The relationship between environmental performance, financial performance and

the business strategy

An empirical study of the Dutch food industry

W i l l e m i j n v a n D u s s e l d o r p T h e s i s M a n a g e m e n t S t u d i e s

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The relationship between environmental performance, financial performance and

the business strategy

An empirical study of the Dutch food industry

February 2008 Student Willemijn van Dusseldorp Churchillweg 43/45 6707 JB Wageningen Reg.nr.: 830609-204-100 Thesis Management Studies MST-80430 30 ECTS Wageningen University Management Studies Hollandseweg 1 6706 KN Wageningen Scientific advisor: Dr. Mr. H.J. Bremmers 2nd scientific advisor: Ir. D.J. Haverkamp

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Preface This thesis is conducted as part of the study Management, Economics and Consumer studies with the specialization „Management‟. During my study I liked courses such as „Financial Management‟. However, while corporate responsibility became „hot‟, my study was coming to an end and I completed most courses, I wished I had taken opportunities to gain more insight on environmental issues for businesses. It was not too late! Starting with the plan to combine the topics finance with environmental management I came to the idea that they might be related in many ways. It turned out that I was not the first having such ideas and a variety of research had already been done. There was still enough to explore though! A gentleman called Benjamin Disraeli once stated: “The best way to become acquainted with a subject is to write a book about it.” Well it hasn‟t been easy and it has taken me „some time‟, but I can assure that writing a thesis is indeed quite educational and a book it almost is. I‟d like to heartily thank all those who contributed to the completion of this thesis. The research was carried out at the Management Studies Group of Wageningen University. I would like to thank Harry Bremmers, my scientific advisor, for all his feedback and his patience. Your vision was inspiring and contributed to the direction of this thesis. I would like to thank Derk-Jan Haverkamp, my second scientific advisor, for his constructive comments and help, especially in the research design but even after leaving the WUR. You offered me the opportunity to use the data you gathered in 2005 and contact companies that were willing to further cooperate. I enjoyed sharing the magnificent room and doing some of the interviews together. I would like to acknowledge all twelve respondents and the companies, remaining anonymous, for their information and time. I am grateful they were willing to cooperate in this research. Last but not least, my family and friends are thanked for all their support.

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Abstract This thesis aims to gain insight in the relationship between environmental management performance, financial performance and firm characteristics such as business strategy. This is carried out by doing literature research and empirical research. Data was gathered through interviews with environmental coordinators of Dutch companies in the food industry, which is socially and economically important. Complementary, secondary data from a survey questionnaire on the development of environmental management of Dutch food companies was used. Previous research showed that environmental performance and financial performance are related and often positively correlated. There are several theoretical pathways that contribute to a positive relationship. These can be market gains or cost savings, with pathways ranging from image improvements to efficiency gains. These pathways do not have to be equally relevant to companies. Every firm is different in its characteristics and circumstances are of influence. The typology of Miles and Snow is used to distinguish firms on business strategy, one of the firm characteristics that are linked. The empirical research shows that the „cost pathway‟ is highly important to firms in the food industry in general. The „revenue side‟ is relevant in order to prevent a bad image, but environmental management is not always perceived to improve image, brand name or reputation. This may require a high environmental performance and prospector strategy where marketing skills are already embedded in the firm. There is evidence that business strategy influences the relation between environmental management performance and financial performance, but firm characteristics such as the sub-sector are more important. Keywords: environmental management, financial performance, business strategy, food industry

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Environmental

Management

Performance

Improved

Financial

Performance

Firm characteristics

-General characteristics

-Business strategy

-Resources and capabilities

Figure 1: Theoretical Framework

Management Summary Society‟s expectations of companies are changing. Traditionally, the role of business was viewed only as economic. Nowadays, stakeholders such as investors, government, employees and consumers are looking beyond companies‟ financial performance. Environmental issues are becoming more important. These trends suggest a need for research in this field. This thesis aims to gain insight in the relationship between environmental management performance, financial performance and firm characteristics such as business strategy. The central research question is: What is the relationship between environmental management performance and financial performance for companies in the Dutch food sector? The sub-questions also consider resources and capabilities and business strategy. The research is carried out by doing literature research, conducting interviews and the analysis of secondary data from a questionnaire survey performed in 2005. Semi-structured interviews were held with twelve environmental managers of companies in the food industry. The companies are assessed on their business strategy, asked about environmental management, resources and capabilities and perceptions on the relation between environmental and financial performance. This was based on the theoretical framework. The interviews were input for a comparative case study. The data from the survey questionnaire were quantitatively analysed and complemented the empirical research. The Dutch food industry is socially and economically important and is therefore interesting research domain. It can be divided in different sub-sectors which again have their own characteristics. Theoretical Framework The theoretical framework is illustrated in figure 1. Environmental management involves reducing the negative impact of a company to the environment. Environmental management systems aim to help managers to reach environmental performance goals. Environmental management is an important determinant of environmental performance and management aspects such as environmental strategies, systems and communication are also considered to be part of environmental performance. Therefore, the term environmental management performance is used in this study, in which it is clear that the management actions are taken into account. Better environmental performance can be beneficial to a company, because of environmental efficiency, but the government and various stakeholders can also demand action. Environmental action involves costs, but finally it can result in a competitive advantage. Prior research provides a good basis for concluding that there is a positive correlation between environmental performance and financial performance. The direction of causation is not fully clear. This study identified several theoretical pathways in which environmental management performance contributes to a positive relationship with financial performance. There can be market gains or cost savings and several pathways ranging from improved image to efficiency gains. Improved environmental performance can lead to increased revenues if customers are favourable disposed to the firm‟s „greener products‟ (customer goodwill). Furthermore, firms may experience lower revenues when a firms‟ environmental record is poor. Environmental management can improve the

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production process leading to cost-saving changes. These pathways are however not equally relevant to all companies, because firms differ in for example business strategy and circumstances and there are underlying reasons such as resources and capabilities that influence the relationships. Since many firms in the food industry face high processing costs, benefits from increased efficiency may be of particular interest. The question is not only „Does it pay to be green‟ or „Why does it pay to be green‟, but also „When and how does it pay to be green?‟. Two of the most popular approaches to conceptualize and operationalize the strategic orientation of companies are Porter‟s Generic Competitive Strategies and Miles and Snow‟s Adaptive Strategies. The defender-type and cost leadership are both searching for continuous improvements in order to improve efficiency. The whole business organisation is directed at this competitive advantage, so this would also include the management of environmental issues. It thus could focus more on the pathway of production efficiency. The prospector and differentiator are the most proactive types of firms and search for innovation and new opportunities. A prospector may benefit more from the revenue side than defenders, since marketing skills are already embedded in prospector firms. Concerning resources and capabilities, financially successful companies may have more financial resources and are better able to afford to improve environmental performance. A firm with many resource-based capabilities will have a broad range of possible environmental improvements, because they can exploit many resources. The prospector is more diverse in its resources and capabilities, implying that more pathways from environmental to financial performance could be relevant. Empirical results Environmental management is an important issue to companies in the Dutch food industry and the environmental coordinating function and time spend on environmental issues are increasing. The attention for environmental issues varies per sub-sector. The companies in the bakery sector have on average less attention for environmental issues than companies in the other sectors. A reason is that the production process is less polluting compared to some other sectors. Assessing environmental management performance is complicated, partly because firms themselves find it very difficult to compare its environmental performance to their competitors. Environmental regulations were the most important reason to improve the environmental performance. Energy use is the environmental aspect that has a lot of attention for companies in the food industry. This is because of the excessive costs. Energy and waste savings from environmental management are often mentioned and perceived to contribute the most to profitability. The competitive position is by many firms associated with being able to distinct from other businesses on „the revenue side‟, but a possible competitive advantage is especially recognized by firms that perform well and otherwise only the „cost pathway‟ is referred to. Improved image from environmental management is by most firms not directly recognized as a link to better financial performance. However, if image is hurt, the profitability will be hurt which needs to be prevented. Firms in the food industry differ in their business strategy. Some firms have more priority for product innovation and introducing new products than others (prospectors). These companies also indicate to have a differentiation strategy. Interesting is that on average, improving production efficiency and cost control have the highest priority compared to other aspects of business strategy. The business strategy varies per sub-sector. There are relatively many prospectors in the bakery sector. Business strategy has a moderate influence on the relation between environmental and financial performance. For some prospectors an environmental management system does not fit into the company because of a strategy in which they need to be flexible.

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Flexibility is needed in order to be able to take advantage of new opportunities. There are some indications that prospectors recognize the „revenue side‟ more than defenders. For example the two firms in the coffee sector are highly different in their strategy and this is also reflected in their environmental management and the perceived relation between environmental management and financial performance. Defender firms focus more on efficiency and this is reflected in their views on environmental management. Defenders recognize the image and marketing pathway less. The cost pathways, especially waste and energy savings, are however recognized by all firms, whatever their business strategy is. Overall conclusions Environmental management performance and financial performance are in many ways related, giving opportunities for a positive correlation. The cost pathways (especially waste and energy savings) are important to all companies in the food industry. The „revenue side‟ is important in order to prevent a bad image on environmental management, but environmental management is not always perceived to improve image, brand name or reputation. Enhanced profitability from image gains can therefore especially be recognized when the firm is environmentally performing well and has a prospector strategy where marketing skills are embedded in the firm. There is evidence that business strategy influences the relation between environmental management performance and financial performance, but firm characteristics such as the sub-sector are more important.

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Table of Contents Preface ............................................................................................................................................. 4 Abstract ........................................................................................................................................... 5 Management Summary .................................................................................................................. 6 Table of Contents .......................................................................................................................... 9 Abbreviations ............................................................................................................................... 11 1. Introduction ........................................................................................................................ 12

1.1. Research background ................................................................................................. 12 1.2. Problem definition ..................................................................................................... 14 1.3. Research Objective ..................................................................................................... 14 1.4. Research Framework ................................................................................................. 15 1.5. Research Questions .................................................................................................... 15 1.6. Definition of concepts ............................................................................................... 16 1.7. Research Material ....................................................................................................... 16 1.8. Research Strategy ........................................................................................................ 18 1.9. Outline Research ........................................................................................................ 19

2. Dutch food and drink industry ........................................................................................ 20 2.1. Introduction ................................................................................................................ 20 2.2. Agri-food chain ........................................................................................................... 20 2.3. Contribution to economy .......................................................................................... 21 2.4. Sub-sectors of the food industry .............................................................................. 23 2.5. Leading multinationals in the Netherlands ............................................................. 24 2.6. Environmental issues ................................................................................................. 24 2.7. Concluding remarks ................................................................................................... 25

3. Environmental management ............................................................................................ 26 3.1. Introduction ................................................................................................................ 26 3.2. Facing the environmental impact of the company ................................................ 26

3.2.1. Views on environmental management ............................................................ 26 3.2.2. Encouragements for environmental management ........................................ 27

3.3. Environmental management systems ...................................................................... 28 3.3.1. ISO 14001 ........................................................................................................... 28 3.3.2. EMAS .................................................................................................................. 29 3.3.3. Certifying the EMS ............................................................................................ 30 3.3.4. Quality systems ................................................................................................... 31 3.3.5. Regulations and covenants ............................................................................... 31

3.4. Evaluating environmental performance .................................................................. 32 3.4.1. Environmental management models .............................................................. 32 3.4.2. Performance evaluation systems ...................................................................... 32 3.4.3. Specific environmental performance measures ............................................. 34

3.5. Concluding remarks ................................................................................................... 35 4. EM linkage with Financial Performance ........................................................................ 36

4.1. Introduction ................................................................................................................ 36 4.2. Prior research on linkage ........................................................................................... 36

4.2.1. Negative and/or neutral association ............................................................... 36 4.2.2. Positive association ............................................................................................ 38 4.2.3. Concluding remarks ........................................................................................... 41

4.3. Market gains and cost savings .................................................................................. 41 4.3.1. Revenue side ....................................................................................................... 41 4.3.2. Cost side .............................................................................................................. 42 4.3.3. Related issues ...................................................................................................... 44 4.3.4. Time lag ............................................................................................................... 45

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4.4. Concluding remarks ................................................................................................... 45 5. Business strategies and firm characteristics .................................................................... 46

5.1. Introduction ................................................................................................................ 46 5.2. Business strategy ......................................................................................................... 46 5.3. Porter‟s Generic Competitive Strategies ................................................................. 47 5.4. Miles and Snow‟s Adaptive Strategies ..................................................................... 48 5.5. Similarities between typologies and concluding remarks ...................................... 49 5.6. Resources and capabilities ......................................................................................... 50 5.7. General firm characteristics ...................................................................................... 52 5.8. Concluding remarks ................................................................................................... 53

6. Empirical research methodology ..................................................................................... 54 6.1. Introduction ................................................................................................................ 54 6.2. Interviews .................................................................................................................... 54

6.2.1 Interview strategy ............................................................................................... 54 6.2.2 Operationalization: from theory to interview protocol ................................ 55 6.2.1. Data gathering .................................................................................................... 58 6.2.2. Analysis ................................................................................................................ 60

6.3. Database questionnaire 2005 .................................................................................... 62 6.3.1. Dataset ................................................................................................................. 62 6.3.2. Operationalization .............................................................................................. 62 6.3.3. Data analysis ....................................................................................................... 65

7. Results .................................................................................................................................. 66 7.1. Introduction ................................................................................................................ 66 7.2. Description of the participating companies ........................................................... 66

7.2.1. Sectors .................................................................................................................. 66 7.2.2. Functions and tasks respondents ..................................................................... 67 7.2.3. Production site, size and parent company ...................................................... 68 7.2.4. Sales ...................................................................................................................... 70 7.2.5. Market structure ................................................................................................. 71 7.2.6. Concluding remarks ........................................................................................... 72

7.3. Analysis interviews ..................................................................................................... 72 7.3.1. Business strategy ................................................................................................. 72 7.3.2. Environmental management ............................................................................ 76 7.3.3. Resources and capabilities ................................................................................. 84 7.3.4. Environmental management and financial performance ............................. 86 7.3.5. Business strategy and the relation between EMP and FP ............................ 92

8. Conclusions and Discussion ............................................................................................. 97 8.1. Conclusions ................................................................................................................. 97 8.2. Discussion ................................................................................................................... 99

References .................................................................................................................................. 101 Appendix 1: Financial performance measures ...................................................................... 106 Appendix 2: Interview Protocol.............................................................................................. 108 Appendix 3: Questionnaire 2005 ............................................................................................ 111 Appendix 4: Mean values and distribution ............................................................................ 113

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Abbreviations BIK Branch Classification Chamber of Commerce (Dutch: Branche Indeling

Kamers van koophandel) BRC British Retail Consortium BSI British Standard Institution CEP Council on Economic Priorities CRSP Centre for Research in Security Prices CSP Corporate Social Performance CSR Corporate Social Responsibility ECIs Environmental Condition Indicators EM Environmental Management EMAS European eco Management & Audit Scheme EMIs Environmental Management Indicators EMS Environmental Management System EPA Environmental Protection Agency EPIs Environmental Performance Indicators EU European Union FRDC Franklin Research and Development Corporation GDP Gross Domestic Product GMP Good Manufacturing Practice GRI Global Reporting Initiative HACCP Hazard Analysis Critical Control Points HR Human Resources IPPC Integrated Pollution Prevention and Control IRRC Investor Responsibility Research Corporation ISO International Standards Organization JFI Jaggi Freedman index KLD Kinder, Lydenberg and Domini MJA Long-term agreement Energy (MeerJarenAfspraken energie-efficiency) R&D Research and Development RBV Resource Based View RDAP Reactive Defensive Accommodative Proactive ROA Return On Assets SCCM Foundation Coordination Certification Environmental management

systems (Stichting Coördinatie Certificatie Milieu- en arbomanagementsystemen) SEC Securities and Exchange Commission SMEs Small and Medium-sized Enterprises TRI Toxics Release Inventory UK United Kingdom USA United States of America WBCSD World Business Council for Sustainable Development

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Planet

Profit

People

Figure 1.1 Triple P concept,

focus areas of this thesis

1. Introduction

1.1. Research background

Society‟s expectations of companies are changing. Traditionally, the role of business was viewed only as economic. Under the condition of obeying the law, economists argued that a firm‟s principal purpose is to maximize profits. Nowadays, stakeholders such as investors, government, employees and consumers are looking beyond companies‟ financial performance. Sustainable development and environmental issues are becoming more important. Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs (Brundtland, 1987). Business contribution to sustainable development has become a major issue. Corporate social responsibility (CSR) is the commitment of business to be accountable to all of its stakeholders to contribute to sustainable development not only in economic aspects but also social and environmental aspects. This is often depicted as the triple bottom line (people, planet profit) concept in which the social, environmental and financial results are presented. These trends suggest a need for research in this field. This research focuses on the planet and profit aspects of CSR (see Figure 1.1). Research on environmental management (planet) and financial performance (profit) is not complete. These areas can be related, but it may vary between companies and industries. A research that is narrowed down provides better possibilities to search for causes and differences between companies in the relationship between environmental and financial performance. This research focuses on companies in the food industry. This industry is of particular interest because of its social and economic importance and a production process that is often related to „natural products‟: food! More insight in the relation between environmental and financial performance may stimulate companies in better environmental management and financial performance. Perspectives on the relationship between environmental and financial performance There are three perspectives in the relationship between corporate social performance, which includes environmental performance, and financial performance (Waddock and Graves, 1997). First, there could be a negative correlation. The argument is that firms face a trade-off between people, planet and profit; between environmental and financial performance. Firms incur costs from improving their environmental performance or socially responsible actions which puts them at an economic disadvantage compared to other companies. A second viewpoint is a neutral association. There could be no causal linkage between environmental performance and financial performance. A third perspective is that there is a positive association. Firms that attempt to minimize costs of compliance will finally incur higher costs. Also, although the costs of improving environmental performance can be significant, other firm costs are reduced. A compatible view is that the actual costs of environmental management are minimal and generate other management benefits that are potentially great (Klassen and McLaughlin, 1996). Prior research on the relationship between financial and environmental performance shows mixed results but increasingly presents evidence for a positive correlation between environmental performance and corporate profitability (Klassen and McLaughlin 1996, Russo and Fouts 1997, Konar and Cohen 1997). The direction of causality between higher profits permitting better environmental performance in the future, or better

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environmental performance resulting in higher future financial performance, however, has been debated. Market gains or cost savings Environmental management could lead to better financial performance through either market (revenue) gains or cost savings (see Figure 1.2). Market (revenue) gains could emerge from improved image. A firm with a good reputation might sell more of its products. Furthermore, environmental management gives opportunities for environmental marketing. Certification offers a basis of differentiation for the consumer or client. Consumers may be willing to pay more for environmentally friendly products. For business to business companies, beyond compliance practices can give value for the client. On the cost side, firms that invest in environmental management systems can avoid potential spills, crises and fines. Cost savings could also emerge from eco-efficiency, the ability to gain process efficiencies and create more products from fewer resources. Higher production efficiency saves costs by means of a reduction in waste and energy usage, materials savings and increased process yields. Furthermore environmental management could lead to better utilization of by-products. Environmental management could also have a positive effect on employee morale and productivity. Companies with a good reputation on environmental performance might be able to attract better personnel. This again leads to higher efficiencies and fewer labour problems. Another opportunity could emerge from a first-mover advantage. A firm may not have short-term financial returns, when developing its environmental strategy. Higher environmental standards incur costs. But companies that spend more on environmental issues may have higher earnings in the long term, because they would have the ability to plan their environmental expenditures instead of making unanticipated costs because of new legislation. An industry leader could also gain competitive advantage by establishing the standard for the industry. Furthermore, firms‟ standing with bankers, investors and government officials may be better which could result in economic benefits. There could even be legal rewards from the government such as environmental subsidies. Related factors Extensive opportunities for business to profit from environmental investments are shown. But of course, not all firms will have all possible benefits from environmental management. Reinhardt (1999) argues that managers need to go beyond the question whether it pays to be green. He suggests that it depends on the circumstances confronting the company and the strategy it has chosen. Whether a firm will benefit from environmental investments depends on external and internal factors, such as the industry structure, position in the market, consumer perceptions, organizational capabilities and internal competencies. Therefore, there is a need to analyze these factors in relation to the link between environmental and financial performance.

Environmental

Management

Performance

Improved

Financial

Performance

Figure 1.2 Two pathways of linkage environmental

management to financial performance

Market gains

Cost savings

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1.2. Problem definition

Given the increasing interest in corporate social responsibility, the relationship between the components environmental and financial performance is an important topic. Furthermore, little research looked at characteristics related to this relationship. More insight is needed in the linkage between environmental and financial performance and related factors such as business strategy (see Figure 1.3). As stated in the introduction, prior research on the relationship between environmental performance and financial performance is mixed, but overall it shows a positive correlation. Research mentions several aspects as a foundation for a positive relation between environmental and financial performance, but these need to be investigated further. Environmental management performance could be a source of competitive advantage and result in financial benefits. However, a correlation does not necessarily imply that higher environmental performance leads to financial performance. A firm that does well financially is also able to spend more on the environment. This should be kept in mind. Furthermore, there are many firm characteristics that can influence environmental management and financial performance. Companies can have all kinds of different business strategies. This may differ from the strategy on environmental issues. The business strategy may affect the profitability of the firm, but also the perspective of looking at environmental management or the relationship between environmental management and financial management. Other circumstances, such as industry structure, could also affect the relationship between environmental and financial performance. This needs to be investigated.

1.3. Research Objective

The goal of this research is to gain insight in the relationship between environmental management performance and financial performance

- by providing an overview of prior research on this relationship

- by indicating the factors that could affect and explain this relationship

- by investigating the association of business strategy, resources and capabilities and general firms characteristics, with this relationship

It is reasonable to expect that benefits of environmental management vary between firms and industries. A research domain narrowed down to the food industry provides better possibilities to search for causes and differences between companies in the relationship between environmental and financial performance. Prior research on for example the S&P500 about whether „it pays to be green‟ is probably not very convincing for most companies in the Dutch food industry to give more priority to environmental management. Further insight in the relationship between environmental and financial performance could stimulate companies to go beyond legal compliance which could contribute to a better environment.

Environmental

Management

Performance

Improved

Financial

Performance

Firm characteristics

-General characteristics

-Business strategy

-Resources and capabilities

Figure 1.3 Theoretical framework: related factors

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1.4. Research Framework

The following research framework (Figure 1.4) shows the structure of the research and the steps that are taken to reach the research objective.

Theory on

environmental

management

(Chapter 3)

Theory on the link

with financial

performance, prior

research (Chapter 4)

Research

model

Data collection

& analysis

(interviews &

database)

(Chapter 6)

Conclusions

(Chapter 8)

Characteristics food

industry (Chapter 2)

Results

(chapter 7)

Theory on Business

strategy (Chapter 5)

Theory on resources

and capabilities

(Chapter 5)

Figure 1.4 Research Framework

The first step is developing a theoretical framework. Relevant literature about the relationship between environmental management and financial performance is reviewed. This is literature about environmental management and performance and prior research on the link with financial performance. Furthermore, theory on business strategy and the resource based view are consulted. The theoretical framework comes together in the research model which is illustrated throughout the research (see for example Figure 1.3). Furthermore, information about the food sector is gathered in order to gain insight in the specific characteristics and important developments in the sector. Next, the data is collected. Interviews are held and findings are supported by data from the environmental management questionnaire in 2005. The interview protocol is based on the theoretical framework. More details on the method can be found in the sections research material and research strategy of the technical research design. The empirical data is compared to each other and the theoretical framework. This gives results about differences between companies in the relation between environmental management and financial performance. Next, final conclusions are drawn.

1.5. Research Questions

The central research question is: What is the relationship between environmental management performance and financial performance for companies in the Dutch food sector? With the word relationship is meant an association, linkage or connection, either real or assumed. Since environmental management involves costs and benefits, there is interaction with the financial performance of companies. The terms are connected, but what kind of relationship is investigated in this research.

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To be able to answer the central question, several research questions are formulated: 1. What is environmental management and environmental performance and how can it

be measured? 2. What is the correlation between environmental performance and financial

performance according to prior research? 3. Through which pathways are environmental performance and financial performance

related? 4. How do differences in company characteristics affect the relationship between

environmental and financial performance? 4.1. What are specific characteristics of (companies in) the food business that

influence the relationship between environmental and financial performance? 4.2. Which other circumstances or general characteristics are related? 4.3. How do business strategies relate to environmental management?

- How can business strategy be measured? 4.4. How do resources and capabilities of companies relate to environmental

management? What is the influence of financial resources of a company on environmental management?

1.6. Definition of concepts

Environmental management “Environmental management encompasses all efforts to minimize the negative environmental impact of the firm‟s products throughout their life cycle” (Klassen and McLaughlin, 1996) Environmental performance “Environmental performance measures how successful a firm is in reducing and minimizing its impact on the environment, often relative to some industry average or peer group” (Klassen and McLaughlin, 1996) This involves physical and management aspects (see chapter 3). Financial performance In the research questions the profitability of the company is meant. In this research, financial performance will however not be measured in accounting terms or ratios, but in terms of perceptions. The terms „financial performance‟, „economic performance‟ and „profitability‟ are used. Food industry With the terms food industry, food business and food sector is meant all companies in the food and drink industry, located in the Netherlands.

1.7. Research Material

During the research there are several sources of information are consulted in order to be able to answer the research issue. The research starts with a literature scan to develop the theoretical framework. Also, literature and documents are consulted on characteristics of the food sector. To obtain empirical data from companies in the food sector, interviews are conducted. Furthermore, data from the environmental management questionnaire in 2005 of Wageningen University support the research.

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The research material was determined in more detail in three steps: 1 What type of information is needed? 2 Which sources of information will be used? 3 Which methods will be used to access the resources?

1 Type of information:

- Information about the Dutch food industry

- Literature about issues, strategies and systems in environmental management and literature and documents about measuring environmental performance

- Prior research

- Identification of benefits of environmental management that affiliate to profitability

- Theory on business strategies

- Theory on resources, capabilities and assets

- Information about differences between companies on strategy, resources and capabilities, environmental management and the perceived relation to profitability

2 Sources of information:

- Scientific papers and articles (search using WUR digital library)

- Books

- Internet sites (search using Google)

- Companies in the food industry 3 Methods to access:

- Search method; extract information from literature, books and websites.

- Search method or qualitative content analysis; extract information from literature.

- Interviews, face-to-face with environmental coordinator of company and company documents if available

- Analysis of the data from the environmental management questionnaire in 2005. Searching literature Literature is widely available through the Wageningen UR digital library. It provides access to major sources of scientific information in the fields necessary. Databases such as Scopus and Web of Science are used. Furthermore, in the library at the Leeuwenborch are many books available. Searching other information on the internet is done using Google. Interviews The empirical research is performed by conducting interviews. A semi-structured interview protocol is set up based on the theoretical framework. Background in interview techniques is explored. Twelve companies in the Dutch food business are interviewed. Several companies that responded to the questionnaire in 2005 were willing to further cooperate in future research. Some of these companies are approached for this research project. An advantage is that more information about those companies was available. Environmental management questionnaire 2005 In 2005, a questionnaire on environmental management was send to all companies in the food industry larger than 50 employees. There was a response of 100 companies. The database in SPSS can be used for analysis. The questionnaire however included only few questions about costs and benefits. More details on the research material can be found in chapter 6.

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1.8. Research Strategy

The research strategy consists of several decisions about the way the research project is carried out. Three central decisions are mentioned by Verschuren en Doorewaard (2005): breadth versus depth, qualitative versus quantitative and empirical versus desk research. Depth and breadth The focus in this research is two-fold, but mainly it is depth. A small scale approach gives the opportunity to yield knowledge with fewer uncertainties than large-scale research that has been performed on the relation between environmental and financial performance. It enables complexity and a thorough foundation. Generalisation of the results is possible to a lesser extent. On the other hand, since there are a lot of factors related to environmental management and financial performance, there is a broad set of concepts that are taken into account. This research is explorative. Qualitative and quantitative The research is mainly qualitative in which interpretation of the literature and interview results is very important. However, there is a small part quantitative, since the data of the environmental management survey questionnaire provides supports the research. Several quantitative (prior) studies have been performed on large corporations. This thesis focuses on the Dutch food industry. Since most of those companies are not obliged to release data on financial performance, it would be difficult to do a quantitative study with hard data. The management studies group of Wageningen University gathered information in 2005 on environmental management of companies in the Dutch food industry, which is used. Desk research and empirical The research starts with desk research in order to gain knowledge on the linkage between environmental performance and related factors. This method is characterized by the use of existing material. Three categories of existing material can be used: literature, secondary data and official statistical material (Verschuren and Doorewaard, 2005). All three categories are used in this research. Literature consists of the knowledge products of social scientists such as books and articles. This research makes use of a broad scale of existing literature. Secondary data is empirical data compiled by other researchers. As mentioned before, data of the questionnaire in 2005 is used. Official statistical material is data gathered periodically or continuously for a broader public. This is used to lesser extent. An advantage of desk research is the reliability of the gathered material. However, the material is originally gathered for other purposes than this research which implies the need to settle for a biased perspective on the research material. A complementary strategy is therefore doing a comparative case study. A case study is characterised by a small number of research units, labour-intensive data generation, more depth than breadth, a selective sample and qualitative data and research methods. In this research, twelve companies in the Dutch food sector are studied. New empirical data is gathered by doing face-to-face interviews with environmental coordinators of these companies. Additional information is gathered from company websites and documents. In order to find differences, the empirical data is compared with each other and theoretical starting points.

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1.9. Outline Research

First there is an introduction to the Dutch food industry and the environment. These are important for understanding firm‟s actions. Following, insight in environmental management systems and performance is gained to be able to recognize actions and assess a firm‟s environmental management (chapter 3). Next, the relation to financial performance is explored by evaluating previous research. The benefits of better environmental management are described, because these could be incentives for companies to improve their environmental management and it gives more insight in how it could possible lead to improved firm financial performance. In chapter 5, business strategy is described and several business characteristics are linked to environmental and financial performance. The next chapter describes in detail how the interviews were set up and the methods to measure. The results are presented in chapter 7, with the complementary results of the questionnaire of 2005 in boxes. Chapter 8 presents the conclusions and discussion.

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2. Dutch food and drink industry

2.1. Introduction

This chapter gives an introduction to the study domain. Section 2.2 provides an overview of the agri-food chain in order to give insight in the position of the companies in the food industry. Section 2.3 shows economic characteristics of the food industry and places it in an international context. The following section elaborates on the different sectors of the food industry. Section 2.5 continues with the leading multinationals in the Dutch food industry. The information presented in this chapter also helps to understand the characteristics of the interviewed firms. Recall that in this research „the food and drink industry‟ is sometimes abbreviated to the term „food industry‟.

2.2. Agri-food chain

To give an idea about the position of the food industry in the agri-food chain it is described and shown in Figure 2.1. The Dutch agri-food chain consists of primary businesses, the food industry, wholesalers, retailers and the food service and finally the consumer.

