Identifying Firm Capabilities As Drivers of Environmental Management and Sustainability Practices - Evidence From Small and Medium-Sized Manufacturers

Business Strategy and the Environment
Bus. Strat. Env. (2012)

Published online in Wiley Online Library
(wileyonlinelibrary.com) DOI: 10.1002/bse.739
Identifying Firm Capabilities as Drivers of Environmental

Management and Sustainability Practices – Evidence
from Small and Medium-Sized Manufacturers
Kay H. Hofmann,1* Gregory Theyel2 and Craig H. Wood3
1
Department of Corporate Management and Economics, Zeppelin University, Friedrichshafen, Germany
2
Institute for Manufacturing, University of Cambridge, Cambridge, UK
3
Whittemore School of Business and Economics, University of New Hampshire, Durham, NH, USA
ABSTRACT
Firms increasingly need to consider environmental issues as a result of stricter governmental
regulation and due to growing pressures from a broad range of stakeholders. The literature
on environmental management is vast but not much is known about firm-specific capabilities
that facilitate the adoption of environmental practices and environmental collaboration.
Drawing on the dynamic capabilities literature, this study identifies the adoption of advanced
technology, experiences with inter-firm relations and capacity for product innovation as three
capabilities that support firms’ efforts to become ‘greener’. Descriptive statistics portray the
diffusion of the related management practices among 294 small and medium-sized manufac-
turers from the United States. Based on regression analysis, the authors provide evidence for
a relationship between the underlying capabilities and environmental management practices.
Consequently, the results point to additional benefits of known strategic capabilities and
suggest how firms should approach sustainability initiatives by developing certain competen-
cies first. Copyright © 2012 John Wiley & Sons, Ltd and ERP Environment.
Received 01 June 2011; revised 21 September 2011; accepted 24 September 2011

Keywords: environmental management; sustainability; dynamic capabilities; technology adoption; stakeholder collaboration;
product innovation
Introduction
D
URING THE PAST TWO DECADES, SMALL AND MEDIUM-SIZED MANUFACTURING COMPANIES (HEREINAFTER REFERRED
to as SMMs) have faced increasing pressure from a range of different stakeholders to improve their
environmental performance. During this time, researchers have been showing the benefits of environ-
mental management, which may be specific to environmental performance (Lenox and King, 2004;
Florida and Davison, 2001; Theyel, 2000; Florida, 1996) but may also strengthen competitive advantage and
improve financial performance (Al-Najjar and Anfimiadou, 2011; Lucas, 2010; Bryson and Lombardi, 2009;
Montabon et al., 2007; Orlitzky et al., 2003; Geffen and Rothenberg, 2000). Although SMMs have often been
*Correspondence to: Kay Hofmann, Department of Corporate Management and Economics, Zeppelin University, Friedrichshafen, Germany.
E-mail: kay.hofmann@zeppelin-university.de
Copyright © 2012 John Wiley & Sons, Ltd and ERP Environment
K. H. Hofmann et al.
described as laggards (see, e.g., Revell and Rutherfoord, 2003; Tilley, 1999) and early initiatives to stimulate
environmental management among smaller companies proved ineffective (Friedman and Miles, 2002), more
recently green initiatives among these enterprises have proliferated (Revell et al., 2010).
Much of the existing literature uses individual case studies or explorative analyses of limited samples to study the
topic (Sroufe et al., 2002). Consequently, general guidelines for how to capture the benefits of environmental
management are difficult to make, often industry specific and so far vague at best. Little is known about possible
factors that influence a firm’s ability to adopt environmental management and to translate these improvements into
competitive advantage. From a dynamic capabilities perspective, certain capabilities may be required in order to
successfully implement environmental management (Kerr, 2006). Christmann (2000), for example, shows that
capabilities for process innovation and implementation moderate the relationship between environmental manage-
ment and cost advantage. This important finding, however, does not yet answer the more fundamental question of
whether certain capabilities are antecedents of the implementation of environmental management. From a more
practice oriented perspective this yields the following research questions. Do firms that strive to become greener
first need to develop capabilities as a foundation on which environmental management is established in a second
step? If this is the case, then which specific capabilities are needed?
Drawing on the dynamic capabilities literature, we interpret the adoption of advanced technology, collaboration
experience with suppliers and customers and innovative capacity as capabilities and explore their influence on firms’
ability to implement environmental management practices and environmental collaboration. In many industries,
these capabilities are regularly developed as part of companies’ business strategies and are therefore available to
be leveraged in an environmental context (Christmann, 2000). Undoubtedly, technology adoption, collaboration
capabilities and innovativeness are also general determinants of success among SMMs. The conceptual framework
depicted in Figure 1 illustrates the connection between capabilities, environmental management and two perfor-
mance measures. For the purpose of this paper we define environmental management as a systematic administra-
tive approach to reducing or eliminating the damage created by a firm to the natural environment in which it
operates. We identify leading environmental management practices and forms of environmental collaboration that
are part of this systematic approach. In the empirical section, we do not only describe to what degree firms adopt the
individual measures, we also strive to identify factors (i.e. capabilities) that determine their implementation.
The remainder of this paper is structured as follows. In the next section we review literature on environmental
management practices and environmental collaboration and their relationship with the above-mentioned capabili-
ties. Based on these theoretical considerations we develop our hypotheses. The section is followed by a description
of the data and the methods employed. Our analysis begins with a descriptive part portraying the adoption of
advanced technology and various management practices among the firms in our sample. We develop a typology
and describe the characteristics of four types of company. Therein are implications for strategic positioning and
operational effectiveness for managers of SMMs. Furthermore, the findings relate to improving environmental
performance, as the leading companies – relative to the other companies in the typology – may be endowed with
capabilities that facilitate the adoption of sustainability practices (Dutta et al., 2005). We then use regression analysis
to explore the underlying relationship between these capabilities and environmental management. After the discus-
sion of the empirical results, the paper concludes with implications for managers as well as policy makers.
Environmental Environmental
Management Performance
Mark
Id et Sig
ea nals Resource
s
Productivitiy
Economic
Strategic Management Capabilities Products
Performance
Figure 1. Capabilities, environmental management and performance
Copyright © 2012 John Wiley & Sons, Ltd and ERP Environment Bus. Strat. Env. (2012)
DOI: 10.1002/bse
Firm Capabilities as Drivers of Environmental Management Practices
Theoretical Considerations
Initially, we present research on the link between environmental management and performance gains. Although this
aspect is not directly addressed in this paper, the evidence from the literature suggests that not only environmental
but also economic performance may be affected positively by environmental management. Not only are these insights
highly relevant to small and medium-sized companies, they also strongly motivate our analysis of capabilities as factors
that influence a firm’s ability to implement environmental management. Accordingly, the following subsections
elaborate on the influences of technology adoption, inter-firm collaboration and capacity for product innovation on
the adoption of environmental practices. The last subsection outlines the evolution of firms from being collaborators
with their suppliers and customers to collaborators for environmental challenges and opportunities.
Environmental Management and Firm Performance

