Business and the Environment2

1
Business and the Environment2

• Lecture 2 Drivers of manager decision making
  within firmsstake holders, market
  structure/conditions.
• Understand the pressures and conditions that
  affect managerial decisions regarding
  environmental efforts.
• Firm objective to maximize profits Problem areas
  that affect firm behavior and responses to the
  environment.
• Two key problems

2
Business and the Environment

• Agency problems. Deviation of management from
  share owner interests. Social Responsibility of
  business debate.
• Problem of uninternalized benefits and costs in
  profit maximization.
• The source of the environmental and natural
  resource problem.
• We will return to this issue in more depth
  because it is central to the environmental
  problem.
• How to link environmental action to firm
  profitability?

3
Business and the Environment

• Other factors affecting firm managers as they
  consider environmental issues.
• Internal decision making
• Trade offs on products within profit constraints.
• Trade offs on short/long term, RD
• Revenue enhancement via market research and new
  offerings
• Cost containment via lifecycle analysis and
  supply chain management

4
Business and the Environment

• Drivers of environmental positions.
• Hoffman slide (Hoffman, 2000, p. 17).
• Regulatory
• Tax
• Regulation
• Market instruments
• Uncertainty
• Efforts to mold policy and gain a strategic
  advantage
• We will return to this issue with regard to GHG
  regulation and other environmental policies.

5
Business and the Environment

• Drivers Financial resourceinvestors, insurance
  companies, banks
• Risk to insurance companies for liability for
  environmental damages. Strict liability
  negligence rules. Depends on how the law is
  structured.
• Nuisance actions.defend the right to use ones
  property free from disturbances or influence from
  activities created by others (externalities).

6
Business and the Environment

• Negligence actions.defend against injury due to
  loss of due care. Standards? Was due care
  applied? Changes in polluttee behavior.
  Precaution.
• Strict liabilityPolluter pays. Liable for
  damages to third parties, even if they could not
  be avoided with due care. Used when there is a
  likelihood of great harm. Incentive effects.
  Polluters consider costs. May over compensate.
  Pollutees do not consider costs.

7
Business and the Environment

• Risk to investors if unready for policy or policy
  is harmful.
• Risk to investors. Due diligence for
  environmental damages that could place the loan
  at risk.
• Environmental performance proxies for overall
  performance.
• TXU case.

8
Business and the Environment

• Drivers Consumers
• Willingness to pay of some market segments
• Changes in taste.
• High incomes.
• High education levels
• This is a fundamental challengemarket
  differentiationmarket segmentation, determining
  willingness to pay, barriers to entry.

9
Business and the Environment

• Which consumer groups will be concerned about
  environmental quality?Segment markets by gender,
  age, education, ethnicity, location, income,
  urban/rural, north/south, political affiliation
• Core competencies of a firmhow to match with
  environmental differentiation?
• Will return to this issue.
• Major strategy issue for firms.

10
Business and the Environment

• Drivers Competitors
• Lose competitive position vis a vis competitors
  who more rapidly and credibly respond to market
  demand for environmental action.
• Alternatively gain competitive advantage vis a
  vis competitors who do not meet new demands.
  First mover.
• Toyota-General Motors example.

11
Business and the Environment

• Drivers Trade Associations and other forms of
  collective action.
• Use norms, rules for members to follow.
• Group certification. Reputation. Industry wide.
  Larger firms are most active-why?

12
Business and the Environment

• May preempt government regulation.
• Might be preferable to industrymore industry
  specific, more flexible, more focused, less
  uncertain, less risk, more discretion.
• May be less regulation than society desires, but
  if lower cost and more effective may be superior
  to government regulation.
• Customers might benefit if more flexible and
  lower cost.

13
Business and the Environment

• Can force higher costs on competitorsusually
  incumbents gain advantages over smaller new
  entrants. There are differences in compliance
  costs. Upfront, fixed costs that can be spread
  across larger output in larger firms.
• Examples
• Chemical Manufacturers AssociationResponsible
  Care.

14
Business and the Environment

• Motivation
• crises. Bhopal, Love Canal, PCBs in the Hudson
  River.
• A series of federal actions1976 Toxic Substance
  Control Act and Resource Conservation and
  Recovery Act. Empowered EPA to regulate. 1980
  Superfund Law with joint and several liability
  for industrial wastes. Ex post liability for
  entire cleanup costs.
• Industry fears more.

15
Business and the Environment

• 1984 RC launched.
• Largest firms.
• Provided motivation for public good provision
  without government regulation.
• Focus on management practices not numerical
  targets (why?).
• Action plans to implement management
  codesemergency response, pollution prevention,
  safety, health, product stewardship,
  distribution.
• Various studies of its effectiveness.

16
Business and the Environment

• Other examples Forest Stewardship Council (FSC)
  founded by environmental groups and Sustainable
  Forestry Initiative (SFI), founded by industry
  groups.
• SFI 1994 by American Forest and Paper Assn.
• Largest companies advocates. Some small.
• Crisesconcerns about land management practices.

17
Business and the Environment

• Collective action to set up principles and action
  plans. Some defection among smaller firms over
  costs.
• Less world wide coverage. Differences in land
  management and forestry practices around the
  world. Harder to have uniform regulations.
• Issues of how strict are the rules and coverage.