(In home 70%) Consumer (Out-of-home 30%)

Retailer Food service (hotel and catering industry)

Primary Producers

Wholesaler (including convenience and food service)

Food industry

Figure 2.1 Agri-food chain (based on Nijboer, 2004, p.9)

The primary producers are for example dairy or crop farmers. The food industry processes and produces products. The wholesalers include the food service wholesalers and convenience wholesalers. Food service wholesalers are for example the Sligro and Deli XL. Their buyers are the hotel and catering industry. The convenience wholesalers supply to supermarkets and small specialized retailers. The food retailers are supermarkets that sell their products to consumers.

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The wholesalers and retailers are not completely separated parts of the chain, but often integrated in one enterprise. There are large supermarket organisations that take care of the procurement, distribution and sales activities for super markets. Dutch supermarkets are in the hands of a small number of chains. There are about 8 supermarket organisations for the retailers. Superunie, Albert Heijn, Laurus and TSN/Schuitema are the largest. They represent almost 80% of the turnover. There are two kinds of super market organisations. The integrated organisation buys its products at the supplier and takes care of the distribution for their own shops or independent enterprises. This is for example the Albert Heijn. The cooperating supermarket organisations, such as Nettorama, buy their products together with other supermarket organisations via a purchasing organisation. They take care of their own distribution to their shops. Most independent supermarkets join a certain supermarket formula that is owned by the supermarket organisation. (Nijboer, 2004) Total turnover of supermarkets and other food retailers in 2002 was approximately €36.5 billion of which €31.4 billion was on food. 65.6% of these sales were at supermarkets. The rest was at bakeries and ambulant trade (such as market trade). The expenditures on food are increasing. (Nijboer, 2004, p. 11) However, the percentage of expenditures on food and non-alcoholic beverages declined over the past 10 years in Europe. In 2005, this was about 11% of total household consumption expenditure in the Netherlands. (CIAA, 2006, p.17) There is a growing consumer demand for healthy and safe food products. Research also shows that more than half of the Dutch consumer says to be willing to pay more for products if this results in cleaner industries (CBS, 2007). Furthermore, organic food is rising. In 2005, Dutch consumers spend more than €467 million on organic products. Of the vegetables and fruit they bought, 3% were organic. Almost half of the organic products are sold in supermarkets. (LEI, 2007, p.35)

2.3. Contribution to economy

The Netherlands is part of the European Union (EU) in which the food and drink industry is a major contributor to the economy. The EU food industry is the largest manufacturing sector with a turnover reaching €836 billion in 2005. It accounts for 3.8 million workers in 282,600 companies, which also makes the food industry the leading employer in the EU manufacturing sector. The labour productivity is considerably lower than in most other industries. In many European countries, including the Netherlands, the food and drink sector also is the largest industry. The Netherlands is ranked 6th of the EU member states in terms of food and drinks industry turnover in 2005 with almost 40 billion Euros. (CIAA, 2006, p.9) As shown in Table 2.1, there are approximately 4500 companies in the Dutch food industry, providing jobs to 144,000 people. About two-third is employed by companies of 100 staff and over. In 2004 there were 220 of such companies in the Dutch food industry. Their joint turnover was 41.9 billion Euros. (LEI, 2007, p. 28)

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Table 2.1 Figures of the food industry

Businesses Employees Turnover (€ million)

European Union - SMEs - Large companies (250+)

282,600 99.1% 0.9%

3,800,000 61.3% 38.7%

836,000 47.8% 52.2%

The Netherlands - 100+ employees

4500 220

144,000 66%

N.A. 41,900

Sources: CIAA (2006) and LEI (2007)

The food industry is a fragmented industry, composed of a diverse range of companies from small and medium-sized enterprises (SMEs) to large companies. According to the definition of the European commission, companies with less than 50 employees are small enterprises and up till 250 employees are medium-sized companies. SMEs are socially and economically important, since they represent 99.1% of the food business population. These companies account for 47.8% of the EU food and drink turnover and employ 61.3% of the sectorial workforce. The small percentage large companies thus generate 52.2% of the turnover (CIAA, 2006, p.7). In 2005 and 2006, a large European survey was conducted with respect to technical innovation. The amount of innovation undertaken by companies tends to increase with firm size. However, the results show that most food companies, including SMEs, continuously search for opportunities to innovate. (CIAA, 2006. p.8) More theory on strategy is provided in chapter 5. The Dutch food sector has a strong international orientation. Half of the food industry turnover is realised abroad of which three-quarters is in other EU member states. (LEI, 2007, p.28) The EU plays an important role in world trade of food and drink products, being the largest exporter of food and the number two importer. In 2005, the EU food industry exports were €47.6 billion, which is a market share of 20%. The imports were €43.1 billion. The US is by far the largest trading partner, accounting for 22% of all EU exports. (CIAA, 2006, p.12) Exports inside the EU reached €146.4 billion in 2005. The Netherlands is the largest intra-EU exporter with €26 billion, accounting for almost 18% of the total amount. (CIAA, 2006, p. 16) Germany is the most important trading partner. Research and development (R&D) expenditure in the EU food and drink industry accounts, on average, for 0.24% of industry output. The R&D intensity of the EU food industry remains lower than the spending by the food industries of the US (0.35%), Australia (0.40%) and Japan (1.21%), which are important competitors of the EU. However, there seems to be a high level of R&D in the food industry in the Netherlands. Within the food industry, Nestlé had the highest R&D investments in 2005, followed by Unilever. There are many companies from the Netherlands in the top 20 of the biggest EU R&D investors. (CIAA, 2006, p.20)

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20.0%

15.5%

15.3%11.2%

6.5%

6.2%

4.5%

4.2%

3.9%

12.8%

Meat

Beverages

Dairy

Bakery

Animal feed

Processed fruit and

vegetablesChocolate and sugar

confectioneryOils and fats

Grain mill products and

starch productsOthers

Figure 2.2 Distribution of turnover in sub-sectors of EU food industry

2.4. Sub-sectors of the food industry

The food industry can be divided in different sub-sectors. In the Netherlands, companies have to register at the Chamber of Commerce, which divides companies in several sub-sectors using a „BIK‟ code. Table 2.2 shows figures on the several sub-sectors of the Dutch food industry for firms with more than 100 employees. Table 2.2 Figures on sub-sectors of ‘larger’ companies in the Dutch food industry

Businesses

>100 staff

Employees

(x1,000)

Turnover

(€ mln)

Meat 55 16,9 5161

Bakery 40 10,8 1610

Fruit and vegetables 25 9,1 2782

Animal feed 15 5,1 2951

Dairy 10 10,9 5534

Cocoa, sugar and confectionary 10 5 2981

Beverages 10 8 3734

Fat and oils 5 2,2 4780

Other 50 * *

Total food industry 220 89,7 41860

Total industry 1355 454,9 168259

Percentage food industry in total industry 16,5% 19,7% 24,9% Source: LEI (2007)

Of the Dutch food industry companies with 100 staff and over, many are in the meat sector, which includes slaughterhouses and meat processing. Almost 17,000 workers are employed by business of 100 staff and over. However, in terms of turnover, Dairy firms rank number 1. In section 8.3, the relative sizes of several sectors of the Dutch food industry are shown for companies with 50 employees or more. In the EU, the meat industry is the largest sector. The size of the sectors of the EU food industry in terms of turnover is shown in Figure 2.2, based on data from the CIAA (2006). Beverages, dairy and bakery also account for a large part of turnover of the food industry. „Others‟ in this distribution include for example fish products, sugar, coffee and tea, seasonings and dietic food. 'Beverages' is the most important sector in terms of exports. The EU export of beverages reached €14,504 million in 2005 which is some 30% of total food and drink exports of the EU. Sales of both alcoholic and non-alcoholic drinks increased. Most imported in the EU are fish and oils.

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2.5. Leading multinationals in the Netherlands

There are a number of large multinationals located in the Netherlands. In 2005, the top 10 Dutch food concerns reached a turnover of €75 billion worldwide. Table 2.3 shows a list of the largest Dutch food and beverage firms in 2005. Table 2.3 The top 10 Dutch food concerns in 2005

Firm Global turnover (in € million)

Total staff

Product groups

1. Unilever 39,672 206,000 Food and drinks

2. Heineken 10,796 64,305 Beer

3. Sovion 6,285 14,000 Meat

4. Friesland Foods 4,419 16,438 Dairy

5. Campina 3,569 6,811 Dairy

6. Nutreco 3,002 6,993 Animal feed, poultry meat

7. CSM 2,618 8,458 Sugar, bakery ingredients and lactic acid

8. Numico 1,988 14,000 Baby food and clinical nutrition

9. Wessanen 1,877 7,349 Natural foods and convenience foods

10. Provimi 1,585 8,000 Animal feed

Source: LEI (2007)

Unilever is among the world‟s leading food giants. This company also produces homecare and personal care products though. However, global turnover was almost €40 billion of which food and drinks accounted for €23 billion. The total number of employees worldwide was 206,000 people which is even more than the total number of employees in the whole Dutch food and drink industry. Other large firms of the Dutch food industry are also leading. Heineken is the biggest brewer in Europe with a market share in the Netherlands of approximately 50%. Friesland Foods and Campina process about 80% of the milk that is produced in the Netherlands. Nutreco is the fifth leading animal feed producer in the world. (LEI, 2007)

2.6. Environmental issues

Haverkamp (2007) describes the four most important environmental emissions in the Dutch food and beverage industry identified by Dutilh and Blijswijk (2004). These are:

- Water usage and energy consumption

- Emissions to water and air

- The use of packaging materials

- Production of organic waste In the food industry, water is used for example for washing products, cleaning machinery, to produce steam or as a product ingredient. Many firms reduced their water usage during the 1990 due to the introduction of management systems. Energy is needed for the production process, for example for heating or cooling. The energy consumption of the food industry decreased from 2000 till 2005. The dairy, bakery and animal feed sector have relatively high levels of energy consumption. This is due to their production process. In general, the water isn‟t re-used because of the risk it involves. That means that there are relatively large emissions of wastewater. In 2004, the food industry was responsible for even 72% of the total Dutch industry emissions. Other emissions that are an environmental issue to firms in the food industry are CO2 and NOX, smell and so-called particulate matters, which are tiny little substances.

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The food industry is a very large user of packaging. In 2001, this was 60% of the packaging material used by the total Dutch industry. This is due to the need for conservation of the freshness of the products and because products are delivered to consumers which means many small units. Firms in the food industry often produce organic waste, such as bones or potato peels. The food industry, in particular because of the vegetables and fruit firms, is responsible for a large part of the solid waste production by the Dutch industry. A lot of the waste flows can however be recycled. For example, rotten apples can be eaten by cows or the organic waste can be used for bio-fuels. Therefore, organic waste is often referred to as a „by-product‟. (Dutilh and Blijswijk (2004), in: Haverkamp (2007))

2.7. Concluding remarks

This chapter showed the importance of the food industry and helps to better understand companies that are part of the food industry which are empirically investigated in the interviews and questionnaire (see chapter 7). The food industry is part of the agri-food sector and can be divided in several sub-sectors. It can be concluded that the Dutch food industry is an important economical cornerstone. It is highly international oriented, which should be taken into account when looking at aspects such as strategy and environmental management. There is research and development in this area. Therefore, when looking at business strategies, this is a relevant characteristic. The Dutch food industry includes several leading multinationals, including Unilever, Heineken and Nutreco. It also holds numerous highly innovative SMEs that play an important role in the food industry. The food industry has to deal with several environmental issues and is for some issues responsible for a relatively large impact on the environment. These characteristics of the food industry are taken into account in the theoretical framework which is provided in the following chapters.

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3. Environmental management

3.1. Introduction

This chapter is the first out of three concerning the theory that is the basis for this research. The focus in this chapter is on „environmental management performance‟, which is part of the theoretical framework as shown in Figure 3.1. Environmental management will be further related to other aspects of the theoretical framework in next chapters. In the following sections, environmental management is described in order to understand how and why companies deal with environmental issues. This involves environmental management systems which are examined in section 3.3. Since quality systems and long term agreements between the public and private sector are related to environmental management systems, these are also shortly described. Following, environmental performance is discussed.

3.2. Facing the environmental impact of the company

As sustainable development and corporate social responsibility are major issues, there is a need for environmental management. Klassen and McLaughlin (1996) describe environmental management as “all efforts to minimize the negative environmental impact of the firm‟s products throughout their life cycle”. Environmental management thus involves all efforts to minimize the negative impact of a company on the environment. When these efforts are systematized, the term „environmental management system (EMS) is used (see §3.3). Environmental performance measures how successful a firm is in reducing that impact (see §3.4). Managing the environmental aspects of a company can range from monitoring the environmental performance of a firm to controlling all activities that have an impact on its environment.

3.2.1. Views on environmental management

Corporations can have different views on environmental management. On the one hand firms can view environmental management as compliance with environmental regulations. Firms follow all applicable laws and regulations in order to prevent fines. Corporate environmental expenditures are seen as costs and therefore it would involve a trade-off between environmental and financial performance. The costs of improving environmental performance would hurt profitability. Firms tend to adopt this „compliance model‟ when they are in a commodity-based business, because in these markets sales are primarily driven by price and differences between products are not very significant (Miles and Covin, 2000). However, another philosophy is that environmental management fits in a strategy that leads to a sustainable competitive advantage. This „strategic model‟ suggests that investing in environmental capabilities can create either a lower cost or differentiation-based competitive advantage. Business strategies will be further elaborated on in chapter 5.

Environmental

Management

Performance

Improved

Financial

Performance

Firm characteristics

-General characteristics

-Business strategy

-Resources and capabilities

Figure 3.1 Theoretical Framework, focus of chapter 3

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3.2.2. Encouragements for environmental management

There are several factors that encourage industry to pay attention to environmental management. These could be divided in three categories: environmental efficiency, the influence of the government and the development of stakeholder influence (Welford and Gouldson, 1993). The first, environmental efficiency, has to do with costs. Companies often strive to produce efficient in order to minimise the costs of their operations. Costs on for example raw materials, waste and energy can encourage industry to minimise its environmental impact. This will be further illustrated in chapter 4. Second, the government influences the environmental management of industry through the development of environmental legislation. Industry must satisfy an increasing number of legal obligations in relation to their operations. Companies have to plan ahead to be able to comply with current and future regulations. Furthermore, the government applies market instruments to trigger companies to improve their environmental performance. This includes taxes, subsidies and the provision of information. Third, the stakeholders can be an incentive for environmental management. These are for example customers, trading partners, the community, employees, investors, insurers, media and pressure groups. Traditionally their interest was mainly focussed on the financial performance of a company, but environmental performance is increasingly important. Consumers can include the environmental performance of a company in their purchasing decision. Companies that are able to communicate their environmental performance could enhance their competitive position. Many businesses do not sell directly to consumers, but there can also be pressure from trading partners, since the demand for care for the environment can go through the whole supply chain. An increasing number of companies prefers to buy their resources from companies that meet certain standards of environmental performance (see section 3.4). The neighbourhood can also be of influence, as they do not want to be exposed to noise, smell or environmental risks due to a company's activities. Employees want a healthy and safe working environment, but also want to work for an ethical and responsible company. Furthermore, companies that communicate their efforts to care for the environment may find it easier to attract, retain and motivate the personnel. Investors and insurers can also be an incentive to improve the environmental performance. The past years, „green investing‟ is gaining popularity. For investors, companies that are environmentally performing well can have advantages. These companies have a lower risk for environmental incidents which would result in financial losses. This is also relevant for banks and insurers. Media and pressure groups can influence a company‟s public image and therefore it can be important for a firm to communicate their environmental management efforts. (Welford and Gouldson, 1993) As stated before, the incentive for improving efficiency relates to costs. The government and stakeholder influence however can also be related to costs and benefits. For example, if a company plans ahead to meet demands of environmental regulations it is able to find the most cost-effective way to comply or when employee morale increases, personnel costs can be lower. Therefore, in chapter 4, the mentioned encouragements for environmental management will be considered as possible links to financial performance.

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3.3. Environmental management systems

As companies need environmental management, management tools, standards and systems are required. An environmental management system (EMS) is the system that a company uses to control the environmental aspects of products, processes and activities in order to be able to reduce the negative impact. It helps managers to reach environmental performance goals as included in their environmental policy. An EMS also assists managers to comply with legal requirements and therefore preventing environmental violations. Research on Flemish companies (with more than 100 employees) shows that the most important ground for implementing an environmental management system is improved firm image. Most companies did not agree on the proposition that an EMS is an economic disadvantage. (OVAM, 2006) Several organizations have published standards and guidelines for an EMS, for example the International Standards Organization (ISO) and the European Union. The ISO 14001 standard is the most widely adopted voluntary system and is closely aligned to the European Eco Management & Audit Scheme (EMAS). These standards both closely followed national standards that were introduced earlier by the British Standard Institution (BSI). Environmental standards are also often combined with quality management. In the following sections these systems will be further described.

3.3.1. ISO 14001

The International Standards Organization is concerned with the introduction of total quality management. This leaded to the ISO 9000 series of standards for quality management. The ISO 14000 standards are international norms specifically for environmental management. It is focussed on the production process instead of the product itself. The major parts are ISO 14001 which is the standard against which organizations are assessed and ISO 14004, a guidance document. It is further specified by norms on environmental labelling, life-cycle assessment, environmental auditing, environmental performance evaluation guidelines and terms and definitions. Furthermore, there are ISO 19011 standards for auditing 14000 and the ISO 9000 quality management together. ISO 14001 is a globally recognised certification system for environmental management systems. Many companies use an EMS based on ISO 14001 to monitor and continually improve their environmental performance. The norms are based on a principle called continual improvement of product quality. The continual improvement approach is based on the so-called „Deming cycle‟ involving „plan-do-check‟ stages. There are five essential steps in the continual-improvement cycle of ISO 14001: environmental policy; planning; implementation and operation; checking and corrective action and management review (see Figure 3.2). There are no quantitative levels of targets provided, but continuous improvement of the environmental management system enables a firm to reach high environmental performance. The first step requires a company to make an environmental policy statement, to which the top management is committed and which provides for continual improvement. The objectives must include compliance with the environmental regulations. The second step requires identifying the environmental aspects of the firms‟ activities. Furthermore, the legal and other requirements, specific to the firm, have to be identified and the degree of compliance with these requirements. Next, objectives and targets can be set to contribute to continual improvement of the firm‟s environmental performances. By creating environmental management programmes, procedures are established for achieving the targets and objectives.

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Environmental policy

Planning

Implementation

and operationChecking and

corrective action

Management review

Environmental policy

Planning

Implementation

and operationChecking and

corrective action

Management review

Figure 3.2 Continual improvement cycle of ISO 14001

The third step, „implementation and operation‟, involves assigning responsibilities to managers and provide training and awareness. Operational procedures need to be reviewed to ensure that they are compatible with environmental policies. Establishment and control of documentation that describes the EMS is needed so that information is accessible. Furthermore communication regarding the EMS and environmental procedures is important. Finally, the implementation of the EMS requires procedures for emergency preparedness and response, in order to prevent environmental impacts. Checking and corrective action, the fourth step of the continual-improvement cycle, involves monitoring and measurement to ensure that the actual environmental performance complies with the EMS. Preventing or correcting any non-conformance is important in this step. To be able to do this, records of environmental performance and data has to be kept. Audits of the EMS have to be performed in order to assess compliance with the EMS objectives and ISO 14001 norms. The last step, management review, involves reviews of the environmental performance, EMS performance, priorities and objectives. This information can be used to modify and improve the firms‟ environmental policy and plans and it can start a new cycle of continual improvement. (Lesourd and Schilizzi, 2001)

3.3.2. EMAS

EMAS stands for „Eco Management and Audit Scheme‟ and has been developed by the European Union. EMAS used to cover industrial productions only, but since 2001 it is open to all economic sectors. The EMAS norms are more environmental performance oriented and more complete than the universal ISO14001 norms which are also integrated. EMAS goes beyond the ISO 14001, requiring the undertaking of an initial environmental review and a public available environmental statement including the policy, programme, EMS and information on the performance. Also the audits are more specified. They are to be conducted at least every three years. Furthermore, the environmental performance of a firm‟s contractors and suppliers has to be considered. In order to receive EMAS registration, an organisation must comply with 4 main steps. First, an initial environmental review has to be conducted, considering all environmental aspects of the organisation‟s activities, methods to assess these, regulations and the existing environmental management. Next, an effective environmental management system has to be established. This includes establishing objectives, operational procedures, training needs, monitoring and communication systems. The third main stage is to carry out an environmental audit assessing the management system,

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conformity with the companies‟ policies and compliance with environmental regulations. The fourth step is to provide a statement of the companies‟ environmental performance that shows the results and future steps to be undertaken. It all has to be approved by an accredited EMAS verifier. (EC, 2007)

3.3.3. Certifying the EMS

It is possible for a firm to seek ISO14001 certification or EMAS verification and registration. This demonstrates a firm‟s concern with the environment. However, it does not guarantee a high level of environmental performance. The guidelines make it easier and therefore could make it less costly to improve the environmental management performance. However, certification of an EMS costs money and it firms may consider it as sunk costs that are high for certain companies. On the other hand it is an investment and in certain cases over-compliance could serve the best interest of the firm. It avoids the risk of having to comply hastily with new regulation, often at a larger cost than if proactive action is taken. (Lesourd and Schilizzi, 2001) The Dutch government presented a policy to stimulate the implementation of an EMS in 1989 and created facilitating organisations in order to implement this policy. One of these was SCCM, an organisation for coordinating the certification of EMSs in the Netherlands. The number of EMS certifications has grown steadily from 1990 till now. In the beginning, only the BSI standard was open for certification. However, the ISO 14001 has a dominant position since 1995. (Klaver and Ypma, 2006) The number of ISO14001 certifications varies a lot from country to country. There tends to be a higher number of certifications in countries with a high GDP and where the public opinion is „environmentally conscious‟. However, there are also some emerging Asian countries with a high number of certifications which could be due to governmental policies. ISO 14001 certifications mainly seem to concern large international firms. The number of ISO certifications in the Netherlands (605) is quite a lot compared to many other countries. In 2000, only Germany, Spain, Sweden, the UK, the USA, Taiwan, and Japan had more certifications, with Japan having the most certifications by far (3318). (Lesourd and Schilizzi, 2001, pp. 324-326) The number of certifications is rapidly growing. In the Netherlands, already 75 ISO certificates existed in December 1995. This number increased to 1073 in December 2002. (Klaver and Ypma, 2006, pp. 233) In June 2007, the SSCM database shows more than 60 Dutch companies registered to be ISO 14001 certified that were part of the food industry. There are several companies that can perform the audits for certification. More than half of the Dutch companies in the food industry were certified by „Lloyd‟s Register Nederland B.V.‟. (SCCM, 2007) The EMAS numbers are quite low though. The number of registered (production locations of) organisations was 25 in April 2004. The SCCM database shows thirteen Dutch companies that were EMAS registered in June 2007, of which none belong to the food industry. A reason for the low interest for EMAS is that is has a limited validity because it is only in the EU. Furthermore, EMAS registration is, as described earlier, more demanding, since for example a public environmental report is required. Therefore the costs for EMAS can be higher than for ISO certification. There are also companies with an uncertified system. This number is quite high. (Klaver and Ypma, 2006)

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3.3.4. Quality systems

There are several quality systems in which attention is paid to the production and food safety. Food quality systems and safety standard can also pay attention to environmental issues, or they are related with environmental management systems such as with the ISO standards audits. Therefore, the mostly used systems in the food industry are shortly depicted. All firms in the food industry are obliged to set food safety procedures based on HACCP (Hazard Analysis Critical Control Points). HACCP is a preventive system that requires to systematically analyze the production process on possible hazards for food safety. Critical control points need to be determined and monitored in order to protect food safety. (VWA, 2007) The basic principles of HACCP can be further specified in a hygiene code. A hygiene code includes several practical measures for food safety in a sector. Good Manufacturing Practice (GMP) is a production related quality system with a focus on hygiene. There are several GMP norms from several different branch organisations. (Food info, 2007) ISO 9001 is a widely used standard for a quality management system. It is mainly directed to consumers or clients and aims to improve the quality. The British Retail Consortium (BRC) is an inspection protocol used by British retailers to which suppliers most comply. It requires the adoption of HACCP established in a quality system and the management of the environment, product, process and personnel must be controlled.

3.3.5. Regulations and covenants

There are also regulations and some long term voluntary agreements that have to do with environmental management. In the Netherlands, firms in the food industry are required to obtain an environmental permit because of legislation (Environmental Management Act, Dutch: Wet milieubeheer). Only for some small firms or firms with a limited environmental impact an exception can be made. Firms have to deal with environmental requirements on for example noise, smell, waste water disposal and soil pollution. Most firms have to submit their request for the permit at the municipality, but for the water disposal they also have to deal with the Dutch water boards. Covenants are also relevant for the environmental management of Dutch firms in the food industry. Environmental covenants are voluntary public-private environmental agreements. An important covenant is the Long-term agreement Energy (MJA). This aims encourage firms to decline their energy consumption. It was introduced in 1991 and renewed in 2001. (SenterNovem, 2007) Another energy covenant is the „Energy Efficiency Benchmarking Covenant‟. It started in 1999 in order to improve the energy efficiency of industry pledging to use new technologies. (CB, 2007). A Packaging Covenant in which 250.000 companies had agreements with the government and municipalities ended in December 2005. It aimed to reduce and recycle the amount of packaging material used. New legislation, the Packaging Decree, holds business responsible for collecting and recycling the packaging material that they use and are required to pay for it. (SVM, 2007) There are also some covenants for specific sectors.

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3.4. Evaluating environmental performance

The term „environmental performance‟ is highly related to „environmental management‟ and „environmental management systems‟. Environmental management involves efforts to reduce the negative impact of a company on the environment. “Environmental performance measures how successful a firm is in reducing and minimizing its impact on the environment, often relative to some industry average or peer group” (Klassen and McLaughlin, 1996). This section shows that environmental management is an important determinant, or part of environmental performance in general (Klassen and McLaughlin, 1996).

3.4.1. Environmental management models

The need for insight in the environmental management of companies has resulted in many environmental management models. Both academics and practitioners have developed classifications, based on for example strategies or performance, to describe trends in environmental management. Environmental management models that classify companies on their environmental behaviour are starting to pay more attention to the management side. An overview of models is provided by Kolk and Mauser (2002). An example of an environmental strategy typology is the RDAP scale, which is described and further developed by Clarkson (1995). A performance scale with the terms reactive, defensive, accommodative and proactive is used to characterize a company‟s position on social responsiveness. Table 3.1 shows the characteristics of the different types. An element called „posture or strategy‟ has been added to describe the strategy of management. The second element, „performance‟, evaluates the data concerning the actions of the company with regard to the management of stakeholder issues and the levels of responsibility that the company has defined. A firm that is reactive fights to doing responsible investments. A defensive company does only what is required. Accommodative is a firm that is progressive and firms that are proactive lead the industry. Table 3.1 The RDAP scale

Rating Posture or Strategy Performance

Reactive Deny responsibility Doing less than required

Defensive Admit resp. but fight it Doing the least that is required

Accommodative Accept responsibility Doing all that is required

Proactive Anticipate responsibility Doing more than is required

Source: Clarkson (1995)

Environmental typologies can help to understand the reactions to environmental issues of companies. However, it can be difficult to apply the models to the actual behaviour. There is a poor fit with business reality. The problem could be that such models are focused environmental management rather than environmental performance. (Kolk and Mauser, 2002) Management aspects are part of environmental performance, but so are outcomes. Performance evaluation systems evolved next to environmental management modelling. This will be further discussed in the following section.

3.4.2. Performance evaluation systems

In evaluating a company‟s environmental performance it is important to choose meaningful indicators to measure the environmental impact of activities. There are recent initiatives to evaluate environmental performance such as the Global Reporting Initiative (GRI) guidelines, the eco-efficiency guide of the World Business Council for Sustainable

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Development (WBCSD) and the earlier mentioned International Standardisation Organisation (ISO) standards. The GRI guidelines focus on communication to stakeholders. They show how to collect and categorize data on firms‟ environmental, social and economic performance. A distinction is made in reporting on vision, governance structure and management systems and performance indicators. The WBCSD applied this to eco-efficiency and makes suggestions for assessing or calculating business or product specific measures. ISO has published standards that complement the ISO 14001 norms to guide companies in improving and evaluating their environmental performance. These are the ISO 14031-14032 standards on environmental performance evaluation, developed in 1999. The ISO 14031 norms are the guidelines and ISO 14032 are examples that illustrate how to use the guidelines. A distinction is made between environmental performance indicators and environmental condition indicators (context). Environmental performance indicators are divided in management performance indicators (input) and operational performance indicators (output). Thus the indicators are related to three areas: the management system with environmental management indicators (EMIs), the operational system with environmental performance indicators (EPIs) and the state of the environment with environmental condition indicators (ECIs). Kolk and Mauser (2002) use the insights from ISO14031, GRI and the WBSCD and subdivide the performance indicators into operational indicators and impact indicators. Examples of environmental management indicators (EMIs) include management efforts to influence an organization‟s environmental performance such as policy, management systems and communication. Environmental performance indicators (EPIs) deal with impacts of the actual facilities and equipment on the environment. Operational indicators are for example procurement and the production process. Impact indicators are outputs such as emissions. Environmental Condition Indicators (ECIs) are used to assess the state of the environment and include for example the concentration of contamination in the air or soil. Further examples are shown in Table 3.2. Table 3.2 Components for environmental performance evaluation based on ISO

Area Indicator Examples

Management area: input

Environmental Management Indicators (EMI) Provide information on environmental management capabilities and efforts

Includes management efforts to influence an organization‟s environmental performance, such as those with regard to: - Vision, strategy, policy - Organizational structure related to

environmental management - Management systems and related

documentation - Management commitment to environmental

issues - Communication to internal and external

stakeholders

Operational area: output

Environmental Performance Indicators (EPI) Provide information on the consumption of services and resources and on output/waste

- Environmental Operational Indicators; Involves specific actions, such as:

o Procurement measures o Technical product/process measures o Product/service use measures

- Environmental Impact Indicators; Involves „outputs‟, for example:

o Energy consumption o Water consumption o Greenhouse gas emissions o Materials consumption o Total waste

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Environmental area: context

Environmental Condition Indicators (ECI) Provide information on the condition of the environment relevant to the company‟s activities

o At the local, national or international levels: thickness of ozone layer, average global temperature, size of fish populations in oceans

o At the local or regional levels: concentration of a specific contaminant in air, soil, groundwater or surface water; population density or noise levels in a plant‟s surroundings

Adjusted from Kolk and Mauser (2002)

Evaluation of environmental management and performance is feasible, but these indicators should be specified to the particular situation of the company or industry. Adaptations need to be made that consider the characteristics of the sector or organization (Kolk and Mauser, 2002).

