The Influence of Organizational Life Cycle on Environmental Proactivity and Competitive Advantage

The Dynamic Capabilities View and Environmental Proactivity

The DC view (Teece et al., 1997) is a popular theory in the field of strategic management that places importance on the relationship between firms’ strategic choices and environmental conditions. Failure to address changes in challenging environments can negatively affect firm performance (Audia, Locke, & Smith, 2000).

Teece et al. (1997) defined dynamic capabilities as a firm’s ability to respond to its external environment by constantly developing new capabilities in creating a competitive advantage. According to the DC view, the competitive advantage of firms lies in their managerial and organizational processes, shaped by their specific asset position and the evolutionary paths they have adopted in the past (Barreto, 2010). A particular set of routines can lose its value if the routines support a competence that is no longer of interest to the market (Teece et al., 1997).

The inability to make sense of ecological cues introduces hidden vulnerability (Whiteman & Cooper, 2011). The natural environment can seriously constrain firms’ attempts to create a competitive advantage because it is likely that in the coming years strategy and competitive advantage will depend on capabilities that facilitate environmentally sustainable economic activity. Therefore, environmental proactivity is considered one of the key dynamic capabilities that is tacit, causally ambiguous, firm-specific, socially complex, path-dependent, and may provide a competitive advantage (Aragón-Correa & Sharma, 2003).

The extent to which environmental proactivity leads to competitive advantage depends not only on the firm’s internal environment (discussed in detail in the next sections) but also on the firm’s external environment (e.g., Aragón-Correa & Sharma, 2003; Hart & Dowell, 2011). Aragón-Correa and Sharma (2003) found that certain features of firms’ external environment (uncertainty, complexity, and munificence) moderated the link between environmental proactivity and competitive advantage, whereas Banerjee (2002) recognized that firms from highly polluting industries reveal a stronger orientation to environmental proactivity. Uncertainty is related to managerial perceptions of the general business environment or one of its components as being unpredictable (Dess & Beard, 1984; Milliken, 1987). Flexible legislation, fast-changing demands of consumers and society, and uncertainty about future technologies facilitate the strategic choice of innovative approaches to environmental protection (Majumdar & Marcus, 2001; Rueda-Manzanares et al., 2008). Managers will reduce uncertainty by taking preventive actions instead of reacting to events that have already occurred (Aragón-Correa & Sharma, 2003). Therefore, greater uncertainty is likely to result in a firm’s stronger proactivity. Complexity exists when managers perceive a great diversity of factors and issues as relevant (Miller & Friesen, 1983; Smart & Vertinsky, 1984; Tan & Litschert, 1994). Perceived complexity makes it difficult for managers to identify key strategic factors and introduce changes (Amit & Schoemaker, 1993; Aragón-Correa & Sharma, 2003). It is therefore argued (Rueda-Manzanares et al., 2008) that in a complex general business environment firms are less likely to make large investments in environmental proactivity. Finally, munificence is the degree to which an environment can sustain a firm’s continuous rate of growth (Dess & Beard, 1984). A munificent environment is characterized by lower taxes, governmental incentives, robust infrastructure, fast-growing markets, a general economic upturn, a qualified workforce, and so on (DeCarolis & Deeds, 1999). In a munificent environment, firms find more opportunities to develop a proactive environmental approach (Aragón-Correa & Sharma, 2003).

Despite the significant advances in this field, more research is required to analyse internal and external contingencies when studying the value of dynamic capabilities (Barreto, 2010). Specifically, greater efforts should be made to compare the effects of similar dynamic capabilities in clearly distinct environmental conditions (e.g., in different industries or different periods of time; Barreto, 2010; Winter, 2003).

Organizational Life Cycle Theory

While the importance of environmental issues is recognized, little is known about how they are integrated into firms’ operations during their evolution. The OLC theory importantly contributes to the literature that describes the characteristics of organizations in different stages of their evolution (Miller & Friesen, 1984). Although there are many different models, most researchers describe a similar pattern of organizational development. In the five-stage model that is used in this article (Table 1), firms are predicted to evolve through their birth, growth, maturity, revival, and decline stages (Miller & Friesen, 1984). As a result, firms in different stages vary in their organizational structures, innovativeness, proactivity, decision-making, and so on (Greiner, 1972; Quinn & Cameron, 1983).