The most prominent driving forces that influence a company’s decision to adopt environmental management
practices are rising environmental legislation, concern over liability, direct and indirect costs of regulatory compli-
ance, discrimination in factor markets (i.e. especially in labor markets), public concern about environmental
degradation, proliferation of international voluntary environmental initiatives, customer requirements and concern
about overall competitiveness (Haddock-Fraser and Tourelle, 2010; Delmas and Montiel, 2009; Delmas and Toffel,
2008; Kassinis and Vafeas, 2006; Christmann and Taylor, 2002; Baylis et al., 1998). In response to these pressures,
the following sustainability practices have proliferated in recent decades: employee involvement programs, internal
audits, supplier audits, ISO 9000, ISO 14000, total quality management, just-in-time manufacturing, life-cycle
analysis, total cost accounting, pollution prevention plans and designated environmental management staff
(Simpson and Samson, 2010; Florida and Davison, 2001; Dorfman et al., 1992; Garrod and Chadwick, 1996; Smart,
1992; Theyel, 2000).
While improvements in environmental measures caused by these activities are straightforward, additional bene-
fits of green efforts have been shown to span from cost containment or reduction (Christmann, 2000) to product
differentiation (Bonifant, Arnold and Long, 1995, 2007) to obtaining competitive advantage (Lucas, 2010). Neverthe-
less, bottom line enhancements in the financial performance of firms as a result of environmental management
practices remain all but certain, especially for SMMs (Simpson et al., 2004). Although industry best practices
leading to cost savings and product innovations are ubiquitous, these ‘success stories’ are typically scattered across
industries and casuistic in nature (Sawhney and Jose, 2003). Early empirical studies using larger samples of firms
have produced inconclusive results (Russo and Fouts, 1997; Hart and Ahuja, 1996; Nehrt, 1996; Klassen and
McLaughlin, 1996). Recent studies, however, provide some evidence that formal corporate environmental manage-
ment systems have positive impacts on both environmental and economic performance (Melnyk et al., 2003).
Christmann (2000) underlines that financial rewards of environmental strategies are not as straightforward and easy
to attain as theoretical argumentation and intuition suggest. She identifies complementary capabilities (cf. Teece
et al., 1997) that must be present in order to realize cost advantages. She concludes that environmental activities need
to be aligned with overall business strategies and must correspond to existing capabilities. Darnall and Edwards
(2006) show empirically that publicly traded firms have stronger complementary capabilities and therefore accrue
lower costs when adopting environmental management systems. In the same vein, Plaza-Úbeda et al. (2009)
elaborate on additional conditions that must exist in firms so that environmental improvements materialize.
Technology Adoption and Environmental Practices

The implementation of advanced manufacturing as one example for the adoption of technology has been identified as a
basis for superior environmental performance (Levinson, 2009; Florida, 1996). This strand of literature shows that
technology adoption and environmental practices may be connected through the following common principles: produc-
tivity and quality improvement, cost reduction and technological innovation. Other research suggests a similar relation-
ship between lean production and innovative environmental production practices (Maxwell et al., 1993). Manufacturing
companies often improve and modernize their facilities through the adoption of new technologies and thus not only
DOI: 10.1002/bse
have opportunities for improving their operational effectiveness but also environmental performance. It appears as if
technology adoption and environmental improvements are intertwined: adopting new technology usually leads to
cleaner production processes and the decision to improve environmental performance often requires the use of novel
technology. Nevertheless, not all sustainability practices require the adoption and support of advanced technology,
which becomes especially evident in the case of environmental management practices such as employee incentive
programs, training or the employment of a dedicated environmental manager.
The dynamic capabilities literature (Teece et al., 1997), however, provides a perspective that suggests an underlying
relationship even between advanced technology and such environmental management practices. Adopting advanced
technology involves identifying, if necessary modifying and finally implementing new technologies in existing produc-
tion systems. To trigger this process an entrepreneurial mindset of questioning the status quo is needed. A firm’s
willingness and ability to adopt advanced technologies and accept the associated risks (i.e. because desired long-term
performance implications are often uncertain) may be interpreted as a dynamic capability. Moreover, adopting
advanced technology requires organizational learning and guides companies’ evolution (Eisenhardt and Martin,
2000; Zollo and Winter, 2002). In particular, workers and management who operate and oversee sophisticated produc-
tion facilities become acquainted with more standardized organizational processes and routines. Advanced technology
(e.g. computer aided design or manufacturing) specifies production as well as management processes and reduces the
need for idiosyncratic interference of experienced staff. Complex work routines, managed via check-lists and pre-
defined skill catalogues, largely displace craft-based workbench approaches. Hence, the adoption of advanced technol-
ogies requires and further expands the dynamic capabilities needed by an organization to handle new challenges (Helfat
et al., 2007), for example the implementation of complex management systems, or, in our context, state-of-the-art
environmental management practices. We rephrase this underlying relationship, which yields our first hypothesis.
H1. Firms that adopt advanced manufacturing technology practices are more likely to adopt environmental manage-
ment practices.
Inter-Firm Relations and Environmental Practices

