LIFE CYCLE ASSESSMENT AND INNOVATION IN LARGE FIRMS

Business Strategy and the Environment, Vol. 5, 145-155 (1996)

LIFE CYCLE ASSESSMENT AND INNOVATION IN LARGE FIRMS -

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Frans Berkhout, Science Policy Research Unit, University of Sussex, Brighton, UK

Life cycle assessment (LCA) applications within large European firms are discussed. Many industrial applications have been proposed for cradle to grave assessments of environmental burdens of products, including technology design and optimization, technology strategy, green marketing and environmental foresight. There is evidence of a growth of LCA competences and applications within industrial firms, although there are few examples of systematic applications of the instrument in business decisions. The influence of life cycle approaches on the generation of product and process innovations is assessed. The paper argues against the assumption that LCA will be ‘internalized pervasively across industry. Commodity producers will maintain externally oriented approaches, whereas some engineering based final goods producers may find more routine uses for internally oriented LCAs. These applications may influence technological innovation. In most cases the capacity to appropriate LCA-based innovations will be constrained.

CCC 0964-4733/96/ 03014S11 0 1996 by John Wiley & Sons, Ltd and ERP Environment.

INTRODUCTION

egulatory and market pressures are forcing firms to learn more about the environmental R impacts of their products and to act to

reduce them. Where in an earlier period it was sufficient to comply with emission limits and product standards, today the scope of environmental problems which need to be managed by the firm has broadened to include components of product life cycles which are outside its direct control. The management problem has grown in scope and complexity, and in the process has become more unpredictable and costly. Environ- mental management has become a strategic issue in many industrial sectors, with an increasing emphasis on the environmental impacts of products.

Two difficult questions arise. How sigruficant are each of the many impacts which a product system may have on the environment? What are the most effective means of reducing these impacts? To begin to answer these questions a firm first requires a framework of analysis. Traditional approaches such as risk assessment are frequently too narrow for this task as they are concerned with just one phase of the product or project life cycle or a limited number of downstream impacts of single substances. Most products are composed of many materials and the environmental and resource commitments associated with them stretch both upstream and downstream.

Life cycle assessment (LCA) or ecobalances have emerged as widely used techniques for evaluating the resource and environmental commitments of products and processes. For many industrial firms the quantification of the environmental impacts associated with the product systems they straddle was one response to pressures for sustainable production. The approach also meets demands by regulators and consumers for more integrated environmental controls and for more comprehen- sive information.

BUSINESS STRATEGY AND THE ENVIRONMENT

LIFE CYCLE ASSESSMENT AND INNOVATION IN LARGE FIRMS

This paper reports the adoption of life cycle approaches by large European firms and its impact on technological innovation. Many firms are developing in-house LCA competences and in some the instrument is being applied to support business decisions. The paper reviews the basic features of the methodology and its institutional history. The pattern of LCA applications is described, together with an analysis of the likely impacts on technical innovation within firms. Finally, learning and adoption strategies are described.

LIFE CYCLE ASSESSMENT

Life cycle assessment is a framework for learning about the environmental impacts of products from ‘cradle to grave’. The approach has two roots: traditional engineering and process analysis, in which materials and energy flows are optimized in production processes; and energy analysis, which developed during the 1970s in the aftermath of the first oil shock. Up until the early 1990s, most analysis concentrated on energy resource requirements and energy-related environmental impacts. For many bulk commodities energy analysis will provide a large proportion of the picture, but there has been a recent trend to integrate impacts associated with non-energy materials flows.

The objective of a life cycle study is to assess the total environmental impact of a product, whether an intermediate or a finished product. A full LCA would include the whole life cycle of a product, stretching from raw material extraction through materials processing, component production, final assembly, distribution, use, recycling and waste management. A classical study would include a description of the product system and its mass and energy balances (inventory stage), an accounting of the environmental and resource impacts of the system (classification and characterization) and, finally, some valuation of the impacts (normalization and valuation).

Most life cycle studies cover only a limited set of life cycle components and many do not include a formal assessment step. More limited ’cradle to gate’ life cycle inventory (LCI) studies typically provide mass and energy balances and environmental emissions inventories for the production of intermediate products, such as commodity plastics (Boustead, 1994/95). Downstream production, use and waste management activities are not considered and no attempt at classifylng or valuing impacts is made. Analysis will normally be limited to the physical and chemical features of the system and impacts on ecological systems.