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Table 1.

Organizational Life Cycle Stage Characteristics.

	Stage of organizational life cycle
Characteristics	Birth	Growth	Maturity	Revival	Decline
Situation	Young, small, homogenous environment	Older, larger, heterogeneous environment	Larger size, competitive, and more heterogeneous environment	Very large, heterogeneous, dynamic, and competitive environment	Homogenous and competitive environment, internal focus
Structure	Simple, informal	Some formalization, functional	Formal, bureaucratic, functional	Divisional or matrix	Formal, bureaucratic, functional
Decision-making	Centralized, intuitive, substantial risk-taking	Somewhat less centralized, more managers involved	Professional management, risk avoidance	Participative, high level of risk-taking	Centralized, conservative, risk avoidance
Innovation and strategy	Considerable innovation, niche strategy	Cost-efficient while maintaining an innovative bent	Focus on cost efficiency, consolidation of product-market strategy	Substantial innovation, strategy of product-market diversification	Low-cost, low level of innovation, consolidation of product-market

Source. Adapted from Adizes (1979); Lester and Parnell (2008); Miller and Friesen (1984); and Quinn and Cameron (1983).

In the birth stage, a new firm attempts to become a viable entity. Firms are young, owned by their founders, and have simple and informal structures. The growth stage is characterized by rapid sales growth and the establishment of distinctive competencies. Typically, a functionally based structure is created, the decision-making style is more decentralized, and procedures are formalized. The maturity stage occurs as sales levels stabilize and the level of innovation falls. Firms in this stage seek to protect what they have gained instead of innovating, while top management focuses on planning and strategy; formalization and control become the norm. Firms in the revival stage display a desire to diversify and expand their product-market scope. Their creativity and innovation is sometimes facilitated through the use of a matrix structure, and decision-making is considerably decentralized. The revival stage possesses similar elements of structure, formalization, and decision-making as the growth stage. The decline stage is characterized by a drop in profitability due to external challenges and a lack of innovation; control and decision-making tend to become centralized (Lester & Parnell, 2008; Miller & Friesen, 1984; Quinn & Cameron, 1983).

OLC Stages and Environmental Proactivity

Existing empirical research confirms that the level of environmental proactivity and its relationship with competitive advantage rest not only on a single attribute but also on the interrelation and complementarities between multiple characteristics such as managerial attitudes, physical assets, organizational capabilities, and intangible resources (González-Benito & González-Benito, 2006). Following this, we argue that firms can reach the same level of environmental proactivity and competitive advantage from “different paths” (based on the idea of equifinality; Katz & Kahn, 1978). In other words, firms from different OLC stages can have a similar environmental approach.

The OLC literature shows that firms shift between the highly innovative birth, growth, and revival stages, and the more conservative maturity and decline stages (Adizes, 2004; Lester et al., 2003; Miller & Friesen, 1984; Quinn & Cameron, 1983). Although each stage is unique, a combination of the different complementary variables (e.g., situational, structural, decision-making) that determine the OLC stages sets the degree of innovativeness and managerial attitudes that is similar within the two groups, namely, an innovative one with firms in the birth, growth, and revival stages, and a conservative one with firms in the maturity and decline stages. Based on this, we argue that the level of environmental proactivity and achieved competitive advantage will be very similar within the innovative and conservative groups of stages. To overcome the limitations of the small sample size in the current study, we used this classification of the OLC stages.

The present study considers that a firm is innovative if it develops an organizational culture that encourages employees to innovate and adopt new ideas (Hurley & Hult, 1998). Miller and Friesen (1984) empirically verified that a firm’s strong capacity for innovation, determined by its resources and capabilities (Kostopoulos, 2002), is common in the stages of birth, growth, and revival, and strategies related to the development and implementation of advanced environmental practices are thus expected to emerge. Innovative behaviour and expected higher levels of environmental proactivity in the innovative stages are further supported by the set of organizational characteristics, such as flexible structures, a higher degree of risk-taking, and a lower degree of formalization (Burns & Stalker, 1961).

