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This is a preprint of an article to be published in Asian Business & Management©, 2008. Creating a Green Brand for Competitive Distinction Nicole Darnall* Department of Environmental Science & Policy George Mason University 10541 School Street Fairfax, VA 22030 Voice: 703.349.1233 • 703.993.3819 Fax: 703.993.1066 ndarnall@gmu.edu * This paper draws on field data gathered between 2003 to 2006, in addition to the teaching case “Sustainability and environmental standards: seeking competitive distinction at Damaí Lovina Villas,” by Nicole Darnall and Mark B. Milstein of Cornell University. The case received an honorable mention at the 2006 oikos Sustainability Case Writing Competition, and is available through the oikos Foundation. The author thanks Glenn Knape of Damaí Lovina Villas and Restaurant for providing data for this analysis. 1 Creating a Green Brand for Competitive Distinction ABSTRACT This research examines the question of how an environmentally proactive hotel can gain competitive distinction by way of “green” branding. It demonstrates that not all green branding options are created equal. The two most widely recognized options unilateral commitments and participation in VEPs (self-monitored, third party certified, and hybrid programs) have significant variations in their ability to inform relevant constituencies, achieve external legitimacy and add firm value. To illustrate these points, this research systematically evaluates the efforts of Damaí Lovina Villas, a small boutique Indonesian hotel, to promote its environmental activities by way of developing a green brand. Further, this study develops a framework that other companies can use to assess their green branding options. Key words: Environmental strategy, green branding, voluntary environmental program, certification, green hotel, case study 2 Creating a Green Brand for Competitive Distinction INTRODUCTION Individuals worldwide are becoming increasingly savvy about expressing their environmental preferences. For instance, changing market demand has affected intermediary markets where Asian companies report that corporate buyers are offering preferential purchasing if they demonstrate minimal harm to the natural environment. Similarly, within the United States, 15 percent of consumers routinely pay more for green products, and another 15 percent seek green products if they do not cost more (Ginsberg & Bloom, 2004). The shift in global market demand is affecting product and service markets worldwide (D’Souza, 2004), where consumers are willing to pay price premiums of $30 per night for hotel services that demonstrate their superior environmental performance (Rivera, 2002). Consumers also have revealed a willingness to spend 20 – 50 percent more for organically produced food products, (Barkley, 2002) and $3,000 - $8,000 more for hybrid cars over comparable non-hybrid models (Walters, 2005). These examples illustrate that market opportunities exist for companies which consider the environment in the development of their products and services and endeavor to develop a “green” brand. Previous research has alluded to the institutions which firms can use to develop a green brand. For instance, companies can take unilateral actions to improve their environmental performance (Anton, Deltas & Khanna, 2004) by self-advertising their environmental activities, or participate in a voluntary environmental program (VEP) that requires participants to self- monitor and publicly report their environmental performance (Darnall & Carmin, 2005). In other instances, companies can receive third party certification for their environmental activities (Darnall & Carmin, 2005). However, most previous research examining these options evaluates 3 one in the absence of the others. Even less is known about the practical tradeoffs firms face when choosing one alternative over another. This research offers three contributions to existing scholarship. First, while previous studies have examined the merits of firms’ efforts to promote their environmental activities by way of engaging in unilateral activities, participating in self-monitored VEPs, or utilizing third party certification, no studies that we know of consider the appropriateness of these options for a company that has an established proactive environmental strategy. That is, for companies which exceed the environmental expectations established by typical VEPs or certification schemes, these branding options might understate their sustainability activities and diminish their potential reputational value. However, at odds with this view is the belief that self-promotion of an organization’s environmental activities may suffer from diminished legitimacy in the eyes of environmentally conscious consumers. This research explores these less understood but important tensions related to green brands, and the various options available to organizations that wish to promote their sustainability visions. The second contribution of this research relates to the fact that companies which are considering their green branding options are faced with a variety of choices. Each has its strengths and weaknesses. However, companies lack a systematic way to asses these options. This study offers a framework for doing so. Third, this research evaluates the strategic relevance of green branding mechanisms for smaller firms. This focus is important since existing VEPs generally are not designed for the market conditions of a small business. Our research considers what branding options are appropriate for these enterprises, and why green brands might be particularly relevant to companies operating in emerging Asian economies. 4 Drawing on examples from Damaí Lovina Villas and Restaurant, a boutique Indonesian hotel, this research examines the question of how an environmentally proactive organization can gain competitive distinction. It offers a framework that companies can use to assess their green branding options that is particularly relevant to smaller organizations operating in Asia. Further, it considers the legitimacy of these branding options by assessing the tradeoffs associated with firms’ unilateral actions to self-advertise their environmental activities and participation in a VEP requiring self-monitoring, third party certification or both. UNDERSTANDING GREEN BRANDING IN THE HOTEL INDUSTRY Globally, the hotel industry is beginning to recognize the benefits related to undertaking proactive environmental efforts. For example, in the Americas (such as Costa Rica and Ecuador) and Africa (e.g., Kenya) ecotourism represents a significant portion of the gross domestic product and economic activity. While Asia is less recognized for its ecotourism efforts, it is making headway. For