The extant literature on the benefits of inter-firm relations is large (e.g. Gulati et al., 2009; Mazzarol and Reboud,
2008; Lavie, 2006; Kale et al., 2002; Delmas, 1999; Dyer and Singh, 1998; Chan et al., 1997). In particular, benefits
may include performance enhancements, value chain optimization, cost containment, risk reduction, growth,
efficiency in innovation, interchange of knowledge as well as know-how, reduction of ambiguity and the identifica-
tion of opportunities (Un et al., 2010; Cannon and Perreault, 1999; Teece, 1992; Dertzousas et al., 1989). A related
strand of research has investigated the underlying pre-conditions, necessary capabilities, types of partnership and
the degree to which different collaborative designs are capable of leading to the above-mentioned results (Schreiner
et al., 2009; Lin et al., 2009; Lusch and Brown, 1996; Heide and John, 1992; Gulati, 1998). While alliances are
generally capable of producing economic value, successful collaboration among firms requires dynamic capabilities.
These capabilities involve specific competencies such as risk acceptance, communication skills and organizational
learning (Anand and Khanna, 2000) and are sometimes referred to as ‘relational capital’, which is a necessity not
only for managing an alliance but also for learning and benefiting from it (Kale et al., 2000).
In addition to the fairly straightforward effect that environmental management practices may be identified within
an alliance as an opportunity to address business challenges (Kerr, 2006), the collaborative capabilities such as
organizational learning and risk acceptance may be important requirements for a successful implementation of
environmental management practices. Consequently, we expect the following.
H2. Firms that collaborate with customers and suppliers are more likely to adopt environmental management practices.
Product Innovation and Environmental Practices

Innovation is widely regarded as a critical factor to achieve and maintain competitive advantage. For this reason,
much research has been dedicated to identify the determinants of innovation (e.g. Lederman, 2010). The research
at hand departs from this approach and seeks to understand the influence of innovative capacity of firms on the
DOI: 10.1002/bse
adoption of environmental management practices. Nevertheless, we draw on the existing innovation literature to
identify the key characteristics and capabilities of innovative firms. These are typically described as entrepreneurial
companies with flexible organizational structures that allow for an innovative combination of the available resources
and skills (Francois et al., 2002; Sandberg, 1992).1 The organizational culture of firms with innovative abilities
promotes internal communication, supports ‘intrapreneurs’ and fosters the acceptance of risks because the develop-
ment and launch of product innovations may lead to failures and anticipated outcomes remain uncertain for
extended periods of time (Berchicci and Bodewes, 2005; Francois et al., 2002).
Furthermore, innovative ability requires companies to adopt state-of-the-art processes and to observe technolog-
ical developments in their external environment. Lederman (2010) shows that innovative firms spend more
resources on R&D activities and also tend to acquire licenses for foreign technologies. Along these lines, recogniz-
ing industry or even broader societal trends and observing the needs of customers are critical competencies to
generate ideas and stimulate innovation (Hoffmann, 2007). Hence, innovative firms appear to maintain an interface
with customers (Bentley, 1990) and other central stakeholders. Lokshin et al. (2009) provide evidence that not
individual firm characteristics, such as improving team cohesiveness and providing slack time to foster creativity,
but rather the combination of customer, technological and organizational competencies, leads to more innovation,
suggesting that an innovative ability consists of the interplay of these various capabilities. Due to the characteristics
of the latter, it is reasonable to expect that they simultaneously influence a company’s receptivity for sustainability
issues and to that effect also its attitude toward green management, making it more likely that innovative firms
adopt environmental management practices.
Finally, companies with an innovative ability may understand environmental management practices as another
source of ideas for innovation and in particular for sustainable product development (Crowe and Brennan, 2007;
Berchicci and Bodewes, 2005), giving them a strong incentive to implement environmental practices. All of these
considerations lead to the following hypothesis.
H3. Firms with a higher capacity for product innovation are more likely to adopt environmental management practices.
Inter-Firm Relations and Environmental Collaboration

Despite the fact that the majority of collaborative efforts typically aim at enhancing industrial performance, inter-
firm relations have proven effective in spawning environmental benefits (Florida, 1996). Firms often describe these
improvements as unintended consequences of broader collaborative efforts. The rationale behind this effect is
obvious: collaboration may sensitize firms to new opportunities and facilitates the diffusion of problem-solving
expertise among the parties involved. Other research is even more particular and asserts that relations with suppli-
ers aid the adoption of innovative environmental technologies (Geffen and Rothenberg, 2000). For example, firms
have taken specific actions such as the re-design of products and production processes with the help of supply chain
partners (Lee and Kim, 2011; Theyel, 2001). Such joint efforts expedite solutions, reduce costs and can ultimately
lead to increased productivity, better environmental performance and growth (Bonifant et al., 1995; Christmann
and Taylor, 2002). The growing complexity of environmental challenges may increasingly compel firms to collabo-
rate along the value chain (Linton et al., 2007; Srivastava, 2007).
Furthermore, with growing public awareness and rising stakeholder pressures it is likely that existing inter-firm
relations are leveraged to address environmental concerns. It is intuitive that solving environmental issues collabora-
tively may be faster, cheaper and more effective if firms can draw on established communicative structures, joint
knowledge, integrated technologies, personnel and trust (Lee and Kim, 2011; Sharfman et al., 2009; Dyer and Singh,
1998). Experiences with inter-firm relations may hence be interpreted as a capability that facilitates or at least mediates
an extension of collaborative efforts to environmental issues. We transform this relationship into the last hypothesis.
H4. Firms that collaborate with customers and suppliers are more likely to engage in environmental collaboration with
their customers and suppliers.
1
Concerning flexible organization capacities, small and medium-sized firms may even have an advantage over larger companies (Bos-Brouwers,
2010).
DOI: 10.1002/bse
Data and Methods
Data Collection and Questionnaire

