucks formed an alliance with a nonprofit organization called Conservation International (which you will find sometimes mentioned as CI). Since this collaboration agreement was decisive for the project Starbucks was part of, I decided to change my plans a bit and to use this second episode to tell you how the company historically had a responsible way of thinking their business, and how this alliance was born.

In 1990, Starbucks created its mission statement, expressed as “to establish as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles as we grow”. This statement relied on six guiding principles, including “to apply the highest standards of excellence to the purchaising, roasting, and fresh delivery of our coffee” and “to contribute positively to the communities and the environment [that the company was part of]”. Alligned with these principles, Starbucks paid 2,5 times the price the US market paid for green coffee by 2001; and in 2002 increased its direct purchases from small to midsize farms and co-ops from 9% to 59% of its cofee supply.

The mayor shift the company made in its purchases policies was, however, the introduction of environmental preservation efforts focused on shade-grown coffee through an alliance with Conservation International. This organization had the mission of conserving the Earth’s living natural heritage and its global biodiversity. Back in the mid 1990s CI had identified coffee as an important commodity affecting biodiversity and conservation, since coffee plantations had been taking over areas otherwise covered by rain forest. Traditionally, coffee had been grown under shaded conditions, but in the 1980s new higher-yielding varieties were introduced that were grown in full sunlight and generally in conjunction with intensive agrochemical usage.

In 1996, CI launched a pilot Conservation Coffee Program with three coffee cooperatives located in the El Triunfo Biosphere Reserve in Chiapas, Mexico. The region had been declared protected area by the government in 1972 because of its important biodiversity, and there were around 14.000 farmers operating in the area (with coffee being the main crop). CI’s program aimed at preserving and promoting shade-grown coffee; the task of getting small farmers to change their regular practices for conservation methods was not easy, though. In the words of the head of the CI’s Coffee Initiative “Farmers are great economists: ‘A day doing what I know, I feed my family. A day trying a new way, I might not'. So we knew from day one that we had to offer clear benefits to accelerate adoption of conservation practices”.

It was clear for CI that linking with a mayor coffee buyer was key for the program to work out. They approached Starbucks in 1997, but the company was reluctant at first: even if making a positive impact was one of their guiding principles, they were not willing to buy coffee from just anybody because sacrificing quality was not an option. On the other hand, they were experts in selling coffee, and CI was an expert in conservation: a fruitful partnership would leverage both parts’ expertise.

By the beginning of 1998 both companies signed a memorandum of understanding for a pilot sourcing program. Starbucks agreed to go out to Chiapas and communicate to farmers what they had to do to bring their coffee up to its quality standards, although there was no commitment to buy. The company did commit to contribute US$ 150.000 over three years. Meanwhile, CI’s role was to work directly with the farmers, as it had been doing since the pilot program was launched in 1996.

This was just the start for the collaboration agreement. Since this first step turned out to be successful, both organizations extended the reach and the duration of the project… but I’ll tell you more about that in the upcoming episode!

Wake up and smell the coffee (Episode One)

As I promessed in my previous post, I’m starting my “What some companies did in real life when facing customer demands” series with a case that involves Starbucks. When I started writing down all the relevant information I realised that the case is quite long, and since I want to go over a couple of points I decided to divide it into several episodes so that you don’t get lost. This first part is kind of a background… so let’s get started.

Maybe you’re familiar with the Starbucks brand, maybe not. The company, devoted to the specialty coffee segment, started in the early 1970s in the city of Seattle, and in 1982 Howard Schultz -current CEO- joined as head of marketing and overseer of the retail business. After two years he had problems when the owners didn’t accept his ideas for extending Starbucks’ reach, and eventually left. In 1987, the owners were looking to sell the company and Schultz acquired the entire operation, merging it with a line of espresso bars he had founded after leaving.

In 1992 Starbucks went public; simultaneously the company started its international expansion, and established strategic partnerships with PepsiCo for the production of bottled Frappucino and Dreyer’s for a line of ice creams. By the last quarter of 2002, Starbucks had 4.000 stores in the United States and 1.500 in 22 other countries, with plans to expand to 10.000 stores in 60 countries by 2005, and 15.000 by 2007.

In 2001 the coffee industry was going through hectic times. Increased production at a worldwide level had made the market prices fall to their lowest in 30 years: out of the seven million tons produced, less than six million were actually sold. Two main concerns arose then: on the one side, Fair Trade movements started to pressure large coffee buyers to pay higher prices to small growers; and on the other side, environmental groups claimed that growing practices were leading to habitat destruction.