instance, in Kerala, India, Thenmala Ecotourism is India’s first “planned ecotourism destination” with nature trails, educational facilities, and adventure activities that are ecologically sustainable (Schlichter, 2007). Individual hotels also are becoming more environmentally sensitive. As an example, the Evason Hua Hin Resort in Thailand has been hailed as one of Asia’s top green hotels for using biodegradable products and developing extensive energy conservation and waste minimization practices, while at the same time supporting community conservation projects (Agoda, 2007). Similarly, in Indonesia, the most populous country in the world behind China, Alila Ubud has been recognized internationally for its comprehensive waste recycling and water conservation efforts (Agoda, 2007). Hotels such as these recognize that an eco-friendly reputation can enable them to target environmentally 5 conscious customers, gain differentiation advantages, and yield premium prices for their services (Rivera, 2002). However, consumers often have difficulty distinguishing which hotels have a strong sustainability ethic because of the lack of information that is available to them. In consumers’ minds, the performance differences between hotels are indistinct in that each hotel appears to have the same objective and procedures. The lack of information potentially hampers market efficiency in that environmentally conscious consumers who wish to patron green establishments have limited information to do so. Additionally, individuals who wish to invest in environmentally conscious businesses have difficulty identifying them. Within this setting, the challenge for the environmentally conscious hotel is to inform consumers and investors about their otherwise ambiguous environmental activities and policies, thus reducing information asymmetries. In general, information asymmetries occur when knowledge about a firm and its performance are unavailable to external parties. When information asymmetries are present, product prices, which are a function of production costs, efficiency and product quality, are pooled within common markets (Akerlof, 1970). In such cases, prices are no longer accurate market signals and instead reflect average costs, efficiencies, and qualities of all enterprises operating within the common pool market (Akerlof, 1970). Because consumers and investors cannot make rational buying decisions, market failures arise (Alchian & Demsetz, 1972). For instance, when questions arise about a product’s quality, consumers are less likely to buy it unless the manufacturer offers a product guarantee or warranty (Barney & Ouchi, 1986). Similarly, in the absence of accurate environmental information, consumers and investors are unable to draw distinctions (Darnall & Carmin, 2005) among hotels. Because there is no readily 6 available means to determine which firms are cleaner than others (Darnall & Carmin, 2005), potential guests who wish to patron and individuals who wish to invest in green hotels may find it difficult to do so. To remedy environmental information asymmetries, a variety of institutional arrangements have evolved. However, two are more widely recognized than others. They are unilateral commitments and participation in VEPs (self-monitored, third party certified, and hybrid programs). Unilateral commitments are firms’ self-initiated efforts (Darnall & Carmin, 2005) to proactively address their environmental impacts. Firms that rely on unilateral commitments establish their own environmental goals, rather than having an outside party do so, and then self-promote their adherence to those goals. In an effort to educate interested parties about their environmental activities, companies that rely on unilateral commitments engage in direct marketing. For instance, by way of its website Suneva Fushi Resort & Six Senses Spa, Maldives emphasizes its efforts in resource conservation, energy and water efficiency, waste minimization. It also has an extensive community education program. Like other hotels relying on unilateral commitments, Wyndham Hotel, which has locations throughout Asia and elsewhere, provides information in its guest rooms about its towel exchange program in an effort to encourage guests to help reduce water, energy and detergent use. Companies that rely on unilateral commitments have the advantage of maintaining internal control over their environmental program and the messages communicating information about those programs. However, these messages may suffer from external legitimacy problems. Legitimacy refers to organizations’ actions that are considered desirable or appropriate within some socially constructed system of norms, values, beliefs and definitions (Suchman, 1995). Companies that self-advertise their efforts in the absence of some form of external verification 7 may be perceived as less trustworthy because their messages are more readily manipulated to favor the company’s position. As a consequence, unilateral commitments may resolve information asymmetries only on a basic level. The second type of institutional arrangement that has evolved to remedy information asymmetries about firms’ environmental practices is the VEP. VEPs consist of formalized programs, codes, agreements, or commitments that encourage organizations to voluntarily reduce their environmental impacts beyond the requirements established by environmental regulations (Carmin, Darnall & Mil-Homens, 2003). VEPs typically are developed and sponsored by government, an industry association, or a nonprofit organization. Sponsors of VEPs first determine the program’s environmental goals and subsequently recruit companies to agree to fulfill program commitments. As the name suggests participants in self-monitored VEPs determine their conformance to program goals by way of self-monitoring their environmental performance and reporting their activities to program sponsors (Darnall & Carmin, 2005; Darnall & Sides, 2008). All self- monitored VEPs generally emphasize conservation, energy efficiency, employee education, waste minimization and recycling. Related to the hotel industry, while more than a dozen self- monitored VEPs target hotels as their participants only a handful are relevant to Asian business. The most widely known is Best Green Hotels. To participate in Best Green Hotels, hoteliers use an online submission form to self-report information regarding 29 environmental activities that include towel and sheet reuse, alternative energy, gray-water recycling, organic food, and guest and worker education (see Table 2). Responses are then summed and ranked based on their number of “green” attributes. Between 1 and 6 green triangles are then assigned to participating 8 hotels to indicate their level of “greenness.” A rating of 