VIEWS: Environmental Strategy for Industrial Markets

Dispatch from SSC Intern Julie Holst

Corporate environmental responsibility can maximize upside benefits and minimize downside risks. Benefits come from increasing the customers’ willingness to pay, improved employee retention rates, more productive employees and recruiting better employees. Risks are minimized by preempting regulations, increasing barriers to competition through strategic differentiation, and being able to help government entities design new regulatory structures.

In industrial markets, a business can ensure that selling an environmentally preferred product will indeed maximize their upside benefits and minimize their downside risks if the company utilizes one of the following necessary tools: cost leadership or product differentiation.

Cost leadership is simple to understand. A company with cost leadership is a company with the leading, or cheapest, price for their product. Cheap prices attract customers and fend against competition. An example of a price leading company is Walmart. Its low prices have assisted Walmart in becoming the largest company in the world.

However, cost leadership is often difficult to implement with environmental products. Such products often require more capital input from the business to develop more eco-benign designs. That capital input is to be replaced by increased product prices. Therefore, product differentiation may be the more promising approach. In order to make environmental product differentiation succeed, a business must satisfy three requirements:

  • Willingness to pay for environmental quality which is driven by considerations of the total cost. Eco-friendly, durable and convenient products can actually reduce the total cost for consumers in the long run.
  • Credible information about the environmental attributes of the product is necessary for customers to be convinced that the product possesses the benefits that the seller claims.
  • The applied innovation must be defensible against imitation.

Examples of products achieving all three of the tasks above are Herman Miller chairs, Patagonia, and Dolphin-Safe Tuna. I suggest researching these companies further.