Journal of Asia Pacific Business Innovation & Technology Management

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1 Journal of Asia Pacific Business Innovation & Technology Management 002 (2012) Contents lists available at JAPBITM Journal of Asia Pacific Business Innovation & Technology Management APBITMS Homepage: Could Green Companies Beat Their Competitors? A Conceptual Model Based on Indonesia Experience Hasrini Sari, Hasnelly ** *Department of Industrial Engineering, Bandung Institute of Technology, Bandung, 40132, Indonesia ** Department of Food Technology, Pasundan University, Bandung, 40153, Indonesia ABSTRACT Nowadays, more interest is shown by many countries to environmental issues, particularly because of the degradation of the quality of both local and global environments. Over-exploitation and bad production methods are two among several factors that are causing the phenomena. Therefore, green product companies have great potential to be developed in the future. Nevertheless, green product companies face several problems, primarily demand in the market. Although consumption of green product, especially green food, tends to increase, but green behavior is difficult to predict. Therefore, green companies could not only lean on green attribute to win market competition. This paper will describe a framework showing several factors that important in influencing green companies performance based on former empirical research and literature review. Two external factors and two internal factors are identified as factors that should be prioritized by green companies in order to win market competition APBITM Society. All rights reserved. Keywords: Green Companies, Green Products, Performance I. INTRODUCTION Nowadays, more interest is shown by many countries to environmental issues, particularly because of the degradation of the quality of both the local and global environments. The consequences of the degradation of quality of environment can be seen around the world, from decreasing rate of crops, global illness and even death (Rozelle et al., 1997; Smith et al., 1999). Over-exploitation and bad production methods are two among several factors that are causing the phenomena. The above conditions are showing cause to build and develop green companies, defined as companies hasrinis@gmail.com Part of this paper has been presented on International Conference on Asia Pacific Business Innovation and Technology Management in Malaysia, Summer 2012

2 that offer environmental friendly products. Nevertheless, market for green product is still growing very slowly, especially in Indonesia. Although consumption of green product, especially green food, tends to increase, but green behaviour is difficult to predict. In most cases, customers show positive attitude towards the environment and feel worry about its condition, but they rarely adopt green behaviour. Their consumption decisions do not reflect this concern. As a result, the market performance of green products is generally not as good as their competitors (Landler in Alwitt and Pitts 1996; Reitman in McCarty and Shrum, 2001). For example, The National Agency for Food and Drugs in Indonesia conducts a survey concerning energy saving products in The result shows that approximately 87% respondents state that they will choose the green product although the price is higher that its substitute. However, they also state that product green statement is coming number four after guarantee, price, and brand in their priority list (The National Agency for Food and Drugs of Indonesia, 2011). Therefore, green companies could not only lean on green attribute to win market competition. This paper proposes a framework showing several factors that important in influencing green companies performance, especially in Indonesia. This framework is built based on former empirical research and literature review. II. PROPOSED FRAMEWORK Based on former empirical research and literature review, it could be identified several factors that influence green product companies success, especially in Indonesia. The proposed framework is presented in Fig. 1 below. Every factor is discussed in detail in the following section. Communication Process Customer Value Founders or Owners Values Green Companies Performance Economic Government Policy Strategy Level of Green Figure.1. the proposed framework 39

3 2.1. Green Companies Success Green companies are defined as companies that offer green products to their customers. Nevertheless, green companies are different in their level of green, meaning level of action to overcome environmental issues. Sari (2011) differentiates four types of companies based on their focus and action on environment (Figure 2). Figure 2. Typologies of Green Companies (Sari, 2011) Companies that do not have or distribute any knowledge on environmental impact are categorized as Basic-Brown group. Ignorance companies are group of companies which have any knowledge about the negative impact of their action on environment but do not take any action to overcome it due to economic consideration. Companies which do have knowledge about quality of environment and do some action to minimize the negative effect are categorized in two-sided group. Nevertheless, action taken has not make the input, production process and output of the companies are entirely environmental friendly. The forth group are companies which have implemented environmental friendly principles on every action and decision made in the companies. Moreover, employees are encouraged to hold environmental values on their daily life. Green companies success is proposed to be measured by two criteria, which are economic performance and level of green (level of actual action on overcoming environmental issues, referring to Figure 2). In order to survive in business competition, a company must be able to support itself financially including its daily activities. It should also earn profit advantageous for its stakeholder. Therefore, superior economic performance must be achieved. Moreover, green companies are required to prove their concerns on environmental problems. These 40