6 triangles indicates that a hotel has all the green attributes deemed important by Best Green Hotels. —INSERT TABLE 1 ABOUT HERE— Participants in self-monitored VEPs self-advertise their commitment to VEP goals by way of their corporate websites and promotional materials. Sponsors also promote the activities of member companies and advertise how they benefit the environment. Establishments recognized by Best Green Hotels are included in an online database of more than 2,500 hotels that is searchable by location and other identifiers. Best Green Hotels recognizes individual participants on their website and through recognition programs, which confers additional legitimacy to member hotels. Self-monitored VEPs therefore may provide information to the marketplace that can attract patronage from environmentally conscious consumers and investors. For these reasons, participants in self-monitored VEPs may derive additional benefits than companies that rely on unilateral efforts alone. Other VEPs rely on independent third party auditing to assure conformance to program goals. Although less prevalent than self-monitored VEPs, certified VEPs have significant popularity because of their external monitoring and reporting features. By virtue of undergoing external certification, companies may be more compelled to improve their environmental performance to a greater degree than programs requiring self-monitoring alone (Potoski & Prakash). As a consequence, these VEPs may confer additional external legitimacy (Bansal & Hunter, 2003) about participants’ environmental commitments. Further, the certification process is more likely to formalize managerial commitment towards achieving environmental performance goals (Rondinelli & Vastag, 2000). However, with the greater level of monitoring comes a greater cost to participating firms. 9 Within Asia, ISO 14001 is the most widely recognized third-party certified VEP in large part because it extends beyond the hotel industry to any type of sector, public or private. ISO 14001 requires participants to implement an environmental management system (EMS).1 EMSs consist of a collection of internal policies, assessments, plans and implementation actions (Coglianese & Nash, 2001), affecting the entire organizational unit and its relationships with the natural environment. Firms that implement ISO 14001 focus on continually lowering the environmental impact of their goods, products and services. Certification requires businesses to hire independent external auditors to review and verify that their EMS conforms to the ISO 14001 standard. Once certified, the ISO 14001 label indicates that a company has implemented a management system that documents the firm’s pollution aspects and impacts, pollution prevention processes (Bansal & Hunter, 2003), and mechanisms for continually improving them over time (Darnall, 2006). Like ISO 14001, ECOTEL also relies on independent third party auditing to assure conformance to program goals. Certification is based on five environmental management areas that include environmental commitment, solid waste management, energy efficiency, water conservation and preservation, and employee and community involvement. Achieving ECOTEL certification involves undercover (and surprise) member inspections and interviews with hotel staff. Operating since 1994, more than 1000 hotels have applied for certification (Szuchman, 2000). However, only 35 have obtained it, which makes this VEP highly exclusive. Participants are identified on an online searchable website. Hotels that achieve ECOTEL certification can retain their label for a period of two years, but must agree to re-inspections (announced or unguided) at any time during that period. 1 Unlike most VEPs, ISO 14001 is not specific to an industrial sector, and any type of organization can certify to the standard. 10 Like participants in self-monitored VEPs, hotels participating in certified VEPs can self- promote their proactive environmental activities. Because they undergo external certification, participants in these VEPs may garner additional external legitimacy (Bansal & Hunter, 2003) for their environmental commitments. One reason relates to the fact that the external monitoring requirement provides additional incentives for companies to improve their environmental performance to a greater degree than programs requiring self-monitoring alone (Potoski & Prakash). A less common VEP is the tiered monitoring or hybrid approach. Sponsors of hybrid VEPs allow companies to decide whether they would prefer to self-monitor or undergo independent third party monitoring. These programs are popular because firms that do not fully embrace the additional commitments required by certification can still participate in the VEP. Once a member of the program at the self-monitoring level, participants may later chose to graduate towards membership at the certified level or continue at the self-monitoring level. Related to the Asian hotel industry, the most widely known hybrid program is Green Globe 21 (GG21). GG21 is based on the Australian Nature and Ecotourism Accreditation Program Standard. It operates in 42 countries, and has about 150 certified hotels worldwide. About 23 percent of GG21 participants operate in Asia. Unlike the ECOTEL program, which has only four (11 percent of its total) certified hotels in Asia, with none being located in Indonesia or China. However, more than half (53 percent) of GG21’s participants are located in Indonesia. Participants are included in a website which is searchable directly by potential guests. GG21 is designed to facilitate environmentally sustainable ecotourism by promoting a core set of principles. These principles include: waste minimization, re-use & recycling, energy efficiency, conservation & management, management of fresh water resources, waste-water 11 management, hazardous substances, transport, land-use planning and management, involving staff, customers and communities in environmental issues, design of environmentally sensitive products, partnerships for sustainable development, protection of air quality, noise control, environmentally sensitive, and purchasing policy. Hotel participants also may use the GG21 label in their promotional materials. Participants complete an online self-assessment of their environmental activities. Program sponsors then provide participants with a report that is updated annually on where their performance is positioned relative to environmental and social benchmarks. Like certified VEPs, hybrid VEPs take a more expansive view of environmental management by considering transportation impacts, design, partnerships, purchasing, and landuse. However, the hybrid VEP also emphasizes many of the more specific environmental management activities put