Interactive Effect of Factors on Proactive Environmental Strategy

This report, based on a Springer 2009 Journal of Business Ethics article, investigates the complex relationship between a firm's proactive environmental strategy (PES) and its performance. Drawing on the resource-based view and institutional/legitimacy theories, the study explores the interactive effects of internal drivers (e.g., entrepreneurial orientation) and external drivers (e.g., government regulations, customer sensitivity) on a PES. The research examines how these factors influence a firm's sales and profit growth. The study utilizes data from manufacturing firms in New Zealand to test the proposed model. The report highlights the importance of top management support and pollution prevention in defining a PES and emphasizes the need to consider both internal and external perspectives for a comprehensive understanding of a PES's impact. The research aims to provide insights into achieving a competitive advantage through effective environmental strategies.

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 importantfor cogenerating 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.Over the lastthree
decades, the program has generated gains every ye
(3) Bayer has an executive Corporate Sustainability
Board on climate change and a working group on
renewable raw materials.(4) Unilever,which finds
thatraw materialsaccountfor up 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 th
prevention (versus control or the reactive using of a
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 a
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 issue
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,is essentialbecause 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
this framework by positing the externally driven
perspectiveas a moderatorthat is 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 its derivatives(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 modelof a PES.
We then developour modeland proposeour
hypotheses,followed by our research methodsand
data analysis.Finally,we discussour study’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 wh
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,not to 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,
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 issue
initiatingenvironmentalprogramsand policies;
rewarding employeesfor environmentalimprove-
ments;and contributing organizationalresources to
environmentalinitiatives(Berry and 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
the marketplace(Menon and Menon,1997).In
addition, previous researchers acknowledge the role
of top management as significant in predicting cor-
poratesocialperformance(Miles, 1987;Weaver
et al.,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
managementis crucialto 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-
tive involvementon environmentalissuesis the
environmentalposition taken by The Body Shop
and its founder Anita Roddick.
Since Hart’s articlefirst 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)cost advantages(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 threatinfluencesthe extentto
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 commitmen
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 wi
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 th
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 activ
in the delivery ofthe strategy (Aragon-Correa and
Sharma, 2003).
Externally driven perspective on a proactive environ
strategy
In addition to the internally driven perspective,a
PES needsto take into 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.

1995). Suchman (1995, p. 574) defines legitimacy as
‘‘a generalized perception orassumption thatthe
actions of an entity are desirable.’’ Rao et al. (2008)
argue that in emerging industries, new ventures face
the vexing ‘‘liability ofnewness’’problem because
they have to prove to stakeholdersthatthey are
worthy investment opportunities.We contend that
when there are institutionalpressuressuch asgov-
ernmentregulationand consumersensitivityto
environmental issues, a firm’s desire to enhance social
fitness is likely to provide the boundary condition for
the effectiveness ofeconomic fitness.That is,insti-
tutionaltheory suggeststhatwhen there isinstitu-
tional pressure from various stakeholders, improving
sociallegitimacy in the eyes ofits stakeholders can
moderate the degree to which firms adopt a PES based
on internalantecedents (e.g., Oliver, 1991). In fact,
Oliver (1991, p. 150) posits that responding to insti-
tutionalpressure‘‘emphasizesthe importanceof
obtaining legitimacy for purposesof demonstrating
social worthiness.’’
A legitimacy-based view hasits rootsin neo-
institutionaltheory (e.g.,DiMaggio and Powell,
1983; Oliver, 1991). Legitimacy theory is widely used
as a framework to explain strategic choice with regard
to the environmentaland socialbehavior of organi-
zations (Harvey and Schaefer,2001;Hooghiemstra,
2000).Neo-institutionaltheorists(e.g.,DiMaggio
and Powell,1983;Oliver,1991)positthatsince a
competitive strategy may foster cooperative action in
the interestof sociallegitimacy,a competitive
advantage must be created within the broader scope
of sociallegitimacy.From a legitimacy theory per-
spective,attention to the public’s perception ofthe
firm and the reputation of the company will alter the
internalperspective’s impact on a PES (Hooghiem-
stra, 2000). As we outline subsequently, our predic-
tion is that when there is greater social pressure from
stakeholders such as the government and consumers,
the influence of the internal perspective on a PES will
be strengthened.
