ENVIRONMENT: THE NEXT SOURCE OF COMPETITIVE ADVANTAGE
By Prof. P.D.Jose
The nineties have seen rapid changes in the
competitive landscapes facing businesses. All pervasive environmental regulations
and attendant potential for liabilities, stakeholder pressures, resource and
input scarcities have made effective environmental management increasingly
vital to the survival of almost every firm. Faced with this many firms are
actively trying to convert their environmental management practices into a
source of competitive advantage by moving away from reactive, end of the
pipeline process solutions to proactive ones of identifying and preventing
environmental damages. They are also reexamining, restructuring and redesigning
their structures, strategies, systems and processes to minimize the negative
environmental impacts and maximize positive returns.
How do these competitive advantages arise? Current
research indicates that environmental management may influence a company's
performance in three ways: on the cost side, revenue side or through the
creation/strengthening of competitive advantages.
Beneficial impacts from the cost side are relatively
easier to achieve and have been profitably employed by a number of firms,
particularly those operating in sectors with high raw material or high waste
disposal costs. Smart environmental management measures reduce costs of doing
business by improving resource and energy utilization efficiencies (through
recycling and rationalization of inputs and processes), reducing operating
costs, insurance premiums and potential for liabilities and damage claims etc.
Programmes such as Dow’s ‘Waste Reduction Always Pays” 3M’s ‘Pollution
Prevention Pays’ are based on this philosophy. For instance, an Economist study
indicated that, industries in South Asia which balked at the 10-15% additional
costs added to the cost of a new pulp and paper mills were buying the latest
and cleanest equipment not because of government regulations but since it
reduced operating costs.
The emergence of product liability and packaging
regulations mean that companies may derive significant advantages in the future
from costs avoided due to proactive environmental management. Over the next decade
manufacturers will have to take responsibility not just for their products but
also for what happens to these products during their life time
and even at the end of their lives. Companies are converting this challenge into a source
of competitive advantage. Volkswagen, for instance, guarantees to take back all
cars manufactured after a 10-year life period. Given the high costs of junking
used vehicles and the shortage of dumping spaces, the company would be better
placed than it’s competitors in attracting customers. Also by ensuring the recyclability of components Volkswagen has
cut down the raw material procurement and processing costs simultaneously
achieving first mover and cost advantages. Similar is the case of the consumer
goods industry. Given the current
packaging regulations in Europe, firms that are able to put into place systems
for waste collection enjoy significant advantages over others.
The second benefit gained by firms is through
increased product and market opportunities, and consequently, revenues. This
may be achieved through improved brand equity, improved market access,
increased market realization per unit of product/service, increased market
share or through the creation of new markets.
The third way in which companies benefit from
proactive environmental management is through the creation of newer competitive
advantages or strengthening of existing ones. Competitive advantages in turn
may arise from cost leadership, product differentiation and substitution,
creation of leveraging competencies, innovation, standard setting,
collaboration and first mover advantages. Monsanto for instance created a
positive market image by stressing it’s acre for the environment through strict
plant, material controls. By
simultaneously lobbying for higher standards it became a de facto manager of
regulations. With Monsanto effectively setting the environmental standards it’s
competitors found it difficult more expensive to bridge the gap that had been
created between Monsanto and themselves. In fact, the competitive companies
today follow the Highest Common Denominator approach, i.e., producing
everything to the world’s toughest standards.
The significance of a proactive environmental policy
is clearly evident in DuPont’s committing to a complete and early phase out of
CFCs even though an argument could have been made to adhere to the Montreal
Protocol based time table. The company
thus had a head start over others in the search for alternatives to CFCs. Interestingly, this decision was more beneficial
to the DuPont than originally intended in the light of the later agreements by
the international community to bring forward the deadline for elimination of
CFCs.
As noted above the advantages of proactive and
sensible environmental management are many. It is therefore vital for managers
to consider the environmental trajectories of their products and processes into
corporate planning processes. One of the many methods that may be used for this
is the Environment-Strategy Matrix.