forward by self-monitored VEPs. Table 2 summarizes each of the institutional arrangements for green brands that are available to Asian hotels and hotels worldwide. It illustrates that each of the green branding options vary according to their ability to reduce information asymmetries, and their goals, promotion, control of messages, and external legitimacy. —INSERT TABLE 2 ABOUT HERE— While previous research has examined the merits of relying on these two institutional arrangements to create a green brand, to our knowledge, these studies have not considered them simultaneously and within the context of a firm which has a well-developed environmental strategy. Such organizations may exceed the environmental expectations established by VEPs and limit the reputational value gained by participating in them. However, at the same time firms’ self-promotion of their sustainability activities may have less legitimacy in the eyes of 12 environmentally conscious consumers and investors. Given the variety of institutional options and the complexity of their decision, firms would benefit from a framework to assess their green branding choices in a systematic way. The case study of Damaí Lovina Villas and Restaurant offers a basis for developing such an arrangement. This framework involves five components: 1) identifying the population of applicable VEPs and assessing their 2) requirements and 3) benefits (see Table 4). The previous sections have addressed these tasks. The following sections: 4) account for environmental activities of a specific firm, and 5) assess the investments—both fees and additional environmental programs—required for VEP participation. A conclusion then is reached regarding a preferred green branding approach. —Insert Table 4 about Here— CASE STUDY: DEVELOPING DAMAI LOVINA VILLA’S GREEN BRAND Damaí Lovina Villas and Restaurant is a profitable small, boutique hotel located in Bali, Indonesia. It consists of 8 luxury villas that accommodate 16 guests, and employs a staff of 57. The hotel is situated 3.2 kilometers from Lovina Beach among spice plantations, tropical jungles, and terraced mountainsides, and offers poolside views of Javanese volcanoes and the ocean below. Visitors to the area are told that Damaí’s restaurant is “not to be missed under any circumstances” (Fodors Travel, 2001) since it is “the most exquisite gourmet dining experience in northern Bali, if not the entire island” (Reader & Ridout, 2002). New menus are developed each day based on available organic produce that comes from local markets and the hotel’s private garden. Damaí’s customers are urban professionals vacationing from Scandinavia and predominantly Denmark. Most other guests come from other Western European countries and the United States. Visitors generally are celebrating special occasions. While the hotel operates 13 at capacity during high-season, its total annual occupancy is about 65 percent. As a means of increasing its occupancy, the hotel is considering how to leverage its proactive environmental strategy to create a green brand that distinguishes itself from its competitors. To that end, it is contemplating whether to unilaterally advertise its environmental strategy or participate in one or more VEPs. Research Design Data on Damai’s environmental activities were gathered between 2003 and 2006 and included publicly available information, hotel documents, and two site visits. Six in-depth personal interviews of between 30 minutes and 6 hours with the hotel’s general manager and suppliers were conducted to document the extent of the hotel’s environmental activities. These meetings were followed-up with numerous email communications. Detailed accounts were written and verified by the general manager in 2006. The advantage of field work is the depth of knowledge and context gained from a process or situation. In this case, the ethnographic information, which can only be gathered through interviews (Larson, 2000), provides the detail necessary to fully understand the green branding process. While case studies are limited in terms of their generalizability, they can be used in conjunction with other research to suggest patterns (Larson, 2000). Case studies also can be exemplars for understanding the complexity of a situation as this research will demonstrate. Damaí Lovina Villas’ Environmental Activities To assess Damai’s best green branding approach, it is necessary to inventory its environmental activities. Doing so will indicate how much the hotel will need to invest to qualify for recognition in each VEP. 14 Partnership with IPSA. In developing its environmental strategy, the hotel partnered with Institut Pengembangan Sumber Daya Alam (IPSA, or the Institute for Natural Resources Development), a center for environmental education and training that emphasizes low-input agriculture techniques. IPSA also has a factory that develops environmentally friendly agricultural and household products. The partnership encouraged Damaí to receive training in organic farming procedures. At IPSA’s suggestion, the restaurant now uses organic practices to grow 80 percent of its produce in the gardens surrounding the hotel. What Damaí does not grow onsite is purchased from local farmers who also utilize organic farming principles. ISPA also developed organically produced massage oils, perfumes, soaps, lotions, and shampoos especially for Damaí. Damaí purchases all body products in bulk and places them in refillable ceramic dispensers in guest rooms. Doing so has eliminated the need to purchase and dispose of plastic toiletry bottles. Further, in working closely with IPSA, Damaí created a line organically produced spa products that are sold at the hotel. Damaí has a chemical free policy, which is made possible by using IPSA’s non-toxic organic sanitizers. The organic products also are cheaper than traditional chemical-based detergents and sanitizers. In its gardens, pests are managed using biological controls. Through strategic planting of crops, indigenous insects help curb unwanted insects. Pests also are controlled by using IPSA organic botanicals made of lemongrass and citronella. All of the hotel’s natural wastes are composted, including pre- and post-preparation food scraps, spoilage, cooking oil, paper, flowers, and natural packaging (e.g. crates and boxes). Animal-based wastes are treated using IPSA’s non-toxic and environmentally safe microorganism products. These products reduce bacteria development. Once treated, the waste is 15 composted and used as fertilizer in Damaí’s gardens. By using the hotel’s compost in lieu of chemical fertilizers Damaí increased its crop production by 20 percent. At the suggestion of ISPA, the hotel uses permaculture to reduce water consumption and encourage healthy crops. Permaculture is