2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
PROFITABILITY IN ECO-FRIENDLY INITIATIVES: A STUDY
IN A HOTEL SECTOR ORGANISATION
Pradeep Randiwela1
p_randiwela@yahoo.co.uk
University of Colombo-Sri Lanka
Imaduwa M.R. Priyadarsshna
Imaduwa.m.r.p@gmail.com
1
Professor of Marketing, Former Dean – Faculty of Management and Finance, University of Colombo, Sri
Lanka.
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Cambridge, UK
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2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
ABSTRACT
Along with the new market developments, businesses are being either pushed or on its’ own
accord; taking initiatives to reduce their carbon foot print in its business activities. In a
commercially charged business sphere, profitability in terms of a monetary value of these
“Green Initiatives”, holds the top most vitality to all its’ stakeholders. Therefore, the primary
aspire of this study is to compare the monetary values retrieved from the concerned
organizational records and interpret them in terms of its profitability or the recoverability of
the initial investment by using a method which will be compatible with the current practices
of accounting standard.
The formula to work out the profit is based on the hypothesis that the difference between
“running costs” before and after the green initiative, to be considered as an opportunity cost
which could be either plus or minus in most of the cases. Then apply the outcome to the
“Return calculation formula” as the “Operating Income” or if more appropriately termed it as
“Generated Income” of the initiative. Further, to see whether the initial capital that has been
invested could be recovered via these returns over a five year period by applying amortization
laws.
Primary data for the study have been collected from The Jet Wing Beach hotel in Sri Lanka, a
well established organization that has dedicated to implement green initiatives and had been
recording on costs and quantities throughout. More than 90% of the tested initiatives are
marginally profitable in terms of ROIC where it hits as highly profitable in terms of
recoverability. If added, the other benefits such as, health benefits, environmental benefits,
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gaining a competitive advantage or even gaining a cost or price leadership which has not
been tested or quantified in this paper certain to add more value to these respective initiatives.
INTRODUCTION
Ever since the natural evolution of the planet earth had started, eons before the imaginable
memory of the man, it has changed its composition, atmosphere, landscape, vegetation and
the inhabitants that it sheltered on, rendering to the great philosophical declaration of the
greatest thinkers among men to walk on this planet earth, to declare that the “Change” is the
only constant that exists in this arena. In recent history of the mankind though, within an
extremely short period of time, man has polluted and changed the entire planet with their
various practices and lifestyle choices to a point that the environment we lives in, is changing
so fast, we may not even have couple of more hundred years of livable atmosphere left.
In order to overcome this hazardous situation, various initiatives such as rewarding
for environmental friendly strategies, imposing fines or taxes, prohibiting certain practices
and self regulatory mechanism are been used.
Yet, orientation and the profit driven activities of these businesses, needs to be a
monetarily measured to assess the outcome of these actions in order to justify them to various
stake holders of these businesses (Masero, 2010). Therefore to be able to determine the
profitability of almost all the activities of this nature has become the main focal point of the
business communities today.
As for the hotel industry, which the focus of this study, as a whole, needs to be
playing a bigger role in taking part in these conservation or mitigating activities due to the
mere fact that it provides alternative life styles to millions of people all over the world by
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making use and by altering the natural resources available in a scale that has never seen
before.
RESEARCH OBJECTIVE

To identify and segregate the eco-friendly initiatives that has been employed by the
organization with and without a capital investment.

To figure out the profitability of all the initiatives as well as the recoverability of the
initiatives with a capital investment
REVIEW OF LITERATURE
The Profitability of an organisation, as a measure of success has been categorised into four
different classes (Schmalensee, 1989), such as: Competitive rate of return on capital
employed, Accounting rates of return on assets or equity, Price-Cost Margin, and Market
value of a firm’s securities.
But successfulness, accuracy and appropriateness of these measures are not
investigated. In measuring accounting returns one must assure that there are information in
regards to accounting earnings and book value, which would certain to render value to
estimating accounting returns (Damodaran, 2007).
The various rates of return calculations such as Return on Invested Capital (ROIC),
Return on Equity (ROE) and Return on Assets (ROA) estimate the returns on investment,
ultimately designed to draw conclusions on whether the actual returns are surpassing the
costs incurred. The eco-initiatives such as pollution reduction could be actually profitable in
terms of cost savings via increased efficiency, reduction in compliance costs and
minimization of future liabilities (King & Lenox, 2001). Therefore, it is possible to calculate
a rate of return by using the opportunity cost or the savings due to an eco friendly investment
that has been calculated using the difference between the running costs of the affected aspect
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ISBN : 9780974211428
or area of the organisation pertaining to such initiative, via earlier an after the implementation
cost details. Then apply this value to the “Return calculation formula” as the “Operating
Income” or if more appropriately termed it as “Generated Income” of that particular
investment or the initiative.