4 concerns should not only be shown limited in their final products and their corporate social responsibility activities, but also become the soul of the companies. Every activity performed in the companies considers its impact on environment. Members of the organization always consider environmental aspect in carrying out their daily life Founders or Owners Values Sari (2011) in her qualitative study finds that value of founders or owners greatly influence the implementation of green principles in the company. The impact is even greater for green companies in Indonesia because most of them are small/medium in size. Furthermore, founders or owners values ultimately will determine values, norms, and behaviour of members of the organization utilized in solving problems. This condition, which is also called organizational culture, affects organizational performance (Marcoulides and Heck, 1993). Nevertheless, the strength of founders or owners value in influencing their organization will greatly depend on their ability to share their passion on environment. At this point, communication process will play an important role. A good example is Anita Roddick. Her passion on environmental issues has been spread throughout the Body Shop, and it becomes the breath of the company internally and externally. Internally, recruitment system is designed to explore the individual view on environment (Hartman and Beck-Dudley, 1999). While externally, Body Shop employees participate in local social activities (Teimouri et al., 2011). Concern for environment has become the main competitive advantage of the company since it is founded. This value is still being hold after it is sold to L Oreal Strategy Grant (1991) defines strategy as the match an organization makes between its internal resources and skills and the opportunities and risk created by its external environment. Therefore, strategy reflects organization s effort to survive by adapting to its environment. Figure 3 shows the loop between environment and organization. As it is shown, strategy is formulated based on how organization perceives its business environment. Furthermore, business environment will deliver environmental influence to organization as a whole. In a mean while, when organization tries to achieve its objective, several adaptation effort is exerted. Ultimately, this will bring certain influence to business environment as a whole. 41

5 Environmental Influence Strategy Perception on its Environment Business Environment Objectives Adaptation Figure 3. The loop between environment and organization According to resource-based perspective, strategy could become a competitive advantage for an organization, if it is valuable, unique, hard to copy, and irreplaceable (Hamel and Prahalad, 1994). Hasnelly (2011) empirically tests the implementation of two kinds of strategy: which are resource-based and market-based approach, in green companies in Indonesia. The result shows that both of them are significantly influence companies performance in the eye of their customers. Therefore, strategy determines organizational performance. When an organization chooses to exploit environmental issue as its strategic competitive advantage, several consequences are followed this decision. Many researches show that good image will be an incentive for the firm. Chen et al. (2006) in his study to several firms in Taiwan find that investments on green enhance firms competitive advantage; as long as the firms understand the appropriate values as well as positioning. On the other hand, firm consistency in green is needed. Once it fails to fulfil its promises, the impact could destroy the firm. Strasser (2008) shows that market valuation of firms which are won environmental friendly award will be increased. In a mean while, market valuation of firms which are having environmental problems will be decreased. Moreover, some are convinced that green strategy will only destroy shareholder value (Rugman and Verbeke, 1998) Customer Values Customers decision to buy a product is based on their perception of its value, that is, the comparison between benefit and cost (Gupta and Lehman, 2005). They will also compare between the values of the product itself and its substitute. Unique characteristics of green products such as intangible benefit, generally higher cost, and limited distribution make them having lower values compare to substitutes. Sari and 42

6 Firmanzah (2009) in their study in Indonesia, state that benefit-to-self is not a significant factor in influencing customers intention to buy green products. While three other factors, which are benefit to environment, comparative cost and attainable cost, significantly influence customers decision to buy. Therefore, the product price should be set carefully by considering the environmental benefit offered. Moreover, it is revealed that potential consumers of environmental friendly products could be divided into four segments based on psychological characteristics of consumers, which are degree of environmental concern and attitude toward buying environmental friendly products (Sari and Firmanzah, 2011). Each group pays attention to different aspects of green products. The first group, namely an idealistic-contributive group, consists of consumers with high degree of environmental concern and attitude toward buying green products. Second group, called an idealistic-passive group, contains consumers with high degree of environmental concern but low attitude toward buying. The third group represents consumers with high attitude toward buying but low degree of environmental concern and is called the egoistic-contributive group. The forth group is characterized by consumers with low degree of environmental concern and attitude toward buying, called the egoistic-passive group. In order to achieve superior customer value, information about the characteristics of customers should be utilized especially in designing product offering. Moreover, besides following the customers wants and needs, the firms could also influence consumption through the characteristics of their product offering to the market (Schrader and Thogersen, 2011). Nevertheless, both depend on how the firms communicate their products and convince their customers. High Idealistic -passive Idealisticcontributive Environmental Concern Low Egoisticpassive Egoisticcontributive Low High Attitude toward Buying Green Products Figure 4. customer segmentation 2.5. Communication Process In order to achieve organizational success, a company should hear its customers opinion. This opinion can 43

