ESM 210 Review

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ESM 210 Review

• ESM 210 Fall 2008
• Course Objective Enable MESM Graduates to work
  with and within firms to achieve environmental
  and natural resource objectives.
• Understand the organization of a firm
• Factors influencing firm behavior
• Special problems of externalities and open access

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• Debate over the social responsibility of
  business.
• Firm green differentiation strategies
• Firm innovation, supply chain management, life
  cycle analysis, cost control.
• Measurement.
• Policy interfacetax, regulation, market.
• Special case of emission trading.

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• Problem sets
• Analyzed Toyota and General Motors as to their
  different records regarding hybrid cars firm
  structure, size, major markets, marketing
  decisions, environmental drivers, input supply
  conditions.
• Debate over the Social Responsibility of
  Business Profit sacrificing.
• Used Reinhardts product differentiation strategy
  to examine General Electric and Deckers.
• Comparative environmental performance of HP, IBM,
  Intel/Exxon Mobil, BP, Shell.

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• Types of firms
• Sole owner.
• Partnerships.
• Corporation.
• Cooperatives.

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• Key parties
• Investors (share owners). 30 of the population
  owns stock or mutual funds. Others pension funds
  are major equity owners.
• Employeesfirms are the major employers in the
  economy.
• Consumersfirms are the major providers of goods
  and services.

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• Society RDfirms are the major sources of
  applied technology and innovation.
  Entrepreneurship.
• Structure
• Objective
• Profit maximization
• Sum of the discounted residual of expected
  revenues-expected costs.
• Most controversial aspect.

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• Drivers of environmental positions.
• Hoffman slide (Hoffman, 2000, p. 17).
• Regulatory
• Tax
• Regulation
• Market instruments
• Uncertainty
• Efforts to mold policy and gain a strategic
  advantage

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• Drivers Financial resourceinvestors, insurance
  companies, banks
• Risk to insurance companies for liability for
  environmental damages. Strict liability
  negligence rules. Depends on how the law is
  structured.

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• Drivers Consumers
• Willingness to pay of some market segments
• Changes in taste.
• High incomes.
• High education levels
• This is a fundamental challengemarket
  differentiationmarket segmentation, determining
  willingness to pay, barriers to entry.

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• Which consumer groups will be concerned about
  environmental quality?
• Drivers Competitors
• Lose competitive position vis a vis competitors
  who more rapidly and credibly respond to market
  demand for environmental action.
• Alternatively gain competitive advantage vis a
  vis competitors who do not meet new demands.
  First mover.
• Toyota-General Motors example.

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• Drivers Trade Associations and other forms of
  collective action.
• Use norms, rules for members to follow.
• Group certification.
• Drivers Suppliers
• Risk of lost business when suppliers are linked
  to one or two producers.
• Alternatively, supply chain managementfirm seeks
  to avoid problems with suppliers in supply chain.
  Damage product or service reputation in the
  market. Firms can require that their suppliers
  adhere to certain environmental standards

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• Drivers NGOs
• Can be influential interest groupsboth as a
  market segment and as a political force.
• Source of legal challenges. Uncertainty. Time
  costs.
• Cooperate. Place on Board of Directors, etc.
• Cooperate in design of policy. Environmental
  Defense.

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• Other drivers
• Employeesmotivation and company culture.
• Press and other mediamold demand.
• Religiousmold taste regarding the environment.
• Academyresearch on impact. Information.

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• Firms face market pressures as they consider
  responding to environmental problems.
• Demand issues.
• Price elasticity of demand.
• Want it to be less than one.

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• Supply issues.
• Cost of responding.
• Innovation options.
• Input costs and past contracts may limit options.
• Government policiessubsidies, tax, regulation.
• Productivity, cost and firm size. Returns to
  scale, constant cost, increasing cost. Small
  firms may have fewer options? Or be more flexible.

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• Market structure as it affects firm response.
• Competitive
• many firms, many very close substitutes, ease of
  entry, consumer power, high price elasticity,
  pressure on price and cost.
• Commoditiescomputer hardware, ag products
• Trade. Globalization.
• In such markets firms may be reluctant to adopt
  environmental products or processes. Why?

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• Monopolistic competition.
• Many firms, somewhat differentiated products.
• Ease of entry.
• More market segmentation possible.
• Mass retail.
• Specialized retail, niche markets.
• Possibly limited individual firm response to
  environmental pressures. Why?

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• Oligopoly.
• Few firms.
• Differentiated products.
• Lower price elasticity of demand.
• More power over price and output. Price
  discrimination possible.
• Market segmentation.
• Firms may be more responsive to environmental
  demands. Why?

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• Monopoly.
• One firm.
• Differentiated products.
• Price discrimination.
• Low price elasticity of demand.
• Market segmentation.
• Firm may or may not be responsive to
  environmental demands. Why?