Because ofthe tacitnature ofa pollution-pre-
vention capability,an external(legitimacy-based)
orientationshould not jeopardizecompetitive
advantage,but rather reinforce and differentiate the
firm’s position through the positive effect of a good
reputation (Hart,1995).Hence,a firm mustalso
maintain legitimacy and build reputation through
communication and transparency to invite external
stakeholders’scrutiny into theiroperations(Hart,
1995; Suchman, 1995).
Interaction between the two perspectives
Based on the preceding literature review, we sugges
that a model attempting to explain a PES should tak
a contingency view and capture how the externally
driven perspective moderatesthe internally driven
perspective’s effect on a PES. We outline the reason
for our approach below.
First, while each perspective emphasizes a differen
aspect of a firm’s management of the business–natu
environmentinterface,both aim to enhance the
firm’s competitive advantage in the natural environ-
mentalarena. While one underscores the economic
fitnessapproach,the otheremphasizesthe social
fitnessapproach.As a consequence,the interplay
between these two approaches can shed light on ho
a PES can be developed.Second,both perspectives
are theory driven and have received attention from
scholars in their respective fields of research. It is als
important to note that both perspectives are designe
to promote a better understanding of the influence o
a PES on a firm’s performance. Indeed, they are not
mutually exclusive paths for firms to follow.
In summary, our review of the literature suggests
that there is a shortage of studies that simultaneous
modelboth the internaland externalperspectives
relating to a PES, and moreover, their interactive ef-
fects.The lack ofsuch a contingency approach in
modeling a PES leads to at least two major problems
that are of concern: First, most studies have subscrib
to only one perspective of a PES and have used the
same term to referto differentaspectsof a firm’s
behavior; this has produced results that are often di
ficult to compare and sometimes contradictory. Sec-
ond, the richness of a PES is not exploited. Adopting
only one perspective impliesthatthe fullrange of
options for a firm seeking to improve its performanc
may not be captured; this can lead to a partial expla
nation of a firm’s performance and to an incomplete
theory. Third, reliance on a direct effects only model
can obstruct the insights that a contingency model,
offering the boundary conditionsof the impactof
internally driven factors on a PES, can provide.
In light of the limitationsassociated with the
extant literature, it is important to develop a model
283Interactive Effect ofInternaland ExternalFactors on PES

thatcan incorporate both perspectives,and more
importantly, demonstrate the interactive effect of the
two on a PES. It is also essentialto substantiate
empirically the effectof a PES on firm’sperfor-
mance. Our model, which we explain next, satisfies
these requirements.
Proposed model and hypotheses
The theories that we draw onto construe our model,
which is depicted in Figure 1,are the RBV ofthe
firm and itsderivatives(internalperspective),and
institutionaland legitimacy theories(externalper-
spective). The centraltenet of the RBV of the firm
and its derivations (i.e.,NRBV and dynamic capa-
bilities perspective) suggest that a firm’s PES and, in
turn, the firm’s growth and competitive advantage is
determined by its idiosyncratic internal resources and
capabilities(e.g., Barney,1991;Eisenhardtand
Martin, 2000;Hart, 1995;Teeceet al., 1997;
Wernerfelt,1984).In our model,we examine
entrepreneurialorientation as an idiosyncratic capa-
bility that is likely to explain the extent to which a
firm adopts a PES.
Legitimacy and institutionaltheories are usefulin
the development of our hypotheses because both are
diagnostic with regard to how firmsrespond with
strategic choices based on the demands of the macro
external environment. More specifically, we consider
institutionalpressuresfrom importantstakeholders,
such asconsumersand government,which may
possess valuable tangible and intangible resources.