7 be represented by customer value. Ultimately, customers perception on value will greatly influence how a company create and manage its products. Nevertheless, the ability of the company in capturing customers perception and value will depend on the process of communication between the two parties. On the contrary, companies could influence how customers perceive their product using appropriate tools. Customer education is considered as an appropriate tool to communicate green product offering to customers (Alwitt and Pitts, 1996; Ottman, 1998). Firmanzah and Sari (2009) find that customer education enhances customers perception of green product benefit and its economic accessibility. Customer education also positively influences consumers environmental concern. Therefore, educate customers about green products could alter the degree to which they value the products. By learning more about green products characteristics and contribution to themselves and the environment, customers will conclude that the product is worth to buy Government Policy Green business is basically reflects interconnection among public policy, environment and green marketing (Prakash, 2002). In addition, Rugman and Verbeke (1998) propose that environmental regulation will influence managers in making organizational strategy. Moreover, Fairchild (2008) investigates manufacturing companies motive in going green and finds that firms will not voluntarily going green because of high investment. This result is also supported by a study in UK by Williamson et al. (2006 in Fairchild, 2008 pg. 334). They find that the firms are willing to be green if benefits are higher than costs. This criterion is disadvantageous for environmental friendly action in the firm because green strategy will only destroy shareholder value (Rugman and Verbeke, 1998). Therefore, regulation is needed in the form of financial support from government along with education to customers and investors. Rugman and Verbeke (1998) also state that regulation from government is the most important source of pressure on firms to be green. Hence, the success of green companies is highly related to government support as the public policy maker. The government could give pressure for many parties to be greener through its regulation. Even more, quality improvement of the environment will only be achieved through massive green action, meaning that many people and parties perform green behaviour (Hartmann and Ibanez, 2006). Government regulation will make this kind of movement easier to realize. Meanwhile, support from government to green product industry in Indonesia is still low. Moreover, community education from government about environmental issue and green product is rare. In fact, this instrument will be effective if it is conducted by government instead of sporadic movement by SME producers. Moreover, government could initiate education program that involve several parties such as non-profit organizations, local authorities, and socialites. Firmanzah and Sari (2009) concludes that economic accessibility is more important in influencing consumers attitude toward buying green product than products benefit. This means that customers tend to hinder individual sacrifice. Accordingly, the role of government as public regulator is needed to enhance the accessibility of green product for customers economically, such as imposing lower product taxes. 44

8 Prakash (2002) argues that government plays an important role to encourage green behaviour by imposing unavoidable collective sacrifice, for example strict standard for product sold along with certain certification. To that purpose, customers are forced to buy healthy and green product but with higher price. For lower social class society, it is recommended to plant vegetables to fulfil their own need. Nevertheless, green is not an issue for a certain group of people, but for everybody (Esty and Winston, 2006). III. CONCLUSIONS Green behavior is difficult to predict. In most cases, customers show positive attitude towards the environment and feel worry about its condition, but they rarely adopt green behavior. Their consumption preferences do not reflect this concern. As a result, the market performance of green products is generally not as good as their competitors (Landler in Alwitt and Pitts, 1996; Reitman in McCarthy, J., & Shrum, 2001). This paper tries to identify several factors influence the performance of green companies based on former empirical research in Indonesia and literature study. In general, there are two environmental factors (customer value and government policy) and two internal factors (founders or owners values and organizational strategy). While green companies success is proposed to be measured by two factors, which are economic performance and green performance. REFERENCES [1] S. Rozelle, G. Veeck, J. Huang. The Impact of Environmental Degradation on Grain Production in China, , Economic Geography, Vol. 73, No. 1, Jan. 1997, pp [2] K.R. Smith, C.F. Corvalan, T. Kjellstrom. How Much Global ill Health Is Attributable to Environmental Factors? Epidemiology, Vol. 10, No. 5, Sep., 1999, pp [3] L.F., Alwitt, R.E. Pitts. Predicting purchase intentions for an environmentally sensitive product, Journal of Consumer Psychology, 5, 1, 1996, pp [4] J. McCarthy, L.J. Shrum, The influence of individualism, collectivism, and locus of control on environmental beliefs and behavior. Journal of Public Policy & Marketing, 20, 1, 2001, pp [5] The National Agency for Food and Drugs of Indonesia. Konsumsi Berkelanjutan: Gerakan Gaya Hidup Hijau, Menuju Ekonomi Hijau: Pembelajaran pada Tahap Transisi Bappenas, November [6] H. Sari. Typology of green companies in Indonesia, The 10th Asia Pacific Roundtable for Sustainable Consumption and Production (APRSCP), Yogyakarta, Indonesia, November 9-11, 2011 [7] G.A. Marcoulides, R.H. Heck. al Culture and Performance: Proposing and Testing a Model, Science, 4,2, 1993, pp [8] C.L. Hartman, C.L. Beck-Dudley. Marketing strategies and the search for virtue: A case analysis of The Body Shop, International, Journal of Business Ethics, 20, 1999, pp

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