3.4.3. Specific environmental performance measures

A range of measures of environmental performance have been developed in order to obtain more insight into firms‟ environmental performance and to be able to benchmark against competitors. There are specific environmental performance measures used in several studies on environmental and financial performance. Most of them are not covering all areas of environmental performance as described in the previous section. Developed indicators and measurement systems include ratings from the Franklin Research and Development Corporation (FRDC), the Council on Economic Priorities (CEP), Fortune‟s survey on reputation of responsibility to the community and the environment, Kinder, Lydenberg and Domini (KLD), and the Investor Responsibility Research Corporation (IRRC). The FRDC scores are based on a number of criteria such as compliance records, expenditures and other initiatives to reduce waste reduction and to support environmental protection organizations. The IRRC corporate profiles include data on Toxics Release Inventory (TRI) emissions, oil spills, chemical spills, environmental litigation, superfund sites (US environmental law) and non-compliance fines (Cohen et al., 1995). These indicators are also used separately in several studies which will be described in chapter 4. Other indicators are the participation in environmental management standards, signing up to CERES principles, investments in cost-reducing pollution-reducing technology, environmental rewards, environmental crises and/or media reports on the environment. More and more companies also release environmental information about their environmental management and performance in the form of corporate environmental or sustainability reports. These can be used for content analysis. General performance evaluation systems have been developed by practitioners, rather than academics. A risk however is that ratings are subjective if they are developed by its stakeholders. A vicious circle could emerge in which ratings are partly based on reputation and reputation is influenced by ratings (Ilinitch et al., 1998).

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3.5. Concluding remarks

Environmental management involves reducing the negative impact of a company to the environment. Environmental management systems can help manager to reach environmental performance goals. Environmental management and environmental performance are closely related. Environmental management is an important determinant of environmental performance and management aspects such as environmental strategies, systems and communication are also considered to be part of environmental performance. Therefore the term „environmental management performance‟ is used in the theoretical model (as illustrated in Figure 3.1), in which it is clear that the management actions are taken into account. Better environmental performance can be beneficial for a company, because of environmental efficiency, but the government and various stakeholders can also demand action. Environmental action involves costs, but finally it can result in a competitive advantage. The relation to financial performance is further explored in the following chapter.

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4. EM linkage with Financial Performance

4.1. Introduction

In the previous chapter, environmental management and performance was described. There could be several mechanisms linking better environmental performance to improved financial performance. These will be explored in this chapter. The focus is thus on „financial performance‟ and the „arrow‟ between environmental management performance and improved financial performance of the theoretical framework as shown in Figure 4.1. First, prior research will be reviewed in order to be able to draw conclusions on the nature of the linkage. Following, this linkage will be further theoretically explored, by specifying two possible pathways that link environmental and financial performance.

4.2. Prior research on linkage

A number of studies have examined the link between corporate environmental performance and financial performance. There is also research that focuses on the relationship between corporate social responsibility and financial performance. Since environmental performance is part of corporate social responsibility, these studies can also be relevant. Three different perspectives have emerged on the relationship between environmental and financial performance. There may be negative, neutral or positive linkages between environmental and financial performance. (Waddock and Graves, 1997, Miles and Covin, 2000). Previous studies have shown mixed results regarding this relationship (see McGuire et al, 1988, Cohen et al., 1995). However, this review shows that the majority of studies supports a positive association. A second issue that should be addressed is the direction of causation. It is possible that environmental performance results in better financial performance, or the other way around that higher profits give opportunities to improve environmental performance. (Klassen and McLaughlin, 1996, Waddock and Graves, 1997).

4.2.1. Negative and/or neutral association

A first thought is that there is a negative association, because firms face a trade-off. This view proposes that unnecessary costs incur when a firm attempts to perform superior on environmental issues. This could result in a competitive disadvantage due to higher costs that are required for enhanced environmental performance. Another option is a neutral association. Perhaps there is no causal linkage between environmental performance and financial performance. While a majority of empirical evidence suggests that there is a positive relationship between environmental performance and financial performance, a few studies support the negative or neutral association perspectives (see Table 4.1). In contradiction with Spicer (1978), Chen and Metcalf (1980) argued that environmental performance was not related to financial performance when differences in firm size were taken into account.

Environmental

Management

Performance

Improved

Financial

Performance

Firm characteristics

-General characteristics

-Business strategy

-Resources and capabilities

Figure 4.1 Theoretical Framework, focus of chapter 4

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In these studies, the same original data on 18 pulp and paper corporations was used where environmental performance was based on CEP environmental ratings (Cohen et al., 1995). Jaggi and Freedman (1992) found a weak negative, but significant relationship between environmental and financial performance in the short run, in a study of 13 pulp and paper companies. This may be due to high costs of pollution abatement supporting the negative association perspective concerning unnecessary high costs. The findings may however not fully reflect the relationship between environmental and financial performance as this study is (also) performed on a specific industry and small sample size. More important, the measure for environmental performance is debatable since it is related to water discharges only and the data was self-reported by the firms to the US Environmental Protection Agency (Miles and Covin, 2000). Alexander and Buchholz (1978) found no relationship between perceptions of the social performance of 50 corporations and their financial performance. (Miles and Covin, 2000) However, it is debatable whether business leaders‟ and business students‟ perceptions on social performance can be considered as a measure for environmental management performance, so this result should not be highly taken into account in conclusions about the relationship between environmental and financial performance. Table 4.1 Overview of environmental and financial performance related studies

supporting negative or neutral association Study Environmental

performance measures

and data*

Financial performance

measures and data** Major findings on relation

1

Alexander and

Buchholz

(1978)

Students' and business

leaders' perceptions of

social responsibility

risk-adjusted financial

performance

No significant relationship between perceived

level of CSR and risk-adjusted financial

performance (50 US companies)

2

Chen and

Metcalf (1980) CEP ratings Profitability, P/E ratio

Environmental and financial performance not

related if firm size taken into account (18

pulp and paper firms)

3

Mahapatra

(1984)

Pollution control

expenditure in six

industries Average market returns

Negative correlation for a larger sample and

time period

4

Aupperle et al.

(1985)

Carroll's Concern for

Society

(LT and ST) ROA

(some risk-adjusted)

Negative, but insignificant, association

between CSR and accounting-based risk

5 White (1991)

Social responsibility

screening criteria of

mutual funds

Nominal and risk-

adjusted performance

of the fund

Funds slightly underperformed the S&P500

index on both a nominal and risk-adjusted

basis

6

Jaggi and

Freedman

(1992)

BOD, TSS and Ph levels

reported to EPA

Financial data from

Compustat

A weak negative relationship between

environmental and financial performance in

the short run (13 pulp and paper firms). Sources: Miles and Covin (2000), Wagner (2001) and Orlitzky et al. (2003), McGuire (1988) * CEP: Council on Economic Priorities, EPA: (US) Environmental Protection Agency ** Financial performance measures are explained in appendix 1.

Mahaptra (1984) compared pollution control expenditures across six different industries to the average market returns, using a larger sample and time period than comparable preceding studies. The conclusion was that these expenditures do not reward the companies for socially responsible behaviour, but use resources that could have been invested profitably. It is however not clear whether the higher expenditures on pollution control resulted in better environmental performance for these companies. (Cohen et al. 1995) Thus, it does not directly reflect the relation between environmental and financial performance. White (1991) tracked the performance of six mutual funds that make use of social responsibility screening criteria and found that these funds slightly underperformed the S&P500 index. However, this is not necessarily evidence that firms who are socially or environmentally responsible are less profitable. The performance of mutual funds may be more dependent on the capabilities of the fund managers to make the right choices in

38

trading stocks, than the performance of environmentally conscious firms in general (Cohen et al., 1995). This review shows that there are studies that support negative or neutral associations, but their number seems to be limited, especially studies on environmental performance instead of the broader CSR. Altogether, there is not enough evidence that there would be a negative relationship. Further studies are described in the following section.

4.2.2. Positive association

The third possibility was that there is a positive association. There are several arguments such as that firms that attempt to minimize costs of compliance will finally incur higher costs, because of for example fines. Better environmental management could also result in higher employee morale or increased productivity. Although the costs of improving environmental performance can be significant, other costs can be reduced or revenues are increased (McGuire et al., 1988, Klassen and McLaughlin, 1996). Far more studies can be found that support a positive link between environmental performance and financial performance than a negative or neutral association (compare Table 4.2 to 4.1). In a research by Miles and Covin (2000) an overview is provided with a comparison of 13 environmental and financial performance related studies. The majority of the studies suggest that there is a significant positive relationship between environmental performance and financial performance. A review of the research on the correlation between environmental and financial performance by Murphy (2002) summarizes twenty empirical studies (of which several firms are described in Table 4.2) that show that environmental management impacts corporate profitability. Furthermore, twenty non-quantitative papers are reviewed that show the theoretical work that has been done on the relationship between environmental and financial performance. It shows that firms with good environmental performance realize stronger financial results and companies that score poorly on environmental criteria have weaker returns. Several other studies argue that prior research on the relationship between financial and environmental performance shows mixed results, though generally positively correlated (Klassen and McLaughlin, 1996, Cohen et al., 1995, McGuire et al., 1988). Many studies state that prior studies suffer from several problems and of course, they present a „better‟ study or new objective evidence on the question whether “it pays to be green” (for example Konar and Cohen, 2001). This is often done by correlating some kind of specific environmental performance indicator with a financial indicator (see Table 4.2). McGuire et al (1988) for example found a positive relationship between a firm‟s reputation of social responsibility and ROA. Konar and Cohen (2001) compares environmental and financial performance of firms in the S&P500. Their measure of firm performance and valuation is based on Tobin‟s q. Environmental performance was measured by the Toxic Release Inventory (TRI) emissions levels and pending environmental lawsuits against the firm. It shows that bad environmental performance has a negative impact on the intangible asset value of firms and toxic chemical releases affect firm market valuation. Russo and Fouts (1997) concludes that environmental performance and economic performance are positively linked and that industry growth moderates this relationship. The resource-based view of the firm is applied to corporate social responsible issues. They hold a theory that proactive policies translate into internal competitive advantages. The hypotheses are tested by analyzing 243 firms that had environmental ratings from the Franklin Research and Development Corporation (FRDC) over a two-year period (1991-1992). This is based on compliance and prevention

Table 4.2 Overview of environmental and financial performance related studies supporting positive association Study Environmental performance measures and

data*

Financial performance measures and

data** Major findings on relation

Spicer (1978) CEP ROE

Poor environmental performance results in firms incurring higher risk and lower returns (18

pulp and paper firms)

McGuire et al.

(1988)

Fortune's survey of corporate reputations

(compared with CEP ratings)

Risk-adjusted return (alpha), total return,

beta, ROA, sales growth, asset growth,

income growth, risk

Firms low in social responsibility experience lower ROA and stock-market returns than firms

high in social responsibility

Cohen, Fenn and

Naimon (1995)Environmental litigation proceedings, superfund

sites, nr&value of noncompliance penalties,

TRI, nr&volume of oil spills, chemical spills

(IRRC and SEC data)

ROA, ROE, risk-adjusted market returns

(Compustat data)

Portfolios of 'low pollution' S&P 500 firms had better economic performance of 'high

pollution' firms

Hamilton (1995) TRI emissions, media coverage, CRSP data Stock returns (NYSE & AMEX) Stock value declines after negative news coverage of TRI emissions

Feldman et al.

(1996) EMS, ICF Kaiser rating

Capital costs, average firm Beta values

(NYSE & AMEX data)

Firms (S&P500) that improved their environmental performance by adopting 'beyond

compliance' environmental management systems realized lower capital costs

Hart and Ahuja

(1996)

TRI emissions (IRRC data)

ROA, ROE, ROS

Pollution prevention activities have a positive influence on S&P500 firms' ROE, ROA and

ROS

Klassen and

McLaughlin

(1996)

Environmental awards, environmental crisis

(spills) (NEXIS database)

Stock market returns: equity market valuation,

shares outstanding, share price (CRSP

database, NYSE & AMEX)

Increases in stock value of the firm after environmental awards and decreases in market

value after negative publicity of environmental crises

Nehrt (1996) Investments in cost-reducing pollution-reducing

technology Profit growth

Firms (paper/pulp) that invest first in pollution-reducing technologies realize positive

abnormal profit growth

Konar and Cohen

(1997)

TRI, number of environmental lawsuits (IRRC

data)

Tobin's Q; market value, intangible assets

(Compustat data)

Low environmental performance has a negative effect on intangible asset value of S&P500

firms and is related significantly negative to Tobin's q.

Russo and Fouts

(1997) FRDC environmental performance ratings

ROA (and several control variables such as

firm growth) (Compustat data)

Higher environmental performance is associated with improved ROA ratios, the relationship

is strenghtened as industry growth rate rises

Waddock and

Graves (1997)

KLD index of CSP (based on corporate data

sources, media and surveys) ROA, ROE, ROS

Social performance depends on financial performance, positively related. Financial

performance also depends on good CSP.

Christmann

(2000)

Use of innovative pollution prevention

technology (Survey data, compared with TRI

data)

Cost advantage compared to competitors

(Survey data, compared to Compustat data)

Best practices of environmental management generally do not lead to cost advantage for all

(chemical) firms, firms need to possess certain characteristics (complementary assets) in

order to create cost advantage

Dowell et al.

(2000)

Participation in environmental management

standards market value (tobin's q)

S&P500 firms with international environmental standards more stringent than local law had

higher market values than firms with standards at or below the legal mandate

Clemens (2005)

Ratings compared to competitors: policy,

environmental responsiveness, consciousness

(Survey data)

Ratings compared to competitors: earnings,

revenues, market share, ROA, long run

profitability (Survey data)

A positive relationship between environmental and financial performance for small (steel

industry) firms

Telle (2006) Index of several pollutants (JFI) (NPCA data) ROS

Greener plants tend to perform economically better, but a conclusion that it pays to be green

is premature Sources: Articles (highlighted) and overviews in Murphy (2002), Miles and Covin (2000), Orlitzky et al. (2003) and Wagner (2001) (see References) * SEC: (US) Securities and Exchange Commission, CRSP: Centre for Research in Security Prices, JFI: „Jaggi Freedman index‟ **Financial performance measures are explained in appendix 1.

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efforts by firms. Financial performance was measured by the company‟s return on assets (ROA). Companies that improved their environmental performance experienced positive increases in ROA. This „accounting based measure‟ however only reflects historical firm performance. It is questionable whether the positive and significant effect of regression analysis studies such as described actually is sufficient to be able to conclude that the results indicate that „it pays to be green‟ (Telle, 2006). It is possible that there are underlying reasons for the associations that are found (for example Cohen et al., 1995). Furthermore, there is the issue of causality. It is not clear whether environmental management results in better financial performance or whether financially successful companies have more resources and are better able to afford to improve environmental performance. The debated „direction of causality‟ is in some studies attempted to be addressed though. Klassen and McLaughlin (1996) proposes a theoretical model that links environmental management to financial performance and test it using financial event methodology and archival data. The basis for the model is the argument that although there are significant costs to improve environmental performance, other costs are reduced or revenues are increased. Environmental management is an important determinant of environmental performance. Environmental performance affects firm financial performance through cost savings and market gains. The hypotheses were tested and empirical evidence showed that firms receiving environmental awards realized significant positive stock returns and bad environmental news such as oil spills was followed by significant negative returns. This supports a causal link between environmental and perceived future financial performance. Hamilton (1995) also uses event methodology and shows that stock value declines after negative news coverage of bad environmental performance. Furthermore, Waddock and Graves (1997) found CSP to be positively associated with prior financial performance and CSP was also found to be positively associated with future financial performance. Most of the research is performed on large publicly traded firms. As one of only little research, Clemens (2005) investigates the relationships among green performance, financial performance and green economic incentives for small firms. The data was collecting by a survey on perceived green and financial performance compared to competitors. A positive relationship between environmental and financial performance for small firms in the steel industry was found. It does however not address causality. Christmann (2000) applies the resource-based view of the firm to analyze the competitive effects of environmental strategies. It shows the importance of heterogeneity in firm resources and capabilities. Survey data and stock market data from chemical companies was used and indicated that the competitive effects of environmental practices differ across firms with certain characteristics. The best practices of environmental management generally do not lead to cost advantage for all firms. Firms need to possess complementary assets such as capabilities for process innovation and implementation in order to create cost advantage from the implementation of „best practices‟. Complementary assets moderate the competitive effects of environmental practices. The effects of environmental management and performance are thus not the same for all firms. This suggests that it is necessary to examine why or “when it pays to be green” instead of “Does it pay to be green?” (Reinhardt, 1999, Kind and Lenox, 2001).

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Although the studies that suggest a positive relation between environmental and financial performance also show some shortcomings such as with measurement, many studies seem to support each other‟s conclusions. Measuring environmental and financial performance will always be difficult thus most studies do not include all different measures as described in Table 3.2 of the previous chapter. A broad range of studies with measures varying from perceptual measures, ratings, emissions and/or management practices is present though. The body of evidence for positive relations is substantially larger than for negative or neutral associations.

4.2.3. Concluding remarks

Previous research provides a good basis for concluding that there is indeed a positive correlation between environmental performance and financial performance. Although most of the research is performed on large firms with publicly traded shares, research on specific sectors and an example with small firms have also been described. Therefore, there is reason to expect that for firms in the food industry there also is a positive relationship between environmental and financial performance. The direction of causation can also be taken into account in the empirical research. There can also be underlying reasons and there can be differences between firms that could influence the relationships. This asks for further analysis which is done in this thesis by showing the linkages (next section) and including other business characteristics (next chapter).

4.3. Market gains and cost savings

The previous section made clear that there is a substantial body of evidence that shows positive relations between environmental and financial performance. One of the reasons for such a relation is that environmental management performance can have a positive effect on financial performance, because of either market gains or cost savings as shown in Figure 4.2 (Klassen and McLaughlin, 1996). In chapter 3 and the previous sections several possible benefits of environmental management, an EMS and environmental performance passed by that could further specify this link. Previous research also mentioned and considered various arguments for a positive effect of environmental management performance on improved financial performance. This section further specifies the possible pathways in order to elucidate the link from environmental management performance to financial performance.

4.3.1. Revenue side

Sales revenues are the number of products sold multiplied by the product price. Environmental management might give a basis to increase the market share and/or the contribution margins. This is further specified in Figure 4.3 and described below. Image, reputation and marketing Improved environmental performance could lead to increased revenues if customers are favourable disposed to the firm‟s „greener products‟ (customer goodwill). The customer does have to be aware of the environmental practices of the firm and therefore

Environmental

Management

Performance

Improved

Financial

Performance

Figure 4.2 Two pathways of linkage environmental

management to financial performance

Market gains

Cost savings

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reputation and image is important. Reputation for leadership or responsible behaviour in environmental issues could thus be a source of competitive advantage and increase sales. If beyond compliance practices give value for clients, environmental marketing could be important to communicate the environmental efforts of the company. Rating programs or environmental certifications, such as the European EcoLogo can help to establish an informed buying behaviour in order to be able to differentiate from competitors. (Klassen and McLaughlin, 1996, Russo and Fouts, 1997) The customers can be other companies or end-consumers. Research of iNSnet shows that more than half of the Dutch consumer says to be willing to pay more for products if this results in cleaner industries. Almost all respondents want to contribute to the climate problems by choosing sustainable products. However, there are some conditions to it. The products have to be the same price or have the same quality as regular products, and it must be able to recognize them as sustainable products. The Dutch are especially willing to pay more for products if they are better for their health and if it is clear why they are so expensive. (iNSnet, 2006) Many businesses do not sell directly to consumers, but there can also be pressure from trading partners. Increasingly, the demand for care for the environment concerns the whole supply chain. A number of companies prefers to buy their resources from companies that meet certain standards of environmental performance such as the earlier described ISO14001. Complying with these standards could thus prevent a loss of sales to such companies. However, it are especially large companies only that ask for certification or environmental reports (SenterNovem, 2003). In addition, it may even be more important to protect image and reputation. Firms may experience lower revenues when a firms‟ environmental record is poor (Earnhart and Lizal, 2007). Environmental crises could hurt reputation if they are reported in the media. This could have a negative effect on the buying behaviour of customers or other stakeholders, in other words, customer goodwill could decrease. Environmental management systems could prevent environmental crises or legal sanctions and thus decrease the risk for a bad image or reputation.

4.3.2. Cost side

Environmental management involves costs such as investments in new technologies and time spend on analysing and implementing new procedures and processes. However, these investments lead to potential savings on a variety of costs. These are further specified in Figure 4.3 and described below. Production efficiency leading to material, waste and energy savings Environmental management may improve the production process leading to cost-saving changes. This could be for example removing unnecessary steps or realizing the need for better equipment. Furthermore, environmental management might help managers to recognize inefficiencies or become aware of new technologies or products. Monitoring and the use of environmentally friendly technologies have the potential to increase the production efficiency. Sometimes the term „eco-efficiency‟ is used, which is the ability to gain process efficiencies and create more products from fewer resources. Increases in efficiency can result in lower costs from the better utilization of inputs such as materials and energy and a reduction of waste disposal costs. (Christmann, 2000) Also, opportunities for recycling and lower packaging and transportation costs etc. may be discovered. (Telle, 2006). Since many firms in the food industry face high processing costs (Orsato, 2006), benefits from increased efficiency may be of particular interest.

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Market gains

Cost savings

Improved

financial

performance

Environmental

management

performance

Eco-marketing

Image / reputation

Material savings (input,

recycling, packaging)

Energy savings, less

waste disposal

Subsidies

Employee goodwill,

moral and productivity

Improved production

processes

Production efficiency

Lower financing and

insurance costs

Less compliance and

liability costs

Customer goodwill

Value for client

(higher contribution

margins or turnover)

Few labour problems

Attract and retain quality

staff

Better standing with

bankers investors,

government officials

Lower risk (accidents,

legal actions)

Figure 4.3 Two pathways of linkage environmental performance to financial performance further specified

Based on Klassen and McLaughlin (1996) Improved employee goodwill, morale and productivity Better environmental performance may reduce labour costs. Improved employee goodwill is an important outcome of social responsibility. A firm perceived as high in social responsibility may face relatively few labour problems (McGuire et al., 1988). This may be the same for environmental responsibility. Good employee relations can enhance morale, productivity and satisfaction. Environmental management could improve working conditions, because of for example a cleaner working environment due to lower emissions. Improved working conditions increases labour productivity which lowers labour costs and decreases compensation claims and litigation costs (Earnhart and Lizal, 2007). Also, the process of developing an environmental policy or management system increases employee skills. Furthermore, environmental management may improve the ability to hire and retain high quality staff, especially if they tend to be environmentally conscious. Conversely, firms with a poor environmental record may find it difficult to attract, recruit and retain talented staff (Russo and Fouts, 1997). It could thus also influence costs for recruitment, selection and training new employees. Better standing with government officials Better environmental management and performance may also improve a firm‟s standing with important actors such as bankers, investors and government institutions. Improved relationships may bring economic benefits. (McGuire et al., 1988) If a company fails to meet legal requirements or agreements, governmental agencies may find it necessary to be stricter in order to force to firm to improve, resulting in higher compliance and liability costs for the firm. Conversely, if a firm performs well, there may

44

be reduced regulatory scrutiny, thereby reducing costs to the firm such as lost productivity due to inspections. It may also lower costs from regulatory sanctions (less fines) and lawsuits. (Earnhart and Lizal, 2007) In addition, the government applies market instruments to trigger companies to improve their environmental performance such as taxes on environmentally damaging goods, subsidies on environmentally friendly goods and the provision of information. Environmental management and improved relationships may result in fewer taxes and better access to these subsidies and information. Furthermore, good relations give the opportunity to be able to influence public policies or the future development of environmental regulations. This could lead to a competitive advantage when the costs of environmental protection increase for a firm‟s competitors, since they need to make investments to comply. (Christmann, 2000) This has to do with a possible first mover advantage, which will be further explained in the next section. Lower risk Related to sanctions and lawsuits, better environmental performance reduces risk for accidents and legal actions. At the cost side, financing costs for the firm may reduce if lenders associate environmental management with lower risk. If risk is reduced, the required return on capital will be lower meaning that the firm will be accorded a lower cost of capital. Conversely, investors may consider firms that have low environmental performance to be riskier investments, meaning that the required return on capital would have to be higher. With low environmental performance it may also be more difficult for a firm to obtain capital at consistent rates. Banks that lend to firms secure the loans on the basis of the physical assets. Environmental liabilities or lawsuits would reduce the value of assets; therefore, commercial lenders would be reluctant to lend money to a company with a high risk for liabilities. It would be more difficult for bad environmental performing companies to attract and retain investment and insurance for their operations. (Welford and Gouldson, 1993, McGuire et al., 1988, Feldman et al., 1996) Reduced risk may thus lower financing and insurance costs and improve a firm‟s access to sources of capital. The rise of „green investing‟ also shows that banks and other institutional investors increasingly take environmental considerations in their investment decisions.

4.3.3. Related issues

In the previous sections, several pathways that link environmental and financial performance were described. Two other issues cannot be easily be placed in the scheme; however they are related and relevant. First mover advantage Environmental management may involve using new environmentally friendly technology. These technologies could influence the future development of environmental regulations since these are often based on the best available technology. This provides the firm with a „first mover advantage‟ in which he could gain competitive advantage by establishing the industry standard and creating a potential barrier to entry. (Klassen and McLaughlin, 1996, Earnhart and Lizal, 2007) This could also help to preserve the market in the long term (Klassen and McLaughlin, 1996). If a firm anticipates better to future environmental regulation it can also better find the most cost-effective way to comply with the regulation. Anticipation enables better planning of the expenditures and minimizes disruptions of the production process that are associated with the necessary changes and implementation of technologies. Companies that respond late will have to implement technologies faster or they might not be able to comply, which both results in

45

costs. The „leader‟ thus has a competitive advantage and gain cost advantage through learning curve effects. The costs of environmental protection would be lower relative to competitors, especially if the environmental regulations were influenced by the „leader‟. (Christmann, 2000) The benefits of a first mover advantage are represented in the pathway of better standings with government officials. Market value A firm‟s valuation in the financial market is based on future profitability. If traders have faith in the future of a company they are willing to pay more for the stock. As described before, bad environmental performance may increase a firm‟s financial risk. Investors could take environmental management systems or performance improvements into account to assess a firm‟s risk. Corporations that have a low environmental risk will have a lower required return on capital and create additional value for stockholders. Investors would be willing to pay more for firm‟s future cash flows meaning that the stock price increases. Recall that research indeed showed that market value was affected by environmental performance and crises (Hamilton, 1995, Klassen and McLaughlin, 1996, Konar and Cohen, 2001, Dowell et al., 2000). The market value does however not discern revenues from costs (Earnhart and Lizal, 2007), so this is not included in Figure 4.3. Increased stock prices are thus not directly an increase in revenues for the firm, but shareholder wealth increases.

4.3.4. Time lag

Several causal effects from environmental management performance to financial performance have been discussed. However, many of these benefits are given a certain time lag. For example, consumers need time to realize that a firm is doing better environmentally before modifying their willingness to pay for the products. For firms that demand certain production standards there will be less time needed, since it is easier for the supplier to communicate the change to a large company than to end-consumers. Other stakeholders also need time to respond to better performance. For example regulators will first need to have inspected the company with good result, before being less strict. Furthermore, benefits of better working conditions for employees might also take time for certain effects such as air quality. (Earnhart and Lizal, 2007). Other effects would be noticed immediately, such as those from improved production efficiency. However, it is reasonable to expect that the link from environmental management to financial performance would be more positive in the long run than short run. This could mean that the sooner environmental measures are implemented, the more companies could experience a financial benefit.

4.4. Concluding remarks

Previous research provides a good basis for concluding that a positive relationship between environmental and financial performance can be expected. For the empirical research this would mean that high levels of environmental performance are expected to be associated with enhanced profitability. The direction of causation can also be considered. The link from environmental management performance to financial performance is further explored. There can be market gains or cost savings and several pathways ranging from improved image to efficiency gains. These pathways are however not expected to be the same for all companies, because there can be differences between firms such as business strategy that could influence the relationships. Furthermore, there could be underlying reasons such as resources and capabilities that are related. Literature on business strategy and other firm characteristics is explored in the next chapter.

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5. Business strategies and firm characteristics

5.1. Introduction

The previous chapter reviewed prior research which shows that the relationship between environmental and financial performance is often concluded to be positive. Several theoretical pathways were described that could contribute to a positive relationship. However, these pathways are not expected to be equally relevant to all companies. This chapter deals with the differences between companies that could influence (the view on) the relationship as shown in Figure 5.1. Reinhardt (1999) argues to go beyond the question “Does it pay to be green?”. The right environmental policy depends on the circumstances confronting the company and the strategy it has chosen. Managers should look at environmental problems as business issues. Therefore it is interesting to look at the business strategy. It is likely that the business strategy influences the approach that companies take or should take to environmental issues. This could reflect in the views on the relationship between environmental and financial performance. Hence, it is of importance to take the business strategy into account when looking at environmental management. Insight is needed order to be able to assess the business strategy in the empirical research. Therefore, business strategy will be explored in this chapter. Also, additional research is needed to explore how underlying firm characteristics affect the relationship between environmental and financial performance (King and Lenox, 2001). These characteristics can be a firm‟s resources and capabilities. This will be explored in section 5.6. Furthermore, circumstances and firm characteristics that are sometimes used as control variables could affect the relationship. It is not possible to take into account all possible differences between companies, but some attention is paid to general characteristics.

5.2. Business strategy

Corporate strategy is concerned with the long-term direction for the whole firm. A business strategy identifies how a division or strategic business unit will compete in its market or domain. A business unit is a single business firm or a component that operates with a separate mission within a larger enterprise. (Schermerhorn, 2002). In this research corporate or business strategy is not further distincted. The term business strategy is used because the empirical part involves business units (see chapter 6). Business strategy directs a firm towards a certain competitive advantage (Schermerhorn, 2002). Every aspect of the firm plays a role in this strategy, such as human resources, finances, production methods and its environment. Two of the most popular approaches to conceptualize and operationalize the strategic orientation of companies are Porter‟s Generic Competitive Strategies and Miles and Snow‟s Adaptive Strategies. These will be described in the following two sections.

Environmental

Management

Performance

Improved

Financial

Performance

Firm characteristics

-General characteristics

-Business strategy

-Resources and capabilities

Figure 5.1 Theoretical Framework, focus of chapter 5

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5.3. Porter’s Generic Competitive Strategies

Porter established a popular „five forces model‟ that describes the forces driving industry competition. Business should find a position in the industry where the company can best cope with these competitive forces. The best strategy for a given firm depends on its particular circumstances. However, according to Porter (1980), three potentially successful generic strategies can be identified to outperform competitors. These are overall cost leadership, differentiation and focus, as illustrated in Figure 5.2.

