THE SOCIAL SIDE OF SUSTAINABILITY
How cooperatives can redefine value distribution in value chains
By IMD Professor Francisco Szekely and Zahir Dossa, Ph.D. - November 2014
Michael Porter introduced the concept of the value chain in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance. He described it as a series of activities that a firm in a specific industry performs to deliver a valuable product or service to the market. But what does it mean to increase value in the value chain, and to redistribute the existing value to people in the chain who do not earn their fair share? And how can companies do this in a socially sustainable way?
One possible starting point is the Fair Trade movement, which aims to pay a fairer set of wages to producers. However, studies have demonstrated that high certification costs and limited demand for Fair Trade goods have resulted in only marginal increases to producers' incomes.i
A more promising option to redistribute value can be through the cooperative form of organization. This was established in north-west England during the 19th century in response to harsh working conditions and has more recently been adopted by the Fair Trade movement and other sustainable development initiatives. Cooperatives have a unique structure, in which their members (including producers and workers) are also their owners.
What can we learn from cooperatives, and how can organizations make their supply chains more socially sustainable? These were the questions that motivated our study of the argan oil cooperative movement in southwest Morocco.
The Morocco case
In 2013, 44% of Morocco's population lived in rural areas, where GDP per capita was estimated to be €1,325 – 60% less than the national average. Access to resources in the country's desert and mountain regions is severely limited, which further exacerbates the problem. Although the government has embarked upon campaigns to develop the country's rural corridor, the most significant changes to date have come from the cooperative movement in argan oil —a plant oil found only in Morocco that is used in high-end personal-care products and as a gourmet food oil product.
The sector is particularly interesting because of the impact of social enterprises on the most under-privileged population segment: women living in rural areas. Most women in southwest Morocco are uneducated, illiterate and do not speak Arabic, which makes it difficult for them to leave the countryside. With no alternative employment options in this patriarchal society, argan oil cooperatives offer women and their families a much-needed additional source of income.
Dr. Zoubida Charrouf developed the first argan oil enterprise in southwest Morocco in 1996, structuring it as a female cooperative. The Amal cooperative had a mechanized system for pressing and filtering argan oil, procedures that were previously performed by hand. The more efficient production process, combined with growing awareness for the health and beauty benefits of argan oil, generated interest from cosmetic companies in Europe and North America. This led to the birth of other, privately owned argan oil enterprises with superior managerial and technical skills, which soon outperformed the cooperatives.
With grants from various countries, Charrouf founded the Ibn al Baytar association in 1999 and financed the growth of cooperatives under its umbrella. The injection of donor funding also attracted good managers to run cooperatives in the countryside. By 2009 Ibn al Baytar had helped organize 1,800 women into 20 cooperatives. At the time, there were an estimated 150 cooperatives in Morocco employing approximately 7,000 women, with each member earning an average income of €617. This was over three times higher than the income of argan oil producers at private enterprises. However, despite investing 20 hours of manual labor to produce 1 liter of oil, producers earned only 0.8%, or €5, of the final retail price (the liter of oil is sold in 50ml bottles with a retail price of approximately €32 each, totaling €640 per liter).
This problem exists across commoditized industries, and is not unique to the argan oil sector. We would therefore suggest two best practices that could enable organizations to optimize the socioeconomic impacts of their value chains.
1] Vertical integration through branding and the elimination of middlemen.
Very few argan oil cooperatives sell directly to the market, because they lack the direct connection to retailers and have poor branding and marketing skills. Instead, they sell to cooperative associations, which then sell to distributors that are connected to cosmetic labs and brands in global markets. By connecting directly to cooperatives instead, retailers could eliminate middlemen and increase the amount returned to cooperatives and their members.
In addition, cooperatives should invest in developing their own brand so that they can sell directly to consumers. The Argan Tree is one example of this (disclosure: Zahir Dossa, one of the authors of this article, is the founder and president of this company). Developing a brand around five product offerings, The Argan Tree sources argan oil directly from its own 60-woman cooperative in Morocco and returns 100% of the profits to the members.
2] Value chain transparency
Although many organizations have had difficulty communicating the social impacts of their value chains, the internet offers the possibility of full transparency. By showing exactly where the money from a purchase goes, companies can better communicate their social sustainability to their customers. The Argan Tree shows how much money from every purchase is returned to its producers, while also detailing how the remaining revenues are distributed. In doing this, organizations can more clearly demonstrate the sustainability of their value chains while building trust and customer loyalty.
Both of the above steps require organizations to be committed to making their supply chains more sustainable. By integrating producers into their value chain and making efforts to become more transparent, they can balance responsible environmental practices with positive socioeconomic impacts.
Francisco Szekely is Sandoz Family Professor of leadership and sustainability and Director of the IMD Global Center for Sustainability Leadership (CSL). He directs Sustainability Leadership in Action (SLA), a talent development initiative targeted at leaders committed to discovering new ways to increase their performance and deliver exceptional results.
Zahir Dossa is a postdoctoral fellow at the CSL. He earned a Ph.D. from MIT in Sustainable Development and is the founder and president of The Argan Tree.
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