The sample consists of 294 SMMs from seven industries (i.e. chemicals, rubber, fabricated metals, industrial
equipment, electrical and electronic equipment, transportation equipment and instruments), located in five East
Coast states, namely Virginia, New Hampshire, Maryland, Maine and Vermont. The seven industries were chosen
because they are important industrial sectors in US manufacturing. A total of 550 target firms were randomly
selected from the population of these firms contained in the Dun and Bradstreet database. The sampling procedure
ensured that every firm is a separate entity and that they are not affiliated with each other (e.g. by being plant
subsidiaries). The size was limited to 500 or fewer employees in order to focus on SMMs.
The data gathering approach is based on a telephone questionnaire with primarily structured, closed-end
questions and definitions of major terms. The survey items concerning the adoption of advanced technology,
inter-firm relations, innovativeness and environmental management practices are drawn from case studies, the
academic literature and discussions with practitioners. We conducted pre-test interviews with SMM production
managers in order to narrow the four groups down to the most common industry practices, which we then used
for the final questionnaire. The reasons for choosing a telephone survey were expected high response rate, quick
and flexible feedback, and low cost. A professional research marketing firm conducted the survey, resulting in a
high response rate of 294 completed and useable interviews (53.4 percent). A firm’s plant manager was contacted
up to three times to maximize the response rate. The firms participated in the survey on a voluntary basis. We
investigated whether the responding firms structurally differed from non-responders in regards to all critical
characteristics. Since we could not find any evidence for such differences, we are confident that there is no selection
bias in the data.
Description of Variables and Models

Concerning our main variables of interest, interviewees were asked about their firm’s adoption of advanced
technology (10 items), general collaboration (12 items), environmental management practices (7 items) and
environmental collaboration (10 items). Five-point ordinal scales ranging from 1 (not at all) to 5 (to a great extent)
were used; the specific practices included in the questionnaire are all listed in the tables provided. For the regres-
sion analyses, we combine the individual items within the four categories by calculating overall average scores,
without assigning weights. Hence, our dependent variables ENVIRONPRACT and ENVIRONCOLLAB consist
of the average adoption level per firm regarding environmental practices and green collaboration, respectively.
Likewise, the independent variables of interest TECHADOPT and COLLAB indicate the average adoption levels
of advanced technology and collaboration practices (with customers and suppliers), respectively. We understand
the latter two constructs as proxies for the underlying dynamic capabilities. Moreover, one question captured
the degree to which firms have ‘enhanced versions of existing products over the period of three years’, again
employing a five-point ordinal scale; the respective explaining variable is labeled PRODUCTINNO. Although this
measure captures the success of innovative efforts, we assume that a company with a high score exhibits a higher
innovative ability and can draw on the underlying competencies and capabilities that lead to innovation. The ques-
tion was pre-tested prior to data collection in order to ensure that the respondents indicate longitudinal innovation
performance when responding to the phrase ‘over the period of three years’. However, due to the cross-sectional
design, we cannot rule out entirely that the environmental management practices were adopted before the
innovation took place.
The two regression models are estimated separately via ordinary least squares (OLS) and include additional
controls that capture firm size, operationalized as the log-transformed number of employees (LNEMPLOYEES),
age of the company (YEARS) and industry as well as state effects. The log-transformation of LNEMPLOYEES
corrects for extreme outliers in the right tail, which cause a skewed distribution of this variable. The reported
standard errors are robust to heteroscedasticity. An overview along with brief descriptions of all variables, summary
statistics and a correlation matrix are provided in the appendices.
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Empirical Results and Discussion

Adoption of Advanced Technology and Collaboration
The firms in this study show discernible patterns of adoption of advanced technology and collaboration practices. The
majority of the firms do not adopt the technology practices and forms of collaboration or adopt them only to a slight
degree. However, a small group of firms, between 15 and 25 percent, adopt the practices to a large and to a great
degree, with a few notable exceptions such as computer aided design (CAD), computer aided engineering (CAE)
and production planning and inventory control systems, which are adopted by a much larger percentage of the firms
(see Tables 1 and 2). Most companies do not use the technology practices involving recording and analyzing machine
operations, with four of the five practices having more than 50 percent of the firms reporting ‘not at all’, but for five of
these practices there is a consistent group of about 15 percent of the firms using the advanced operation practices to a
large degree or a great degree. While few of the collaboration practices stand out, technical assistance and certification
had the highest means for adoption with customers and suppliers. The disparity between the large portion of
non-adopters and the small, but distinguishable, group of adopters raised our curiosity and motivated our
further assessment of the data in order to unveil specific groups of firms by their adoption behavior.
We continue to describe the characteristics of the firms in the logic of a two by two typology initially developed by
Kaufman et al. (2000), because it offers an informative approach to understanding the strategic positioning of the
companies. Based on each observation’s mean level of adoption of advanced technology and collaboration, we
organize the firms into four clusters along these two dimensions. The thresholds between the high and low catego-
ries are set to the aggregate sample averages. Then we calculate the mean number of employees, mean adoption of
environmental practices and environmental collaboration scores as well as product innovation levels within the four
quadrants. Table 3 reveals that the groups exhibit marked differences in these characteristics.
Consistent with the original typology, we name the firms in quadrant I (low technology, low collaboration)
‘commodity suppliers’ because they do not adopt advanced technologies and show little collaboration; their
preferred mode to interact with customers and suppliers is standard market contracts. They are on average the
smallest firms, show less variability in their manufacturing processes and use more automation, which may explain
why they employ fewer workers. Without implying causality, these firms also reach the lowest average scores for
innovation. There is a disproportionate number of firms from the industrial equipment and transportation
equipment industries in this quadrant.
Quadrant II is populated with ‘collaboration specialists’, which have a relatively high collaboration average and a
low advanced technology adoption score. The firms in this group have the second highest average number of
employees, which may be explained by the need for more people to work closely with customers and suppliers.
Technology practice Adoption Standard 1 Not at all 2 Slight 3 Moderate 4 Large 5 Great
mean deviation (%) degree (%) degree (%) degree (%) degree (%)
Computer aided design 3.40 1.42 15.6 12.4 17.7 24.7 29.6
Computer aided manufacturing 2.54 1.40 31.4 22.7 21.1 10.8 14.1
Computer aided engineering 3.00 1.40 20.1 17.4 24.5 18.5 19.6
Production planning systems 3.33 1.27 11.8 11.8 30.5 24.1 21.9
Statistical process control 2.57 1.22 23.5 25.1 31.7 10.4 9.3
Record machine idle-time 1.97 1.25 52.4 19.0 14.8 6.9 6.9
Record reasons for idle-time 1.86 1.23 57.1 19.0 12.1 4.5 7.3
Record machine down-time 2.01 1.37 54.8 17.9 9.7 6.9 10.7
Record reasons for down-time 2.06 1.39 53.1 16.6 12.1 7.6 10.7
Analyze reasons for idle-time and 2.25 1.38 45.5 13.1 22.4 8.6 10.3
down-time
Table 1. Technology adoption

