THE GREEN BUSINESS SECTOR
Environmental problems have been plaguing our society for decades. Business and technology are among the main culprits causing this surge of problems. The Green Pages, Your Everyday Shopping Guide to Environmentally Safe Products, written by S.J. Bennett and Company, Inc. states, "From the so-called greenhouse effect that threatens to heat the Earth irreversibly to the overflowing landfill down the block, we're confronting a range of environmental problems that no one could have even conceived of 50 years ago" (vii). These problems include solid waste, water pollution, air pollution, acid rain, global warming, and ozone depletion. The "green business" sector has recently emerged as a result of these environmental issues. These businesses exhibit concern for the environment by producing and selling environmentally sound products. This paper will define what a "green" product is, discuss the increasing consumer awareness of "green" products, identify the incentives and costs of producing and/or selling a "green" product, and conclude with a case study.
Definition of a "Green" Product
What exactly is a "green" product? A "green" product is essentially a product that is environmentally friendly. So, what does environmentally friendly entail? There are many different explanations that answer this question. Laurence Tasaday explains in his book, Shopping for a Better Environment, how he decides whether a product is environmentally friendly. He states, First we consider the product's life cycle - its manufacture, use, and disposal - to determine its total impact on the environment. Then we weigh its benefit to humans against its environmental costs. Third, we ask whether any less harmful alternatives are available. And finally we ask the most important question, Is it worth it? That is, does the value of the product outweigh its environmental costs?
Joel Makower, author of The E-Factor, states, "At its essence, being 'green,' for all the many things it entails boils down to two basic goals: reducing waste and maximizing resource efficiency" . Waste includes human effort, energy, use of facilities, and money. Resources include those used by the company such as materials, energy, supplies, and inventory. Resources also include those that come from the environment such as water, air, plants, and land.
It is clear that each company has their own definition of what a "green" product is. Most definitions are similar, however, and usually contain at least one of the following words: sustainable, organic, natural, biodegradable, or chemical free.
The Increasing Consumer Awareness of "Green" Products
Awareness of today's environmental problems is reaching an all-time high and people are eager to make a difference. In today's society, businesses are constantly striving to be socially responsible. A huge part of being socially responsible is having and exhibiting concern for the environment. All people in business, whether they realize it or not, have an impact on the environment. Makower explains that there are two ways in which all businesses and the people who work within them affect the environment: "We consume energy and other resources, and we create wastes that must be disposed of. All of us, from the hourly wage earner to those with golden parachutes, do these two things. It's a fact of life for everyone in every sector". There are, however, ways to do these things that can lessen their effect on the environment. The new and emerging "green business" sector is taking a proactive approach to protecting the environment. These businesses are incorporating "environmental thinking in positive and profitable ways throughout [their companies'] operation[s]".
Being a "green" company is becoming an important issue in the new millennium. Makower states, "The distinction between being a 'green' or 'ungreen' company may become a critical factor in how your stakeholders - be they stockholders, regulators, environmentalists, competitors, employees, or the consuming public - view your company's image". Consumers are becoming more and more aware and concerned with the products that they purchase and consume. Christopher and Judith Plant explain in their book, Green Business: Hope or Hoax?, "[green shopping] gives people a sense that they can actually do something themselves to tread more lightly on the planet". By being environmentally aware, consumers are helping to change the marketplace for the better. Tasaday states, "We can use the tremendous power of our consumer dollars to tell companies what we want - to encourage those that act responsibly and make environmentally sound products, and to discourage those that create waste and pollution". Because consumers are exhibiting a concern for the environment, businesses must exhibit concern as well if they intend to survive in today's society. All companies must abide by the rules and regulations set forth by the Environmental Protection Agency, but many companies are doing much more that just abiding by the law. They are making a sincere and socially responsible effort to produce "green" products.
The Costs and Incentives of Producing and/or Selling "Green" Products
Producing and selling "green" goods can be quite costly. In order to manufacture a "green" product, the production process usually costs more than it would to produce a conventional product because companies tend to use costly production processes that minimize pollution. As a result, some "green" products tend to cost retailers more, and in turn these retailers must charge consumers a relatively high price. An employee from Happy Planet, a company that specializes in selling organic cotton goods, states: We reduce our competitiveness and increase our price points because we nourish and regenerate as we produce instead of exploit. So, our products become more expensive, but we have achieved a positive balance between profit and preservation where our products reflect fair and true costs, without subsidies or hidden life cycle issues (which cost the world in the long run). Un-measured external impacts to land and labor allow most companies to keep prices low and consumers in a state of ignorant bliss.
Although the production process can be costly and the prices high, these prices are a true reflection of the environmental soundness of the product. Concerned and educated consumers are usually willing to pay the extra price to obtain an environmentally sound product. High costs are not always permanent. As a company builds a name for itself and gains consumer loyalty, it is possible that due to learning effects and economies of scale, costs will be reduced over time. According to Microeconomics, by Robert Pindyck and Daniel Rubinfeld, a learning effect is when "average cost[s] decline over time because workers and managers absorb new technological information as they become more experienced at their jobs"
An economy of scale is a situation in which output can be doubled for less than a doubling of cost. This is a result of increasing returns to scale, which is when output more than doubles when all inputs are doubled. These two situations arise due to an increase in the scale of operation, which "allows managers and workers to specialize in their tasks and to make use of more use of more sophisticated, large-scale factories and equipment". Therefore, for a new firm emerging in the "green business" sector, costs may be quite high at first, as they might be using new technology and production processes that are safe for the environment, but as time passes and the business grows, it is possible that these costs will decline.