Environment-Strategy
Matrix
The Environment-Strategy (ES) matrix (See Figure 1)
is constructed around the two dimensions of Environmental Attractiveness and
Market Attractiveness and draws upon the GE portfolio matrix. Market
Attractiveness is a combination of various factors related to the market,
competitive intensity, firm competitiveness, technological, and economic
aspects. MA indicates prospects for the
firm within the industry sector in which it operates. Environmental Attractiveness
(EA) is determined by the nature of the environmental impacts, both beneficial
and adverse, generated by the business during raw material procurement, and the
manufacturing, use and disposal of its products and services. The factors that contribute to market and
environmental attractiveness are shown in Table 1. The set of factors which determine the strategic position for any
SBU, product or service within the ES Matrix will be unique to that particular
business. The relative importance of
each of these factors will vary depending on the business environment, the
technology and the strategy of the firm.
The location of an SBU within the matrix will be based on an evaluation
of these factors, internally by the management and externally by experts and
regulatory agencies.
Table 1: Factors Influencing
Market and Environmental Attractiveness
|
Market Attractiveness |
Environmental Attractiveness |
||
|
Market Factors |
Total Market Size Annual Market Growth Rate Total Market Share Annual Market Share Growth Rate |
Internal |
Energy Intensity Environmental Impacts Potential for Accidents Firm's Historical Envtl. Performance Risk to Employees |
|
Firm Competitiveness |
Product Quality Brand Image Technological Lead |
|
|
|
Competitive
Intensity |
No. of Competitors Relative Market Share Barriers to Entry & Exit Rate of New Product Introduction Capacity Utilization Levels |
External |
Regulatory Intensity Expected Regulatory Trends Direct Subsidies Compliance Costs Penalty Costs Power of Pressure Groups Historical Envtl. Performance of the Sector Risk to Customers, Communities and Ecosystems |
|
Technological
Factors |
Maturity of the Market Speed of technological Change Lead Time for New Products |
||
|
Economic Factors |
Contribution Margins Capital Intensity Direct Subsidies |
||
|
|
|
||
The various contexts in which a business may operate
are detailed in Figure 1. Being in the high EA-high MA region (Cell I) is the
most sustainable and strategically advantageous position for the business. Firms
operating in this cell are normally market leaders and innovators enjoying
first-mover advantages. The strategy at
this position should be to focus on protecting leadership. Although SBUs in the
medium EA-high MA (Cell II) category are in attractive market positions in
relation to the environment, they are not market leaders. In this cell environmental performance is
the critical factor that blocks the business move to a sustainable leadership
position within its industry segment. Business units in the low EA-high MA
region (Cell III) have the obvious advantage of being big contributors to the
corporate coffers, but they may increase the financial risk to the firm in
terms of potential liabilities and non-compliance fines.
SBUs and products in the medium EA-high MA region
(Cell IV) could be either in mature markets where the prospects for growth are
low or in newly emerging markets where the potential has not been fully
realized. Correspondingly the basic strategy
would be to increase margins by introducing new procurement strategies in a
mature market or to invest for growth in the attractive segments. SBU's in the medium MA-medium EA (Cell V)
have no significant competitive advantage on market or environmental
attractiveness. For a complacent management
the market share is in danger of being captured by competitors and hence the
protection of the existing market share is very important. Similarly SBUs in
the low EA-medium MA region (Cell VI) should attempt to improve their
environmental performance by seeking alternative technology channels, which are
environmentally friendly as well as competitive. Investments in expansion should be limited to those businesses,
which have good prospects while simultaneously maintaining investments in
environmental protection.
SBUs in the high EA-low MA (Cell VII) are
environmentally attractive, but operate in low growth or stagnant markets. In mature markets the business should be
managed to improve current earnings.
There should also be an effort to protect and refocus the product
portfolio. Those in the low MA and low/medium EA regions (Cells VIII and IX)
are unattractive propositions for the firm.