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• The Macro Economy and Firm Response to
  Environmental Problems.
• Understand the impact of business cycles on
  environmental action
• Relationship between income/wealth and
  environmental quality and the dilemma these
  relationships pose for environmental managers.
• Business Cycles.
• Important impact on employment, consumption,
  competitive pressures.

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• Income elasticity of demand.
• Periods of slow growth may pose challenges.
• Environmental Kuznets curve.

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• What does this mean for firms and the
  environment?
• For firms that outsource production in developing
  countries, early on there will be limited local
  pressure for environmental safeguards.
• As development proceeds and per capita growth
  occurs, local interest will increase and
  receptivity to external pressures from NGOs and
  others for environmental improvements in supply
  chain management will grow.

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• Findings
• No monolithic Corporation
• Different histories and somewhat different
  structures.
• Different target markets wrt willingness to pay.
• Short term vs long term emphasis and constraints
• Employee costs
• Unions
• Capital markets
• Regulatory environment
• Presentation by Anna Brittain on her experiences
  with small firms in Northern California.

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• Objective Understand the problem of public
  goods and externalities and why they are
  particularly difficult for private-sector firms.
• The problem of Externality
• This is why environmental and certain natural
  resource problems are fundamentally different
  from other firm issues of product development and
  marketing, labor and other input selection and
  management.

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• How to solve the problem? Fisheries, water, air
  emissions.
• Regulation.
• Tax
• Assign property rights.

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• Firms and Externalities the special problem of
  the environment.
• Firms are organizations to create and capture
  value.
• The residual of PgtC goes to cover costs and
  payments to investors.
• Focus of managers on profit maximization.
  Attention to revenues and costs.
• Externalities require inclusion in the cost or
  revenue structure.
• Problem of appropriability.

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• Need to capture a portion of the public good.
• Environmental product differentiation. WTP.
  Convey credible information. Prevent entry.
• Cost reduction. Industry and firm structure.
  Value chain and supply chain analysis.
• Risk Management. Information investment. Changes
  in probability of environmental events, changes
  in cost and liability.

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• Becomes incentive compatible.
• Firms voluntarily provide environmental benefits.
• Becomes part of their product offering.
• Becomes part of their production, supply chain,
  and cost management.
• Alternative is Corporate Social Responsibility,
  where it is defined as profit sacrificing actions
  to provide public goods.

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• The Social Responsibility of Business Debate.
• the question of whether or not managers should go
  beyond this, to sacrifice profits in order to
  provide greater environmental protection?
• Understand the CSR debate and how it relates to
  environmental management.
• Definition of CSR and various perspectives.
• Measurement of CSR.

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• CSR
• Legal
• Ethical
• Economic/Business

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• Application of CSR Firm Water Policy
• Taking actions that are consistent with
  profitability in avoiding costly regulation,
  community, and consumer reaction.
• Taking actions driven by external pressures that
  are riskier and more rapid than the firms
  managers would prefer.

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• Develop and implement a water strategy
• Conduct a water use assessment across the supply
  chain
• Evaluate water related risks within the value
  chain and the supply chain.
• Supply issues?
• Quality issues?
• Who is affected?
• Risk?
• Reputation?
• Production?
• Distribution?
• Input supplies?
• StakeholdersNGOs, media, government

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• Sectors (Value chain analysis) and water
  usevolume, source, impactquantity, quality.
• Sourcinginputs, storage
• Productionmanufacturing, assembling, storage
• Packaging
• Distributiontransport, storage, support,
  marketing.
• End of liferecycling, disposal.
• Facilities at all levels and divisions.

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• Risk Management
• To change the probability that the environmental
  event occurs through changes in the supply chain
  use of water.
• To change the losses involved.
• To change the firms liability.
• To change the managers liability.
• To obtain more information on mitigating the
  problem. To change corporate culture.
• To evaluate the costs and benefits of these
  actions.

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• Cost-benefit analysis involves
• Evaluation of uncertainty,
• Ease of implementation,
• Assessment of impact on supply chain,
• Visibility,
• Community, market good will.
• Coordinate managerial levels and set firm initial
  agenda
• hardware response (inputs, supply chain),
• operational response (production, RD, delivery),
  
• employee response,
• consumer response (marketing).

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• Interact with relevant stakeholders on
  implementation
• Community
• NGOs
• Shareholders
• Employees
• Government
• Operationalize.
• Document.
• Communicate.
• Evaluate.

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• Environmental Product Differentiation.
• One way that a firm can enhance its competitive
  advantage by being environmentally friendly via
  product differentiation. Internalize public
  goods.
• Another is Innovation and cost reduction through
  lifecycle analysis, supply chain analysis,
  industrial ecology.
• Another is productivity enhancement also via
  lifecycle analysis, supply chain analysis,
  innovation, and industrial ecology.

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• Willingness to pay (WTP) among a market segment.
  Demonstrated value with no substitutes.
• Provision of credible information about
  environmental benefits and other product
  characteristics and how these benefit consumers.
  Brand. Reputation. Nature/attractiveness of the
  externality or environmental problem. Nature of
  the data.
• Barriers to imitation. Capturing value. First
  mover. Knowledge of segment. Regulation. IP.
  Competition drives the value to consumers. Why is
  this a problem for environmental product
  differentiation?

