Volume 22, Number 3
Balancing the benefits
Gal Raz looks at the environmental and social impacts of firms’ product and process design decisions.
Gal Raz is asking some very challenging questions regarding firms’ product and process decisions and their impact on the environment.
The Associate Professor in Ivey’s Operations Management Group is investigating the environmental and social impacts of firms’ strategies regarding product refurbishing, product and process innovation, and competition.
And these questions are challenging some long-held assumptions. For example, Raz’s research is looking at whether adding a refurbished cell phone to a product line-up is an environmentally-friendly strategy. Does product innovation, such as a faster charging tablet that uses less energy, or process innovation through more efficient manufacturing processes, really benefit the environment? Does competition provide a more sustainable answer?
Raz, who came to Ivey from Darden Graduate School of Business in Charlottesville, Virginia, first focused his interest on product lifecycles primarily in the electronics industry examining the behavior of firms such as AT&T, HP, and Apple. But as his areas of research have expanded, so have the lessons learned. Here’s a quick summary of Raz’s recent work.
Should a service provider like AT&T include remanufactured cell phones in its new cell phones product line? And what are the environmental implications?
“The thinking was that people might buy the refurbished phone over the new phone and this mix would be more environmentally friendly because of the decrease in new phone sales and the lower environmental impact of refurbished cell phones,” Raz says. But what his research with colleagues Anton Ovchinnikov from Queens University and Vered Blass from Tel Aviv University (TAU) has shown is that in some cases, introducing a refurbished cell phone as part of the product line might actually increase new phone sales. Companies might decrease the price of new phones in order to sell more, thereby creating more of the components required for a refurbished phone, which can be sold at a greater profit.
They have used the term “negative cannibalization” to describe this behavior, as it results in an increase rather than a decrease in the new phones’ sales.
“People usually think, ‘Remanufacturing: You don’t have to produce the product, you don’t have to use the raw materials, so that’s a great thing.’ You expect it to be environmentally friendly but the fact is that, if you have growth in the market or in your own sales, you might actually be doing more environmental harm.”
Increased demand through innovation
Building on this initial research, Raz has shown that, depending on the type of the product produced, focusing on product versus process innovation can also have a negative environmental impact.
For example, creating a tablet that charges faster and uses less energy may, in fact, grow the overall market. “Now you’re selling a better product – it charges faster, so more people want to buy it – but overall you might be creating a negative environmental impact due to the increased demand.”
In this work conducted together with Cheryl Druehl from George Mason University and Vered Blass from TAU, Raz looked at different products and their lifecycle stages and showed that while some (such as perishable food and disposable batteries) will have a decrease in the environmental impact, others (such as electronics and fashion products) might have an increase in the environment impact.
Lessening the effects through competition
The original refurbishing research looked at a monopoly – for example a firm such as AT&T that until 2011 had a monopoly in the iPhone market in the U.S. But what about a competitive environment? Would a healthy competitive environment lessen the negative effects on the environment?
No – competition actually makes things worse by decreasing the prices of new cell phones even further and thus growing the market even more (both for firms that sell refurbished products and for firms that do not) and with it the environmental impact.
So what are the answers that Raz’s work is driving him towards? The answer lies in reframing the benefits beyond just the environmental to include the social impacts.
Yes, his research has shown that a company will sell more new products to sustain the refurbished market, which arguably is a bad thing. “But is it bad for the farmer in Africa, who is now able to use the phone to sell his crops, get better information and earn more so he can send his kids to school?”
Raz’s recent work has looked into this relatively new area of social impact. While there were negative environmental impacts due to increased sales, in all cases analyzed there was an improvement in the overall benefits to society.
“With the more products you sell, especially of the refurbished ones, some consumers who couldn’t get the product before are now able to buy a refurbished version of it, while others who previously bought refurbished can now buy new, so people are now moving up – all are able to get a better utility from this scenario.”
Which leads to yet another question: What is the right balance between environmental and social benefits?
“Overall, there are many answers about what that balance should be. I would argue that we should focus on social benefits, but those need to take into account both the (possibly negative) environmental impacts that could include health and climate change issues, and the (positive) individual benefits and the benefits to society from more products reaching more segments of society.”