Sustainability-oriented innovation for competitive advantage: Does the business environment matter?

Published on 11 September 2012 in Sustainability and Communities , Ecosystems and biodiversity

Introduction

Sustainability-oriented innovation within firms, such as the development of eco-friendly production methods, is seen as a route for product differentiation, value creation and as a way for firms to enhance their bargaining power within the supply chain. In addition, such a view assumes that the newly developed products or services will achieve a return high enough to sustain further research and development, as consumers will be willing to pay a premium over conventional product prices. Whilst nobody denies that continuous innovation is a necessary condition for business sustainability, as it offers enduring competitive advantage and compliance with new regulations (e.g., related food safety regulations), one may ask whether it is enough to invest in technological innovation alone for that situation to occur?

The above question has partly been answered by economics (see Alston, Sexton, and Zhang, 1997). From a research manager’s point of view, e.g., where a government body has to evaluate the effects that public research has on the economy, the conclusions were that if the interest is just to evaluate the aggregate benefits of research for the entire economy, departures from perfect competition do not matter much if they are modest. However, if distributional issues are important (as is the case in many supply chains), even modest departures from competition can cause the competitive model to yield seriously misleading results. Furthermore, significant departures from competition, especially the joint presence of oligopoly (few suppliers) and oligopsony power (few buyers), can have important effects on the total benefits and the distribution of benefits from research.

If instead of considering the aggregated case, one explores firms’ incentives for private innovation when there is unbalanced power along the supply chain, this necessarily affects the distribution of returns from innovation and therefore the incentives to innovate and adopt innovative practices. This implies that the business context in which innovation takes place is an important factor in determining its appeal for those involved.

The purpose of this note is to highlight lessons from a successful case study where a group of producers organise in such a way that they create a business environment (i.e., the market structure) where innovation can have its desired effect, i.e. to provide producers with adequate returns to innovation such that their businesses become sustainable.

Key Points

The supply chain in this study is characterised by considerable collaboration between the marketing company and its dedicated network of Scottish growers and farmers from exporting countries. This guarantees the marketing company all year round supplies by like-minded growers in Scotland, Holland, Spain, Morocco, the Middle East and South America. In addition, the chain has a strong orientation towards quality and sustainability-enhancing innovation as a means of achieving competitive advantage.

On-going support and good quality communication facilitate the transfer of accumulated expertise (both commercial and technical) and innovative technologies from the marketing company to the growers, and also build strong bonds, confidence and trust. A sub-group of Scottish farmers is directly involved in the marketing company’s own research projects in collaboration with research institutes, and also in the monitoring of production efficiency and costs. Then, extensive sharing of knowledge and benchmarking among all farmers helps to speed up the adoption of innovation.

In parallel, the marketing company ensures sustainable prices for farmers, which gives them security and confidence for continuing investment. Thus, the way in which the supply chain is organised, together with the sustainability-oriented innovation ensures value creation, increased economic efficiency and improved risk management, but importantly these benefits are also seen (by farmers) as equally shared amongst those responsible for their creation (i.e., a fair distribution of returns).

The clear orientation of the supply chain towards quality and sustainability-oriented innovation is strongly communicated to customers (e.g. multiple retailers) through the development of: their own pesticide residue-free, premium brand, an exclusive premium soft fruit variety, and a patented environment-friendly production system.

It is also evident that coping with the growing complexity of sustainability issues is leading to an increasing interdependence within supply chains. Notably, the evidence generated in the project suggests that multiple retailers may relax the application of their bargaining power in favour of those suppliers providing sustainability-oriented innovation, as this may offset costs that otherwise would fall on the retailer, namely those associated with the organisation of supply, or dealing with unexpected circumstances (e.g. effects of climate change, food safety scares).

Research Undertaken

The information presented in this note derives from results of the 2005-2010 Scottish Government Research Programme on the sustainability of Scottish agri-food supply chains and the 2011-2015 research on food security and resilient food supply chains. The research carried out aimed to (i) understand the motivations and behaviour towards sustainability of agri-food supply chain participants, and to (ii) explore how different types of supply chains and market conditions influence sustainability at the farm level.

The specific results presented here form part of an in-depth study of a UK wide soft fruit supply chain, which is one of the leading suppliers of soft fruit (strawberries, raspberries, blueberries and blackberries) to UK multiple retailers.

Policy Implications

The research identified that for a group of agri-food firms to transform sustainability-oriented innovation into a long-term competitive advantage it is necessary that it is accompanied by a supportive organisation of the supply chain. The organisational characteristics need to be:

A participatory business model, where suppliers (i.e., producers) are included in the tasks and decision making, so they feel that those are worth the effort (i.e., they perceive that the return for the effort is fair). Examples of these are inclusion of farmers in the experimentation and monitoring of the effectiveness of new practices and increased information/knowledge flow.
A close relationship with the customers, where the benefits from the relationship can be readily perceived by all parts. Examples of these are the management and guarantee of supply for the retailers, and the introduction of innovative products and practices.

In terms of the business model, the marketing firm shows leadership by organising the supply through an appropriate structure (which includes governance mechanisms) that ensures the effective involvement and active contribution of producers (farmers) in the development of innovative solutions, their assessment and diffusion, whilst firms retain their independence. This business model not only enables and facilitates greater focus on sustainability-related innovation, but also secures scale and scope economies for this innovation, in both the domestic and imported input markets. Furthermore, the structure allows that these economies together with the value created to be fairly distributed along the chain.

Finally, focusing on the introduction of innovations as a necessary and sufficient condition for attaining long term economic sustainability, disregarding the importance of the business environment (i.e., the market structure) where the innovation takes place, although may be successful in the short term, but it may not be resilient strategy for the continuity of the producer firms when there is power unbalances in the supply chain.

Authors

Chrysa Lamprinopoulou Chrysa.Lamprinopoulou@sruc.ac.uk

Philip Leat Philip.Leat@sruc.ac.uk

Cesar Revoredo-Giha Cesar.Revoredo@sruc.ac.uk

Topics

Sustainability and Communities , Ecosystems and biodiversity