Absorptive Capacity and Interpretation

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Business Strategy and the Environment Bus. Strat. Env. (in press) Published online in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/bse.479

Absorptive Capacity and Interpretation System’s Impact when ‘Going Green’: an Empirical Study of Ford, Volvo Cars and Toyota Mats Williander* Fenix Center for Research on Knowledge and Business Creation, Chalmers University of Technology, Vera Sandbergs allé 8, SE-412 96 Göteborg, Sweden ABSTRACT Whether or not it pays to be green or under what circumstances is an important ongoing debate among economic researchers. However, this question, with its rather instrumental rationality, may underestimate another key issue: the ability of companies to create value that can be captured from customers. This paper reports on three companies in the automotive industry developing and launching cars with improved eco-environmental performance and less petrol consumption. The study reveals that, despite being captured in the same technological paradigm, the individual company’s mode of environmental interpretation and its aspiration to exploit new technology may be two important explanatory factors in its ability to go green profitably. The study indicates that an enacting mode of environmental interpretation may be superior to a discovering mode, and suggests that for companies having a discovering mode there may be a need to complement existing engineering practice with insights into consumer psychology, and bundling of common good versus private good product attributes. The research upon which this paper is based was conducted using an insider/outsider approach in studying the three companies. Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment. Received 16 December 2004; revised 27 April 2005; accepted 9 May 2005 Keywords: automotive industry; greening of industry; alternative approaches; path dependency

Introduction HE GREENING OF INDUSTRY RESEARCH IS UNDOUBTEDLY VERY BROAD, SPANNING FROM GENERAL

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strategic views (Hart, 1997), and how to reach them (Figge et al., 2002; Hart and Milstein, 1999; Kemp et al., 1998; Lothe and Myrtveit, 2003; Newton, 2002; Schnaiberg and Gould, 1994) to interaction effects of regulation (Palmer et al., 1995; Porter and van der Linde, 1995; Rugman

* Correspondence to: Mats Williander, Fenix Center for Research on Knowledge and Business Creation, Chalmers University of Technology, Vera Sandbergs allé 8, SE-412 96 Göteborg, Sweden. E-mail: [email protected] Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment

M. Williander and Verbeke, 1998; Wallace, 1995). It further continues with ethical aspects (Payne and Raiborn, 2001), organizational culture (Harris and Crane, 2002), insurance issues (Minoli and Bell, 2003), management compensation schemes (Lothe and Myrtveit, 2003), corporate non-monetary measures (Figge et al., 2002) and the like. These issues could simply be caused by the fact that most corporations cannot see profits in going green. The economic research on the greening of industry (Elkington, 1994; Hart and Ahuja, 1996; King and Lenox, 2001; Maxwell, 1996; Payne and Raiborn, 2001; Porter and van der Linde, 1995; Reinhardt, 1998, 1999; Walley and Whitehead, 1994) builds on an underlying assumption of instrumental rationality that the benefits could be calculated. One line of reasoning is that pollution is waste, and reducing waste may save money (Hart, 1995; Hart and Ahuja, 1996). Another is that internalizing the cost of polluting is unlikely to increase profits (Maxwell, 1996; Walley and Whitehead, 1994). A third line of reasoning is that the issue as such is not different from any other strategic issue for companies existing in webs of simultaneous multiple externalities (Reinhardt, 1998). In contrast, this paper argues against this instrumental rationality view. The potential profitability from clean production (Hart, 1995; Hart and Ahuja, 1996) is not necessarily driven by the same business logic as the potential profitability of clean products (Dagnoli, 1990; Foster and Green, 2002; Kemp et al., 1998; Reinhardt, 1998; Strannegård, 1998). The automotive industry is one example where the production of polluting cars can be very clean.1 In many businesses, the offered products can be eco-environmentally improved without any change in their private attributes, such as green electricity (Rowlands et al., 2003). Yet other businesses may experience a positive correlation between eco-environmental improvements and private attributes, as potentially found in dishwashers, refrigerators and washing machines (Strannegård, 1998). In such cases, improved eco-environmental performance also has a positive impact in the product’s ‘private good’ domain. For such businesses, going green is mainly an issue of creating cost efficient ‘win–win’ propositions (Reinhardt, 1998). In such cases and in cases where the consumers perceive cost as low (Diekmann and Preisendörfer, 2003), progress can be made for the eco-environmental issue ‘if we analyze them as we would other business issues’ (Reinhardt, 1998, p. 44). But these cases may be the exceptions. There are products, such as cars, where symbolic and behavioural aspects of the product and its use may be in conflict with eco-environmental improvements. Greening of such industries becomes a reciprocal interaction between human action, technology and societal structures (Orlikowski, 1992) in which history has created a path-dependent socio-cognitive model of technology evolution (Garud and Rappa, 1994) affecting the decision criteria of both companies and consumers. The understanding of this reciprocal interaction and how to offer eco-environmental product improvements within the constraints of the institutional context can profoundly affect a company’s competitiveness and profitability. To date, this matter has not been considered among economic researchers. The individual company’s absorptive capacity (Cohen and Levinthal, 1990) and interpretation system (Daft and Weick, 1984) could potentially affect its profitability expectations in going green. Furthermore, these same issues could affect profitability for those companies that do try to go green. It is argued here that contributions from economic theory on the greening of industry may be significantly improved from a position outside of the technological paradigm rather than from within it. This paper shows that different companies, despite being captured in the same technological paradigm, have different and historically conditioned assumptions controlling their actions in fundamentally different ways. These beliefs substantially affect their different potentials in going green profitably. The paper is a case study of Ford Motor Company, Volvo Car Corporation and Toyota Motor Corporation in their efforts to bring more eco-benign product offers to the market. All three companies have

