Sustainable development approaches in the food and beverage industry

A comparison between Nestlé SA and Kraft Foods Inc.


Bachelor Thesis, 2011
49 Pages, Grade: 2,0

Excerpt

Table of content

Chapter 1 - Introduction
1. 1. Introduction
1. 2. Aims
1. 3. Objectives
1. 4. Methodology
1. 5. Limitations

Chapter 2 - Company Introduction
2. 1. Introduction
2. 2. Nestlé SA
2. 3. Kraft Foods Inc.

Chapter 3 - Theoretical framework and literature review
3. 1. Introduction
3. 2. Drivers of Sustainability in Business
3. 3. Triple bottom line
3. 4. Shareholder theory
3. 5. Stakeholder theory
3. 5. 1. Shareholders and Investors
3. 5. 2. Managers
3. 5. 3. Employees
3. 5. 4. Suppliers
3. 5. 5. Consumers
3. 5. 6. Non Government Organisations
3. 5. 7. Government
3. 5. 8. Miscellaneous
3. 8. Conclusion of Chapter

Chapter 4 - Methodology
4. 1. Introduction
4. 2. Methodology Requirements
4. 3. Case Study Methodology

Chapter 5 - Analysis and discussion
5. 1. Introduction
5. 2. Sustainability Issues
5. 2. 1. Nestlé's Focus on Sustainability Issues
5. 2. 2. Kraft Foods' Focus on Sustainability Issues
5. 2. 3. Discussion
5. 3. Sustainable Development Approaches
5. 3. 1. Nestlé's Approach
5. 4. 2. Kraft Foods' Approach
5. 5. Evaluation of the Sustainable Development Results
5. 6. Conclusion of Chapter

Chapter 6 - Conclusion
6. Conclusion

References

Chapter 1 - Introduction

1. 1. Introduction

The human body requires food and drinking to maintain health and provide essential biological functions for life. In the past, people organised their own food and beverage supply within their families and communities to survive with agriculture. The development of the last centuries led to the need to transfer the business of producing food and beverage on specialised companies. A global food and beverage industry was developed to meet the demands of several million people. These days food and beverage are produced and traded in the whole world. Consequently, both positive and negative economic, social, and environmental impacts are created by the food and beverage industry's business operations (Steger 2004). These impacts attract growing attention of civil society, governments, and not least business itself across the globe (Crane et al. 2008). For example, a majority of consumers concern about environmental issues because they believe it significantly affects their health (Elkington 2001) or interests in provenance and societal embeddedness (Goodman 2008). Steger states that companies' responsibility for social and environmental impacts of business are expected by consumers to a greater level (2004). In this way, a variety of sub disciplines such as accounting, marketing, operations management, strategy, and organisational behaviour are increasingly forced by consumers, civil society, government, economics, development studies sociology etc. to develop approaches for exercising the growing responsibility of companies in environmental and social issues (Crane et al. 2008). This leads to the question how the food and beverage industry approaches sustainability within their business. According to the so called Brundtland Commission sustainability is the goal of the 'development that meets the needs of the present without compromising the ability of future generations to meet their own needs' (World Commission On Environment And Development, 1987: 54). Similar to Laszlo's (2003, 2008) and Hopkins's (2003) comprehension of the term 'sustainability', the dissertation's definition of sustainability comprises corporate social responsibility, environmental management, green management, and other theoretical concepts which describe how companies take responsibility for environmental and social impacts of their business. The sustainable development approaches of one of the fundamental industries are evaluated in this dissertation to answer the question how the food and beverage industry achieves sustainability in their business.

This dissertation is organised as follows. In chapter one the aims, objectives, methodology, and limitations are outlined. Chapter two sets the context of the food and beverage industry, focusing on Nestlé SA and Kraft Foods Inc. Chapter three examines the theoretical framework by reviewing the current literature. Especially the drivers are identified, triple bottom line is presented, the shareholder and stakeholder theories are analysed, and stakeholders are presented. Chapter four is concerned with the methodology to examine Nestlé's and Kraft Food's sustainable development approach. Subsequently, chapter five is occupied with the analysis and discussion of their sustainable development approaches, focusing on their sustainability issues and the results of their strategy. Finally, chapter six concludes the paper.