Life cycle studies have been used to understand

three types of problem: (i) assessments of single products to learn about their eco-profiles (an example is the recent European surfactant life cycle inventory study; Stalmans ef al., 1995); (ii) comparisons of process routes in the production of substitutable products or processes (the early studies on paper and polystyrene foam hot drink cups; Hocking, 1989); and (iii) comparisons of alternative routes for delivering a service or function (mobility, warmth, painting).

Most life cycle studies have been comparative assessments of products delivering similar functions, but there has been a more recent trend towards the use of life cycle approaches in comparing alternative processes or policies (Fraunhofer-Institut, 1995). Comparisons may be drawn for analytical reasons, but within industry (and also in policy-making) life cycle studies are never neutral. Their purpose is to inform a firm or a sector group about the competitive position of its products and processes.

DEVELOPMENT OF LCA METHODOLOGY

The term ‘life cycle assessment’ was first used to describe holistic environmental assessments in the late 1980s. Since then there has been a flowering of activity with many hundreds of studies conducted. Few of these studies have consistent methodological approaches or use equivalent data and evaluation criteria. Critiques of LCA studies have therefore been relatively easy to mount. Some of the prevailing problems are put down to the immaturity of the technique (data and allocation problems in inventory analysis), whereas others may turn out to be less tractable (impact assessment and evaluation). Many processes have multiple inputs and outputs and so the boundary between the product system being studied and others needs to be defined. Three allocation situations are typically distinguished: co-production, in which several valuable products are produced in the same process; combined waste management; and recycling, in which a waste from one system becomes an input to another (for a brief review of alternative approaches, see Ekvall, 1994).

The results of many early LCAs were divergent. For example, a 1990 study sponsored by Procter and Gamble showed that cloth reusable diapers used more energy than disposables, whereas a 1991 study by the US National Association of Diaper Services showed that disposables consume 70-8076 more energy (Curran, 1993). In each case the ’functional unit’ and the boundaries of the system analysed were different. The fixing of system boundaries is central to the compilation of LCIs and there is considerable scope at this stage for

146 BUSINESS STRATEGY AND THE ENVIRONMENT

biasing the final results by selecting boundaries favourable to the preferred result. Comparisons of the results of studies are possible only if the study assumptions have been handled as uniformly as possible (Hulpke and Marsmann, 1994).

Even where boundary setting is uncontroversial, evaluating alternatives is never straightforward (Lindfors, 1995). To illustrate this we use the example of an LCI study for titanium dioxide published by the Tioxide Group, part of ICI (Tioxide, 1995). The aim of the study was to compare two process routes available for titanium dioxide production: the sulphate and the chloride routes. Titanium dioxide is a white pigment used in paint and many other products. Its production has been the focus of sustained environmental policy concern in Europe since the early 1970s (Haigh, 1995). A series of European directives resulted on the regulation of wastes from titanium dioxide production, the most recent in 1989. The 1995 LCI study was stimulated by claims at a technical meeting in 1991 by two competitors of Tioxide, Du Pont and SCM, that the chloride route was cleaner as it led to lower aquatic emissions. Tioxide operates plants with both processes and sought to defend the sulphate route.

Despite many apparent problems, a dynamic community of interest encompassing academic and industrial scientists, consulting firms and industrial manufacturing firms has grown up around LCA over the past ten years. Within this community some differentiation of roles has taken place into developers, providers and users of life cycle studies, although each of these three roles is represented in each part of the community. Large industrial firms, for instance, have been at the forefront of both developing and applying the technique. Neverthe- less, most methodological and theoretical develop- ments arise in universities and consulting firms with affiliations to academic departments; the main providers of large data-intensive Life cycle studies are consulting firms and the main users are firms in manufacturing sectors. [For example, Ian Boustead was formerly with the Open University in the UK; Ecobilan in France is a spin-off from the Ecoles des Mines; Chalmers Industriteknik is a consulting business within the Chalmers Institute of Tech- nology in Gothenburg; and CML is attached to the University of Leiden.] These communities are linked together through small professional associations such as the European branch of the Society of Environmental Toxicology and Chemistry (SETAC) and working groups in national and international standards organizations.

A common response to methodological and market uncertainties associated with LCA has been a proliferation of efforts at standardization. These

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efforts have taken place in technical, official and industrial forums. Technical standardization has been carried forward primarily within SETAC. An active programme of bench-marking and standard- setting led in 1993 to the publication of a Code of Practice (SETAC, 1993). Official standardization was initiated within the International Standards Organisation (ISO) in June 1993, leading to a 'Principles and Framework' document agreed in Rio in March 1996. The IS0 process took the SETAC document as a starting point. In parallel, national standards were agreed in France and Canada in early 1994 and new standards are being prepared by the Deutsche Institut f ir Normung (DIN). The results of these efforts have so far proved dis- appointing. Industrial standardization efforts have taken place in some final goods sectors such as automobiles (EUCAR) and electronic goods (ECMA/ TC38). These activities were launched to resolve industry-specific problems with conducting LCAs.