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Manufacturing is about 10% of a car’s lifecycle CO2 emissions (John Sullivan, private communication, 2005).

Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment

Bus. Strat. Env. (in press) DOI: 10.1002/bse

Absorptive Capacity and Interpretation System’s Impact when ‘Going Green’ actively and voluntarily tried to bring eco-environmentally improved products to the market, though using different approaches. They each have a global presence and have acted independently in the studied time period. The paper begins with a brief literature review of technological paradigms, interpretation systems and consumer psychology. The methodological issues of the case studies are then addressed, followed by a section exploring the empirical material. Finally, some findings and implications are further discussed.

Technological Paradigms and Interpretation Systems When a company asks itself the question whether or not it pays to be green, there are inherent assumptions depending on the established technological paradigm (Dosi, 1982), also called a technological regime (Kemp et al., 1998). For the automotive industry, the technological paradigm is part of a large technological system (Hughes, 1987). Various organizations in a large technological system act as components in that system, interacting with technological components in ways that over time influence organizational structures to effectively mirror the technology. Such mirroring between organizations and technologies becomes bi-directional and affects the ease with which new and alternative technologies become accepted (Hughes, 1987). Paradigms, and especially paradigms in a phase of what Dosi calls ‘oligopolistic maturity’, are considerably limited in their search heuristics (Kemp et al., 1998) and show a considerable ‘blindness’ to other technological possibilities. They also have powerful exclusion effects through selective devices, such as economic forces and institutional and social factors that, within a large set of possible directions of development, operate early and on rather general questions (Dosi, 1982). The combination of ‘rules and beliefs embedded in engineering practices and search heuristics with the rules of the selection environment’ (Kemp et al., 1998, p. 182) greatly influences the product design and how various product attributes are bundled into a total value proposition. The existing technological paradigm influences both the designing organization’s perspective – what will be considered for experimentation, and also the consumer’s perspective – what will be considered on the market. Established rules and behaviour may lead to rigidities and path dependence that potentially create lock-in effects (Heffernan, 2003). Although this may be a general effect in a certain business, the effect on the company level depends on the individual company’s history in terms of absorptive capacity and aspiration level to exploit new technology (Cohen and Levinthal, 1990). Cohen and Levinthal (1990) suggest that an organization with a high aspiration level to exploit new technology will conduct more innovative activity and thereby increase its awareness of outside opportunities. The individual company’s beliefs about the environment and intrusiveness to it depend on two different types of assumption: ‘analyzable’ and ‘unanalyzable’ (Daft and Weick, 1984, p. 289). For companies having an active intrusiveness to their environment, the analysable assumption is called discovering. These companies act using formal search, questioning, surveys, data gathering and active detection. The unanalysable assumption for companies having an active intrusiveness to their environment is called enacting, where companies act through experimentation, testing, coercion, inventing the environment and learning by doing. Active companies captured by the same technological paradigm may hence show substantial individual differences, and depending on their individual history may take one of the four following routes from a shared starting point of technological ‘blindness’: (1) (2) (3) (4)

discovering assumption and high aspiration to exploit new technology discovering assumption and low aspiration to exploit new technology enacting assumption and high aspiration to exploit new technology enacting assumption and low aspiration to exploit new technology.