1. 2. Aims

This dissertation pursues to understand the idea of sustainable development in business, focusing on the food and beverage industry. The necessity of sustainability in business should be recognised. To build the basis for the subsequent analysis and evaluation the theoretical framework are examined. After it, Nestlé's and Kraft Foods' sustainability implementation and the consequential results are analysed, evaluated, and compared to complete the comprehension for sustainability in business.

1. 3. Objectives

The objective of chapter two is to familiarise the reader with the food and beverage industry by presenting the companies Nestlé SA and Kraft Food Inc. Chapter three pursues the objective to present the drivers of sustainability in business, triple bottom line approach, shareholder and stakeholder theories, in the existing literature on this topic. Chapter four outlines the methodology. Based on the previous chapters, chapter five attempts to analyse and evaluate the sustainability issues, approaches, and overall results of Nestlé's and Kraft Foods' sustainability development. Finally, conclusions are given in chapter six.

1. 4. Methodology

This dissertation is based on secondary data provided by primary and secondary publications about sustainable development in business and economics, corporate social responsibility, environmental management, and green management. Consulted sources for the data were provided by the library of Edinburgh Napier University such as books and subscribed database with e-journals, and own book purchases. Regarding the analysis and evaluation of Nestlé`s and Kraft Foods` sustainable development approach the dissertation relies primarily on annual company reports, sustainability reports, and corporate responsibility reports.

1. 5. Limitations

The limited availability and focus heterogeneity of secondary data in the field of sustainability reduce the quantity of the provided information. Along with it, the focus on the food and beverage industry aggravates the unconditional transferability of the conclusions between the food and beverage industry and other industries. In addition, the sustainable development approaches of Nestlé and Kraft Foods differs and do not permit transferability on other companies due to the uniqueness of every company.

Chapter 2 - Company Introduction

2. 1. Introduction

The food and beverage industry is defined by Baas et al. as the world food market provider of basic and special foods including fresh and long life products, packed and unpacked foods, bulk and added value products for low, middle, and high income populations (1999). Therefore, it is a large and important global industry. In the European union with 3.8 million employees and a ratio of 13.6 % of total production this industry is the third largest employer and largest manufacturing sector (Ionescu-Somers and Steger 2008). Nevertheless, only 0.9 % are represented by multinational companies, but are accountable for over 50 % of the total turnover (Ionescu-Somers and Steger 2008). Two of these multinational companies, Nestlé SA and Kraft Foods Inc., are in focus of this dissertation.

2. 2. Nestlé SA

Nestlé is a merger of the Anglo-Swiss Milk Company and Farine Lactée Henri Nestlé Company to the Nestlé and Anglo-Swiss Milk Company in Vevey, Switzerland 1905 (Nestlé c 2011). Until the end of the Second World War Nestlé provided Europe and Asia with condensed-milk, chocolate, coffee, tea, soups, and other related products with factories in the United States, Great Britain, Germany, Spain, and Latin America (Nestlé c 2011). Postwar, Nestlé strategically acquired a significant number of companies related to nutrition, cosmetics, and pharmacy accompanied by strong growth and economic success (Nestlé c 2011). This development made Nestlé to the world's leading company in nutrition, health, and wellness, generating turnover of almost GBP 75 billion with around 281,000 employees in 2010 (Nestlé a 2011).

Today, Nestlé's product segments are beverage, milk products, nutrition, ice cream, prepared dishes and cooking aids, confectionary, pet care, and pharmaceutical products. The company is managed by the board of directors with 14 members and an executive board with 14 members presided by chairman Peter Brabeck-Letmathe and chief executive officer Paul Bulcke, respectively (Nestlé a 2011). They describe their strategy as driving short-term performance whilst at the same time investing in the longer-term development which includes investments in the emerging markets (Nestlé a 2011). The overall objectives are to achieve annual organic growth between 5-6 %, EBIT margin improvement, and to be recognised as the world's leading nutrition, health, and wellness company (Nestlé a 2011). Nestlé is listed in the Dow Jones Sustainability Index (CME Group Index Services 2011). Subject of this work is Nestlé's sustainable development approach called "Creating Shared Value".

