+1443 776-2705 panelessays@gmail.com
  

 

Answer the following questions given below.  It will be necessary to gather data from the FINRA site and publicly available ESG rating sites, as well.

1. Based on the information contained in the case, what does Nestle see as the biggest issues it must begin to address today? 

   a.  Of these, which two do you/your group believe are most important and why?

   a.  Do these issues also impact competitors such as Pepsi and Kraft Heinz?  Explain (consider product mix and sourcing)

2.  What are the major criticisms your group believes the public might have about Nestle’s plans, especially with regard to consumer tastes and trends (don’t limit  your answer to information contained in the case)?

2. Using information external to the case: 

  a. Using more than one source, what is Nestle’s current ESG score?  What is their lowest subscore? 

  b. Using more than one source, how does Nestle’s ESG score compare with Pepsi and Kraft Heinz?  Identify key differences, if any.

9 – 9 1 3 – 4 0 6

R E V : A U G U S T 9 , 2 0 1 3

________________________________________________________________________________________________________________

Professor Ray A. Goldberg and Lorin A. Fries (HKS 2012) prepared this case. HBS cases are developed solely as the basis for class discussion.
Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright © 2012, 2013 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-
7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be
digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

R A Y A . G O L D B E R G

L O R I N A . F R I E S

Nestlé: Agricultural Material Sourcing Within the
Concept of Creating Shared Value (CSV)

As we look ahead to the next ten years, it seems wrong to talk about “the future of sustainable agriculture.”
Simply put, there is no future without sustainable agriculture.

— Peter Brabeck-Letmathe, Chairman, Nestlé1

Now after more than ten years of focusing on sustainable agriculture, many food processors and farmers are
collectively working to redesign the whole food value chain to make it sustainable.

— Hans Jöhr, Head of Corporate Agriculture, Nestlé2

Hans Jöhr stood from his chair and walked to the window to think. It was a quiet morning at
Nestlé, but his mind raced in anticipation of the executive board meeting that afternoon. As the
company’s Corporate Head of Agriculture, Jöhr recognized the meeting as a key opportunity to
strategize far into the future, reexamining how his team’s efforts in sustainable agricultural sourcing
supported Nestlé’s position as the world’s leading nutrition, health and wellness company. The
company had undertaken to impact three of the world’s most urgent challenges—nutrition, water,
and rural development—and Jöhr’s team was fundamental to each of these pillars. Yet the forces
changing the global food system were formidable: unprecedented levels of hunger, obesity, and
chronic disease; land degradation, frequent natural disasters, and critical threats to water supply;
population growth by the billions in the coming decades, along with increased urbanization; and a
volatile and tentative world economy. In the face of such threats and complexity, how could Hans
Jöhr ensure that Nestlé’s agricultural raw materials were safe, high quality, of consistent supply, and
sustainably and ethically and economically produced? How can the procurement process enable the
small scale producer to become a viable partner in the milk production models that Nestlé has
developed in the developing world? Further, how could his team excel beyond the company’s day-
to-day business and enable Nestlé’s visions for the future?

A leading food company in the 21st century faced increasingly complex trends that affected its
core business model and strategic approach:

? Globalization led firms to rely on multiple origins of supply and multiple national
governmental programs that impacted each of its major commodity systems.

? Production and consumption becomes more and more geographically decoupled worldwide,
hence open trade is critical for food security.

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? Operational consolidation was occurring at every level of the supply system, forming long-
term relationships focused on removing inefficiencies and preparing for shocks along the
value chain.

? Emerging technologies, especially synthetic genomics, placed increasing emphasis on the
nature of each component of the supply chain and its impact on the ultimate consumer.

? Consumers had increasingly diverse consumption demands, and food companies were
becoming more adept at catering to such personal preferences, while remaining attentive to
food safety concerns.

