Tuesday, December 11, 2007

Green Evolution

Profit maximization, an ultimate goal of every business, possesses its inalienable theoretical simplicity: an elegant amalgamation of total revenue’s maximization and total cost minimization. What else is there to it? In the absence of externalities, equating marginal revenue to marginal cost determines the optimal quantity of output and achieves the above stated goal- yielding maximum profit. Until relatively recently, the traditional combination of cost minimization and revenue maximization used to be the traditional and, on a large enough scale, the only way of conducting business, but it is not anymore.

At the end of the twentieth century an environmentally friendly business model started gaining popularity. The trend continued and received substantial support carrying the new business model well into the new millennium. What exactly am I talking about? I believe it would be a fair statement to point out the following. The business community observed a shift from traditional profit maximization model to conducting business while taking environment into consideration. After that we made the next step, introducing the entire segment that made environment its focal point and generated profit solely via helping the environment. Today, it seems there are companies that approach business in an even different manner. Instead of supplying a good or a service to satisfy the existing demand or create a supply that would in turn create its own demand, few companies are putting emphasis on environment at the expense of profit maximization. If anything, such conduct seems to be counter intuitive to neo-classical economics. Surprising as it is, such is a new business trend.

Allow me to illustrate. For simplicity purposes, let us consider the paradigm shift within the food industry. For generations, we have all enjoyed the good old pesticides-filled and antibiotics affected foods. Then came “Whole Foods Market,” “Wild Oats,” and “Vitamin Cottage,” making promises to change business and rescue the consumers’ bodies of pesticides, hormones, and poisons. After achieving such goal quite abruptly, it was those companies that pledged to bring yet another change to conducting business. Now the goal of those commercial enterprises was to alter their business models and tailor them to the existing preferences of the general population, which in the 21st century are unquestionably environmentally centered.

Take a closer look at Whole Foods Market. If you see what I see, then among other things you will take note that the company is fueling its trucks with biodiesel at four out of nine company’s distribution centers; it is the only FORTUNE 500 Company to offset 100 percent of its electricity use with renewable energy credits. Also, it is developing green construction methods, building some stores to LEED certification standards, and selecting green building materials. Finally, in addition to recycling glass, plastic, and aluminum the company offers a bag refund in an attempt to promote reusing packaging materials as well as compostable food packaging for prepared foods. For more information on Whole Foods, please visit http://www.wholefoodsmarket.com/pressroom/pr_10-23-07.html.

To top this list, may I mention that Whole Foods recently received Green Power Partner of the Year Award from U.S. Environmental Protection Agency for second consecutive year. Why? Well, according to their website “In 2007, Whole Foods Market is being recognized for increasing its green power purchasing to include more than 509 million kilowatt-hours of wind-based renewable energy credits. This is enough renewable energy to offset 100 percent of the electricity used in all of its stores, facilities, bake houses, distribution centers, regional offices and global headquarters in the U.S. and Canada. Whole Foods Market is the only FORTUNE 500 Company to offset 100 percent of its electricity use with renewable energy credits.” Well, that doesn’t really fit together with the traditional framework of cost minimization, does it? After all, what kind of cost-minimizing business would double its expenditures on electricity?

Let me guess what you are thinking. If you are a diligent student of Economics, right about now you might be thinking that it is a part of the business model of a natural, organic grocery chain. Appealing to people’s environmental preferences and supplying organically grown foods, that is just good business and creates an even better reputation for the company, right? What’s more, you might be thinking that Whole Foods got lucky to be in a position where it can supplement its traditional revenue sources with a good environmentally friendly reputation. Seriously, how many traditional (non-electricity generating) businesses would buy green credits and most importantly why?

Surprisingly, to name just a few, Kohl’s Department Stores, New York University, Pepsi Americas Inc, The Pepsi Bottling Group, Pepsi Bottling Ventures LLC, Starbucks, Johnson & Johnson, Mohawk Fine Papers, PepsiCo, Staples, Sloan Valve Company, City of Bellingham (WA), Wells and Fargo, and of course Whole Foods- all of them have purchased enormous quantities of renewable energy. Together, these companies account for a purchase of more than 3.55 billion kilowatt-hours of renewable (mostly wind powered) energy (see details at http://www.epa.gov/greenpower/awards/winners.htm). I seriously urge you to consider the amount of energy 3.81 billion kilowatt-hours provide. Other participants include Bank of America, Hewlett-Packard, Dell, and Google (who actively seek and implement environmentally friendly practices into their business models. For details, go here http://www.webwire.com/ViewPressRel.asp?aId=32715.

As you can see, it not just organically fed tree huggers proclaiming slogans about the virtues of saving the whales. Numerous industries’ large capitalization leaders assume the responsibility for their environmental practices. The above listed names constitute only the top of the pyramid, representing the tip of the sword in the battle for the quality of environment for us all. Their voluntary participation and invaluable contribution demonstrate the unflinching willingness and considerable ability to provide unparalleled leadership among businesses. Make no mistake in your mind: this is a beginning of a trend that will only become stronger. This is no longer a world of governmental coercion to make businesses abide by some arbitrarily set pollution legislature or standard. This is an unprecedented evolution of corporate thought. This is a Green Evolution.

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