DRIVERS OF INDUSTRIAL LCA ACTIVITY

During the late 1980s interest in product life cycles emerged strongly in Europe. There were a number of reasons for this growth in interest.

(i) Industrial firms faced stronger environmental pressures from environmental organizations, consumers, regulators and the marketplace. Businesses were receptive to an analytical tool which could provide answers to some of these new questions.

(ii) A growing awareness of the global nature of many environmental problems (ozone deple- tion and climate change, for example) created a political need for action. Life cycle assessment was an approach for investigating and comparing the global impacts of ordinary mass- produced products.

(iii) Local environmental issues, such as municipal waste disposal, became generic issues facing policy-makers in all industrialized countries. Industry was forced to respond and LCA provided a vehicle for comparing the waste management and recycling options for compet- ing materials and products.

(iv) Consumers and consumer advocates began demanding more information about the environmental impacts of products. This led to a profusion of labelling schemes, some of which have been based on LCA.

In response to these pressures, interest in developing and adopting life cycle approaches

BUSINESS STRATEGY AND THE ENVIRONMENT 147


emerged in three distinct spheres during the 1980s: in industry, government and among consumer and environmental organizations. In each sphere the motivations for learning about and adopting life cycle approaches were different. Industrial firms have been interested in defensive 'external' applications of LCAs in protecting products against environmental claims by competitors and consumer organizations and in seeking to influence environmental policy and regulation. More positive 'internal' applications of LCA as in product and process design and improvement, strategic planning, monitoring of environmental performance and the framing of 'green' procurement policies were also proposed.

For policy-makers, LCA was seen as a technique for exploring environmental policies which took account of patterns of consumption and waste generation. This is reflected in the work of the Enquete Commission on the Protection of Humanity and the Environment in Germany, the Dutch national environmental plans and Ecocycle legislation in Sweden. These product and substance- chain policies typically adopt a life cycle approach and aim at product life cycle management. Finally, NGOs and consumer groups have regarded LCA as a tool for making industry more accountable and for monitoring changes in the environmental performance of its products.

PATTERNS OF INDUSTRIAL ADOPTION OF LCA

Early advocates believed that LCA would shed light on a wide spectrum of environmental problems, leading to widespread adoption in decision-making (see Heijungs, 1994; Udo de Haes, 1994; Christiansen et al., 1995; Gloria et al., 1995; Welford, 1995). They assumed that once methodological and data problems were resolved, the tool would be widely used. The experience of industrial applications of LCA provides a different picture. In many industrial sectors no pressure exists to adopt LCA as a management tool, nor is there any clear economic or strategic incentive for using the technique. LCA is unlikely to become a pervasively used environmental management tool in practice. Firms conduct and use life cycle studies when there is a suitable problem to solve. In many industrial contexts such problems do not arise. Indeed, strong disincentives to LCA may exist, as in the USA, where a fear exists that life cycle studies may provoke future liability claims against manufacturers.

Industrial interest in LCA emerged in Europe in the late 1980s. Firms such as Dow Europe,

Procter & Gamble and Volvo became active promoters of the instrument. By the early 1990s industrial firms in several manufacturing sectors had established LCA competences in-house. Firms in the USA have been slower to follow the European lead and there are only recent indications that Asian industry is following this trend. The industrial sectors in which firms have developed LCA competences include plastics/ packaging, detergents, automobiles, consumer products, paper, aluminium, electronic goods and food.

The most concerted industrial interest in LCA has been motivated by public and regulatory pressure to act on municipal and industrial waste streams. Pressure on the 'back-end of product systems has been the main driver - important in sectors such as packaging, consumer goods, detergents, automobiles and electronic goods. However, concern over other aspects of product life cycles - materials and energy inputs, production processes, product use and waste disposal - have also been a stimulus for industrial interest in LCA.

Among the firms who have developed in-house LCA competences, large firms facing specific environmental regulatory or market pressures predominate. These include all the European chemicals majors and car assemblers, as well as major producers in the paper and board sector. In France strong interest has emerged in the agro-food industry. Within sectors and even within countries there is a wide variation in commitment and investment in LCA. Small firms producing consumer goods have also applied LCAs, frequently with government assistance.