? With scarce available natural renewable resources on one hand and enormous losses and
waste of food on the other, the food system players have to innovate to match future needs.
There was increased understanding of the role of food and nutrition to human, animal, and
plant health, and innovation centers focused on new challenges in these areas.

? In many markets consumers placed value on sustainable and ethical production practices,
which required upstream traceability in the supply chain.

? World leaders had prioritized food security as among the most crucial and urgent issues for
economic development, security and human well-being.

? Actors in the private, public and not-for-profit sectors were increasingly collaborating in
innovative partnerships to tackle development challenges and pursue economic
opportunities.

For Hans Jöhr, a key piece of this puzzle was sustainability. By organizing agricultural sourcing to
support producers and their environment through his team’s Sustainable Agriculture Initiative at
Nestlé (SAIN, pronounced “sign”), the company could depend on a more consistent supply and
quality of raw materials. Further, Nestlé’s direct relationship with 680,000 farmers called “Farmer
Connect” sourcing program with full traceability, safety, and quality control is one big part of the
entire puzzle of responsible sourcing differentiating raw materials: Jöhr saw a significant opportunity
to link sourcing to nutrition through biofortification—the process of breeding crops in a way that
increased their nutritional value. This could not be done with traditional commodities purchased
through a long and anonymous supply chain. “Every day there are hundreds of millions of hands
that take, or don’t take, a Nestlé product,” Jöhr explained. “How is this linked to agricultural
sourcing? That’s the real question.”3 In a tumultuous global food system amid growing momentum
to align business, environment, and social objectives and with customers increasingly demanding
sustainability and high nutritional value products, the key objective is to understand how consumer
trust is linked to sourcing activities and the natural quality of agricultural materials. Jöhr felt the
winds changing in the food and beverage industry. Business as usual would no longer suffice for the
company, its customers, its broader stakeholders, and the planet. These new realities prompted
urgent questions for Jöhr to address at the executive board meeting:

1. How does Nestlé develop, with other stakeholders, incentives on water and land management
that are fair and equitable, so that current and future needs of the rural and urban populations
are met?

2. How does Nestlé provide new development models that utilize current and future new
technologies that can be accessible to all at every level of the food chain, at every stage of
development?

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3. How does Nestlé develop better feedback mechanisms from every sector of the vertical food
chain so that it can encourage the more urgent introduction of its products, with their
improved nutritional components, for the improved health of its consumers?

4. How does Nestlé find impartial third-party evaluators of its programs who can measure and
provide valuable feedback as to their impact on health, nutrition, economic development, and
waste management?

5. How does Nestlé both compete and partner with entities in a changing, complex food system?
In addressing the above issue, how does Nestlé accomplish progress at all levels of the food
chain in terms of efficiency and creativity, to enable it to remain a profitable and competitive
leader in the global food system?

6. How does Nestlé encourage the co-existence of alternative sources of supply from local
unique organic crops to global multinational firms and farm cooperatives?

7. How does Nestlé encourage the development of genetically modified crops that both improve
commodity productivity and improve nutrition in an environmentally sound manner?

8. How does Nestlé and its new human nutrition center help the consumer better understand
the importance of food and its relationships to his or her health management needs?

The world has changed a great deal. Companies such as WalMart are demanding more from their
supply chain in every form. Managers now take a systemic view of the global food system (see
Figures 1–6). They want total shared value and are doing so with public-private-NGO partnerships
that they never dreamed of needing to have. In addition, at every level of the food chain (from input
technology to the end consumer), leadership on sustainability, health, nutrition, the environment,
land, water, waste management, and economic development is expected as part of the “new normal“
business relationship. The demand for accountability and positive creativity in tackling these
manifold expectations is also a new critical factor. A whole new industry of impartial firms that
measure the results of these activities is being developed. How to manage these new private–public
partnerships and how to instill these values throughout the company and how to provide
compensation to managers who excel in these areas are again new to most companies. The legal
profession has to find new ways of creating these new partnerships while protecting the unique
creativity of the firms and their heavy investment in sensitive research. It also has to protect the
independence of the public and NGO entities involved. Jöhr said:

We do need to capture this new world and the increased expectations that society has from
Nestle and the expanded new leadership Nestlé must bring to this arena.