DifferentiationOverall

Cost leadership

Focus

Low Cost PositionUniqueness Perceived

by the Customer

Strategic Advantage

Industrywide

Particular

Segment Only

Str

ate

gic

Targ

et

Figure 5.2 Porter’s three Generic Strategies (Porter, 1980)

A low cost position allows a firm to still earn returns after competitors have competed away profits. Efficient use of labour and capital can give a firm a competitive advantage. It often requires a high market share or for example better access to raw materials. A cost based competitive advantage could be reached by continuous improvements in for example waste reductions. Differentiation means that the product or service that the firm offers is industry wide perceived as unique. This could be achieved by for example design, technology, customer service or brand image. Concerning environmental management, superior customer value could be created through for example „green‟ marketing. The third strategy is to focus on a particular segment of the product line, buyer group or geographic market. There could be opportunities for serving this target more effectively or efficiently than the broad market. The firm could achieve differentiation or lower costs in this narrow market. Porter (1980) argues that companies should choose to develop its strategy in one of these three directions; otherwise a firm that is „stuck in de middle‟ is in a bad strategic situation resulting in bad profitability. It is interesting to explore what the effect of the strategy on the relation between environmental and financial performance could be. Consequences of environmental management, such as the effect on image or costs, could be a source of competitive advantage. But since different types of strategy give potential for certain kinds of competitive advantage, some benefits of environmental management might be more important for one firm than another. The pathways as described in the previous chapter could thus be of different importance related to a firm‟s strategy. If a firm has a differentiation strategy, environmental management might be especially used to improve image. This path could be more important for such firms than for cost-leaders. If a firm has a cost leadership strategy, benefits of environmental related to production efficiency might be more important, since this is already their strength.

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5.4. Miles and Snow’s Adaptive Strategies

Miles and Snow (1978) investigated the competitive strategies of many companies and state that they revolve around a few fundamental business strategies. Firms are classified according to how they respond to the three elements of the so-called „adaptive cycle‟: the entrepreneurial problem, engineering problem and administrative problem. The first has to do with the organizational domain; which goods or service and what is the target market. The engineering problem involves the creation of a system to operationalize the production and distribution. The administrative problem is that of developing the organizational structure and processes. The basic types that are distinguished are the prospector, defender and analyzer. A range of characteristics of these strategies are set out in Table 5.1. Prospectors search for innovation and new opportunities. They are the leaders in an industry by creating changes and uncertainty to which their competitors must respond. The efficiency is usually not optimal though. A prospector strategy is best suited to a dynamic and high-potential environment. Defenders avoid change by emphasizing existing products and market share. They have narrow and stable market domains. Instead of making adjustments in their technology, structure or methods, they focus on improving the efficiency of existing operations. However, competition can cause decline in the long term. A defender strategy is suited for a stable environment or declining industries. Table 5.1 Characteristics of Miles and Snow’s types of strategies

Prospector Defender Analyzer

Entr

epre

ne

uria

l P

rob

lem

Broad and continuously developing domain, diverse product line

Narrow and stable domain, limited product line

Both stable and changing domain, limited basic product line

Monitors wide range of environmental conditions and events

Ignore developments outside of domain

Surveillance limited to marketing; some research and development (R&D)

Search for innovation and new opportunities. Creates change in the industry

Product development closely related to current goods or services

Search for small number of related product / market opportunities

Growth through product and market development

Growth trough market penetration

Steady growth through market penetration and product-market development

Eng

ineerin

g Multiple, flexible

technologies

Single core, capital-intensive, cost-efficient technology

Cost-efficient technology for stable products and flexible for new products

Low degree of routinazation and mechanization

Continuous improvements to maintain efficiency

Technology can never be completely effective or efficient

Adm

inis

trative

Product (or geographically) structure

Functional structure Mixed (matrix) structure

Broad planning, problem oriented, not finalized before action is taken

Intensive planning, cost-oriented, completed before action is taken

Intensive planning for stable products, broad planning for new products and markets

Marketing and R&D experts most powerful

Financial and production experts most powerful

Marketing and R&D influential, and production

Skills in product R&D, market research

Skills in production efficiency, cost control

Skills in production efficiency, marketing

Sources: Miles and Snow (1984), Miles & Snow (1978) Table 3-1, 4-1, 5-1

Analyzers try to maintain their core business while exploring innovation and other opportunities. They operate in a relatively stable product market domain, but also a

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changing market domain. Their structure and processes are formalized and efficient, but in their more innovative areas they follow new ideas from competitors rapidly if they look promising. Miles and Snow also mention a fourth type of organization, the reactor. Reactors are firms that act inconsistent and unstable. They avoid change, but in order to survive, they will respond to competitive pressures as a last resort. Only in highly regulated industries this could be suited. Since reactors do not follow a conscious strategy, it is often excluded in empirical studies on Miles and Snow‟s typologies (Chan et al., 2006). As the description and characteristics of the strategies show, in most aspects defenders are the anti-pole of prospectors. For example efficiency is highly important for defenders, while new developments for prospectors are more important making it difficult to optimize efficiency. Analyzers are diverse and share both prospector characteristics for new markets and defender characteristics for stable products. Miles and Snow‟s typology is in previous studies also interpreted as a continuum on which prospectors and defenders represent extreme positions (Aragon-Correa, 1998). This typology also provides a basis for looking at how business strategy associates with the relation between environmental performance and profitability. A firm at the prospector end is proactive, flexible and searching for new opportunities. It may be more open for new opportunities arising from environmental management. Since procedures are less embedded in the organisation, it would be easy to adjust and implement new developments. On the other hand, such a firm would also want to remain flexible and an environmental management system might give limitations for large changes. Conversely, defenders avoid huge changes and have capital intensive technologies that need to be continuously improved in order to maintain efficiency. An environmental management system, which focuses on continuous improvement, might be very useful to contribute to a defender‟s target. In the previous chapter, several pathways were described that link environmental and economic performance. A prospector for example might benefit more from the revenue side than defenders, since marketing skills are already embedded in prospector firms. Conversely, defenders focus on improving the efficiency of existing operations. The whole organisation is directed at this competitive advantage, so this would also include the management of environmental issues. It thus might focus more on the pathway of production efficiency (see Figure 4.3).

5.5. Similarities between typologies and concluding remarks

Miles and Snow (1984) state: “Perhaps it should come as no surprise that today‟s business strategies represent variations and improvements on previous strategies. Although the language may be new – low-cost producer (Defender), product differentiator (Prospector), focused operation or nichemanship (Analyzer) – the overall strategic orientations are essentially the same.” The defender-type and cost leadership are both searching for continuous improvements in order to improve efficiency. The prospector and differentiator are the most proactive types of firms. The reactor is like „stuck in the middle‟, since these firms do not have a clear strategy. The analyzer and focus both share characteristics with the other two types. These are less comparable though, since the analyzer does not in particular focus on a certain market segment, but can follow successful ideas in other markets too. Off course, the two typologies are different, since they each stress somewhat different aspects of business-level strategy (Morgan et al., 2000). However, Porter‟s generic strategies and Miles and Snow‟s typology are based on many common assumptions and show some clear resemblances, especially when the defender and prospector are seen as a continuum. Therefore, these typologies can support each other in assessing the business

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strategy. Furthermore, since both these typologies are popular and even show similarities, it seems logical that these basic strategies will be present in real life industries. Although models are often difficult to apply to actual behaviour, Miles and Snow‟s typology may be relatively easy to operationalize given all the described characteristics. Therefore, it is suited to use this typology primarily, to help to identify the different reactions to environmental issues and association with financial performance.

5.6. Resources and capabilities

In previous sections, several possible cost savings or market gains resulting from environmental management were described. Firms with differentiation / prospector strategies may focus more on market gains and firms with cost-leadership / defender strategies may focus more on the cost savings. Business strategy can direct a firm towards a certain competitive advantage, but every aspect of the firm plays a role in this strategy, such as human resources, finances and production methods. Many of these aspects can be described as resources and capabilities of the firm. A framework called the resource based view of the firm (RBV) (Wernerfelt, 1984) looks at firms in terms of resources rather than for example in terms of products. Where Porter has a perspective on the position in the market, the RBV highlights the influence of internal competencies of firms. Firms differ in experiences, skills, resources and organizational cultures. The RBV considers competitive advantage as resulting from the capabilities of firms to use resources. Resources are the source of a firm‟s capabilities, it is however difficult to divorce these concepts. By resources is meant anything which could be thought of as a strength or weakness of a given firm. These can be for example brand names, in-house knowledge of technology, employment of skilled personnel, trade contracts, machinery, efficient procedures and capital (Wernerfelt, 1984). In the resource-based view, resources are classified as tangible, intangible and personnel-based. Tangible resources include capital and physical resources such as machinery. Intangible resources have no physical existence, such as reputation and human resources (Russo and Fouts, 1997). Competitive advantage can only be sustained if firm‟s resources are valuable and nonsubstitutable. It should easily be accomplished or replaced by another resource or alternative means. Furthermore, strategically important resources must be rare. They should not be available to other competitors, otherwise it is not a unique resource. Furthermore the firm‟s resources should give barriers to imitation. They must be difficult to replicate (Hart, 1995). Christmann (2000) stresses the importance of complementary assets and the heterogeneity in resources and capabilities. The study shows that the competitive effects of environmental practices differ across firms with certain characteristics. The best practices of environmental management generally do not lead to cost advantage for all firms. Firms need to possess complementary assets such as capabilities for process innovation and implementation in order to create cost advantage from the implementation of „best practices‟. For example pollution prevention or pollution control technologies require different capabilities. When pollution prevention technologies are implemented, significant changes in the existing production processes or product designs need to be made. This is not needed for pollution control technologies. The success of using prevention technologies thus requires special capabilities to innovate and implement modifications. If these capabilities for process innovation and implementation are not possessed by the firm, it might not be able to generate cost savings from these new technologies. These

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firms might be better off to wait and learn from and imitate early movers. (Christmann, 2000) Related to previous paragraph, firms that wait and learn from and imitate early movers are typically analyzers. Analyzers thus might handle environmental issues differently than firms with other strategies, because of differences in resources and capabilities. Even more differences exist between prospectors and defenders. These types are anti-poles in strategy which implies differences in resources and capabilities. Prospectors have skills in for example research and development, while defenders have good resources and capabilities for a high production efficiency and cost control. As described in chapter 3, firms can differ in their environmental policy. This can vary from compliance where there is often a short-term, end-of-pipe approach to going beyond compliance with a focus on prevention. Russo and Fouts (1997) argues that firms that only want to comply to environmental regulations will differ in their resource bases from firms that tend toward pollution prevention and that the policy affects a firm's ability to generate profits. This can be confirmed in all three resource areas: tangible resources, human resources and other intangible resources. End-of-pipe compliance policies would affect physical asset resources in particular. With a proactive environmental policy there is more need to redesign the whole production process. This requires the use of new technologies. Such resources are more valuable and give a barrier to imitation. This would be a source of competitive advantage when they outperform the assets of the competitors. This way, environmental performance can enhance economic performance, because of specific resources and capabilities. There is a comparable link through human resources and intangible resources. The process of improving environmental performance builds resources of organizational commitment and learning and increased employee skills and participation. Concerning the intangible resources, a reputation for environmental leadership increases sales among customers that are sensitive to such issues. Another intangible asset is political acumen, which is the ability to influence public policies resulting in a competitive advantage. Russo and Fouts (1997) These arguments actually have been described before in this thesis, namely in section 4.3. Some other terms have been used, but the same links have been made. The physical assets have to do with the production process and production efficiency. Human resources are represented in the pathway of employee goodwill, morale and productivity. Reputation was mentioned at the revenue side. The term political acumen has to do with a better standing with investors and government officials. Apparently, the pathways from environmental to financial performance have to do with resources and capabilities. Environmental management thus influences resources and capabilities. The resources and capabilities differ between firms and are related to their business strategy. This again is thus reason to expect that differences between business strategies come with differences in the relevance of the distincted pathways between environmental and financial performance. Furthermore, as high environmental performance asks for changes in resources and capabilities in all areas (physical, human resources, intangible), high performing companies would recognize more pathways and low performing companies are expected to be able to benefit through especially the production efficiency pathway (physical assets).

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Environmental management could affect resources and capabilities as described before, but resources and capabilities could also again affect environmental performance and thus the relationship between environmental and financial performance. Although most research shows arguments for a link from environmental to financial performance, the other way around can still be given some considerations. For example, if a firm has relatively new machinery, it will be easier to monitor the production process which could improve the production process. This will result in less waste which is an indicator for a better environmental performance. A resource of particular interest in this argumentation is financial resources, since these have to do with the debated „direction of causality‟ (Klassen and McLaughlin, 1996). Financially successful companies might have more financial resources and are better able to afford to improve environmental performance. A firm with many resource-based capabilities will have a broad range of possible environmental improvements, because they can exploit many resources. If we look at the strategy types again, the prospector is more diverse in its resources and capabilities, implying that more pathways from environmental to financial performance might be relevant.

5.7. General firm characteristics

In the previous paragraphs, business strategy and resources and capabilities are linked to the relationship between environmental and financial performance. In real life, there are many factors that could be mentioned as every company is unique. Christmann (2000) for example argues that the structure of the industry and characteristics of the product market in which a firm operates are important factors for whether or not firm can gain a competitive (differentiation) advantage from better environmental performance. Companies differ in products, size, geographic situation, industry, sector, structure, legal entity, skills, markets etc. Some characteristics are covered in the business strategy and/or resources and capabilities. Many more factors could be mentioned, but it would be too complex to take all aspects into consideration. However, some basic characteristics should be taken into account in the empirical research, in order to be able to understand the context. Food industry and market The food industry has been described in Chapter 2. Here it was clear that there are several sub-sectors. These sub-sectors need to be taken into consideration as they face different characteristics. Orsato (2006) argues that eco-efficiency practices can generate some level of savings in nearly every firm, but particular circumstances result in some firms being rewarded more than others. These circumstances can be the market. Eco-efficiency has a “greater potential to generate a competitive advantage in firms that supply industrial markets, face relatively high levels of processing costs, and generate wastes and/or by-products. Many firms in the food and beverage industries fall into this category.” This would imply that the pathway from environmental to financial performance by improved production efficiency is of particular interest in the food industry. Another aspect of the market is the market structure. A market structure describes the state of a market with respect to competition. The most important market forms are perfect competition, monopolistic competition, oligopoly and monopoly. (Case, 1996). These market forms differ in the number and size of producers, the availability of information and the type of goods and services that is being traded. In perfect competition there are a large number of firms producing a homogeneous product. In monopolistic competition there is a large number of independent firms with a small portion of the market share. An oligopolistic market is dominated by a small number of

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firms which own more than 40% of the market share. In a monopoly there is only one provider of a product or services. These market structures could have its impact on the business strategy. For example, in perfect competition, a defender strategy would probably be best suited and increased production efficiency then might have the best potential to generate a competitive advantage. Size Many quantitative studies define certain „control variables‟. A variable that is often taken into consideration is firm size. For example Chen and Metcalf (1980) argued that environmental performance was not related to financial performance when differences in firm size were taken into account. (Cohen et al., 1995). Another approach to firm size is that its resources also increase, thus the opportunities to use them to improve environmental performance will be larger. The food industry is a fragmented industry, composed of a diverse range of companies from small and medium-sized enterprises (SMEs) to large companies. In 2005 and 2006, a large European survey was conducted with respect to technical innovation. The amount of innovation undertaken by companies tends to increase with firm size. However, the results show that most food companies, including SMEs, continuously search for opportunities to innovate. Within companies that innovate there can be two categories distincted; big and small innovators. Large and medium-sized companies invest many resources in R&D and frequently introduce new products on the markets. For a majority of large companies, major product and process innovations are relevant. Companies that innovate without introducing radical changes are mostly small enterprises. SMEs often focus on product improvement in which innovations quickly lead to improvement. (CIAA, 2006. p.8)

5.8. Concluding remarks

This chapter linked differences between companies to the relationship between environmental and financial performance. Two of the most popular approaches to conceptualize the business strategy of companies were described. These typologies can support each other in assessing the business strategy. Business strategy can direct a firm towards a certain competitive advantage, but every aspect of the firm plays a role in this strategy, such as human resources, finances and production methods. Many of these aspects can be described as resources and capabilities of the firm. Furthermore, the pathways shown in chapter 4.3 have to do with resources and capabilities. Environmental management influences resources and capabilities, but it can also be the other way around. Particular circumstances result in some firms being rewarded more or through other pathways than others. Several examples have been provided of firm characteristics that affect the relationship between environmental and financial performance. For example, especially firms with differentiation / prospector strategies might be able to benefit through market gains and firms with cost-leadership / defender strategies might focus more certain cost savings. Since the several pathways of the relationship between environmental and financial performance, and the link with other firm characteristics, have not been investigated before, there is a need for empirical research. This is described in the following chapters.

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6. Empirical research methodology

6.1. Introduction

This research consists of literature research, empirical research and the use of secondary data. The previous chapters provided a theoretical framework that showed several aspects of the relationship between environmental and financial performance. The first chapter already shortly described the research strategy. A mixed methodology is applied including interviews and the use of the data of a survey questionnaire of 2005. The interviews are the most important empirical data in this research and used for a comparative case study. The empirical data that was compiled in 2005 by other researchers (Haverkamp, 2007) is secondary data and is used for additional insights. This chapter further explains how the empirical research was carried out. Section 6.2 presents the link from the theory to the interviews and describes how the interviews were conducted. Section 6.3 presents the dataset, explains which variables of the questionnaire in 2005 are used to measure several constructs and describes how the statistical analyses are carried out. The results of the analyses are shown in chapter 7.

6.2. Interviews

The empirical research is performed by conducting interviews. A semi-structured interview protocol is set up, based on the theoretical framework. This is further described in section 6.2.2 in which the constructs that are measured are operationalized. The following sections describe how the interviews were conducted.

6.2.1 Interview strategy

The purpose of the interviews is gathering insight information on the selected companies, to be able to answer the research issue. There are several possibilities for conducting open interviews. This could be an attitude-free interview, a semi-structured interview, a focused interview, the elite-interview or expert-interview and retrospective open interview (Baarda et al., 2001). In this research, semi-structured interviews are used. A translated version of the interview protocol can be found in appendix 2 and will be further explained in the next section. Most of the questions and some of the answers are „fixed‟, but not all of them. This ensures that all the subjects are asked for and it gives the opportunity to elaborate on interesting issues or change part of the order of the subjects. Several closed questions are used in a specific order. Furthermore, open questions are included in which asking for more details is necessary. It was also possible to ask further questions. The interview protocol provided a basis for the interview and was shown to the respondent. The interviewer however had a larger protocol with possible extra questions and information that could be relevant during the interview. The environmental coordinators of the companies were interviewed. This is an expert- or informants interview, because a certain type of respondents was involved (Baarda et al., 2001). They are well informed on the environmental issues, but are also able to answer broader questions. The environmental coordinators were chosen, because of their expertise on the environmental area, which is important for the research. They will be able to give valuable information about their organization. One could argue whether the informants on this position have enough knowledge on all subject matters. However, prior research from Clemens (2005) on the relationship between green performance and financial performance, in which responses from green managers as well as owners was included, shows that the type of respondent was not related to their view on their firm‟s green performance or their financial performance.

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Seven steps were taken for the interviews: 1. Interview protocol, based on the theoretical framework (see next section). 2. Selecting and finding respondents (see section 6.2.3) 3. Preparing the interviews 4. Conducting the interviews 5. Putting the interviews on paper 6. Checking with respondents 7. Analysis (see section 6.2.4, see chapter 7 for the results)

6.2.2 Operationalization: from theory to interview protocol

The theoretical framework is the foundation for the empirical questions. A model of the theoretical framework (see Figure 6.1) is shown in each chapter. There is a relation between environmental management performance and financial performance. This was explained in section 4.2. This relation can be further distincted in several aspects of a revenue side and a cost pathway (see Figure 4.3). Several firm characteristics are expected to influence the relation between environmental management performance and financial performance. This is described in chapter 5. The empirical research focuses on whether these theoretical findings and assumptions are perceived in firms in the food industry. Therefore, perceptions on the relation between environmental and financial performance need to be measured, taking into account the several aspects of the revenue side and cost pathways. It is also important to have insight in the environmental management of the participating companies, because this can already shed light on the links without specifically mentioning the term financial performance. It could also be interesting to measure environmental management performance and the financial performance separately in order to confirm a statistical correlation. However, that would be more a quantitative method while the interviews are directed more at deeper insight. Furthermore, measuring financial performance is difficult since most companies in the food industry are not obligated to publicize their financial figures. Therefore, the focus of the interviews is to get more insight into reasons and motives that relate to environmental and financial performance. In order to get insight in the influence of the firm characteristics, some general characteristics and the business strategy needs to be measured. Furthermore, resources and capabilities need to be linked to environmental management. The interview protocol can be found in appendix 2. The protocol with all questions of the interviewer was further specified with possible questions and terms to keep in mind or ask further about. The following paragraphs provide further details on how the theory presented in previous chapters is used as a foundation for the empirical questions. The interview protocol is thus based on the theoretical framework (see Figure 6.1). The questions are divided in several sections, based on the different aspects of the research model: 1. General questions (general characteristics) 2. Business strategy 3. Environmental management 4. Resources and capabilities 5. Financial performance (the link with environmental management) The business strategy is deliberately measured before environmental management, because this is seen as a separate firm characteristic. This makes sure that for example the

Environmental

Management

Performance (3)

Improved

Financial

Performance

Firm characteristics

-General characteristics (1)

-Business strategy (2)

-Resources and capabilities (4)

Figure 6.1 Theoretical framework: related factors

(5)

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priority for marketing is measured separately from environmental issues, where later in the interview it is related to environmental management. The resources and capabilities have less priority and are directly related to environmental management. The financial link with environmental management is measured in the last section, because the other sections eventually leaded to these questions which are actually the core of the research, given the other firm characteristics. Respondents may already relate environmental management to costs, benefits or aspects of environmental and financial performance earlier in the interview which also indicates reasons, motives and priorities. 1. General information Several facts were asked for administrative reasons. This included the date of the interview, which company was interviewed, who the respondent was and how he can be reached. This made sure that further data could easily be matched to other data from for example web sites and document. Dates, names and addresses also made sure that it was possible to ask for further comments when data was lacking. Furthermore, it is relevant what the function and time spend on environmental management is of the respondent. This enables picturing the situation of the companies and respondents. 2. General questions Chapter 2 showed the importance of the food industry and helped to better understand companies that are part of the food industry. In order to be able to give a description of the interviewed companies, several figures were asked for. The turnover and number of employees (question 1-3) indicates the firm size. Question 4-7 gives insight in the market the company operates in and gives necessary information to be able to determine the market structure. 3. Business strategy In the theoretical framework, two typologies are described that distinguish several strategies. The strategy needs to be assessed in order to provide a basis for further analysis. The typology of Miles and Snow is used which distinguishes defenders, prospectors and analyzers. Reactors are not taken into account, since these are companies without a clear strategy. Other studies don‟t take the reactor into account either (Chan et al., 2006). The typology of Miles & Snow offers a range of characteristics that can be used to operationalize measuring the business strategy. Using question 8, "What is the priority of the following aspects at your company? Could you explain further?” several factors were discussed in order to be able to classify the business strategy: Table 6.1 Indicators for the assessment of the business strategy (question 8)

Question interview Literature (section 5.4 / Table 5.1)

1 Product innovation and new market opportunities

Prospectors search for innovation and new opportunities.

2 Being the first one to introduce new products on the market

Prospectors are the leaders in an industry by creating changes and uncertainty to which their competitors must respond. Defenders avoid change by emphasizing existing products and market share.

3 Improving production efficiency

The efficiency is usually not optimal for prospectors. Defenders focus on improving the efficiency of existing operations. Defenders have skills in production efficiency.

4 Cost control Defenders have skills in cost control. Financial experts are powerful.

5 Flexible technologies Prospectors have multiple, flexible technologies. Defenders have a cost-efficient technology.

6 Product research and development

Prospectors have skills in product R&D. For defenders, the product development is closely related to current goods.

7 Market research Prospectors have skills in market research.

8 Marketing With prospectors, marketing experts are powerful.

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Companies are asked to score on the priority of these aspects. 1,2,5,6,7 and 8 of question 8 will have high priority for prospectors (see Table 6.1). Defenders will have priority for aspects 3 and 4, since defenders focus on improving the efficiency of existing operations and have skills in cost control, while for prospectors the efficiency is usually not optimal. Analyzers have both prospector and defender characteristics which would also make it possible to recognize this strategy. The second aspect was also asked for in the questionnaire of 2005. These aspects also provide a starting point for further conversation about strategy aspects. The other typology that was described in the theoretical framework was Porter‟s generic strategies. These are based on many common assumptions and show some clear resemblances with Miles and Snow‟s typology. Question 9 asks for the strategy according to Porter‟s terms. This can support assessing the business strategy. 4. Environmental management and performance It is important to get insight into the environmental management and environmental performance of the companies. Chapter 3.4 described how environmental performance can be evaluated. There are many components that can be taken into account in the management, operational and environmental area. Not all indicators are however equally relevant to this research. For example, hard output figures of energy consumption are difficult to compare in a research of 12 different companies. Such aspects are only relevant when more information is shared that provides an idea about how the company deals with these environmental issues. The environmental issues and measures that are taken are thus interesting. The focus is on „environmental management performance‟ which includes management efforts to influence an organization‟s environmental performance, such as those with regard to for example management systems or commitment to environmental issues. First, it is relevant to be able to get a general idea about what the main environmental issues are for the company. This is measured in question 10: “To what extend are the following aspects of environmental pollution a point of attention at your company?”. It asks for eight aspects of environmental pollution. This question is copied from the questionnaire of 2005. Haverkamp (2007) used this question to measure the environmental „pollution level‟ of companies. Question 11 asks for the measures that have been taken and are expected to be taken. The performance indicators of chapter 3.4 are kept in mind in this question. The next question asks about an environmental management system. The elements of an environmental management system were kept in mind (Lesourd and Schilizzi (2001) and in the questionnaire of 2005). Question 13 measures reasons to improve environmental performance. Several possible reasons are asked to score on. How the government and stakeholders, which are included, can for example encourage firms (see section 3.2). It is interesting to get an idea whether a possible competitive advantage, risks or a financial advantage are also encouragements. This is further elaborated on later in the interview. This question also provides a basis to recognize the vision of the company on environmental management which is an indicator for environmental performance, for example whether a company complies to legal requirements or goes beyond compliance. Question 14 directly asks the respondent to score the environmental performance of the company compared to its most important competitors. As mentioned in chapter 4, this has also been done in previous research such as Clemens (2005).

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5. Resources & Capabilities Chapter 5 described how resources and capabilities are linked to the relation between environmental and financial performance. The following part of the interview asks to what extend the resources and capabilities can be a limitation for environmental management and the other way around; to what extend environmental management affects the resources. The resources that are mentioned in the research protocol are also mentioned by Wernerfelt (1984) and Russo and Fouts (1997) (see section 5.6). 6. Financial performance The main goal of this research is to gain insight in the relation between environmental and financial performance. In the empirical research is asked for the perceptions of the respondents of the companies. In the previous questions of the interview, financial advantages were already somewhat brought up, but now it is elaborated on and several pathways as described in chapter 4 are evaluated. Recall that previous research provided a good basis for concluding that there is a positive correlation between environmental performance and financial performance. Question 16 can be used to determine whether this is also recognized in de food industry. In the theoretical framework a revenue and cost side were specified that link environmental performance to financial performance (Figure 4.3). Question 16 broadly distincts these pathways and question 17 “To what extend does environmental management have a positive effect on the financial performance of your company, through the following aspects” elaborates on different aspects of the revenue and cost pathway. Some of the terms that are present in Figure 4.3 were asked about earlier in the interview such as risks. Not all terms of Figure 4.3 are included in the interview to score on, but they were discussed during the interviews, such as attracting quality staff. As concluded in the theoretical framework, the direction of causation is not fully clear, so this had to be taken into account in the empirical research. In order to get an idea of the effect of the financial performance of a company on its environmental management, this was considered in question 18: “To what extend does the financial performance of your company affect the attention for environmental issues within your company?”, etc. The last three questions are about measuring the costs and benefits of environmental management. One of the reasons to ask about perceptions instead of hard data is because it is difficult to measure and distinct the benefits of environmental management. There has been research that asks companies to measure these costs and benefits in euros; however this would be too complicated for the separate pathways. It is interesting to know though what and how companies measure the costs and benefits, because this can also give a better view on how the company deals with it. This question is not highly important and that is better to end the interview with. The interview protocol was checked by the scientific advisors of Wageningen University.

6.2.1. Data gathering

The following steps that had to be made were selecting companies and finding respondents, preparing, conducting and processing the interviews. Selection of companies and finding respondents In selecting firms to be interviewed, several criteria were used. All companies had to be:

- Located in the Netherlands

- Part of the food industry

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This is the study domain of this research. The companies could be located everywhere in the Netherlands. The chamber of commerce divides branches by „BIK code‟. Companies with branch (SBI ‟93) code 15 are part of the food industry.

Several other factors were taken into account:

- Sub-sectors: comparable companies The food industry exists of several sub-sectors as described in section 2.4. In order to represent the food industry, several of these sub-sectors should be included in the research. However, there may also be differences between the sub-sectors because of their production processes. Therefore, it is interesting to interview more than one company per sub-sector or companies that have comparable products or processes, in order to make a consistent analysis.

- Size: medium or large The food industry includes small, medium sized and large companies. In order to get a more homogeneous sample with respect to environmental management, business strategy and other firm characteristics most companies were to be medium sized or large firms. This was also done in the survey of 2005 (Haverkamp, 2007). Furthermore, these companies more often have an environmental coordinator. Most interviews will focus on business units; otherwise discussing the companies‟ environmental management is too complex.

- Environmental management Companies with a lot of environmental issues can be more interesting to interview, because of more interesting information to share. However, it would be good to also include companies that have fewer issues, to have a more representative sample.

- Strategy An important factor of this research is the link of business strategy to the relationship between environmental and financial performance. To be able to analyse this, companies with differing strategies should be included. The survey of 2005 helped to select the companies.

The questionnaire of 2005 ended with the question whether they wanted to cooperate in further research by giving an interview. In total, seventeen respondents answered yes. These companies were interesting to include in this research, because extra information from the questionnaire was available from these companies, especially on environmental management. Four of these companies had already recently been interviewed for other research of the business administration group. The other companies to be contacted were divided between research of Haverkamp (2007) and this research. Six companies were contacted for this research of which five companies finally were included. The respondent of the other company wasn‟t employed there anymore and an interview wasn‟t possible. These five participating companies were shortly analysed, based on the database of the 2005 questionnaire. This provided a plan for selecting the rest of the companies in which the sub-sectors, size, environmental management and strategy were taken into account. A combination of comparable sub-sectors, also some medium-sized companies, varying companies concerning environmental management and not only firms with a prospector strategy but also with a possible defender strategy (this could be a private label producer) needed to be contacted. The contact information was retrieved from the internet and the overview of addresses from the Dutch Chamber of Commerce used for the survey of 2005. The companies were asked for their environmental coordinator. Most companies were willing to cooperate, except for some private label producers. In total 12 companies were interviewed. A description of these companies is provided in the next chapter.