2. 3. Kraft Foods Inc.

Kraft Foods company history began with James L. Kraft's wholesale cheese business in Chicago in 1903 (Kraft Foods c 2011). The company invented pasteurised processed cheese and was listed on the Chicago Stock Exchange as the Kraft Cheese Company in 1924 (Kraft Foods c 2011). In 1928, the Phenix Cheese Company was acquired by Kraft Cheese Company and the name was changed to Kraft-Phenix Cheese Company (Kraft Foods c 2011). In 1930 the company was acquired by National Diary, after the interim name change to Kraftco Corporation in 1969, the company was renamed to Kraft Inc. in 1976 (Funding Universe 2002). In 1988, the Philip Morris Corporation purchased Kraft Inc. in order to merge subsequently Kraft Inc. with Philip Morris's food unit General Foods to Kraft General Foods in 1989 (Kraft Foods c 2011). In 1995, the company was renamed to the present name Kraft Foods and went public as Kraft Foods Inc. in 2001 (Kraft Foods c 2011).

Nowadays, Kraft Foods is the second largest food and beverage company in the world in the product segments confectionary, snacks, beverages, cheese, convenient meals, and grocery (Hoovers 2011, Kraft Foods a 2010). It generates a turnover of GBP 30.4 billion, achieved with 97,000 employees in 2010 (Kraft Foods a 2010). The company is managed by the board of directors with 12 members and an executive board with 11 members presided by both chairman and chief executive officer Irene Rosenfeld (Kraft Foods d 2011) and is driven by a four priorities strategy. Focusing in growth categories, expanding presence in developing markets, expanding presence in instant consumption channels, and enhancing margins are the four strategic priorities (Kraft Foods a 2010). Kraft Foods is listed in the Dow Jones Sustainability Index and Ethibel Sustainability Index (Kraft Foods a 2010). Subject of this work is Kraft Foods sustainable development approach described as "Better World".

Chapter 3 - Theoretical framework and literature review

3. 1. Introduction

The introduction has already given an argument for sustainability in business. However, it was merely an explanatory approach which is not sufficient to demonstrate the drivers of sustainability in business. Furthermore, Steger rightly states that companies must have an economic reason to act sustainably (2004). Therefore, this literature review examines the drivers for sustainability in detail. Subsequently, the triple bottom line approach and the two major theories for corporate responsibility are analysed to discuss which theory promotes sustainable development in business. In focus are the shareholder and stakeholder theories, although that other theories exist, because the corporate social performance and the corporate citizenship theory are not fully developed or adopted respectively (Melé 2008) and suffer from a lack of an economic-aligned perspective for sustainability in business (Swanson 1999). Subsequently, a closer examination of major stakeholders of the food and beverage industry and their roles supports the evaluation of stakeholders in business. Finally, conclusions are given.

3. 2. Drivers of Sustainability in Business

Companies are always concerned with managing financial value through the allocation of the factors capital, labour, technology, and location. During this process companies create external social and environmental impacts (Steger 2004). This impacts can be positive or negative. The companies' externalities during making profits are often unintentional (Laszlo 2008) and not internalised (Steger 2004). This leads to the first driver for sustainability in business. The externalities jeopardise intergenerational equity through destroying the environment and harming the societal justice (Schaltegger et al. 2003). The negative impacts are contrary to the Brundtland Commission statement because the needs of the present are met with 'compromising the ability of future generations to meet their own needs' (World Commission On Environment And Development 1987: 54). It is essential for companies to make profits nowadays, but it is likewise essential to ensure the ability to make profits tomorrow. Otherwise the future profits are jeopardised by today's business operations, e. g. devastation of fishery resources prevents future profits through fishing.