Table 1 provides a characterization of LCA applications across different product categories. 'Simple' and 'durable' are clearly relative terms. Here, simple signifies that relatively few material types have been used in the product and durable means that a product's useful life is of the order of months and longer.

From this classification some preliminary conclusions can be drawn about the function of LCAs for producers along the product chain. The further upstream in the product cycle a firm is located, the more it will be concerned with upstream and production process impacts. Firms located in the middle of the product chain will be more concerned with the choice of materials which influence energy efficiency and waste management during and after the use phase.

LCA AND THE GENERATION OF INNOVATION

The classification of LCA activities in industry is a


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Table 1. Classification of products and industrial LCA applications. Product Major environmental

impacts Function of LCA

Intermediate product Bulk commodity (plastics, metals)

Manufactured component

Short use life (packaging, consumption products)

Simple consumer product

Long use life (building material)

Long use life (cars, white goods) Complex consumer product

Upstream and production

Use and downstream

Defence against substitutes Influencing policy on waste

managment and recycling Provision of data to customers

Downstream

Use

Use

Influencing policy on waste management and recycling

Environmental optimization of products and packaging

Marketing products

Influencing policy on waste management and recycling

Optimization of inputs, energy efficiency and waste management routes

useful starting point for generalizations about the likely influence of LCA on industrial innovation. The key question which needs to be answered is: under what conditions might the results of an LCA lead to a change in a product system which brings appropriable benefits to the innovating firm?

Before trying to answer it, the question itself needs to be further elaborated. Firstly, we take innovations to be changes in processes and products, whether incremental or radical. This means that defensive uses of LCAs which leave existing product systems unchanged are not counted. In fact, it appears that many defensive LCAs may in the longer term lead to product system changes which are to some extent informed by a knowledge of life cycle environmental impacts.

The second problem is to disentangle those changes in product systems which are made because of the knowledge provided by an LCA from changes made for other reasons. Life cycle studies may be conducted to solve a myriad of problems faced within and outside firms and only a proportion would be expected to have an influence on technical change. Even in these cases, the results of an LCA will be just one ingredient in the complex and iterative process of decision-making which leads to product or process changes. Many different types of knowledge play a part in technological innovation, ranging from the theoretical to the practical, the codified to the tacit. Formal LCAs are a type of theoretical and codified knowledge, but less formal decision tools based on a life cycle approach (such as check lists) may also incorporate more practical knowledge. LCA-based knowledge itself may therefore appear in several different forms and may influence in a variety of ways different stages of the innovation process. It

will be difficult in most cases to identify exactly the influence of LCA results in the innovation process.

There also appears to be no easy way in which the influence of LCAs could be detected in measurable indicators of technological activity within firms. In other fields of innovation studies, performance characteristics of products and production processes can be used as measures of organizational or technical change. Tests of the innovation potential of LCA are likely to remain elusive.

In principle, all product systems (or the services they provide) could be further optimized with regard to their environmental impact. However, only a proportion of these opportunities will be identified and realized because (i) the technological opportunities are limited by current knowledge, (ii) existing capabilities and investments are bounded, (iii) the uncertainties, costs and perceived benefits of improvement are distributed unevenly and (iv) barriers are created by other institutional factors such as industrial structure and market demand. Innovations will be generated and diffused if they 'match' the prevailing socio- technical paradigm, including, crucially in the case of environmentally driven innovations, the regulatory environment.

An extensive literature exists on the sources, nature and direction of technical change and this does not need to be rehearsed here. There is now a good understanding of the conditions under which technological innovations are generated and why they are adopted within firms. These conditions vary according to the sector in which a firm operates and are related to its accumulated organizational and technical capabilities. Following Dosi's characterization we idenhfy three basic factors in the



generation of innovations: technological opportunities, market demand and appropriability (Dosi, 1988).

TECHNOLOGICAL OPPORTUNITIES

The opportunities available to firms in their search for solutions to technological problems will depend on the nature of the problem (for instance, in mature industries the potential for radical improvements in process efficiency may be limited) and on the knowledge (both theoretical and practical) which has accumulated with firms. Life cycle assessment represents a new framework within which knowledge about products and processes is generated. The likelihood that this knowledge will lead to technological opportunities will depend on three main factors: the environmental impact of those activities; the 'depth of the product life cycles in which the firm's activities are situated; and the maturity of the industry.

