Interactive Effect of Internal and External Factors on a Proactive Environmental Strategy and its Influence on a Firm's Performance

The Interactive Effect of Internal
and ExternalFactors on a Proactive
EnvironmentalStrategy and its Influence
on a Firm’s Performance
Bulent Menguc
Seigyoung Auh
Lucie Ozanne
ABSTRACT. While the literature on the effective man-
agement of business and natural environment interfaces is
rich and growing,there are stilltwo questions regarding
which the literature has yet to reach a definitive conclu-
sion: (1) what is the interactive effect between internal and
externaldriverson a proactive environmentalstrategy
(PES)? and (2) does a PES influence firm’s performance?
Drawing on the resource-based view forthe internal
drivers’ perspective and institutional and legitimacy theo-
ries for the external drivers’ perspective, this study suggests
that the effect of entrepreneurialorientation on a PES is
moderated by the intensity of government regulations and
customers’ sensitivity to environmental issues. The authors
also examine the relationship between the PES and a firm’s
performance in terms of sales and profit growth. Implica-
tions are discussed regarding the role of a PES in achieving
a competitive advantage in the marketplace.
KEY WORDS: proactive environmental strategy, entre-
preneurialorientation,resource-based view,legitimacy
theory,institutionalpressure,stakeholder theory,natural
environment
Scholarly interestin the antecedentsof a firm’s
proactive environmental strategy (hereafter PES) and
in its impact on performance has been strong and is
growingexponentially(e.g.,Aragon-Correaand
Sharma,2003).This interest is not confined to the
academic community.A recentreportby Business
for SocialResponsibility (2007,pp.11–35)offers
severalexamplesof firmsengaging in PESs:(1)
DuPont,a $27 billionchemicalcompanywith
operationsin 75 countries,is well regarded for
achieving substantialemission reductionsoverthe
last 15 years, as well as making further commitments
to reach 65% below the 1990-emission levelsby
2010.The companyconsidersinternalcapacity
building importantforcogenerating socialbenefit,
business opportunity,and growth in the context of
climate change. (2) 3M uses a companywide system
called Pollution Prevention Pays(3P)thatencour-
ages employees at alllevels to rethink products and
processesto eliminate waste.Overthe lastthree
decades, the program has generated gains every year.
(3) Bayer has an executive Corporate Sustainability
Board on climate change and a working group on
renewable raw materials.(4) Unilever,which finds
thatraw materialsaccountforup to 10 timesthe
company’sinternalemissions,givespreference to
suppliers’ products with lower emissions.
We define PES as a top management-supported,
environmentally oriented strategy that focuses on the
prevention (versus control or the reactive using of an
end-of-pipe approach) of wastes, emissions, and pol-
lution through continuouslearning,totalquality
environmentalmanagement,risk taking,and plan-
ning (e.g.,Aragon-Correa and Sharma,2003; Hart,
1995). A PES has been predominantly viewed from an
internally driven (competitive) perspective,and the
term is used to describe a firm’s voluntary and inno-
vative activitiesof pollution prevention,which are
initiated and championed by top management (e.g.,
Aragon-Correa and Sharma,2003;Sharma,2000;
Sharma and Vredenburg, 1998). That is, we define a
PES as a higher-order construct that is composed of
two sub-dimensions:pollution-prevention and top
management support of natural environmental issues.
Although a PES has generally been approached from
merely a pollution-prevention perspective, we deem
that the inclusion oftop management support,as a
Journalof Business Ethics(2010) 94:279–298 Springer 2009
DOI 10.1007/s10551-009-0264-0

top-down process,isessentialbecause winning the
support and attention of top management is critical for
a PES’s success. Previous researchers who have drawn
on this perspective have advanced our understanding
the effect of a PES on a firm’s competitive advantage
(Sharma and Vredenburg, 1998). Hart (1995), how-
ever,in his originalarticle on the naturalresource-
based framework, has proposed that a strict, internally
driven perspective to a PES is limited.Hart (1995)
arguesthata PES should also accommodatean
external,legitimacy-basedperspectivebecausea
legitimacy-based perspectiveto a PES doesnot
endanger competitive advantage but, in fact, further
strengthens it.
