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«PROACTIVE ENVIRONMENTAL STRATEGIES IN SMALL BUSINESSES: RESOURCES, INSTITUTIONS AND DYNAMIC CAPABILITIES Jan Lepoutre Promotor: Prof. Dr. Aimé Heene ...»

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3.4.2.1. Environmental performance (e) Although the improvement of the natural environment is the final goal of PES, remarkably little studies actually asses whether firms with a PES are successful in achieving improved environmental performance. Most studies seem to assume, however, that the adoption of proactive environmental practices automatically generates good environmental performance. Applications of social behavior theory on environmental intentions learn that noble intentions do not necessarily result in actions or willingness to act (Derksen & Gartrell, 1993; Schaper, 2002; McKeiver & Gadenne, 2005). For example, studies have shown that a firm disclosing a commitment to a PES, is not necessarily effective: a firm may disclose a commitment for “impression management” reasons, to decrease the impact of unsystematic risk (Bansal & Clelland, 2004). In addition, very few voluntary environmental programs or standards really check whether the environmental performance of their members really improves (Darnall & Carmin, 2005; Potoski & Prakash, 2005), which results in the adoption of PES on the fringe and not at the core of the firm strategy (Wagner, 2007; Boiral, 2007).

Another explanation could lie in the measurement of PES: “some studies have used environmental management indicators as part of environmental performance”, and others “have measured environmental performance within the variable environmental management” (Claver, Lopez, Molina, & Tari, 2007: 607). For example, environmental performance has been measured as having an environmental management system (Lefebvre et al., 2003; Chen, Lai, & Wen, 2006), awards (Klassen & McLaughlin, 1996), the perception of reductions relative to competitors (Branzei et al., 2004) and self-reported improvements of emissions (Melnyk, Sroufe, & Calantone, 2003; Zhu & Sarkis, 2004).

Chapter 3

The few existing studies that do investigate the PES - environmental performance relationship seem to convey a startling finding: it is almost as if all firms engaging in a PES are successful in their endeavor (Klassen & Whybark, 1999a; Clelland, Dean, & Douglas, 2000; Zhu & Sarkis, 2004; Chan, 2005; Potoski & Prakash, 2005). Given the considerable challenges that the natural environment imposes to most organizations in terms of uncertainties, paradigm shifts, inexistent experience, etc, one would expect this not to be generalizable across all firms. More research would be needed to investigate the difference between intentions and results.

3.4.2.2. Economic performance (f) Studies investigating “whether it pays to be green” have been interested in both the impact of PES on economic performance, as well as the impact of environmental performance on the economic performance. In this context, economic performance has been investigated as return on assets, stock price, market share and combinations of these aforementioned indicators (Wagner & Schaltegger, 2004; Wagner, 2007). Although a formidable number of papers promote the “business case of greening” by pointing at cost reductions, revenue enhancements, the strengthening of supplier ties, improved public image, reduction of liabilities, etc (Gallarotti, 1995; Shrivastava, 1995a), empirical results are inconclusive.

Whereas the majority of studies indicate a positive association of PES with economic performance (Klassen & McLaughlin, 1996; Russo & Fouts, 1997; Klassen & Whybark, 1999b; Dowell et al., 2000; Clelland et al., 2000; Gil et al., 2001; King & Lenox, 2002;

Melnyk et al., 2003; Carmona-Moreno et al., 2004; Chan, 2005; Chen et al., 2006), others find opposing results (Sarkis & Cordeiro, 2001; Galdeano-Gomez & Cespedes-Lorente, 2004;

Bansal, 2005) or are inconclusive (Gilley et al., 2000; Zhu & Sarkis, 2004; Menguc & Ozanne, 2005; Wagner, 2005; Gonzalez-Benito & Gonzalez-Benito, 2005c; Wagner, 2007).

This has led some authors to suggest that the relationship between PES and economic performance follows an inverse U-shaped pattern (Schaltegger & Synnestvedt, 2002; Wagner, 2005): environmental efforts may have an increase in economic performance first, but “sooner or later the increased environmental effort will represent net costs” (Schaltegger & Synnestvedt, 2002:341-342). The actual point at which environmental investment return net costs, however, depends on both internal (management) and external (consumer preferences, available technologies, etc) factors. In order to further refine the relationship between environmental strategies or environmental performance and financial performance, a number of studies have therefore argued in favor of and introduced mediating and moderating Chapter 3 variables. Such an endeavor derives from the fact that it is very unlikely that a ‘one-size-fitsall’ rule for the link between proactive environmental strategies and financial performance

would exist (Aragon-Correa & Rubio-Lopez, 2007; Wagner, 2007):

“discussions of business and the environment are too often derailed into sterile arguments about whether it “pays to be green”, as though the answer had to be categorical. Rather than searching for an unconditional answer, it is useful to ask under which circumstances it makes sense from a business standpoint for firms to invest in in environmental performance.” (Reinhardt, 1999: 10) Again, both internal and external moderators have been proposed and investigated to refine the PES – economic performance relationship. In what follows, I will discuss the findings that have emerged from my reading of the literature in this perspective.