Environmental Impact

Life cycle approaches will be more applicable to product systems which have a relatively high environmental impact, either in terms of gross impacts or in their impacts relative to the service provided by a product system. To give a simple example, a materials- and energy-intensive industrial sector such as automobiles is more likely to be able to reduce life cycle environmental impacts than an information-intensive sector such as telecom- munications. This is partly because innovation in materials-intensive sectors is already oriented towards improvements based on reducing materials and energy intensities. Moreover, LCAs will be most likely to uncover improvement potential in product systems with relatively high global or regional environmental impacts.

The criterion of environmental impact needs to be qualified. If the boundaries for a telecommunica- tions system are set widely enough they would include materials-intensive elements. For instance, a telecoms LCA may include the increased potential of alternative systems to provide telecommuting or teleshopping opportunities. If such activities lead to changed transport patterns, this might bring environmental savings. Nevertheless, the scope of LCAs conducted within firms will typically be limited to core activities, whether a product or as the function provided by a product.

Life Cycle Depth

The likelihood of discovering technological opportunities for improvements will also be determined by the number of steps in a product

life cycle: the deeper the life cycle (i.e. the more steps), the greater the opportunities for improvement. Each system step introduces new inefficiencies. There may also be opportunities for improvements by considering the whole product system to avoid unnecessary steps by, for instance, substituting one material for another. In very attenuated life cycles there may be the potential for complete replacement with an alternative product or service whose life cycle is less deep. This could pose either a competitive threat or an opportunity for a firm.

Most published life cycle studies have been for relatively simple (and therefore 'shallow') product systems - bulk commodities and simple short use life products - partly due to a lack of inventory data. These aggregated studies for simple materials and energy-intensive systems rarely provide new knowledge which stimulates process innovation.

Technological Maturity

Utterback and Abernathy (1975) have described regularities in the dynamics of innovation within different industrial sectors. In particular, they showed that when a new technological system was commercialized technical change was dominated by product innovations. As the technology is stabilized, market growth slows and industrial production becomes more concentrated: the technical system can be said to have grown mature. In general, with greater maturity a greater proportion of technical change will be due to process innovations, which will tend to accumulate more slowly. This pattern is less prominent in science-based firms and may not be applicable at all to suppliers of specialized goods where product development will continue to be more important (Pavitt, 1984).

Life cycle studies have until now related mainly to products. In mature industrial sectors involving large-scale production the principal technological opportunities will be in the form of process change. The structure and depth of the product system will tend to change little without basic feedstock changes. The main changes will be in yield improvements. As these process improvements are already being searched for and selected for other reasons - competition on price and/or quality - LCA will not provide much in the way of new insight. In mature industries where product innovation remains important, as in the car industry, life cycle studies can stimulate and direct innovative activity under certain conditions.

MARKET DEMAND

For technological opportunities to be converted into


commercialized innovations, market demand must exist for a new product or process. Typically, this demand is exerted by customers, although environmentally driven technical change has traditionally depended more on the ’push of regulation. Market demand for LCA-based improvements may include environment-led pressures affecting purchasing decisions, as well as other considerations (lower energy costs during the use phase of a product, for instance). Ecolabels are the clearest examples of market instruments supported by LCAs. There are few examples of regulations where compliance requires an LCA. Adoption of life cycle approaches is a sign of ‘beyond compliance’ behaviour (Walley and Whitehead, 1994). In most sectors, compliance is assumed. Market demand for firms to do more varies greatly between sectors and national markets. The factors making up market demand for life cycle approaches applied to technical change include the relative sigruficance of environmental impact to product function, environmental pressure in the sector and consumer demand for information.

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In principle, the likelihood that environmental impacts will lead to a decisive market demand for improvement will depend on the perceived significance of the impact, whether there is a justifiable trade-off between product function and environmental impact (a drug responsible for toxic environmental impacts may still be justified because of its therapeutic value) and on the availability of a competitive alternative product or service. Given the limitations of LCA as a tool for characterizing and evaluating local environmental impacts, the measure of significance would be related to the relative scale of global and regional impacts.

Relative Significance of Environmental Impact to Service

Market demand for improvements in life cycle environmental performance will depend on the perceived relative environmental impact of the product system. Primarily these will be impacts which customers are most directly aware of and for which traditional policy instruments are less effective. In particular, life cycle approaches associated with ’use phase’ and ‘end of life’ impacts are more likely to stimulate innovations generating customer value. Cases of upstream impacts with market implications, as in the titanium dioxide case, are less common, although critical for firms to manage where they occur.

