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FROM ENVIRONMENTAL MANAGEMENT TO ENVIRONMENTAL STRATEGY
Annual costs for pollution control in the United States rose from $27 billion in 1972 to more than $90 billion in 1990 and are projected to reach $155 billion by the year 2000. No small sum, this will amount to roughly 2 percent of U.S. gross domestic product. The effect of such expenditures on economic competitiveness is clear. Or is it?
There is little disagreement that environmentalism affects corporate management, altering profit and loss statements and influencing both domestic and international strategy. Yet, although many within industry and government vilify environmentalism as a threat to economic growth, others take advantage of the economic opportunities it offers. For example, the Carrier Corporation, a division of the United Technologies Corporation, invested $500,000 to eliminate its use of toxic solvents to clean copper and aluminum parts in the manufacture of air conditioners. By the end of one year, the company recouped $1.2 million in reduced manufacturing costs. E. I. du Pont de Nemours and Company implemented a $500 million capital improvement plan at three chemical plants in North Carolina and South Carolina, which, reduced emissions of airborne toxins by 60 percent and increased production by 20 percent. Electrolux has developed environmental products, including a solar-powered lawn mower, chain saws lubricated by vegetable oil, and water-saving washing machines, that generated 3.8 percent higher profits in 1997 than did its conventional products.
What is going on here? What allows these companies to see an opportunity where others see only a threat? Are these examples unique in the business world? Or do they represent business managers thinking about environmental issues in a strategic way? The answer to this last question is yes. Dissecting the support for this answer is the focus of this book.
At the core is a simple and straightforward question—what is the relationship between environmental protection and corporate competitiveness? There are presently two schools of thought: (a) the win–win perspective and (b) the win–lose perspective. Pollution reductions either (a) boost or (b) inhibit corporate productivity and success in the marketplace; environmental affairs are either (a) a source of competitive advantage or (b) a drag on the firm's resources and opportunities. Which argument is right? Clearly, there are costs to environmental protection. But with increasing frequency, there is also evidence of companies gaining competitive advantage through opportunities revealed by environmentalism. The truth is that both the win–win and the win–lose perspectives are right. And they are both wrong. Simply put, they are unrealistically simple and unnecessarily polarized views of a complex issue. As is often the case, the answer lies somewhere in between. In this middle space lies a need for trade-offs and strategic decision making. In the next section, we will consider each perspective in turn and then discuss a third one, the strategic perspective.
Building a Framework for Corporate Environmental Strategy
The dichotomous framing of the environment-economics debate shares parallels with the dispute resolution field of the mid-1980s, in which writers argued whether to follow a win–lose or a win–win framework. Or, in the terminology of the negotiations literature, they argued over whether to follow a distributive or an integrative framework. We can understand our focus of study more clearly if we learn from this debate and the way it was resolved.
The Win–Lose Perspective
The first framework, the win–lose (distributive) framework, is the traditional formula for developing environmental regulation. It is based on a comparison of the beneficial outcomes of pollution control policy and the costs necessary for industry to secure them. By the very nature of this "cost-benefit" framing, environmental and business interests are set up in a state of opposition—environmental benefits can be gained only by imposing an economic cost. By definition, the balance between economic costs and environmental benefits becomes a zero-sum game. It can be seen in the rhetoric of articles and papers on the topic. For example, an article in the Journal of Economic Perspectives states that increasing stringency of environmental regulation "must," by its very nature, result in reduced profits for the firm. Similarly, an often cited article in the Harvard Business Review argues that the trade-off is a "necessity" for achieving environmental improvements.
Aggregate empirical data support much of this thinking. Environmental health and safety regulations increased from ten modest statutes in the late 1960s to more than forty-five very complex regulations in 1990. As a result, firms in the United States devote significant resources each year, net of cost savings, to environmental protection. This led Brad Whitehead and Noah Walley of McKinsey & Company to a sober approach to corporate environmental strategy. "Ambitious environmental goals," he wrote, "have real economic costs. As a society, we may rightly choose those goals despite their costs, but we must do so knowingly. And we must not kid ourselves. Talk is cheap; environmental efforts are not." Thus, regulation forces companies to do what they would rather not. Viewing environmental issues through this perspective leads corporate managers to see them strictly as matters of regulatory compliance or corporate social responsibility and not related to competitive strategy.
