*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.
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 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.
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 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:

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 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?
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 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 friendly—
cost saving, product differentiation. Internalize
public goods.
 Changes in taste in particular markets toward
environmental goods—with less elastic, more
profitable conditions. WTP.
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 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
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 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?
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 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?

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 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?
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 Credibly providing information.
 Scientific
uncertainty.
 Regulatory uncertainty.
 Market response uncertainty.
 How to disentangle the product’s effect from
other factors? Is this observable? Is this
valued?
 How important is the product in the consumer’s
overall consumption?
 Credibility of the firm and industry. Chevron?
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 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.
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 Ciba Specialty Chemicals, Low Salt Textile Dyes.
 Willingness to pay: Market—textile 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: R&D. 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.
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 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 pay—target market—farmers, no tillage,
reduce costs, reduce erosion. No substitutes. Farmers
required to replant each year with company seed.
Customers capture benefits of lower cost.
 Credible information—farmers have cost of tillage
information. But controversy over use of herbicides—
uncertain long-term effects. (What is the trade off?).
Monsanto has scientific credibility.
 Barriers to entry—reputation of Monsanto and Roundup.
Existing ties to farmers. Contracts.
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 Patagonia—recycled polyethylene bottles for fiber,
organic cotton. Higher cost.
 Willingness to pay. Target Market—wealthy, 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 benefits—
signage.
 Credible Information. Reputation—information 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.
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 Starkist tuna—dolphin-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 goods—no 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.
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 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.
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 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.
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 Productivity enhancement—cost 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

input—lowers costs. Reduces resource use.
Technology change. New production methods.
 Recycle and reuse inputs—lowers waste disposal
costs, risks, hazard management. Intel and water
use example.
 IP and trade secrets. Why companies are wary of
providing information.
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 Reduced risk management costs, remediation,
emergency response costs (proactive planning—again
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.
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 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 management—Geyer
 GHG emissions.
http://www.epa.gov/OTAQ/climate/index.htm
 Avoidance of environmentally hazardous
substances—CFCs, lead, and costly clean up,
liability.
 Responsibility under state and federal
regulations: Clean Air Act, Clean Water Acts
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 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)
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 Avoid penalties, OSHA reviews.
 Flexible regulation.
 Preempt more direct regulation.
 Voluntary environmental agreements in the US
under the EPA. Negotiated arrangements.
 Firms benefit—lower cost, more flexible
regulation. Can design to be part of competitive
advantage strategy.
 EPA benefits—lower monitoring and enforcement
costs.
 NGO involvement may be made explicit.
 Link to state regulation may be made explicit.
 Usually more available to larger firms—lobby
expenses. Smaller firms use trade groups and the
benefits are spread among the members. Less
competitive advantage.
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 Take away:
 Role of competitive advantage as a means
of capturing some of the public good as a
private good—higher rates of return
(profitability) due to environmental
product differentiation, improved
productivity, cost savings, more flexible
regulation.
 Conditions under which each is successful.
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 Anna Brittain will present her
experiences.