Monday, December 6, 2010

Reduce, Reuse, Recycle…or Rethink

For consumer durables, environmental sustainability starts with discarding conventional wisdom.

strategy+business magazine
by Tim Laseter, Anton Ovchinnikov, and Gal Raz

Illustration by Lars Leetaru
Image via WikipediaSince Earth Day in 1970, schoolchildren have heard the mantra “reduce, reuse, recycle” as the solution for the growing problem of consumer waste. … Over the last decade, the reduce and reuse parts of the slogan have shown signs of catching on, as per capita waste generation has declined to 4.5 pounds per day, and the volume going into U.S. landfills is now less on a per capita basis than it was 50 years ago. Europe has, if anything, made even more progress.
Some forms of recycling have become the dominant mode for consumers. For example, 88 percent of newspapers and 77 percent of corrugated boxes are now recycled. Even though 38 percent of paper bags are recycled, consumers are now attacking the source by shifting to reusable shopping bags.
But consumer durable products — including televisions, refrigerators and other appliances, cell phones, and automobiles — offer a more intractable problem that requires deeper thought for consumers and — especially — for the businesses producing them. Overall, a third of municipal waste is now recycled, but the percentage for durable goods stands at only 17 percent. Worse yet, durables often contain hazardous materials not found in consumables and packaging. Unlike consumables, durable products face an “end of life” problem that requires more options than simply reducing, reusing, and recycling. For this set of products, the new mantra for producers increasingly includes a fourth “R”: rethink. Rethinking the environmental challenges posed by durable-goods waste also provides interesting opportunities for businesses. The challenges presented by discarded and unused cell phones, which we have studied closely, are a particularly good example.
Flaws of the “Three Rs”
1. Reduce. Decreasing the generation of waste makes sense, and has proven highly effective for consumer goods. …
Some consumer durables offer a similar opportunity to reduce size. … Reducing the size and weight does not work for many categories of durable goods, however. …
Moreover, reducing product dimensions may have unintended negative consequences. Consider the fate of the largest carpet recycling facility ever built. The state-of-the-art Polyamid 2000 recycling facility in Premnitz, Germany, which cost US$200 million to build in 1999, closed after only three years. It turned out that a “reduce” strategy by European carpet manufacturers had shortened carpet pile and reduced the nylon content to a level that made recycling uneconomical.
2. Reuse. Shifting a culture from the disposable to the reusable has also worked well in general. The cycle experienced by the bottled water industry offers a great case in point. At the beginning of the new millennium, consumption of bottled water grew at double-digit rates to the point where water became the second-largest beverage category, behind only carbonated soft drinks. After peaking around 2007, however, the industry contracted by 1 percent in 2008 and 2.5 percent in 2009. Environmentally conscious (as well as cash-strapped) consumers had turned to tap water and refillable bottles. …
In the case of durable goods, the issue of reuse proves a bit more complex. In fact, academics in the field use the terms refurbishment and remanufacturing to clarify the extent of work needed to make a used product serviceable again. Consumer electronics are often refurbished simply by having their software tested and upgraded. But the reuse of products such as automotive parts and toner cartridges requires extensive remanufacturing labor, including such tasks as disassembly, cleaning, and parts replacement.
Reusing durable products can offer substantial economic and environmental improvements. Currently, remanufactured cartridges make up 6 percent of toner sales, and can be produced at 20 percent of the cost of a new cartridge. …
But reuse can also have drawbacks. From a broad environmental perspective it is better, for example, to recycle than to reuse energy-inefficient cars. … Other energy-intensive products — such as home appliances and even high-power computer chips — often offer similar benefits if they receive “early retirement” ahead of their functional life expectancy.
International Recycle SymbolImage via Wikipedia3. Recycle. Recycling comes last in the hierarchy of waste management techniques for decreasing landfill disposals, but has generally had the greatest environmental impact to date. Lead acid batteries provide the best case study of recycling of consumer durable products, with a 99 percent recycling rate. At the other extreme, consumer electronics offer one of the biggest areas of opportunity. … Because product life cycles for electronic gadgets are growing ever shorter, electronics represent a growing component of the waste stream, but currently attain only a 15 percent recycling rate. …
Rethinking Durables
Sustainability for consumer durables demands deeper thinking than the simple “reduce, reuse, recycle” framework. And unlike consumables, where the responsibility for rethinking falls on consumers, for durables, the primary rethinking job belongs to business executives and environmental regulators.
A rethinking of the problem should start with an examination of the ecological impact and economics across the full product life cycle — from manufacture through use, reuse, recycling, and disposal. The economic incentives for the various industry players must also be considered, including original equipment manufacturers (OEMs), retailers, service providers, remanufacturers, recyclers, and waste management companies. Every industry has a unique set of players; for each of them, the costs and benefits vary considerably, and are sometimes at odds. This insight provides a starting point for thinking strategically about reshaping the industry value chain in ways that increase profits while reducing environmental impact. Such rethinking can be employed by business executives to seek out new profit pools — or, alternatively, by regulators to alter the profit pools and enhance overall societal benefits.
Mobile phone subscribers per 100 inhabitants 1...Image via WikipediaConsider the case of cell phones. …Some 285 million people in the U.S. have cell phones; that is, the penetration rate stands at 91 percent.