But in the negotiations literature, win–lose models are seen as incomplete because they ignore the possibility of outcomes that can be better for both parties. As shown in figure 1.1, distributive bargaining allows environmental gains to be achieved only at the expense of economic growth. That is, the pool of resources is considered fixed, and parties negotiate over their allocation. As environmental protection is weakened, we move to the southeast (point B), satisfying economic interests. As environmental protection is strengthened, we move to the northwest (point C), at the expense of economic interests. Mutual gain solutions are outside the realm of possibility.
The win–lose perspective reinforces confrontational rather than cooperative approaches toward resolving opposing interests in real-world conflicts (such as the escalated tension accompanying logging practices in the face of endangered species protection or power generation under increasingly stringent clean air requirements). On the basis of win–lose positions, economic and environmental interests fight a battle over concessionary agreements, with each side pursuing its own goals. Moreover, the two parties often demonize each other. Environmentalists are perceived as insensitively seeking environmental protection at all costs and willing to sacrifice economic development and human economies toward that end. Corporate decision makers are perceived as pursuing economic growth at all costs and willing to forfeit environmental considerations to increase profit. Joint solutions through cooperative decision making become impossible. Yet clearly, this is not always true.
The Win–Win Perspective
The second framework, the win–win (integrative) framework, proposes that the needs for environmental protection and economic growth can be mutually satisfied. The argument of the win–win proponents is that the economics–environment relationship is a false dichotomy when framed within the cost–benefit model. They see no trade-off between the two. Instead of defining environmental gains in opposition to economic costs, this school of thought holds that "the costs of addressing environmental regulations can be minimized, if not eliminated, through innovation that delivers other competitive benefits" to the firm. The cost–benefit equation is reconstructed to include economic gains that offset economic costs. In essence, the term economics in the economics-versus-environment debate is redefined in cooperative rather than competitive terms, with environmental benefits.
Some argue that economic benefits can be gained through "innovation offsets," which can lead to absolute advantages for firms seeking creative responses to environmental regulation that are consistent with the firms' competitive objectives. For example, Harvard Business School professor Michael Porter and his co-author Claus van der Linde argued that "emissions are a sign of inefficiency and force a firm to perform non-value creating activities such as handling, storage and disposal ... reducing pollution is often coincident with improving the productivity with which resources are used." Another supporter of this argument, Al Gore, argued that "some companies have found that in the process of addressing their environmental problems they have been able to improve productivity and profitability at the same time ... an emphasis on environmental responsibility makes good business sense." In the end, win–win proponents argue that the key to realizing such benefits lies in "a new frame of reference for thinking about environmental improvement," one that steps out of the traditional cost–benefit model.
Anecdotal evidence supports this argument. For example, Balzers Process Systems, a manufacturer of equipment used in the production of optical components, semiconductors, and compact discs, faced an environmental compliance problem in 1991. Balzers used Freon to clean parts before shipment, but the Environmental Protection Agency (EPA) had fined the small company $17,000 for leaks in its system. As a term of the settlement, the company sought a new cleaning process. It switched to a water-based solution in 1993, eliminating the use of Freon entirely. The company found that with no change in customer satisfaction, the new system cost half of what the old system had cost to run, about $100,000 per year. Furthermore, the new cleaning system posed no threat to employee safety, as had the Freon system. In the words of Paul Keough, deputy regional administrator for the EPA, "Here's a situation where we had a problem with a company and they used it as an opportunity." Only after the EPA forced the company out of its old mind-set was it able to find the economic opportunity that was exposed by environmental improvement.
