Sustainability and shared value: coordination versus low-value equilibria in supply-chains

Background context: multinational companies have committed to zero deforestation but found that complying with these promises is particularly difficult. Many disjointed investments have resulted in slow progress. Justification... [ view full abstract ]

Background context: multinational companies have committed to zero deforestation but found that complying with these promises is particularly difficult. Many disjointed investments have resulted in slow progress. Justification of the research / research argument: we combine a new theoretical two-stage model with an extensive collection of primary data related to the beef industry in Brazil. The main justification of the research is the lack of coordination in the beef industry supply-chain that results in a low-value equilibrium for the industry and all stakeholders through suboptimal sustainability-related investments. Aim: The present article has three goals: to provide a formal definition of shared value; to derive propositions regarding obstacles to sustainability-related investments due to supply-channel conflicts; and to illustrate possible paths to solve these conflicts through a case study involving the beef industry in Brazil. Methods/approach: We formalize channel conflicts and shared value by using a two-stage model in which the first stage follows a Stackelberg model that is used to describe the obstacles in sharing costs and generate value that should be distributed in the second stage through a Shapley value. The case study uses primary data from interviews with down and upstream companies in the beef industry supply-chain, focusing on deforestation issues in the Amazon region. Findings/results: We find that coordination failures can be resolved by a combination of institutional development and the reduction of information asymmetry. In particular, we find that possible firm-level are unequal throughout the supply-chain, and marginal benefits do not equal marginal contribution, making a Shapley value solution untenable for the beef industry. For ranchers, the main benefits are related to cost savings through improved operational efficiency; for retailers, a better position to manage and mitigate risk; and for slaughterhouses, improved sales and marketing. Conclusions: The business case for sustainability encounters many obstacles, among them coordination failures that lead to low-value equilibria in supply-chains. In this article we provide a formal definition of shared value and show the conditions for solving the coordination failures in supply-chains that might lead to more sustainability-related investments and improved social welfare. Keywords: supply-chain; shared value; Shapley value; Stackelberg; beef industry.