Building a competitive advantage through environmental business strategy Flashcards
How to build a competitive advantage through environmentally friendly business practices:
– An environmentally friendly corporate strategy needs to ensure that the business remains competitive and differentiates itself from competitors.
– This necessitates the classification of environment friendly investments according to their potential to become sources of competitive advantage.
Two Generic Business Level Strategies (Porter, 1980)
1) Cost Leadership:
• Maximise economic value by having lower costs than competitors
e.g. IKEA: focuses on price… main attribute of their strategy
e.g. Ryanair or Easyjet… they operate and lower costs and have addressed issues of health and safety
2) Product Differentiation:
• Maximise economic value by offering a product that customers prefer over competitors’ product.
- Some companies are so successful doing this that they operate inelastic demand… People will keep buying their stuff e.g. Apple
Assets and asset types:
An asset is anything the firm owns or controls.
Types of assets:
– Physical (tangible): plant equipment, location, access to raw materials
– Human (intangible): training, experience, judgment, decision-making skills, intelligence, relationships, knowledge
– Organisational (intangible): Culture, formal reporting structures, control systems, coordinating systems, informal relationships
What is a capability?
“bundle” of assets or resources to perform a business process (which is composed of individual activities)
• All firms have capabilities. However, depending on its strategy, a firm will prioritise certain capabilities against others e.g. a focus on differentiation strategy prioritises new product development while a focus on low cost strategy prioritises improving process efficiency.
• The firm’s most important capabilities are called competencies.
e.g. Apple will use its capabilities in a way that’s clearly linked to product development
Resource Based View of the firm theory
Firms can gain sustainable competitive advantage if their resources add value, are rare, inimitable and organised to capture value.
- Valuable - they enable a firm to implement strategies that improve its efficiency and effectiveness (e.g. adoption of a new production system in operation processes that reduces CO2 emissions and improves production effectiveness)
- Rare - not available to other competitors (e.g. first adopters of ISO 14001)
- Imperfectly imitable - not easily implemented by others (e.g. organisational culture). Builds a unique culture, culture is a result of intangible resources…very hard to copy.
- Organised to capture value - the resources do not confer any advantage for a company if they are not organised appropriately (e.g. organise implementation of management systems (e.g. ISO14001, ISO5001 and ISO9001 in a way that they complement each other to maximise benefits).
4 strategies to build competitive advantage through environmentally friendly practices: Orsato (2006)
Strategy 1: Eco-efficiency
Strategy 2: Environmental cost-leadership
Strategy 3: Beyond compliance leadership
Strategy 4: Eco-branding
lower costs: 1 2
differentiation: 3 4
organisational processes p/s
Strategy 1: Eco-efficiency
Firms should focus on resource productivity in the form of materials savings, increases in process yields, and better utilisation of by-products.
- Innovation major factor into transforming costs into profits and enhancing competitiveness + it leads into more efficient use of limited resources (Porter and Claas van der Linde, 1995).
- Waste essentially is an inefficient way of managing resources
- Reintroduce by products into process e.g. Plastic paper cardboard OR produce new products
DuPont and Eco-efficiency
DuPont’s mission: “increasing shareholder and societal value while decreasing the company’s environmental footprint along the value chain in which we operate”.
Three main strategies:
– Reduce consumption of raw materials and energy;
– Integrate chemistry, biology and technology to create products with greater societal value and lower environmental impact;
– Engage stakeholders.
How do they do that?
- Organising resources in a way that adds value. Allows their firm to reduce its ecological footprint.
- They invest into rarity to develop something quite unique not adopted by others.
- As part of its ‘Responsible Care’ strategy Dupont aims to increase transparency and communications between the plants and the communities in which they operate.
- Managers’ report on a quarterly basis and they need to report on their performance to shareholders
- DuPont settles lawsuits over leak of chemical used to make Teflon
Strategy 2: Environmental cost-leadership
Many firms might expect from an ecologically oriented business strategy price premiums for their products.
- In niche markets this might be possible….., but what about the vast majority of markets with reduced scope for differentiation?
- Things are challenging when it comes to saturated markets, makes environmental issues less appealing to managers.
- How can you invest into something that doesn‘t pay directly? It takes a while until you break even, then you will start making profits.