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Bus. Strat. Env. (in press) DOI: 10.1002/bse

M. Williander Obviously, for a successful move towards greener product offerings, it is important to ensure that consumers willingly join, including the willingness to pay for the cost addition that often accompanies improved eco-environmental performance of some product typologies. Since the cost issue is beyond the scope of this paper, we settle for observing that for cars developed by manufacturers within their current technological paradigm improved eco-environmental performance seems to come at a cost.

Consumers on Private and Common Good In order to be considered by consumers, alternatives to established technological paradigms need to become socially embedded (Hård and Jamison, 1997; Newton, 2002). Alternative technological offers must have a reasonable fit to the ‘defining power’ of established technologies in (1) symbolic, (2) organizational and (3) behavioural structures (Hård and Jamison, 1997). In addition, they should not challenge too many of these structures simultaneously. ‘An alternative technology seldom succeeds if it poses an alternative at all three levels’ (Hård and Jamison, 1997, p. 148). The product performance in these three structures constitutes its perceived value by the consumer, i.e., what the consumer considers ‘private good’. Despite consumer attitudes on common good issues such as eco-environmental concern, research in consumer psychology indicates that consumer behaviour generally follows rational-choice theory in high private cost situations (Diekmann and Preisendörfer, 2003). When a person perceives a high personal sacrifice for the common good, the willingness to make the sacrifice is in general very low despite attitude (Tyler et al., 1982). Depending on product typology, the product’s performance in the private good domain can stand in various degrees of conflict with its performance in the common good domain, influenced by its role and meaning in the current technological system. For a car, power, size and body shape may have fundamental negative effects on its eco-environmental performance, but positive effects on perceived personal good such as status, acceleration and the like. The prospect theory from behavioural economy suggests that the psychology behind consumer choice is quite subtle and complex and not as logical as the traditional utility theory suggests (Kahneman and Tversky, 1979; Kalyanaram and Winer, 1995; Meyer and Johnson, 1995; Thaler, 1985). There is an asymmetry in consumers’ perception of gains versus losses so that the perceived punishment of losing is greater than the joy of winning an equal amount of value (Kahneman and Tversky, 1979). One example is ‘the observed discrepancies between the amount of money people are willing to pay for a good and the compensation they demand to give it up’ (Tversky and Kahneman, 1986). Outcomes are perceived as gains and losses rather than as states of wealth, that is, gains and losses refer to some kind of reference point which can be affected by the formulation of the offered prospect (Kahneman and Tversky, 1979). The automotive industry does meet consumers that may have various attitudes about the ecoenvironment while in general they buy on behaviour, i.e. judged from a private good perspective. Even small losses in the private good domain for the sake of common good improvements may be crucial because of the low willingness to pay for common good combined with the asymmetry in consumers’ perception of gains versus losses and the reference point for comparison.

Methodology The research on which this study is based has been undertaken in a collaborative context with academia and industry researching together (Adler et al., 2004). The study is what Bartunek and Louis (Bartunek and Louis, 1996) call an insider/outsider research methodology. The insider researcher is Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment

Bus. Strat. Env. (in press) DOI: 10.1002/bse

Absorptive Capacity and Interpretation System’s Impact when ‘Going Green’ simultaneously a practising manager at Volvo Car Corporation, which in turn is owned by Ford Motor Company. This enabled detailed know-how and a broad contact network for better access to and understanding of the practices and mechanisms of the industry. The outsider researchers, who are academic colleagues at a university of technology, served to maintain a critical distance to the empirical material. Being able to combine insider know-how and access to practices with outsider distance and critical reflection on insider findings is the main strength of the insider/outsider research design. In terms of data collection at Volvo and Ford, interviews were conducted with 20 project team members as well as with five employees outside the projects. ‘Interviews with individuals whose importance became clear during data collection’ (Eisenhardt, 1989) were used as a selection method, as well as for individuals who had left the companies, until saturation was reached. Data from Toyota originated from another research project within the same research group on the same topic, technology and final product. In addition, as secondary data, Liker’s analysis and research was used (Liker, 2003). Data saturation has not been validated for Toyota. The interviewees were managers in functions such as product planning, marketing and sales, product development, and finance. Interviews lasted for about an hour and a half. An interview guide was developed and adhered to that allowed open-ended interviews on the topic. All interviews were recorded and significant passages were transcribed. In addition to the interview material, internal documents were collected and examined. The empirical material was coded according to different etic categories (Boje, 2001), that is, in categories that made sense to the practitioners and were used verbally by them. Such categories were market demands, customer expectations, policy issues, management decisions, company strategy, development issues, infrastructure dependence and the like. The data in each category was then qualitatively evaluated with respect to the type of interpretation system and aspiration to exploit new technology, thus forming the basis for the relative positioning of the companies in relation to these aspects.

