Summary by Erin Howry
Master of Accountancy Program
University of South Florida, Summer 2003
Environmental Cost Main Page |
Social Accounting Main Page
The purpose of this article is to emphasize that companies should address environmental issues in the same manner as other investment issues in order to benefit the environment as well as increase profits and/or reduce costs.
There are potential roadblocks on the path to treating environmental investments as any other investment decision. These roadblocks, or assumptions about environmental issues, make it difficult for managers to shift their thinking. The first assumption is that environmental problems are matters of social responsibility. This way of thinking overlooks the potential profits and/or cost reductions that a business can experience by investing in the environment. The second assumption is that environmental problems are usually associated with negative outcomes. Managers that think this way associate environmental issues with extra costs and a loss of control over their operations. The third assumption is that environmental management only has one “winner”. That is, if the company wins, the environment is a loser and vice versa. However, if treated as a business decision it is possible for both parties to benefit. The final assumption is that the government and environmental groups are the company’s adversaries. While this is one possible scenario, another is to team with these groups in an effort to beat the competition. Reinhardt believes that “if executives bring to environmental decision making the same kind of optimism, opportunism, analytical thinking, and openness that they instinctively bring to bear on other business problems, both their companies and the environment will benefit (151).”
Reinhardt identifies five different approaches for a company to follow in order to incorporate environmental issues into their business:
The first approach deals with product differentiation. The idea is for a company to create products or use processes that offer greater environmental benefits or cause smaller environmental costs than their competitors. Companies may be able to charge a higher price for these “environmental friendly” products or they may experience an increase in market share. Reinhardt identifies three conditions that are necessary for this approach to be beneficial to the company. A breakdown in any one condition will cause the product differentiation model to fail. First, they must be able to find customers willing to pay a premium for this type of product. Second, the company must be able to communicate the environmental benefits credibly. And third, in order to profit on this environmental investment, the company must be able to protect itself from competitors trying to imitate their idea.
The idea behind the second approach is for the company to work with the government or work towards creating private standards for environmental regulation. In order for this to benefit a company, they must be willing to take the risk that their increase in costs will be less than their competitors increase in costs. This approach works well for a product or service where the customer is unwilling to pay a premium for an environmental friendly product.
The third approach focuses on internal cost reduction. This approach is best explained by example. One such example is a company in the hotel industry. By replacing small bottles of shampoo and lotion with bulk dispensers, one company saved nearly $37,000 per year (154). Another example is Xerox’s Environmental Leadership Program. This program included waste reduction efforts, product take-back schemes, and design for environment initiatives. Reinhardt states, however, that had Xerox been an unchallenged market leader, this program might not have been conceived. He states that Xerox mirrors a common pattern: “dramatic cost savings are often found when a company is under tremendous pressure (154).”
The fourth approach deals with environmental issues being addressed from the risk management vantage point. The focus of this approach is to avoid potential costs stemming from an industrial accident, a consumer boycott, or an environmental lawsuit. Reinhardt lists several questions that a company can ask itself regarding its environmental insurance policies and risk management systems: “Is the company buying the right policies? Is it retaining risk when the coverage is overpriced? Is it rewarding managers who reduce risk in their own operations or subsidizing risky behavior by failing to police it adequately? (155).” For this approach to work, management must fully embrace the idea and change the culture and employee’s attitudes towards environmental management.
The fifth approach is really a combination of one or more of the above approaches. By employing one or more of the above, Reinhardt believes a company can “rewrite the competitive rules in their market (156).” One example is Xerox, which follows the internal cost reduction approach as well attempting to change their business model. They differentiate themselves from their competition by taking responsibility for disposing of a customer’s used equipment as well as taking back products from customers that are superseded by new technology. These outdated machines are then harvested for their reusable parts, new technology is incorporated, and then resold as a new machine. Xerox is able to reduce their overall costs while differentiating themselves from competitors who lack their take back policies.
The bottom line is that when environmental issues are broken down and analyzed as normal business decisions, the company as well as the environment can benefit. Managers are urged to focus more on the long-term effects these decisions can have on their profits and costs reductions.
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