The Firm and Private Environmental Strategies

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The Firm and Private Environmental Strategies

• Dennis Aigner on Corporate Social Responsibility.
  Alex Farrell on energy responses.
• On January 10th we talked about
• Porters competitive forces buyer power,
  supplier power, competitive entry, threat of
  substitutes, rivalry among incumbent firms. All
  environmental actions undertaken by a firm must
  be done within the competitive environment of the
  firm. Why?
• Buyer power. Number and price sensitivity.
  Willingness to pay.
• Supplier power. Number.
• Competitive entry. Imitation. Reduces pricing
  power.
• Threat of substitutes. Imitation. Reduces pricing
  power.
• Competitive rivalry.
• All of these reduce the ability of the firm to
  capture some of the private benefits of providing
  public goods or reducing externalities.

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The Firm and Private Environmental Strategies

• Hoffman, Chapters 1, 2 Challenge is changing
  public goods into private profits. Providing
  value and capturing it.
• Competitive position of the firm may affect its
  willingness to consider environmental factors.
  How can a firm enhance its competitive advantage
  by being environmentally friendlycost saving,
  product differentiation. Internalize public
  goods.
• Ways of showing how environmental actions can
  affect the firm.
• Changes in taste in particular markets toward
  environmental goodswith less elastic and more
  elastic conditions.

3
The Firm and Private Environmental Strategies

• Change in regulation that increases cost.
• Firm differentiates product based on
  environmental characteristics.
• Firm adopts technology that lowers cost.

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The Firm and Private Environmental Strategies

• If successful, these actions can allow the firm
  to capture some of the public goods of
  environmental quality as private goods. Product
  differentiation that gives the firm greater
  pricing power within its market cost lowering
  that gives the firm a cost advantage relative to
  competitors.
• 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.

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The Firm and Private Environmental Strategies

• Hoffman, Chapters 2-6 Esty and Winston Chapter
  3 Drivers of Environmental Quality
• Politicians responding to constituent demands to
  reduce externalities, improve environmental
  quality. Income and education of constituencies.
• Agencies.
• Regulation Command and Control Regulation. What
  is this? Uniform standards. Most do not have
  provision for cost-benefit analysis. Why?
• Environmental regulation became the major source
  of regulatory cost for firms by the 1980s.
• Problems of regulatory capture bureaucratic
  incentives lack of residual claimants.
• 1990s shift in some cases to more market based
  approachesITQs, Emission Permits. What are the
  economic/ethical issues?

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The Firm and Private Environmental Strategies

• Suppliers of the resources that firms
  needinputs, money.
• Green supply chainworks if there are cost or
  reputational advantages. Appropriates some of the
  social benefits. Kinkos pressure Boise Cascade,
  Victorias Secret and International paper.
• Trade Associations. Internalize industry gains,
  reduce industry reputational losses.
• Insurance companies. Liability for environmental
  damages. Strict liability negligence rules.
• Banks. Cost of capital. Due diligence for
  environmental damages that could place the loan
  at risk.
• Share holdersbalance financial and environmental
  criteria (goes both ways)
• Employees. Commitment.

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The Firm and Private Environmental Strategies

• Consumers. Which ones will be concerned about
  environmental quality?Segment markets by gender,
  age, education, ethnicity, location, income,
  urban/rural, north/south, political affiliation.
• Changes in taste, demand.
• Consultants, NGOs, Academics (information), Think
  tanks, Press, Religion. Example. Global warming.
• How the firm responds depends upon
• Core competencies.
• Competitive conditions.
• Management leadership.

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The Firm and Private Environmental Strategies

• Regulation and/or litigation.
• Nuisance actions.defend the right to use ones
  property free from disturbances or influence from
  activities created by others (externalities).
• Negligence actions.defend against injury due to
  loss of due care. Standards?
• Strict liabilityPolluter pays. Liable for
  damages to third parties. Likelihood of great
  harm. Incentive effects.

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The Firm and Private Environmental Strategies

• Reinhardt Environmental Product Differentiation
• Under what circumstances does it pay a firm to
  provide a public good or reduce externalities?
• Identify the market segment
• Provide credible information about both the
  environmental and private value.
  Uncertaintyscientific, regulatory, market.
• Develop barriers to entry.
• Ciba Specialty Chemicals, Low Salt Textile Dyes.
• Market
• Reduced rinsing and wastewater treatment, less
  redyeing, lower cost.
• Defend against entry. Brand reputation, IP, first
  mover.

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The Firm and Private Environmental Strategies

• Monsanto Conservation tillage via use of Roundup.
  Repositioned to promote conservation by reducing
  plowing.
• Patagoniarecycled polyethylene bottles for
  fiber, organic cotton. Higher cost.
  Marketwealthy, highly educated, not price
  sensitive. High willingness to pay. Credible
  reputationinformation on environmental values,
  private values with statement, warranties,
  design. Small, privately held company. Corporate
  culture. Single message.
• Starkist tunadolphin-safe tuna. Higher cost.
  Branding. Not successful. Dolphins rebound.
  Market segment very price sensitive, less
  concerned about environment, branding conveys few
  private goodsno statement. Ease of entry by
  competitors. Commodity. Environmental value not
  captured by the firms. H.J. Heinz, the parent
  firm is a multiproduct firm. Less clear corporate
  culture.

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The Firm and Private Environmental Strategies

• Saloner, Chapter 14 Corporate Strategy in a
  Multiproduct, multibusiness firm.
• Compare to Patagonia.
• Multiple units, some might have conflicting
  environmental records, markets. Hard to create a
  cohesive message, culture.
• Diversified corporations add value if they have
  synergies across unitseconomies of scope.
• Environmental differentiation or cost saving
  strategies can be complicated. Can they spread
  across units? Benefits positive or negative
  across units?

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The Firm and Private Environmental Strategies

• Monday January 22
• Hardin, the Tragedy of the CommonsDiscuss how
  the Commons applies to business. The challenge of
  addressing externalities, providing public goods
  in a competitive arena.
• Reinhardt, Chapter 1, The Environment as a
  Business Problem. Review.
• Written powerpoint assignment. Identify a firm
  and its response to global warming or climate
  changeeither positive or negative. Describe the
  actions it has taken as concretely as possible.
  Then analyze why it has taken that action based
  on
• Identifying market segment and willingness to
  pay.
• Credible information to the segment regarding
  environmental and private benefits.
• Barriers to entry.
• Be ready to hand in and present in class.
• Business plans idea

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The Firm and Private Environmental Strategies

• Modular housing with environmental benefits
• Market segment
• Environmental and private cost advantages
• Barriers to entry