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Preparation and conducting the interview The interviews were prepared by consulting information from internet, such as the websites of the companies, media articles concerning the company and when available the companies‟ environmental report. Furthermore, the questionnaire of 2005 was examined. The interviews were conducted face to face. They took place in February, March and April 2007. The interviews were conducted in Dutch. They were recorded with an mp3 player with voice memo. At the beginning of the interviews, permission for recording the interview was asked. The research was shortly introduced. Several instructions for conducting interviews, as described in Baarda (2001), page 144-145 were taken into account. The interviews were intended to take between 1 and 2 hours, dependent on the respondent and interesting issues that could arise. Afterwards, the respondents were given the opportunity to check the written down interview. Some additional questions were asked when something wasn‟t clear. Not all interviewees responded.

6.2.2. Analysis

The interviews are literally written down on paper. The interviews took on average 110 minutes. The shortest interview was just over an hour, the one that took the most time took 140 minutes. In font „Arial narrow‟ size „10‟ this results in 140 pages to be analysed. Because of reasons of confidentiality, the large amount of pages and the Dutch language, the interviews are not included as an appendix in this thesis. They can only be requested for further research of Wageningen University if it is treated confidential. According to Baarda et al. (2001) the analysis can be performed in 8 steps using labels to reduce and define the important text. However, since the interview was already structured to some extent, the topics of the questions are seen as labels. The questions where a score was given were put in an excel file which made it easier to make comparisons and recognize interesting items. Some of the scores were put in SPSS in order to do some statistical analysis. Tests Since most variables were not distributed normally, non-parametric tests are used. The Kolmogorov-Smirnov Z test is used. This test is another test than the Kolmogorov-Smirnov test that tests whether a sample is from a normally distributed population. It looks for differences between two groups, like the non-parametric Mann-Whitney test and it is a non-parametric equivalent of the independent t-test. The K-S test is especially suited for very small sample sizes which is the case for the interviews. Furthermore, the text was sorted per label or question in order to be able to make analyses. The analysis started with quite baseline descriptions and later several items of the interview were linked. For some general information on the companies, the internet, the chamber of commerce or company documents were also used. Assessment of the business strategy: to a scale from defender to prospector Recall that there are three main types that are distinguished by Miles and Snow (1978). The business strategy was first assessed based on the three types, but eventually the defender and prospector types are seen as ends on a scale. Prospectors search for innovation and new opportunities, defenders avoid change and analyzers try to maintain their core business while exploring innovation and other

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opportunities. In a way, all participating companies in this research could be classified as some kind of analyzer. According to Miles and Snow (1978), balance is the common characteristic of the analyzer‟s solutions to the entrepreneurial, engineering and administrative problem. The configuration is a combination of prospector and defender characteristics. All companies have a certain core business or firm base, while also looking for opportunities varying from innovations close to the existing product lines (firm 1,2,3,4,5,6,7,9 and 11), new products in the portfolio (firm 5), being flexible for other companies (firm 12) or providing extra services with the product (firm 8). Several companies actually have a differentiation strategy, but they also hold on to their existing product lines for which low costs are also very important. However, Miles and Snow (1978) describes the analyzer further as a company that avoids expenses of research & development and follows successful introductions of other companies. Only one firm (10) in the sample clearly shows this characteristic of the analyzer strategy. Furthermore, although most companies‟ innovations are not completely out of the box, there are differences in priorities for being the first one with new products. Thus, to classify all firms as analyzers wouldn‟t point out the differences and doesn‟t give a good basis for further analysis. Therefore it is better to interpret Miles and Snow‟s typology as a continuum on which prospectors and defenders represent extreme positions. As mentioned in chapter 5, this has also been done in previous research. The defender and prospector obviously have their own distinct characteristics. The defender and prospector type are seen as ends on a scale. Since the distinction between 3 strategies is difficult and questionable, the firms are assessed on the degree to which they are a defender or prospector. This is also more comparable with the operationalization of the strategy of the companies in the database of the questionnaire in 2005. Business strategy content analyses In order to assess the business strategy, the scores on the aspects of question 8 are used and content analysis is performed in order to base the strategy on more than just a general impression. The sum of the scores on aspect 1,2,5,6,7 and 8 which can be seen as prospector characteristics minus the score on question 3 and 4 which are typical defender aspects is calculated. In order to indicate the degree to which a company is a prospector, this sum is divided by the mean on all questions of that company. The reason to do this, is that the scores are meant to give an idea about the priorities of the aspects and for example one company gave a „5‟ to every aspect and another gave a „4‟ to every aspect, so if not corrected with the average one firm would score higher for prospector which is not valid. The content analysis is performed in two different ways. Based on the characteristics of the types of Miles and Snow described in chapter 5, the interview was scanned on statements that would be typically prospector or defender. Statements that are considered as typically prospector are for example: “we create demand”, “we want to be flexible” and “market research is highly important”. Statements that are counted as defender are for instance: “efficiency has high priority” or “we want to be cost leader”. The number of „prospector statements‟ is divided by the sum of the prospector and defender statements. The next content analysis is the percentage of words that could be indicated as „typically prospector‟. The text that is relevant on deciding the strategy of the company (this is question 8 of the interview) is selected and split into „prospector text‟ and „defender text‟. All words are counted in order to come to a percentage. To check whether these are reliable indicators for the business strategy, Pearson correlations are calculated.

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6.3. Database questionnaire 2005

6.3.1. Dataset

In 2005, the Business Administration Group of Wageningen University conducted a survey questionnaire on the development of environmental management of Dutch food companies. The empirical data that was gathered is used in this research. The research domain consisted of the food processing companies with at least 50 employees. The study population was based on the classification codes of the Dutch Chamber of Commerce (so-called „BIK codes‟). The Dutch Chamber of Commerce provided the addresses and number of employees of these selected companies. A structured questionnaire was sent to 417 companies in the Dutch food industry. The questionnaire was assessed by ten experts from different companies. A list with definitions was enclosed to make sure that the concepts were correctly interpreted. The mailing also contained a pre-paid return envelope, and an introduction letter. Anonymity of participants was assured. A second mailing was sent four weeks later to firms that had not responded yet. In total, 100 questionnaires were returned. This equals a response rate of 24%. The reasons for non-response were investigated by phone at approximately 150 companies. Reasons that were mentioned were for example a lack of time and a corporate policy not to participate because of confidentiality reasons. (Haverkamp, 2007)

6.3.2. Operationalization

The questionnaire starts with several general questions. The questionnaire focuses on environmental management. Most variables were measured on a 5-point Likert scale. The questions that were used from the questionnaire can be found in Appendix 3. The general questions that are used to describe general characteristics of the companies in the questionnaire of 2005 are:

- Job Position (question 1)

- Reserved time (question 2)

- Turnover (million) (question 3)

- Parent company? (question 5)

- International sales (question 7) Furthermore, the data from the Dutch Chamber of Commerce on the number of employees and the sector were used. Table 6.2 provides an overview of the rest of the questions that are used as indicators to measure several constructs in this research. Table 6.2: Used indicators from the questionnaire 2005

Subject Name of variable

Questions

Prospector strategy

Prospector (10.1+10.4+10.8)

Our company thinks it‟s important to be the first to introduce new products on the market (10.1)*

Buyers‟ demand for new products or product characteristics is large (10.4)*

The technical possibilities in our company to change products or product characteristics are large (10.8)*

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Environmental management (performance)

Environmental pollution (or „mean burden‟)

Please indicate to what extend the following aspects of environmental pollution is a point of attention in the company*

- Soil pollution (11.1) - Noise (11.2) - Water pollution (11.3) - Smell (11.4) - Air pollution (11.5) - Hazardous substances (11.6) - Waste production (11.7) - Energy use (11.8)

EMS Which of the following elements of an environmental management system are implemented at your company? - Formulating an environmental strategy/ -policy (20.1) - Formulating a chain oriented environmental strategy

(20.2) - Executing an environmental-audit (20.3) - Formulating an environmental action program (20.4) - Environmental training of employees (20.5) - Setting up an information system / database (20.6) - Regular measurement of environmental impact

(20.7) - Periodical internal environmental reporting (20.8) - Periodical external environmental reporting (20.9)

Better EM performance than competitors

Our environmental performance is better compared to our most important competitors. (18.6)*

Benefits Improvement of firms‟ image

Please indicate to what extent the environmental management contributed to the following subjects at your company*

- Improving our corporate image (23.1)*

- Successful marketing of products (23.5)*

- Gain insight into the production process (23.2)*

- Reducing waste production (23.3)*

- Reducing energy usage (23.4)*

Better marketing of products

Insight into production process

Less waste production

Less energy usage

Costs High costs for human resources

Please indicate to what extent the following experiences with environmental management are applicable at your company*

- High personnel costs are needed (24.1)*

- High investments are needed (24.2)*

- There is a high administrative burden (24.3)*

High investment costs

High administrative loads

Relationship Net positive financial effect

- The revenues are higher than the costs (24.4)*

*5-point Likert scales

Prospector strategy (scale and two groups) As described in paragraph 5.3 there are several characteristics of the prospector strategy. Since the questionnaire does not focus on business strategy, there are not a lot of questions that could be used to measure the strategy. However, three questions in particular can be used. A characteristic of the prospector is locating and taking advantage of new product and market opportunities. They create change in the industry. This can be measured by the indication whether a company thinks it‟s important to be the first one to introduce new products on the market and whether the demand for new products or product characteristics is large. To be able to take advantage of new opportunities, the

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engineering problem for a company is to avoid long-term commitments to a single technological process. A characteristic of the prospector is therefore flexible, prototypical technologies. The question about whether the technical possibilities to change products or product characteristics are large is therefore an indicator for the prospector strategy and included in the variable. These questions were measured on a 5-point Likert scale ranging from “Completely agree” to “Completely disagree”. The three questions are added and divided by 3. De scores can therefore range from 1-5 in steps of 0.33. In the analysis of the interviews the firms have also been divided in two groups. This has also been done with the companies in the questionnaire of 2005. The groups are made based on the prospector variable. Group 0 scores 3.33 or lower and group 1 (the prospectors) had a score of 3.67 or higher. Environmental management performance The interviews and the questionnaire of 2005 included the same question about the attention for several aspects of environmental pollution. The variable „mean burden‟ added the scores on these questions (5-point Likert scale) and divided this by 8, the number of items. This indicates the attention for environmental aspects which could also be a sign of the environmental pressure on the firm. The environmental aspects are also analysed separately. The questionnaire included a question on which elements of an environmental management system were implemented. Environmental management systems help managers to reach environmental performance goals and environmental management is an important determinant of environmental performance and management aspects such as environmental strategies, systems and communication are also considered to be part of environmental performance. The variable „EMS‟ gives insight in the environmental management performance of the firms. It is measured by looking at the amount of elements of an EMS are implemented in the company. As shown in Table 6.2, 9 elements are taken into account. These elements have been transformed in one variable „EMS process‟ which is given a 0-9-scale score. A company that implemented all nine elements scores 9, a company with nothing in place scores 0. All scores between 0 and 9 are possible. A second variable to measure the environmental management performance is based on the perception of whether a company‟s environmental performance is better compared to their most important competitors. This way of measuring is also used in a study of Clemens (2005) that investigates the relationships among green performance and financial performance. Benefits, costs, relationship The questionnaire included several questions about costs and benefits. These are interesting for this research, since there could be several pathways of the relationship between environmental performance and financial performance. The benefits on image and marketing are more on the „revenue‟ pathway, the benefits from less waste and energy are cost saving. The three costs that are mentioned are less relevant, since this research especially focuses on the benefits of environmental management that could explain the relationship, however these aspects are related to environmental management and financial performance. The „net positive financial effect‟ actually checks weather companies think that there is in general a positive relation between environmental and financial performance. Table 6.2 shows the variables and underlying questions. All variables were measured on a 5-point Likert scale.

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6.3.3. Data analysis

The statistical analyses have been carried out using the software program SPSS 12.0.1. for Windows. Most of the variables were already put in the software program by researchers of the business administration group of Wageningen University. Distribution Parametric tests have four basic assumptions that must be met. These are normally distributed data, homogeneity of variance, interval data and independence. (Field, 2005). Appendix 4 gives an overview of the mean scores of the included variables in this research. Furthermore, it shows that most data is not normally distributed. Therefore, only non-parametric tests were used. Unfortunately, it is more likely to miss a significant effect if non-parametric tests are used (Field, 2005). Reliability The reliability of the construct (variable that consisted of several questions from the

questionnaire) is assessed with Cronbach . This is the most common measure of scale reliability which means that a scale should consistently reflect the construct it is

measuring. A value of 0.7-0.8 is an acceptable value for Cronbach‟s ; values substantially lower indicate an unreliable scale. (Field, 2005) The value for the prospector strategy is 0.708, which is acceptable. Tests The statistical tests that are used for the data of the questionnaire of 2005 are the Mann-Whitney, Kruskal Wallis and Spearman. These are suitable for non-parametric data. The Mann-Whitney test (the non-parametric counterpart of the independent t-test) is applied to test between two-groups. In this research this involves the groups based on different strategies. The Kruskal Wallis test (the non-parametric counterpart of ANOVA) is applied to test whether more than two independent groups differ. In this research, this involves the different sub-sectors. Spearman rank correlation coefficients for non-parametric data are evaluated (non-parametric equivalent to Pearson correlations). Many correlations have been computed of which some are shown in the results.

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7. Results

7.1. Introduction

This chapter presents the results of the analysis of companies that are interviewed and additional analysis of the database. It starts with general characteristics of the companies that are interviewed. Next, interesting points from the following sections of the interviews are discussed. This is done in the order of the interview protocol. Finally, in 7.3.5 the relation between environmental management performance and financial performance is compared in relation to some firm characteristics. The focus there is on the business strategy. Figure 7.1 shows which part is discussed in which section of this chapter. The results are complemented by analysis of the data from the environmental questionnaire of 2005. This text is put in boxes.

7.2. Description of the participating companies

The semi-structured interviews have been conducted with 12 firms in the Dutch food industry. The „general information‟ and „general questions‟ of the interview and company websites provide basic information about the companies. Several characteristics of the participating companies can be found in Table 7.1. These and other characteristics will be further described in this section in order to provide an understanding of the situation of the interviewed companies. The firms are referred to according to the number in Table 7.1. For the overview, the companies are to some extend sorted by sector. Table 7.1 Characteristics of the participating companies

Firm Sector Main product

Size

(employees)

Size parent

company Position of respondent

% time

on EM

1 Bakery Breakfast cake 200 1100 Head Quality and Environment 10%

2 Bakery Bread substitutes 600 - Manager Technical service 5%

3 Bakery Frozen patisserie 275 253000 HR-Environmental coordinator 50%

4 Meat Snacks 300 800 HR-Environmental coordinator 20%

5 Meat Snacks 500 7300 Manager Quality Environment Safety Health 10%

6 Vegetables Sauces 450 41000 Coördinator Facilities 20%

7 Spices Sauces and spices 290 4200 HR-Environmental coordinator 20%

8 Fat Oils 100 150000 Environmental coordinator 50%

9 Coffee Coffee 45 - Quality-HR-Environmental coordinator 20%

10 Coffee Coffee 200 1000 Quality-HR-Environmental coordinator 10%

11 Beverage Soft drinks 400 20000 Environmental and Safety engineer 50%12 Beverage Soft drinks 140 600 Manager Environment Facilities Projects 30%

(The names of the companies and respondents are omitted in the table to ensure a certain degree of confidentiality.)

7.2.1. Sectors

In box 9.1, the relative sizes of several sectors of the food industry are shown. The main sectors the food industry could be divided in are meat, bakery, vegetables and fruit, beverages, dairy and other food industries. Except for dairy, all these sectors are represented in the participating companies. The sector is based on the BIK-code. Information on the main product that the companies produce was gathered from their

Environmental

Management

Performance: §7.3.2

Improved

Financial

Performance

Firm characteristics

-General characteristics: §7.2

-Business strategy: §7.3.1

-Resources and capabilities: §7.3.3

Figure 7.1 Theoretical Framework and where to find results

§7.3.4

§7.3.5

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company websites. Of most sectors or main products, at least 2 companies are included in this research. Three companies in the bakery sector were included. One company produced all kinds of breakfast ginger cakes. The second company, which can be seen as a competitor of the first company, produces all kinds of products that are eaten alongside or instead of a sandwich, including breakfast cake and toast, several various bread varieties, specialties and biscuits. The last company in the bakery sector is one of the largest industrial bakeries for frozen patisserie. The aspect of cooling links this company also to the snack producers. Two companies are part of the meat sector. Firm 4 primarily produces snacks. The other firm that is mentioned as a company in the meat sector was actually much diversified. The interview took place at one of the snacks production sites, but the firm has several business units and is also involved in for instance the vegetables sector and sells for example sauces. The company however does not produce all those products. There are two companies included that produce sauces. The first one also had other production sites were other products were produced, but the interview took place at, and was focussed on the site where sauces and dressings were produced. The other company also produced spices next to the sauces. Both these products were relevant in the interview. The spices are produced for business-to-business sales to, among others, firm 6. The 7th company produces oil and starch out of soy beans. There are two companies included that produce coffee and tea and two companies in the beverage sector.

7.2.2. Functions and tasks respondents

Most of the respondents are environmental coordinators combined with human resource management, quality and/or safety. The environmental management tasks include gathering information from the production site on environmental issues, requesting and compliance with environmental permits, communication about the environmental management system, training and coordinating initiatives or projects to reduce for example energy use or to optimize processes. On average, the respondents spend 25% of their time on environmental issues. Most respondents have a full time job, except for one (firm 4) that works part-time since a few years. Some of the respondents are responsible for environmental issues at several production sites. Most of them are the only one at the production site with the

Box 7.1 Dutch food industry sectors compared to the questionnaire 2005 In the table below, the different branches of the Dutch food industry are shown. „Other food industries‟ include grain mill products (6% of the sample), fat (3%), animal nutrition (3%), sugar (3%), chocolate (2%), spices (3%) and coffee (1%). It shows that the distribution of companies of the total population (of medium sized and large Dutch food industry companies) and the companies in the sample of the questionnaire 2005 is fairly the same. Haverkamp (2007) concluded, based on a statistical assessment, that the samples are representative for the Dutch food and beverage industry as a whole. Table 7.2 Food and beverage sectors

Sector Total population (N=426) Sample (N=100)

Meat 20% 20%

Bakery 26% 26%

Vegetables and fruit 8% 11%

Beverage 6% 8%

Dairy 11% 10%

Other food industries 29% 25%

TOTAL 100% 100%

Source: Adjusted from Haverkamp, 2007 (p. 105), database questionnaire 2005

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environmental coordinator function, but there are some exceptions. Firm 1 holds a head function and an extra employee on quality and environment. Firm 5 has a team of 8 people on quality, environment, safety and health for several production sites. Firm 8 has several environmental coordinators and other functions on areas that need extra attention. At this company, if a production site is large enough there is a full time function. Otherwise, quality, safety and environment is a part-time function. Firms do also have other job positions that carry responsibility for certain aspects that link to environmental management such as (other) quality management systems or packaging. It seems that environmental coordinating functions and time spent on environmental issues are increasing. Several respondents mentioned that their function was relatively new. At Firm 2, the environmental part just moved from technical service to a more specific function. Firm 3 did the same approximately 5 years ago. Firm 10 started a new function about a year and a half ago. The respondent stated: “Environmental management was shredded and the experiences were that it wasn‟t dealt with structured enough. In my function, which is less ad hoc than the head technical service, I can give more priority to environmental management”. For a company that already has an environmental coordinator since 1978 environmental issues are also taking more time. The respondent states: “It used to be 1 day a year, now it is 2 days a week”. This could be explained by increasing government requirements. The respondent of „firm 8‟ states: “The requirements are getting extensive and obligations to report are increasing. We have to pay more attention to monitoring systems and the quality of it. The only way to make this possible is to give people this responsibility at a production site” However there is one major exception in the interviewed companies. Firm 4 points out that where there used to be 2 full-time employees that coordinated environmental management, now there is only 1 part-time HR-environmental coordinator. There is an explanation for this. Since 1991, the company was part of a large multinational that states that sustainable development is an important value and there were enough resources to make investments. A year ago, the company was taken over by a smaller investment company that has other priorities. External organisations Companies are also advised by consultancy and engineering firms, for example long-term assistance with the environmental management system and to keep informed about new legislation and regulations. Often they set up the request for environmental permits. External firms can also advice on specific issues such as noise, smell or soil pollution.

7.2.3. Production site, size and parent company

In this section, insight is provided in the production site, parent company and size measured by the number of employees. Production site For most of the participating companies, the interview was focussed on a specific production site instead of the parent company. This is because the activities of the holding can highly vary, which would make it difficult to answer questions on the strategy and environmental management of the company. Furthermore, environmental coordinators are often appointed to a certain company or production site. However, for firm 1, 2, 7 and 8 the case was about multiple production locations where one site was the most important subject. Firm 10 had a separate production location and head office. Firm 5 was the biggest exception, for which the respondent coordinated environmental issues for several business units, however, not all products were produced by the company. Environmental management was especially relevant for the sub-sector meat and included several production sites.

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Employees The included companies vary from 45 employees to 600 employees (with a mean of 292). As described in Chapter 2, companies with less than 50 employees are small enterprises and up till 250 employees are medium-sized companies. Following this EU definition, this research includes 1 small company, 4 medium-sized companies and 7 large firms. It should however be noted that firm 6 and 8 mentioned the number of employees for the specific production location and office, but they are actually part of a large company with the same name. For firm 1,2,5,7 and 10 it is the number of employees for several production locations including the sales office. The number of employees of firm 4 used to be twice as much. When the company was taken over by a large company 10 years ago, sales moved to another location and these employees stayed there after the recent take over. Furthermore, automatization and reorganisations cause the decrease of staff. Small and medium-sized enterprises (SMEs) are interesting because of their social and economic importance described in Chapter 2. Small companies are actually not really the research object because in general they are expected to have less to talk about regarding environmental management, but the small coffee company included is growing and sustainability is a major issue in this company. Larger firms have more resources and capabilities to pay attention to environmental management and can therefore be especially of interest in this explorative research.

Box 7.2 Characteristics of the companies in the questionnaire 2005 Function The average time spend on environmental management is 22%. This doesn‟t differ a lot with the interviews, since there it was 25%. The job position of the respondents varies. 18% is environmental coordinator, 24% is quality manager and many respondents (20%) have multiple functions where environmental management is combined with human resources, quality and/or technical service. As shown in table 7.1, a much larger percentage of the respondents in the interviews had multiple functions (9 out of 12). Table 7.3 Function: Job position respondents (n=98; 2 were missing)

Job Position Percent

Environmental coordinator 18.4

Manager quality 23.5

Multiple functions (Environmental and labor / Environmenal+quality+labor manager / Technical service + environment / Quality and environment)

20.3

Board member 12.2

CEO 5.1

Manager production 7.1

Plant manager 6.1

Other (Controller / Manager labor / Manager external affairs / Marketing / Team manager storage raw materials)

7.0

Total 100.0

Table 7.4 Descriptive Statistics: size, sales etc.

N Minimum Maximum Mean Std. Deviation

Reserved time (%) 96 .1 100.0 22.470 26.6504 Total number of employees 100 50 1151 206.15 208.645 Turnover (million) 79 2.0 2000.0 130.262 272.8666 Mother company? 91 0 (no) 1 (yes) .49 .503 International sales (%) 84 .0 100.0 42.298 35.4838

Size The average number of employees is 206 while for the interviews the mean was 292. The sample includes 79 medium-sized and 21 large companies. About half of the companies has a parent company. Further figures are shown in table 7.4.

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Parent company Most companies are part of a larger company, parent company or holding, except for the small coffee firm and one of the firms in the bakery sector, which are both family run businesses. The parent companies include large multinationals. Five of the firms‟ parent companies are based in the Netherlands. Of the other five parent companies, two of the multinationals are headquartered outside Europe, namely in the US.

7.2.4. Sales

In this section insight in the buyers, international sales and turnover is provided about the interviewed companies. Buyers All interviewed companies sell mainly business-to-business. As described in section 2.2, this can be either through wholesalers and retailers, or the food service. Another possibility is to produce intermediate goods that are sold to other companies in the food industry (see Figure 7.2). It is interesting to note that the respondents‟ views on the term „business-to-business‟ varied. Some companies view sales that go through the retail channel as business-to-consumer. They do mention that this is not directly sold to the consumer. The percentages are therefore not relevant without further explanation and it gives reason not to draw strict conclusions on the data on B2B and B2C of the questionnaire in 2005. The buyers of the companies are relevant, because these may influence the business strategy, environmental management and relation with financial performance. Almost all companies produce final products that are sold through the wholesaler and retailer to consumers. For two of the bakery firms, this is almost all of the sales. Six of the interviewed companies indicated that these sales are approximately half of total sales or that both retail and the food service are important. The small coffee company (firm 9) sold approximately 5% of their products through a shop at the production site, several shops in the neighbourhood and a web shop. The rest of the sales were to the food service. The other coffee company (firm 10) indicated that approximately 95% of their products are sold through retailers. However, this is a private label producer, so the products were distributed by other companies. At least five other companies also sell to private labels, but not for such a large part of the production. One of the beverage companies‟ main business is co-packing. It produces mainly specialty products for other brands, thus it sells to other companies in the food industry that take care of the distribution. The company whose main products are oils produces intermediate goods and mainly sells to other firms in the food industry. One bakery firm and the company with spices also produce some intermediate goods that are sold to other companies in the food industry and the food service. The marketing and sales of the products are sometimes located at another location or done by other companies.

Primary Producers

Consumer

Retailer Food service (hotel and catering industry)

Wholesaler (including convenience and food service)

Food industry

Processors: final products

Processors: intermediate goods

Primary Producers

Consumer

Retailer Food service (hotel and catering industry)

Wholesaler (including convenience and food service)

Food industry

Processors: final products

Processors: intermediate goods

Primary Producers

Consumer

Retailer Food service (hotel and catering industry)

Wholesaler (including convenience and food service)

Food industry

Processors: final products

Processors: intermediate goods

Primary Producers

Consumer

Retailer Food service (hotel and catering industry)

Wholesaler (including convenience and food service)

Food industry

Processors: final products

Processors: intermediate goods

Consumer

Retailer Food service (hotel and catering industry)

Wholesaler (including convenience and food service)

Food industry

Consumer

Retailer Food service (hotel and catering industry)

Consumer

Retailer Food service (hotel and catering industry)

Wholesaler (including convenience and food service)

Food industry

Wholesaler (including convenience and food service)

Food industry

Processors: final products

Processors: intermediate goods

Processors: final products

Processors: intermediate goods

Figure 7.2 Agri-food chain (figure 2.1 adjusted)

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International sales All companies have international sales, although one company indicates it is only 1%. The average international sales are approximately 40%. Most companies specify that the international sales are mainly to European countries, such as England, Scandinavia, Italy, France, Spain and Germany. It should be noted that some companies see Belgium as national sales. The respondent of firm 4 therefore changed his initial answer. Another respondent couldn‟t answer the question in percentages since the company didn‟t make a distinction between sales in the Netherlands and in Belgium. This question was also included in the questionnaire of 2005, but its value could therefore be doubted. Another market that is mentioned is the „nostalgia market‟ such as Australia. These are sales to Dutch people in foreign countries, but off course this is only a small percentage of total sales. Turnover Not all respondents answered the question on sales in euros. Two respondents didn‟t know figures on sales by heart. Three other respondents did not want to give these figures, because of company policy, they are not public. All interviewed companies are private limited companies (B.V.). According to the Dutch law, these companies are obligated to deposit their financial report at the Chamber of Commerce. This is not necessary for companies with a parent company that consolidates these figures. This is the case for several of the interviewed companies. The financial reports are not obtained from the Chamber of Commerce, because it is not crucial for this research and it costs money. It could be interesting to take it into account to assess a companies‟ financial performance, but since this research is mainly qualitative research instead of quantitative it is less relevant. Most respondents indicated that their company was growing or intended to grow. An exception was the company that was just taken over.

7.2.5. Market structure

For all participating companies, the market they operate in can be described as an oligopoly. The markets are dominated by a small number of firms that own a large percentage of the market share. Most respondents indicate that they only have a few competitors. For many A-brands there are only one or two up to maximum 10 real competitors and several smaller producers. On the other hand it is mentioned that there are several „layers‟ of competitors. The bakery that produces frozen patisserie states: “There are not a lot of frozen patisserie factories, maybe ten in Europe. But we also have to deal with fresh pastry. That may be a hundred competitors. Furthermore, we have to deal with the freezer. A freezer isn‟t large. So we have to compete with pizzas and snacks. Then you are talking about thousands of competitors.” Another company points out that the amount of competitors varies between their product groups. Most markets are seen as quite stable. There are hardly any companies that enter the market. The „big players‟ are taking the lead. Sometimes smaller companies are taken over. There is one interesting aspect to keep in mind however: both coffee companies indicate that foreign companies are entering the Dutch market. Thus globalisation could influence the market structure.

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7.2.6. Concluding remarks

In this section, several company characteristics were described in order to provide insight in the cases and to provide a basis for further analysis. Some noteworthy findings are that the respondents‟ position is a function that seems to be rising and answers in the interviews give reason to be careful with some variables on sales of the environmental questionnaire of 2005. As expected, financial figures were not fully available since the firms were privately owned or business units of larger firms and did not publish separate figures. Furthermore, this section showed that the cases give coverage of a range of product sectors and provides a mixture of large and medium sized companies and supplying various products to various buyers. The following section will analyse the companies on their business strategy, environmental management and the relation with financial performance.

7.3. Analysis interviews

In this section, further results of the interviews are described, complemented by findings from the questionnaire of 2005 in boxes. The several parts of the research model are analysed and related to other characteristics. This provides a basis to draw conclusions on the relationship between environmental performance, financial performance and other business characteristics.