By 2001, the North American coffee market purchased 17% of the coffee beans produced worldwide, and around 16% of the beans consumed in the US corresponded to the specialty market. Still, less than 1% of the coffee sold in the United States as a whole was grown in sustainable conditions. By that time, Starbucks was already getting letters from its customers asking why weren’t they buying shade-grown coffee and contributing to the protection of the rain forest where coffee crops were generally grown.

This is the scenario for the case… My next post will revolve around how Starbucks dealt with the environmental part of the equation, and in the following one I’ll tell you more about the social aspects of the project the company was part of.

Association of ideas

Since the Finals Season began for me this past week, I had my (hopefully) last Marketing exam on Thursday. As I was reading the documents related to Promotion, I came across a timeline that describes how marketing communication evolved through the twentieth century. Here’s a summary:

In the 1920s the focus was on maximum production, and the concept of customer-oriented research for designing products did not exist at all.
During the 1950s, customers were thought of as a huge bunch of people with no difference between them. Along with the rise of the media came the massive communication, with advertisements centered exclusively on the product.
The birth and development of Information Technologies in the 1970s made possible for the retailers to get to know their costumers: what they preferred; where, when and how often they consumed. The concept of brand loyalty began around those years.
By the beginning of this century there was an important shift in marketing communication: it started flowing both ways, going from a monologue where companies advertised and customers did nothing but listen, to a dialogue in which societies have started to rise their voices so that corporations can hear them.

So I thought of something that I started to hear a couple of years ago and keep listening over and over: companies are now seen as social actors, and in such role they are not only responsible for giving jobs, but also for taking care of the people that work for them and the communities they are part of (both socially and environmentally)… in a number of cases they are even asked to perform activities that actually correspond to the State. Moreover, in some countries people not only question companies’ operations, but their suppliers’ and distributors’ as well.

And then I remembered about something Philip Kotler said at a talk I had the chance to attend last year: if your company went under, who would notice? Who would care? Satisfaction is no longer measured only by how well a product adjusts to customer’s needs, but also by the impact it has on society in all sorts of ways.

So I thought of a couple of cases that I know of and that I’d love to share with you, in which companies faced challenges imposed by the demands of customers that expected them to play a positive role in society. I will tell you about these cases in my next posts, so I hope you enjoy them and let me know what you think!

Post Scriptum

After finishing the draft of Danger: Demolition area I found this:

'Haier became a leader in China's white-goods market, despite heavy competition, mainly because of its expert knowledge of the nuances of the Chinese consumer and its ability to develop products tailored for those needs. For example, Chinese consumers in rural markets used the company's washing machines to clean vegetables such as sweet potatoes. Haier modified its product so that vegetable peel would not clog the machine's pipes. The company then affixed large stickers on the modified washers with instructions on how to wash vegetables safely using the machine. The next generation of washing machines can even produce goat's milk cheese.'

I swear I did not make it up: it's from a paper prepared by Accenture -The Rise of the Emerging-Market Multinational-, and they got it from an article published by Financial Times in September 2004.

What surprised me the most is that Haier did not create a new line of products designed for the specific purpose of washing vegetables. Apparently they are market leaders, so they could have perfectly done that, and this way they would have made people buy a yet another device. Instead, they adapted their design... and if it did work, people would still buy more products from them!

I don't mean to take back what I said in my previous post, but changing the definition of a product from 'something that washes clothes' to 'something that washes clothes but can also wash vegetables and produce goat cheese' (!) sounds a little too risky, doesn't it?

Limits to Growth

Some years ago, in my Systems Dynamics class, I came across archetypes, which are models that explain how certain systems operate as the time goes by, and how they respond to changes in their main variables. Please keep reading, I promess it's not rocket science! :)

One of these archetypes is called Limits to Growth, and it was presented by Donella Meadows, Dennis Meadows, Jørgen Randers and William Behrens in 1972 in a book that has the same name as the archetype. What this model states is, basically, that there is no such thing as an unlimited positive reinforcing behavior, because there are always limits pushing growth back.

I'll translate into an example what I've been saying so far. Let's take the planet as our system of study, and the extraction of natural resources as a behavior. A reinforcing behavior would be to extract resources without waiting for them to regenerate. As we all know, most of the resources our planet has are limited, and since human kind has exploited them for centuries according to the requirements imposed by development... well, we are where we are now.

