Being Green Against the Wind? The Moderating Effect of Munificence on Acquiring Environmental Competitive Advantages

Perceived Munificence, PES, and Competitive Advantage

The O&NE literature has described corporate environmental strategies that range from conforming to regulations and standard industry practices to engaging in innovative and voluntary initiatives beyond such standards (Sharma, 2000). These two extremes are typically labeled reactive and proactive strategies (i.e., Aragon-Correa, 1998; Hunt & Auster, 1990). Reactive strategies consist of defensive approaches to environmental problems. Firms react to changes by instituting practices such as pollution measurement, end-of-pipe solutions, imitation of competing firms’ environmental initiatives and compliance with environmental regulations, and stakeholder requirements. Conversely, PES involve implementing environmental practices that anticipate and prepare for future changes in regulations and social trends, that extend beyond legal and industry standards and that continuously seek to improve, redesign or transform operations, processes, and products that prevent—instead of just ameliorate—negative environmental impact (Aragon-Correa, 1998; Buysse & Verbeke, 2003; Hart, 1995; Russo & Fouts, 1997).

Low perceived munificence (perceived hostility) reduces the degree of freedom for strategic decision making (Baum & Wally, 2003). When firms perceive the business environment as hostile, they are more likely to focus on core business activities that ensure firm survival (Miller & Friesen, 1983; Wiersema & Bantel, 1993). Managers might be tempted to cut expenses related to organizational processes that do not guarantee short-term financial outcomes, such as training regarding environmental issues, environmental life cycle assessment, and product redesign. As a consequence, environmental strategic postures will become more reactive.

Applying the cost–benefit model from McWilliams and Siegel (2001), hostility (low munificence) can reduce the number of firms that have the resources to invest in environmental practices as an integral component of a differentiation strategy. Therefore, it is more likely that managers simply do not have the resources required to invest in PES. In addition, because resources are more limited and sales are declining, the opportunity cost of investing in environmentally proactive practices (e.g., environmental training, pollution prevention) versus other alternatives is also higher. In these conditions, the relative cost of investing in PES is comparatively higher than in munificent environments.

Furthermore, there is evidence that perceived munificence moderates the effect of managers’ proenvironmental values on their assessments of environmentally harmful opportunities (Shepherd et al., 2013). In conditions of perceived hostility (i.e., low munificence), green personal values have a weaker effect on decision making, and environmentally damaging opportunities are considered more attractive. Therefore, the likelihood of maintaining and developing PES may decrease in these conditions.

By contrast, in environments that are perceived to be munificent (i.e., not hostile), managers will be less affected by resource constraints and stakeholders’ blockages (Castrogiovanni, 1991; Wiersema & Bantel, 1993). Under perceived munificence, companies have greater opportunity to extend beyond core activities (Castrogiovanni, 1991), and managers are more likely to be entrepreneurial and proactive in exploring new combinations of resources and developing more innovative projects (Rosenbusch, Rauch, & Bausch, 2013). Thus, perceived munificence leads to expectations that managers will allocate more resources to organizational learning and to generating dynamic capabilities, such as PES (Aragon-Correa & Sharma, 2003).

When the environment is considered munificent, it is more likely that investment in PES will be framed as an opportunity rather than a liability because firms anticipate high resource availability, market growth, and low competition. When the environment is conceived of as an opportunity, managers will be more likely to expect to achieve differentiation advantages from engaging in environmental protection, and these conditions will foster the adoption of PES (Aragon-Correa & Sharma, 2003; Menguc, Auh, & Ozanne, 2010; Russo & Fouts, 1997; Sharma, 2000). For example, Russo (2003) found that a munificent environment for independent power systems consisting of legal reforms, strong trade associations, and abundant natural capital fostered the rapid rise of the wind power industry in California. Therefore, we propose the following hypothesis:

The Contingent Effect of Perceived Munificence on the Link Between Innovation Capabilities and PES

Innovation is inherently related to proactive environmental management and pollution prevention (e.g., Sharma et al., 2007; Sharma & Vredenburg, 1998). PES typically consist of best practices and organizational routines that are linked to continuous improvement or reconfiguration of existing—and to the invention of new—products, processes, technologies, and business models (Hart, 1995; Sharma et al., 2007). In addition, innovation may enhance other abilities that are recognized as core elements of PES, such as proactivity, early timing and outperforming legal requirements, and market standards (Aguilera-Caracuel & Ortiz-de-Mandojana, 2013; Aragon-Correa, 1998). In this sense, innovation and PES can be regarded as complementary assets because innovation is required to gain competitive advantages through PES (Christmann, 2000).

