Replacement+Decisions+for+Hazardous+Substances+,+June+6,+2010

Replacement+Decisions+for+Hazardous+Substances+,+June+6,+2010

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Unformatted text preview: Replacement Decisions for Potentially Hazardous Substances Tim Kraft, Feryal Erhun, Robert C. Carlson, and Dariush Rafinejad Department of Management Science & Engineering, College of Engineering, Stanford University, Stanford, CA, USA, tkraft@stanford.edu, ferhun@stanford.edu, r.c.carlson@stanford.edu, rafineja@stanford.edu As public awareness of environmental hazards increases, a growing concern for corporations is the potential negative environmental impact of their products and the chemicals those products contain. We analyze the optimal decisions of firms and stakeholders when a substance within a product is identified as potentially hazardous. We model the following problem: a firm sells a product containing a substance that is potentially hazardous. Although the substance is not regulated, the firm believes regulation may occur in the future. Hence, it must devise a strategy in terms of timing and intensity of investments for the development and the implementation of a replacement substance. In an environment where replacement costs are expected to be millions of dollars, regulations are uncertain, and both consumer and non-governmental organization (NGO) pressures exist, a carefully developed plan that balances costs and risks is critical for a firm. Our results indicate, from the firms perspective, that larger firms should plan their replacement decisions carefully to avoid unnecessary development and implementation costs, while smaller firms should invest aggressively to establish a niche position within the market. From the external stakeholders perspective, NGOs and regu- latory bodies should take a pragmatic approach when pressuring firms to develop a replacement substance, applying pressure only when consumer awareness and the existing threat of regulation are low. Key words : Environmental investments and regulation, product strategy, hazardous substance uncertainty History : June 2010 1. Introduction As public awareness of environmental hazards increases, a growing concern for corporations is the potential negative environmental impact of their products and the chemicals those products con- tain. When a substance within a firms product is identified as potentially hazardous, a replacement strategy must be developed for managing both costs and risks. For potentially hazardous substances only speculation exists regarding their environmental impact. However, this speculation compli- cates firms decisions by increasing the likelihood of regulation, altering consumer preferences, and encouraging pressure from stakeholders such as non-governmental organizations (NGOs). In this paper, we analyze the decisions of both firms and stakeholders when a substance is identified as potentially hazardous. We investigate the timing and intensity of firms investments, as well as the 1 2 Kraft et al.: Replacement Decisions for Potentially Hazardous Substances effectiveness of external stakeholders pressuring firms to replace a substance.effectiveness of external stakeholders pressuring firms to replace a substance....
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Replacement+Decisions+for+Hazardous+Substances+,+June+6,+2010

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