As a consequence,in thisstudy,we testHart’s
propositionaccommodatingthesetwo comple-
mentary perspectivesin the same research setting.
More specifically, we examine the interaction effect
between the internalperspective and the external
perspective on a PES.For example,we respond to
callsby researcherssuch asOliver(1991,p. 710)
who contends:‘‘Research on the combined effects
of resource capitaland institutionalcapitalon firm’s
performance mightbe one approach.’’Based on a
review of the extant literature, we argue that there is
a need to incorporate both the internally driven and
externally driven factors to capture fully the essence
of a PES.
There hasbeen considerable research aimed at
understanding the internally driven perspective ofa
PES by drawing on the resource-based view (RBV)
of the firm (e.g.,Aragon-Correa,1998;Sharma,
2000;Sharma and Vredenburg,1998).We extend
thisframework by positing the externally driven
perspectiveas a moderatorthatis expectedto
delineate the boundary conditionsof the influence
of the internally driven perspective.Thatis,rather
than simply including the internaland externalfac-
tors as direct effects on a PES,our modelpursues a
contingency approach that explicates the contextual
conditionsof the impactof an internalfactor’s
contribution to a PES.The externally driven per-
spectivedrawson institutionaltheoryand the
legitimacy literature by incorporating the notion of
corporate socialperformance (e.g.,Hooghiemstra,
2000; Wilmshurst and Frost, 2000). Both the inter-
naland externalperspectives,we suggest,are com-
plementary and capture the extent of a firm’s social
performance and responsiveness. In order to realize a
true and accurate understanding ofthe value-gen-
erating role of a PES, there is a need to include the
interactive effect of the two perspectives.
In orderto summarize,thisstudy hasthe fol-
lowing purposes.First,we develop and testa con-
ceptualmodelthatinvestigateshow the externally
driven perspective,drawingon institutionaland
legitimacytheories,moderatesthe effectof the
internally driven perspective,which has its roots in
the RBV of the firm, and itsderivatives(e.g.,
dynamic capabilities,naturalRBV, etc.) on a PES.
Second,we examine the performance ramifications
of a PES in terms of the sales and profit growth of a
firm.If a PES can enhance the salesand profit
growth ofa firm,we deem then thatthiswill be
perceived in a positive lightby managerswho are
contemplating whetherto allocate more resources
and budgetto environmentally friendly strategies.
We use data from variousmanufacturing firmsin
New Zealand, a country known for its commitment
to advancing an environmentalagenda.
In the sections to follow,we revisitthe existing
literature on the internally driven and externally
driven perspectives ofa PES and integrate the two
streams ofresearch into a broader modelofa PES.
We then developour modelandproposeour
hypotheses,followed by our research methodsand
data analysis.Finally,we discussourstudy’stheo-
reticaland managerialimplications.
Literature review
In accordance with the growing scholarly interest,
previousresearchershave discussed atlength the
performance implications of a PES. The proponents
of a PES have, for long, provided empirical evidence
thata PES isindeed positively related to a firm’s
efficiency and effectiveness (Russo and Fouts, 1997).
There is also, however, equally convincing empirical
evidenceshowing thata PES hasno significant
performanceimpact(Christmann,2000).In her
study,Christmann (2000)discussed someof the
noticeable methodologicalproblems thatmay have
contributed to the inconsistent findings in the cur-
rent literature. While this scholarly debate continues,
it is clear that there is a lack of agreement about what
the antecedentsto a PES are and how they are
combined to influence aPES. A carefulreview,
280 Bulent Menguc et al.

however,of Hart’s(1995)originalproposition re-
veals that two complementary perspectives of a PES
exist:(1) an internally driven (or competitive) per-
spective (Aragon-Correa and Sharma, 2003) and (2)
an externally driven (or legitimacy-based)perspec-
tive (Oliver,1991).We now revisitthe existing
literatureon eachperspective,respectively,and
subsequentlyintegratethe two by positingan
interaction between the two perspectives.