The effectiveness of a firm’s approach to innovation has long been regarded as dependent on a variety of organizational and contextual variables (e.g., Damanpour, Szabat, & Evan, 1989; Miller & Friesen, 1983; Smith & Grimm, 1987). In particular, discretionary slack with respect to resources allows organizations to afford systematic experimentation and to bear the cost of implementing riskier innovations (e.g., Damanpour, 1991; Deeds & Decarolis, 1999). In munificent environments, resources are abundant and it is more likely that organizations will have some discretionary slack (e.g., Dess & Beard, 1984). Slack enables an organization “to experiment in relation to the environment, either through new product introductions or through innovations in management” (Bourgeois, 1981, p. 31). Thus, slack resources favor organizational innovation and problem-solving behaviors (Sharma, 2000) and will lower the perceived risk of adopting innovative environmental technologies and processes (Menguc et al., 2010; Russo & Fouts, 1997). In this context, organizations will be more likely to use their innovative capabilities to pursue complex and risky strategies—such as PES.

In addition, perceived munificence may affect the development of organizational structures that favor innovation effectiveness. In perceived hostile environments (scarcity), firms tend to formalize procedures, centralize strategic decision making, and reduce structural complexity (Yasai-Ardekani, 1989). Managers frequently respond to perceived hostility (i.e., low perceived munificence) by becoming more involved in routine decision making, establishing shorter lines of communication, and exercising more direct control. In this context, innovation capabilities might be translated less effectively into green practices. For example, if a firm in a hostile environment develops a process innovation aimed at reducing waste, it is less likely either that top management will ask for valuable insights from lower level employees who routinely operate the process or that lower level employees will spontaneously suggest ideas about—or improvements to—the process.

Conversely, managers tend to respond to perceived munificence by delegating decision making to and empowering lower level organizational units and specialists and by reducing procedural formalization to allow greater flexibility (Yasai-Ardekani, 1989). The cost of failures associated with loose control of strategic decisions is regarded as negligible compared with the benefits of being able to rapidly respond to environmental opportunities (i.e., early timing). Such core elements of organic organizations are essential when developing innovations for preventive solutions and PES (Aragon-Correa & Sharma, 2003; Russo & Fouts, 1997).

After conducting an extensive meta-analysis, Damanpour (1991) concluded that innovation capabilities are more effective when a firm engages in organic organizational approaches (low formalization, decentralized decision making, and structural complexity) as opposed to mechanized approaches. Similarly, Miller and Friesen (1983) found that conservative—as opposed to entrepreneurial—organizations obstruct innovativeness. Perceived munificence thus encourages a firm to align its organizational structure and innovation capabilities to improve environmental proactivity. Therefore, we propose the following hypothesis:

The Contingent Effect of Perceived Munificence on the Creation of Environmentally Based Competitive Advantages

The role of munificence in developing environmentally based competitive advantages appears to be intricate and multifaceted. Aragon-Correa and Sharma (2003) argued that, although munificent environments may enhance the potential of a firm to translate its PES into a superior performance, the competitive advantages derived from such a proactive strategy might be obstructed by other types of potential advantages (unrelated to environmental strategy) that competitors may gain in munificent environments.

This logic accords with the model proposed by McWilliams and Siegel (2001). Some companies may benefit (e.g., obtain competitive advantages) from engaging in proenvironmental practices even when these advantages do not necessarily translate into better performance than that of their competitors. Investments in environmental proactivity may not necessarily have a significant effect on profitability because (a) the company’s costs may also increase and (b) competitors may have other differentiation advantages that provide superior rents. For example, organic foods might have a differentiation advantage in the marketplace that drives some customers to prefer these foods to the nonorganic foods offered by competitors. However, this advantage might be obscured by other factors, such as considerably higher pricing, limited market supply, or limited distribution.

