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Environmental Impact of Servicizing

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By Michael McLaughlin (MBA’15)

Can businesses be greener while also increasing profits? Professor Vishal Agrawal’s research on product development, supply chain management, and business models explores the financial and environmental performance of business strategies commonly thought of as beneficial for the environment.

“Without a clear definition of what it means to be green, firms and environmental groups frequently promote certain strategies as green, but these claims may be quite misleading,” states Agrawal. For example, making products modular allows consumers to only replace the improved components, instead of throwing away the entire product. However, Professor Agrawal’s research shows that such modularity may instead allow firms to make products obsolete faster which can lead to consumers replacing components more frequently. In all, such a strategy may backfire by leading to more waste.

“Servicizing”, a business model in which a firm sells the use of its product rather than the product itself, has recently gained traction as a green strategy. A prime example of servicizing is car sharing by Zipcar.   The firm owns the product (the car) and the consumer buys the services of the product (personal transportation). While car sharing reduces the need to own a car, thereby reducing the environmental impact due to production, it may also inspire car use that wouldn’t have otherwise taken place. Prior to the availability of car sharing services in cities, someone without a car would have walked or taken the bus to go to the grocery store. Now they can easily drive instead.

Professor Agrawal’s research investigates whether the servicizing trend is actually environmentally superior to conventional sales models. “Because servicizing allows consumers to pay for how much they want to use instead of the entire product, more consumers can participate,” he explained. Agrawal has found that when people are only charged the variable cost of operation rather than the fixed cost of ownership, product adoption increases which leads to a higher total production impact. His researchidentifies when and which kind of servicing business models are environmentally beneficial.

Professor Agrawal recently presented his research on the environmental potential of servicizing business models at the Sustainable Public Procurement Working Group Meeting organized by the Environmental Protection Agency and the United Nations Environment Program. He plans to continue his research to help these organizations determine what type of business models help and which hurt the environment. “Establishing a set of guidelines for what makes a business model green would help businesses and environmental groups better focus their priorities and not be accused of greenwashing when promoting a strategy as green.”