In a financial short-term view this argumentation may not be sufficient enough. However, cost and risk increases can have a negative influence on financial short-term results (Kurucz et al. 2008). Bowie and Dunfee revealed that preventing consumer boycotts, increased labour costs, liability risk, and short-term losses in market capitalisation avoid costs and risks for financial results (2002). A study by Salzmann et al. suggests that companies are incurring unnecessary costs and reductions in profitability if they go below an optimal limit of social and environmental performance (2005). Consequently, sustainability concerns reducing costs and risks.

These cost and risk are intertwined with stakeholders' such as consumers, government, employees etc. growing expectations in terms of health, safety, social well-being, and environment (Laszlo 2008). Quinn and Jones suggest instrumental stakeholder management to achieve cost and risk reductions through trading off stakeholder expectations in the companies' decisions, for example to avoid stakeholder opposition (1995). Laszlo states that the empowerment of self-organising communities are eased through the internet and its low-cost collaborative platforms (2008). Thereby, consumers gain influence on governments and local authorities which they use to assign their expectation on governmental and authorities' decisions. As a consequence, new regulations and deteriorated relationships with authorities can restrict the business, e. g. unfavourable permitting terms, prohibitions, legal requirements, which have a potential impact on cost and risk of business.

There are not only cost and risk minimisation drivers for sustainability. There are additional strong drivers which open new market opportunities and create potential profits. The competitive environment has changed and companies have the chance to gain competitive advantage over industry rivals through considering sustainability in business (Kurucz et al. 2008). Prahalad (2010) demonstrates how population growth and poverty enable organisations to capitalise this global drivers for change at the 'bottom of the pyramid'. Sustainable solutions are required to maximise profit on the base of the pyramid as a new market. Moreover, product differentiation through building in and marketing environmental and social aspects of products (Schaltegger 2003) increases customer loyalty (Andersen 2004), attracts sustainably-conscious consumers, adds new production differentiation criteria, enhances image, and/or enables higher margins.

Additionally, sustainability in company enables the assumption of cost leadership in industry through reduced cost or increased productivity (Schaltegger 2003, Lovins et al. 1999). Reduced cost are the result of increased efficiency in utilising resources and services such as logistics, e. g. no empty running, or reduced commercial cost of operation such as waste disposal charges. Furthermore, new market mechanisms such as emissions trading which attach a price on environmental and social impacts (Laszlo 2008) alter the competitive environment regarding the internalisation of externalities in price.

Andersen subscribes to the improvement of employee and organisational motivation, and moral caused by sustainable development in the company (2004). Considering that it is for companies increasingly difficult to attract and retain employees, and gain access to the best people, sustainable development is also a competitive advantage. Being part of an sustainable organisation and sharing the common idea of sustainability provide a strong sense of community, belonging, feeling of doing good, and contributing to others is easily comprehensible attractive for employees and motivate them (Andersen 2004).

During the sustainable development process new knowledge, capabilities, and solutions are acquired. Laszlo emphasise that these can be used as drivers for innovation in business and reveal potential for further earnings, e. g. entering the advisory market for sustainability in a certain industry (2008).

It is recognisable that several parts of the industry and academia affirm the existence of a variety of drivers which promote sustainability in business. The most conclusive argument for leaders and shareholders may the cost and risk reduction potential in companies. In all probability, companies rather do not need to be convinced but are forced by the necessity of sustainability in business to ensure profits and business success in the new competitive environment. Stakeholders, especially consumers and government, and competitive pressure increasingly shape a competitive environment which will not accept unsustainable companies in business.

3. 3. Triple bottom line

It was already considered that in this dissertation the term sustainable development comprises the economic, environmental, and social dimensions of business. This comprehension of sustainability is the consequence of John Elkington's triple bottom line approach (1998). It condensed the interrelationships of the three dimensions into one single approach for reporting organisational success in sustainability (Morrison 2009). Hopkins affirms the triple bottom line approach through assessing that making profits often occurs to the detriment of the environment and society (2003). The triple bottom line approach attempts to consider the detriment of the environment and society during the assessment process of profit trough the application of three different bottom lines. The economic bottom line is defined as the profits 'after the deduction of costs and depreciation of capital' (Elkington 2001: 25). In order to answer the question whether the profits are sustainable the environmental and social bottom lines are included (Rubenstein 1994). The environmental bottom line is to increase natural capital, which is defined as replaceable, renewable, or substitutable natural value (Elkington 2001) The social bottom line is to increase social capital, which is defined by Fukuyama as the ability of people to work together with a shared set of ethical norms in a trustful atmosphere for common purposes that decreases business costs and promotes innovations (1995).