Source: Author survey responses.
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Collaboration Adoption Standard 1 Not 2 Slight 3 Moderate 4 Large 5 Great

practice mean deviation at all degree degree degree degree
(%) (%) (%) (%) (%)
Partnership programs 2.08 1.25 46.6 19.4 20.1 7.1 6.7

with customers
Certification with 2.58 1.41 32.4 17.4 24.0 11.8 14.3
customers
Single sourcing 2.20 1.21 37.9 24.6 23.5 7.4 6.7
with customers
Long-term contracts 2.43 1.28 31.1 23.2 26.6 9.6 9.6
with customers
Concurrent 2.20 1.25 40.7 21.4 21.8 9.5 6.7
engineering
with customers
Technical assistance 2.80 1.23 16.5 25.1 33.0 13.1 12.4
from customers
Partnership programs 2.09 1.24 44.3 22.6 19.9 5.9 7.3
with suppliers
Supplier certification 2.50 1.33 31.4 20.3 26.6 10.7 11.0
Single sourcing 2.18 1.20 38.6 24.1 24.1 6.9 6.2
with suppliers
Long-term contracts 2.25 1.26 37.2 24.9 23.2 5.5 9.2
with suppliers
Concurrent engineering 2.00 1.10 43.3 25.4 23.6 3.2 4.6
with suppliers
Technical assistance 2.54 1.15 21.6 26.8 35.4 8.2 7.9
from suppliers
Table 2. Collaboration adoption

The firms in this group show innovation scores that are medium to higher, which may indicate the stimulating
effect of collaboration on innovativeness (cf. Hoffmann, 2007). However, these firms could also be compensating
for bypassing technology with more frequent communication with customers and suppliers. If this is the case, these
firms might be able to reach full potential in innovation if they were to adopt advanced technology practices.
Collaboration specialists are more likely to be in the electrical and electronic equipment industry. This is an industry
that calls for close cooperation with customers and suppliers as product designs and corresponding production
processes frequently change.
We consider firms in quadrant IV as ‘technology specialists’ because they emphasize advanced technology but
practice limited collaboration. These companies are closest to the overall sample average in terms of employee size
and product innovation scores. This may suggest that firms only adopting advanced technology practices are likely to
fail to distinguish themselves from other firms and suffer from ‘straddling’ between automated commodity produc-
tion and specialty, innovation driven manufacturing. These firms are more likely to be in the rubber and fabricated
metals industries, which may be explained by the need for advanced technology practices in these sectors. Neverthe-
less, combining the use of advanced technology practices with closer inter-firm relations could help the firms in this
quadrant to distinguish themselves and also to become more innovative.
The leaders in the adoption of advanced technology practices and collaboration methods are located in quadrant III;
we refer to them as ‘problem-solvers’. On average, they are the largest firms and they clearly outperform the remaining
companies regarding product innovation. These findings are consistent with those of Kaufman et al. (2000). Relative to
the other groups, this strategic positioning may endow problem-solvers with capabilities that improve the efficiency
with which they employ resources to address environmental issues (Dutta et al., 2005). In turn, these firms may be
more effective and faster in responding to challenges and taking advantage of market opportunities. To test whether
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Collaboration
Low High
Low I – Commodity Supplier II – Collaboration Specialist

n = 113 (38.4%) n = 53 (18.0%)
Ave. No. of Employees = 29.38 Ave. No. of Employees = 49.79
Ave. Technology Adoption = 1.55 Ave. Technology Adoption = 1.67
Ave. Collaboration = 1.65 Ave. Collaboration = 3.03
Ave. Environmental Practices = 2.13 Ave. Environmental Practices = 2.55
Ave. Environ. Collaboration = 1.96 Ave. Environ. Collaboration = 2.33
Ave. Product Innovation = 2.54 Ave. Product Innovation = 2.81
Technology
IV – Technology Specialist III – Problem-Solver
n = 49 (16.7%) n = 79 (26.9%)
High Ave. No. of Employees = 43.48 Ave. No. of Employees = 64.42
Ave. Technology Adoption = 3.01 Ave. Technology Adoption = 3.33
Ave. Collaboration = 1.88 Ave. Collaboration = 3.19
Ave. Environmental Practices = 2.53 Ave. Environmental Practices = 3.23
Ave. Environ. Collaboration = 2.22 Ave. Environ. Collaboration = 2.67
Ave. Product Innovation = 2.87 Ave. Product Innovation = 3.31
Table 3. SMM typology
their average scores are significantly larger we use one-way ANOVA and compare the problem-solvers to the other three
groups using the Bonferroni method. The results show statistically significant differences between the groups on both
measures: technology adoption and collaboration. The only score that does not differ significantly – although it is
higher – is the technology adoption average of problem-solvers compared with that of technology specialists. Clearly,
the efforts of problem-solvers lead to innovative products,2 a position that these firms signal into the market. The
demands of working with customers and suppliers and the integration of advanced technology practices require these
firms to have more employees. Alternatively, the larger firm size may also point to the success of these firms, as their
higher innovativeness enables them to cater precisely to the particular needs of their customers. Interestingly, problem-
solvers are found nearly equally across the seven industries and states, which suggests that this positioning is not
limited either by sector or by location. Consequently, the benefits of adopting advanced technology and establishing
inter-firm relations are generally attainable for all firms in our sample.
Capabilities for Adopting Environmental Practices and Environmental Collaboration