The effect ofentrepreneurialorientation on proactive
environmentalstrategy
Firms are not likely to pursue a PES unless their upp
echelonsemphasizeentrepreneurialactivity(i.e.,
innovativeness,proactiveness,risk-taking)(Covin
and Slevin,1989,1991).Top management’s recep-
tivity regarding pollution prevention willincrease
when firms possessmore of an entrepreneurial
orientation. Aragon-Correa and Sharma (2003, p. 74
claim that‘‘[p]roactive strategiessuch aspollution-
prevention approaches need to be integrated into th
administrative,entrepreneurial,and engineering
dimensionsof a firm.’’Indeed ‘‘enviropreneurial
marketing,’’ a term coined by Varadarajan (1992) th
underscoresthe importanceof incorporatingan
entrepreneurial spirit into the pursuit of an environ-
mentalmarketing strategy,is consistent with a PES
thatpromotesecologicalsustainability (Menon and
Menon, 1997).
When there is an entrepreneurialmindset
embedded in the organization,top managementis
more willing to take risks,tolerate ambiguity and
Internal Perspective
• Entrepreneurial orientation
External Perspective
• Government regulations
• Customer environmental
sensitivity
Proactive Environmental
Strategy
Firm Performance
Covariates
• Firm size
• Type of industry
• Environmental
dynamism
Figure 1.Conceptualmodel.
284 Bulent Menguc et al.

uncertainty,and ventureinto potentiallyhigh-
rewarding, albeit risky, domains. Managers are more
inclined to interpretnew marketspacesasoppor-
tunitiesthan threats(Dutton and Jackson,1987;
Sharma, 2000). In fact, drawing on the strategic issue
interpretation literature,Sharma (2000) reports that
the more managers interpret environmental issues as
opportunitiesratherthan threats,the more likely
they are to adopt a PES. Such bold, aggressive, and
proactiveattitudesare likely to transferinto the
adoption and implementation ofmore innovative
and creative products and processes that are unique
and difficultto imitate (Russo and Fouts,1997).
Moreover,when thereis a high entrepreneur-
ial orientation,organizationalcapabilities,such as
learning,continuousinnovation,and experimenta-
tion,are present,which lay the foundation for the
adoption ofa PES.Consistentwith our argument,
Aragon-Correa (1998)found thatprospector-type
firmsthatinvesthighly in entrepreneurship,engi-
neering, and administration are more likely to adopt
a PES.
A PES entailsconsiderable risk and uncertainty,
and requires an innovative posture for it to be firmly
established in an organization (Aragon-Correa, 1998;
Aragon-Correa and Sharma, 2003). The proclivity of
top managementto supportnaturalenvironmental
issues is enhanced when an entrepreneurialorienta-
tion ispervasive in the organization.As a conse-
quence, an entrepreneurial orientation with its focus
on seekingnew ventures,growth,and market
opportunities is consistent with the development of a
PES. As a result, a firm’s entrepreneurial orientation is
likely to promote a PES.Thus,we hypothesize the
following:
H1: A firm’sentrepreneurialorientation isrelated
positivelyto a proactiveenvironmental
strategy.
Moderating role ofintensity ofgovernment regulation
Institutional pressures are defined as social, legal, and
culturalforces outside the firm that exert influence
on how managersperceive the environmentand
eventually shape and determine strategic decisions
and behaviors (e.g., DiMaggio and Powell, 1983). In
a natural environmental setting, many external forces
may strengthen a firm’s desire to adopt a PES based
on the firm’s entrepreneurial orientation (Bansal and
Roth, 2000).We considertwo componentsof
institutionalpressure:the intensity ofgovernment
regulation andconsumersensitivityto environ-
mentalissues (e.g.,Kassinis and Vafeas,2006).The
intensity ofgovernmentregulation and consumer
sensitivityto environmentalissuesmay further
motivate firmsto take proactive stepstoward the
adoption of a PES from entrepreneurialorientation.
