«PROACTIVE ENVIRONMENTAL STRATEGIES IN SMALL BUSINESSES: RESOURCES, INSTITUTIONS AND DYNAMIC CAPABILITIES Jan Lepoutre Promotor: Prof. Dr. Aimé Heene ...»
Third, since there is no or little (perceived) cost for using common goods, there are no economic incentives to use them in a way that is socially efficient (Baumol & Oates, 1988).
“Fundamentally, it [pollution] is a manifestation of economic waste and involves unnecessary, inefficient or incomplete utilization of resources, or resources not used to generate their highest value. In many cases, emissions are a sign of inefficiency and force a firm to perform non-value-creating activities such as handling, storage and disposal.” (Porter & van der Linde, 1995b).
From a strategic management point of view, the particularity of environmental strategies is rooted both in the free-rider problem that underlies the described market failure effects, and the lack of visibility or relative impact of one’s actions on the improvement of the natural environment. Firms that want to voluntarily refrain from causing externalities or social harms stemming from resource depletion face the peril of bearing the cost that careless businesses do not. At the same time, these latter businesses may benefit from the efforts from the former. Similar to the difference between those who pay and those who do not pay for a train ticket, the polluters free-ride the non-polluters’ efforts. As a result, environmental strategies are often perceived as costly endeavors that do not create market positions that are favorable from a strategic point of view (Walley & Whitehead, 1994; Reinhardt, 1999).
“In a world where environmental externalities were the only departure from the assumptions of perfect competition (…) firms that volunteered to internalize these costs could not survive.” (Reinhardt, 1999: 10) Whenever the production of waste also represents a cost to the firm, reducing pollution obviously presents an opportunity for cost reduction (Hart, 1995; Porter & van der Linde, 1995a). Such a situation represents a “win-win” between the minimization of environmental impact and the maximization of profit and is therefore the “low hanging fruit” of environmental strategy. Things become more difficult when the voluntary internalization of environmental impacts that do not present themselves as immediate win-wins (Walley & Whitehead, 1994; Palmer, Oates, & Portney, 1995). In order to overcome these market failures, strategists will need to seek alternatives that redeem their investments in the natural environment (Nehrt, 1996; Nehrt, 1998; Reinhardt, 1999; Dean & McMullen, 2007; Cohen & Winn, 2007).
2.3.2. The natural environment as a social issue Besides the idiosyncratic properties of the natural environment in its relationship towards the market (the economic sphere), the natural environment induces specific interactions with the social sphere. The counterpart of the indivisibility of the natural environment is that every one claims to have the right to use or access the common good. As a result, a consumption level of the common good in a way that impedes the consumption for other agents, will prompt social protest and pressure to abandon the consumption. As such, the natural environment becomes a social issue (Clarkson, 1995). Social issues present particular conditions to strategy, since they may influence the possibilities, opportunities, threats and challenges to strategy in the form of (1) regulation, (2) stakeholder issues and (3) market segmentations.
First, the natural environment is presented as regulation. Over the last decades, governments on different levels in society have engaged in substantial efforts to tackle the market failures associated with the natural environment through a variety of policy measures.
Such measures include legislation stipulating which products can be used or produced, formalized “licenses to produce”, forbidding the use of polluting practices or even the production of certain products, market regulation through cap-and-trade systems, taxes and subsidies, compulsory reporting on toxic substances, and many more (Baumol & Oates, 1988). The goal of these coercive measures follows a logic of sticks, carrots and sermons (Bemelmans-Videc, Rist, & Vedung, 1998). Through sticks (punishment when failing to comply with the law), carrots (using financial incentives to further environmentally friendly practices) and sermons (sensitizing and awareness rising through media campaigns and knowledge diffusion), governments try to direct the economy to more environmentally friendly practices and products. The literature presents environmental regulation both as a threat and as an opportunity (Dean & Brown, 1995; Nehrt, 1996). It is argued that environmental regulation may destroy the economic possibilities of incumbent and conservative firms (Walley & Whitehead, 1994; Palmer et al., 1995), or may inhibit the foundation of new firms (Dean & Brown, 1995). Advocates of environmental regulation, however, argue that environmental regulation sets the stage for creative destruction and green innovation (Porter & van der Linde, 1995a; Rugman & Verbeke, 1998; Hart & Milstein, 1999).