But is this framework too simple? In the negotiations literature, win–win models are seen as shortsighted in their failure to address the inevitable distributive aspect of most negotiations. As depicted in figure 1.2, integrative bargaining allows for a steady satisfaction of both environmental and business interests. In reality, however, the win–win formulation is possible only in certain circumstances. It is not always possible to achieve all of one's interests and have the other party do so as well. The costs of environmental protection are at times real and have to be acknowledged. For example, federal efforts in 1991 to protect the northern spotted owl in the Pacific Northwest excluded large tracts of federal land from logging. The supply of raw timber decreased, mill capacity was eliminated, logging jobs were lost, and lumber prices increased. The distributive aspect of the relationship between economics and the environment cannot be denied.
A Strategic Perspective
A more balanced and accurate approach to handling corporate environmental issues is to recognize that the relationship between environmental and economic interests is neither purely cooperative nor purely competitive. Even the case of the northern spotted owl has both integrative and distributive components. Although some logging companies were hurt by restrictions on the timber supply from federal lands, windfall profits accrued to others that relied on timber from private lands and smaller, more efficient timber mills. Today, Oregon remains one of the largest producers of timber products in the United States, but instead of relying on 300-year-old trees from public lands, the industry obtains smaller timber from privately held, sustainable tree farms. Despite a cutback in timber-related employment, most timber-dependent counties in Oregon report rising property values, increasing timber-related wages, and an overall increase in jobs. This is due to newer and leaner operations that have risen up to replace the aging mills and retraining of the workforce for the region's growing high-tech industry. Thomas M. Power, chairman of the Department of Economics at the University of Montana, reported that from 1988 to 1994, jobs in the region grew by 18 percent, contrary to dire predictions; his report was endorsed by thirty-four economists from the Pacific Northwest.
The disagreement between the win–lose and win–win arguments centers on the extent to which real opportunities exist for improving production processes through environmental protection. Win–lose proponents argue that although some mutual gain in economic and environmental interests may once have been possible, those opportunities have long since passed. The "low-hanging fruit" of environmental opportunity was found when the pollution control emphasis was on early (and simple) reductions in pollution. Now, they argue, as we move toward ever stricter controls, those opportunities are more difficult to find, if they exist at all. Win–win proponents counter with the oft-told story of the economist walking with his son. The son tugs on his father's coat and says, "Daddy, there's a twenty-dollar bill on the ground." The father replies, "It couldn't be, Son. If there was, someone would have already picked it up by now."
Amory Lovins, director of research for the Rocky Mountain Institute, has challenged this kind of thinking in terms of the problem of climate change, arguing that "we do not need to worry about how the climate science turns out or whether this is a real problem or not." Instead, he believes that "protecting the climate will be highly profitable rather than costly." He sees "$10,000 bills lying all over the floor" of factories "of every imaginable variety" and believes that climate change can be controlled with positive consequences for the bottom line. His point is that companies are not always on the innovation frontier and often do not recognize opportunities that lie before them. Most business executives concede that there are opportunities in energy conservation but are convinced that climate change will impose serious costs on industry and that hidden opportunities are not as abundant as Lovins suggests. The middle ground between these views highlights two facets of the issue. First, markets and companies are not always efficient, and therefore, environmental improvements may offer strategic benefits (integrative opportunities exist). Second, business managers are not stupid, and it would be naive not to acknowledge that environmental initiatives often cost companies significant amounts of resources (distributive aspects cannot be denied).
In the negotiations literature, a balance between integrative and distributive thinking is referred to as a mixed-motive model. The mixed-motive perspective acknowledges the possibility of mutual gain solutions while simultaneously acknowledging their distributive aspects. As shown in figure 1.3, opportunities often exist to merge the win–win and win– lose perspectives. Negotiators can expand the realm of possible outcomes through more creative responses to environmental pressures (from point A to point D) and then allow each party to argue over whether to move toward point E or point F. For example, to gain a rancher's endorsement of a plan to reintroduce endangered wolves into Yellowstone National Park, environmental groups created a special fund to compensate the rancher for any loss of livestock due to wolf predation. The introduction of a new variable reduced the rancher's downside and enabled the parties to reach a compromise.
Excerpted from Competitive Environmental Strategy by Andrew J. Hoffman. Copyright © 2000 Island Press. Excerpted by permission of ISLAND PRESS.
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