We begin by assessing the adoption levels of environmental management practices and environmental collaboration
separately, each followed by tests regarding the hypothesized relationships with certain capabilities. Although the
descriptive statistics continue to be framed in the typology, in all regression analyses below, the typology classifica-
tions are irrelevant and disregarded.
Environmental Practices
The adoption of environmental practices by the firms in this study is far from uniform from one practice to the next
(see Table 4). Having an environmental plan, offering employees environmental training, and inventory control of
hazardous materials are the practices with the highest levels of adoption. Employee incentives for environmental
suggestions, having a dedicated environmental manager, and environmental procurement policies are the least
adopted policies, a result that is not very surprising due to the larger resources that the latter practices require.
While there is disparity in the adoption levels between environmental practices, there is also disparity between
firms that are adopters of environmental practices and those that are not. This is the case for all the practices, but
the bipolar nature of adoption between firms is particularly striking in the case of waste audits, where about 33
2
However, the comparison of the mean figures indicates statistically significant differences only between problem-solvers and commodity
suppliers.
DOI: 10.1002/bse
Environmental practice Adoption Standard 1 Not 2 Slight 3 Moderate 4 Large 5 Great

mean deviation at all degree degree degree degree
(%) (%) (%) (%) (%)
Environmental plan 2.99 1.43 19.5 22.0 21.3 15.0 22.3

Environmental manager 2.42 1.56 45.7 11.9 13.7 11.6 17.1
Waste audits 2.70 1.54 33.8 16.4 16.7 12.6 20.5
Environmental training 2.82 1.44 25.1 19.0 24.4 11.9 19.7
Environmental employee 1.96 1.23 51.7 20.0 16.3 4.8 7.1
incentives
Environmental inventory 2.74 1.53 33.3 11.8 22.9 11.5 20.5
control
Environmental 2.44 1.46 38.1 19.1 18.7 8.6 15.5
procurement
Table 4. Adoption of environmental practices

percent of the firms do not adopt waste audits while about another third adopts them to a large or great degree. This
dichotomous relationship is also found for providing incentives for employees to make suggestions for environmen-
tal improvement, where over 70 percent of the firms do not adopt or only do so to a slight degree, but nearly 12
percent of the firms adopt this practice to a large or great degree. These results indicate there is likely to be distinct
positioning occurring regarding the adoption of environmental practices. This warrants further analysis using the
typology we described above. In other words, do firms that position as commodity suppliers or problem-solvers
choose different environmental approaches, and how do firms that straddle as either a collaboration or technology
specialist adopt or refrain from environmental practices?
Problem-solving firms are by far the leaders in the adoption of environmental practices, with an average score of
3.23 for the seven practices covered (see Table 3). Again, we use one-way ANOVA to analyze the differences between
the average scores for environmental practices of the different groups. The results of the Bonferroni method
confirm that the problem-solvers adopt environmental practices to a larger degree: All differences between the
problem-solvers and the remaining groups are statistically significant at the five percent level. This finding is
consistent with the description of problem-solvers as being leaders in the adoption of advanced technology,
collaboration and product innovation. The adoption levels for the environmental practices are lowest for commodity
suppliers, which fits with the philosophy of these firms’ positioning. Collaboration and technology specialists show
their straddling behavior again by having averages between the leading problem-solvers and the lagging commodity
suppliers.
In order to test hypotheses H1 through H3 we run an OLS regression with the mean adoption level of environ-
mental practices as the dependent variable (ENVIRONPRACT). The results in Table 5 (first column) show that the
adoption of environmental practices is indeed influenced by the degree to which firms adopt advanced technology,
providing strong evidence in favor of H1. The corresponding coefficient of TECHADOPT is positive and statistically
significant at the one percent level. Employing advanced technology appears to facilitate the adoption of environ-
mental practices, or, stated differently, the capabilities developed in the course of working with advanced technology
help firms to also become leaders in the adoption of environmental practices. A direct influence in the sense that
advanced technology involves the employment of environmental practices and causes an ‘automatic’ adoption
becomes rather unlikely, when looking at the individual practices. For example, the introduction of CAD technology
does not mandate firms to have environmental management plans or waste audits, just to name two items.
The statistically significant coefficient of COLLAB also provides strong evidence in favor of H2: Firms that
maintain stronger relations with their customers and suppliers adopt environmental management practices to a
larger extent. Interestingly, the effect sizes estimated for TECHADOPT and COLLAB are very similar in magnitude.
Finally, the results also support H3, although the significance level of the parameter for PRODUCTINNO is weaker
(p = 0.088). Nevertheless, there is marginal evidence that innovative firms make more efforts towards green initia-
tives. As mentioned above, caused by the cross-sectional research design, we cannot ultimately determine the
DOI: 10.1002/bse
Table 5. Results of the OLS regressions (dependent variables: ENVIRONPRACT and ENVIRONCOLLAB)
The table contains coefficient estimates; figures in parenthesis are robust standard errors. Omitted categories are SIC28 and
STATEVA. ***, ** and * indicate significance levels of 1%, 5% and 10%, respectively.
direction of causality. Thus, the alternative explanation that environmental management practices stimulate innovation
remains valid. The control variables capture additional factors. The coefficient estimate of LNEMPLOYEES is insignifi-
cant, suggesting that the firm’s size does not have an influence on the adoption of environmental management practices.
Interestingly, however, the coefficient of YEARS is positive and statistically significant (p = 0.036): all else being equal,
older companies adopt environmental practices to a larger extent. As the correlation between LNEMPLOYEES and
YEARS is small (correlation coefficient of 0.2412), the variable must capture a different effect. A possible explanation
could be that an established firm has been exposed to increasing regulatory constraints in its history and has been forced
to address environmental issues. Over time, thus, firms gather experience with environmental regulatory compliance,
which enables them to be more progressive in this area. Consequently, the variable YEARS may be a proxy for another
capability that is important for the adoption of environmental management practices.3
Environmental Collaboration
Inter-firm relations for environmental purposes between the companies in this study and their suppliers are more
common than the same type of interaction with their customers. Every practice with the firms’ suppliers has a
higher adoption average than with their customers. A possible explanation for this observation entails understand-
ing the firms’ position in the supply chain. For example, the practice with the highest level of adoption is receiving
information on environmental management from material or equipment suppliers (see Table 6). The latter
commonly provide information on what they are selling and the firms in our study are primarily second-tier firms.
This means they purchase raw materials and equipment, which they use to make completed components for their
customers. Hence, the specific supply chain position involves more intense relations with the firms’ suppliers than
with customers. This explanation holds for all five collaboration practices and especially for collaborating for cleaner
3
An alternative but more speculative explanation could be that experience is likely to help companies better understand the competitiveness of
their industries and hence the need to look beyond traditional measures to find competitive advantages in environmental management.
DOI: 10.1002/bse
Environmental Adoption Standard 1 Not 2 Slight 3 Moderate 4 Large 5 Great