The area has not so far been studied in depth. Hence this study is an attempt to meet
the need of the day. Environmental regulations and stakeholders forms the force external
while economic opportunities and ethical mindset represents the force internal that actually
drive an organisation to adopt green initiatives, which could lower costs through LCA such
as, reducing the cost of inputs and waste, sale of waste disposal, achieve gains via green
marketing or increased corporate reputation (Tutore, 2010).
Even when the extent of the correlation of the financial performance of a corporate to
its environmental governance is remains to be open for further investigations (Valentine &
Savage, 2012), there is a movement towards “green purchasing”, where concerned and
educated individuals or organisations who understands the importance in their consuming
behavior to be environmentally sustainable. With increased pressure from the socio-political
background, today’s profit driven organisations are increasingly adopting various green
marketing strategies enabling them to exploit the present environmental issues and create an
competitive advantage (Ishaswini & Datta, 2011).
According to Kim & Han (2010), the hotel industry has also been stimulated to go
green due to the public awareness of environmental damage and desire to purchase
environmentally friendly products. This practice enables the hotels to satisfy the green needs
of their consumers, avoid existing criticism over tourism practices, engage positively in
governmental regulations, substantially reduce the waste and be cost competitive, water and
energy conservation along with introduction of recycling practices.
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The failure in establishing a firm relationship between profitability of an organisation
and its eco friendly activities had, so far, being mainly due to the fact that, in most studies the
profitability measures of the eco initiatives has not been taken in isolation to the other factors
may influence the profitability of an organization (Valentine & Savage, 2012). Therefore,
measurements of eco initiatives with a significant investment to test against its performance
in terms of the earnings or savings it has created as an opportunity cost, it would be ideal to
use a measures of Rates of return in order to establish their worth (Schmalensee et al, 1989).
METHODOLGY
The data was predominantly derived from the organisational publication and internal
recordings such as company accounts. Researchers classified collected data into two major
segments such as, initiatives with a capital investment, and initiatives without a significant
capital investment. Moreover, the data were grouped into energy, water and waste depending
on their nature.
The initial costs and savings data were analysed using the defined ROIC formula for this
respective research, and projected annual income were compared against the annual
depreciation value of the acquired asset to determine recoverability of the capital expenditure
over a legally accepted amortization period of five years.
The numerous types of eco initiatives implemented during the last few years were grouped
into four major categories (Mittapal, 2006), Energy conservation measures, Water
conservation measures, Waste water management measures, and Solid waste management
measures. Out of these Eco-initiatives, eight of them were analysed with available data as
shown in the Table 1. It shows the amount invested as well as its ROIC value. Further, the
initiatives which have invested in assets are to be tested with their projected earnings to
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assess the recoverability of these investments, during a five year period, which is the time
span for legally depreciable period for any asset of an organisation, shown in the Table 2.
ANALYSIS AND FINDINGS
Eco-friendly initiatives of the hotel could be divided into two distinct categories as,
initiatives with a significant investment and ones without. For the ROIC calculation, ROIC of
an investment could be derived from, dividing the “Operating income of the investment” by
“The book value of the Invested capital” (Schmalensee et al, 1989)
The equation;
Where, * represents the eco-initiatives respectively
Further, in situations pertaining to Eco-initiatives such as these, “Operating income”
could be equal to “Generated income” and the “Generated Income” could be assessed by
deducting the “Running Cost of the area or the component” after the initiation from the
“Running Cost of the area or component without or before the initiative” (King & Lenox,
2001)
Therefore,
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Hence, for an Eco-initiative, the ROIC could be derived by using following equation,
In the following Table 2 the ROIC had been calculated by using the above mentioned
equation.
Table 1: ROIC analysis of eco initiatives - 2011
Eco-initiative
Energy conservation
Bio mass boiler
Solar Heater
Key-Card use in rooms
Thermostat in rooms
New energy saving Lamp
fittings
Raw Material use
Salt Chlorinator
Water conservation
Smaller Cisterns with dual
flush
Re use of grey water in the
garden
Alternate
Cost (if
without the
initiative)
Actual Cost
(after the
initiation)
3,257,517.60
2,537,783.28
2,445,558.36
915,528.00
792,171.72
0.00
1,444,703.16
109,863.36
4,574,188.80
Investment
ROIC
(%)
2,465,345.88
2,537,783.28
1,000,855.20
805,664.64
2,087,755.00
3,034,075.00
312,000.00
93,600.00
0.01
0.01
0.03
0.09
3,803,076.00
771,112.80
93,750.00
0.08
216,345.60
185,400.00
30,945.60
1,795,221.00
0.00
2,546,792.52
2,185,716.72
361,075.80
0.00
11,650,852.71
0.00
11,650,852.71
0.00
Cost saving
In above Table 1, it shows the initiatives of Energy conservation or Raw material
usage whilst these initiatives had required a significant capital in their implementation stages.