a method of producing foodstuff in a self-sufficient system. Damaí’s farmers collect leaves and other natural garden waste and distribute them among the crops. Like mulch, the natural waste reduces water evaporation. Permaculture also prevents weed growth and eventually becomes fertile compost. To further sustain its garden, Damaí’s farmers allow a portion of their crops to go to seed. In other instances, plants are grafted. These efforts have reduced Damaí’s crop production costs by 90 percent. Minimizing Waste and Improving Internal Efficiencies. The hotel has a significant emphasis on reducing energy use, solid waste and water consumption. The hotel relies on a solar electric system and sells its surplus electricity. Guest rooms are fitted with energy efficient compact fluorescent lights. Landscape lighting also is energy efficient. Additionally, the hotel has installed one-way valves and sensors in its water system so that the pumps would operate only when water pressure fell below a specified threshold instead of operating 24 hours a day. By implementing these measures, Damaí has reduced its electric use by 65 percent and no longer has an electric bill. The hotel sends plastic and bottle containers back to their respective suppliers for reuse or recycling. Guest rooms are stocked with drinking cups made of recycled glass rather than plastic or paper, and the restaurant uses linen napkins and bamboo drinking straws that are washed and reused. Finding an environmentally friendly substitute for plastic waste bin liners proved challenging since there was no local manufacturer of paper bags. As a consequence, the hotel found local source for large unbleached paper envelopes. Hotel staff cut off the tops of the 16 envelopes and the remainder is used to line waste receptacles. These natural fiber “bags” are composted with all other natural waste from guest rooms. Combined, these efforts have eliminated Damaí’s need to landfill its solid waste. Damaí’s pool is kept at 1/7th the salinity of seawater to inhibit algae growth and to reduce the need for chemicals. However, to further impede algae development, the pool requires a 2 percent chlorine solution. To eliminate the need to purchase chlorine, Damaí switched to iodized water. The new system converts non-iodized salt into pure chlorine. Once the chlorine oxidizes dead bacteria and algae, it is recycled back into salt – ready to be converted to chlorine again. While the system is not chemical free, it is a closed loop process and eliminates the use of stabilizers and calcium byproducts that are associated with traditional chlorination systems. Damaí utilizes a water reuse system that directs used guest water to on-site tanks. Wastewater is filtered through a series of tanks containing volcanic rock, porous rubber, and sand. Waste from the toilets, or "black water," is collected and treated using natural enzymes to break down organic matter. Black water is then passed through a series of filters. All treated water is tested once a month to ensure appropriate health ratings and reused in the hotel gardens. Damaí’s conservation efforts have reduced its water consumption by 75 percent. Community Involvement. Through its partnership with IPSA, Damaí is helping the local farming and fishing communities remediate the effects of agricultural techniques that are harmful to the environment. For example, at the end of each growing season, local farmers burn their agricultural waste to generate ash for fertilizing. However, burning impairs air quality and human health – an issue compounded by the hundreds of small farms that operate in a single community. Poor air quality also diminishes tourism. The hotel is working with local farmers to 17 teach them different composting methods and organic growing practices using IPSA products to increase the pace of decomposition and subsequently improve air quality. Damaí’s partnership with IPSA also extends to the fishing industry. Its interest relates to the fact that one of the biggest problems confronting fish farms is limiting the growth of blue/green algae. These algae produce harmful toxins, emit strong sulfurous odors, and deplete dissolved oxygen in water causing fish to die. Typically fish farmers rely on chemicals to control algae development. These chemicals are harmful to the environment and limit access to organically farmed fish. Damaí and IPSA are working with the fishermen to encourage them to use microorganisms to temper blue/green algae growth and forego chemical use. The hotel also is working with local farmers and village leaders to reclaim eroded topsoil. Bali’s terraced landscapes, traditional irrigation water systems, and monsoon rains cause fertile topsoil to flow from the rice paddies and drain into the ocean. The topsoil loss requires farmers to rely on chemical fertilizers to grow their crops. As a means to address the issue, Damaí built a series of large rock wall filters in the river that runs through the property creating a series of waterfalls. At the bottom of each waterfall is a large pool of water that captures much of the topsoil lost from the seven villages surrounding the hotel. Damaí encourages the local farms to reclaim their topsoil from the hotel pools to reduce the need for chemical fertilizers. Room for Improvement. In spite of Damaí’s rather extensive environmental strategy, there are still several areas that could be improved. For instance, the hotel’s 8 villas originally were constructed using energy inefficient construction techniques, as opposed to integrating natural thatching and vents. These more traditional building materials help maintain comfortable room temperatures and reduce the need for air conditioning. Additionally, the hotel has refrained from promoting its environmental activities in guest rooms, restaurant and gardens because of 18 concerns that it might diminish its luxury status. For the same reason, Damaí also has not involved guests in an optional linen reuse program and in-room recycling, even though these programs have become increasingly popular within the luxury hospitality industry. Finally, Damaí does not have an employee incentive program that promotes the continual improvement of the hotel’s environmental and community practices. Promoting its Environmental Efforts To date, Damaí’s efforts to promote its environmental vision have relied entirely on the hotel website and local travel agents. The main page of Damaí’s website directs environmentally conscious customers to an “organic resort” link to learn about the hotel’s sustainability vision. This link leads potential guests to a statement that says: Inspired by the abundance of natural beauty around the hotel, Damaí…has instituted an ambitious environmental programme from water treatment and conservation