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Internal Drivers and Performance Consequences of Small Firm Green Business Strategy: The Moderating Role of External Forces

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An Erratum to this article was published on 17 June 2015

Abstract

Growing detrimental effects on the bio-physical environment have been responsible for a large number of small firms to adopt a more strategic stance toward exploiting green-related opportunities. This article aims to shed light on how internal company factors help to formulate a green business strategy among small manufacturing firms, and how this, in turn, influences their competitive advantage and performance. Based on data received from 153 small Cypriot manufacturers, we propose and test a conceptual model anchored on the Resource-based View of the firm. The findings underscore the critical role of both organizational resources and capabilities in pursuing a green business strategy. The adoption of this strategy was more evident in the case of firms operating in more harmful, as opposed to less harmful, industries. The implementation of a green business strategy was found to generate a positional competitive advantage, with this association becoming stronger under conditions of high regulatory intensity, high market dynamism, high public concern, and high competitive intensity. It was also revealed that this competitive advantage is conducive to gaining heightened market and financial performance. Our study makes a fivefold contribution: it injects a theoretical perspective into a relatively atheoretic field, underlines the role of organizational resources/capabilities as drivers of eco-friendly initiatives, highlights the often neglected strategic aspects of small firms’ ecological business activities, stresses the contingent role of external forces in moderating the positive impact of small firm green business strategy on competitive advantage, and focuses on the performance implications of the small firm’s engagement in environmental operations.

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Notes

  1. Notably, the collective impact of small firms on the environment is so substantial that in many countries this outweighs the combined environmental effect of large firms, thus, warranting close investigation (McKeiver and Gadenne 2005; Gadenne et al. 2009).

  2. By capitalizing on this theory, Hart (1995) introduced the Natural RBV (NRBV) of the firm, which states that a firm can obtain a competitive advantage by building on three key interconnected strategies, namely (a) pollution prevention, that is, seeking to reduce emissions and waste through the adoption of improvement methods focusing on well-defined environmental objectives; (b) product stewardship, that is, introducing processes that will minimize the environmental impact of a product during and/or after its use; and (c) sustainable development, that is, developing new low-impact technologies, considering the social impact of a firm’s operations, and cultivating engagement with stakeholders.

    Although this theory, as in the case of Resource-based View, also states that a firm can build a competitive advantage through the development of the right resources and capabilities, it places particular emphasis on the above three strategies (also called strategic capabilities) that are important in accommodating the changing natural environment. However, Hart (1995) states that some of the components of his theory (e.g., sustainable development strategy) are difficult to test because companies have not yet adopted them, while others seem to be more applicable in larger business units. For this reason, we have opted to use the original RBV theory, which emphasizes the role of organizational resources and capabilities in achieving a competitive advantage and superior performance through the mediating role of business strategy (Barney 1991) and have adjusted its various components to incorporate environmental elements (some of which were obtained from Hart’s (1995) theory).

  3. The non-imitability issue is of particular importance in the case of small firms, since their larger counterparts can easily imitate their resources because of a greater potential to leverage their market power, access financial markets, exploit economies of scale, and obtain legal assistance (Lieberman and Asaba 2006). However, this resource disadvantage of small firms does not necessarily translate into a capability disadvantage, because the unique capabilities possessed (e.g., flexibility, adaptiveness, entrepreneurial orientation) are difficult for large firms to imitate (Lockett et al. 2009; Aragón-Correa et al. 2008; Alvarez and Busenitz 2001; Tichy 1983).

  4. Environmental regulations provide a driving force for necessitating more pro-environmental behavior among small firms. This is because such regulations (a) raise awareness levels regarding green issues (which are relatively low among owners/managers of small firms) and enhance ethical green standards; (b) help improve policies and procedures within the organization aiming to protect the natural environment; and (c) indicate what is really required to comply with a minimum set of technical standards, which is beneficial when collaborating with other partners in the supply chain (Simpson et al. 2004; Tilley 1999; Williamson et al. 2006).

  5. With regard to the definition of a small firm, and since Cyprus is part of the European Union (EU), we have adopted the EU’s definition, which states that a firm is classified as small when it has fewer than 50 employees, its annual turnover does not exceed €10 million, and its annual balance sheet total is beyond €10 million (European Commission 2003).

  6. To obtain richer insights with regard to the effect of competitive advantage on business performance, we have replaced the competitive advantage construct in our model with cost-based advantage (comprising CAD1 and CAD2) and differentiation-based advantage (comprising CAD5 and CAD6) and re-rerun the SEM analysis. The results indicate that a green business strategy has a significant positive impact on both cost-based advantage (β = .87, t = 5.97, p = .00) and differentiation-based advantage (β = .88, t = 6.56, p = .00). In turn, cost-based advantage has a positive effect on both market performance (β = .43, t = 2.56, p = .01) and financial performance (β = .32, t = 2.03, p = .04). Significant positive results were also obtained with regard to the effect of differentiation-based advantage on both market performance (β = .42, t = 2.48, p = .01) and financial performance (β = .31, t = 2.00, p = .04).

  7. Although many small firms may design appropriate green business strategies, they often encounter various practical barriers that may endanger their effective implementation. Such barriers may include, inter alia, a risk-averse business owner/manager, poor standards of eco-literacy, limited access to relevant information, inadequate understanding of pertinent legislation, and unavailability of time to deal with environmental issues (Dilts and Prough, 1989; Tilley, 1999; Williamson and Lynch-Wood, 2001). To cope with these constraints, small firms need to maintain closer strategic collaboration and invest in network-building with various stakeholders (Avram and Kühne, 2008).

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Acknowledgments

The authors would like to thank Yiota Neokleous, Anna-Maria Christofi and Anna-Maria Piperidou for their assistance in collecting the research data.

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Authors and Affiliations

  1. University of Cyprus, Nicosia, Cyprus

    Leonidas C. Leonidou

  2. Cyprus University of Technology, Limassol, Cyprus

    Paul Christodoulides

  3. International Hellenic University, Kentriki Makedonia, Greece

    Lida P. Kyrgidou

  4. Leeds University Business School, West Yorkshire, UK

    Daydanda Palihawadana

Authors
  1. Leonidas C. Leonidou
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  2. Paul Christodoulides
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  3. Lida P. Kyrgidou
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  4. Daydanda Palihawadana
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Corresponding author

Correspondence to Daydanda Palihawadana.

Additional information

An erratum to this article is available at http://dx.doi.org/10.1007/s10551-015-2721-2.

Appendix

Appendix

See Table 5.

Table 5 Construct operationalization
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Leonidou, L.C., Christodoulides, P., Kyrgidou, L.P. et al. Internal Drivers and Performance Consequences of Small Firm Green Business Strategy: The Moderating Role of External Forces. J Bus Ethics 140, 585–606 (2017). https://doi.org/10.1007/s10551-015-2670-9

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