Nestlé has set the tone, has created the SAI Platform and has helped to establish a totally
new level of awareness and standards on how to source and interact with farmers, traders and
primary processors. It’s like we have created a new discipline within the “Olympic games” or
global food system, not to say new levels of standards within several agricultural raw
materials (commodities). Ten years ago I couldn’t have dreamed about such changes.

Obviously, the economic, political, and even social environment (and nature per se)
changed a lot during the past years. These changes manifested themselves through different
perceptions and media and our sometimes-wrong politics and inflamed crises, etc., which
helped us to drive the Sustainable Agriculture Initiative at Nestlé and create the Creating
Shared Value concept around the entire Nestlé group—not only on sourcing.

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Jöhr had a small magnet on his desk lamp that read, “Go—See—Think—Do.” This was his
mantra, he explained—a cyclical pattern that fueled informed, reflective, proactive work. Eleven
years after creating SAIN and its Farmer Connect program, it was time again to think. “We have a big
tanker,” Jöhr reflected. “We need to know where the winds are blowing to set the sails: what are the
issues for our stakeholders, especially our consumers? What is changing in our operating
environment?”4 Nestlé leaders’ ability to predict and navigate these trends had far-reaching
implications for the company’s continued success; the well-being of upstream producers, workers
and communities; and greater sustainability throughout the global food system.

Nestlé’s Vision

Nestlé had an ambitious vision. It was a company that looked decades into the future to frame its
strategic decisions. Far beyond food supply and even food security, the company saw that it could
make a critical contribution to disease prevention and health science (see Exhibit 1). Most recently the
company invested in Accera, an innovative medical food company. This was an unusual notion for a
leading food company: not only could Nestlé sell high-quality and dependable products to its
consumers, it could provide nutritional and health solutions. In orienting toward the future, Nestlé
was also acutely aware of the trends that were shaping the food system. It built its strategy around
the three core topics within the “creating shared value” (CSV) concept [www.nestle.com/CSV] most
critical to their business: nutrition, water, and rural development. The company’s corporate business
principles reflected these priorities and included particular commitments on agriculture and rural
development, environmental sustainability, and water (see Exhibit 2).

Nutrition The first core topic, nutrition, was of paramount importance in a world plagued by
both malnutrition and obesity (see Exhibits 3 and 4). In 2010, those suffering from hunger numbered
925,000,5 while chronic diseases were the world’s leading cause of death (see Exhibit 5).6 Recognizing
the increased demand for available and convenient packaged foods, the company built nutritional
solutions into its products. Given the critical role of diet in preventive health and disease
management, Nestlé saw that its products and services could help foster healthful lifestyles among its
consumers. This was a natural role for a company that had begun, in 1866, by selling infant formula
to mothers unable to breastfeed their babies. Now more than a decade into the 21st century, Nestlé
sought to “expand the boundaries of nutrition”:7 its most recent investments included the creation of
Nestlé Health Science S.A. and Nestlé Institute of Health Sciences to target new opportunities at the
intersection of the food and pharma industries. Accordingly, their creations were often called
“nutraceuticals.” These organizations focused on what the company called “personalized health
science nutrition,” developing nutritional products for health conditions such as diabetes, obesity,
cardiovascular disease, and Alzheimer’s disease.8 In addition, Nestlé’s Clinical Development Unit,
established in 2012, allowed the company to expand its clinical trials to assess the impact of its
products on human health.9 In 2012 Nestlé also acquired a company that would allow it to research
and develop “brain food,” medical food designed to improve mental functions such as memory and
cognition. Nestlé Chairman Peter Brabeck emphasized that the company sought not only to extend
consumers’ lives, but also to sustain the quality of those lives.10 Thus, from infant formula to
personalized products for the aging, Nestlé sought to provide “nutritional solutions” to its customers
throughout their life cycle.