In munificent environments, firms are not required to exhibit competitive superiority, and survival is possible under a greater number of different alternatives, strategies, and organizational structures (e.g., Peteraf & Bergen, 2003). As a consequence, munificence increases the number of profitable strategic options and enhances organizational heterogeneity (Terjesen, Patel, & Covin, 2011). Therefore, munificence makes it more likely that weak PES can be compensated for by employing a different type of competitive advantage (Aragon-Correa & Sharma, 2003), and the effect of PES on performance is therefore less salient. For example, in a fast-growing market, a monopolistic firm will most likely show good financial results regardless of its environmental strategy.

Conversely, the relationship between PES and performance might be more prominent in low-munificence environments. Seminal studies in strategy suggest that companies with a more proactive, innovative, and entrepreneurial strategic posture frequently perform better in hostile environments (e.g., Covin & Slevin, 1989; Smith & Grimm, 1987), whereas “in benign environments, the relationship between an entrepreneurial strategic posture and firm performance may be much weaker and possibly negative” (Covin & Slevin, 1989, p. 77). Therefore, those companies with a proactive approach to environmental issues might have substantial potential to generate rents in hostile environments. As we previously argued (Hypothesis 1), perceived munificence facilitates the development of PES. However, because there is a general tendency to implement environmental practices in a perceived munificent business environment, implementing PES in a nonhostile environment might not provide unique competitive advantages to the same extent as it might in a hostile environment.

In addition, it may be more difficult to imitate PES in hostile environments. Resource scarcity may cause and/or prolong the effects of inadequate management of firm resources and may cause market opportunities to be missed (Sirmon, Hitt, & Ireland, 2007). In environments that are perceived to be hostile, managers of laggard firms may decide not to devote precious resources to complex environmental practices that are not directly linked to short-term survival, such as new green technologies, product or process environmental re-designs, environmental life cycle assessments, or environmental management-related training. As a consequence, firms are less likely to implement and maintain a proactive approach to sustainability in a hostile environment, which means that firms that do so will gain a more unique competitive advantage. Therefore, we propose the following hypothesis:

Sample Selection and Data Collection

Our sample is the result of a combination of archival data and mail survey responses. Archival data were gathered from Sistema de Análisis de Balances Ibéricos (SABI). This database compiles information about firms’ economic activities, financial information, location, industrial sector, and other miscellaneous information that Spanish companies disclose annually in official and public registers. Survey data were obtained from a sample of companies with more than 10 employees operating in the food industry in three Spanish geographical clusters. Companies in the sample belonged to the following sectors: vegetable/fruit or wine production, barrel and bottle companies, packaging, agricultural machinery, pesticides, and seeds. We selected this research setting because green agricultural practices are particularly salient and valuable for consumers in this environment. Consequently, PES have an enhanced potential to be the source of competitive advantages in such a setting. In addition, despite the demonstrated significant growth of these clusters over the past 20 years, new business models and innovations—new products and processes—have flourished in the sector, which has raised competitive pressures Martinez-del-Rio, Cespedes-Lorente, and Carmona-Moreno (2012). Specifically, the geographical clusters analyzed in this study host firms characterized by conditions of munificence and hostility. The result is substantial heterogeneity among companies in the agricultural clusters in terms of their implementation of PES, their innovation activities, and their perceptions regarding the degree of munificence in their environment. Thus, this empirical setting is relevant and provides sufficient variability to examine the relationships proposed in this study.