To increase sales, firms in the innovative stages often enter new markets where the rate of innovation is high and competition is intense, so it is more likely that they explore, create, and invest in dynamic capabilities. While market expansion in general does not require dynamic capabilities (Winter, 2003), expansion to a novel market, or the creation of entirely new ones, does because the dominant logic that they are accustomed to using is no longer valid. By developing dynamic capabilities for environmental proactivity, a firm might be able to better adapt to changing industry conditions, learn and exploit new opportunities, and articulate an innovative response to market demand. Following these arguments, we expect that firms in the innovative stages of the OLC are likely seeking to adopt a proactive approach to environmental protection.

On the other hand, firms in the conservative stages of the OLC, namely, the maturity and decline stages, are more reactive in their stance. In these stages, the level of innovation falls, firms become conservative, and seek to protect what they have gained (Lester & Parnell, 2008). These firms are expected to be hierarchical, inflexible, and bureaucratic (Burns & Stalker, 1961) and managers’ decision-making style less innovative, less proactive, and more risk-averse than in any other stages (Miller & Friesen, 1984). With such structures and operation, adopting environmentally proactive behaviour is complicated as it requires a loosening of organizational structures and norms (Russo & Fouts, 1997).

Moreover, for firms in the conservative stages any changes in the external environment, such as changes in customers’ preferences, represent a threat because their adaptation is more difficult. Jawahar and McLaughlin (2001) argued that environmental proactivity involves anticipating and accepting responsibility and can only be implemented when threats have been forecasted. If a threat already exists, then it is too late for proaction and firms can only accommodate and develop reactive strategies to obey the legislation. According to the DC view, firms must interact with their external environment in order to prevent rigidity and encourage proactive behaviour (Teece et al., 1997). Therefore, a forward-thinking and action-oriented management style, common to the innovative stages, is an important element for supporting environmentally proactive behaviour. On the contrary, firms in the conservative stages put more emphasis on establishing rigid administrative systems, policies, rules, and guidelines that slow decision-making and reactions to changes in the external environment (Adizes, 2004).

More likely for the conservative stages, environmental compliance only affects physical asset resources, which consist of the physical technology, an organization’s plant and equipment, its geographical location, and its access to raw materials (Barney, 1991). These physical resources are usually costly, albeit necessary for organizations in order to comply with regulation and avoid liability costs. Compliance is primarily achieved by the addition of pollution-removing devices to the existing assets of an organization and does not require expertise in managing new environmental technologies or processes (Hart & Dowell, 2011).

Industry as a Moderator

Hypothesis 1 predicts that firms in the innovative stages of the OLC adopt a more proactive approach to environmental protection than firms in the conservative stages. Apart from firm-specific characteristics, resource selection and deployment are also influenced by external factors, including industry. The development of a firm’s strategic assets is an integrative process that depends on the firm’s strategic choices in relation to industry- and market-determined factors. The applicability of a firm’s bundle of resources and capabilities to a particular industry setting will determine the firm’s competitive advantage (Kostopoulos, 2002).

Firms from related industries have a similar regulatory framework, media attention, scrutiny from activists, community concerns, and changes in consumer behaviour (Berrone & Gomez-Mejia, 2009). Banerjee, Iyer, and Kashyap (2003) found that important antecedents to a proactive approach to environmental protection, namely, public concern, regulatory forces, and competitive advantage, are all moderated by industry type. They claimed that firms from “dirty” industries are more environmentally proactive than firms from service sectors due to the more stringent regulations they face, greater liability risks, and the effect of public concern. On the other hand, given the relatively high visibility of environmental problems in “dirty” industries, the effect of competitive advantage is greater in service sectors due to the few regulations there and consequently the many strategic options. Accordingly, these two groups of firms tend to adopt similar strategies in response to environmental issues (Bansal, 2005; Bansal & Clelland, 2004; Hoffman, 2001).

Due to compliance costs that are much bigger for the high environmental impact sectors, greater cost savings could accrue from resource conservation, lower waste generation, crisis prevention, and the establishment of new barriers. It is therefore more likely that for firms operating in high environmental impact sectors the relationship proposed in Hypothesis 1 will be more positive than for firms operating in moderate environmental impact sectors.

