Background
In the face of uncertainty about advancing regulatory systems, firms’ early implementation of environmental initiatives can increase competitive advantage. Work by Ivey faculty Adam Fremeth and colleague Brian Richter explores how managers can relieve operational pressure from regulatory uncertainty and approach new environmental standards as an opportunity. The researchers identified two strategies to improve interactions with policy-makers in order to reduce the odds of losing and perhaps gain a competitive advantage when an environmental policy is finally established.
Research
In a study published in the California Management Review, Fremeth and Richter designed a framework for firms that wish to assess opportunities and threats in the face of regulatory uncertainty. The framework guides managers through an assessment of existing operations relative to profitability and environmental responsiveness as well as exposure to current and future environmental regulations. Based on a manager’s assessment of their vulnerabilities the researchers propose two strategies that integrate profitability and sustainability: Advocate for pragmatic, progressive policy; and systematically embrace advancing regulation. The researchers predict that firms adopting the first strategy can outperform competitors by leveraging existing environmental strengths. Engaging policy-makers to recognize the benefits of a progressive environmental program can be an effective approach to developing operations consistent with the new policy. Managers adopting the second strategy can buy valuable time to prepare operations for regulatory compliance. Firms that embrace change can better manage costs attributed to rising environmental standards. Case studies of North American operations illustrate the successful implementation of the two strategies and their limitations.
Fremeth and Richter found that successful firms first established credibility in policy development by accepting the direction of policymaking in their jurisdiction and allocating resources to profitable environmental initiatives. Further, they found that firms demonstrating the desire to meet higher environmental standards (in the public interest) can adapt to regulation at their own pace, while others face rising costs associated with developing similar environmental competencies. This implies that in industries where the first instinct is to oppose government regulation, firms that cooperate with policy-makers have more opportunities to improve their market position.
Implications
The uncertainty of future regulations aimed at reducing harmful environmental effects can be a headache for firms. Research by Fremeth and Richter suggests that firms should advocate for policy development around their environmental strengths to optimize green investments and embrace future regulation as proponents of its objectives. Adopting such an approach can make initiatives like developing waste recycling or water conservation and investing in clean technologies both profitable and sustainable.
Reference
Fremeth, A.R. and B.K. Richter (2011). "Profiting from environmental regulatory uncertainty: Integrated strategies for competitive advantage." California Management Review. Volume 54 (1): pages 145-165.