In-depth interviews with seven managers were conducted as an initial step to pretest the questionnaire; the feedback obtained indicated that the questionnaire fit the empirical setting well, which ensured face and content validity. The final questionnaire was sent to a total of 895 CEOs of companies located within a radius of 50 km of a cluster’s focal point. Three mailing waves were launched between February and November, in 2005. The response rate was 266 (29.72%). However, due to incomplete questionnaires and the inability to find secondary data for two of the companies, the final sample consists of complete and valid data from 258 firms. Among these firms, 27.04% produced or processed grapes or wine, 9.44% were agricultural machinery manufacturers, 7.3% were seed producers, 6.87% were pesticide producers, and the remaining 13.73% belonged to other related sectors. We addressed the potential for nonresponse bias by collecting data on certain key attributes—such as the number of employees and return on total assets (ROA)—from the SABI database and compared the responses of our sample with those of nonrespondents. Our t tests revealed no significant differences in the mean size (t = .87) and the mean ROA (t = .93) between respondents and nonrespondents. In addition, we conducted Kolmogorov–Smirnov two-sample tests to confirm the representativeness of our sample. The findings for size and ROA suggested that the two samples (respondents vs. nonrespondents) were drawn from the same population (p = .20 and p = .22, respectively). We also did not find significant differences between the firms that responded to the survey early compared with those that responded late (see Table 1).

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Table 1.

Statistical Significance in the Differences Among Early and Late Respondents.

	Early respondents		Late respondents
Variables	M	SD	M	SD	Mean difference	t	p Value
Ln size	4.03	1.52	3.79	1.38	.24	.79	.43
ROA	0.06	1.03	0.01	0.66	.05	−.38	.71
PES	−0.02	1.02	0.06	1.03	−.08	.28	.78

Note. ROA = return on total assets; PES = proactive environmental strategies.

Despite our reliance on self-reported data to measure innovation capabilities, perceived munificence, and PES (first hierarchical regression analysis), several factors led us to rule out concerns about common method bias from our sample. First, Podsakoff, MacKenzie, Lee, and Podsakoff’s (2003) guidelines were followed during the survey design step and the information collection step. Second, it is difficult for interviewees to guess the direction of the relationships proposed (moderation) and to structure their responses accordingly. Finally, we conducted Harman’s one-factor test to empirically detect any possible common method bias. The factor analysis revealed the selection of more than one factor as the optimal solution (three factors emerged with eigenvalues >1), and no factor accounted for the majority of the variance (Factor 1 = 35.1%, Factor 2 = 15.5%, and Factor 3 = 8%). Moreover, the items tended to load on different factors, corresponding to each construct. The second moderated hierarchical regression analysis was not affected by the potential presence of common method variance because firm financial performance was collected from a secondary data source, SABI.

Measures

To ensure content validity, the measures used in the analyses were validated from a review of prior research; the constructs were drawn from previously accepted and validated scales. A detailed description of the items is included in Appendix A. The multi-industry and multicluster natures of the sample led us to standardize certain variables with the aim of avoiding problems of interpreting similar scores in different sectors (Hambrick, 1983). Consistent with Aragon-Correa (1998), we standardized firm financial performance, PES, and innovation capabilities measures by using the average and standard deviation of the sector in the region to avoid bias that might be caused by different situations in each sector and to make the scores comparable with one another.

Divergent Validity

Three tests were sequentially conducted to assess divergent validity between each pair of factors (see Anderson & Gerbing, 1988). First, 95% confidence intervals of ±2 standard errors were constructed around the correlation estimate between the constructs and were checked if the value 1 fell within any of the intervals; none of the confidence intervals included the value 1, thus providing evidence of the divergent validity of the constructs. Second, chi-square difference tests were performed to compare the fit of constrained (correlation fixed at 1) and unconstrained (freely estimated correlation) nested models. In all cases, unconstrained CFA models fit the data significantly better than constrained models, which provided further support for divergent validity (see Appendix B). Finally, as shown in Table 2, construct intercorrelations were all below the threshold value of .85 that would signal problems of divergent validity (Anderson & Gerbing, 1988). Overall, the three tests were indicative of good divergent validity between the constructs.

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Table 2.

Descriptive Statistics, Standard Deviations, and Correlations.

