Market leaders supporting sustainability related regulation to create competitive advantage

By Elizabeth

Thus far in class, we have collectively touted the espousal of sustainability related regulation as a strategy for creating competitive advantage. Indeed, some among us have even gone so far as to suggest that companies such as Wal-Mart would be smart to join hands with legislators in writing new regulatory policies. The chief benefits of supporting future environmental regulation, the usual arguments go, include the ability to win prestige through leadership in environmental performance, to disarm one’s competitors, and to hedge the risk of future regulatory costs. In my experience with green CPG firms, however, each of these benefits is accompanied by an equal or greater risk to the company.

First, while first mover status may win a company prestige, with it comes the obligation to educate consumers. Whole Foods collaborated with the USDA to create the Organic Law of 2002; Seventh Generation pioneered the still-nascent USDA BioPreferred labeling. Since then, both have spent heavily to educate consumers as to what these regulations mean and why they are worth a price premium. Despite their efforts, consumer comprehension of the USDA’s labeling system has remained low; few customers can explain the difference between natural and organic.

Second, the prestige that comes with pioneering in sustainable products or supply chains may create artificially high consumer expectations for the company’s sustainability profile, opening the company up to future criticism at the hands of its most loyal consumers. Although Seventh Generation, for example, leads the market in formulations that are plant-based as opposed to petroleum-based, consumer rejection of ingredients—whether harmful or not—continues to rise, and the company must meet that bar.

Third, while shaping regulation may allow a firm a temporary advantage over its competitors, such regulation may increase the ease of competitors in copying a firm’s sustainability platform. As few sustainability innovations are protected or out of reach for other major corporations, a second mover competitor may be able to easily replicate the sustainability systems of the first company as well as capitalize on the educational efforts the company undertook with consumers. In my experience, brands such as Stonyfield Farm, which helped define organic law in the early 2000s, have increasingly seen market share lost to copycat natural players such as Chobani.

Finally, while linking arms with legislators may protect a company from regulatory fees and risks in the short-term, the legislative process is unpredictable and impossible for corporations to control. In setting the legislative process in action for some sustainability measures, it is altogether possible that companies could quickly find legislation extending to other, less savory parts of their business. While Wal-Mart might hope to enforce energy efficiency and waste reduction in its Chinese employers, Wal-Mart executives might be ill at ease to wake one morning to find that China had levied a tax on carbon emissions. Unfortunately, I think that this fear of creating environmental regulatory momentum is ultimately what holds many companies back from creating a more favorable regulatory environment for firms with strong sustainability platforms.

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One Response to “Market leaders supporting sustainability related regulation to create competitive advantage”

  1. Thanks for your post. You explain some of the very real challenges that companies must consider when partnering with government to promote environmentally-friendly regulation. You mention the following risks:
    1. Companies become obligated to educate customers
    2. Customers may develop artificially high expectations
    3. Regulations may encourage competitors to copy the pioneering firm’s practices
    4. The legislative process is variable and may help—or harm—a company’s business

    On the first point, successful companies must promote their differentiating qualities regardless of their sustainability profiles. Customers want to understand why they should pay extra any time a product commands a price premium. If it is truly the case that green practices influence a product’s high price, it is in the company’s best interests to explain why. In your example, even though Whole Foods (or “Whole Paycheck,” as some people joke) may not have completely educated consumers about the specifics of green legislation, the company has done an excellent job promoting its wholesome company image. Though some customers scoff at the grocer’s prices, it seems that they recognize Whole Foods’ efforts to be sustainable.

    Your observation that customers may develop artificially high expectations for green companies is valid. The challenge seems to be that customers expect “all or nothing” behavior. Since outsiders are rarely willing (or able) to appreciate the nuances of a company’s operations, it may be difficult for them to understand the tradeoffs required. Also, since marketing efforts tend to focus on the one or two key elements of a company’s platform, it’s probably easier to just be known as fully green. Besides, a slogan that says, “60% of the time, we’re green every time” is somewhat less convincing.

    On the third point, I am not convinced that “green copycatting” is a problem. While it is true that others companies may adopt the first-mover’s sustainable practices, multiple green companies represent an overall benefit for the environment. Maintaining competitive advantage includes making operational changes that decrease the cost of production or increase customers’ willingness to pay. If customers’ WTP is stable (because they’ve already been convinced that natural products are worth a higher price), then the pioneer company’s goal should be to continually find ways to reduce the cost of production, not just hope that competitors stay out of the market.

    Finally, regulatory and political risks are an inevitable part of doing business. Anecdotally, it seems like it is always better to have open dialogue with politicians, even though there is no guarantee that they will always share the same view. It’s possible that some companies are afraid to draw attention to their markets. But it may also be that the companies with the deepest pockets or the most lobbyists do not highly prioritize environmental responsibility.

    Overall, though it may be risky for companies to be proactive regarding environmental legislation, the benefits seem to outweigh the costs.

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