If you have a while, I strongly recommend a video called The story of stuff, that explores further into the different stages a product goes through since raw materials are obtained until it becomes trash (plus, it's really entertaining and easy to understand!). You can check it out by going to

http://www.storyofstuff.com/index.html

And one last thing: for those of you who survived my explanation and want to find out a little more about the Limits to Growth model, just let me know and I'll send you some info!

Congratulations! You've made it to the next label

We're all familiar with the Made in China label, we've seen it many products we use in our everyday life for a long time. If we say it in a more appropriate language, China is the world's most powerful manufacturer, and has achieved and maintained that position for at least two decades. This implies that the products were designed somewhere else, and the production was outsourced to China.

Well ladies and gentlemen, this is changing. China has started to move from Made in China to Invented in China. The country's National Science and Technology Development Plan -covering from 2006 to 2020- aims to increase R&D expenditures to 2.5% of the GDP by 2020 to reduce China's reliance on foreign technology. The ultimate goal is to become an innovation-oriented society by 2020, and a world leader in science and technology by 2050.

First thing we think when we read this is that the Chinese Government will implement some sort of policies so that companies feel encouraged and make of innovation their modus operandi... but that's just part of the picture.

Since the 1990s China has made higher education a priority, and as a result the proportion of graduates from senior secondary schools who go on to pursue higher education has risen from nearly 50% in 1995 to 75% by 2006. More than half of Chinese students graduate in Natural Sciences and Engineering, compared with a world average of 27% and only 17% in the US.

The investment in R&D is not new to China: from 1993 to 2003, the country's R&D expenditures grew faster than any other nation's, pushing its share of world R&D investment from 3.6% to 9.5%. During that same period, the European Union's share of world R&D investment declined from 28.5% to 25%, and the US's share dropped from 37.6% to 36.1%.

In my country, most of the people that decide to go to University major in Human Sciences (Law, Politics, Psychology), and a smaller proportion of Majors are related to Business and Administration. At the same time the Government insists that national industry should grow, that companies should be more competitive for achieving leading positions is the international markets... still, I haven't heard of any mid or long-term plans that will encourage students to pursue a science-oriented education. I don't mean we don't need professionals in Business and Human Sciences, but if any nation is interested in turning innovation into a way of living, policies should not only support companies investing in R&D, but also help building a work force that is suitable for such tasks. And China just gets it.

Danger: Demolition area

I have this personal problem with the idea that most people have when they think of innovation... let's make a little experiment: what do you think innovation implies? Does any of these options come to your mind?

The creative genius Your vision can come either in a modern or a traditional flavor. It doesn't matter if you see characters from the cartoons in a sophisticated lab or Leonardo drawing flying machines, the point is that you think that there are only a few fortunate individuals that can create magnificent inventions out of nothing... and let's face it, most of us are not part of that very exclusive group.

Cutting edge technology You see nanomaterials that react with solar light, complicated manufacuring processes with robots all around, futuristic cars, microchips, devices for producing clean energy... And then you realize that unless you are part of Nokia or the NASA and have unlimited R&D budget, you have pretty much no chance of bringing something new to the table.

The next billion dollar idea You look around and you see your iPhone, your iPod, or both. Maybe you bought them online... let's say through e-bay. And if in fact you did, you probably used your credit card or PayPal. Further more, it was mailed to your door by DHL or FedEx or UPS. Even if you don't have an iSomething (I don't!), you check the webpages you visited recently and there's a huge chance YouTube and Google are among the first. All of these things are so natural in our lives that we just can't tell how we lived before, and most of all: how did the people that created them see the opportunity to innovate.

The whole idea of this post was to tear these paradigms down. Last year, futurethink -an innovation consulting firm- asked 50 top excecutives what did innovation mean to them. One of the most common answers was "to address customer needs and generating valuable products or services".

Of course I'm not saying I wouldn't love to wake up in the middle of the night with a brilliant business concept... but in the meantime it's relieving to feel that we can all innovate somehow.

What is this about?

Hi, and first of all: welcome! I created this blog as a part of my application process for the World Business Dialoge, an international conference for students that will be held in Köln next April. The event will revolve around a main topic, which is The Integrated Challenge: Resources, China & Customer Revolution.

The idea of my blog is to share some thoughts related to this topic, and to receive your feedback. Agree, disagree, ask, discuss, recommend, give your point of view: it will make this space much richer!

And last but not least: if you hadn't heard about this conference before, visit their website:

http://www.ofw.de/

There you can learn more about the event, the team of students in charge of the organization, and the main topic as well. I attended the conference in 2007 and had the best time, I got the chance to listen to great speakers and made a lot of friends from all over the world...

That being said, welcome again! I hope you enjoy and visit often!