Water Nestlé’s second core topic was the natural resource most vital to its operations. Yet
water was being used at unsustainable rates—a growing crisis that Brabeck had taken on as his top
policy priority. By 2005 the world was already using more water than could be naturally regenerated
(see Exhibit 6), and Nestlé calculated that by 2030, water withdrawals would exceed natural renewals
by 60%.11 Critically for the food and beverage industry, agriculture accounted for 70% of global water

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usage.12 As Brabeck summarized, “You need [to invest] 1 liter of water for any calorie you eat that
comes from a plant, and 10 liters for a calorie that comes from meat. [In New England] each day we
consume about 4,500 liters of water.”13 Heretofore a free resource for much of the world, water
scarcity was often a tragedy of the commons: without incentives or collective action mechanisms for
water stewardship, few users sought to limit their extraction. “Water is the most valuable thing in the
world, and yet we don’t give it a value,” Brabeck observed.14 Though improved irrigation and other
technologies could help producers reduce water usage dramatically, weak systems for transferring
and incentivizing these practices prevented their wide-scale adoption.

Rural development Nestlé’s third core topic was rural development. The company was
invested in this area because it recognized that many of the farmers upstream in its supply chain, as
well as an emerging segment of its consumers, were constrained by the daily burdens of poverty and
underdevelopment. Further, the poor often suffered the most in the face of the increasingly volatile
food prices (see Exhibit 7) as well as natural disasters, which had increased in number and severity in
recent years (see Exhibit 8). Investing for development made sense both for the company and for
rural communities: highly productive and more resilient agriculture benefitted the company’s supply
chain and increased farmers’ incomes; improved infrastructure enabled more efficient supply chain
logistics and connected the rural poor to resources like markets, health facilities, and schools; and
better health and nutrition among rural populations helped maintain Nestlé’s supplier and consumer
base while improving life and economic productivity within such communities.

Background

Nestlé S.A. In 2012, Nestlé was the world’s largest food and beverage company. It ranked
40th on the Forbes Global 2000, with net profits of over CHF 9.5 billion in 2011 (see Exhibit 9).15 In the
same year, it had 461 factories in 83 countries, with 328,000 employees worldwide.16 With brands
including Kit Kat, Nescafé, Maggi, Lean Cuisine, and DiGiorno, the company’s agricultural raw
materials sourcing totaled approximately CHF 21.7 billion each year (see Exhibit 10). With such wide
scope came significant vulnerability. The company recognized that a risk to its producers had
potentially severe implications for the company: “5,500 cups of Nescafe are drunk every second,”
said Stefan Canz, a sourcing specialist in Corporate Agriculture at Nestlé. “This puts sustainability
into a different perspective. If something goes wrong with the producers, we suffer.”17 Therefore
Nestlé needed to manage risk and volatility, anticipating shocks to producers and the market; the
well-being of its farmers was intertwined with its own. But, even while Nestlé pursued 5%–6%
annual organic growth, it recognized the environmental implications of such expansion. Hitting this
target would mean about 120,000 additional hectares of land in a given year, Jöhr calculated. “That’s
like a new state in Switzerland. It means 100,000 more cows in Europe, or 500,000 buffalo cows in less
productive regions like Pakistan.” Therefore, central to the company’s future was the question of
protecting natural capital: “How do we use natural resources in a way that sustains growth and
increasing our part of the world food system without jeopardizing natural capital?”18