According to stakeholder theory (Freeman, 1984),
the strategic choicesadopted by firmsdepend on
institutionalpressuresand the influence ofimpor-
tantstakeholders(Oliver,1991).More specifically,
Mitchell et al. (1997) showed that stakeholder power
legitimacy,and urgency affecta manager’sattitude
toward stakeholder pressures and requests. This wa
confirmed by Henriques and Sadorsky (1999) who
affirmed that managers in environmentally proactive
firms were more committed to a proactive environ-
mental posture than those in environmentally reacti
firms.
Neo-institutionaltheoristshaveproposedthat
firms,through proactivemoves,may meettheir
stakeholders’expectationsand enhance legitimacy,
therebyobtainingaccessto the scarceresources
neededto surviveand succeed(DiMaggio and
Powell, 1983). For example, Majumdar and Marcus
(2001)showed thatwhen managersachieve a bal-
ancebetween theirdiscretion and governmental
regulatory policies,they may enjoy entrepreneur-
ship, be creative, conduct R & D, and even develop
new technologies,all of which are important
resources for the development of a PES.
Our argumentis also consistentwith legitimacy
theory because a central tenet of this theory is a soc
contractthatimpliesthata company’ssurvivalis
dependenton the extentto which the company
operates within the bounds and norms of the macro
environment,including society,and isviewed as
constructive and performing desirable actions (Brow
and Deegan,1998,p. 22). As a consequence,a
company needsto demonstrate thatits actionsare
legitimate and its behaviors resemble good corporat
citizenship (e.g.,Berman etal., 1999;Miles and
Covin, 2000).
Taking the above into account,we positthat
there is a need to examine the interaction between
the RBV perspective and institutional(legitimacy)
285Interactive Effect ofInternaland ExternalFactors on PES

theory.According to ourconceptualframework,
this would involveexamininghow institutional
pressures such as intensity of government regulations
moderate the influence ofentrepreneurialorienta-
tion on a PES. More specifically, we argue that the
interaction effectbetween entrepreneurialorienta-
tion and intensity ofgovernmentregulation on a
PES will be positive. This is because firms operate in
a macro environmentwhere governmentscontrol,
sanction,and withhold important resources that are
likely to influence a firm’s adoption of a PES. When
firms competein a marketwheregovernment
involvement,interest,and regulationsregarding
environmentalissuesare heightened,thereis an
elevated expectation for top management to comply,
as this is the norm, with government demands. As a
consequence, in such a context, the implementation
of an entrepreneurialorientation willbe related
positively to the adoption of a pollution-prevention
strategy by top management.Thus,we offerthe
following interaction hypothesis.
H2: The interaction effect between entrepreneurial
orientation and intensity ofgovernmentreg-
ulations willbe related positively to a PES.
Moderating role ofconsumer sensitivity to natural
environmentalissues
Next, we turn our attention to the moderating role
of consumer sensitivity to naturalenvironmentalis-
sues. When consumers are sensitive to and involved
with naturalenvironmentalissues,they favorand
react positively to firms that attempt to develop and
initiate innovative and proactive methods that pre-
serve the naturalenvironment(e.g.,Garrett,1987;
Schwepkerand Cornwell,1991).As consumer
sensitivity to naturalenvironmentalissuesincrease,
consumerscome to expectfirmsto develop inno-
vative waysto interactwith the naturalenviron-
ment. As a consequence, in such a context, as firms
engage in entrepreneurial activities, firms will realize
more PES.When consumersexertpressure,firms
are more prone to adopt a PES for a given levelof
entrepreneurial orientation because the adoption of a
PES is consistentwith the voice of consumers
(Ogden and Watson,1999).We positthatwhen
there is fit between entrepreneurialorientation and
consumer sensitivity to natural environmental issues
it is likely thata firm’sentrepreneurialorientation
will be related positively to a PES.Therefore,we
hypothesize that:
H3: The interaction effect between entrepreneurial
orientation and customers’sensitivity to envi-
ronmentalissues willbe related positively to a
PES.