Market actors in many industrialized countries, whether industrial or individual consumers, are becoming more aware of their responsibility for consumption-related wastes and wish to mitigate them for a variety of reasons ranging from ethical to economic. This may lead to changing customer behaviour, but also places a burden on producers to reduce use-phase and end-of-life impacts. Market pressure for life cycle improvements has been put on firms producing a range of goods from short-life final products such as diapers to durable semi- finished goods such as building materials. Environ- mentally motivated market demands frequently appear unexpectedly and are hence difficult to forecast. The emergence of political controversies around product-related environmental regulation has already generated a rich academic literature (Brickman et al., 1985).

Environmental Pressure in the Sector

Market demand is not static, but continually evolving. Regulatory regimes are also dynamic. Life cycle approaches have been adopted by firms operating in sectors which have consistently come under greater environmental pressure, whether in the market or from the regulator. One of the first requirements for firms is to understand the scale of the threat to their markets and technologies. A further response is usually to plan to manage the threat by defending current activities and by preparing for the commercialization of substitute products or processes.

Life cycle assessments can be useful in both these activities. They allow a firm, often for the first time, to understand the environmental impacts associated with the product systems they traverse and to locate ‘weak points’. This assessment will provide them with a tool to both defend the status quo and potentially a means of orienting a programme of improvements or more radical change. Beyond crisis management, therefore, LCA may become embedded as a steering mechanism for product or process development. In ‘environmental foresight’ firms may seek a greater predictability over likely future environmental pressures on their product systems.

Where there is relatively little technological or input flexibility, LCAs will tend to have an external, defensive role, whereas in sectors where technical change and materials substitution are dynamic options, LCAs will tend to have a more internal, innovative role. This latter approach typically limits the direct use of LCA in managing external environmental pressures. A clear dualism in industrial applications of LCA therefore exists: one externally oriented, aggregated and open; the other internally oriented, specific and opaque.

Customer Demand for Data

Life cycle approaches are also adopted in firms



facing market demand for life cycle inventory data. In conducting LC studies firms often turn to their suppliers for inventory data. The response in the supplier firm may range from careful management of data release to open co-operation, and typically requires an LCA competence to be created within the supplier firm. The nature of the response will depend on the relative size of the supplier and customer firm and the threat posed to future sales of not providing data. Large commodity suppliers tend to provide collaboratively-derived ’industry average’ data to customers in those sectors where it is available (plastics, surfactants), whereas producers of semi-finished and finished goods provide more specific inventory data, but tied to confidentiality arrangements. Confidentiality plays a major part as inventory data may allow a customer to calculate a supplier’s costs. The most direct knowledge trans- fers with the highest innovation potential take place where vertical collaborative LC studies are conducted (for instance, a recent study on paint systems conducted by Ford and BP Chemicals; Hazel et al., 1995).

APPROPRIABILITY

The existence of technological opportunities and market demand are necessary, but not sufficient, conditions for the generation of innovations. Firms must also be able to appropriate the benefits of innovations, usually through the extraction of higher rents due to an often temporary dominant technological or market position. Firms must be reasonably assured that they will be compensated for the costs and risks of innovation. The building of life cycle competences and the adoption of life cycle approaches will depend critically on the appropriability of life cycle based competitive advantage. In most sectors this will be problematic as product life cycles will not be within the direct control of a single firm, and because the market demand for life cycle improvements may be patchy. In modern economies manufactured products are rarely used by their producers, whereas the vertical integration of production is a char- acteristic of only some sectors. Even in contexts where ‘producer responsibiliq exists, this has rarely meant a clear downstream or upstream expansion of corporate responsibility.

Not all the benefits associated with improvements across a product system will be appropriable by individual firms. For LC studies which are conducted for external use, a basic condition is transparency. Secrecy, the most traditional means of defending appropriable technological knowledge, is therefore not an option. In cases where groups of

firms have collaborated on sectoral LCI studies, no advantage usually accrues to participating firms relative to each other. Inventory data are typically collected and manipulated by a third party. Benefits will be spread evenly across a sector. These will be cost and risk sharing in the defence of aggregate market share (as in a defence against a substitute material), the establishment of industry benchmarks of environmental performance, the provision of inventory data to customers and in pre-competitive learning. Appropriability would tend to be easier for firms conducting ’internal’ LCA studies. We can conclude that appropriability conditions will be highly variable, but that in general the appropriability to individual firms of innovations based on LCA studies will be weak. The degree to which LCA-based benefits are appropriable will be determined by a number of factors: the vertical structure of the industry; the position of the firm in a product life cycle; and the ability to market life cycle benefits,

Vertical Structure of Industry

Most product systems exhibit the same basic structure and include raw materials suppliers, intermediate goods producers, finished goods producers, distributors, users and waste managers / recyclers. In some industries, such as paper and pulp, the production of raw materials and their processing into finished goods is concentrated in single firms. In others, the production of finished goods and their distribution tend to be integrated. These patterns are complex and frequently country- specific and will be affected by specific market conditions and by anti-trust legislation and rules. They are also dynamic. At any given moment processes of vertical concentration and disintegra- tion will be observed in different sectors. The ability to capture directly competitive benefits from LCA studies will depend on the extent to which firms in a sector exert control over a product system. In general, the results of LCA studies will therefore be more appropriable the more vertically integrated the industry. This appears to be borne out in the aluminium industry.