to 100% organic farming of produce for the restaurant. There is no additional information on Damaí website that elaborates on its environmental programs. Damaí also has little control over how travel agents promote its operations. Damaí provides travel agents and independent search engines with information about the hotel, and these entities use the information as they deem appropriate. Some travel agents and search engines have begun to market the hotel as being environmentally conscious by advertising that Damaí produces 80 percent of its food in local gardens. However, this message is not consistent, and the hotel’s other environmental efforts are not described. ANALYSIS OF DAMAI’S GREEN BRANDING OPTIONS A close examination of the four VEPs relevant to Damaí reveals that the hotel’s environmental programs are more complex than what is required of typical VEP participants. For instance, Damaí’s chemical and plastic free policies, partnership with IPSA, emphasis on organic 19 products, and onsite farming extend beyond most VEP parameters. However, there are some elements that VEPs emphasize where Damaí could do better, such as more direct involvement of employees and hotel guests in its environmental efforts. Both activities involve little investment in resources. As a consequence, should the hotel choose to participate in Best Green Hotels or GG21, the cost of participation will likely relate only to the annual participation fee. Participation in Best Green Hotels is free, whereas participation in GG21 is $2,033 annually, regardless of whether Damaí seeks certification not. Since Damaí already has a strong environmental program, it would make sense that if the hotel chose to participate in GG21 it should obtain certification. By contrast, should the hotel seek ISO 14001 certification, it would need to develop detailed plans and implementation strategies for how the hotel interacts with the natural environment since its environmental practices, while extensive, are not formalized. The cost of developing an ISO 14001 EMS and certifying it by an independent third party auditor ranges between $270 - 1,370 per employee (Darnall & Edwards, 2006). Certification remains for three years prior to requiring renewal. However, because the hotel has developed strong environmental management procedures prior to adopting an EMS, the cost of implementation and certification to ISO 14001 would likely be at the lower end of this range (Darnall & Edwards, 2006). Similarly, certification to the ECOTEL standard would cost approximately $12,550. These costs do not include modifications that would be required to achieve certification such as adjustments to the hotel’s lighting system so that all electrical devices can be turned off with one switch as guests leave their rooms. Additionally, the hotel would need to involve its guests to a greater degree by implementing a towel and sheet reuse program, a guestroom recycling program, and 20 stronger guest education. Certification to ECOTEL would remain for two years before requiring renewal. Table 3 details the costs associated with each of Damaí’s green branding options. —INSERT TABLE 3 ABOUT HERE— Damaí’s interest in pursuing a green brand relates to its interest in increasing its average annual occupancy beyond its existing 65 percent rate. It therefore is relevant to ask the extent to which annual occupancy would need increase in order to cover the cost of each green branding option. Since Damaí’s unilateral efforts to develop a green brand are determined entirely by the hotel itself, it would need to increase its occupancy to a level at least equal to its investment. However, since participation in Best Green Hotels is free, Damaí would not need to increase its occupancy to justify its participation. By contrast, participation in ISO 14001 would require between a .49 and 2.47 percent increase in annual occupancy to cover the hotel’s costs of certification (Darnall & Milstein, 2007). This occupancy requirement would most probably be at the lower end of the cost range since the hotel has developed strong environmental management capabilities that would offset implementation costs. The cost of participating in ECOTEL is comparable to the cost of ISO 14001 certification. ECOTEL certification would require Damaí to increase its occupancy by about .6% to cover its costs of participation. The hotel also would have to implement some changes in its environmental programs to qualify for certification to the standard. Finally, participation in Green Globe 21 would require an increased annual occupancy of approximately .19 percent to cover the costs of participation. Moreover, if occupancy increased by as little as 1.28 - 3.26 percent, Damaí could participate in all of the aforementioned VEPs. These findings suggest that participation in most common VEPs relevant to the Asian hotel industry would have very little negative impact on Damaí’s profits, which reduces the risk 21 associated with pursuing any (or all) of the hotel’s green branding options. While previous scholarly research has not evaluated hotels’ increased occupancy associated with green brands per se, it has evaluated the price premium that hotels can derive as a consequence of participating in VEPs. More specifically, hotels that participate in VEPs with more stringent environmental criteria can gain price premiums of $30 per night over their non-green competitors. Such a premium would more than offset the cost of Damaí participating in VEPs of any kind. Additionally participating in a VEP which relies on external certification (such as ISO 14001, ECOTEL and GG21) may be of greater value since these programs have more clearly articulated environmental goals that may further reduce external ambiguity for consumers and investors about the hotel’s environmental position. Of the three programs, ISO 14001 and GG21 are more widely recognized. However, ECOTEL has the most stringent certification standards of the three which adds significant value to the hotel’s green brand should it meet the requirements. At the same time, participation in Best Green Hotels, a self-monitored VEP, has no participation fee. As such, there is little reason for Damaí not to participate in it. If it did, the hotel would qualify for a rating of 5 green triangles, which would give it the highest rating of any hotel in Bali. To achieve the program’s highest rating of 6 green triangles, Damaí would need to involve its guests to a greater degree in its environmental efforts by implementing a towel and sheet reuse program, a guestroom recycling program, and stronger guest education. These points also are emphasized by GG21 and ECOTEL. In the event that Damaí is seeking a more conservative approach, participation in GG21 in combination with the Best Green