collaboration mean deviation at all degree degree degree degree
(%) (%) (%) (%) (%)
Customers set standards 2.72 1.48 30.9 16.3 21.9 12.2 18.8
Receive information 3.04 1.48 22.6 15.3 22.2 15.3 24.7
from customers
Collaborate with customers 2.11 1.36 49.0 18.6 15.2 6.6 10.7
for cleaner processes
to substitute materials
for recyclable products
Set standards for suppliers 2.16 1.28 43.0 21.8 19.0 8.5 7.7
Receive information from 1.85 1.17 54.2 22.9 11.5 6.3 5.2
suppliers
Collaborate with suppliers 1.91 1.19 53.7 18.2 16.1 7.0 4.9
for cleaner processes
to substitute materials
for recyclable products
Table 6. Adoption of environmental collaboration

processes, substitution of less hazardous materials and development of recyclable products, because these pertain to
material and equipment inputs.
Another pattern in the adoption of environmental collaboration is that some types of relation, regardless of whether
they are with suppliers or customers, are more commonly adopted than others. The five types fall into three categories –
standards, information and co-development. Standards and the provision of information are generally the most
common types of collaboration. In general, these are easier to adopt and require fewer resources compared with the
co-development of processes and products. Before we address our final hypothesis, it may be worthwhile to return to
the typology in order to assess whether different types of firm adopt green collaboration practices to different extents.
Unsurprisingly, Table 3 shows that problem-solvers have the highest average level of adoption of the environmental
collaboration practices, commodity suppliers have the lowest and the remaining companies fall in the middle, just as
with the environmental practices discussed above.4 More specifically, problem-solving firms have higher levels of
adoption of collaborating for cleaner processes, substitution of less hazardous materials and development of recyclable
products. It is striking that these three types of collaboration are likely to encourage innovation. Hence, all of the
findings are consistent with the patterns and strategic positioning of problem-solvers as described above.
H4 postulated that experiences with general inter-firm relations influence a firm’s ability to address environmen-
tal matters together with partners. In order to test this hypothesis we estimate a firm’s level of environmental
collaboration (ENVIRONCOLLAB) in a model that includes a measure for general collaborative activities as an
explaining variable (COLLAB), along with the same set of covariates as above. The second column of Table 5 depicts
the results. As hypothesized, the stronger the existing collaboration capabilities from joint efforts with customers
and suppliers, the higher the adoption score for environmental collaboration. The coefficient of COLLAB is statisti-
cally significant at the one percent level, hence providing strong evidence for H4. Concerning the control variables,
the results are similar to those from the first model. We abstain from interpreting the significant estimate for
TECHADOPT because the direction of causality between these two variables remains ambiguous. The significant
effect of a firm’s age (YEARS) may be explained in an analogous way to above.
4
Again, we tested for the statistical significance of the differences using the Bonferroni test. In this case, only the difference between the problem-
solvers and the commodity suppliers was statistically significant at the five percent level.
DOI: 10.1002/bse
Conclusion
Motivated by the fact that firms of all sizes have begun to understand the benefits of sustainability practices and
increasingly seek constructive solutions that reduce their impact on the environment and simultaneously create value
(cf. Porter and Kramer, 2011; Revell et al., 2010) the research at hand set out to identify capabilities that facilitate the adop-
tion of environmental practices. Drawing on the dynamic capabilities literature, we show that adopting advanced technol-
ogy, collaborating with customers and suppliers and having an innovative ability, in addition to their known strategic
benefits, may endow companies with capabilities that help them address environmental challenges. This may be espe-
cially important for smaller enterprises which have had difficulties converting green practices into competitive advantage
(Simpson et al., 2004). The descriptive analysis has revealed that currently only about one-third of all manufacturing
firms in our sample can leverage these capabilities – and they appear to do so, another one-third remains in a clearly
disadvantageous position as they fall behind in their adoption of technology and collaboration and one-third straddles
as either a collaboration or technology specialist. The latter can stand to gain the most from the least amount of additional
effort by choosing to strengthen their area of weakness in order to transition to being problem-solvers. Ultimately, the
decision to adopt environmental practices and environmental collaboration remains a strategic choice but should be
considered as a means for incumbent and new problem-solving companies to attain competitive advantage (Bryson
and Lombardi, 2009). Against the background of the multiple benefits of the underlying capabilities, the results may also
be important for policy makers. In particular, public policies and subsidies aiming at increasing the diffusion of advanced
technologies and stimulating innovativeness among small and medium-sized enterprises may even be more justified
and desirable than previously assumed as they may contribute to reducing the environmental impact of firms.
Frankly, it is too early to refer to a theoretical concept that could be labeled ‘green dynamic capabilities’, but in
addition to showing the supplemental benefits of extant capabilities that have long been accredited as sources of
competitive advantage our results point to the important circumstance that the presence of specific capabilities
may facilitate and expedite the implementation of green management initiatives. We hope that our contribution
stimulates further research that combines the dynamic capabilities perspective with environmental management
research to better understand the preconditions for successful sustainability efforts within firms.
Our focus on SMMs located on the East Coast of the US implicates a limitation of the research at hand as the context
factors of the specific sample somewhat constrain the transferability of our findings to other settings. While we expect the
insights to be generally valid for companies in other industries and locations in North America and also for larger enter-
prises, deriving recommendations for firms in Europe, Asia or emerging countries requires a careful review of the local
context factors. Furthermore, while the present paper identifies three drivers of a firm’s environmental management
efforts, it is likely that additional capabilities and competencies exist that have similar effects. We do control for a range
of other variables, but our data does not allow for testing the potential influences of factors such as the entrepreneurial
attitude (personality) of managers/owners toward ways to move beyond regulatory compliance and see opportunities in
environmental management practices (Sangle, 2010; Chatterjee and Hambrick, 2007) or collaborative experiences with
stakeholders other than suppliers and customers, such as universities, industry associations or governmental agencies.
Along these lines, future research could investigate in more depth the relative roles of various stakeholder groups.
Concerning the increasingly important interface with customers and consumers, drawing on the lead user concept
(von Hippel, 1986) could be a worthwhile perspective. Finally, we acknowledge that the cross-sectional study design is
not suited to ultimately answer the question of causality, but it is highly probable that the experiences and the relational
capital companies gain from adopting advanced technology, working with other firms and being innovative enhance
their ability to adopt environmental management or the adoption is concurrent. The empirical methods employed clearly
reveal that there is an association and, with reference to the specific questions asked, it is unlikely that for example, the
adoption of technology practices and inter-firm relations automatically entail the implementation of environmental
management practices; neither do collaborative agreements routinely envision joint efforts on environmental matters.
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Appendix A. Definitions of Variables
Variable Definition
ENVIRONPRACT Measure for adoption of environmental practices: average adoption score