Colgate – Palmolive and Cost-leadership
Colgate’s approach consists of three main pillars:
- ‘People’ refers to initiatives and corporate policies developed to engage stakeholders in business operations. e.g. nine-consumer innovation centres the company set up to ascertain consumers’ preferences and generate products according to their needs.
- It’s rare and not something competitors can easily do.
- They think of ideas and take them into development phases taking things into concern in doing this they try to improve culture which is sensitive to sustainability. - In the ‘performance’ domain, the firm provides financial information and data on the actions it undertakes to manage its corporate responsibilities effectively and produce products that have a positive social and environmental impact.
- e.g. improving ingredient biodegradability and the recycling of packaging. - ‘Planet’, the company includes actions undertaken to combat the climate change phenomenon, and its planet-related commitments to address energy consumption, water use, waste management and greenhouse gas emissions.
- All this work has been widely recognised, as the company was included in Ethisphere’s list of the World’s Most Ethical companies.
Strategy 3: Beyond compliance leadership
For some firms increasing efficiency and achieving cost leadership and environmental protection is not enough!
They want to disclose information about their activities so that their stakeholders are aware of their actions.
e.g. EMS certification (ISO 14001, EMAS); use of reporting schemes such as GRI; use of other tools/ initiatives e.g. the CERES roadmap for sustainability.
Abengoa and Beyond compliance leadership
- Specialises in the generation of electricity from renewable resources, the conversion of biomass into biofuels and the production of drinking water from seawater.
- Abengoa operates several R&D centres to improve the efficiency of its current innovative solutions for sustainability and to develop new solutions such as marine energy.
- CR management system in line with ISO 26000, has adopted the UN Global Compact and has created a computer-based integrated sustainability management system.
However…..
- Major flaws in their financial statements and almost declared bankruptcy… We might have issues that challenge our perception of CSR.
- Result of negative publicity would have been entirely different if they weren’t so reputable and shareholders probably would have walked away.
Strategy 4: Eco-branding
Marketing differentiation based on the environmental attributes of products.
e. g. Big companies buying out small companies – why? Why don’t they invest and create their own Innocent?
- They can learn things from innocent… part of their culture. Very difficult to copy that.
- Easier and quicker way of improving image of Coca Cola, instead of starting from scratch these guys have their own market share.
Seventh Generation and Eco-branding
- Recently acquired by Unilever
- The company sells cleaning, paper, and personal care products generated with human and environmental wellbeing in mind.
- It uses materials based on plants that are grown and harvested responsibly, and not petroleum-based materials.
- Seventh Generation created the Companies for Safer Chemicals organisation to promote the reform of state and federal regulations on toxic substances, so that environmental protection and sustainability are safeguarded and effectively addressed in legislation.
- they also had scandal of fake claims but had very little backlash because of rep.
Key takeaways
– Cost leadership and differentiation are two main strategies companies use to gain a competitive advantage;
– Investment into key resources (competencies) enables firms to not only maintain but also enhance their advantage;
– To do so, resources need to add value, be rare, non-imitable, and organised in a way that adds value to the firm;
– When it comes to environmental protection companies can adopt 4 strategies to gain a competitive advantage through the use of environmentally friendly practices.
– These strategies might not necessarily be mutually exclusive.
Environmental Improvement Process Benefits (Porter and van der Linde, 1995)
- materials savings resulting from more complete processing, substitution, reuse, or recycling of production inputs
- increases in process yields
- better utilisation of by-products
- conversion of waste into valuable forms
- reduced material storage and handling costs
- elimination or reduction of the cost of activities
involved in discharges or waste handling, transportation, and disposal
Environmental Improvement Product Benefits (Porter and van der Linde, 1995)
- higher quality, more consistent products
- lower product costs (for instance, from material
substitution)
- lower packaging costs
- more efficient resource use by products
- lower net costs of product disposal to customers
- higher product resale and scrap value
drawbacks of strategies
- Time
- Conversion Expense
- Costlier Products
In some cases, the switch to using green materials can lead to more expensive products for consumers, e.g. importing products from other suppliers. - Lack of Support
There can be an “entrenched bias” against companies that want to go green. e.g. stakeholders doesn’t believe benefits - Customer Backlash e.g. greenwashing.
- Decreased Productivity