Two Contrasting ‘Going-Green’ Approaches The following case description is divided into the two contrasting approaches: Ford and Volvo versus Toyota. Ford and Volvo show clear signs of explorative assumptions and low aspiration towards new technology, while Toyota demonstrates more enacting assumptions and high aspiration towards new technology. The Approaches at Ford and Volvo Ford’s interest in methane started towards the end of 1979. At that time and with fresh US experience from oil crises, there was a general interest in alternative fuels in the US, so when Ford’s Brazilian subsidiary made a direct request in 1979 for engineering help to provide ethanol-driven cars, which were being promoted in Brazil for state financial reasons, Ford formed a small team to look into a whole range of alternative fuels, of which methane was one. At Ford’s research laboratory, they developed a range of similar vehicles that could run on different fuels. US governmental concern over energy dependency grew in strength, resulting in two laws. The Alternative Motor Fuels Act of 1988 encourages auto companies to produce alternative-fuelled vehicles, while the Energy Policy Act of 1992 mandates fleet customers, especially governmental fleets, to buy and use alternative fuel vehicles (AFVs). Ford’s Policy and Business Strategy Manager says ‘Ford read those acts as a sincere move by the government that wanted us to move into that business’. Volvo’s path towards methane-driven passenger vehicles came from a strategic belief that a growth potential existed through a more focused exploitation of the company core values, safety, quality and Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment

Bus. Strat. Env. (in press) DOI: 10.1002/bse

M. Williander environmental care, from a municipal government initiative to improve local air quality and by Volvo’s concerns about the crash-safety of vehicles being converted after-sales to methane in parts of Europe. Volvo Cars’ top management formed a small team to look into more environmentally friendly fuel alternatives and became involved in the network created by the municipal government to address the local air quality issue.2 A comprehensive fuel SWOT analysis came to the conclusion that methane was a suitable alternative fuel to petrol. Both Ford and Volvo showed an active view toward environmental changes. However, after rather explorative analyses, their interest turned quickly to alternative fuels rather than substantial fuel consumption reductions as a means of addressing eco-environmental and energy security concerns. Since the objective quickly became to offer a vehicle that could be run on an alternative to petrol, it became quite natural both to Ford and Volvo, with the existing engineering practices, to put their efforts into modifying the power train for that fuel, and not into bringing in new, potentially novel and challenging technology or making a specific car model. As the manager of the Ford development project said, ‘Ford’s project goal was to keep other car attributes the same, to make a “transparent functional vehicle” ’. Ford’s vehicles were initially dedicated to methane, taking maximum advantage of that fuel. This gave a range of 250 miles, so the methane offer came close to, but was not on par with, traditional vehicles. The additional cost of a car for methane use is from $4500 to $8000, depending on the number of tanks. Methane storage is inherently more expensive than petrol storage. The tank and high-pressure solenoids required to provide enough methane for a reasonable range increase cost, even at high production volumes. Ford’s Policy and Business Strategy Manager said ‘I personally, in 23 years of doing this, cannot think of a high pressure cylinder being produced at such low cost as petrol tanks’. Ford did not initially invest in bifuel development, since they believed that methane had an ecoenvironmental message, that bifuel vehicles compromised that message, and that the consumer was going to need it. The truth was they never did, which made Ford complement their offer with bifuel cars in 1994. The bifuel cars have a full-size petrol tank, but methane tanks are placed around it to minimize engineering costs. A research project was conducted to look specifically at alternatives but eventually found that the economic benefits did not materialize. To provide two extra gallons of methane fuel might cost the same as providing eight gallons of petrol. To provide enough methane for a reasonable driving range, luggage storage had to be used for tanks. Based on a belief that the infrastructure around the world is too limited for consumers to consider dedicated methane cars, Volvo has focused solely on bifuel vehicles. As at Ford, the engineering efforts were directed toward making the bifuel car as similar as possible to the petrol version in terms of all attributes other than fuel-related ones. The development ambition was captured in the team’s consumeroriented catch-phrase ‘no sacrifices’. Volvo developed a unique under-floor, lightweight tank solution with multiple gas tanks to allow for full luggage space and capacity. That solution required a smaller petrol tank, meaning that the range on petrol or on methane was about 300 km each. Instead of challenging the part of the technological paradigm they controlled themselves, Ford and Volvo thus chose solutions challenging other actors in the technological paradigm such as the fuel infrastructure and consumers. The technology was not new, as after-sales conversion of vehicles to methane became a growing third-party business after the oil crises. Engineers at both Ford and Volvo have the same roles and beliefs embedded in their engineering practices. They tried to make the cars as similar as possible to the traditional cars except in terms of fuel. They believed in an eco-environmental message, and they made certain trade-offs between engineering costs, range and luggage space, i.e. trade-offs between the common good and private good product domains. This was done based on their engineer2