7.3.1. Business strategy

Business strategy was a distinct part of the interview. The respondents gave scores for priorities on eight aspects that have to do with strategy and were asked to elaborate on this. Furthermore, they commented on cost leadership or differentiation strategy. To assess the business strategy, the typology of Miles and Snow (1978) is used. The average scores on the strategy aspects are shown in Table 7.5. The respondents gave quite high scores on all aspects. On average, improving production efficiency and cost control got the highest scores. These are the two typical „defender‟ characteristics. Table 7.5 Scores on strategy aspects, interview question 8 (5-point Likert scales, N=12)

Minimum Maximum Mean Std. Deviation

1 Product innovation and new market opportunities 3 5 4.50 0.67

2 Being the first one to introduce new products on the market 1 5 4.08 1.24

3 Improving production efficiency 3 5 4.58 0.67

4 Cost control 4 5 4.67 0.49

5 Flexible technologies 2 5 4.08 1.00

6 Product research and development 2 5 3.83 1.11

7 Market research 2 5 3.83 1.03

8 Marketing 3 5 3.83 0.72

To what extend do the following aspects have priority at your

company? (1=low, 5=high)

The defender and prospector type are considered as ends on a scale. In order to assess the strategy, the scores on the aspects are used and a content analysis is performed. The results are shown in Table 7.6. The first column shows the firm number as is used in previous tables and descriptions. Next, the mean of the answers on all the questions are shown. The third column shows the sum of the scores on question 1,2,5,6,7 and 8 which can be seen as prospector characteristics minus the score on question 3 and 4 which are typical defender aspects. The fourth column is the score that indicates the degree to which a company is a prospector (column 3 divided by the mean on all questions of that company). The

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following columns are the results of the content analyses. Column 5 shows the percentage of „prospector statements‟ and column 6 is the percentage of „words that could be indicated as typically prospector‟. These three scores for prospector strategy are highly correlated (Pearson correlations of 0.851, 0.840 and 0.944). The final column shows some quotes that illustrate the overall impression that the respondent gave about the business strategy. The companies are sorted from prospector to defender based on column 4, 5 and 6. Table 7.6 Assessment of business strategy Column 2 3 4 5 6 7

Firm

Mean all

questions

Score

q1,2,5,6,

7,8 - 3,4

Score/

Mean

Content: %

prospector

statements

Content: %

prospector

words Quotes

1 4.50 22 4.89 0.94 0.89

"We are marketleader and try to be the first one to introduce products.

We hope competitors don't follow to soon"

9 4.25 18 4.24 0.92 0.90

"In quality and sustainability we always try to be innovative,

furthermore we want to be the first in a product"

3 4.00 16 4.00 0.94 0.93

"As marketleader you have to innovate continuously, come up with

new ideas, but you can't give only this attention"

2 4.00 16 4.00 0.88 0.85

"Everybody can bake, it's good that the production is efficient, but the

money is earned by marketing and sales",

5 4.38 15 3.43 0.64 0.79

"We are especially in new products and new markets, but we are also

putting new live in existing product lines"

6 5.00 20 4.00 0.58 0.59 "We are a marketing company", "Cost control is highly important"

11 4.63 17 3.68 0.58 0.63

"We are dependent on innovations", "If you want to keep earning

money you have to keep improving production efficiency"

8 4.13 13 3.15 0.50 0.57

"More volume is no use", "We have to distuinguish ourselves in other

ways", "Logistics are often a good way to position yourselve in the

market, other ways than the product itself"

7 4.50 16 3.56 0.36 0.49

"Costs need to be lower. The contribution margins are not very high",

"We introduced a product. There was a quest from the market so then

you start to think how to produce such a thing"

4 3.63 9 2.48 0.50 0.47 "The focus used to be different", "It is all about the money"

12 3.75 10 2.67 0.25 0.46

"With a high efficiency you can compete in the market based on the

low price"

10 3.38 7 2.07 0.15 0.33

"Efficiency has high priority", "We always were followers, so we see

something that is succesful and try to copy it, but new products are

gaining priority"" Sorted from prospector to defender (by a weighted average of column 4, 5, 6)

Based on the scores and content analysis, as shown in Table 7.6, several firms are identified as prospectors to a high degree. Especially the top 4: firm 1, 9, 3 and 2 are prospectors. Firm 1 is constantly monitoring the market and wants to develop products to be able to cope with the needs of the market. The products are close to the current production line, but the firm is highly innovative and the first one to introduce new products on the market. The company creates change in the industry, which is a typical prospector characteristic. For firm 9, product innovation and new market opportunities and flexible technologies are the highest priority. They don‟t want to be the „followers‟. They introduced a new innovative product in the Dutch market. They try to produce efficiently, but flexibility is also important. Since they have spare capacity there are possibilities for new products. The company is switching from a product oriented company to a marketing company. The respondent states: “We are in a transition. That‟s why we want to find opportunities. What does the customer want? Do something with it.” Firm 3 gave a score of „4‟ at every aspect. However, the company is market leader and continually sees the urge to innovate. To be able to produce a broad range of products the technological processes have to be flexible. The respondent states: “Efficiency is always an item, but we can‟t be highly efficient, because we want to be flexible.” Flexible production lines are needed to be able to cope with „trends‟. Not all introductions have been successful. The company now plans to do more market research. Other companies have followed new products that are introduced.

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Firm 2 indicates that introducing new products is highly important, but it is difficult to keep the market share. In the past you could take 60% of the market when you were the first one to introduce a new product and nobody really got in between. "Nowadays, there are so many 'copying companies' that it is hard to protect new products." When there is a high turnover, the supermarkets will notice in their cash register what sells well and this is copied within a few months. The respondent confirms that they are usually the first ones to introduce new products or at least they try to be. There are a few „cash cows‟, but you have to keep innovating. Innovations often have to do with the presentation of the product. The top 4 prospectors all indicate that they have a stronger strategic focus on differentiation than cost leadership. This is as expected, since a differentiation strategy is comparable with prospectors (see section 5.5). The respondent of firm 9 comments: “Since we aim at quality and sustainability you can‟t do the same as the mass. You make a distinct product.” Firm 3 elaborates that the brand has to innovate and because of the innovation it is not possible to work highly efficient which means that the key point is not the lowest costs. Many products have to deal with trends and the company wants to be flexible. Firm 2 mentions that with the strong brand much more money is earned than the private labels that they sell. The focus is on quality and brand. For the following companies in the list (Table 7.6), the priority for introducing new products in the market is high and there are examples of successful introductions. Some of these companies somewhat recognize a differentiation strategy, but they also hold on to their existing product lines for which low costs are very important. Firm 5 is highly diverse. Overall, the company searches for new products and market opportunities in a broad and developing domain. The company does not produce all these products itself, but they own brands or take care of the distribution. The company has to coordinate numerous and diverse operations and works with „brand managers‟. The company is often changing and reorganizing. Four years ago, the company made a switch from a production oriented organisation to a marketing organisation. Recently, more focus went to sales again. Market research is highly important. Overall, this firm can be identified as a prospector. However, if the production locations (all in the meat sector) would be assessed another conclusion has to be drawn. In this market, cost leadership is highly important. Snacks are a commodity product. In order to use the full production capacity the company needs private label contracts. The snacks unit of the company does search for new market opportunities and introduces new products, close to the product line, but in order to maintain a low cost price the production efficiency is highly important. For firm 8, innovation and market opportunities are more focussed on the production processes and services such as on-time delivery or quality. Low costs are also very important in order to be able to compete, they could however never reach the same level as foreign producers and therefore it is important to distinguish on other aspects. Improving production efficiency and cost control are highest priority for firm 4. However, a major change had taken place. Until recently, the company was part of a large holding. For this parent company, innovation and market research was highly important. The current parent company has other priorities and this resulted in major changes of strategy for firm 4. The research and development department shrunk from 25 to 6 people. The company is market leader with 15% market share more than the competitors, but the strategy changed with the takeover. For firm 12 the production efficiency, cost control and flexibility is very important. This is an interesting combination since flexibility and efficiency could be a trade-off. However, this company produces specialties for other companies. When the „customer‟

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has a new product, firm 12 is able to quickly make investments, change the production line and start producing. Next, the efficiency is highly important. Innovation or research and development is not very important, since this is done by their buyers. Firm 10 has a very low priority for introducing new products on the market. Research and development also has low priority. The respondent states: “With common sense and we look at what others do”. Market research is performed, but especially to test the taste of their existing products. The company is a private label producer and they do what their buyers, other companies, want. The strategy is to reduce costs and the quality of the product is very important. It could be noted that the strategy and focus can also differ between product locations or business units of a company, especially if the sales and marketing are located at another location. Firm 6 indicated that all aspects had a lot of priority. Improving production efficiency and cost control were especially important for the production location. However, the other aspects were also important, but research and development were located at another location. For firm 5, different strategies could be distinguished. Overall, the company has a broad domain and many prospector characteristics, but for the specific business unit, cost leadership is more important, as stated before. Sectors and strategy Out of the top four prospectors in this research, three are in the bakery sector. This is interesting to compare to the data of the questionnaire of 2005 (see box 7.3). The prospector position of the bakeries can be important to keep in mind, because of possible specific characteristics of this sector. This will be further

elaborated on in the next section where firms reflect on the environmental management of the company. Notable is that one firm in the coffee sector is a prospector while the other firm is the most evident defender. Efficiency and flexibility are important to both firms, but these firms obviously have a different strategy. While firm 9 explicitly states that they don‟t want to be the „follower‟ and want to find opportunities, the respondent of firm 10 mentioned that they look at what others do.

Table 7.7 Sectors and prospector ranks

Firm Sector Prospector ranks

1, 2, 3 Bakery 1, 4, 3

4, 5 Meat 10, 5

6, 7, 8 Vegetables, spices, fat 6, 9, 8

9, 10 Coffee 2, 1211, 12 Beverage 7, 11

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7.3.2. Environmental management

In this section, insight is provided in how the companies in the case study deal with environmental issues. Environmental areas There are several environmental issues the companies have to deal with. Table 7.10 shows the main issues of environmental management, sorted on the average. Table 7.10 Main environmental issues, interview question 10 (5-point Likert scales, N=12) To what extend are the following aspects of environmental pollution a

point of attention at your company? (1=not at all, 5=very much) Minimum Maximum Mean Std. Deviation

Energy use 3 5 4.42 0.67

Noise 1 5 3.83 1.27

Waste production 1 5 3.58 1.31

Smell 1 5 3.50 1.45

Water pollution 1 5 3.42 1.56

Soil pollution 1 5 3.00 1.60

Air pollution 1 5 2.88 1.38

Chemicals 1 5 2.83 1.40 Energy use is the environmental aspect that has the most attention. The main reason is costs. Almost all firms mention financial issues when elaborating on the score for the attention for energy use (firm 1,2,3,4,5,6,8,10,11,12). The respondent of firm 8 stated: “Energy has high priority because it is 30% of our costs”. Several firms mention that the energy bills are high or increasing (firm 1, 2, 3, and 4). Noise is important because of environmental regulations and the neighbourhood. Several companies mention that they are located in or near a village (firm 1, 6, 7, 8, 9, 10, 11, and 12). One respondent states: “In the first place we want to have a good relationship with the inhabitants of the village, but we just have to comply with legislation”.

Box 7.3 Prospectors in the questionnaire 2005 Prospector strategy was measured in the questionnaire based on 3 statements (see 6.3.2). Table 7.8 shows some statistics on this variable.

Table 7.8 Prospector Strategy

N Minimum Maximum Mean Std. Deviation

Prospector (10.1+10.4+10.8) 96 1.33 5.00 3.4375 .87768

In order to explore whether there are differences between sectors in business strategy, the companies are split in 2 groups based on the prospector strategy score. Group 0 scores on average 3.33 or lower, group 1 had a score of 3.67 or higher (see §6.3.2 operationalization). As shown in table 7.9, there are many prospectors in the bakery sector as was also the case in the interviews. Table 7.9 Prospectors in the sub-sectors.

Prospector Groups Total

0: defender 1: prospector

Sub-sectors Grain mill, fat, and animal concentrate 7 (58%) 5 (42%) 12 Slaughterhouses 14 (70%) 6 (30%) 20 Vegetables and fruit 7 (64%) 4 (36%) 11 Dairy 7 (78%) 2 (22%) 9 Other 8 (62%) 5 (38%) 13

Beverage 2 (29%) 5 (71%) 7 Bakeries 5 (21%) 19 (79%) 24 Total 50 (52%) 46 (48%) 96

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Six of the companies were also included in the questionnaire of 2005. This provides an opportunity to compare these with the scores from the interviews. Figure 7.3 shows the mean attention of the six companies in 2005 and of all the companies in the interviews. Five out of six companies gave a slightly higher mean score on attention to environmental pollution issues in the questionnaire in 2005. The comparison indicates that the answers of the respondents are quite consistent. Water pollution was the aspect that had the highest decrease in scores, which is mainly because of firm 3. The respondent explained that there had been an inspection which showed that there the sewerage was polluted.

Attention of companies to environmental pollution

0.00 1.00 2.00 3.00 4.00 5.00

Bakery

Bakery

Bakery

Meat

Meat

Vegetables

Spices

Fat

Coffee

Coffee

Beverage

Beverage

12

34

56

78

910

11

12

Fir

m

Mean

Database 2005

Interview

Figure 7.3 Scores on environmental issues in interviews and questionnaire

It is interesting to know which environmental issues are important to which companies and to what extent. Table 7.12 shows the mean score for attention for environmental issues per firm and their main pollution issues and reasons. This points out that the attention for environmental issues varies per company. The firms in the sector vegetables, spices and fat, have on average most attention for pollution issues. The companies in the bakery sector have on average less attention for environmental issues than companies in the other sectors (see also Figure 7.3). This has to do with the production process. The environmental pollution of these companies isn‟t high according to the respondents. Firm one mentions that the company does not put high pressure on the environment, the respondent of firm 2 states: “We hardly have any polluting issues” and firm 3 says “This branch is not so polluting”.

Box 7.4 Environmental attention in the questionnaire 2005 The question on environmental issues had been copied from the questionnaire of 2005. As shown in table 7.11, energy use is also the most important environmental point of attention in the questionnaire of 2005. Table 7.11 Main environmental issues database

N Minimum Maximum Mean Std. Deviation

Energy use 95 2 5 3.82 .875 Water pollution 100 1 5 3.42 1.273 Noise 100 1 5 3.40 1.119 Waste production 100 1 5 3.28 1.055 Smell 100 1 5 3.12 1.166 Hazardous substances 100 1 5 2.93 1.320 Soil pollution 100 0 5 2.56 1.321 Air pollution 100 0 5 2.50 1.227

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Table 7.12 Average attention for pollution issues per company, main pollution issues, interview and mentioned reasons for this attention, interview question 10

Firm Sector

Mean

attention Main pollution issues (score) Mentioned reasons

1 Bakery 2.75 Soil pollution (5), noise (4), energy use (4) Pollution from previous owners, neighbours, costs

2 Bakery 2.88 Noise (3), smell (3), waste (4), energy use (4) Environmental permit, local government, costs

3 Bakery 1.50 Waste (3), energy use (3) Costs

4 Meat 4.25 Soil pollution, waste, energy use (all: 5) Needed for production, projects

5 Meat 2.88 Water pollution (5), energy use (4) MJA, saving

6 Vegetables 4.50

Noise, water pollution, smell, organic waste, waste,

energy use (all: 5) Neighbours, permits, costs

7 Spices 4.06

Noise, water pollution, organic waste, waste, energy use

(all: 5) Regulations, costs, parent company

8 Fat 4.50

Soil pollution, noise, water pollution, smell, air pollution,

energy use (all: 5) Regulations, government, costs

9 Coffee 4.13 Noise, smell, air pollution, energy use (all: 5) Neighbours, regulations, environment, policy

10 Coffee 2.75 Noise (5), smell (5), energy use (4) Neighbours, complaints, regulations, costs

11 Beverage 3.25 Soil pollution (5), water pollution (4), energy use (4) Production process, costs12 Beverage 3.75 Noise (4), water pollution (4), waste (5), energy use (5) Neighbours, regulation, MJA, costs

Environmental areas and business strategy The attention for environmental issues could differ between strategy types. Energy use and waste are closely related to efficiency and the production process, while noise and smell are not „physical‟ and do not necessarily have to cost money. This is however difficult to analyse, because the top 4 prospectors score much lower on all issues with a mean of 2.81 compared to a mean of 3.74 of the other companies.

Box 7.5 Mean attention in different sectors and strategies In table 7.13 the mean attention for environmental issues in different sectors of the companies in the questionnaire are shown. As in the interviews, the bakeries give the lowest mean score for attention for several environmental issues. A Kruskal Wallis test shows a significance value of 0.006. Because this value is less than 0.05 it can be concluded that the attention for environmental issues significantly differs between these sub-sectors. Table 7.13 Mean burden: attention for environmental issues

Sub-sectors Mean N Std. Deviation

Grain mill, fat, and animal concentrate

3.1875 12 .81621

Slaughterhouses 3.0723 20 .89093 Vegetables and fruit 3.5455 11 .71866

Dairy 3.2161 10 .59562 Other 3.6538 13 .71653 Beverage 3.2500 8 .63616 Bakeries 2.6140 26 .74073 Total 3.1232 100 .81747

Table 7.14 shows the means of the attention for environmental issues from the prospectors (1) compared to the other firms (0). None of the differences are significant (Mann-Whitney U test). Table 7.14 Mean burden: attention for environmental issues

Prospector Groups (10.1+10.4+10.8)

So

il

po

llution

Nois

e

Wa

ter

po

llution

Sm

ell

Air

po

llution

Che

mic

als

Wa

ste

En

erg

y

usa

ge

Me

an

bu

rde

n

(qu

estio

n

11

)

0 (N=50) 2,50 3,26 3,64 3,22 2,54 2,84 3,24 3,80 3,1289

1 (N=46) 2,72 3,57 3,22 2,98 2,54 3,09 3,39 3,84 3,1677

Total (N=96) 2,60 3,41 3,44 3,10 2,54 2,96 3,31 3,82 3,1475

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Which issues are important to a company can depend on many factors. As mentioned before, energy use is important to all companies in the food industry, because of the costs. Issues such as noise and smell can be more of an issue when the company is located near a village. For firm 1, soil pollution was an issue, because of previous owners of the land. For firm 6 for example water pollution had attention because of an environmental permit. Whether certain issues are more relevant to prospectors than to defenders cannot really be said because of all these factors. Environmental management system (EMS) Seven companies implemented an environmental management system (firm 4, 5, 6, 8, 9, 10, and 11). The respondents of firm 7 and 12 indicated that they were busy setting one up. Four companies had an ISO-certified environmental management system (firm 4, 5, 6, and 11). Firm 8 and 9 have their own system. The most important reason to implement a management system is because of several stakeholders. Companies mention several reasons, including customers, the parent company, but also long term agreements with the government or regulations. One respondent (firm 12) says that implementing an environmental management system is linked with the new environmental permit, “but it is also what customers are continually asking for”. Reasons not to implement an environmental management system also have to do with stakeholders. If the customer is not asking for it, the company is less triggered to do so. Many companies do not see financial benefits of an environmental management system and if their stakeholders are not asking about it there wouldn‟t be many other reasons left. Respondents also indicate that their company doesn‟t harm the environment a lot, or that they don‟t think that an environmental management system would improve their environmental performance. There are similar reasons for certifying the environmental management system or not. However, there the respondent of firm 12 is quite explicit about not certifying and states that “they are against certifying”. He argues that the companies that have to do the audits are not strict or critical enough. Everything is just approved while it costs a lot of money.

Box 7.6 Mean EMS implementation Sectors In table 7.15 the mean of implemented elements of an EMS is shown for different sectors. A Kruskal Wallis test shows a significance value of 0.000. Because this value is less than 0.05 it can be concluded that the implementation of environmental management systems significantly differs between these sub-sectors. As in the interviews, the bakeries did not implement environmental management systems. Only one out of 26 companies in the bakery sector implemented all nine elements of an EMS that were asked for. More than half of the bakeries implemented none or only one of these elements. Table 7.15 Implementation of EMS in the sub-sectors

Sub-sectors Mean N Std. Deviation

Grain mill, fat, and animal concentrate 5.7500 12 2.22077 Slaughterhouses 4.0500 20 2.60516 Vegetables and fruit 5.0909 11 2.34327 Dairy 4.5000 10 2.27303 Other 4.9231 13 2.66025 Beverage 6.3750 8 2.38672 Bakeries 2.1154 26 2.21498 Total 4.2100 100 2.71284

Strategy The prospector group had a mean of 4.04, the other companies 4.36. This difference is not significant.

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There are three companies (firm 1, 2 and 3) in this research that did not implement an environmental management system, nor are busy with doing so. These are the three companies in the bakery sector. Their attention for environmental issues was also quite low. According to these companies, their production process is not very environmental unfriendly and environmental management systems are not needed. Reasons for improving environmental performance As shown in Table 7.16, legal requirements are the most important reason for improving environmental performance. Firm 9 gave less priority to legal requirements. The respondent indicated that they want to be ahead of regulations and therefore, legal requirements are not an important motive. One company (firm 5) mentioned that the environmental management system helped them to realize that there was some legislation that they didn‟t comply to yet and another company (firm 6) indicated that they used an external organisation twice a year to check whether they complied to all legislation and advise what had to be changed. Perhaps some other companies are thus not fully aware of all legal requirements. However, it is clear that for the companies in all sub-sectors it is the most important reason for improvements. Financial advantage is also an important motive. This does however, in this question, not indicate that there always is a financial advantage to improving environmental performance. The respondent of firm 3 states later in the interview: “Either it has to be a legal obligation or it has to be financially lucrative.” Table 7.16 Reasons for improving environmental performance, interview question 13

(5-point Likert scales, N=12) What are the most important reasons for improving environmental

performance? (1=not at all, 5=very much) Minimum Maximum Mean Std. Deviation

Legal requirements 3 5 4.58 0.67

Financial advantage 3 5 4.00 0.95

Company aspiration (vision, strategy) 1 5 3.92 1.38

Covenants 1 5 3.75 1.29

Stakeholders (society, consumer, buyers) 1 5 3.17 1.27

Risks 1 5 3.00 1.21

Competitive position 1 5 2.88 1.28 Sorted by the mean

The other reasons vary a lot between companies. Notable is that the firm for which company aspiration was not an important reason was firm 4. This company used to be part of a large multinational for which sustainable development is an important value, but the firm had been taken over by a smaller investment company that has other priorities. An interesting point was that firm 11 indicated to be „against‟ covenants. The respondents stated: “the smaller companies that do not want to improve in certain areas can hide behind the totals in the covenant”. The sector therefore did not join the energy covenant. Firm 12 which operates in the same sector however said that the covenants are difficult to comply to, so all companies would have to put a lot of effort into it. Both companies in the coffee sector (firm 9 and 10) indicated that the stakeholders are not an important reason to improve environmental performance. Firm 9 (which sells mainly to the food service) underlines that their company aspiration is more important. Firm 10 (which sells mainly to retail) explains that their buyers do not have high demands and mentions that the supermarkets may have low priority for the environment during the „price wars‟. “If they tell us to do more about the environment the product will be more expensive. Someone has to pay for it, but the consumer indicated they don‟t mind. They want a cheap product.” Most companies do not see the competitive position as a reason to improve environmental performance. These respondents (including the firms in the bakery sector) comment that the company does not want to distinct itself with their environmental performance or that the possibilities are small. Four respondents do relate environmental

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performance to the competitive position: The respondent of firm 9 states that the company exceeds other companies and thus it is something that can be used to distinct from other businesses. Both firms in the beverage sector (firm 11 and 12) think that better environmental performance is relevant for the competitive position. One of these companies, firm 12, points out that their large customers prefer a company with a good environmental performance, while small buyers want a product that is as cheap as possible. Firm 8 relates environmental performance and the competitive position to the financial aspects of the production process and therefore it is a reason for improvements. There were no interesting findings concerning different business strategies and reasons to improve environmental performance. Environmental performance During the interviews it was clear that comparing environmental management or environmental performance with competitors can be difficult because of a lack of transparency. Two respondents couldn‟t answer the questions at all (firm 6 and 7). Firm 5, 8, 9 and 10 could answer the question but didn‟t have full insight in their competitors‟ performance. Table 7.17 shows the average of the scores on question 14. Elaboration on this question and the previous questions did give some idea about the environmental management performance of the companies. Table 7.17 Perceived environmental performances compared to competitors, interview

question 14 (5-point Likert scales, N=10)

Minimum Maximum Mean Std. Deviation

1Management performance (policy, environmental management system,

communication etc.) 3 5 3.85 0.58

2 Physical environmental performance (energy use, emissions etc.) 3 5 4.05 0.76

What is the environmental performance of your company compared to

your most important competitors? (1=much worse, 5=much better)

Assessing environmental management performance is complicated. How to deal with the aspect that one sector is more polluting and therefore would need more measures than others? Furthermore, the interviewed companies also found it hard to indicate their environmental performance compared to their competitors. However, based on the results of the interviews, the companies are roughly sorted for environmental performance as shown in Table 7.18. This is based on an overall impression of their environmental management. Column 3, 4, 5 and 6 show some aspects that are taken into account while sorting the companies on their environmental performance. Table 7.18 Environmental performance of the interviewed companies

Firm Sector

Environmental

management

system

Environmental

performance

(q14.1:manage

ment)

Environmental

performance

(q14.2:physical)

Other relevant indicators

or keywords

9 Coffee Yes (own system) 4.00 5.00 philosophy of sustainability

11 Beverage Yes (ISO-certified) 5.00 5.00 beyond compliance

5 Meat Yes (ISO-certified) 4.00 4.00 beyond compliance

4 Meat Yes (ISO-certified) 4.00 4.00 previous parent company

6 Vegetables Yes (ISO certified) ? ? policy parent company

12 Beverage Busy setting up 4.00 5.00 beyond compliance

1 Bakery No 4.00 4.00 role model

3 Bakery No 4.00 4.00 more staff and resources

8 Fat Yes (own system) 3.00 3.00 compliance

2 Bakery No 3.50 3.50 compliance

7 Spices Busy setting up ? ? compliance10 Coffee Yes 3.00 3.00 compliance

Sorted from high performance to low performance

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Following, the environmental management performance of the interviewed companies, roughly sorted in Table 7.18, is further described. Firm 9 is considered to be relatively the best performing firm in environmental management. This firm takes far reaching measures. They for example compensate the CO2 emission of the gas they use. The respondent states: “We do that from a philosophy not to burden the society. What our company does should be compensated so all coming generations will be able to live in the Netherlands.” The owner started this philosophy thirteen years ago. The respondent says that it is another way to manage your business. It is another way of thinking, not only short term but also long term. The next firms in the list (Table 7.18) also take many environmental management measures. They have an ISO 14001 environmental management system that is certified and go beyond compliance. This has a lot to do with the policy of the parent company. The management of firm 11 decided in 1999 to have a certified management system for quality, ISO14001 and HACCP. A completely integrated system has been implemented. When asking for reasons to improve the environmental performance the respondent indicated that the company aspiration is highly important and that this comes from the parent company. The parent company has many rules, guidelines and environmental goals. The stakeholders are highly important in this. The parent company is directed by the stakeholders and they are comparing themselves with other large companies. They want to be a leading firm. The companies in the meat sector are high in this list of environmental management performance. Both these firms also mention the parent company. The respondent of firm 5 comments that it would be too easy to just say that the reason is the parent company. It is about sustainability. The parent company has a strategy and last year they published an environmental report for the first time. The respondent states: “The stakeholders want it so we do it”. Firm 4 claims to be a leading company in the branch concerning environmental management. The respondent explains that their previous parent company decided that all their companies needed to be ISO 14001 certified. This company is an international well known company with many A-brands and according to the respondent “there is enough money for investments”. However, the strategy has changed because now they are part of another parent company which has other priorities. It is therefore questionable how this company will perform in the future concerning environmental management. Firm 6 also mentions the policy of the parent company. Quality, energy (environment) and safety are highly important to this firm. The parent company has high norms and there are internal audits. This has to eliminate differences in order be the similar worldwide. Firm 12 is currently implementing an environmental management system conform ISO 14001. The respondent indicates that this goes with the new environmental permit and the customers are asking for it. Better environmental performance is a pre for large customers. He also stated that they are not polluting. This is also what the bakeries indicated that are following in this list. The bakeries did not implement an environmental management system. Firm 1 however did state that they are a role model for the region and that the local government described them as such. The respondent thinks that their environmental performance is somewhat better, because they have a few advisors which would already indicate that they are doing more than others. They also get questions of other companies. Firm 3 indicates that the parent company, which does do audits, is thinking about (certifying) environmental management systems. The respondent however does not think that it is useful or better for the environment. “No customer has asked for ISO14000 so I do not think we will begin with that”. When asking for a strategy he mentions the costs. He does think that their environmental performance is better than their competitors, because they have for example more staff on environmental management and they have more resources to make investments. The strategy of firm 2 is to comply

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with regulations. They do not have an environmental management system because they are flexible and such systems require more long term thinking. The respondent thinks they are an average performer, not worse than other bakeries. He has seen other bakeries and most of them are less organized, except for some large companies. Firm 8 has its own environmental management system or audit protocol. However, they are planning on changing it to ISO 14001, because the buyers and customers are asking questions and it takes effort to explain their current system. It could be easier to take the international accepted norm. The respondent says that they had to do an IPPC (Integrated Pollution Prevention and Control) test which showed they the company scored quite well. They started relatively early with structural managing of communication and environmental aspects. Compliance is highly important. The respondent considers the company to be average or slightly better than their competitors. Firm 7 is busy with setting up an environmental management system based on ISO 14001. It is probably going to be certified. The parent company wants this and the customers are starting to ask for it, although the interviewee has not noticed this yet at their production site. The company does have an environmental strategy, but there has not been an initial audit. Customers do visit to do audits. The respondent does not know how their performance is compared to other companies. He thinks it is quite the same level, because you have to comply with regulations and what customers are demanding is probably the same. Firm 10 implemented an environmental management system because it is a compulsory part of the long term agreement energy. It is not certified, because customers are not asking for it. It costs time and they want to do the least effort. The firm has to deal with lawsuits with their neighbours concerning environmental issues. The respondent does not have insight in the environmental performance compared to their competitors. He expects that the large company in the sector with an A brand to have more specialists and do more monitoring. But there are also companies that do less, especially in other countries. He thinks the company is performing average.