18
Business and the Environment

• Drivers Suppliers
• Risk of lost business when suppliers are linked
  to one or two producers.
• Alternatively, supply chain managementfirm seeks
  to avoid problems with suppliers in supply chain.
  Damage product or service reputation in the
  market. Firms can require that their suppliers
  adhere to certain environmental standards

19
Business and the Environment

• Risk in this, with competition if it raises cost,
  so that firms in perfectly competitive markets
  may not be responsive.
• Green supply chainworks if there are cost
  advantages. Firm can appropriate some of the
  social benefits. Implies that the firm is in an
  oligopoly or less competitive industry.

20
Business and the Environment

• Drivers NGOs
• Can be influential interest groupsboth as a
  market segment and as a political force.
• Hoffman, 2000, p. 107, 108.
• Source of legal challenges. Uncertainty. Time
  costs.
• Cooperate. Place on Board of Directors, etc.
• Cooperate in design of policy. Environmental
  Defense.

21
Business and the Environment

• Alliances with NGOs
• Corporate sponsorship
• Firm contributes to the environmental group
  financially or in kind through becoming involved
  in specific environmental causes or fund raising
• NGO provides product endorsement
• Task force to develop economically feasible
  solutions for the greening of business practices

22
Business and the Environment

• Perceived crisis and shortcomings of adversarial
  approaches to problem solving
• Lawsuits might take years and results in greater
  costs
• Problems that are so complex that they require
  multiple actors to solve them, disagreement over
  solution,
• Environmental groups may have expertise and
  public support but lack power of implementing
  solution

23
Business and the Environment

• Firm perspective
• Access to complementary assets
• Credibility
• Additional communication channels
• Scientific knowledge
• NGO perspective
• Direct impact on firms behavior, potential
  ripple effect within industry

24
Business and the Environment

• Firm perspective
• Negative backlash if the project fails
• Confidentiality issues
• How to retain the Intellectual property rights?
• NGO perspective
• Open to criticism that is becomes and ally of
  industry (sleeping with the enemy)
• Open to criticism that it looses neutrality

25
Business and the Environment

• Ability of the parties to provide complementary
  assets.
• Keep alliance based on subjects that are far from
  firms IP (packaging for McDonalds)
• Clear definition of objectives
• Maintain an arms length relationship formal
  contract

26
Business and the Environment

• Other drivers
• Employeesmotivation and company culture.
• Press and other mediamold demand.
• Religiousmold taste regarding the environment.

27
Business and the Environment

• Academyresearch on impact. Information.
• Global warming concerns, water, waste, energy
• Ozone layer. Mario J. Molina F. Sherwood
  Rowland, Stratospheric Sink for
  Chlorofluoromethanes Chlorine Atomic Catalyzed
  Destruction of Ozone, 249 Nature 810, 810 (1974).
  Helped to galvanize firm support for regulation
  and Montreal Protocol.

28
Business and the Environment

• Firms face market pressures as they consider
  responding to environmental problems.
• Overall market considerations. Market slide
• Demand issues.
• Price elasticity of demand.
• Want it to be less than one.
• Which markets will satisfy this condition?

29
Business and the Environment

• Market segments have different willingness to
  paytaste and income.
• Price discrimination (where different prices are
  charged to different consumer groups) depends
  upon competitive conditions.
• We will examine these in more detail as part of
  market structure.

30
Business and the Environment

• Supply issues.
• Cost of responding.
• Innovation options.
• Input costs and past contracts may limit options.
• Government policiessubsidies, tax, regulation.
• Productivity, cost and firm size. Returns to
  scale, constant cost, increasing cost. Small
  firms may have fewer options? Or be more flexible.

31
Business and the Environment

• Market structure as it affects firm response.
• Competitive
• many firms, many very close substitutes, ease of
  entry, consumer power, high price elasticity,
  pressure on price and cost.
• Trade. Globalization.
• In such markets firms may be reluctant to adopt
  environmental products or processes. Why?

32
Business and the Environment

• Monopolistic competition.
• Many firms, somewhat differentiated products.
• Ease of entry.
• More market segmentation possible.
• Mass retail.
• Possibly limited individual firm response to
  environmental pressures. Why?

33
Business and the Environment

• Oligopoly.
• Few firms.
• Differentiated products.
• Lower price elasticity of demand.
• More power over price and output. Price
  discrimination possible.
• Market segmentation.
• Firms may be more responsive to environmental
  demands. Why?

34
Business and the Environment

• Monopoly.
• One firm.
• Differentiated products.
• Price discrimination.
• Low price elasticity of demand.
• Market segmentation.
• Firm may or may not be responsive to
  environmental demands. Why?

35
Business and the Environment

• Measures of market structure.
• Concentration. Herfindahl indexsum of the
  squared market shares, HHI 0 to 10,000 (more
  concentrated). Affects competitive environment.
• More differentiated, generally competitive
  markets are more likely to have firms that are
  responsive to environmental concerns.
• Heterogeneity.
• Non price competition. Differentiation.

36
Business and the Environment

• We have covered
• Drivers of environmental action by firm managers.
• Market structure impact.