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Bus. Strat. Env. (in press) DOI: 10.1002/bse

Absorptive Capacity and Interpretation System’s Impact when ‘Going Green’ ing practices from trade-offs between various product attributes within the private good domain only. However, in this case they compromised the private good properties of the car in order to meet common good targets. Toyota’s Alternative Approach Toyota’s approach can be considered as an active company with an enacting assumption about their environment. The following statement in 2002 by Fujio Cho, President of Toyota Motor Corporation (Liker, 2003, p. 3) illustrates this assumption: We place the highest value on actual implementation and taking action. There are many things one doesn’t understand and therefore, we ask them why don’t you just go ahead and take action; try to do something? You realize how little you know and you face your own failures and you simply can correct those failures and redo it again and at the second trial you realize another mistake or another thing you didn’t like so you can redo it once again. So by constant improvement, or should I say, the improvement based upon action, one can rise to the higher level of practice and knowledge. In early 1990, Toyota executives were concerned not only about the eco-environment but about the business climate for Toyota. They feared that being too successful for too long might lead to complacency. They were afraid of a reduced sense of urgency among employees for continuous improvement in the way they work. As part of the company culture, ‘Toyota leaders regularly stir the pot even creating crisis when necessary’ (Liker, 2003, p. 51). A project called Global 21 was initiated. Its objective: to develop a car for the 21st century with the same performance as a regular car. However, the car would use half the fuel and be able to be mass produced. Not surprisingly, Toyota’s senior engineers balked, seeing this assignment as more or less impossible. ‘The reply from Toyota’s top management was “We don’t care, we will do it anyhow!” ’ said one manager at Toyota Europe. The task was an extreme challenge for the senior engineers appointed to the project. Finally though, they developed a hybrid concept: it improves energy efficiency, translating into improved fuel economy, and yet the car still runs on petrol. Launched in Japan in 1997, the hybrid Prius I was intended for the Japanese market. Although the Prius I sold well in Japan, according to the manager at Toyota Europe, it was not very popular in the rest of the world, especially in Europe, where it was launched in 2000. The sales in Sweden, for instance, were only 700 cars in three years, and according to a manager at Toyota Sweden about 5% of them were sold to private households. The experience Toyota gained was expressed by a manager of Toyota Europe: ‘People say environmental performance but they buy vehicle performance; it has to be attractive and still environmentally friendly’. In 2000 they launched a revised Prius II in Japan with better performance and better fuel economy, i.e., simultaneous improvements in the common good and the private good domains. Cost reduction of the hybrid system was also of high priority for Toyota. According to the manager at Toyota Europe, the company managed to reduce the cost of hybrid components by 70% from Prius I to Prius II. The revised car was much more accepted by consumers, resulting in increased sales volumes. In the US, Prius I sales in 2003 were 22 264 cars while the Prius II sales in 2004 were 53 753 cars. In Sweden in 2004 over 700 cars were sold in less than a year, and now 60% of buyers were private households.