The triple bottom line approach adds or deducts to the economic value the environmental and social value, respectively to assess companies' progresses in sustainable development (Elkington 2004). Laszlo goes further and makes the triple bottom line approach to the basis of his construct of creating "sustainable value" in business (2008). Sustainable value will be created if environmental and social values in addition to profits are created (Laszlo 2008). Schaltegger et al. also denote the integrated perspective of economic, environmental, and social components as sustainability (2003). A conformance about the new set of business objectives apart from only economic objectives that additionally considers environmental and social objectives is the achievement of Elkington's triple bottom line approach.

3. 4. Shareholder theory

In contrast to the triple bottom line approach, the shareholder theory pursues the one bottom line - profits. Shareholders are private investors, organisations, institutions, and funds which expect financial return on their shares (Andersen 2004) and shareholder value maximisation in compliance with the law (Melé 2008).

Friedman theorised in his often quoted essay that the 'one and only responsibility of business is to increase its profits' (1970). Nowadays, Melé correctly extends this view by expressing business has to maximise shareholder value (2008). Friedman justified it with the specialisation of business in economic issues and government in public issues (1970). Therefore, government should address public concerns such as environmental and social needs through legislation and companies should address creating economic value within the framework of existing legislation. Accordingly, the separation of the responsibilities of the triple bottom line objectives are considered as the most effective way to achieve economic success and sustainability. This system of providing best conditions for creating economic value and at the same time avoiding negative impacts of business through legislation and sharing economic value through the tax system are supported by the experience of two centuries (Jensen 2000), e. g. industrial history of the U.S.A., United Kingdom, or Germany in the 19th and 20th centuries.

However, the last decades have shown that profits are often realised to the detriments of the environment and society. The shareholder system does not work effectively. This is the result of the exclusion of environmental and social considerations in doing business (Porter and Kramer 2011). Business does not occur without economic, environmental, and social influences because the business, environment and, society are closely intertwined. Consequently, it is not intelligent to consider economic, environmental, and social relationships separately and distinguish between public or private issues. In addition, the government is strongly influenced by business and business interests often determine governmental decisions. Therefore, government cannot fulfil its obligation within the shareholder theory and address business' environmental and social impacts through legislation effectively. Furthermore, legislation is imperfect and not convenient to regulate every issue besides strong opposition would be provoked (Melé 2008).

Shareholder value maximisation leads to a increased short-term orientation in business (Melé 2008). Short-term orientation itself is not dangerous, but the short-term results focus supports the distraction from long-term objectives and encourage economic crisis, e. g. the financial crisis starting in 2007 (Miller 2010). The focus on short-term objectives eases the shareholder value maximisation and jeopardises the ability of future business to achieve long-term objectives through wrong short-term incentives, reduction in personnel expenses, fraudulent evasion etc. This is not sustainable in the sense of the Brundtland Commission because the external and future costs are not considered in the present.

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Excerpt out of 49 pages

Details

Title
Sustainable development approaches in the food and beverage industry
Subtitle
A comparison between Nestlé SA and Kraft Foods Inc.
College
Edinburgh Napier University
Course
Business Strategy & Sustainable Development
Grade
2,0
Author
Year
2011
Pages
49
Catalog Number
V204390
ISBN (eBook)
9783656318002
ISBN (Book)
9783656318224
File size
517 KB
Language
English
Tags
CSR Sustainability Sustainable Development Kraft Food Nestle
Quote paper
Lars Siegert (Author), 2011, Sustainable development approaches in the food and beverage industry, Munich, GRIN Verlag, https://www.grin.com/document/204390

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