Second, the natural environment is presented to businesses as a stakeholder issue (Freeman, 1984; Clarkson, 1995; Jones & Wicks, 1999) and embedded in the larger concept of “corporate social responsibility” (CSR) (Davis, 1973; Carroll, 1979; Wartick & Cochran,
1985; Wood, 1991; McGee, 1998). Despite the trend that more and more natural environmental issues are regulated, the last decades have also seen a dynamic surge in stakeholder activism. A stakeholder is “any group or individual who can affect or is affected by the achievement of an organization’s objectives” (Freeman, 1984), and may be both internal (employees, shareholders) or external (suppliers, customers, governments, competitors, civil society organizations) to the firm. Stakeholder theory argues that organizations should voluntarily take the claims of important stakeholders into account, because their support is necessary for the survival of the organization (Freeman, 1984;
Clarkson, 1995). In a similar vein, caring for the natural environment is seen as a “corporate social responsibility”, the moral call to businesses to voluntarily take the effects of their activities on the social and natural environment into account (Carroll, 1979; Wartick & Cochran, 1985; Wood, 1991; Swanson, 1995; McGee, 1998): “the moment corporations and their managers define and accept responsibility and obligations to primary stakeholders, (…) they have entered the domain of moral principles and ethical performance, whether they know it or not” (Clarkson, 1995: 112). Firms that do not respond to their social responsibility do so at the peril of facing consumer or supplier boycotts, pressure group “naming and shaming”, employee strikes or shareholder activism (Freeman, 1984; Henriques & Sadorsky, 1996;
Brammer & Millington, 2006). From a strategic risk management point of view, stakeholders are important when they are perceived powerful, when their claims are considered legitimate and when their interests solicit urgent responses (Mitchell, Agle, & Wood, 1997; Eesley & Lenox, 2006). A strong vehicle in conveying stakeholder influence is the reputation of an organization. Firms that create bad perceptions of their behavior in the social domain, may find themselves with decreasing trust and loyalty (Barney & Hansen, 1994) or access to critical resources (Fombrun & Shanley, 1990), such as human capital (Turban & Greening, 1996; Reinhardt, 1999). The type of influence that a stakeholder can have on the firm depends on the resource dependencies between a firm and its stakeholders (Pfeffer & Salancik, 1978;
Frooman, 1999) or the position a firm holds in a stakeholder network (Rowley, 1997): it is evident that claims from stakeholders possessing critical resources for the firm (and which they may withhold in the event that the firm does not respond appropriately) will be assessed in different ways than those that do not (Frooman, 1999). Such insights are important; since they highlight that the influence of stakeholders may be both direct and indirect through other stakeholders (Rowley, 1997; Frooman, 1999; Hart & Sharma, 2004). Although “the natural environment” is not “a group or individual” by itself and is therefore most often represented by such civil society organizations (Crane & Matten, 2004) as Greenpeace, the Rainforest
Alliance or WWF, it is sometimes argued that the natural environment should be seen as a stakeholder in its own right (Leopold, 1948; Purser et al., 1995; Shrivastava, 1995b; Sharma & Henriques, 2005). In sum, through the interaction with stakeholders, the natural environment is presented as a strategic management issue. The growing attention for stakeholder management and social responsibilities in the organizational and strategy literature is proof of the specific set of resources, capabilities and response patterns which are required (Grant, 2008).
A last manifestation of the natural environment as a social issue is that it may be used to appeal to customers and suppliers in product and factor markets. Since people and organizations want a healthy environment, it is argued that organizations that diminish their negative environmental impact on the environment will be remunerated for their efforts in the market, at least by some segments in the market that show specific sensitivity to it (Arora & Gangopadhyay, 1995; Arora & Cason, 1995; Shrivastava, 1995b; Henriques & Sadorsky, 1996; Klassen & McLaughlin, 1996; Prakash, 2001). Conversely, it is argued that organizations that produce negative impacts on the environment will be punished in the market (Klassen & McLaughlin, 1996).
To strategy, social issues present both opportunities and challenges, paving the way for product differentiation and cost minimization, but also as potential regulation or stakeholder induced cost increments. In addition to these unidimensional challenges, however, the most difficult challenges lie in the harmonization of the natural environment with other social challenges (Hall & Vredenburg, 2003; Matos & Hall, 2007). Solutions that would be very beneficial to the natural environment often conflict with other social claims. For example, it has often been suggested that the environmental burden is a function of population, affluence and technology (input/output) used to bring affluence to the population.
As a result, one could argue – as some authors do – that one way to reduce environmental burden is by limiting the population (Hardin, 1968; Shrivastava, 1995b). A decrease in environmental burden by limiting population growth or affluence, however, often encounters fierce social resistance (Hart, 1997). Similarly, whereas biotechnology was presented as an important example of environmental leadership strategies (Hart, 1995; Hart, 1997), it has encountered the resistance of environmental and antiglobalization advocates alike, who raised concerns about the transfer of genes from genetically modified crops to wild plant species and the potential dependence of developing countries on seed companies (Hall & Vredenburg, 2003). In sum, by considering the natural environment in strategic questions, strategic management is confronted with higher levels of complexity (Matos & Hall, 2007) and
uncertainty (Lewis & Harvey, 2001). Reconciling these differences requires fundamental answers from strategists as to what the company stands for, who it will please, why and how (Wheeler, Fabig, & Boele, 2002; Wheeler, Colbert, & Freeman, 2003).
2.3.3. Paradigm shift The last idiosyncrasy of the natural environment to strategy lies in the place the natural environment occupies in one’s worldviews: the “natural environment” means different things to different people (Gladwin et al., 1995; McGee, 1998; Hoffman & Ventresca, 1999).