Internally driven perspective on a proactive environmental
strategy
Sharma (2000, p. 683) defines a PES as ‘‘a consistent
pattern ofcompany actionstaken to reducethe
environmentalimpactof operations,notto fulfill
environmental regulations or to conform to standard
practices.’’In addition,we add top management
support to such a strategy as an important dimension
of a PES because we see this strategy as a process that is
top-down in nature.Thus,we define a PES asa
higher-order construct that consists of two first-order
dimensions:pollution-prevention and top manage-
ment support of natural environmental issues. Next,
we explain the two sub-dimensions in greater detail.
From a pollution-prevention perspective,a pro-
active (orinnovative)environmentalstrategy isa
reflection ofevolutionaryenvironmentalstrategy
modelsthathave gone beyond the early compli-
ance versus noncompliance categorizations. Previous
researchers have approached PES from a pollution-
prevention versus pollution-control perspective (e.g.,
Hart, 1995; Hart and Ahuja, 1996; Russo and Fouts,
1997),while othershave taken a proactive versus
reactiveperspective(e.g.,Aragon-Correa,1998;
Sharma,2000;Sharmaand Vredenburg,1998).
Nevertheless,both approaches have highlighted the
same phenomenon. That is, while a PES represents a
proactive (orvoluntary and innovative)approach,
pollution-controlstrategiesrepresenta reactive
(or conformance/compliance) approach. A PES aims
to minimize emissions, effluents, and wastes. Central
to a PES are continuous improvement methods that
focus on well-defined environmental objectives rather
than relying on expensive ‘‘end-pipe’’capitalinvest-
ments to control emissions. As Hart (1995) has dem-
onstrated,a PES provides a firm with a competitive
advantage through lower costs, shorter cycle times, and
a better utilization of resources and capabilities.
From a top managementsupportive perspective,
we positthata firm’sadoption ofa PES reflects
top management’s commitment to naturalenviron-
mentalissues.Key behaviors on the part ofthe top
managersinclude,butare notlimited to:commu-
nicating and addressing critical environmental issues;
initiatingenvironmentalprogramsand policies;
rewarding employeesfor environmentalimprove-
ments;and contributing organizationalresources to
environmentalinitiatives(Berryand Rondinelli,
1998).
In general, top managers’ strategic leadership and
their supportmay play a criticalrole in shaping an
organization’s values and orientation toward natural
environmentalissues (Berry and Rondinelli,1998).
The building ofstrongnetwork tiesinsideand
outsidethe industry,and acquisitionof more
knowledge aboutenvironmentalactivitiesmay in-
crease top managers’sensitivity to environmental
concerns and enable them to benchmark their firm’s
environmental activities with those of competitors in
themarketplace(Menon and Menon,1997).In
addition, previous researchers acknowledge the role
of top management as significant in predicting cor-
poratesocialperformance(Miles,1987;Weaver
etal.,1999).In firmsthatare described as‘‘com-
mercial and environmentally excellent,’’ support and
involvementfrom top managementon environ-
mental issues are common (Henriques and Sadorsky,
1999;Hunt and Auster,1990;Roome,1992).
Banerjee (1992) argues that the commitment of top
managementiscrucialto successfulenvironmental
management.In addition,Coddington (1993)and
Hart (1995)concludethatcorporatevision and
strong leadership are the two key facilitators ofthe
implementation ofa corporatewide,environmental
managementstrategy.To this end,Dechantand
Altman(1994,p. 9) note that‘‘environmental
leaders inspire a shared value ofthe organization as
environmentally sustainable, creating or maintaining
green valuesthroughoutthe enterprise.’’A good
example oftop managementleadership and proac-
tiveinvolvementon environmentalissuesis the
environmentalposition taken by The Body Shop
and its founder Anita Roddick.
SinceHart’sarticlefirst appearedin AMR,
scholars have spent significant time and effort trying
281Interactive Effect ofInternaland ExternalFactors on PES

to understand the fundamentalpropositionsof the
natural resource-based view (NRBV). Similarly, the
internally driven (orcompetitive)perspective has
received considerable attention.More recently,this
perspective hasbeen located within the ‘‘dynamic
capabilities’’approach (Aragon-Correa and Sharma,
2003). Eisenhardt and Martin (2000, p. 1107) define
dynamic capabilities as ‘‘the firm’s processes that use
resources– especially theprocessesto integrate,
reconfigure, gain and release resources – to match and
even create marketchange.Dynamic capabilities,
thus, are the organizational and strategic routines by
which firms achieve new resource configurations as
markets emerge, collide, split, evolve, and die.’’
