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When to invest in the right innovations at the right moment in a product's life cycle

Oct. 31, 2013 — When it comes to reducing the environmental impacts of products and services while maximizing profits, firms sometimes invest in the wrong areas.

In Design for the Environment: Life-Cycle Approach Using a Newsvendor Model, University of Virginia Darden School of Business Professor Gal Raz and research colleagues investigated which segments of a product's life cycle create the biggest environmental impacts and where firms should invest their resources in order to reduce those impacts.

His work also revealed a surprising twist -- too much eco-efficiency sometimes harms the environment.

The paper appears in Production and Operations Management and is part of a series of studies examining the life cycle stages of products.

"Initiating new approaches to product design and manufacturing processes can affect a product's cost, desirability to consumers and the impact of the product on our environment," said Raz. "In our paper, we show a better way to determine where design changes will be most effective economically for the firm and most friendly to the environment."

The Product Category Matrix

According to Raz, products sold by firms fall into two categories -- functional or innovative. Depending on the category in which the product falls, there can be a high environmental impact during the manufacturing stage or use stage of a product's life cycle.

To illustrate these two dimensions at work, Raz described how a functional product such as bread has its greatest environmental impact when it is manufactured rather than used or consumed. For an innovative product like fashion apparel, there exists a higher environmental impact during the use stage. For example, dry-cleaning garments consumes energy.

"Investment in innovations that allow garments to be washed in cold water instead of needing to be dry-cleaned, for example, could be better both economically and environmentally for a firm manufacturing innovative products such as fashion," said Raz.

Raz and his colleagues Cheryl Dreuhl, professor at George Mason University School of Management, and Vered Blass, professor at The Leon Recanati Graduate School of Business Administration at Tel Aviv University, approached this research using the newsvendor model, a methodology that captures demand uncertainty, thus differentiating between functional and innovative products.

The researchers showed that functional products in general will have greater investment activities in the manufacturing stage rather than the use stage, while makers of innovative products should focus their investment efforts in the use stage to create eco-efficient and value enhancing products.

Decoupling

The group's research also explored the potential for negative environmental impacts born from the implementation of eco-efficient and value-enhancing product improvements and increased consumer desirability.

"The positive impacts from the environmental design improvements can be outpaced by the negative impacts produced when more consumers purchase the products, or when due to demand uncertainty, a lot of overproduction occurs resulting in waste from leftovers," said Raz.

Raz and his colleagues also explored a policy issue under review by lawmakers -- decoupling. Decoupling is an instrument used to break the link between economic growth (sales revenue) and environmental resource degradation (energy use).

There are two types of decoupling:

• Relative decoupling -- refers to the increased use of a resource (by consumers) that occurs, at a lower rate than economic growth (increased revenue for the producers).

• Absolute decoupling -- achieved when the resource use declines as economic growth occurs.

"We found that absolute decoupling does not occur for innovative products, but does occur for some functional products," Raz said.

The research team also examined the environmental impact of overproduction for different categories of products taking into account their end-of-life use.

Their next research paper in the series will focus on the trade-off between the use stage and end-of-life stage innovations and the impact of regulation on these environmental innovations. Raz and his colleagues found that while regulation can deliver better social outcomes across a product life cycle in the primary and secondary markets, in general, they can hurt overall social impact.

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