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Frontmatter

Fundamentals

Frontmatter

1. When Does it Pay to be Green?

The possibility that business can profit from environmental investments — the win-win hypothesis1 — has captured the imagination of academics, managers and the general public for quite some time. If investing in environmental protection were profitable,2 normal business practices would be conducive to sustainable societies. Based on this premise, academics have persistently looked for causal relationships between environmental investments and variables such as stock price and market share.3 The business case for sustainability exists indeed. Business schools around the world teach success stories of environment-oriented investments (or eco-investments, for short) that paid off, generated competitive advantage or even new market spaces. But if there are so many advantages for business, why is corporate proactive behavior not a widespread phenomenon? Why hasn’t commerce yet led us to sustainable societies? Although simple, it took a while for people to realize that the profitability of environmental investments is similar to other issues in business: it is conditional on specific circumstances. As Forest Reinhardt4 put it, the question is not whether corporations can offset the costs of eco-investments, but when it is possible to do so. In his view, the possibility for corporations to profit from eco-investments depends on “the economic fundamentals of the business, the structure of the industry in which the business operates, its position within that structure, and its organizational capabilities”.5 Hence, directing a firm’s efforts toward profit generation from cleaner technologies or green products might make business sense in certain circumstances, but not in all.

2. What are Sustainability Strategies?

Organizations will always have room to improve the productivity of resources and so reduce their overall environmental impact. Indeed, in trying to go beyond compliance, firms have increasingly adopted a wide spectrum of social and environmental prerequisites into their strategies and practices. But while most companies are expected to become better citizens, in each industry only a few will be able to transform environmental investments into sources of competitive advantage. As with any other issue in business, environmental management is contingent on the internal capabilities and the context in which firms operate. Considering that sustainability strategies are constituents of the generic corporate strategy, one could then ask: what sustainability strategies are conducive to the creation of competitive advantage or new market spaces?

Competitive Environmentalism

Frontmatter

3. Eco-Efficiency

All organizations pursue resource productivity to differing degrees. By optimizing the overall use of resources, such as the reduction of energy consumption and waste, companies can also reduce the costs associated with them and, consequently, become more competitive. However, as emphasized in Chapter 2, even if resource productivity is conducive to higher competitiveness, it cannot be considered a strategy per se. Resource productivity is part of the overall operational effectiveness that companies need to adopt in order to remain competitive. If this is the case, why then is Eco-efficiency portrayed as a generic type of competitive environmental strategy on p. 30? If resource efficiency is a well-known management practice that every organization should pursue, would it not be just operational effectiveness? Or is there something fundamentally new about ecology-oriented efficiency?

4. Beyond Compliance Leadership

Some companies operating in resource-intensive industries are often on the radar of eco-activists. For such firms, it is vital that customers and the general public know about their efforts to go beyond compliance. They spend money certifying Environmental Management Systems (EMSs) according to International Organization for Standardization (ISO) 14001 or subscribing to other voluntary environmental initiatives, which may require them to pay membership fees and make commitments to reduce the overall impact of organizational processes. Companies in the energy and oil business, for instance, are among those that have been spending millions not only to go beyond compliance but also to advertise their green credentials. These companies have been doing their best to demonstrate their commitment to reducing the impact of operations, going beyond what is required by law so that demanding stakeholders see them as leaders in environmental protection.

5. Eco-Branding

The prospect of differentiating products and services has always appealed to business. After all, who would not want to have loyal customers who pay premium prices so the company can avoid razor-thin margins of price-sensitive markets? Higher margins allow the company to better absorb market fluctuations and invest in R&D, among many other good things brought by wealthy customers. In order to differentiate from competitors, firms try to provide something unique that buyers value beyond the price.1 In one way or another, all companies try to do this — even when competing on the basis of low price. They try to be unique so that their clients will prefer them. However, success depends less on the efforts to be different than on how consumers value these efforts and, more importantly, whether they are willing to pay for it.

6. Environmental Cost Leadership

Companies strive to distinguish their products and services. They do their best to present them with features that consumers eventually value higher than rivals’. Such efforts often lead to higher costs, and aiming at price premiums via differentiation strategies is a viable solution for these companies to cover such costs. When it comes to eco-oriented products, it is not much different. As explored in detail in Chapter 5 if being green costs more, the company has little choice but to try to obtain returns from eco-investments via eco-branding strategies. This is okay for firms that are able to tap into niches for eco-oriented products but, by their very nature, niches represent only a small slice of the market. No matter what efforts companies make, markets have limited scope for differentiation. Industrial markets (or business-to-business — B2B), in particular, have a very strict sense of costing, and obtaining price premiums is normally attached to eventual savings during product use. In other words, no matter how eco-friendly a product is, when competing in price-sensitive markets, it has to be cheap first.

Beyond Competition

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7. Sustainable Value Innovation

The preceeding chapters presented the four Competitive Environmental Strategies (CES) available to corporations to compete in existing industries (Part II). This chapter presents the fifth sustainability strategy, which builds on the concept of value innovation. According to the logic of Blue Ocean Strategy (BOS), by creating additional value to customers at lower costs, companies can bypass the competition in an existing industry because such value innovation can generate new markets spaces or, to use the BOS metaphor, “a blue ocean where the company can swim alone”. BOS also presents a subtle caveat: as long as value innovation is created to existing or previously neglected non-customers, environmental impacts resulting from the new offer do not restrict its deployment.1 On the other hand, as the chapters of Part I suggested, sustainability strategies entail embedding the value proposition of the company (private profits) into the broader environmental and societal context (public benefits). This means that the creation of Sustainable Value Innovation (SVI) requires companies to lower costs and increase consumer value while generating public benefits in the form of reduced environmental impacts and value for society.

8. Sustainability Strategies and Beyond

Sustainability strategies are choices available to managers to align environmental and social investments with the generic strategy of the company. Such investments are similar to others in business: only a few will generate private profits. In the same way that an athlete fit to win the marathon has a slim chance of also winning the 100 meters, a company fit to apply for an eco-label may not be suitable to compete in the bio-polymers markets or become the leading organization in setting up a Green Club. As strategy entails choice, adequate competences require some level of specialization. Companies have good reasons to generate public benefits by going beyond compliance and reducing the environmental impacts of processes, products and services as much they can (to be fit). For some, however, the possibility of generating competitive advantage out of eco-branding, for instance, is higher than from other sustainability strategies (to be the best). Hence, while addressing stakeholders’ expectations, managers should not be distracted from the most appropriate strategic focus for their companies. By choosing to focus on a particular sustainability strategy based on solid business principles, they are also addressing shareholders’ expectations. They are investing in the areas that will generate public benefits with the best chances of creating competitive advantages or new market spaces for the firm.

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