According to proponents of this perspective (e.g.,
Aragon-Correa and Sharma,2003),a PES,from a
pollution-prevention and top management support-
ive perspective, is consistent with the very definition
of dynamic capabilities for several reasons. First, a PES
shares a fundamental proposition with the NRBV in
that‘‘to the extent[that]these practicesare tacit,
casually ambiguous,firm specific,socially complex,
path dependent, and value adding for consumers, they
may provide advantage’’(Aragon-Correa and Shar-
ma, 2003, p. 74). In fact, the adoption of a PES results
in a substantialcompetitive advantage due to (pro-
cess-driven)costadvantages(Aragon-Correaand
Sharma,2003;Hart,1995;Hartand Ahuja,1996;
Klassen and Whybark, 1999; Majumdar and Marcus,
2001) and (product-driven) differentiation advantages
(Hart, 1995). A long-term, sustainable advantage lies
in the resource configurationsthatmanagersbuild
using aPES (Aragon-Correaand Sharma,2003;
Christmann, 2000).
Second,a PES is idiosyncratic (i.e.,organization
specific) due to its social complexity (Aragon-Correa
and Sharma,2003).For example,Majumdarand
Marcus (2001) showed that when managers create a
balance between regulatory policiesand theirdis-
cretion, they can enjoy entrepreneurship, creativity,
and risk taking;conductR&D; and even develop
new technologies, which are all important resources
for a PES. Sharma (2000) found that the managerial
interpretationof the environmenteitheras an
opportunity ora threatinfluencestheextentto
which a PES is deployed.To this end,Marcus and
Geffen (1998, p. 1147) came to the conclusion that
‘‘key playersare likely to interpretthe conditions
they face and assign meaning to the actions they take
in fairly idiosyncratic ways.’’Therefore,depending
on the dominant coalition’s attitude and commitment
to naturalenvironmentalissues,the adoption and
implementation ofa PES can be viewed asan
opportunity to generate growth or asa threatand
disruption to existing operations.Andersson and
Bateman’s(2000)study showsthatthe successof
employee-championing behaviors regarding natural
environmental issues depends on their alignment with
top management’s positive attention and actions to-
ward these issues. Thus, we view top management’s
supportof naturalenvironmentalissues to be idio-
syncratic and organization specific because manage-
rialvision,leadership,and focus are distinctive and
socially complex.
Third,a dynamic capability approach to a PES
entails a complex integration and reconfiguration of
organizational,managerial,higher-orderlearning,
and divergentstakeholderperspectives(Aragon-
Correa and Sharma,2003).To thisend,a PES is
consistent with the dynamic capability perspective in
that a PES involves an intricate integration of pollu-
tion prevention, and managerial support and leader-
ship. Sharma and Vredenburg (1998) have shown that
competitivelyvaluableorganizationalcapabilities
such as stakeholder integration,continuous innova-
tion, and higher-order learning may emerge from the
adoption of a PES.
Fourth,the application ofa PES involvespath
dependency.It necessitatesthe integrationand
combination oftacitcapabilitiesthatlead to causal
ambiguity and barriersto imitation.The effective
formulation and execution ofa PES demandsthe
alignmentof the appropriate controlmechanisms
with incentives eliciting organizationalstructures so
that all employees are motivated to participate actively
in the delivery ofthe strategy (Aragon-Correa and
Sharma, 2003).
Externally driven perspective on a proactive environmental
strategy
In addition to the internally driven perspective,a
PES needsto takeinto consideration externally
driven (orlegitimacy-based)activitiesunderinsti-
tutionalpressure because a purely internally driven
approach may prove inadequate due to issuesof
external(social)legitimacy and reputation (Hart,
282 Bulent Menguc et al.