3.4.2.3. Internal moderators (g) Most of the moderating and mediating factors that have been studied in PES environmental/economic performance relationship are embedded in the resource-based view of the firm. The underlying logic is that PES instigate the development of complex, pathdependent and embedded capabilities, which in turn increase the competitive advantage and the financial or environmental performance of the firm (Hart, 1995; Russo & Fouts, 1997;

Sharma & Vredenburg, 1998; Buysse & Verbeke, 2003). The theoretical basis is the ‘Natural Resource Based View of the Firm’ (Hart, 1995), which states that the natural environment imposes constraints to organizations that will necessitate the development of specific capabilities to remain competitive in the market. In fact, Marcus and Anderson have demonstrated that the complex capabilities needed for environmental management can only derive from having a mission that reflects a proactive environmental strategy (2006). Several

of such capabilities have been identified in both conceptual and empirical papers:

- innovation (Sharma & Vredenburg, 1998; Christmann, 2000; Lefebvre et al., 2003;

Chan, 2005; Chen et al., 2006)

- continuous improvement and total quality management capabilities (Kitazawa & Sarkis, 2000; Hanna, Newman, & Johnson, 2000; Darnall & Edwards, 2006)

- higher-order learning (Sharma & Vredenburg, 1998; Chan, 2005; Williander & Styhre, 2006)

- integration of stakeholder perspectives (Sharma & Vredenburg, 1998; Klassen & Whybark, 1999b; Buysse & Verbeke, 2003; Pujari, 2006)

- cross-functional teams (Pujari, Wright, & Peattie, 2003; Pujari, 2006)

Chapter 3

- employee involvement (Kitazawa & Sarkis, 2000; Hanna et al., 2000; Forman & Jorgensen, 2001; Ramus, 2001; Tien, Chung, & Tsai, 2005; del Brio et al., 2007)

- the integration of environmental issues in strategic planning and core managerial processes (Judge & Douglas, 1998; Buysse & Verbeke, 2003; del Brio et al., 2007;

Wagner, 2007)

- flexibility to reverse investments (Rugman & Verbeke, 1998)

- capacity for change (Judge & Elenkov, 2005).

Whereas most of these capabilities were investigated to determine their impact on the financial performance, some studies have also shown these capabilities to have an impact on the environmental performance, for example higher-order learning (Lapre, Mukherjee, & Van Wassenhove, 2000; Halme, 2002; Chan, 2005), innovation (Chan, 2005), stakeholder integration (Chan, 2005), integration of environmental issues in the strategic planning process (Judge & Douglas, 1998).

In addition to resources and capabilities, a number of studies hint that structural variables may also act as moderators. Here, firm size has been found with both positive (Wagner, 2007) as well as negative (Gonzalez-Benito & Gonzalez-Benito, 2005c) and without effects (Orlitzky, 2001). Also, Craig and Dibrell (2006) found that firms with PES achieved higher innovation capabilities and greater financial performance when they were family firms.

These former structural features have led researchers to believe that the idiosyncratic nature of smaller firms will require a specific analysis on the resources and capabilities that aid in the execution of PES (McKeiver & Gadenne, 2005; Etzion, 2007; Aragon-Correa et al., 2008). At the moment, however, only Aragon-Correa and colleagues (2008) have investigated whether the capabilities that were found in larger firms were also needed for successful PES execution in small firms. In their study among 108 Spanish small garages they found that garages benefitted from similar resources and capabilities as large firms, i.e. shared vision, stakeholder management and strategic proactivity.

3.4.2.4. External contingencies (h) In addition to the internal factors that mediate or moderate the PES – environmental and economic performance relationships, external factors have also been shown to have an influence. Again, we draw on Aragon-Correa and Sharma’s (2003) contingency framework to synthesize the findings in the literature.

Chapter 3

1. Munificence. The potential positive effects of PES on competitive advantage seem to be attenuated in munificent environments. Given that more hostile conditions (as opposed to munificent conditions) make it more difficult for competitors to imitate complex and dynamic capabilities (Teece et al., 1997) and that capabilities generating experience and credibility are more important in hostile environments (Brush & Artz, 1999), Aragon-Correa and Sharma (2003) hypothesized that most benefits in terms of competitive advantage could be harvested in hostile environments. Similar propositions were also made by Porter (1991) and Porter and van der Linde (1995b), who suggested that environmental regulations – decreasing the munificence – would result in increased firm performance (the ‘Porter hypothesis’). Regulation attracts the formation of support industries for pollution abatement (Greaker, 2006), or may induce new innovations which accrue competitive advantages, especially to first movers (Nehrt, 1996). Two rare studies among smaller firms, however, present conflicting results on Aragon-Correa and Sharma’s proposition. Whereas Clemens (2006) found that higher munificence in the form of green subsidies negatively impacts firm profitability, Lefebvre et al. found that “firms whose products are facing adverse market conditions find it difficult to turn environmental initiatives into profits” (2003: 277).

2. Complexity. Complexity in the general business environment seems to have a positive influence on the competitive advantage of PES as well. Maintaining the argument as presented above that a PES is associated with the development of capabilities which are difficult to imitate, Aragon-Correa and Sharma (2003) suggested that the few firms that develop a PES in a complex environment, will be able to reap benefits from their capabilities. Empirical indications have been found again in the context of environmental regulation: since environmental regulation is often complex and may require changes in business practices, firms that have engaged in proactive environmental practices benefit from their early mover learning advantages (Nehrt, 1996). In addition, such complex regulation may function as an entry barrier to new firms (Dean & Brown, 1995), decreasing the competitive threat that otherwise may have come from new entrants (Porter, 1980).

3. Uncertainty. Aragon-Correa and Sharma (2003) finally predict that uncertainty in the general environment will strengthen the PES ~ competitive advantage relationship.

Conversely, they predict a weakened relationship in situations where the effects of the natural environment on the organization are uncertain or when it has difficulty to

Chapter 3



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