Proactive environmentalstrategy and firm’s
performance
Firms that implement a PES will be more innovative,
entrepreneurially oriented,technologically sophis-
ticated,and socially conscious,which makessuch
organizations distinct in the eyes of customers (Port
and van der Linde,1995).Accordingly,these orga-
nizationswill be able to preemptthe marketfrom
their competitors and enjoy a first mover advantage
statusby sending a strong signalabouttheir com-
mitmentto the naturalenvironment.Because such
firmsinvestin pollution prevention asopposed to
controlprograms,they willengage in continuous
total quality environment management programs th
enable them to be more cost efficient by minimizing
the need to invest in expensive end-of-pipe capital
intensive investments (Hart,1995;Hart and Ahuja,
1996). In addition, because the implementation of a
PES improves the image, reputation, and eventually
the legitimacy of a firm, it willincrease the positive
view of the firm as a good corporate citizen (Menon
and Menon,1997).We contend thatby imple-
menting a PES,corporate citizenship willbe en-
hanced,which will lead to astrongercorporate
reputation (Berman et al., 1999). In fact, Rondinelli
and Berry (2000) argue that corporate environmenta
citizenship is critical for sustainable development.
As a consequence, firms that pursue a PES will be
perceived as differentiated in the eyes of customers
Through differentiation, firms with a PES will be able
to create more opportunities,and hence generate
greater business growth. A PES can be used to reig-
nite, spark. or fuel firms into a new market space, th
providing the catalystfor salesand profitgrowth.
Owing to a growing environmentalconsciousness
286 Bulent Menguc et al.

and demandsfrom variousstakeholderssuch as
customers,interestgroups,government,and the
media, a PES can be expected to contribute to sales
growth and profit growth. Increased sales growth will
be realized as environmentally friendly products are
well received.That is, implementing aPES will
generate additional sales in areas that are untapped and
where competition isscarce.Further,a PES will
motivate firmsto produce high margin products
adopting cutting-edge technology which can en-
hance profit growth. Through a PES, firms can realize
improved streams of cash flow as a PES will be able to
function in a rent-generating role. Thus, we offer the
following hypothesis regarding the performance im-
pact of a PES:
H4: A proactiveenvironmentalstrategy willbe
positively related to (a)salesgrowth and (b)
profit growth.
Finally,we do nothypothesize a directeffect on a
PES from the externalperspective (i.e.,intensity of
governmentregulation and consumer sensitivity to
naturalenvironmentalissues)because according to
our conceptualmodel,the externalperspective is a
moderatorthateitherstrengthensor weakensthe
effectof entrepreneurialorientationon a PES.
However, as we shall show subsequently, we include
the externalperspective on a PES for modelspeci-
fication purposes and report its effect.
Research method
Questionnaire development and measures
As stated earlier, previous studies have employed the
internal(i.e., resource-based)and external(i.e.,
legitimacy-based) perspectives to explain the extent
of a firm’s implementation of PES. However, there
is a lack ofsystematic research thatinvestigates the
interactive effect of the two perspectives. In order to
fill this gap in the literature, we decided to devise a
survey instrumentthatwould enable usto testthe
conceptualmodeldeveloped in thisstudy.More
specifically, this survey instrument was meant to test
how customers’sensitivity to environmentalissues
and the intensity ofgovernmentregulationsmod-
erate the effectof entrepreneurialorientation on a
PES. The survey instrument also helped us measure
the performance outcomes of a PES in terms of sales
and profit growths.
The survey instrument was developed as follows:
First, we contacted a random selection of 15 CEOs
and/or key managers. We mailed a draft form of the
survey questionnaire and asked them to identify the
scale itemsthey considered awkward and/ornot
applicable. They evaluated every scale item in terms
of content and meaningfulness. Although we did not
need to add new items,we modified some scale
itemsbased on the feedback we received.Second,
we contacted four academics for their comments on
the utility ofthe scale items.We made some revi-
sions to the questionnaire as a result of their evalu-
ations. It should be noted that the questionnaire was
designed so thatrespondentswere asked to recall
theirfirms’environmentalprocessesand effortsin
general.In doing so,we aimed to maximize po-
tential variance and avoid perceptual biases (Table I
Unlessotherwise mentioned,all scaleswere mea-
sured with a five-pointLikertscale (1 – strongly
disagree, 5 – strongly agree).