Environmental Proactivity and Competitive Advantage in Different OLC Stages

Most arguments used to explain competitive advantage and firm performance associated with environmental proactivity are based on the resource-based view and, more recently, on the DC view. For example, Russo and Fouts (1997) showed that the increased return on assets of an environmentally proactive firm is the result of the distinctive resources it possesses: physical assets, technology, human resources, organizational capabilities, and intangible resources. Similarly, Sharma and Vredenburg (1998) identified three key capabilities derived from environmental commitment: continuous innovation, organizational learning, and stakeholder integration. A dynamic capability of environmental proactivity requires the integration of these capabilities through the use of organizational and managerial resources (Aragón-Correa & Sharma, 2003; Russo & Fouts, 1997; Sharma, 2000). In accordance with the OLC theory, compared to firms in the conservative stages firms in the innovative stages are more likely to actively seek opportunities to develop these complex capabilities and acquire valuable resources that are supported by the organizational structure, risk-taking propensity, and significant employee involvement (Adizes, 2004; Miller & Friesen, 1984). Investments in the development of capabilities for environmental proactivity generate more knowledge-based capital (Ghemawat, 1986), whereas the use of new environmental technologies that require increased skills from workers adds to complexity in an organization’s operation, creating advantages that are less transparent and difficult to imitate (Groenewegen & Vergragt, 1991).

Furthermore, empirical studies have found that profiting from environmental proactivity is more likely if a firm possesses a strong innovation capability (Ambec & Lanoie, 2008; King & Lenox, 2001), which is common among firms in the innovative stages. As a result, we expect that the environmental proactivity of firms in the innovative stages has a positive impact on various indicators of competitive advantage such as cost savings, relationships with different stakeholders, growth opportunities, and quality improvements. The latter are not limited to developed firms in the later OLC stages. Through their greater social awareness and concern for the natural environment (Noci & Verganti, 1999), simple and less bureaucratic structure (Adizes, 2004; Miller & Friesen, 1984), flexibility in managing external relationships (Aragón-Correa, Hurtado-Torresn, Sharma, & García-Morales, 2008), and faster decision speeds (Chen & Hambrick, 1995), many smaller firms in the early OLC stages are poised to innovate in ways that larger firms cannot (Jones & Klassen, 2001). For these reasons, smaller firms may be more efficient innovators, more responsive to stakeholder pressures, and more successful in their adoption of proactive environmental behaviour than their larger counterparts.

However, empirical findings in the literature show that adopting a proactive approach to environmental protection is complex as it requires changes in products, processes, and systems (Aragón-Correa & Sharma, 2003) and involves different stakeholders at different levels (Russo & Fouts, 1997) as well as managerial commitment and coordination (Aragón-Correa, 1998). To reduce pollution, firms may need to implement technologies that may fail, or cause quality problems or unforeseen costs (Klassen & Whybark, 1999; Russo & Fouts, 1997). It is also hard to put proactive environmental practices into practice since they usually require the redesign of production, new equipment, and cross-functional employee coordination. Moreover, environmental proactivity may increase uncertainty about outcomes (Aragón-Correa & Sharma, 2003).

With the structures and operation of firms in the conservative stages, adopting proactive behaviour is complicated and unpredictable and requires changes in organizational structures and norms (Russo & Fouts, 1997). Therefore, we argue that environmental proactivity is negatively related to competitive advantage for firms in the conservative stages. These firms are likely to perform better when they are focusing on their existing core competencies, cost control and efficiency.

Data Collection

To test our hypotheses, we conducted a cross-sectional online survey among Australian firms. The Australian economy, comparatively unaffected by the latest global financial crisis, remains among the most robust in the OECD with solid growth prospects and low unemployment. The country was selected on the basis of the Australian economy’s development and stability.

Prior to the survey, we conducted 10 interviews with managers from different industries to ensure the relevance of the concepts and that the phrasing of the items and meaning of the concepts were equally understood.

Our population consisted of 1,736 randomly selected firms in the FrescoData database. This database provides detailed contact data and a directory of each firm’s primary managers. Within the 2-month field phase, namely, November and December 2012, the questionnaire was emailed mostly to senior executives (the Chairman or CEO), who were considered to have a holistic understanding of their firms’ strategies and performance, or environmental managers. The cover letter, sent to senior executives (the Chairman or CEO), indicated that participation was voluntary and confidentiality was guaranteed. After three rounds of reminder emails, the study had received 196 responses (11.3%), of which 155 responses were correctly completed and considered valid. There were no significant differences between the early and late respondents.

