Environmental Product Differentiation

In order to succeed in deriving competitive advantage from environmental

concern, firms need to create value and then capture it from customers, suppliers,

or other economic agents. Their ability to do so depends on the structure

of their industry, the government regulatory framework, and their executives'

own creativity in defining the nature of competition in their businesses. These

are exactly the factors that influence corporate success more generally, suggesting

that we can make significant progress in addressing environmental problems

if we analyze them as we would other business issues.

Pollution and environmental degradation are examples of externalities;

that is, their effects are not reflected in market prices. Economic logic suggests

that in the absence of regulation companies will not take into account the costs

their pollution imposes on society (in the form of increased illness, damage to plant and animal life, and so on). In the simplest case, if the presence of environmental

externalities were the only departure from the assumptions of perfect

competition, then any firm that tried to provide or preserve more environmental

quality than is required by law would lose all of its customers. However, the

world does not deliver market failures one at a time: environmental externalities

coexist with market power, incomplete information, and the other departures

from the competitive paradigm that make business administration interesting.

Further, government intervention in markets, whether motivated by a desire to

offset one or more of these market failures or by some other purpose, itself creates

opportunities and problems for companies. Given the simultaneous existence

of more than one market failure and the presence of government, some

firms can respond to social pressure for improved environmental conditions

while simultaneously delivering increased value to shareholders. Because this

will be possible for some firms and not others, depending on the particular market

imperfections that each confronts, executives ought to think creatively and

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