There are many incentives for companies to enter the "green business" sector. The first and perhaps most obvious reason why firms are choosing to produce environmentally safe products is because of the increased environmental awareness of consumers. Companies produce "green" products to keep their customers happy and to attract consumers who are seeking these products. The next most obvious reason is that they produce these products because they are sincerely concerned with helping to protect the environment.
These companies are also enjoying some benefits as a result of being environmentally friendly. A growing number of constituencies are giving special treatment to those companies who have outstanding environmental records. "The Occupational Safety and Health Administration (OSHA) has a formal name for these - the Voluntary Protection Programs - in which they agree not to routinely inspect companies that have ongoing OSHA-approved safety programs". These environmentally safe companies are able to escape governmental regulation. Makower appropriately comments, "Good social performers may find it easier to win concessions from workers; draw customer; and attract investors, given the reduced probability of costly, government-imposed sanctions".
There are also monetary benefits. A study done by two economics professors of Dickenson College in Pennsylvania, Stephen E. Erfle and Michael J. Fratantuono, looked at the relationship between companies' social performance and their profitability. They found that, "A positive correlation exists between financial performance and several dimensions of social performance - including a company's environmental record" (Makower, 65). It will often take time for the company to establish itself with the consumers and it may have to forgo profits at first, but as explained earlier, after it makes a name for itself and consumers realize that the products are environmentally sound, the company will usually begin to increase its profits and possibly reduce costs. Furthermore, Tasaday states, "environmentally sound products will become even better bargains in the future as consumer demand, new technology, and competition change these products from novelties to the norm".
Another incentive, as presented by Professor Hackett, is that by producing "green" products, a firm can raise the costs incurred by rivals. Firms that have created methods of manufacturing and producing "green" products can encourage the regulation of firms that make conventional items, thereby increasing the competition's costs due to taxes, for example. These environmentally friendly firms can also sell patents for their newly discovered technology of producing "green" products.
It is clear that there are many incentives for profit maximizing firms to produce and/or sell environmentally safe products. Most firms seem to consider protecting the environment and gaining consumer loyalty their main incentives.
Case Study - Baby's Abode
Baby's Abode is a retail company that sells environmentally safe products for infants. Its product line includes diapers, clothing, skin care, furniture, cleaning products, and toys. Its website states, "cloth diapers are better for your baby, the environment, and your budget." Baby's Abode offers two environmentally safe diapers. First is the all-in-one style. It "has Velcro tabs, a waterproof outer layer, and layers of cotton cloth on the inside" (Baby's Abode website). This diaper works like a disposable diaper does except that it is "chemical free, washable, re-useable, breathable, and money saving over the long run" (Baby's Abode website). The second style is a diaper and cover style. Tracy Puckett, owner of Baby's Abode, states, All the cotton diapers I offer are "green" or organic cotton. You lay them inside a waterproof cover and the cover Velcros closed wool covers are the most natural and most breathable. Wool has water resistant oils in it and by nature is water-resistant so it does not use any synthetic materials to keep the cover waterproof. The benefits of this diapering style are the same as the all-in-one style.
By comparing these diapers to the more conventional disposable diapers sold in grocery and drug stores, it is easy to note the benefits. Conventional diapers contain polymer crystals to absorb wetness. In the process of absorbing wetness from urination, however, these crystals, which are the same crystals that cause toxic shock syndrome, also absorb the much-needed moisture from babies' skin (Baby's Abode website). The long-term effects of these chemicals have not been tested, but there is a rising concern. Furthermore, the plastic barriers in disposable diapers is reported to raise a baby's skin temperature and "ABC News reported on studies that found the increase in a baby's temperature of plastic vs. cotton diapers may cause lower sperm counts and aid in the increase of infertility problems" (Baby's Abode website.)
There are also many ecological reasons for using cotton as opposed to disposable diapers. According to the Baby's Abode website, the United States "throws over eighteen billion disposable diapers annually into our quickly disappearing landfills. That is 4,275,000 tons of hazardous waste every year that will remain for the next five centuries, because disposable diapers are not biodegradable." More than 100 viruses have been found to be living in these diapers (Baby's Abode website). Furthermore, in order to manufacture disposable diapers, approximately 250,000 trees are destroyed and 100,000 tons of plastic are used each year (Baby's Abode website). Cotton diapers, on the other hand use no plastic and are durable, washable, and reusable. They also allow for human waste to be disposed of through the sewage system and not just dumped into our already overflowing landfills.
Cloth diapers also have cost savings for the consumer. According to Baby's Abode, disposable diapers cost about $90 per month. A consumer using cotton diapers on their baby will spend approximately $68 per month if they use a diaper service and only $37 per month if they do their own laundering. Overall, it seems to be clear that these "green" diapers are much more beneficial, not only for the consumer but for the environment also.
Baby's Abode is just one example of the many environmentally friendly companies and products that can now be found in today's society. The "green" business sector is growing and a large number of consumers are encouraging this growth by supporting these businesses and purchasing their products. With the current surge of environmental problems, it is important that consumers and businesses are becoming more responsible in taking proactive steps to protecting the environment.
Written by: Kathryn Asprey
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