The situation typically occurs when an SBU has no distinct competitive
advantage, operates in a stagnant market and faces a large number of
competitors. Where the future potential is low the SBUs may be divested.
Transforming
Corporate Environmental Performance
Within the ES matrix the businesses have both
horizontal and vertical mobility. A
horizontal movement signifies a change in the nature of the external effects
generated by the business. It is also useful to note that often movement on one
dimension (MA or EA) causes the SBU to move along the other dimension too. Therefore most strategic transitions would
involve moving diagonally across the matrix.
It is also possible to evolve some rules for
strategy formulation from the ES matrix.
Firms operating on the right side of the matrix should attempt to move
to the left by reducing environmental pollution through resource substitution,
pollution control and environmental auditing.
While those in the extreme left should focus on maintaining leadership
and market share through product differentiation, innovation and cost
reduction. The environmental performance
of an SBU in the low risk category can be improved in the long term by
continuous R & D and innovation.
The goal here should be to move leftwards to environmentally less risky
regions. If a technological break-through or performance improvements are not
possible, it may be appropriate to divest or dispose off these units.
In some cases the movement across the matrix may be
constrained by factors which are outside the control of the management. For
example, when attempting to move vertically, market factors such as overall
market size, annual market growth, barriers to entry and exit etc., can be
influenced only to a limited extent.
Also government policies, the degree of market maturity etc., are
usually outside the control of the individual firm. While moving horizontally from an environmentally unattractive to
an attractive position the firm can manipulate factors such as energy usage,
efficiency, safety precautions and emissions levels.
Conclusion
We have described one of the many tools, which may
be used by firms to improve their environmental performance and gain
competitive advantage. It is useful to note here that the ES matrix can be used
in a number of ways to improve the quality of strategy formulation and
implementation within the firm, including market entry and diversification
decisions, competitive strategy formulation and corporate portfolio
balancing. At the level of the firm,
moving leftwards on the environmental attractiveness axis may increase the
competitive advantages of the business.
These advantages may relate to cost-leadership or cost-competitiveness,
differentiation, resource substitution, the leveraging of competencies,
innovation and standard setting or first-mover advantages. At the industry level, the ES matrix in
combination with conventional portfolio matrix can also be used for analyzing
the competitive structure of the sector in which the firm operates. Once the
relative positions of the different competitors are determined, it is easier
for the management to chalk out strategic plans for countering competition
while simultaneously minimizing environment related risks.
|
|
|
Environmental Attractiveness |
||
|
|
|
High |
Medium |
Low |
|
Market Attractiveness |
High |
1.
Protect Leadership ·
Invest to grow at maximum rate ·
Concentrate efforts on maintaining core strength |
2.
Invest to Improve ·
Move to cell 1 by resource
substitution ·
Build on strengths ·
Reinforce environmentally vulnerable area by changing technologies/processes |
3.Invest Selectively Low Risk ·
Invest to move to cell 2 ·
Improve envtl. performance through innovation and R&D Low Risk ·
Divest/dispose if technological breakthrough unlikely |
|
Medium |
3. Invest to Grow ·
Invest for market growth ·
Invest heavily in attractive segments & move to Cell 1 ·
Build up core competencies to counter competition ·
Emphasize profitability by resource substitution |
5.
Build Selectively ·
Protect existing market share ·
Make investments where industry prospects are high |
6.
Improve or Quit Low Risk ·
Invest in expansion linked to potential: maintain those in pollution
control Low Risk ·
Divest/dispose if unable to move to cell 5 |
|
|
Low |
7.
Protect & Refocus ·
Manage for current earnings ·
Concentrate on attractive segments. Try to move to Box 4 |
8.
Manage for Earnings/ Invest Selectively ·
Protect existing positions ·
Harvest where future prospects are low ·
Minimize investment in expansion |
9.
Divest ·
Sell to maximize cash value |
|
(Source: Corporate Strategy and the Environment: a
Portfolio Approach, Journal of Long Range Planning, Vol. 29, No.4, pp.462-472,
1996.)