Box 7.7 Mean on ‘Better EM performance than competitors’ Sectors In Table 7.19 the means on whether the respondent thinks that the firm has a better EM performance than competitors are shown, comparing the different sectors. As in the interviews, the companies in the beverage sector rated themselves highest. The differences between sectors on this question are not significant. This makes sense, since most firms would probably consider other companies in the sector as their competitors. But the majority of companies (61 out of 95) scored neutral. This was also the case in the interviews, where it became clear that companies find it difficult to compare themselves to their competitors. Table 7.19 Means ‘Better EM performance than competitors’

Sub-sectors Mean N Std. Deviation

Grain mill, fat, and animal concentrate 3.33 12 .778 Slaughterhouses 3.32 19 .885 Vegetables and fruit 3.20 10 .632 Dairy 3.00 9 .500 Other 3.38 13 1.044 Beverage 3.86 7 .900 Bakeries 3.20 25 .577 Total 3.29 95 .770

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Business strategy and environmental management In the theoretical framework was described that a firm at the prospector end may want to remain flexible and an environmental management system might give limitations for large changes. Conversely, defenders avoid huge changes and have capital intensive technologies that need to be continuously improved in order to maintain efficiency. An environmental management system, which focuses on continuous improvement, might be very useful to contribute to a defender‟s target. Out of the 12 companies that were interviewed, 7 companies implemented an environmental management system and 2 were busy with setting one up. 3 companies did not implement an environmental management system. These happen to be part of the top 4 prospectors. When asking for the reasons why the firm doesn‟t have an environmental management system, the respondent of firm 2 states: “We do not work according to an ISO system, because we are a flexotic organisation. We are very flexible, but sometimes very chaotic”. Firm 3 mentioned earlier in the interview that they want to be flexible. The respondent states: “Being flexible is always our philosophy”. Firm 3 questions whether the benefits would be more than the costs and nobody has ever asked for it. Firm 1 does not think that it is polluting and therefore don‟t seem to find an environmental management system necessary. Recall that all these three firms were part of the bakery sector. There thus seem to be several reasons, flexibility being one of them.

7.3.3. Resources and capabilities

The following section of the interview was about resources and capabilities. Respondents were asked to score the influence of several resources on environmental management and the influence of environmental management on these resources. The mean of the scores on all the resources varied between 3.00 and 4.00. Brand name scored highest as advancing environmental performance, while this aspect scored lowest on the effect of environmental performance on the resource. Further details on the scores are not very relevant to show, however some interesting insights from elaboration on the aspects can be mentioned. There were seven items in the interview protocol, but some that are closely related are jointly discussed. Physical assets and production process Physical assets can influence the environmental performance. Firm 2 mentions that physical assets are a limitation because of old machines. Some parts are changed in order to save energy, but some parts have a long life. Firm 10 mentions that the old machines are difficult to improve which makes it hard to monitor. Many machines in these companies of the food industry last long and are highly expensive and therefore cannot just be replaced. Most companies that are interviewed have some old and some new machines. Several companies are in the middle of replacements and mention that when a new machine is purchased the environment is taken into account (firm 1, 4, 6, and 7). Obviously, new machines can advance environmental performance. The respondent of firm 11 states: “50% is younger than 2 years. We have one line that is 25 years old. The losses are higher, energy use is not isolated, and that is a difficulty. But on the new machines are the most modern bits applied, they give a lot of possibilities.” The production process and efficiency is highly related to the physical assets. For most companies, the wish to improve efficiency positively influences environmental performance. However, firm 10 mentions that they are highly flexible and therefore not very efficient. 30-40% of the time the lines are not operating which is a limitation.

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Technological knowledge and staff Technological knowledge can be used to improve environmental performance. The respondent of firm 8 states: “If I look at what we have done (environmental measures) and why this is done, it was especially because of technological knowledge that it is improved”. Companies indicate that there is a lot or enough knowledge (firm 1, 6, 8, 9, 10, 11, and 12). The respondents of firm 6 and 9 elaborate that where there is a lack of knowledge, this can be brought into the company by external organisations. Knowledge is also linked to the staff. The employees seem to be highly important in a company for environmental management and they have to be kept involved. The respondent of firm 2 states: “People are highly involved and want to cooperate for improvements, but they have a lack of knowledge, so they need guidance”. Most of the production personnel is however, not thinking about the environment. Some companies have to deal with staff that cannot all deal with the changing production process (firm 2, 12). There used to be many employees that did for example manual packaging. Now many processes are automized, but the operating the machines can be too difficult for some of the „old‟ staff. A lack of knowledge or competences could be a limitation for environmental management. Furthermore, firm 5 indicates that there is a limited capacity of staff to manage environmental projects. Most companies indicate however that the staff is trained and getting more involved. But this shows that improvements are initiated by management, so the relation for most companies is not that the staff actually advanced environmental management. Reputation and brand name When it is asked whether reputation advances environmental management, many firms indicate that „reputation‟ is important. Brand name is by most respondents regarded to be the same. Firm 1 gave a score that it advances environmental management and mentions “we have an excellent reputation at all fronts”. A company does not want to be mentioned in the media in a negative matter (firm 2). An environmental scandal would be a huge problem and can‟t be risked (firm 3). Environmental reports are published to improve the image (firm 5). Companies can‟t allow their selves to harm the environment, because then it would harm the brand name (firm 6). If no attention is paid to the environment it is bad for the company name (firm 7). Customers do not want to do business with companies that are not paying attention to environmental management. If you think about a company a customer shouldn‟t have to think about environmental excesses (8). Strategy Firm 10 however states that reputation and brand name are not advancing environmental management at all (scored 2 on both). They don‟t feel the pressure. Firm 10 was the defender (rank 12). Efficiency and cost control are highly important for this firm. It is interesting to compare firm 10 to firm 9, which is the other firm in the coffee sector, but scored high on prospector (rank 2). Firm 9 indicates that reputation and brand name certainly do advance environmental management (scored 5 on both). The respondent comments that they want to keep their good name. The top 4 prospectors on average give a score of 4,250 on both reputation and brand name, while the other companies have a mean score of 3,429 for reputation and 3,875 on brand name. This is as theoretically expected, since reputation and brand name have to do with image and are more on the revenue side. These differences are however not significant. The other way around, environmental management is in general not perceived to improve the reputation or brand name and the respondents hardly elaborate on this idea.

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The respondent of firm 8 explains that a few years ago some environmental measures were taken and the government and neighbourhood were pleased with it, but then after a while this fades out and new measures and improvements are expected. An exception is firm 11 that claims that they are admired by branch organisations, governments and other companies, improving their reputation. They do not however sell more products because of their environmental management. Financial assets Some companies indicate that financial assets can be a limitation to improve the environmental management (firm 3, 5, and 10). The respondent of firm 3 states: “It is a limitation, because money isn‟t really set apart, unless I indicate that it is finally saving money”. Most respondents claim however that financial assets are not a limitation (firm 2, 6, 7, 8, 9, and 12). Firm 7 denies that environmental investments could be hard to do. “The board wants to invest money to comply with regulations”. The respondent of firm 12 explains that it is no problem if it has to do with a large customer. “If we need to purchase machines in order to produce less waste than that is what happens”. It seems however that there actually is not really a different view, but that it depends on the situation. Financial assets are not a limitation for investments that are needed to comply with regulations or customer demands or result in saving money, but if it is less necessary than it can be a problem. Firm 9 seems to be an exception, that takes far reaching measures and states that money is available if something wants to be done. The other way around, the effect of environmental management on the financial assets, differs. Some projects have a net positive return. The firms that see a positive relation especially mention energy costs (firm 1, 8 and 11) waste (firm 2, 6, 10 and 11) in this part of the interview. Energy use was in question 10 already shown to be the most important environmental issue with the main reason that was mentioned the costs. More on the relation between environmental management and financial issues is described in the following section.

7.3.4. Environmental management and financial performance

In this section, environmental management is linked to financial performance. First respondents were asked for their perception of this relationship. The mean scores are shown in Table 7.20. As can be seen the means vary quite a lot. Table 7.20 Perceived relation environmental management and profitability, question 16

Minimum Maximum Mean Std. Dev.

1

For companies within the sector, the environmental

performance is positively related to the profitability. 2 5 3.67 1.07

2

Environmental performances contributes to a higher

turnover (sales) of our company. 1 4 2.25 0.97

3

Thanks to environmental management a higher selling

price can be asked for our products. 1 3 1.71 0.62

4

The costs of environmental management are lower than

the cost savings it results in. 1 5 3.83 1.03

5

For our company, better environmental performance

results in a financial advantage. 2 5 4.33 0.89

To what extend do you agree with the following statements

(1=disagree, 5=agree)

Sector Several respondents think that environmental performance is positively related to the profitability in their companies‟ sector. Several explanations are provided. First, environmental management and financial performance are positively related, but not because the first causes the other. The respondent of firm 2 thinks that a company that is

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doing well won‟t have a lot of focus on environmental issues so that there would be an indirect link. Another firm states that it has to do with how you deal with things. There is a relation, but not necessarily a causal relation. The respondent of firm 10 thinks that environmental management is an indicator for how „mature‟ a company is: “If a company implemented an environmental management system, and it works, it means that the rest is also performing well.” The respondent of firm 12 thinks that there are several phases. Companies that are not performing well won‟t spend a lot of money on the environment. They move to Asia where there are fewer requirements. Second, companies think about the cost savings. Firm 1 bases it on waste water and energy costs that are relevant for the whole sector. The respondent of firm 8 mentions that there is research that shows that there is a positive relation between profitability and environmental management and agrees, based on their environmental performance. Some things cost a lot of money, performing well means lower costs. Another explanation is based on the revenue side. Interviewee 11 thinks there absolutely is a relation because of the media and consumers. “If the brand name is hurt, the whole company can fall down, thus your profitability” A minority of respondents does not think that environmental management is positively related to profitability in the sector (firm 3, 4 and 9). Firm 9 states that companies in the coffee sector are not doing very much with environmental management. “If I look at the large companies, I have the idea that they are doing less with it, not like we do, while they earn much more money”. Turnover Most respondent do not agree with the idea that environmental performance contributes to a higher turnover. Consumers are buying the quality of the product (firm 6). It is difficult for the consumer to notice, especially if the marketing is not focussed on this aspect (firm 4). The media doesn‟t write positive articles if you are performing well, so that the consumer would buy more (firm 11). Firm 7 gave a score of 3 on the second statement which is relatively high. His comment was however that it is hard to determine whether environmental management contributes to a higher turnover. There are two exceptions. Firm 9 and firm 12 gave a score of 4 which means they agree with the statement. The respondent of firm 9 believes that their company sells more products because of their environmental management. Firm 12 mentions that in the food industry it is very important that people think that they are being healthy and the environment is part of that. Both companies are however not very close to the consumer. Their buyers are other companies and they do not do a lot of marketing to the end consumer. The reactions are quite consistent with the comments in question 13 whether the competitive position was a reason to improve the environmental performance. Most companies do not see the competitive position as a reason to improve environmental performance, or at least not to use it to distinct from other companies. The companies in the beverage sector and a coffee company were an exception (firm 9, 11 and 12) Selling price The interviewed companies do not agree that a higher selling price could be asked for the products because of environmental management. Only one firm (12) sees some opportunities, because the respondent thinks that there is a small group that is critical. “Especially export to Israel has to be kosher” The rest of the comments are very clear: “That is actually not true”, “I disagree”, “I wish it were so”, “Not at all”, “Totally disagree”, “Would you pay more? No, that‟s why.”; “The customer is not willing to pay. You lose it in the contribution margin”, “Buyers have demands, but they do not want the price to increase because of it”, “We actually positioned our eco products lower in order to trigger people to buy it”.

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Cost savings Most of the respondents agree with the statement that the costs of environmental management are lower than the resulting cost savings. However, this is especially on the long term (firm 4, 5, and 6). Firm 4, 5 and 6 all certified their environmental management system which also shows their long term thinking. Whether the costs are lower than the savings also depends on the measures that are taken. Firm 3 mentions the energy savings. Firm 12 is implementing an environmental management system at the moment and doesn‟t really know. It should result in cost savings, especially on waste production. Especially energy and waste are thus mentioned in relation to cost savings, which was already clear earlier in the interview. Financial advantage The final statement is in general about the relation between environmental performance and a financial advantage. Out of the 12 respondents, 11 firms „agree‟ with the statement, giving scores of a 4 or a 5. There are some respondents that elaborate that on the short term it is negative, but on the long run it is positive (firm 5 and 7). Firm 5 was the only firm that gave a score of 2, but said that for the long term he would give a 3 or 4. Most companies thus agree and the highest scores are given on this statement. Pathways A positive relation is thus perceived. Following, the several pathways of this relation (as shown in Figure 7.4 and described in chapter 4) are further analysed.

Market gains

Cost savings

Improved

financial

performance

Environmental

management

performance

Eco-marketing

Image / reputation

Material savings (input,

recycling, packaging)

Energy savings, less

waste disposal

Subsidies

Employee goodwill,

moral and productivity

Improved production

processes

Production efficiency

Lower financing and

insurance costs

Less compliance and

liability costs

Customer goodwill

Value for client

(higher contribution

margins or turnover)

Few labour problems

Attract and retain quality

staff

Better standing with

bankers investors,

government officials

Lower risk (accidents,

legal actions)

Figure 7.4 Pathways of linkage, Source: chapter 4

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Table 7.21 shows some descriptive statistics of the scores on aspects of the relation between environmental and financial performance that were asked for. Table 7.21 Pathways of relation between environmental management and financial

performance, interview question 17 (5-point Likert scales)

To what extend did environmental management contribute to profitability

of your company via the following aspects? (1=not at all, 5=a lot) Minimum Maximum Mean Std. Dev. N

Image 1 4.5 3.32 1.06 11

Marketing (eco) 1 4.5 2.86 1.23 11

Material savings 1 5 3.54 1.20 12

Waste and energy savings 3 5 4.13 0.53 12

Higher productivity / production efficiency 1 5 3.25 1.14 12

Employee moral 1 5 3.42 1.08 12

Lower financing costs 1 3 2.05 1.01 10

Subsidies 1 4 2.88 1.21 12

Fewer fines 1 4 2.22 1.56 9 Image None of the respondents thought that environmental management contributed „a lot‟ to profitability by means of a better image. Most of the respondents scored a 3 or 4. Some companies indicated that it is hard to say, because it is hard to measure (firm 3, 7). Two firms do state that image is important (firm 5 and 9), but apparently this is not generally seen as contributing highly to the profitability. However, if the image is hurt, the profitability is hurt. This was also already described in a previous paragraph on reputation and brand name. Marketing Marketing does not score high as a pathway from environmental management to profitability. Several respondents state that marketing isn‟t using environmental management (firm 2, 4). Firm 3 states that this is not interesting to do. Firm 5 however does use marketing and thinks that on the long run it will have its return. Furthermore, if it is not done, there would be a negative effect, because the consumer has expectations. There are some companies that have eco-products (at least 1, 6, 9 and 10). Firm 1 used to have ecological products for about 5 years, but the turnover was too low. Now they are starting with ecological products again, but that is for sales in Germany. The ecological market there is doing better. Dutch consumers think they are too expensive. Firm 6 just started with ecological products. The eco-label represents that the company thinks that the environment is important. Firm 10 also produces certified ecological products. However, this does not have anything to do with the processing of the firm. It is the procurement only and there has to be better cleaning in order to prevent mixing. It is only done if the customer, another company, asks for it and the contribution margin for firm 10 is the same. Another respondent (firm 11) thinks that the consumer is not sensitive for eco-marketing, at least not for their products. Productivity and efficiency Productivity and environmental management could be related, but it is not directly recognized as an benefit of environmental management resulting in better financial performance. The respondent of firm 10 elaborates that the environmental coordinator is not the one steering the efficiency and it is not because of environmental management. Other firms do see this relation. In the theoretical framework it was pointed out that many firms in the food industry fall into a category where eco-efficiency has great potential because of relatively high levels of processing costs and wastes. As shown too in Figure 7.4, efficiency has to do with the more direct terms as material, waste and energy savings. The respondents rated these terms highest as will be described below.

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Material savings Material savings are seen as one of the most important pathways of the relation between environmental management and financial performance. These can be savings on for example raw materials or package materials. Firm 11: “training people and adjusting the machines results in direct savings”. Firm 5 states that there are savings on materials, but the savings are not resulting in better profitability because of the importance of cost leadership. “It is one of the methods”. This makes it complicated. Waste and energy savings Waste and energy savings are perceived to contribute the most to profitability, because of environmental management. All respondents agree on this. Not only the high scores and comments indicate this, but throughout the interviews many examples on waste and energy savings were given. When asking about financial assets in question 15, waste and energy were mentioned as examples. As described in the section about environmental management, energy use also was the aspect that had the most attention, because of the costs. Several companies indicate that the energy costs are increasing, because of higher prices. This is extra reason for companies to have a look at this aspect and that can be done under the term environmental management. Employees As described earlier, the staff is highly important for environmental management. However, most respondents do not see them as an obvious pathway through which environmental management could result in cost savings. Several firms do not recognize a significant influence of environmental management on employee morale (firm 1, 4, and 10). The respondent of firm 7 states that people first have to see the usefulness of the environmental management system, so that should be provable. Other firms do think that there is a relation. Firm 2 states: “Everything where people are being involved has a positive effect”. Firm 6 mentions that if everything is neat, people are willing to do an extra step. Firm 11 states that if processes managed better, the staff is getting motivated and will work harder for your company. Firm 5 recognizes a possible benefit of environmental management that it would be easier to attract personnel. This has to do with image. Direct costs are not saved, but a positive image of the organisation gives opportunities. Financing costs This possible benefit of environmental management scored lowest. This could also be of a lack of information about this aspect. Several companies or the respondents seem not to really know. Three of the respondents indicate that there are no financing costs at all. Investments are paid from equity, capital from the parent company or saved money. Subsidies Most of the companies try to get environmental subsidies, although these are not major for most of the firms. The subsidies that were mentioned were for soil sanitation, time switches for the light, wastewater treatment, training of the personnel, broad projects with other companies and assistance from SenterNovem. Firm 3 indicates that they do pay attention on it, but often it costs so much time and a lot of information is needed that it isn‟t worth doing it. For firm 7, the costs of requesting subsidies are a reason not to do a lot about it. One firm disagrees with the idea that environmental management leads to subsidies, because companies that have to clean things up are subsidized, while companies that have already taken care of everything do not receive subsidies. Two firms indicate that they are subsidized for their waste water by the water treatment organisation. This is however, not a benefit of environmental management.

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Fewer fines Ten out of the 12 companies claim they never have any „environmental fines‟. Fewer fines is thus not possible and it is not seen as a benefit from environmental management. Firm 1 does mention that fines are prevented. Several companies mention that their company operates complying with regulations and therefore do not receive any fines. There are two companies that have had fines and they give a high score on this aspect. One firm says it would be a utopia to think that everything is going well at all companies. The examples given are accidents, mistakes in the process or cleaning or lacking to report an incident. The other firm once received a fine of 150,000 guilders because of violation of a permit. Fines are now prevented. An example showed that the good knowledge within the company about the environmental permits gives a solid stand with the government. One firm that didn‟t have environmental fines was involved in law suits about environmental issues with the neighbourhood. These could also be seen as environmental fines. They do not comply with noise regulations. A plan was made together with the government. Environmental management could prevent law suits and therefore save money.

Box 7.8 Benefits and costs of EM in the questionnaire 2005 Several questions were asked about costs and benefits of environmental management in the questionnaire of 2005. Although in the questionnaire the link to financial performance was not explicitly made, comparable aspects were asked for that are interesting to look at. Table 7.22 shows mean values of these variables and mean values in different sub-sectors. The first five items indicate whether the respondent thinks that environmental management contributed these aspects (1= not al all, 5= a lot). The last four items indicate whether these experiences were recognized at the firm. As in the interviews, waste and energy savings scored higher than image and marketing and also marketing scored lower than image. Furthermore, the average score on „net positive financial effect‟ is 2.37 meaning that on average the respondents to some extend think that the revenues were higher than the costs of environmental management. The companies in the beverage sector score highest for the „benefits‟ and the net positive financial effect compared to the other sectors. A Kruskal Wallis test shows a significance value of 0.028 for „net positive financial effect‟. This value is less than 0.05 and it can therefore be concluded that whether a net positive financial effect is perceived significantly differs between the sub-sectors. This was however not recognized from the interviews. The other (cost) variables do not differ significantly between the sub-sectors. Table 7.22 Means benefits and costs (5-point Likert scales)

Sub-sectors

Imp

rovem

ent

of

firm

s' i

mage

Bett

er

ma

rketin

g

of

pro

ducts

Insig

ht

into

pro

ductio

n

pro

cess

Less w

aste

pro

ductio

n

Less e

nerg

y

usage

Hig

h c

osts

for

hum

an

resourc

es

Hig

h in

vestm

ent

costs

Hig

h

adm

inis

trative

loads

Net

positiv

e

fin

ancia

l effect

Grain mill, fat, and animal concentrate

3,11 1,73 3,08 2,92 3,50 2,09 3,17 3,00 2,50

Slaughterhouses 2,79 1,83 3,18 3,35 3,32 2,00 2,76 2,84 2,87 Vegetables and fruit 2,67 1,89 2,80 3,40 3,10 1,88 3,00 2,70 2,00 Dairy 2,67 1,86 2,80 3,70 3,63 2,11 3,30 3,30 2,56 Other 3,00 1,83 2,83 3,38 3,46 2,40 3,25 3,00 1,91 Beverage 3,71 2,25 3,25 3,75 3,67 1,88 2,25 3,00 3,14

Bakeries 2,27 1,80 2,43 3,33 3,04 2,00 2,91 2,81 1,94 Total 2,77 1,86 2,87 3,37 3,32 2,05 2,96 2,92 2,37

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The last additional questions of the interview Effect profitability on environmental management Most respondents indicate that the money available for environmental management is not dependent on the profitability of the company. However, with higher profits it is easier in all areas. Some respondents indicate that certain investments are postponed if there is less money available, or with higher profits it is easier to make investments. For most companies this seems to be the same for all business areas. However, one company mentions that other things may have more priority because some projects are easier to postpone than others. Measuring It is difficult to measure the costs and benefits of environmental management in euros. None of the companies give figures of the total costs or benefits. Several firms do indicate that per project costs and benefits are calculated. Furthermore, the respondent of firm 11 does indicate that there are a lot of things that are measured such as waste and investments and booked at an environmental cost centre. Firm 8 mentions personnel costs for environmental management and savings on physical environmental performance as benefits. Especially benefits are difficult to measure. Some respondents compare it to safety and health, “how much is a finger worth?”. Most companies do measure all kinds of outputs such as water and energy use, cleaning materials and waste. The level of measuring seems to differ. Firm 4 indicates that a lot of environmental performance indicators are measured. There are a lot of digital meters that are connected to a computer system. Water usage through the whole factory can be traced. The respondent checks the figures every week. Another firm (10) mentioned earlier in the interview that last year they had a project to reduce the waste. When there was more attention for it, there was less waste, but now it is getter more again. Now another project was going to be set up. The measuring seems to be less than with firm 4. When asking why waste isn‟t always monitored the respondent answers that they are an Ad Hoc company and it costs time. Several respondents mention a log or computer system that is used to keep track of outputs.

7.3.5. Business strategy and the relation between EMP and FP

The previous sections provided descriptions of the different parts of the interview and sometimes several question or interesting items were linked. In the theoretical framework it was assumed that relationships between environmental management performance (EMP) and financial performance (FP) can be affected by the business strategy, resources and capabilities and other (general) firm characteristics. Especially the influence of business strategy will be further explored in this section. In the chapters of the theoretical framework, several pathways were described that link environmental and economic performance. It was noted that a prospector might benefit more from the „revenue side‟ than defenders, since marketing skills are already embedded in prospector firms. Conversely, defenders focus on improving the efficiency of existing operations. The whole organisation is directed at this competitive advantage, so this would also include the management of environmental issues. It thus might focus more on certain cost savings, for example the pathway of production efficiency. In question 16 of the interview, the respondents were broadly asked about the relationship between environmental and financial performance. Five statements are put down from which an overall impression has been already described in 7.3.4. The first statement is about a relationship between environmental performance and profitability in

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general in the sector. The second and third statements are about environmental management and turnover and selling price respectively. This is more the revenue side. The fourth statement asks about cost savings. The last statement is about the relation between environmental and financial performance in general. Table 7.23 shows the mean scores of the top 4 prospectors compared to the other 8 companies. Table 7.23 Perceived relation prospectors versus defenders, interview question 16

(5-point Likert scales, N=12) Top 4

prospectors:

1, 9, 3, 2

Firm 5, 6,

11, 8, 7,

4, 12, 10

Total

mean

Exact

Sig.

1

For companies within the sector, the environmental

performance is positively related to the profitability. 2.75 4.13 3.67 0.010

2

Environmental performances contributes to a higher

turnover (sales) of our company. 2.25 2.25 2.25 1.000

3

Thanks to environmental management a higher selling

price can be asked for our products. 1.75 1.69 1.71 0.879

4

The costs of environmental management are lower

than the cost savings it results in. 4.00 3.75 3.83 0.887

5

For our company, better environmental performance

results in financial advantage. 4.50 4.25 4.33 1.000

To what extend do you agree with the following statements

(1=disagree, 5=agree)

For statement 1 is p<0.05, which means that there is a significant difference between the groups. As mentioned before, 3 out of the 4 prospectors are in the bakery sector and these companies all gave a 3. They think that there is a small or indirect relation. Firm 3 mentions that the environmental costs are not high. The prospectors give a lower score on the first statement, however, their explanations do not highly differ from the defenders. Firm 1 that scored highest on prospector thinks that there is, to some extent, a positive relation within the sector, because of waste removal costs and energy costs that are relevant to all firms in the bakery sector. The scores between the two groups on statement 2-4 do not differ significantly. Comments of the respondent of firm 1 to why he doesn‟t agree that environmental performance contributes to a higher turnover (sales) of the company is that the reason for the relationship is that the costs are just lower. “We do not sell more cakes, but we throw less cake away.” Firm 9 also scores high on prospector and, as an exception compared to other firms, does think that they sell more products because of their environmental management. This firm also has a high environmental performance. The respondent of firm 9 states that the company exceeds other companies and thus it is something that can be used to distinct from other businesses. The other firm (firm 12) that gives quite a high score (a 4) on the second statement is more a defender and states: “In the food industry it is highly important that people think it is healthy and the environment is part of that”. This respondent mentioned earlier in the interview that if their environmental performance is better than their competitors it is a preference for their large customers. Firm 4, that is more on the defender side, says that as long as environmental performance is not used in the marketing strategy it will not increase sales. In question 17 several aspects of the revenue and cost pathway are asked for. Table 7.24 shows the mean scores of the top 4 prospectors compared to the other 8 companies, while Table 7.25 shows all the scores for further details.

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Table 7.24 Pathways of relation between environmental management and financial performance, prospectors versus defenders, interview question 17

Top 4

prospectors:

1, 9, 3, 2

Firm 5, 6,

11, 8, 7,

4, 12, 10

Total

mean

Exact

Sig.

1 Image 3.25 3.36 3.32 0.288

2 Marketing (eco) 3.25 2.64 2.86 0.309

3 Material savings 4.00 3.31 3.54 0.533

4 Waste and energy savings 4.25 4.06 4.13 1.000

5 Higher productivity / production efficiency 2.75 3.50 3.25 0.727

6 Employee moral 3.50 3.38 3.42 0.909

7 Lower financing costs 1.50 2.42 2.05 0.190

8 Subsidies 3.25 2.69 2.88 0.576

9 Fewer fines 1.67 2.50 2.22 0.881

To what extend did environmental management contribute

to profitability of your company via the following aspects?

(1=not at all, 5=a lot)

Table 7.25 Pathways of relation between environmental management and financial

performance, from prospectors to defenders, interview question 17

1 9 3 2 5 6 11 8 7 4 12 10

1 Image 3 4 3 3 4 5 4 4 x 2 4 1 3.32

2 Marketing (eco) 3 4 3 3 4 5 1 2 x 2 4 1 2.86

3 Material savings 4 4 4 4 1 5 5 2 4 4 4 2 3.54

4 Waste and energy savings 4 4 4 5 3 5 5 4 4 4 4 4 4.13

5 Higher productivity / production efficiency 4 3 1 3 2 5 4 4 4 4 3 2 3.25

6 Employee moral 2 4 4 4 4 5 4 3 3 3 4 1 3.42

7 Lower financing costs 1 3 1 1 3 3 3 2 x 3 x 1 2.05

8 Subsidies 2 3 4 4 2 4 1 4 1 4 3 3 2.88

9 Fewer fines x 3 1 1 1 x 4 5 1 x 3 1 2.22

Prospector Defender

Mean

To what extend did environmental management contribute

to profitability of your company via the following aspects?

(1=not at all, 5=a lot) Firm:

Image and marketing have to do with the revenue side of the relation between environmental and financial performance. It was expected that prospectors might recognize the image and marketing pathway more, because marketing skills are more important to those firms. Although the top 4 prospectors do not differ significantly on image and marketing and image scores are even lower compared to the other companies (see Table 7.24), more detailed results show that the lowest scores on image and marketing are given by companies that are more defender than the other firms, namely firm 4 and 10 for image and firm 11, 8, 4 and 10 on marketing (see Table 7.25). Firm 7 did not give a score, because it is hard to measure according to the respondent. However, he does mention that the image of the company can be damaged if there would be negative reports in the media. Firm 2 explains that environmental management is not a sales argument for the marketing department. The respondent relates this to the product. “We already have a positive image. We are a baker and produce a natural product. Nobody thinks we have a polluting production process.” Furthermore, it is interesting to compare firm 9 and 10 since both these firms are in the coffee sector but firm 9 is a prospector while firm 10 is the most evident defender. Concerning image and marketing there is a clear difference between these two firms. Firm 9 does think that environmental management contributes to profitability through image and marketing, while firm 10 thinks it doesn‟t. The respondent of firm 9 explained that companies are especially choosing for them. It is clear that the most obvious defender (firm 10) does not agree with the benefits on the revenue side (image and eco-marketing). The respondent comments that image can be an issue for certain companies, but not theirs. Concerning marketing it is interesting that this company actually does produce ecological products. This however only concerns the procurement and not the

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production process of the firm. The eco products cost more, but the customer pays for it. The contribution margin is approximately the same as for the other products. The following aspects have to do more with the cost pathway. There are no significant differences between prospectors and defenders. When the detailed scores and opinions on the pathways of material savings savings are compared, there are no obvious relations with the strategy orientation. Most firms perceive that environmental management contributed to profitability by material savings. There are some exceptions. Firm 5 comments that material savings do not contribute to profitability, because the savings are taken by the market. Cost leadership is important for (specific parts of) this company. There are savings but this is translated in the selling price in order to remain cost leader. This however thus ensures the sales. Waste and energy savings resulting from environmental management are perceived to contribute a lot to profitability. The strategy orientation doesn‟t seem to play a role. For higher productivity and production efficiency somewhat lower scores are given by prospector firms. Although the first prospector does see higher productivity as a pathway, the following prospector firms have different opinions. Firm 9, a typical prospector comments that on the one hand environmental management does contribute to a higher productivity, but on the other hand the company finds this less important. The respondent explains that they want to remain flexible and that their strength is to be able to make switches fast. This respondent thus confirms that environmental management contributes to profitability through image: “Image absolutely, what you see is that companies especially choose for us”. Also firm 3, 2 and 5 do not see higher productivity as the link between environmental management and profitability, where the following firms (11, 8, 7, 4, 12), that have less a prospector strategy thus more a defender strategy do see this connection. Firm 10 that is mostly defender however scores lower. He comments that he thinks that there is a relation, but he is not the one that takes care of it. The production chefs have their monitoring system for efficiency. There is a connection, however, the environmental manager is not the one that tells that the efficiency is too low. The respondent states that it is more the other way around. When the efficiency is better, his figures are better. On the other hand, environmental management was described in chapter 3 as „the efforts to reduce the negative impact of a company on the environment‟. The efforts to improve the efficiency thus may also be seen as environmental management if this lowers energy costs, waste production, etc.

