FORUM Industrial Ecology and Competitiveness Strategic Implications for the Firm Daniel C. Esty Yak Law School Yak School of Forestry and Enuironmental Studies New Haven, CT, USA Michael E. Porter Haruard Business School Boston, MA, USA - I Keywords Summary closed loop competitiveness In the emerging field of industrial ecology one of the un- corporate environmental settled questions is the degree to which design for the en- management vironment, closing energy and materials loops, and other eco-efficiency externalities industrial ecology concepts apply at the firm level. In this remurce productivity article we examine this issue with a particular focus on whether industrial ecology can guide company strategy and efforts to enhance competitiveness. We conclude that industrial ecology thinking will often be useful for firms seeking to improve their resource pro- ductivity and thus their competitiveness.The systems per- spective that industrial ecology promotes can help companies find ways to add value or reduce costs both within their own production processes and up and down the supply chain. But industrial ecology cannot always be Address correspondence to: counted upon to yield competitive advantage at the firm Daniel Esty level. In some cases, the cost of closing loops will exceed Yale School of Forestry and the benefits. In other cases, regulatory requirements do Environmental Studies 205 Prospect St. not fully internalize environmental costs, and thus polluting New Haven CT,065 1 1, USA firms may gain temporary or permanent cost advantages email: daniel.esty8yale.edu relative to companies that attempt to eliminate all emis- sions. Finally, because industrial ecology focuses attention on materials and energy flows, it may not optimize other variables that contribute to competitiveness within the 8 Copyright 1998 by the Massachusetts Institute of Technology and Yale UniverJity Corporate Setting. Volume 2. Number 1 I Journal of Industrial Ecology 35 1 FORUM Introduction many respects, a fundamental alignment between good environmental performance and recent in- Industrial ecology offers an analytic tool that novation-driven views of what produces com- can be applied in various ways and at various pe titive advantage. levels of economic aggregation.’ Because the field is still emerging, considerable debate exists over industrial ecology’s use and value in differ- Industrial Ecology as a Guide ent contexts. In this article, we explore one di- to Resource Productivity mension of industrial ecology: its potential In some respects, recent work in industrial application as a tool for shaping firm strategy ecology-with its emphasis on how effectively and competitiveness. We examine, in particular, various critical resources are employed in a pro- the connections between industrial ecology and duction process-is building on thinking that current work in the fields of competitive strategy emerged in the late 1980s and early 1990s on “en- and international competitiveness. We observe vironment and competitiveness” (Porter 1990; that industrial ecology can spur a certain type of Porter 1991; Esty 1994).While traditional eco- corporate thinking that, when screened through nomic thinking argues that competitive positions the lens of resource productivity, may lead to in- are built on low-cost inputs, recent work on cor- novations that improve efficiency, lower costs, porate competitiveness focuses on the dynamic and raise the value created by a production pro- nature of business and the importance of innova- cess. Industrial ecology can thus serve as a tool tion (Porter 1990). Today’s competitive advan- for sharpening firm competitiveness. We note, tage often derives from finding unexpected ways however, that although industrial ecology has to lower the cost of producing goods or identify- potential in the realm of competitive strategy as ing ways to increase a product’s value-either di- a “discovery”tool, it has limitations as a broader rectly or indirectly. Enhanced resource productivity firm-level guide for strategy generally. is thus what makes companies truly competitive Design for the environment (ME), materials (Porter and van der Linde 1995a, 106). cycling, and an emphasis on closed-loop produc- Resource productivity can be defined as: tion processes will yield competitive advantages in some circumstances. But in other cases, these resource productivity of input x = approaches will not enhance a firm’s competi- f (value added by x - the direct costs of x - tive position. Notably, closing some loops may the indirect costs of x + the indirect add costs that exceed the benefits to be ob- opportunities for value added from x). tained, especially if the regulatory system within In this equation, the direct value added and which a company operates does not fully inter- costs are the parts of the production process to nalize the costs of air or water pollution or waste which firms currently pay attention. The value disposal. In addition, attention to energy and added by a resource to the final product of the materials flows can distract from the optimiza- firm is obviously central to its productivity. As a tion of other scarce resources such as the ana- product becomes more useful and thus worth lytic attention of managers. more to customers, its value increases. Hence companies recognize the importance of trying to find ways to improve the quality, features, or Firm-Level Industrial Ecology functionality of their products. Direct costs-la- Managing at the firm level through an indus- bor and material inputs-are also traditional trial ecology lens offers both opportunities to ad- parts of most companies’ accounting calculus. vance competitiveness and potential risks. In the Companies understand that to the extent they sections that follow, we identify and analyze the can produce their products with fewer or potential benefits and then review the limits of cheaper inputs, they will improve resource pro- industrial ecology as a corporate strategy tool. In ductivity, lower costs, and increase profits. doing so, we find, in many circumstances and in Some aspects of industrial ecology address 36 journal of Industrial Ecology FORUM 1 opportunities to improve environmental perfor- Within the Firm mance and simultaneously to increase the value Many ways are available to improve resource of a product or to lower direct costs2 For ex- productivity by identifying and eliminating waste ample, producers, made more attentive by indus- and thereby lowering the costs of production. trial ecology thinking and life-cycle analysis to Even before the advent of industrial ecology, waste disposal problems their customers face companies were pursuing these opportunities un- from the products they have sold, may make der the rubric of “pollutionprevention’’ (Dorfman changes in a product’s design to facilitate recy- et al. 1992). By fostering a fusion of thinking from cling or reuse. Such ME strategies can lower the the physical sciences about the conservation of customers’ costs and therefore enhance the mass and energy with the teachings of economics product’s value. Likewise, a manufacturer who about efficiency, industrial ecology can go even adopts a waste minimization strategy may find further in helping firms obtain maximum returns he can recapture and reuse raw materials and from a given set of inputs-that is, to optimize re- thus purchase fewer inputs, thereby cutting his source productivity. Moreover, by encouraging direct costs of production. systems thinking-including attention to a In addition, many indirect or hidden opportuni- company’s materials balance, the possibility of ties exist to lower costs or to improve the value of closed-looped systems, and design for the envi- a product. In general, these opportunities arise be- ronment opportunities-an industrial ecology yond the scope of a firm’s traditional product defi- perspective can encourage companies to focus on nition, management vision, and accounting the multiple dimensions of resource productivity procedures. Below, we separate out three critical that must be considered to optimize competitive- places to look for hidden resource productivity ness. Attention to a company’s materials balance, gains: (1) within the firm; (2) within the chain of the possibility of closed-looped systems, and DfE production (involving suppliers or customers);and opportunities can add to the value of a product or (3) beyond the chain of production. In each area reduce the cost of production. of opportunity, industrial ecology may be helpful as Dow Chemical, for example, redesigned its a discovery tool, broadening the perspective of cor- process for scrubbing the hydrochloric acid used porate decision makers, encouraging innovation, to make chlorinated organic compounds. The and facilitating the reconfiguration of product refined procedures allowed Dow to eliminate the definition, design, production, delivery, and dis- need for certain wastewater evaporation ponds, posal in ways that can be both profitable and envi- to recapture part of the former waste stream for ronmentally beneficial. reuse as inputs in other production processes, to No doubt skeptics will ask why, if these op- reduce its caustic waste by 6,000 tons per year, portunities for improved competitiveness are so and to cut its acid waste by 80 tons per year. readily available, companies have not already With an investment of $250,000 to implement moved to take advantage of them. There are the new process, Dow obtained $2.4 million in several