Position of the Firm in the Product Life Cycle

Firms in less vertically integrated sectors may also extract competitive benefits from LCA studies, especially if their position in the product system affords them a greater degree of leverage over other firms inhabiting the same system. Dominant firms will tend to be assemblers of finished goods. Assemblers are the primary orchestrators and motivators of product systems and through their


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LEARNING AND ADOPTION design and procurement decisions they are primarily responsible for the ecoprofile of a product system. Assemblers are typically large firms who are the only holders of complete knowledge about the materials components embedded in a product and about its performance. This dominant position provides them with the greatest scope for extracting benefits, both directly and indirectly, from an environmental optimization of the product system.

By virtue of their central position final goods producers are able to look both upstream and downstream in appropriating the benefits of life cycle approaches. By choosing substitute materials or new waste management routes they will have the greatest freedom to optimize the environmental performance of finished goods. They will also face the greatest exposure to market and regulatory pressure for product improvement. Command of product life cycles therefore lies with the assemblers of final goods and it will generally be these firms which are best able to appropriate the benefits of LCAs.

Marketing

Most discussions of appropriability assume that innovating firms will be able to demonstrate to the market the technical advantages of their products through demonstrations and marketing. Appropri- ability depends on the capacity to demonstrate some advantage and to defend ownership of knowledge. Overt claims of life cycle environmental benefits are not safe because they inevitably lead to counter-claims, also LCA-based (cf. the dispute over petrochemical and oleochemical based surfactants; Kluppel et al., 1995). Attempts to extract 'environmental' rents from the market have therefore become more focused. Firms may make claims about the comparative life cycle advantages of one product over another directly to customers, or they may seek to make less specific advertisement of the life cycle benefits of their products. This can be achieved through a range of signalling behaviours including conference presentations, scientific publications and public information. These signals may be directed at customers and consumers, or at shareholders and financial markets.

We have identified some determinants of LCA- based innovations in firms. The conclusions are rather contradictory and it is not surprising that many firms have been unsure about what to make of LCA as an environmental management tool. Put simply, our analysis suggests that firms in highly integrated and highly polluting sectors with 'deep' product systems, producing 'simple' final goods to the market are the most likely to appropriate LCA-based technological innovations.

Life cycle activities within industry are highly differentiated. Learning and adoption by firms faces many obstacles, even where a clear strategic or economic rationale exists. Life cycle assessment can be an expensive, complicated and controversial technique requiring new skills and competences to be brought into the firm. Given these problems, how do firms learn about LCA and how do they adopt the technique?

Firms initiate learning and adoption about LCA in three ways: they subcontract life cycle studies to outside consultants; they grow in-house competence; or they participate in an industry-wide collaborative life cycle inventory study. Today there is a greater tendency to adopt the latter two strategies. Established consulting companies continue to hold the largest life cycle inventory databases, partly because they retain ownership over data generated in studies. However, as more firms develop in-house competences and build their own databases, this monopoly position may be eroded. Consulting companies also continue to play a part in the methodological development of LCA and in its diffusion into firms by carrying out studies for both internal and external audiences. The market for large full-blown LCA studies for industry may now have passed its peak.

In several sectors, especially among producers of intermediate commodity products, collaborative inventory studies were launched during the early 1990s. The Association of Plastics Manufacturers in Europe (APME) studies of commodity thermoplastics led the way, followed by the publication of the surfactant studies by the ECOSOL group (Stalmans et al., 1995). Most of the other studies are still to report. Table 2 lists collaborative studies currently underway in Europe. Currently there is only one cross-sectoral collaborative life cycle programme: the Scandinavian NEP project.