Both initiatives that are categorised under Water conservation had not required a significant
initial investment in order to implement them. The return ratio against the investment, all
initiatives under energy conservation indicates a not so significant but essentially a positive
rate, where the initiative under the Raw material usage shows an insignificant ROIC
percentage.
The Table 2 shows the possibility of the recoverability of the same investments shown in
Table 1. The main assumption here for the calculation based on the legal principal that allows
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2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
a business to depreciate its capital investments on its assets, in five equal portions of the
initial book value of the investment called “amortisation”, within a period of five years.
Therefore, Table 2 obtains the annual savings of each and every Eco-initiative of the
organisation from the Table 1 and had divided this value by the value that has obtained by
dividing the initial investment of the pertaining initiative by five.
The formula;
Hence, above calculation should indicate the strength of the projected earnings via
savings that would enable the organisation to earn back the initial cost of the investment in
five years, where they could amortize the total investment in accounting terms.
Table 2: Investment recoverability analysis of the eco initiatives with investment – 2011
Eco initiative
Bio mass
boiler
Solar Heater
Key-Card use
in rooms
Thermostat in
rooms
New energy
saving Lamp
fittings
Salt
Chlorinator
Alternate
Cost (if the
no initiative)
Actual Cost
(after the
initiation)
Cost saving
Investment
Recover
ability as
a ratio
3,257,517.60
792,171.72
2,465,345.88
2,087,755.00
5.90
2,537,783.28
0.00
2,537,783.28
3,034,075.00
4.18
2,445,558.36
1,444,703.16
1,000,855.20
312,000.00
16.04
915,528.00
109,863.36
805,664.64
93,600.00
43.04
4,574,188.80
3,803,076.00
771,112.80
93,750.00
41.13
216,345.60
185,400.00
30,945.60
1,795,221.00
0.09
The outcome shows the ratio of the recoverability, even the last initiative which has a negative
ROIC, has the slimmest positive margin of recovering the investment, where every other
initiative shows healthy positive ratios of the recoverability.
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In brief the findings suggests that, it is safe to predict that just by taking initiative in its individual
form, shows strong possibilities of generating profitable income over the time. This will depend
on the adaptation of the best management as well as operational practices in order it to achieve its
service as well as product excellence. The main reason for the above proclamation is that, all of
these initiatives been tested, could easily be copied and bettered by the competitors and the
profitability calculations for the initiatives with an investment, are mainly based on a saving that
had been identified via the difference in the operating costs between the initiated and the
alternative that had been used before.
There is an overwhelming case for the adaptation of these Eco friendly initiatives by an
organisation as they are mostly profitable and the initial costs are highly recoverable through the
general accounting and company tax laws. More than 90% of the tested initiatives are marginally
profitable in terms of ROIC but highly profitable in terms of recoverability. If added, the other
benefits such as, Health benefits, Environmental benefits, gaining a competitive advantage or
even gain cost or price leadership which has not been tested or quantified in this paper certain to
add value to the above declaration.
CONCLUSION AND RECOMMENDATIONS
The study was mainly carried out on an organisation that has initiated a significant number of
Eco-initiatives while keeping its pertaining monetary records in a meticulous manner, when
compares to most of the other Sri Lankan organisations in the local Hotel sector. Nevertheless,
The Jetwing Beach is not a publically floated company that would have compelled them to reveal
their accounts on a more transparent public domain such as publically available Annual reports or
web sites which should contain details, which could have been and inevitable would have been
scrutinized equally by the public, competitors or any other interested parties.
Still, the study could be used as a catalyst for further explorations into this hardly
researched arena of Eco-friendliness in businesses, which still in its infancy, even though the
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concerns were raised as far back as 1920s. It creates an opportunity to future researches to find
out things such as what motivates or propels organisational leadership to commit to these type of
initiatives while trying to devise more accurately ascertainable accounting methods to test the
costs and benefits, fair and clear ways to analyse data and predict for the future in areas such as
consumer behavior, emission reduction valuations in monetary means or create indexes to show
the contributions by these initiatives to lengthen the impending environmental catastrophes.
At the heart of the matter, somehow, it is quite clear that there is a clear and vindicating
case for the businesses to be more aware of the Eco concerns of the very environment that they
operates in and protect, improve or enhance it for their and wider community’s benefit.
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