Variable	M	SD	1	2	3	4	5	6	7	8
1. Superior financial performance	0.11	1.00
2. PES	0.01	0.96	.197**
3. Innovation capabilities	0.01	1.03	.266***	.262***
4. Perceived munificence	4.67	0.89	.187**	.128**	.374***
5. Ln size	3.78	1.33	−.016	.215**	.115	.094
6. Prior financial performance	0.17	1.22	.602***	.030	.099	.117	−.085
7. CEO’s experience	13.16	3.78	.075	−.082	.081	.048	.059	.038
8. Perceived uncertainty	4.17	1.26	−.063	.009	.095	.046	−.062	.021	−.024
9. Perceived complexity	4.01	0.91	−.030	.078	.137*	−.107	.025	−.044	.091	.307**

Note. PES = proactive environmental strategies.

*

p < .05. **p < .01. ***p < .001.

Taken together, the factors examined in this study have satisfactory internal consistency reliability and construct validity.

Practical Implications

This article may help managers understand how the general business environment in which a company operates influences the strategic value of PES. Although additional studies may be required, our study shows that managers’ assessments of the costs and benefits associated with marginal investments in PES (e.g., McWilliams & Siegel, 2001; McWilliams et al., 2006; Shepherd et al., 2013) may be affected by their perceptions about the munificence of the environment (Shepherd et al., 2013). Our results suggest that when managers perceive hostility, they tend to adopt less proactive approaches to environmental issues and to cut investments in PES. Ironically, our results suggest that those firms that invest in environmental proactivity in hostile conditions outperform environmental laggards. This finding does not necessarily imply that managers act irrationally. Instead, in hostile environments, investment in environmental proactivity might be comparatively more expensive than in munificent environments, which yields a different cost–benefit analysis for PES investments. Managers may simply be obliged to prioritize activities that guarantee firm survival.

In addition, our results show that not only innovation capabilities but also perceived munificence ease the adoption of proactive approaches to sustainability and contribute to earning profits.

Limitations and Future Research Avenues

Our study has several limitations that should be acknowledged when interpreting its results; however, these limitations also offer opportunities for future research. Although this study employs objective data and a lead dependent variable (superior financial performance) in the analysis of the moderating role of perceived munificence in the PES–performance link, reverse causality cannot be conclusively ruled out because findings of the interaction effects of perceived munificence on the innovation–PES relationship are based on cross-sectional data. Given the dynamic nature of some of our variables, additional testing of causality is required, and future research should generate additional empirical evidence of the relationships proposed in this study based on longitudinal/panel data analyses.

Our findings are derived from the food industry in three Spanish geographical clusters. Future research should focus on other geographical clusters and industries to enhance the generalizability of our findings. However, the variety of clusters, business models, and sectors included in the sample provides some basis for generalization.

In addition to the opportunities for future studies resulting from these limitations, other related research directions might also be promising. First, we have examined the contingent effect of perceived munificence on the relationship between innovation capabilities and PES; future studies might address the role of other relevant capabilities—including organizational learning, cross-functional integration or shared vision—in developing PES and the role of munificence in these relationships. Second, studying the interplay between munificence and the other environmental dimensions, such as uncertainty and complexity, in strategic capability and competitive advantage might improve our knowledge regarding how the general business environment shapes organizational behaviors and outcomes. For example, companies operating in a munificent environment might obtain sustained competitive advantages when there are high levels of complexity because managers might find it difficult to identify the key factors that are strategically important for success. Sophisticated organizational capabilities are most suitable for complex situations because they confuse competitors and are more difficult to create, implement, and administer (Aragon-Correa & Sharma, 2003). In addition, complexity might also affect the willingness of managers to implement PES even when operating in a perceived munificent environment. Third, our data were collected before the economic crisis affected Spain. It would be interesting to compare our results with other studies carried out during more recent years to determine whether the theoretical relationships suggested in this study remain significant in the postcrisis general business environment. Finally, it would be interesting to complement the traditional variables that characterize the perceived business environment (i.e., munificence, complexity, and uncertainty) with a study of contextual variables that characterize the natural environment, such as firm motivations (e.g., Bansal & Roth, 2000; Martinez-del-Rio & Cespedes-Lorente, 2014) and the perceived dependence of the firm on biodiversity and ecosystem services (Starik & Kanashiro, 2013; Winn & Pogutz, 2013).