The data were collected from firms with different numbers of employees, revenues, ownership forms, and from different industries. Thus, the sample contains a wide range of firms. Regarding the size of the firms, we examined the number of employees: 41% of the firms employ 1 to 49 employees, 23% have 50 to 249 employees, 24% have 250 to 2,499 employees, and 12% have 2,500 or more employees. The structure of the respondent firms in revenue terms is as follows: 17% of the firms reported revenues of below AUD 1 million; 43% reported revenues of between AUD 1 million and AUD 40 million; 30% between AUD 40 million and AUD 1 billion; and 10% AUD 1 billion or more. The final industry distribution is as follows: services (51%); agriculture, fishing, mining, and forestry (13%); manufacturing (10%); construction (8%); transport, postal, warehousing, and communication (6%); utilities (5%); and other (7%). Regarding the ownership forms, 69% of the firms are privately held and 31% are publicly traded and others.

Because all data are self-reported and collected through the same questionnaire during the same period of time with a cross-sectional research design, common method bias could have augmented the relationships between the variables. Harman’s one-factor test was therefore conducted to test the presence of common method bias. If a substantial amount of common method bias is present, one general factor will account for the majority of the covariance among the variables (Podsakoff & Organ, 1986). The test performed on the items environmental proactivity and competitive advantage indicated that no general factor accounts for most of the covariance in the dependent and independent variables.

As suggested by Podsakoff, MacKenzie, Lee, and Podsakoff (2003), we attempted to reduce the presence of common method bias by also assuring that the respondents’ answers would be anonymous, by asking the respondents to answer questions as honestly as possible, and, finally, by not revealing the conceptual framework of the study and mixing the constructs in a way that reduced the possibility of the respondents guessing how the researchers wanted them to respond.

Measures

Limitations and Future Research

Our study has two important limitations. First, the variables are measured based on managerial perceptions and consequently have a certain degree of subjectivity. Social desirability in reporting a firm’s environmental practices may be a potential bias, despite the assurance of anonymity given to the respondents. Therefore, environmental investments made by firms and environmental performance measures need to be included in further studies. The second limitation is our measure of the OLC, which was derived from the existing empirical literature (Miller & Friesen, 1984; Quinn & Cameron, 1983) and applied after we found the scale of Lester et al. (2003) to be inappropriate. Herein lies the need to find a reliable and consistent OLC scale that would enable each of the five OLC stages to be examined separately.

Future research might explore the proposed relationships by adding new perspectives. One important area of research is the funding of environmentally friendly technologies in different stages of the OLC. The great costs of scaling up production, distribution, and installation of environmental friendly technologies add significant risk to investments. A lack of funding is generally viewed as a major barrier to the progress innovative firms could otherwise make (Bygrave, 2004). Venture capitalists are one source of capital needed by high-potential firms. The start-ups the venture capitalists support can have a large impact on sectors such as transportation, power generation, construction, and manufacturing (Marcus et al., 2013). However, the fact that such technologies are less mature makes funding increasingly problematic. Therefore, examining how funding for environmentally friendly technologies in different stages of the OLC may be promoted constitutes an important area for future research. Without this, the development of the environmental management area is at risk, as is the change we aim to achieve.

Another important avenue of research for organization and environment scholars is understanding the role of a sharing economy where people offer and share underutilized resources (e.g., skills, space, goods) in assisting economies towards sustainability. The potential sustainability benefits associated with the new models are interesting from an environmental perspective, particularly in the context of increasing pollution. Sharing models have emerged in many sectors including professional services (e.g., oDesk), transportation (e.g., Lyft), money (e.g., Kickstarter), and space (e.g., Airbnb). Their success is mainly driven by the current financial recession, growing environmental consciousness, and rapid development of information and communication technologies that enable sharing. We believe that the sharing economy is a pathway to a sustainable future (B. Cohen & Kietzmann, 2014). Yet more research needs to be conducted to deliver new ideas and findings. For instance, which conditions contribute to the adoption and success of such models in different stages of a firm’s evolution? Or another challenging research topic is to analyse and understand the public–private partnership process in sharing economies. For example, despite the growing opportunities for sharing economy models in the private sector, more research is needed to examine collaboration between private sectors, government funding, and regulations in solving infrastructure challenges that inhibit the faster development of such models.