Business and the Environment 7

1
Business and the Environment 7

• Examine one of the major ways in which business
  can respond to environmental concerns in a manner
  that is consistent with profitability.

2
Business and the Environment

• Environmental Product Differentiation.
• One way that a firm can enhance its competitive
  advantage by being environmentally friendly via
  product differentiation. Internalize public
  goods.
• Another is Innovation and cost reduction through
  lifecycle analysis, supply chain analysis,
  industrial ecology.
• Another is productivity enhancement also via
  lifecycle analysis, supply chain analysis,
  innovation, and industrial ecology.

3
Business and the Environment

• The challenge in environmental product
  differentiation is changing public goods into
  private profits.
• Providing value and capturing it. Why is this
  necessary?
• Define Competitive Advantage.
• Requirements for success

4
Business and the Environment

• Willingness to pay (WTP) among a market segment.
  Demonstrated value with no substitutes.
• Provision of credible information about
  environmental benefits and other product
  characteristics and how these benefit consumers.
  Brand. Reputation. Nature/attractiveness of the
  externality or environmental problem. Nature of
  the data.
• Barriers to imitation. Capturing value. First
  mover. Knowledge of segment. Regulation. IP.
  Competition drives the value to consumers. Why is
  this a problem for environmental product
  differentiation?

5
Business and the Environment

• The competitive position of the firm affects its
  willingness and ability to consider environmental
  factors.
• How can a firm enhance its competitive advantage
  by being environmentally friendlycost saving,
  product differentiation. Internalize public
  goods.
• Changes in taste in particular markets toward
  environmental goodswith less elastic, more
  profitable conditions. WTP.

6
Business and the Environment

• Firm differentiates a product in a market that
  has a willingness to pay that more than covers
  the higher cost. Make demand more inelastic via
  market segmentation and product design retail
  clothing, high end grocery, other niche consumer
  products

7
Business and the Environment

• If successful, these actions allow the firm to
  capture some of the public goods of environmental
  quality as private goods. Product differentiation
  gives the firm greater pricing power within its
  market.
• Key is whether or not there is value created and
  whether the market segment is willing to pay for
  it. Identify market segment, information
  credibility, barriers to entry. Business Planning
• What would the characteristics of the target
  market need to be?

8
Business and the Environment

• Identify factors associated with environmental
  awareness and do market research
• Education,
• Income,
• Membership in other groups,
• Past purchasing practices,
• Political affiliation,
• Ethnicity,
• Age,
• Gender,
• Location, urban/rural, north/south, east/west?

9
Business and the Environment

• Identify how the environmental product would
  benefit this target
• how would they find value and how much?
• What is their willingness to pay? Price
  elasticity?
• Focus groups, surveys, market research
• Identify the competitive environment/industry
  structure
• what competitors exist? Links to the target.
• How easily could they duplicate the strategy?

10
Business and the Environment

• Credibly providing information.
• Scientific uncertainty.
• Regulatory uncertainty.
• Market response uncertainty.
• How to disentangle the products effect from
  other factors? Is this observable? Is this
  valued?
• How important is the product in the consumers
  overall consumption?
• Credibility of the firm and industry. Chevron?

11
Business and the Environment

• Develop barriers to entry.
• Regulation. Require duplication. Can be counter
  productive if leads to imitation.
• First mover if there are learning, reputation,
  and other advantages.
• Develop close ties to market segment. Most
  difficult to duplicate.
• Develop core competencies. Link to overall
  position of the firm.

12
Business and the Environment

• Ciba Specialty Chemicals, Low Salt Textile Dyes.
• Willingness to pay Markettextile firms in
  developed and underdeveloped countries. Reduced
  rinsing and wastewater treatment, less redyeing,
  lower cost. Response differs by region. Higher
  price. Few substitutes. Meets a market need.
  Customers capture benefits of lower cost.
• Credible information RD. Firms have information
  about rinsing and water treatment costs. Ciba has
  experience.
• Barriers to entry. Brand reputation, IP, first
  mover, complicated production process. Difficult
  to duplicate. Matter of time.

13
Business and the Environment

• Monsanto Conservation tillage via use of Roundup.
  Repositioned to promote conservation by reducing
  plowing.
• Existing market as a herbicide.
• New market in an environmental segment.
• Willingness to paytarget marketfarmers, no
  tillage, reduce costs, reduce erosion. No
  substitutes. Farmers required to replant each
  year with company seed. Customers capture
  benefits of lower cost.
• Credible informationfarmers have cost of tillage
  information. But controversy over use of
  herbicidesuncertain long-term effects. (What is
  the trade off?). Monsanto has scientific
  credibility.
• Barriers to entryreputation of Monsanto and
  Roundup. Existing ties to farmers. Contracts.