Hotels may be a suitable option. GG21 is one of the most widely recognized VEPs applicable to hotel industry. The hotel qualifies for immediate certification based on its existing environmental practices, which means that unlike ISO 14001 22 and ECOTEL, Damaí will not incur implementation costs in order to obtain certification. Moreover, participation in GG21 is not costly. Should the hotel have concerns about the merit of GG21, it could participate in GG21 for several years and then assess whether it has improved its occupancy sufficient enough to warrant continued participation. Damaí also could continue its unilateral efforts to self-advertise its environmental strategy. In so doing, significant modifications would be required to more effectively characterize the hotel’s environmental focus. Presently, Damaí’s web page (www.Damaí.com) is limited in terms of informing potential visitors of the hotel’s environmental programs, which renders it ineffective creating a green brand of any sort. Modifications to the website should be made regardless of whether the hotel chooses to participate in a VEP or not. However, pursuing a unilateral approach on its own so may be viewed with greater skepticism than if an independent organization, such as a VEP sponsor, promoted Damaí’s efforts. DISCUSSION & CONCLUSION By 2006, the travel and tourism industry accounted for more than US $3 trillion in global spending every year and employed about one out of every ten workers in the world. Within this industry, consumers and investors are increasingly expressing their interest in environmentally friendly products, services and businesses. However, these individuals often have difficulty distinguishing which firms have strong environmental practices because of the lack of information that is available to them. To remedy environmental information asymmetries, some businesses are relying on institutions to inform consumers and investors about their environmental activities and distinguish themselves by creating a green brand. This research demonstrates that not all green branding options are created equal. The two most widely recognized options—unilateral commitments and participation in VEPs (self- 23 monitored, third party certified, and hybrid programs)—have significant variations in their ability to reduce information asymmetries, achieve external legitimacy and add firm value. To illustrate these points, this research systematically compares and contrasts the efforts of Damaí Lovina Villas, a small boutique Indonesian hotel, to promote its environmental activities by way of developing a green brand. It offers three contributions to previous research. First, it assesses the complex decisions facing companies that wish to create a green brand. It evaluates the various options available to organizations like Damaí that wish to promote their sustainability visions. By inventorying the hotel’s environmental activities, the case demonstrates that Damaí has a well established environmental program. Questions therefore exist about whether VEPs with less ambitious environmental requirements may diminish the hotel’s potential external value gained by VEP participation. However, even for firms that have strong environmental programs, VEPs often can identify issues that could be improved. The VEPs included in this study emphasize that Damaí could expand its environmental focus further by developing guest participation programs related to its recycling and energy conservation efforts, in addition to increasing its employee and guest education efforts. Further, this research addresses the multifaceted issues associated with pursuing unilateral environmental commitments as opposed to participating in a VEP. It suggests that companies which self-advertise their efforts in the absence of some form of external verification may be perceived as less trustworthy because their messages are easier to manipulate to favor the company’s position. Their ability of unilateral commitments to resolve information asymmetries therefore is diminished. Companies may benefit to a greater degree by simultaneously participating in a VEP, especially those that are certified. VEP participants which undergo 24 external certification are more likely to formalize managerial commitment towards the environment (Rondinelli & Vastag, 2000) and improve their environmental performance to a greater extent than programs requiring self-monitoring alone (Potoski & Prakash). Certification therefore can confer additional external legitimacy (Bansal & Hunter, 2003) about participants’ environmental commitments. The second contribution of this research is that it offers a framework for which firms can assess their green branding options. The framework involves five steps: 1) identifying the population of applicable VEPs, 2) evaluating the relevant VEPs’ environmental requirements, 3) assessing the relevant VEPs’ benefits, 4) evaluating the environmental activities of the firm in question, and 5) estimating the investments required for VEP participation. Related to the last step, it is important not simply to estimate the cost of the green branding options in monetary terms, but also a breakeven value. Doing so focuses attention on the firm’s ultimate goal for participation and multiple measurements that indicate when the goal has been achieved. With respect to the hotel industry, that breakeven value could also be annual increased occupancy required to cover the cost of developing a green brand, as was the case for Damaí. However, it could also be increased room prices required to cover branding costs, increased room stays, or some other meaningful value. Once the five steps are completed, a conclusion can then be reached regarding a preferred green branding approach. Developing a framework for which firms can assess their green branding options is important because businesses are faced with a variety of branding choices that have various costs and benefits. In the absence of a systematic way to evaluate these options, many businesses may simply forgo a green brand. In such instances, consumers and investors would be unable to draw distinctions between green firms and their less environmentally friendly competitors. This issue 25 is especially relevant to the smaller firm since it often lacks resources to systematically evaluate its green branding options. For instance, while Damaí had a fairly sophisticated environmental program in place for six years, it had not pursued a green brand. The hotel wanted to receive more external value from its activities, but it did not know where to begin. No doubt, many other smaller hotels are in a similar position. Finally, this research illustrates how a smaller hotel can make significant strides in improving the environment and its