The development of an in-house LCA competence is a requirement of its application in business decision-making, as well as for participa- tion in collaborative studies. There appear to be a number of, ways in which firms organize this competence. In most firms it is centralized, whereas in others it is devolved to business units. The location of expertise vanes between research, product design and development, and safety, health and environment departments. Even in large global firms, LCA competence resides in small teams of one to ten people. These practitioners are the competence holders and in most firms they remain responsible for providing external and internal LCA services. There are few examples of firms where life cycle inventory and assessment tools



Table %. Collaborative industry ecobalance studies. Abbreviation Organization

APME EAA ECOSOL ECMA ECSA EUCAR FEFCO IISI ISOPA IISRP PMMA

Association of Plastics Manufacturers of Europe European Aluminium Association European Centre of Studies on Linear Alkylbenzene European Computer Manufacturers Association European Chlorinated Solvents Association European Council of Automotive Research European Federation of Corrugated Board Producers International Iron and Steel Institute Isocyanite Producers Association International Institute of Synthetic Rubber Producers Polymethylmethacrylate Taskforce

have been disseminated widely. In 1995 Volvo Car Corporation provided on a trial basis about 50 engineers with access to an LCA-based environmental priority strategies (EPS) package through their computer-aided design system.

Where internalization is taking place, life cycle approaches often need to be integrated with other eco-design approaches (OTA, 1992; te Riele and Zweers, 1994; Keoleian et d., 1995). There are both structural and cultural obstacles. In a review of LCA applications in industrial design, Keoleian (1994) argued that in the development of new products there is a mismatch between the opportunities for design changes and the capacity to evaluate life cycle inventories and impacts. During the specifica- tion of design requirements, when most resource commitments are established, comparatively little will be known about the final product, so that trade- offs between cost, performance and environmental parameters cannot be properly assessed. In the design and development phase, as the characteristics of the product become more clearly defined, the scope for ecobalance studies grows, but the ’design solution space’ narrows. Fewer and less critical choices about materials and functional trade-offs can be made.

Time pressure within product development also plays a major part as firms in all sectors seek to compress product development times. Elaborate and time-consuming life cycle studies are not feasible in this context. However, most product development is incremental in nature. Marginal adjustments to assessments are therefore possible once the initial large investment in building a product life cycle inventory has been made (Kaniut and Kohler, 1996). A more common trend among car-makers and electronic goods manufacturers is to develop simplified approaches ranging from lists and manuals to user-friendly eco-indicator soft- ware systems. Few designers have much interest in a tool which is complex and opaque. It becomes a threat to their work since it appears to reduce the autonomy of decision-making. The practical requirement for a usable tool, however, runs

counter to a belief within the LCA community of the need for comprehensiveness and rigour.

A range of solutions exists to remove these barriers to adoption within firms. Some will choose ambitious and centralized solutions; others will choose simpler, decentralized approaches. At BMW the solution has been for a deep integration of life cycle assessments into a new product development process based on the concurrent engineering concept (Franze et al., 1995). BMW conducts LCA studies on components (doors, body-in-white, air intake manifolds) and aims to establish ecoprofile benchmarks for key components in all its vehicles. LCA has become one of many inputs into key materials choice decisions, made early at the conceptual design stage. Dismantlability and recyclability assessments are also conducted concurrently.

CONCLUSIONS

A number of conclusions can be drawn from this analysis of the application of life cycle approaches in industry. Firstly, it is still early days. Most firms with an interest in life cycle approaches are still learning about the technique, whether separately or collectively. Secondly, adoption even in sectors where competitive benefits are expected requires further database development and agreement on consistent approaches. There is still a lack of faith in the instrument within industry because it does not provide clear, appropriable advantages. Thirdly, real and perceived environmental impacts of products vary a great deal. For car companies LCAs are attractive because they provide a heuristic for making and communicating materials choice decisions. For chemical companies LCAs provide a way of defending existing markets and expanding into new ones. Applications of life cycle approaches therefore differ greatly from sector to sector and from company to company. Fourthly, the assumption that LCA will be pervasively ‘internalized as an environmental management tool is unfounded.


F. BERKHOUT

LCA is an instrument which in certain circum- stances may provide firms with useful new knowledge, but experience shows that routine exploitation of this knowledge will provide the greatest competitive advantage to producers of simple finished products. There are also cases, especially in the chemicals industry, in which commitment to LCA is waning now that the great battles over plastic packaging waste and pollution from detergents appear to have passed.

ACKNOWLEDGEMENTS

Research conducted for this paper is supported by a grant from the Global Environmental Change Programme of the UK's Economic and Social Research Council.

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BIOGRAPHY

Frans Berkhout, Science Policy Research Unit, University of Sussex, Falmer, Brighton, East Sussex BNl 9RF, UK.


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LIFE CYCLE ASSESSMENT AND INNOVATION IN LARGE FIRMS