Consumers’ Views on Alternative Vehicles In the case of methane-fuelled vehicles, the consumer sees a range of cars where the bifuel or dedicated methane is an engine variant in a certain car model. On the whole, it is the weakest engine, but at an Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment

Bus. Strat. Env. (in press) DOI: 10.1002/bse

M. Williander additional cost of $4000 or more. The car will give the consumer either a range close to a traditional car, but then dedicated to methane and possibly with reduced trunk space, or if a bifuel with a range roughly half of a traditional car for each of methane and petrol. After 23 years of methane-fuelled vehicle offers in the US, the infrastructure of stations providing methane fuel there is about 1600 unevenly distributed stations, where almost half of them are private, compared to more than 175 000 petrol stations. In Sweden one can find methane fuel stations unevenly spread in the southern part of the country. Gas companies in Germany have joint ambitions to add another 1000 methane fuel stations to the 430 existing ones before 2006.3 In Sweden and the US, most stations providing methane fuel only provide methane and not petrol, so a bifuel car has to be refuelled at two different locations. In addition, the fuel price difference in Sweden may result in an economic payoff first after more than 10 years of ownership for a normal household. The residual value in Sweden and the US has been lower than for similar petrol vehicles, while the situation is much better in Germany. Germany is the exception due to a substantial methane promotion by the government, shown in a running cost of about 40% of petrol. The price addition in a hybrid car is in the same range as for a bifuel vehicle. The reduction in fuel consumption roughly translates into the same fuel cost savings as when driving on methane in Sweden and the US (October 2003). The Prius brand exists only for the hybrid, which means a Prius owner is a hybrid owner and the reference price is obscured. The Prius can be seen as a bundling of common and private good into a unique product where it is impossible for the consumer to separate the two. The product proposition does not challenge any of the symbolic, behavioural or organizational dimensions of the existing dominant technology. No alternative fuel is required, and range cannot only be equalled but also potentially improved due to the car’s higher energy efficiency. A unique body style, high-tech interior features combined with the hybrid technology marketed as high-tech create a symbolic value. In various ways, the consumer is continuously reminded that Prius represents leading edge technology, fuel savings and eco-environmental performance combined. The difference in consumer acceptance of these two types of product offer, where the price addition and fuel savings are about the same, becomes obvious. Ford officially confirmed on 30 January 2004, that they would stop offering methane-fuelled vehicles in the US after the current 2004 model year. Volvo continues to sell some thousand bifuel vehicles annually, mostly to fleet operators. Consumers’ growing interest in the Toyota Prius II, launched outside Japan in 2004, prompted Toyota to decide in August 2004 to increase production by 50%4, and now, in March 2005, ‘the popular Prius gas-electric hybrid mid-size sedan recorded its best-ever overall sales month with 10 236 units, an increase of 160.9% over March 2004’5 in the US.

Discussion This study has shown that, despite all being captured in the same technological paradigm, Ford and Volvo on one hand and Toyota on the other have different and historically conditioned assumptions controlling their actions in fundamentally different ways. Such assumptions substantially affect the potential in profitably going green. All three companies proved to be active towards changes in their environments. All three recognized the automotive industry’s need to address petrol consumption and emissions. Ford and Volvo looked for other and cleaner energy sources, while Toyota looked for less energy demand. The approach of Ford and Volvo is less of a challenge to the existing technological par3

http://www.essener-nachrichten.de/umwelt_und_natur.htm http://autoweb.drive.com.au/cms/A_102397/newsarticle.html 5 http://www.theautochannel.com/news/2005/04/01/027086.html 4

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Bus. Strat. Env. (in press) DOI: 10.1002/bse

