Rules of the Game
Changing "business as usual"
Businesses looking to improve their social and environmental bottom lines face a dilemma: how can they do so yet compete with companies that do not? Business professor Desirée Pacheco studies how these entrepreneurs adapt by altering the “rules of the game.” By improving industry standards, self-regulation, and harnessing the power of social movements—competitive disadvantages become opportunities for better business and broader benefits.
Many of today’s entrepreneurs are factoring nontraditional measures of progress—environmental outcomes, social impacts—into their business strategies and emerging industries. Ultimately however, success in business must be measured by financial profits.
So how can businesses adopt sustainable approaches while competing against businesses that do not? The triple bottom line approach (considering environmental, economic, and social factors) may produce a broader societal benefit, yet these opportunities are not always available. Instead, firms are oftentimes left to absorb the additional costs of sustainable initiatives.
Desirée Pacheco studies the factors that come into play as entrepreneurs attempt to gain footing in emerging industries, such as solar and wind power, or work to improve existing lines of business against more nebulous environmental and social justice measures.
Pacheco teaches in PSU’s School of Business Administration, where she is the Hanna Andersson Emerging Scholar in Management and Sustainability. She’s identified a number of non-market forces that influence these efforts—and found how entrepreneurs adapt.
“Oftentimes businesses won’t do what is best for everyone because they don’t know if their competitors will,” Pacheco says.
She refers to the classic “Prisoner’s Dilemma,” of game theory, in which two prisoners isolated in separate cells must decide to stay true or betray the other. If both stay true, they receive minimum sentences. If both betray, they receive moderate sentences. But if one betrays and the other does not, the betrayer is set free while the one who stayed quiet is punished with the maximum sentence. This model of uncertainty demonstrates how companies won’t cooperate with one another to improve practices, despite mutual benefits.
What do farmers in Oregon have to do with a chemical company in Montreal? Both found ways to improve the environmental implications of their industries without suffering a competitive disadvantage. “They’ve overcome these dilemmas to change the rules of the game,” Pacheco says. She calls it “escaping the green prison.”
Pacheco cites the rise of voluntary certification standards for organic farming as an example. Farmers who chose to eliminate chemical fertilizers and pesticides from their operations increased environmental sustainability, but eliminated proven methods of increasing productivity—thus creating a competitive disadvantage.
By establishing third-party organizations such as Oregon Tilth and California Certified Organic Farmers to monitor and promote agreed upon environmentally friendly farming practices, farmers helped create new markets for products that could command premium prices.
DuPont, a global chemical company, relied on chlorofluorocarbons (CFCs) in manufacturing products such as Freon, and lobbied against restrictions on their use despite a growing body of evidence tying CFCs to ozone layer depletion. But in 1986, DuPont flipped sides, pushing for adoption of a DuPont-patented alternative at the Montreal Protocol. Ratification of the treaty was followed by legislation worldwide banning use of CFCs. DuPont thus secured a strategic and financial advantage with a product that was better for the environment and the common good.
Whether change comes from informal agreements or legal edicts, a number of non-market factors can alter environmental behaviors in business—from state and federal incentives and subsidies, to social movements, industry and trade groups. These might result in voluntary third-party certifications, such as the U.S. Green Building Counsel’s “Leadership in Energy and Environmental Design” or LEED standards for new and renovated buildings, or in mandatory labeling on packages. These might produce favorable tax structures or industry subsidies.
“Many of these changes are driven by social demand, rather than market demand,” Pacheco says. She has also examined how renewable energy companies have found footholds in competing with cheaper fossil fuel-based power, using such approaches.
She assessed 15 years of the wind energy sector, where initial opportunities came through efforts of environmental social movement organizations. This resulted in new regulatory efforts that hampered large energy organizations and allowed for growth of the wind energy industry: specifically renewable portfolio standards that mandate production of energy from renewable sources. That in turn generated greater viability and visibility, attracting additional financing and research.
At this point (not earlier), more specialized advocacy appears, such as proponents of clean energy. These groups help move the industry along through education and support of financial and policy incentives, especially at the state level. Once again, the rules of the game are changed, creating new opportunities for entrepreneurs looking beyond the bottom line.
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