In line with our conceptualization,we measured
proactive environmentalstrategy as a higher-order con-
struct oftwo-first-order dimensions:pollution pre-
vention and top managementsupport.In order to
measure the scope of pollution prevention, we utilize
the CERES Principlesto develop a 10-item,five-
point scale (1 – strongly disagree, 5 – strongly agree
specifically forthisstudy.The CERES Principles
(formerly known as the Valdez Principles) are a set o
10 environmental management principles developed
in 1989 by a coalition ofpension funds,environ-
mentalgroups,and religiousorganizations(Codd-
ington,1993).Previousstudieshave employed the
same or similar items to measure the scope of a PES
(e.g.,Sharma,2000).Top managementsupportmea-
sured the extent to which top management was see
to play a criticalrole in shaping an organization’s
values and orientation toward a PES. We developed
four-item, five-point scale for this study (1 – strongly
disagree, 5 – strongly agree).
Entrepreneurialorientation measured the extentto
which theorganization’soverallculturedemon-
strated a propensity to take calculated risks, to act i
an innovative fashion, and to be proactive on natura
environmentalissues.Hence,we used an eight-
item,five-pointscale (1 – doesnot describe this
287Interactive Effect ofInternaland ExternalFactors on PES

TABLE I
Confirmatory factor analysis
Scales and items Factor loading t-Value
Pollution prevention (a = 0.86; CR = 0.88;AVE = 0.50)
This organization …
Eliminates the release of any substance that may cause environmentaldamage 0.990a –
Safeguards allnaturalhabitats affected by the operations 0.719 5.785
Sustainably uses renewable naturalresources 0.677 5.300
Conserves non-renewable naturalresources (e.g.oil, naturalgas) 0.704 5.327
Eliminates physicalwaste from the operations 0.584 5.027
Reduces physicalwaste through recycling 0.549 4.815
Disposes of physicalwaste through environmentally safe methods 0.750 5.731
Eliminates the use of products that cause environmentaldamage 0.617 5.232
Informs our customers of the environmentalimpacts of the products marketed 0.772 6.372
Corrects conditions that endanger the environment 0.736 5.612
Top management support (a = 0.78;CR = 0.80;AVE = 0.55)
Top managers in this organization…
Communicate that addressing environmentalissues is critical 0.861a –
Initiate environmentalprograms and policies 0.793 10.728
Reward employees for environmentalimprovements 0.424 5.025
Contribute organizationalresources to environmentalinitiatives 0.813 11.023
Entrepreneurialorientation (a = 0.87;CR = 0.89;AVE = 0.53)
This organization…
Has a culturalemphasis on innovation and R&D 0.782a –
Has a high rate of new product introductions 0.866 11.896
Has a bold,innovative product development approach 0.917 12.717
Has a proactive posture to the market 0.681 8.713
Has an aggressive posture toward competitors 0.720 5.070
Has a strong inclination for high risk,high potentialreturn projects 0.559 6.923
Has a market environment that encourages boldness to achieve objectives0.691 8.845
Is first to introduce new technologies and products 0.706 9.103
When faced with risk, adopts an aggressive, bold posture 0.502 6.130
Customers’environmentalsensitivity (a = 0.90;CR = 0.92;AVE = 0.65)
The release of substances into the environment 0.817a –
The protection of naturalhabitats 0.819 11.937
The sustainable use of renewable naturalresources 0.800 11.362
The conservation of nonrenewable naturalresources 0.836 12.125
The elimination of physicalwaste 0.831 11.807
The reduction of physicalwaste 0.840 12.053
The environmentally safe disposalof physicalwaste 0.817 11.817
Purchasing environmentally safe products 0.670 8.965
Understanding the environmentalimpacts of the products they use or purchase 0.784 11.105
Government regulations (a = 0.86; CR = 0.88;AVE = 0.54)
The release of substances into the environment 0.724a –
The protection of naturalhabitats 0.710 8.045
The use of renewable naturalresources 0.726 8.258
The use of nonrenewable naturalresources 0.884 10.336
The elimination of physicalwaste 0.807 9.431
The environmentally safe disposalof physicalwaste 0.549 6.007
288 Bulent Menguc et al.

organization,5 – definitely describes this organiza-
tion) adapted from Covin and Slevin (1989) for the
specific context of this study.