Absorptive Capacity and Interpretation System’s Impact when ‘Going Green’ adigm, which is why they were classified as less aspiring towards new technology than Toyota. It may be argued that Volvo has a somewhat higher aspiration than Ford, as seen in Volvo’s implementation of a unique lightweight under-floor tank system and in Ford’s strong economic selective device which made the company remain in known technological territories. Toyota’s ambition to develop such a huge technological challenge as the hybrid power train for mass production is a clear sign of high aspiration towards new technology. Toyota’s vision of the car of the 21st century, how the company put it on the market from that vision, learned from that process and consumer reactions, revised it and re-launched it successfully are all indications of an enacting assumption about the environment. Ford and Volvo seem to have more discovering assumptions. They tried to interpret governmental desires, consumer desires and alternative fuel potentials in a rather analytical manner, independently ending up with methane-fuelled cars requiring an infrastructure of stations providing methane fuel. The relative failure of Prius I compared with Prius II, especially in Europe, may indicate that none of the companies clearly understood consumer psychology and behaviour on common good issues in high private cost situations, i.e., in the challenge in getting private pay for common good improvements. Prius I was primarily for the Japanese market, in which it sold well, so there is a possibility, although not clear, that Toyota may have understood the challenge. Nonetheless, Toyota’s culture of learning by doing shows its ability to adjust for any potential lack of or bias in understanding of the consumer. The combination of low technology aspiration and discovering assumption seems to have had substantial influence in Ford’s and Volvo’s choice of solutions. They showed no ability to learn, revise and re-launch. Instead, Ford decided to discontinue their methane offers and Volvo continues to offer their proposition in hitherto continuously small volumes. It is quite interesting to note that the least challenging proposition from a technology perspective became the most challenging one from a consumer perspective. Customers’ preferences for the various offerings are not only shown in the comparison between the Prius and the methane cars and the Prius I versus the Prius II, but also in to whom the cars were mainly sold. The lowest economic incentives for methane-driven vehicles were given in Sweden and the US, where fleet sales became the overwhelming part. Fleet operators were also mandated to buy alternativefuelled vehicles in the US and some could gain on the fuel price difference. A growing number of companies in Sweden want to have an eco-environmental company profile; i.e., cars providing that image have that product attribute as a private good for such companies. Private customers and fleet customers can have quite different private good domains. This case study clearly shows that the current economic research on the greening of industry (Hart and Ahuja, 1996; King and Lenox, 2001; Maxwell, 1996; Reinhardt, 1998, 1999; Walley and Whitehead, 1994) may be significantly improved by positioning itself outside of the technological paradigm under study, and from that position incorporating theory on companies’ interpretation system and absorptive capacity, as well as consumer psychology and economic behaviour. Consumers’ perception of a product proposition may be far from rational, especially for products with high symbolic value. Such product typologies provide development engineers with greater possibilities to improve the common good domain of products through a conscious ‘bundling’ with private good product attributes, the domain where consumers’ willingness to pay exists. However, companies need to be aware of and exploit these possibilities. The findings on the studied companies’ different abilities to exploit these possibilities support Daft and Weick’s (1984) model of organizations as interpretation systems as well as supporting Cohen and Levinthal’s (1990) findings on companies’ absorptive capacity. This paper suggests that high aspiration to exploit new technology in combination with an enacting assumption about the environment may be a more successful path in becoming green profitably than lower aspiration to exploit technology and a Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment

Bus. Strat. Env. (in press) DOI: 10.1002/bse

M. Williander discovering assumption about the environment. This suggestion may depend on product typology, especially the product’s symbolic value and its potential conflict between the product’s common good and private good attributes. The observed difference between enacting and discovering assumptions about the environment may stem from these companies’ limited experience in consumer behaviour concerning common good and private good product attributes. Companies having a discovering assumption can be especially misguided on common good issues since consumer attitude in such cases may differ substantially from behaviour. An enacting attitude may reduce the need for such insight because of the learning-by-doing approach. One potential alternative to an enacting assumption may hence be to improve companies’ capabilities to correctly analyse consumers on eco-environmental issues complemented with engineering practice in ‘bundling’ of common good and private good product attributes. This ‘bundling’ means developing beyond a technical solution to an eco-environmental problem to become also a technical solution to a commercial problem without compromising the eco-environmental performance achieved. Such ‘bundling’ of common good product attributes with private good product attributes seems to be an area of high relevance with only limited research.

Conclusion Eco-benign products may easily become designed for incentives because of engineers’ design trade-offs, driven by a discovering assumption about the environment and low aspiration towards new technology. Such practices matured in established technological regimes cause the product offer to become unattractive to consumers. Consumer rational-choice behaviour when the cost is perceived as high for improved eco-environmental product performance creates an externalization of the cost if the product proposition is to be given a chance of surviving competition from traditional offerings. A premature conclusion may easily be that it does not pay to be green. However, firms with an enacting assumption about the environment and high aspiration to exploit new technology may be able to provide ecoenvironmental offerings that create a consumer willingness to pay by simultaneously improving the common good and private good product domains. Although not confirmed in this study, an open attitude to exploitation of new technology combined with extensive insight into consumer psychology on common good issues may be an alternative to an enacting assumption for those companies having a discovering assumption about the environment. There is thus a need for further research in this area but also in the apparent ‘blind spot’ of bundling of common good and private good product attributes. The recommendation to managers is to look into the potential and possibilities of bundling the common good and private good in products, and to challenge existing engineering practices.

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Bus. Strat. Env. (in press) DOI: 10.1002/bse