operational efficiencies. Most (if not all) of Damaí’s environmental initiatives have long since paid for themselves. These findings are particularly relevant to other hotels and businesses operating in Indonesia and other Asian countries that lack strong environmental regulations and enforcement. They demonstrate that private sector entrepreneurial solutions can help solve environmental problems in the absence of effective government action. This issue is important because many emerging Asian countries are struggling with how to improve their economic status while protecting the environment. The results of this research demonstrate that companies that undertake proactive environmental activities can improve the environment and simultaneously reduce their operating costs. To the extent that governments can help educate firms about virtues of developing proactive environmental programs, they may be able to balance their need for growth and environmental protection to a greater degree. In sum, this research examines the question of how an environmentally proactive organization can gain competitive distinction by way of informing market participants about their environmental activities. It examines the importance of green branding and demonstrates they are not all created equal. The two most widely recognized options—unilateral commitments and participation in VEPs (self-monitored, third party certified, and hybrid programs)—have 26 significant variations in their ability to inform consumers and investors alike about participants’ environmental activities, to achieve external legitimacy and add firm value. Further, this study develops a framework that companies can use to assess the tradeoffs associated with their green branding options. 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Philadelphia Associated Press, 9 December. 30 Table 1: Comparison of the Environmental Goals Required of Indonesian Green Hotel Brands APPROACH PROGRAM NAME ENVIRONMENTAL REQUIREMENTS Unilateral -- Less known because varies from hotel to hotel Self-monitored VEP Best Green Hotels Linen program Energy conservation Bulk purchasing Composting Organic Food Education of guests and staff Water conservation Recycling Certified VEP ISO 14001 Environmental policy Environmental aspects and impacts Objectives and targets Implementation strategy Monitor and correct for problems Management review ECOTEL Environmental commitment Solid waste management Energy efficiency Water conservation and preservation Employee and community involvement Hybrid VEP Green Globe 21 Waste minimization, reuse & recycling Energy efficiency, conservation & management Management of fresh water resources Waste-water management Hazardous substances Transport Land-use planning and management Design of environmentally sensitive products Partnerships for sustainable development Protection of air quality Noise control Environmentally sensitive purchasing policy Involving staff, customers and communities in environmental issues This is a preprint of an article to be published in Asian Business & Management©, 2008. Table 2: Comparison of Green Branding Approaches Applicable to Indonesian Hotels PROGRAM UNILATERAL PARTICIPATION IN VOLUNTARY ENVIRONMENTAL PROGRAMS CHARACTERISTICS APPROACH Self-monitored Certified Hybrid* Environmental goals Established internally Established externally Established externally and internally Established externally and internally Comprehensiveness Less known because varies from hotel to hotel Narrow focus on activities Broader focus on operational systems Narrow focus on activities in addition to a broader focus on operational systems Promotion of green brand Self promotion via website and corporate materials Self promotion plus external promotion by program sponsors Self promotion plus external promotion by program sponsors Self promotion plus external promotion by program sponsors Control of environmental messages Internal control Internal and external control Internal and external control Internal and external control Relative cost Determined by hotel Inexpensive Expensive Moderate External legitimacy Low Moderate High Moderate to high * Sponsors of hybrid VEPs allow companies to decide whether they would prefer to self-monitor or undergo independent third party monitoring. This is a preprint of an article to be published in Asian Business & Management©, 2008. Table 3: Damaí’s Cost of Green Branding APPROACH PROGRAM NAME COST OF GREEN BRAND* ANNUAL INCREASED OCCUPANCY REQUIRED TO COVER GREEN BRAND COSTS Unilateral -- Determined by hotel. Determined by hotel. Self-monitored VEP Best Green Hotels Free. Self-promotion costs determined by hotel. 0% Certified VEP ISO 14001 $270 - 1,370 per employee every 3 years.** Estimates include implementation, auditing, and certification costs. Self-promotion costs determined by hotel. .49%-2.47%*** ECOTEL $12,550 flat fee every 2 years, plus modifications costs required to obtain certification, which are difficult to assess**** Self-promotion costs determined by hotel. .60%+ Hybrid VEP Green Globe 21 $2,033 annual flat fee whether certified or not. Self-promotion costs determined by hotel. 0.19%*** * All values are in USD. ** See Darnall & Edwards, 2006. Values include implementation costs since Damaí will have to formally document its policies and procedures. However, because the hotel has developed strong environmental management capabilities, implementation and certification would likely be at the lower cost range. *** Estimates based on Darnall & Milstein (2007), but are converted into annual values. **** The cost of certification is 500,000 rupees ($12,550) for hotels with less than 100 rooms and 5,000 additional rupees per room for hotels with more than 100 rooms (Nair, 2007). Table 4: Assessing Green Branding Options Assessment Step: Explanation 1) Identify the population of applicable VEPs Consider both industry-specific VEPs, but also generic VEPs that apply to a variety of industries (e.g., ISO 14001) 2) Assess relevant VEPs’ environmental requirements Determine their environmental goals, comprehensiveness, monitoring requirements 3) Evaluate relevant VEPs’ benefits What is the probability that they will resolve information asymmetries in the market? Consider how they promote their brand, how recognized it is, whether it offers external legitimacy, whether the same benefits can be derived from undertaking unilateral commitments alone. 4) Assess the environmental activities of the firm in question Identify gaps that will need to be addressed in order to meet participation requirements 5) Estimate the investments required for VEP participation Consider both participation/certification fees and additional environmental programs that may need to be implemented to qualify for program participation.