Institutionalpressureswere captured in termsof
customers’sensitivity to environmentalissuesand
the intensity ofgovernmentregulations.Customers’
environmentalsensitivity measured customers’sensi-
tivity to a series of environmental actions. In order to
capture this,we developed a nine-item,five-point
scale (1 – customers do not care,5 – customers are
very concerned).The itemsused to measure the
intensity of government regulations were similar to those
used to measure customers’environmentalsensitiv-
ity.We asked respondents to evaluate the extent to
which governmentregulationsforce the organiza-
tion to observe environmental standards (eight-item,
five-point scale where 1 – not very intensely regu-
lated, 5 – very intensely regulated).
We measured firm’sperformancein termsof the
salesgrowth and profitgrowth.Respondentswere
asked to indicate their firm’s sales growth (1: 0–9%;
2: 10–24%;3: 25–49%;4: 50–74%;5: 75–100%;6:
100% and over)and profitgrowth (1:0–9%;2:
10–24%;3: 25–49%;4: 50–74%;5: 75–100%;6:
100% and over)during the 3 yearsprior to this
study.
In order to avoid modelmisspecification,we in-
cluded measuresof firm’ssize,firm’stype,and
environmentaldynamism to controlfor their effects
on PES and firm’s performance.Environmental
dynamism wasmeasured by afour-item,bi-polar
scale taken from Heide and John (1990). Firm’s size
was measured by the number of full-time employees
(i.e.,naturallogarithm).Firm’stypewasa dummy
variable(1 – predominantlybusiness-to-business
companies; 0 – others).
Sample selection and data collection procedure
We purchased a list ofmajor New Zealand manu-
facturing firmsoperating in a variety ofindustries
from a leading marketresearch/databank company
(a totalof 325 firms). Our focus on firms operating
in multiple industriesis designed to enhance the
generalizability of our modeland its findings. Con-
sistent with Dillman’s (1978) TotalDesign Method,
the firstmailing packetcontained apersonalized
letter,a questionnaire,and a postage-paid envelope
with an individually typed return-address label.1 In
addition,we offered respondents a copy ofthe fin-
ished report,which summarizesthe research find-
ings, to increase the response rate. Four weeks after
the first mailing,we senta follow-up letter and an
additionalcopy of the questionnaireto non-
respondents. We obtained 150 usable questionnaire
for a response rate of 47%.
The distribution of the firms in terms of industry
was as follows: Food, Beverage, and Tobacco (29%);
Forestry and Wood Products (11%); Paper, Printing,
and Publishing (11%); Textiles, Apparel, and Leather
(10%);Agriculture (8%);Machinery (8%);Chemi-
cals,Petroleum,and Plastics (7%).In addition,69%
of firms had more than 150 full-time employees and
TABLE I
continued
Scales and items Factor loading t-Value
The disclosure of environmentalinformation 0.683 7.805
The clean up of environmentalaccidents 0.748 8.542
Environmentaldynamism (a = 0.79;CR = 0.81;AVE = 0.56)
The operating market environment for my organization…
Has trends that are easy/difficult to monitor 0.909a –
Has stable/volatile industry volume 0.750 10.153
Has sales forecasts that are quite accurate/inaccurate 0.699 8.894
Is predictable/unpredictable 0.610 7.718
a Cronbach’s alpha,CR composite reliability,AVE average variance extracted.
a
Scale item was fixed to 1 to set the scale.
289Interactive Effect ofInternaland ExternalFactors on PES

75% were operating predominantly in the business-
to-business domain.
