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Darden's Lenox: Green Leaders View Environmentalism as Strategic Opportunity, Not Compliance Headache

Professor Michael Lenox is the Executive Director of the Batten Institute for Entrepreneurship and Innovation at the University of Virginia's Darden School of Business. Professor Lenox concentrates on two main areas: technology strategy and the interface of business strategy and public policy. In our fourth installment of four, we'll discuss the sets of incentives that drive corporations to adopt green strategies--and sometimes to not adopt them. (To read our discussion from the beginning, please click here)

BNET: How should companies assess what types of "green" strategies they should implement?

Lenox: The work I've done on this topic shows that big activist organizations and NGOs tend to target major firms not because they are bad performers, per se, but really because they are very visible relative to their industry. The message I give students and executive groups I work with is: you're going to have a lot of variance naturally in the way firms react to environmental issues, so you really need to examine the incentives of all involved. Some firms in some industries are going to be very responsive to consumer demands; their consumers are going to want green products and the companies will need to produce them. Others want their reputation enhanced by being very environmentally conscious to impress outsiders, but some may not have that same level of consumer demand or societal scrutiny. If you take SC Johnson, which produces a lot of products that are sold directly to consumers, it's very valuable for them to have a progressive environmental strategy. But there are other chemical firms who are upstream in the industry and only sell their products to other firms, and this is much less of an issue to them. It doesn't matter because the mother at the grocery store isn't buying their products.

Some companies take the tack of managing the incentives produced by the regulatory environment. Duke Energy is a company that has been very aggressive in arguing for a cap and trade system in carbon dioxide. That's a very interesting strategy since they are a major, large-scale utility which has a lot of coal-fired electric plants. Their argument for doing this is they want to shape the regulatory debate, to be credible when they say, "This is how environmental policy should be structured."

For some firms, the incentive is really based on efficiency. I have done work looking into the question, "Is lean green?" Are there operational advantages from trying to minimize your waste at the factory level? There is a lot of evidence that there are advantages. So for some firms, this will really be a way of cutting costs. Energy efficient lighting is the one a lot of people know about; the savings here go right to the bottom line in terms of your overall cost structure. The point is: people need to really think through how these sorts of incentives vary in different firms and industries.

BNET: What sort of companies are leading the charge to transform industries and make them more sustainable?

Lenox: What I've been looking at lately, really combining my two streams of interest, are the questions of innovation and entrepreneurship on environmental issues. My recent realization is that a lot of the talk about business and the environment focuses on the large established incumbent firms? How can we get these big firms to change their behavior to solve the environmental issues that they are causing, ultimately. The realization I've had is that in many industries the change agents will more likely be entrepreneurial ventures. Is the auto industry going to become greener because Ford, GM and Chrysler transform or because some entrepreneur in Silicon Valley comes up with a new hybrid engine or fuel cell engine that revolutionizes the industry? My bias now is to say that it's more likely to be because of the guy in Silicon Valley. I've also been looking at the building industry, where there has been a lot of entry by new green suppliers, anything from efficient toilets to recycled wallboards.

Another thing we're trying to tease apart right now is policy, tax incentives and job creation in the green economy. My feeling is that despite all the proclamations about the expansion of green jobs by the states, it's hard to predict where those jobs will go. A major energy initiative in Virginia might not really produce many jobs there, but might benefit only some solar firm residing in California.

BNET: What are the lessons you are learning from these entrepreneurs you are studying? What patterns are emerging about the new environmental business opportunities they are pursuing?

Lenox: There's a long history of academic literature dealing with technology and , especially how large incumbent firms become blind to opportunities. They become too focused on their current customer segments and they fail to see opportunities.

The power of entrepreneurship is "to let the thousand flowers bloom." We know that most ventures will fail. There's a lot of ferment right now in renewable energy and most of these companies will not succeed, but all it takes is that one or two guys in the garage to shift industries and lead economic growth. You can't get that many "experiments" out of established players.

We're also seeing a lot of promise in business model innovation--new ways of delivering products and services. People are figuring out ways to transition from selling "products" to selling "services". Doing that switch might change incentives, so you can have a more green product at the end of the day. Xerox had talked about this for years. They don't just sell you a copier, they rent it to you or sell you the service of the copies themselves and then they have an incentive to make their machines more recyclable and able to be retrofitted.

BNET: What are people getting wrong in business when they try to implement green strategies?

Lenox: That's a great question. I worry that there might be too much rhetoric about building the green economy. What are the policies, how many jobs will be created and specifically how will things change? Right now, there's too much of a "magic wand" effect: wave it and wonderful jobs will be created and we'll move right out of recession. I'm optimistic, but I still think we need to be more strategic about what needs to take place.

If I were to characterize businesses' attitude on the environment, I would say there has been a wholesale shift in the last 20 years, but especially in the last two to three. At first, it was more a compliance and legalistic viewpoint where now it's becoming more of a strategic concerns. Companies are getting much more savvy. But they are also realizing that it's harder than they thought. Not every opportunity is going to pay off and there's not a win-win situation every time. Firms are struggling with where they should take action and where they shouldn't.