A printed circuit board inside a mobile phoneImage via WikipediaCell phones, however, quickly become obsolete, creating a glut of older, unused phones with waste and environmental implications. … As a result, the initial lifespan of a phone has fallen to between 18 and 24 months. In other words, roughly half of the phones in use one year are retired the next year. An estimated 10 to 15 percent of these are simply discarded and merged invisibly into the municipal waste stream. A much larger percentage of those retired are “stockpiled.” Because of their small size but high perceived value, roughly 65 to 70 percent of the old phones end up in a drawer as a rarely used backup.
That leaves less than 20 percent of retired phones in the U.S. to be collected for reuse or recycling. Of those, about 65 percent are reused, mostly in emerging markets in Africa and Latin America. …
Ultimately, only 6 or 7 percent of cell phones are recycled for scrap metal. The typical recycled phone generates less than a dollar of revenue from the recovery of about an ounce of copper and trace levels of the more expensive precious metals such as gold, palladium, and silver. …
Electronic waste, which includes cell phones, makes up less than 2 percent of the mass disposed of in landfills, but it accounts for 70 percent of the hazardous waste. Since most old handsets remain stockpiled in a drawer, cell phones have had little impact on landfills to date. But with the retirement of 130 million handsets per year, there may well be more than a billion stashed handsets that could eventually end up as toxic waste.
Rethinking the Cell Phone Cycle
Our research into the cell phone value chain, in collaboration with Vered Doctori Blass of Tel Aviv University, offers two examples of how industry players at different points along the value chain could potentially increase profits while reducing the environmental impact.
The first opportunity is in phone design. … By focusing explicitly on the end-of-life stage in addition to the initial production stage, cell phone companies can design the product to automate the disassembly process and lower the cost of refurbishment and component reclamation. A clear technology road map for such modular designs would increase the odds that components can be reused rather than merely recycled. And components that are not likely to be reused can be designed for easier recovery of valuable raw materials.
Additionally, innovative design can reduce the energy consumption of the phone, therefore reducing the cost to the consumer and increasing demand. …Changes in design that reduce the quantity of precious metals in cell phones can also be critical. …The downside is that if cell phone manufacturers keep decreasing the amount of gold, recycling will become unprofitable (unless gold prices continue to increase or government regulation provides incentives or makes recycling mandatory).
These trade-offs illustrate that cell phone companies need to rethink their design efforts. … Because innovation can be applied to different aspects of design, manufacturers need to rethink where changes in design can be most effective economically and environmentally.
The second opportunity is in refurbishing older phones. Our research into smartphone pricing in a monopoly environment — such as the U.S. partnership between Apple and AT&T for the iPhone or Sprint and HTC for the Android-based Evo 4G — indicates that a service provider could significantly increase profits by offering refurbished models along with new ones. … In short, a service provider such as AT&T or Sprint could use refurbishing to expand its market by actively creating a secondary market to serve a more cost-conscious set of consumers.
The environmental and societal impacts of such a refurbishing strategy, however, would require further assessment. On the one hand, refurbishing a used smartphone consumes less energy than manufacturing a new one. …On the other hand, in this example, refurbishment does not displace production but instead is used to expand the market.
Some of this negative impact could be offset by expanding processes to collect the phones after the second use. … Ultimately, a service provider like AT&T might find it necessary and lucrative to expand geographically to developing regions to control both the demand for the refurbished products and their eventual collection and disposal.
Independent of whether better collection and recycling offsets the environmental impact of more smartphones, industry leaders must make sure that government regulators understand the societal benefits of such a strategy. Expanding the reach of smartphones to more of the world’s population offers a low-cost way to reduce the digital divide between people in developed versus developing nations, with perhaps even less environmental impact than the much-lauded $100 laptop. Regulations must avoid discouraging such innovation.
As these examples suggest, creating a more sustainable solution to managing consumer durables’ end of life requires significant rethinking. By taking a strategic perspective that embraces a wide range of levers, from design to pricing to vertical integration, companies could avoid the win–lose mind-set so often imposed on them through government regulation. Given the current unsustainable approach to consumer durables life-cycle management, the creative capitalist can easily find opportunities to increase profits while reducing environmental impact.
Reprint No. 10406

Author Profiles:

  • Tim Laseter holds teaching appointments at the London Business School, the Darden School at the University of Virginia, and the Tuck School at Dartmouth College. He is the coauthor of Strategic Product Creation (McGraw-Hill, 2007) and the newest edition of The Portable MBA (Wiley, 2010). Formerly a partner with Booz & Company, he has more than 20 years of experience in operations.
  • Anton Ovchinnikov is an assistant professor of business administration at the Darden School of Business at the University of Virginia. His research addresses theoretical and application issues, including behavioral operations and environmental sustainability in the business, government, and nonprofit sectors.
  • Gal Raz is an associate professor of business administration at the Darden School of Business at the University of Virginia. His research focuses on supply chain pricing and contracts and the public policy implications of supply chain management. Previously, he was on the faculty of the Australian Graduate School of Management in Sydney.
  • Also contributing to this article was Vered Doctori Blass, who holds a teaching and research appointment at the Leon Recanati Graduate School of Business Administration, Tel Aviv University.
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