We tested for the likelihood ofnonresponse bias
by using the extrapolation technique thatequates
late responsesto nonrespondents(Armstrong and
Overton,1977).We split the totalsample into two
groups:those received before the second wave of
mailing and those received after the second wave.
We used a t-test to compare these groups in terms of
their mean responsesfor each variable.The results
revealed no significant differences between the two
groups, thus leading us to conclude that respondents
did not differ from nonrespondents.
Our major goalregarding the data collection was
to ensure thatthe key informantswere eitherthe
CEO or a person who held an equal position in the
company. One of the authors made a series of phone
calls and conducted further mailsurveys to confirm
that the questionnaires were completed by managers
who were CEOsor held equalpositions(Phillips,
1981).
Analyses and results
We presentthe dataanalysisin threesteps:(1)
measure validation,(2) a post-hoc test for common
method bias, and (3) hypotheses testing.
Measure validation
As proposed by Anderson and Gerbing (1988),we
estimated a (six-factor)measurementmodel.Con-
firmatory factor analysis (CFA) reveals that allfactor
loadings are greater than 0.40,normalized residuals
are less than 2.58,and modification indices are less
than 3.84. The measurement model also provides an
acceptable fitto the data:[v(887)
2 = 1711.9;good-
ness-of fit index (GFI) = 0.93; Tucker-Lewis index
(TLI) = 0.94;confirmatory fitindex (CFI) = 0.95;
root mean squared error of approximation (RMSEA) =
0.06].The reliabilityestimates[Cronbach’salpha,
composite reliability, and average variance extracted
(AVE)] for the differentmulti-item constructsare
shown in Table I.
We found support for the presence of convergent
validity in the scales;the factor loadings are signifi-
cant in the measurement model(t > 2.0;Anderson
and Gerbing, 1988), and the AVE estimates are equa
to or higher than 0.50 (Bagozziand Yi,1988).In
supportof discriminantvalidity,the squared corre-
lations between any two constructs are less than the
AVE estimates of the corresponding constructs for al
pairs(Fornelland Larcker,1981).We also assessed
discriminantvalidityby comparingthe uncon-
strained model to the constrained model and setting
the correlation between two constructs to one.For
every pair of constructs, we found a significant chi-
square difference,which providesevidence ofdis-
criminant validity.
As we stated earlier,we conceptualized PES as a
higher-order factor of pollution prevention and top
management support. We performed a second-orde
CFA for PES.We found that pollution prevention
(loading = 0.87,R 2 = 0.87)and top management
support (loading = 0.76,R 2 = 0.79) loaded signifi-
cantly on the higher-order construct of PES and the
constructitselfindicated agood fit to the data
(v(76)
2 = 186.2,GFI = 0.93, TLI = 0.94, CFI =
0.95, RMSEA = 0.06). The Cronbach’s alpha, com-
positereliability,and AVE for the higher-order
construct of PES were 0.80, 0.81, and 0.63, respec-
tively.These findings supported that PES could be
operationalized as a higher-order construct of pollu-
tion prevention and top managementsupport.In
furtheranalyses,we averaged thescoresof the
respective sub-constructs (i.e.,pollution prevention
and top management support) to obtain the measur
of PES. Table II provides the means, standard devi-
ations, and intercorrelations of the study’s variables
Testing common method bias
Owing to our reliance on self-reported data, we teste
whether common method bias was a likely threat th
could inflate the resultsof the hypothesestesting.
First,we conducted Harman’ssingle factortestin
CFA (Podsakoff and Organ, 1986). The results indi-
cated that a single-factor modeldid not fit the data
well (v(902)
2 = 3539.8,GFI = 0.39, TLI = 0.38,
CFI = 0.41,RMSEA = 0.14).Second,the chi-
square difference test also demonstrated a significan
difference between the single-factor modeland the
six-factormodel(i.e., the measurementmodel)
(Dv2 = 1827.9, Ddf = 15, p < 0.001). The evidence
from both tests indicates that the six-factor modelis
290 Bulent Menguc et al.