ENVIRONCOLLAB Measure for environmental collaboration with customers and suppliers: average adoption score
TECHADOPT Measure for adoption of advanced technology: average adoption score
COLLAB Measure for collaboration with customers and suppliers: average adoption score
PRODUCTINNO Measure for innovative ability concerning product development
LNEMPLOYEES Measure for company size: natural log of the number of employees
YEARS Measure for company experience: years in business
SIC28 Industry dummy: SIC28 = 1 if company belongs to chemicals
SIC30 Industry dummy: SIC30 = 1 if company belongs to rubber
SIC34 Industry dummy: SIC34 = 1 if company belongs to fabricated metals
SIC35 Industry dummy: SIC35 = 1 if company belongs to industrial equipment
SIC36 Industry dummy: SIC36 = 1 if company belongs to electrical and electronic equipment
SIC37 Industry dummy: SIC37 = 1 if company belongs to transportation equipment
SIC38 Industry dummy: SIC38 = 1 if company belongs to instruments
STATEVA State dummy: STATEVA = 1 if company is located in Virginia
STATENH State dummy: STATENH = 1 if company is located in New Hampshire
STATEMD State dummy: STATEMD = 1 if company is located in Maryland
STATEME State dummy: STATEME = 1 if company is located in Maine
STATEVT State dummy: STATEVT = 1 if company is located in Vermont
Appendix B. Summary Statistics and Correlation Matrix
The table displays pairwise correlation coefficients.
DOI: 10.1002/bse

Identifying Firm Capabilities As Drivers of Environmental Management and Sustainability Practices - Evidence From Small and Medium-Sized Manufacturers

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Business Strategy and the Environment

Bus. Strat. Env. (2012)

Identifying Firm Capabilities as Drivers of Environmental

Received 01 June 2011; revised 21 September 2011; accepted 24 September 2011

Figure 1. Capabilities, environmental management and performance

Environmental Management and Firm Performance

Technology Adoption and Environmental Practices

Inter-Firm Relations and Environmental Practices

Product Innovation and Environmental Practices

Inter-Firm Relations and Environmental Collaboration

Data and Methods

Data Collection and Questionnaire

Description of Variables and Models

Empirical Results and Discussion

Table 1. Technology adoption

Collaboration Adoption Standard 1 Not 2 Slight 3 Moderate 4 Large 5 Great

Partnership programs 2.08 1.25 46.6 19.4 20.1 7.1 6.7

Table 2. Collaboration adoption

Low I – Commodity Supplier II – Collaboration Specialist

Table 3. SMM typology

Capabilities for Adopting Environmental Practices and Environmental Collaboration

Environmental practice Adoption Standard 1 Not 2 Slight 3 Moderate 4 Large 5 Great

Environmental plan 2.99 1.43 19.5 22.0 21.3 15.0 22.3

Table 4. Adoption of environmental practices

Environmental Adoption Standard 1 Not 2 Slight 3 Moderate 4 Large 5 Great

Table 6. Adoption of environmental collaboration

Appendix A. Deﬁnitions of Variables

ENVIRONPRACT Measure for adoption of environmental practices: average adoption score

Appendix B. Summary Statistics and Correlation Matrix

The table displays pairwise correlation coefﬁcients.

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