The concept of Creating Shared Value (CSV) A dialogue had emerged over the last
decades about companies’ interaction with society and the environment. Various approaches had
emerged, including the “triple bottom line” and “corporate social responsibility.” While these
concepts varied between actors, they were predicated on the notion that companies had
responsibilities beyond their financial returns, and that they should divert a portion of their profits to
invest in social and environmental programs. The Nestlé team saw it differently. Peter Brabeck,
believed there was no place for philanthropy by businesses. “I have nothing to give back to society,”
he explained, “because I have not been stealing anything from society.”19 The company recognized
that its health and growth depended on having investment from its shareholders and a social license

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to operate; thus, it had to create both financial and social value.20 This approach was rooted in long-
term strategic thinking: as the world’s largest food company, Nestlé was highly dependent on the
communities and ecosystems that supplied its raw materials. Therefore, there was a business case for
investing in environmental sustainability and social well-being. To capture this concept, Nestlé
partnered around 2005 with thought leaders at the Harvard Business School and the social impact
consulting firm FSG to introduce “creating shared value” (CSV) into the academic discourse. The
company also adopted CSV as its guiding principle, as illustrated in its Nestlé Creating Shared Value
Pyramid (see Exhibit 11).

Though CSV was new terminology, Nestlé explained that the same principles had driven the
company’s strategy for decades. It pointed especially to its milk district models, a decentralized
system of rurally-based delivery points that helped low-income dairy farmers access markets,
reducing waste and increasing rural incomes. More recently, the company took the bold move of
distancing itself from the obligation to report on short-term financial results. With near-unanimous
shareholder approval, it changed the company’s articles of constitution, permitting it to withdraw
from all stock markets that demanded quarterly profit reporting.21 This was part of the company’s
efforts to take a holistic view of “success.” Hans Jöhr explained, “We’re not into charity; we have to
measure the financials—but not exclusively. Financials are necessary like the oxygen in life. But
imagine if life were only about oxygen.”22

The premise of CSV was at once revolutionary, logical, and aspirational, evolving out of the old
corporate social responsibility. “We focus on creating shared value now, not on sharing created value
anymore,” Jöhr noted. Its win-win premise had captured the imaginations of students, scholars, and
practitioners. Perhaps there was a true opportunity to bridge the often stark divide between
multinational businesses and the public sector, channeling private sector resources towards
sustainable development for people, the environment, and business alike. This would represent a
paradigm shift: forward-looking companies would recognize non-financial goals to be in their true
long-term business interest. The idea worked because it was deeply logical. A company like Nestlé
relied on the quantity, quality, and consistency of the materials it sourced. “We purchase 10% of the
world’s coffee and cocoa production,” Stefan Canz of Corporate Agriculture explained, “therefore we
depend on functioning ecosystems and a healthy environment.”23 Thus, safeguarding the natural
resource base for production and investing in human health, capacity, and resiliency made business
sense. Yet, elements of CSV were still aspirational. While business, social, and environmental well-
being were mutually reinforcing in many areas, in some cases there was a negative net financial value
for the company, challenging its ability to be competitive in current markets.

The Role of Agricultural Sourcing within Nestlé

Hans Jöhr could summarize his job in a single hefty objective: “to ensure the delivery of safe,
quality assured, regulatory compliant, and competitively priced agricultural materials supplied
through Farmer Connect to serve Nestlé’s brands and consumers.”24 But this summary masked
enormous complexity. Hans Jöhr’s job was far more than a logistics supply chain: it was an integral
foundation of Nestlé’s vision to be the world’s leading nutrition, health and wellness company.
Sourcing had to be an enabler for this vision.25

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Creating the Sustainable Agricultural Initiative at Nestlé

Creation of SAIN and the SAI Platform

Nestlé’s concern for sustainable production was already embedded in the company’s agricultural
portfolio. More than a decade prior, in 2000, Hans Jöhr and his team had created SAIN, the
Sustainable Agriculture Initiative at Nestlé. SAIN encouraged good agricultural practices among its
suppliers, providing technical assistance through a team of extension workers. These activities
sustained and were fully aligned with the company’s later created CSV approach: productive farmers
who were stewards of natural resources represented a more reliable and sustainable source of quality
raw materials for the company. Though Nestlé in many countries does not legally contract with
farmers, it described significant producer loyalty in the majority of its markets.