14
Business and the Environment3

• Patagoniarecycled polyethylene bottles for
  fiber, organic cotton. Higher cost.
• Willingness to pay. Target Marketwealthy, highly
  educated, outdoors oriented, not price sensitive.
  High willingness to pay. Branding carries
  message. Close ties to market segment. Customers
  capture benefit of providing environmental
  benefitssignage.
• Credible Information. Reputationinformation on
  environmental values, private values with
  statement, warranties, design. Small, privately
  held company. Corporate culture. Single message.
  Close ties to market.
• Barriers to entry. Reputation and links to target
  market. Hard to credibly duplicate.

15
Business and the Environment

• Starkist tunadolphin-safe tuna. Higher cost.
  Branding. Not successful. Dolphins rebound.
• Willingness to pay. Market segment very price
  sensitive, less concerned about environment,
  branding conveys few private goodsno statement.
  Customers capture little public benefit as a
  private benefit that they value.
• Credible information. H.J. Heinz, the parent firm
  is a multiproduct firm. Less clear corporate
  culture. Link to Starkist is limited.
• Ease of entry by competitors. Commodity.
  Environmental value not captured by the firms.
• Lower production regulation with fewer
  competitive advantages.
• Shift from no encirclement to no mortality. A
  looser standard.

16
Business and the Environment

• Environmental Product Differentiation as a source
  of Competitive Advantage then depends on
• The firm and its products.
• The market segment and willingness to pay.
• Information about the environmental problem and
  the value provided to consumers.
• Barriers to entry to allow the firm to capture
  value and hence, motivate its actions.

17
Business and the Environment

• Examined Environmental product differentiation
  strategies as source of competitive advantage vis
  a vis competitors.
• Innovation and cost reduction, Productivity
  Enhancement will be addressed in more detail in
  subsequent special lectures (Geyer, Von
  Weizsacker) but we can summarize some key issues
  now.
• Cost reduction relative to competitors. Source of
  competitive advantage. Increases firm response.

18
Business and the Environment

• Productivity enhancementcost savings (capture
  part of the public good).
• Amory Lovins (article on course webpage)
• Von Weizsacker Factor 4.
• Components
• Reduce input use so as to increase output per
  inputlowers costs. Reduces resource use.
  Technology change. New production methods.
• Recycle and reuse inputslowers waste disposal
  costs, risks, hazard management. Intel and water
  use example.
• IP and trade secrets. Why companies are wary of
  providing information.

19
Business and the Environment

• Reduced risk management costs, remediation,
  emergency response costs (proactive
  planningagain the water example), reduced
  liability costs, reduced insurance premiums.
• Incorporate environmental benefits up front in
  expansion plans, new equipment, new processing
  plans. Less costly than doing it ex post.
• Education of employees, management, suppliers,
  customers.
• Longer-term versus short-run benefits. Upfront
  costs. Assess productivity and environmental
  gains and cost savings carefully and link
  specifically to firm benefits along with social
  gains and how these will be communicated.

20
Business and the Environment

• Sources of environmental information. Vered
  Doctori-Blass will give a lecture on measurement.
• Toxic Release Inventory chemicals, such as
  dioxins, elements such as lead, mercury
• http//www.epa.gov/tri/
• Life cycle analysis
• Supply chain managementGeyer
• GHG emissions. http//www.epa.gov/OTAQ/climate/ind
  ex.htm
• Avoidance of environmentally hazardous
  substancesCFCs, lead, and costly clean up,
  liability.
• Responsibility under state and federal
  regulations Clean Air Act, Clean Water Acts

21
Business and the Environment

• Compliance under regulatory rules Sources of
  competitive advantage.
• In the same way that lower costs and product
  differentiation can provide competitive
  advantage.
• Protect licenses to operate and avoid disruption
  of production and service (restaurant closures
  due to violation of health standards as an
  example of the disruption involved)

22
Business and the Environment

• Avoid penalties, OSHA reviews.
• Flexible regulation.
• Preempt more direct regulation.
• Voluntary environmental agreements in the US
  under the EPA. Negotiated arrangements.
• Firms benefitlower cost, more flexible
  regulation. Can design to be part of competitive
  advantage strategy.
• EPA benefitslower monitoring and enforcement
  costs.
• NGO involvement may be made explicit.
• Link to state regulation may be made explicit.
• Usually more available to larger firmslobby
  expenses. Smaller firms use trade groups and the
  benefits are spread among the members. Less
  competitive advantage.

23
Business and the Environment

• Take away
• Role of competitive advantage as a means of
  capturing some of the public good as a private
  goodhigher rates of return (profitability) due
  to environmental product differentiation,
  improved productivity, cost savings, more
  flexible regulation.
• Conditions under which each is successful.

24
Business and the Environment

• Anna Brittain will present her experiences.