Volkswagen, environmental regulations and competitive advantage

20150311_143608The news yesterday as regards practices at the number one car maker in the world Volkswagen and the almost immediate fall in the company’s share price made for interesting reading.

The US Environmental Protection Agency (EPA) found that software in a number of diesel cars could deceive regulators, leading to the company being ordered to recall half a million cars, facing fines that could add up to billions of dollars, and potentially criminal charges for the VW executives.

The question as to whether environmental regulations can impact upon competitive advantage has been hotly debated for some time. Most of the work has been undertaken in terms of the impact of regulations on trade. A common claim is that countries with lower environmental regulations, tend to engage in more polluting industries. This is known as the so called ‘pollution haven effect’, where businesses migrate to countries with lower regulatory policies.

The case for and against a link between regulations and competitive advantage is open to debate. For example, some adhere to the so called Porter hypothesis or ‘revisionist view’, which holds that there are win-win opportunities created by environmental regulations, most notable the first mover principle. In this scenario, the organisation that is able to develop and implement systems first gains competitive advantage over its rivals. Indeed, the management gurus, Michael E. Porter and Claas van der Linde contend that high competition and costs lead to greater innovation.

However, others argue that other factors such as labour costs, market access, infrastructure, skills, and wages and salaries have much, much more of an impact than environmental regulations. They also contend that any impacts depend on the type and competitiveness of the industry. The more competitive the industry and the higher the environmental costs, the lower the trade performance. In addition, the costs for regulating some industries (e.g. heavy industry such as mining, refineries and chemicals), is generally higher.

There are certainly lessons to take from the VW story: First, the case suggest that there is some link between environmental regulation and competitive advantage. The nature (e.g. whether positive or negative), and extent depends on the situation. Second, there is a growing realisation amongst organisations that environmental sustainability can and should play a significant role in corporate strategy. This is particularly the case in the competitive world of industry such as car manufacturing and retail, where price margins are small and even small fluctuations can lead to significant profits or losses. The motor industry, in large measure because of its potential pollution impacts has been a key target for environmental regulation. It is also only now recovering from the economic slump of 2008 and competition is fierce. Third strong regulatory and enforcement procedures and practices are vital. Having legislation in place is one thing, but being able to effectiveness monitor and police it is crucial. Equally, the manner in which the regulation is important. A mix of command and control and voluntary measures are probably the most appropriate approach. Fifth, these issues affect us all irrespective of whether we are individuals or organisations. It is imperative therefore that we all engage and seek to build more resilient systems.

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