SAIN was designed as a bottom-up approach. Several barriers to sustainable agriculture were
systemic, however, and necessitated broader changes in the industry and in policy. Therefore Nestlé
joined with Unilever and Danone to create the Sustainable Agriculture Initiative (SAI) Platform in
2002. By 2012 the Platform, www.saiplatform.org, had 43 active members including Coca-Cola,
PepsiCo, General Mills, Kraft, and McDonalds. These partners worked in pre-competitive and
collaborative forums on sustainable agriculture, which they defined as a “productive, competitive,
and efficient way to produce agricultural products, while at the same time protecting and improving
the natural environment and social/economic conditions of local communities.”26

A Decade of Progress in Sustainable Agriculture

Calls for Sustainability in the Global Food System

Natural resource scarcity and climate change Nestlé’s sustainable agriculture activities
were situated amid increasing international attention to natural resource scarcity and climate change.
There was a growing body of evidence about such threats, accompanied by tools to measure the
environmental “footprint” of a wide range of human activities. Shocks like the food price crisis of
2007–08 and the financial recession shook the world, prompting urgent calls for more sustainable
practices in individual lifestyles and business operations. Many of the threats had already reached
critical levels; among the most prominent issues overlapping with agriculture were climate change
and deforestation.

In the first decade of the 21st century, climate scientists provided irrefutable proof of climate
change and its links to anthropogenic, or human, activities. The problem was divided into two main
issues: mitigation and adaptation. Mitigation focused on slowing or reversing the pace of global
warming and associated climatic changes, while adaptation sought to address those threats that had
already manifested. There were several key overlapping issues between climate change and
agriculture. Production activities—especially where land was cleared of forest or cattle were reared—
could generate high levels of carbon and methane, the two primary greenhouse gases. Indeed,
agriculture and forestry activities together represented up to 30% of global emissions.27 Yet farmers
also suffered many of the effects of climate change: natural disasters had spiked in number and
increased in severity,28 and the majority of these had direct implications for agricultural production.
Less dramatic changes, such as increasingly erratic rainfall, also had devastating effects. While U.S.
farmers faced the worst drought since the 1950s in 2012, a highly-publicized hardship, countless
smallholder farmers lost their entire harvest due to miscalculating when the rains would come.

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Forests also attracted significant attention as society began to appreciate their role in global
climate change. Not only could forests absorb greenhouse gases—a critical counterbalance to
emissions—but the activity of clearing land for agricultural production resulted in substantial
emissions itself. Yet at the turn of the century there were few immediate incentives for preserving
forested land when production on the same land would be profitable. During this period,
governments such as Brazil’s made significant strides to reduce deforestation through legislation,
international bodies like the United Nations designed financial incentives for preserving forest, and
advocacy groups like Greenpeace pressured companies to prove that their products did not
contribute to deforestation.

Trends in consumer demand The first decade of the 21st century also saw significant changes
to consumer trends. The first concerned demographics: the global population hit 7 billion in 2011 and
was projected to be 9.1 billion by mid-century. In 2008 the world became more urban than rural, a
trend that was projected to accelerate especially in Asia and Africa (see Exhibits 12 and 13).29 And
poor consumers in emerging economies were increasingly participating in markets as many emerged
from poverty and businesses became more adept at reaching those at the base of the socioeconomic
pyramid. And as the global population skyrocketed, farmers represented an ever smaller and older
demographic. In 2012 the average age of U.S. farmers was 58 years, and over one-third of European
farmers were older than 65.30

In the same period, consumer preferences had shifted towards more responsible and sustainable
production. As companies like Nestlé knew, consumers were no longer solely focused on price, taste,
and nutritional content. Consumers were asking two additional questions about