Three decades have passed since the first international Earth Day celebration in April 1970. Since then, the developed world has done much to clean up its air and water. However, finding solutions for the next batch of environmental concerns promises to be even more daunting--and expensive. It's no wonder firms worry about picking up the tab, even at a time when global climatic changes have become of increasing concern. All this begs the question: Can businesses make money for their shareholders while paying attention to environmental safety?

The key to this conundrum, notes HBS associate professor Forest Reinhardt, is for managers to make environmental issues an integral part of doing business. "Unfortunately, these concerns are often regarded as ancillary to the main purpose of an enterprise and as a constraint on the way it would otherwise be run," he observes. "Managers tend to make their plans and then figure out how to square them with environmental concerns. According to my research, however, they can make more progress from a shareholder value standpoint and from an environmental standpoint if they bring environmental considerations into the mainstream of management." In his book, Down to Earth: Applying Business Principles to Environmental Management (Harvard Business School Press: 1999), Reinhardt draws on the fields of strategy, finance, marketing, and organizational design to offer executives five ways to help them incorporate environmental performance into their firm's strategic plan. "I analyze five approaches that a company might take in trying to have its cake and eat it, too," he says. Reinhardt illustrates the feasibility of each approach--differentiating environmentally friendly products, managing competitors, reducing costs within the firm, redefining markets, and managing risk and uncertainty--with examples of both successful and unsuccessful efforts. "Any of these will work in some firms but not in others," he remarks. "It's important to analyze the circumstances under which a given approach will be viable."

The first scenario Reinhardt considers involves creating a product that provides a greater environmental benefit or takes a lesser toll on the earth than competitors' offerings--and then selling the environmental benefits to customers. "Of the possible ways to reconcile the need to deliver shareholder value with intensifying demands for improved environmental performance, perhaps the most straightforward is to provide environmentally preferable products and then capture the extra costs from consumers," he writes.

The success of such differentiation, Reinhardt points out, depends upon customers' willingness to pay a premium for environmentally friendly products, the firm's ability to convince consumers that its product is truly special, and whether the company can protect its innovation from imitation by competitors. By emphasizing both environmental friendliness and product quality in its marketing strategy, for instance, sportswear and outdoor clothing maker Patagonia has found upscale customers willing to pay as much as 50 percent more for clothes made from organic cotton or recycled materials.

In his second approach, managing competitors, Reinhardt shows how companies that are proactive in setting industry standards can gain competitive advantage while improving the environment around them. By influencing regulation in ways that favor their individual business practices, a company may put others at a disadvantage. In particular, he says, industries that create their own regulatory bodies can create environmental value while avoiding the inflexibility inherent in government regulation.

The action taken by the Chemical Manufacturers Association in the aftermath of the Union Carbide disaster in Bhopal, India, exemplifies the advantages of private regulation for both the environment and business. Concerned that further federal regulation would seriously undermine their ability to manage their companies, large American chemical producers launched a private regulatory program called Responsible Care to prove their commitment to environmental responsibility and to forestall more government intervention.

	I want them to look at environmental issues as just another piece of their daily operations.

Comprised of ten guiding principles and six management codes, the initiative encompasses issues of community awareness and emergency response, pollution prevention, process safety, the reduction of risk from distribution of chemicals, employee health and safety, and product stewardship. "Besides taking these important matters into their own hands," notes Reinhardt, "the large companies driving the Responsible Care program benefited from the advantages of economies of scope in dealing with these matters."

In addition, Reinhardt suggests that under some circumstances, taking steps to improve environmental performance can result in cost savings for the firm. While environmentalists often cite examples of companies that have done this successfully, Reinhardt cautions that going down this path won't work for every organization, that it requires careful consideration of where costs should be cut, and that it often means taking a more long-term view. The hotel industry, for example, has saved money through more environmentally conscious practices such as installing soap dispensers in guest rooms rather than providing individual bars of soap. Xerox substantially lowered its operating costs when it redesigned its manufacturing systems to save energy and raw materials. Beyond that, it has also improved its environmental practices through redefining its markets, Reinhardt's fourth approach.

A company may be able to create both financial and environmental value by transforming the way it competes. Xerox accomplished this when it began taking back old copiers from customers in the early 1990s. The company then dismantled the old machines and "remanufactured" new models using parts from the retired copiers. The remanufactured models carry the same guarantee and sell for the same price as traditionally built machines. Like their predecessors, they can also be returned to Xerox when a product line is discontinued. "Savings from the product take-back initiative arise from reduced logistics, inventory, and raw material purchasing costs," Reinhardt says.

Finally, he contends, every company must manage environmental risk. For example, firms specify procedures for managing particular risks such as accidents or spills and also evaluate the way managers handle these circumstances when reviewing their performance for bonuses and promotions. If organizations analyze their environmental risks carefully--looking for the optimal mix of risk reduction, risk transfer, and risk retention--the process can become a long-term source of competitive advantage. But Reinhardt emphasizes that firms will realize this advantage only if the management of environmental risk and uncertainty is integrated into their overall strategy. One company that has done this successfully, he points out, is Chevron, which uses incentive systems to encourage managers to implement practices developed by environmental experts at corporate headquarters.

While much of the debate about environmental safety problems has swirled around who is responsible for fixing them, Down to Earth allows businesses to examine the issue from a more clinical perspective. "Using my approach," concludes Reinhardt, "managers will make better choices by thinking analytically about the costs and the benefits of different kinds of decisions. I want them to look at environmental issues as just another piece of their daily operations." That way, companies have a chance to keep both the insides of shareholders' pockets and the world we inhabit a nice, healthy green.

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