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• If successful, these actions allow the firm to
  capture some of the public goods of environmental
  quality as private goods. Product differentiation
  gives the firm greater pricing power within its
  market.
• Key is whether or not there is value created and
  whether the market segment is willing to pay for
  it. Identify market segment, information
  credibility, barriers to entry. Business Planning
• What would the characteristics of the target
  market need to be? Discussed criteria.
• Patagonia presentation

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• Identify how the environmental product would
  benefit this target
• how would they find value and how much?
• What is their willingness to pay? Price
  elasticity?
• Focus groups, surveys, market research
• Identify the competitive environment/industry
  structure
• what competitors exist? Links to the target.
• How easily could they duplicate the strategy?

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• Credibly providing information.
• Scientific uncertainty.
• Regulatory uncertainty.
• Market response uncertainty.
• How to disentangle the products effect from
  other factors? Is this observable? Is this
  valued?
• How important is the product in the consumers
  overall consumption?
• Credibility of the firm and industry.

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• Develop barriers to entry.
• Regulation. Require duplication. Can be counter
  productive if leads to imitation.
• First mover if there are learning, reputation,
  and other advantages.
• Develop close ties to market segment. Most
  difficult to duplicate.
• Develop core competencies. Link to overall
  position of the firm.

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• Environmental Product Differentiation as a source
  of Competitive Advantage then depends on
• The firm and its products.
• The market segment and willingness to pay.
• Information about the environmental problem and
  the value provided to consumers.
• Barriers to entry to allow the firm to capture
  value and hence, motivate its actions.

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• Examined Environmental product differentiation
  strategies as source of competitive advantage vis
  a vis competitors.
• Innovation and cost reduction, Productivity
  Enhancement (Geyer, Von Weizsacker) Cost
  reduction relative to competitors. Source of
  competitive advantage. Increases firm response.

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• Productivity enhancementcost savings (capture
  part of the public good).
• Von Weizsacker Factor 5.
• Components
• Reduce input use so as to increase output per
  inputlowers costs. Reduces resource use.
  Technology change. New production methods.
• Recycle and reuse inputslowers waste disposal
  costs, risks, hazard management. Intel and water
  use example.

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• Sources of environmental information. Vered
  Doctori-Blass.
• Toxic Release Inventory chemicals, such as
  dioxins, elements such as lead, mercury
• http//www.epa.gov/tri/
• Life cycle analysis
• Supply chain managementGeyer
• GHG emissions. http//www.epa.gov/OTAQ/climate/ind
  ex.htm
• Avoidance of environmentally hazardous
  substancesCFCs, lead, and costly clean up,
  liability.
• Responsibility under state and federal
  regulations Clean Air Act, Clean Water Acts

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• Business/Policy interaction
• Business mold policy
• Reduce uncertainty
• Impact competitive advantage
• Voluntary agreements
• Interest group politics
• Bureaucratic incentives
• Information demands, especially in environmental

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• Business and GHG Emission Regulation
• Cap and Trade
• Costs
• Benefits
• Allocation
• Extent of trades
• Competitors

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• Given all of this, what should a business manager
  do?
• Develop a climate strategy
• Assess emissions profilequantities and sources
  of direct and indirect emissions.
• Develop metrics to track, measure, and control
  emissions
• Assess risks of emissions
• Regulation
• Competitors, consumer reaction
• Impact on product lines.
• Impact on production.
• Determine methods of reducing emissions.

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• What are the costs and benefits of doing so?
• Rank from low to high cost.
• Short-term, long-term costs, technologies,
  changes in operations, value chain, supply chain
  adjustments.
• Benefitsstrategic gains.
• Market gains environmental product
  differentiationwhich? magnitude? WTP?,
  information conveyance?, barriers to entry?

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• Cost leadership
• Assess policy options and develop company
  position Cap and Trade, Allocation, Tax,
  Regulation.
• Implementation
• Set goals and targets.
• Develop procedures.
• Internal within the organization.
• Supply chain
• Industry
• Regulators

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• Communication.
• Customers
• Suppliers, distributors
• Employees
• Capital markets
• Regulators
• NGOs
• Develop alliances with NGOs.
• Develop alliances with regulators, voluntary
  actions, etc.
• Develop industry alliances.

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• Assess implementation.
• Product differentiation
• Company reputation
• New market opportunities?
• Cost savings
• Employee reaction
• Impact on regulation
• Risk reduction
• Investor relations
• Adjust strategies.

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• GHG regulation poses great regulatory uncertainty
  and at the same time market opportunities for
  firms.
• Preparation key.
• Environmental managers can mold the firm
  response. Credibility.

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• Final will be like the past problems, only done
  individually.
• Research
• Short responses
• Document