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Box 7.9 Correlations in the questionnaire 2005 Several questions were asked about costs and benefits of environmental management in the questionnaire of 2005. Table 7.26 shows several figures including the mean values of these variables and the Spearman rank correlations with four variables that have been described earlier. Item 5-9 indicate whether the respondent thinks that environmental management contributed these aspects (1= not al all, 5= a lot). The last four items indicate whether these experiences were recognized at the firm. Table 7.26 Spearman rank correlations (N varies between 96 and 70)

N Mean Std. Dev.

1 2 3 4

1 Prospector (10.1, 10.4, 10.8) 96 3.44 0.88 x

2 Mean burden (question 11) 100 3.12 0.82 ,11 x

3 EMS implementation (question 20) 100 4.21 2.71 .09 .30** x

4 Better EM performance than competitors (18.6)

95 3.29 0.77 .12 .08 .44** x

5 Improvement of firms‟ image 86 2.77 1.17 .20 .31** .57** .61**

6 Better marketing of products 85 1.86 .99 .34** .47** .24* .22*

7 Insight into production process 90 2.87 1.02 .21* .36** .52** .40**

8 Less waste production 97 3.37 1.00 .14 .26** .13 .23*

9 Less energy usage 91 3.32 1.01 .14 .23* .24* .20

10 High costs for human resources 82 2.05 .82 .17 .24* .05 .18

11 High investment costs 92 2.96 .94 .04 .27* -.08 .01

12 High administrative loads 92 2.92 .98 .10 .21* -.01 .14

13 Net positive financial effect 78 2.37 1.05 .08 .19 .34** .11

** Correlation is significant at the 0.01 level (2-tailed) * Correlation is significant at the 0.05 level (2-tailed) Except for EMS implementation, the variables were measured on 5-point Likert scales (see 6.3.2)

There are several interesting results. Mean burden, which is the attention for environmental issues, is significantly and positively correlated to almost all „benefits‟ (5-9) and costs (10-12). Apparently, companies that have more environmental issues, recognize more costs and benefits. „EMS implementation‟ is significantly and positively correlated to 4 out of 5 of the benefits and the net positive financial effect, while there is no correlation with the costs. This could imply that firms that implemented an EMS are getting more aware of the benefits and/or that firms that think there are more benefits implement an EMS. Meanwhile, the views on the costs seem to depend on other factors. Furthermore, better EM performance than competitors is positively correlated to 4 out of 5 „benefits‟. Strategy „Prospector‟ strategy is significantly positively correlated with „better marketing‟. This is expected since the marketing skills are already embedded in prospector firms and environmental management could also be used to differentiate from competitors. Waste production and energy usage are benefits of environmental management on the „cost side‟ (see figure 7.4). These correlations with prospector strategy are lower than with image and marketing and not significant. When the prospector strategy is split into two groups, the means of prospectors are higher on all benefits (see table 7.27). A Mann-Whitney U test shows that only the difference of the mean values on „better marketing of products‟ are significant (p=0.003). Whether there is a net positive financial effect does not differ between prospectors strategies. Table 7.27 Mean values

Prospector Groups (10.1+10.4+10.8)

Improvement of firms' image

Better marketing

of products

Insight into production

process

Less waste

production

Less energy usage

0 (N=40,41,48,49,47) 2,58 1,56 2,69 3,20 3,17 1 (N=43,41,40,44,43) 2,86 2,10 3,05 3,55 3,47 Total 2,72 1,83 2,85 3,37 3,31

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8. Conclusions and Discussion The aim of this thesis was to gain insight in the relationship between environmental management performance, financial performance and firm characteristics such as business strategy. This has been reached by insights from literature and empirical research. The research question “What is the relationship between environmental management performance and financial performance for companies in the Dutch food sector?” is a broad question with many facets. The research questions were answered in a theoretical framework and empirical part. Research question 1: “What is environmental management and environmental performance and how can it be measured?” and part of research question 4.3: “How can business strategy be measured?” were formulated in order to do get insights to be able to carry out the core of the research. The conclusions from these questions can be found in section 3.5 and 5.5 respectively. This chapter describes the conclusions that follow from this research, using the rest of the research questions. This leads to an overall and main conclusion. Furthermore, the methods and results of this research are discussed. This leads to several „questions‟ that could be further explored in future research.

8.1. Conclusions

What is the correlation between environmental performance and financial performance according to prior research? Literature research shows that environmental management and financial performance are related. The majority of studies show that there is a positive correlation. Through which pathways are environmental performance and financial performance related? Better environmental management performance could lead to enhanced financial performance. This link is described in much more detail in the literature and has many aspects. It could be through either cost savings or revenue gains. These two pathways can be, based on literature, further distincted and empirical results show differences in the importance of these pathways to firms in the food industry. The revenue side involves image and reputation. On the one hand, environmental management can in certain cases improve a company‟s image or reputation. Environmental management then could be used for marketing. Results show that this is however not highly recognized by firms in the food industry. This may have to do with the environmental performance of firms. Only if firms are paying a lot of attention to environmental management and are performing well it is a way to distinct from other companies and it can contribute to enhanced financial performance. This is not a general rule as not all high performing firms agree, but the firm that had the most attention for environmental management did indicate that they sell more products because of their environmental management. On the other hand, environmental management can prevent that a company‟s image, reputation or brand name is hurt. There are also customers (firms) that do not want to do business with companies that are not paying attention to environmental management. This pathway is highly recognized by firms in the food industry. The cost side involves waste, energy and material savings, production efficiency, productivity and subsidies, less liability and financing costs from better standings with investors and government and lower risk. Empirical results show that waste and energy, which are very concrete aspects, are highly important in the relation between environmental and financial performance. There is a lot of attention for these issues because of the high costs. Waste and energy savings are often taken as examples by companies and considered to be the most important link between environmental and financial performance.

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How do differences in company characteristics affect the relationship between environmental and financial performance? The relation between environmental and financial performance thus has many aspects. These pathways are however not equally relevant to all companies, because firms differ in for example strategy and circumstances and there are underlying reasons such as resources and capabilities that influence the relationships. The question is not only „Does it pay to be green‟ or „Why does it pay to be green‟, but also „When and how does it pay to be green?‟. The circumstances confronting the company and business strategy affect all kinds of business aspects, thus also environmental management and its relation to financial performance.

- What are specific characteristics of (companies in) the food industry that influence the relationship between environmental and financial performance? One of the circumstances of the companies in this research is the food industry which has its characteristics such as the potential for eco-efficiency. This is reflected in the importance of waste and energy savings in the relation between environmental and financial performance. Furthermore, all participating companies of the interviews operate in a market that is stable and can be described as an oligopoly. This implicates that in contrast with for example perfect competition, there are possibilities to differentiate from other companies and producers can influence the price. Environmental management can be used to differentiate. Most companies do not use this explicitly, but it does occur in the food industry.

- Which other circumstances or general characteristics are related? Circumstances of the company are also the sub-sector of the food industry they operate in. The production process of firms can highly differ per sub-sector which can require other environmental management. The attention for environmental issues and implementation of environmental management systems differs between sub-sectors. The bakery sector for example has relatively less attention for environmental issues and most firms do not feel it is necessary to implement environmental management systems, because the branch is not highly polluting. The costs involved are probably also different per sub-sector, since the views on whether there is a net positive financial effect differ.

- How do business strategies relate to environmental management? The business strategy can vary from a defender-type or cost leadership to prospector or differentiator. A firm at the prospector end is proactive, flexible and searching for new opportunities, which also reflects in their environmental management. The need to be flexible can avert companies to implement an environmental management system. This is not a general rule though. Marketing skills are more embedded in prospector firms which enables firms to use environmental management to contribute to better marketing of the products which is reflected in the empirical results. This opportunity to enhance financial performance also requires a distinctive environmental management and depends on more factors than business strategy. Defenders focus on improving the efficiency of existing operations. The whole organisation is directed at this competitive advantage, so this would also include the management of environmental issues. Cost pathways related to production efficiency are thus important. However, waste and energy savings are important to firms in the food industry in general, so the business strategy is not an highly important factor. Furthermore, not all firms consider efforts to improve the efficiency as environmental management.

- How do resources and capabilities of companies relate to environmental management? What is the influence of financial resources of a company on environmental management? It is mentioned in literature that enhanced financial performance may affect the environmental management in a positive way. This has to do with the availability of (financial) resources. When more resources are available it is easier to for example invest in better machinery.

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Now, “What is the relationship between environmental management performance and financial performance for companies in the Dutch food sector?”. Environmental management performance and financial performance are related through varying revenue and cost saving pathways, giving opportunities for a positive correlation. There are thus many aspects (e.g. reputation, efficiency etc.) to the relation between environmental and financial performance and varying factors (such as business strategy) that can be linked. The „revenue side‟ is important in order to prevent a bad image on environmental management, but environmental management is not always perceived to improve image, brand name or reputation. Enhanced profitability from image gains can therefore especially recognized when the firm is environmentally performing well and have a prospector strategy where marketing skills are embedded in the firm. Since there are significant differences between sub-sectors, this should be taken into account in research and policy making. Business strategy is a relevant factor although its impact on the relation between environmental and financial performance only seems to be moderate considering all aspects that make firms to what they are.

8.2. Discussion

In this section, the methods and results of this research are discussed. This leads to several „questions‟ that could be further explored in future research. Measuring environmental performance and financial performance This thesis has shown many aspects of the relation between environmental and financial performance. It could also be interesting to check, using a quantitative methodology, to what extend there is a positive link between environmental and financial performance in the food industry. This would however bring the challenge of measuring environmental performance. It turned out in this research, that it is very hard to assess the environmental performance of firms. The focus was on environmental management and the „environmental management performance‟ was measured. However, having an environmental management system is not the only indicator for environmental performance and it was very difficult to take different pollution levels of different sub-sectors into account. Perhaps it is easier to measure the relation between just the implementation of environmental management systems and financial performance, because that is more concrete. Financial performance can also be measured in different ways. It was not done in this thesis, because the data that would be needed was not easily available and this research had a qualitative focus with empirical research based on perceptions. Stock market By analyzing previous research it was concluded that there often is a positive correlation between these aspects which provided an argument to further explore this link and relate it to other characteristics. However, in many papers that provided proof for a positive relation, financial performance was measured by market values or stock returns. The stock market is an indicator for financial performance, but it is difficult to include in the model with revenue gains or cost savings. When the stakeholders expect the company to do well in the future, the market price would rise, but this does not mean that the sales of the firm increased. Furthermore, most companies in the food industry do not have stocks that are traded on the public market. Perhaps, if they had, image and reputation would be more important. It would be interesting to provide a better understanding of how the stock market is linked to the relation between environmental and financial performance.

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Broad research brings many questions to be investigated This research was broad and the study confirmed that „many things‟ are related or linked to „everything‟. It brought several interesting results, but some were only indirectly „related‟ to the core of the theoretical framework. For further research, it would be interesting to focus on a certain aspect. Many aspects of the relation between environmental and financial performance had to do with stakeholders. It could be interesting to focus on certain stakeholders. In the theoretical framework was described that a good environmental management may decrease risk and improve the standing with banks and investors. In the empirical part it wasn‟t further elaborated on, because it seemed that the respondents were not completely informed concerning this aspect. It may be interesting to investigate how banks, insurers and investors take environmental management into account and to what extend the financial departments of firms perceive this relation. The results showed that sometimes customers ask whether a company has an environmental management system and this is one of the reasons for firms to implement such a system. But what kind of firms have these demands and why? Which companies require a high environmental performance and what happens else? Another field that has not fully been explored is the influence of environmental regulations. This is an important reason for firms to improve their environmental performance and the empirical results gave ground to expect not all firms are fully aware of all legal requirements. Strategy has been related to environmental and financial performance in many ways in this research, but the links are quite indirect. Image gains are probably also dependent on the environmental performance and this is determined by many factors. When a firm performs badly, how can it indicate that there would be an image gain leading to better financial performance? On the other hand, if environmental performance is difficult to measure, and society doesn‟t know a lot about environmental management, it might be easy to improve a firms „environmental image‟ independent of its real environmental performance. Priority for marketing is one of the indicators for a prospector firm. A firm that has more priority for marketing is thus expected to use environmental management as a marketing tool leading to better financial performance. Is the benefit then resulting from the marketing skills or the environmental management? This research thus was explorative and gives input for many more questions to be answered.

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SenterNovem. Nieuws, 09-04-2003, Duurzaam inkopen in productketen wacht schone toekomst. http://www.senternovem.nl/duurzaaminkopen/nieuws/2005/duurzaam_inkopen_in_productketen_wacht_schone_toek.asp Stichting iNSnet (2006). iNSnet Duurzaamheids Monitor 2006: Motieven en belemmeringen voor duurzaam gedrag – executive summary, Sittard, 28-8-2006 SVM-PACT, www.svm-pact.nl, date January 2007 Telle, K. (2006). „”It Pays to be Green” – A Premature Conclusion?‟, Environmental & Resource Economics, 35, pp. 195-220 Verschuren, P. and H. Doorewaard (2005). Designing a research project. LEMMA BV, Utrecht VWA (Voedsel en waren authoriteit). HACCP, http://www.vwa.nl, date January 2007 Waddock, S.A. and S.B. Graves (1997). „The corporate social performance- financial performance link‟, Strategic Management Journal, 18(4), pp. 303-319 Wagner, M. (2001). „A review of empirical studies concerning the relationship between environmental and economic performance. What does evidence tell us?‟, Center for Sustainable Management e.V. Welford, R. and A. Gouldson (1993). Environmental Management & Business Strategy. Pitman Publishing, London Wernerfelt, B. (1984). „A Resource-Based View of the Firm‟, Strategic Management Journal, 5(2), pp. 171-180

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Referred to in Chapter 4 (Table 4.1, Table 4.2), but from other sources: Alexander, G.J. and R.A. Buchholz (1978). „Corporate Social Responsibility and Stock Market Performance‟, Academy of Management Journal, 21(3), pp. 479-486 Aupperle, K.E., Carroll, A.B. and J.D. Hatfield (1985). „An Empirical Examination of the Relationship between Corporate Social Responsibility and Profitability‟, The Academy of Management Journal, 28(2), pp. 446-463 Chen, K.H. and R.W. Metcalf (1980). „The relationship between pollution control record and financial indicators revisited‟, Accounting Review, 55, pp. 168-177 Dowell, G.; Hart, S. and B. Yeung (2000). „Do corporate global environmental standards create or destroy value?‟, Management Science, 46(8), pp. 1059-1074 Hamilton, S.; Jo, H. and M. Statman (1993). „Doing well while doing good? The investment performance of socially responsible mutual funds‟, Financial Analysts Journal, 49(6), pp. 62-66 Hart, S.L. and G. Ahuja (1996). „Does it pay to be green? An empirical examination of the relationship between emission reduction and firm performance‟, Business Strategy and the Environment, 5, pp. 30-37 Jaggi, B. and M. Freedman (1992). „An examination of the impact of pollution performance on economic and market performance of pulp and paper firms‟, Journal of Business Finance & Accounting, 19(5), pp. 697-713 Mahaptra, S. (1984). „Investor Reaction to Corporate Social Accounting‟. Journal of Business Finance & Accounting, 11(1), pp. 29-40 Nehrt, C. (1996). „Timing and intensity of environmental investments‟, Strategic Management Journal, 17, pp. 535-547 Spicer, B.H. (1978). „Investors, Corporate Social Performance and Information Disclosure: An Empirical Study‟, The Accounting Review, 53, pp. 94-111 White, M.A. (1991). Green Investing: The recent performance of environmentally-oriented mutual funds. McIntire School of Commerce, University of Virginia Charlotteville, VA.

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Appendix 1: Financial performance measures Financial performance or profitability measured and conceptualized in various ways. In this appendix, financial performance measures are described in order to be able to understand prior research. Measure Description Further comments

Accounting-based measures Reflect historical firm performance.

Profit revenues minus costs Not useful for benchmarking. For example doesn‟t take into account risks and firm size.

Profit margin profit divided by the total operating revenue

Shows whether a firm is able to produce a product or service at a low cost or a high price.

Return on Assets (ROA)

ratio of income to the average total assets

Firms can increase ROA by increasing profit margins or asset turnover.

Return on Equity (ROE)

ratio of income to average common stockholders‟ equity

Different from ROA because of financial leverage, the extent to which a firm is financed by debt or equity.

Return on Investment (ROI)

Return on an investment The return may be referred to as interest, income, profit or loss

Return on Sales (ROS)

ratio of income to sales revenue

Detects operational efficiency, also known as a firms operating profit margin

Stock-market-based measures Stock-market-based measures not applicable to all firms. Whether firms have shares traded at the stock market depends on the legal entity of the firm.*

Market price of a share (market value)

price for which the stock is sold on the market

Depends on trade and thus information is very important. A firm‟s valuation in the financial market is based on future profitability. If traders have faith in the future of a company they are willing to pay more for the stock. Market prices give estimates about the true value of the assets of the firm. A firm‟s value can be divided in tangible and intangible assets.

Tangible assets replacement value of a firm’s assets such as machinery and equipment

Intangible assets have no physical existence, allow the firm to earn profits over the return on its tangible assets. Examples: value of a trademark or patent, brand name

Price-to-Earnings (P/E) ratio

current market price divided by earnings per share of common stock

Dividend yield dividend payment per share of a firm divided by the current market price per share

Related to the perception of the market of future growth prospects of the firm. Firms that have high growth prospects generally have lower dividend yields.

Market to book value

market price per share divided by the book value per share

Tobin’s Q market value of all of the firm‟s debt and equity

Firms with a high Q ratio tend to have attractive investment opportunities or a

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divided by the replacement value of the firm‟s assets

significant competitive advantage

Risk Risk is a very important factor in business, because it comprises a potential negative impact on for example returns. In corporate finance models, the idea is developed that the expected return on a stock and the cost of capital are positively related to risk. Risk and return are for example connected in the capital-asset-pricing model (CAPM). This implies that the expected return on a security is related to its beta.

Beta coefficient

“a measure of the sensitivity of a security‟s return to movements in an underlying factor”

Source: Ross (2002) * “Naamloze Vennootschap (NV)” is the Dutch term for a public limited liability corporation. Such a firm has shares that may be traded on the public stock market and is owned by the shareholders. In this research however, most companies are a “Besloten Vennootschap (BV)”, a private limited company. The shares are registered to owners.

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Appendix 2: Interview Protocol By means of this interview we want to gain insight in the relation between business strategy, environmental management, resources and capabilities of a company and the financial performance. There will be structured questions in order to discuss these subjects. The interview starts with some general questions about the company.

General information

Date: Name of company: Address: Phone number: Respondent: Function and years of work experience: How much of your time is reserved for environmental management? % What are you main activities and responsibilities in environmental management?

General questions

1. What was the turn-over of your company in 2006 (estimate if necessary)? How is the turnover of your company changing? 2004: ______%, 2006: 100%, 2008: ______%

2. Is your company part of a parent company? What was the turnover of the parent company in 2006 (estimate if necessary)?

3. What is the number of employees of your company and the parent company? 4. What percentage of the turnover of your company is earned by sales to consumers or to other companies in

the chain (b2b or b2c)? Consumers: % Business: %

5. What percentage of the turnover of your company is earned by sales at the national or international market? National: %

International: % 6. How many suppliers and buyers (other companies) does your company have and who are the most important

ones? 7. How many competitors does your company have?

Business strategy

This section contains questions about the general business strategy of your company and is not yet about environmental management. Answers on the statements below and explanations will give an idea of the strategy. Based on this we will try to classify your company in a typology. 8. What is the priority of the following aspects at your company? Could you explain further?

1. Product innovation and new market opportunities Few 1 2 3 4 5 very much

2. Being the first one to introduce new products on the market Few 1 2 3 4 5 very much

3. Improving production efficiency Few 1 2 3 4 5 very much

4. Cost control Few 1 2 3 4 5 very much

5. Flexible technologies Few 1 2 3 4 5 very much

6. Product research and development Few 1 2 3 4 5 very much

7. Market research Few 1 2 3 4 5 very much

8. Marketing Few 1 2 3 4 5 very much

9. To what extend do you recognize a cost leadership or a differentiation strategy at your company?

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Environmental management and performance

We would like to gain insight in how your company deals with environmental management, what the reasons are and what the environmental performance of your company is. 10. To what extend are the following aspects of environmental pollution a point of attention at your company?

1. Soil pollution Not at all 1 2 3 4 5 Very much

2. Noise Not at all 1 2 3 4 5 Very much

3. Water pollution Not at all 1 2 3 4 5 Very much

4. Smell Not at all 1 2 3 4 5 Very much

5. Air pollution Not at all 1 2 3 4 5 Very much

6. Hazardous substances Not at all 1 2 3 4 5 Very much

7. Waste production Not at all 1 2 3 4 5 Very much

8. Energy use Not at all 1 2 3 4 5 Very much

11. What are the most important environmental measures that have been taken within your company? What kind

of measures do you expect to be taken in the future? 12. To what extend is an environmental management system implemented at your company (strategy, action

program, training, audits, reporting etc.)? Is the environmental management system certified (based on ISO14000 or EMAS)? What are the most important reasons?

13. What are the most important reasons to improve environmental performance? Could you explain further?

1. Legal requirements Not at all 1 2 3 4 5 Very much

2. Covenants Not at all 1 2 3 4 5 Very much

3. Company aspiration (vision, strategy) Not at all 1 2 3 4 5 Very much

4. Stakeholders (society, consumers, buyers) Not at all 1 2 3 4 5 Very much

5. Competitive advantage Not at all 1 2 3 4 5 Very much

6. Risks Not at all 1 2 3 4 5 Very much

7. Financial advantage Not at all 1 2 3 4 5 Very much

8. Other:… Not at all 1 2 3 4 5 Very much

14. What is the environmental performance of your company compared to the most important competitors? Could

you explain further?

1. Management performance (policy, environmental management system, communication etc.)

Worse 1 2 3 4 5 Better

2. Physical environmental performance (energy use, emissions etc.) Worse 1 2 3 4 5 Better

Resources & Capabilities

It is relevant to gain insight in which resources and capabilities can be a limitation or advance environmental management and could therefore relate to environmental performance. With resources the assets or characteristics are meant, such as physical and financial assets, but also the employees and organizational processes. 15. Could you indicate and explain:

a) To what extend are the following resources a limitation or do they advance environmental performance? resources environment

1. Technological knowledge Limitation 1 2 3 4 5 Support

2. Physical assets (machines) Limitation 1 2 3 4 5 Support

3. Production process (efficiency) Limitation 1 2 3 4 5 Support

4. Employees (involved, productivity) Limitation 1 2 3 4 5 Support

5. Reputation (trade contacts) Limitation 1 2 3 4 5 Support

6. Brand Limitation 1 2 3 4 5 Support

7. Financial assets Limitation 1 2 3 4 5 Support

8. Other:… Limitation 1 2 3 4 5 Support

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b) To what extend does environmental management have a positive effect on these resources?

Environmental management resources

1. Technological knowledge Not at all 1 2 3 4 5 Very much

2. Physical assets (machines) Not at all 1 2 3 4 5 Very much

3. Production process (efficiency) Not at all 1 2 3 4 5 Very much

4. Employees (involved, productivity) Not at all 1 2 3 4 5 Very much

5. Reputation (trade contacts) Not at all 1 2 3 4 5 Very much

6. Brand Not at all 1 2 3 4 5 Very much

7. Financial assets Not at all 1 2 3 4 5 Very much

8. Other:… Not at all 1 2 3 4 5 Very much

Financial performance

It is relevant to gain insight in how environmental management could relate to financial performance. Environmental management financial performance 16. Could you indicate to what extend you agree with the following statements? Could you elaborate on this?

1. For companies within the sector, the environmental performance is positively related to the profitability

Disagree 1 2 3 4 5 Agree

2. Environmental management contributes to a higher turnover (sales) of our company

Disagree 1 2 3 4 5 Agree

3. Thanks to environmental management a higher selling price can be asked for our products

Disagree 1 2 3 4 5 Agree

4. The costs of environmental management are lower than the costs savings that it results in

Disagree 1 2 3 4 5 Agree

5. For our company, better environmental performance results in a financial advantage

Disagree 1 2 3 4 5 Agree

17. To what extend does environmental management have a positive effect on the financial performance of your

company, through the following aspects? Could you elaborate on that?

1. Image unknown Not at all 1 2 3 4 5 Very much

2. Marketing (eco) unknown Not at all 1 2 3 4 5 Very much

3. Materials savings unknown Not at all 1 2 3 4 5 Very much

4. Waste and energy savings unknown Not at all 1 2 3 4 5 Very much

5. Higher productivity / production efficiency unknown Not at all 1 2 3 4 5 Very much

6. Employee morale unknown Not at all 1 2 3 4 5 Very much

7. Lower financing costs unknown Not at all 1 2 3 4 5 Very much

8. Subsidies unknown Not at all 1 2 3 4 5 Very much

9. Fewer fines unknown Not at all 1 2 3 4 5 Very much

10. Other:… unknown Not at all 1 2 3 4 5 Very much

Financial performance environmental management 18. To what extend does the financial performance of your company affect the attention for environmental issues

within your company? To what extend is a financial advantage a reason to do more about the environment? Is the environmental budget dependent on the profitability of your company?

Measuring 19. Are the costs and benefits of environmental management measured at your company? How? 20. Could you indicate what the costs and benefits are of the most important environmental measures? If not

possible, could you indicate, for the most important measures, whether the benefits are (substantial) higher or lower than the costs?

21. What is the total financial economical effect of all environmental measures? If this information is not available, could you indicate whether the benefits are higher or lower than the costs?

Further comments? Thank you for your cooperation!

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Appendix 3: Questionnaire 2005 Only the questions that are used in this research are shown. The questions are translated from Dutch. 1. What is your main position in the organization?

0 Environmental Coordinator 0 Quality Manager 0 Controller 0 Board Member

0 CEO 0 Health & safety manager 0 Product Manager 0 Other: ……….

2. What percentage of your time is reserved for environmental management? % 3. What was the turnover of your company in 2004? € million 5. Is your company part of a parent company? 7. What percentage of the turnover of your company is earned by sales at the national or international market? National: %

International: %

10. To what extent do you agree with the following statements Completely disagree – 1 2 3 4 5 – completely agree

1 Our company thinks it’s important to be the first to introduce new products on the market 4 Buyers’ demand for new products or product characteristics is large 8 The technical possibilities in our company to change products or product characteristics are large

11. Please indicate to what extent the following aspects of environmental pollution is a focus of attention in the company

Not at all – 1 2 3 4 5 – Very much

1 Soil pollution 1 2 3 4 5 2 Noise 1 2 3 4 5 3 Water pollution 1 2 3 4 5 4 Smell 1 2 3 4 5 5 Air pollution 1 2 3 4 5 6 Hazardous substances 1 2 3 4 5 7 Waste production 1 2 3 4 5

18. Please indicate to what extend you agree with the following statement

Not at all – 1 2 3 4 5 – Very much 6 Our environmental performance is better than our most important competitors

20. Which of the following elements of an environmental management system are implemented at your company?

0 Formulating an environmental strategy/ -policy 0 Formulating a chain oriented environmental strategy 0 Executing an environmental-audit 0 Formulating an environmental action program 0 Environmental training of employees 0 Setting up an information system / database 0 Regular measurement of environmental impact 0 Periodical internal environmental reporting 0 Periodical external environmental reporting

23. Please indicate to what extent attention for the environmental contributed to the following items

Not at all – 1 2 3 4 5 – Very much 1 Improving our corporate image 1 2 3 4 5 Unknown 2 Gain insight into the production process1 2 3 4 5 Unknown 3 Reducing waste production 1 2 3 4 5 Unknown

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4 Reducing energy usage 1 2 3 4 5 Unknown 5 Successful marketing of products 1 2 3 4 5 Unknown

24. Please indicate to what extent the following experiences with environmental management are applicable at your company

Not at all – 1 2 3 4 5 – Very much 1 High personnel costs are needed 1 2 3 4 5 Unknown 2 High investments are needed 1 2 3 4 5 Unknown 3 There is a high administrative burden 1 2 3 4 5 Unknown 4 The revenues are higher than the costs1 2 3 4 5 Unknown

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Appendix 4: Mean values and distribution This appendix shows the mean values, standard deviation and results of the Kolmogorov-Smirnov and Shapiro-Wilk tests for the used variables of the questionnaire 2005. For most variables the K-S test is highly significant (Sig. less than 0.05) indicating that the distributions are not normal.

Descriptive Statistics

96 1.33 5.00 3.4375 .87768

100 1.63 5.00 3.1232 .81747

100 .00 9.00 4.2100 2.71284

95 1 5 3.29 .770

86 1 5 2.77 1.165

90 1 5 2.87 1.019

97 1 5 3.37 1.003

91 1 5 3.32 1.010

85 1 5 1.86 .990

82 1 4 2.05 .815

92 1 5 2.96 .937

92 1 5 2.92 .975

78 1 5 2.37 1.046

54

Prospector (10.1+10.4+10.8)

Mean burden (question 11)

EMS (question 20)

Better EM perf ormance than

competitors

Improv ement of f irms' image

Insight into production process

Less waste product ion

Less energy usage

Better marketing of products

High costs for human resources

High inv estment costs

High administrat iv e loads

Net positive f inancial ef f ect

Valid N (listwise)

N Minimum Maximum Mean Std. Dev iation

Tests of Normality

.117 54 .061 .962 54 .086

.087 54 .200* .978 54 .415

.129 54 .025 .928 54 .003

.353 54 .000 .777 54 .000

.192 54 .000 .859 54 .000

.198 54 .000 .872 54 .000

.217 54 .000 .878 54 .000

.233 54 .000 .885 54 .000

.245 54 .000 .823 54 .000

.266 54 .000 .859 54 .000

.188 54 .000 .897 54 .000

.218 54 .000 .892 54 .000

.272 54 .000 .852 54 .000

Prospector (10.1+10.

4+10.8)

Mean burden (question

11)

EMS (question 20)

Better EM perf ormance

than competitors

Improv ement of f irms'

image

Insight into production

process

Less waste product ion

Less energy usage

Better marketing of

products

High costs for human

resources

High inv estment costs

High administrativ e loads

Net positive f inancial

ef fect

Stat ist ic df Sig. Stat ist ic df Sig.

Kolmogorov-Smirnova

Shapiro-Wilk

This is a lower bound of the true signif icance.*.

Lillief ors Signif icance Correctiona.