Environmental Product Differentiation

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Environmental Product Differentiation:
IMPLICATIONS FOR CORPORATE STRATEGY

Forest L. Reinhardt

roducers of toilet tissue, outdoor wear, tuna, beef, investment services, trash bags, and herbicides have recently positioned their products as environmentally preferable, with the idea of capturing a price premium, winning new customers, or both. Managers are looking for ways to reconcile their need to deliver shareholder value with intensifying demands for improved envirofimental performance. Perhaps the most straightforward way to do so is'to provide environmentally preferable products and then capture the extra costs from consumers.

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Environment and Business: A Debate Derailed
The debate about business and the environment is polarized. A group of business academics asserts that "it pays to be green." That is, they argue that firms can increase profits if they set ambitious environmental targets, lobby for tighter not looser government regulation, and make the environment the central organizing principle of their businesses. In this view, it is clear that the environmental problems society confronts are significant and that firms can and should profit from contributing to their solutions.' A second group of executives and business academics, emphasizing that firms exist to serve their shareholders. 'Numerous colleagues and friends have helped me to clarify my thinking on the points discussed in this article, including Bob Dolan, Alexander Dyck Pankaj Ghemawat, Robert E. Grady,Tom McCraw, Cynthia Montgomery, David Moss, Kash Rangan, Julio Rotemberg, Bruce Scott, Deb Span Richard Tedlow, Dick Vieton Lou Wells, and Steve Wheelwright. I am indebted, as well, to John Sawhill and his colleagues at The Nature Conservancy, to California Management Review editor David Vogel, and to two anonymous referees at the Review. Remaining errors are mine.

CALIFORNIA MANAGEMENT REVIEW

VOL. 40, NO. 4

SUMMER 1998

43

Environmental Product Differentiation

responds that this first view is not very realistic. In this second view, managers who lose their focus by chasing environmental objectives cannot compete effectively with those who keep their eyes on the goal of shareholder value. If pursued beyond compliance with government regulations, environmentalism in companies is likely to divert management attention and capital from the real problems of the business.'^ In a recent article in the California Management Review, Dennis A. Rondinelli and Gyula Vastag assert that "the debate over whether environmental protection poses a threat or opportunity for business will not soon be settled."' In fact, that debate will never be settled, because it has been framed in the wrong terms. Instead of asking whether it pays to be green, we ought to be asking about the circumstances under which it might pay. A business's behavior with respect to the environment, like any other aspect of strategy or management, should be considered in the light of the basic economic situation of the business: the structure of the industry in which it competes, its own position within that industry, and its internal organizational capabilities. It is necessary to understand this basic economic context in order to think sensibly about businesses' response to the environmental challenge. Without this understanding, prescribing environmental policies for firms is just sloganeering. If a group of business academics wrote that all firms ought to seek differentiated niches in their marketplaces, or that all should maintain debt to capital ratios of 40%, or that all should seek maximum employee empowerment, executives would not take them seriously. The executives would respond, correctly, that the answers depend on the nature of the business. Human resource management policies are appropriately different at law firms as opposed to restaurants, financing policies appropriately different in food processing as opposed to data processing, and marketing strategies...
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