Will firms go green if it pays? The impact of disruption, cost, and external factors on the adoption of environmental initiatives

• Author: Glen W. S. Dowell,Suresh Muthulingam
• Date: 01 June 2017
• DOI: http://doi.org/10.1002/smj.2603
• Published date: 01 June 2017

Strategic Management Journal

Strat. Mgmt. J.,38: 1287–1304 (2017)

Published online EarlyView 5 December 2016 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2603

Received 17 September 2015;Final revision received3 October 2016

WILL FIRMS GO GREEN IF IT PAYS? THE IMPACT OF

DISRUPTION, COST, AND EXTERNAL FACTORS ON

THE ADOPTION OF ENVIRONMENTAL INITIATIVES

GLEN W. S. DOWELL1*and SURESH MUTHULINGAM2

1Samuel Curtis Johnson Graduate School of Management, Cornell University,

Ithaca, New York, U.S.A.

2Supply Chain and Information Systems, Smeal College of Business, The

Pennsylvania State University, University Park, Pennsylvania, U.S.A.

Research summary: Research on the link between nancial and environmental performance

implicitly assumes that rms will pursue protable environmental actions. Yet, clearly, factors

beyond protability inuence rms’ environmental choices. We treat these choices as organiza-

tional change decisions and hypothesize that adoption of environmental initiatives is inuenced

by a combination of prot, levelof disruption caused, and external inuences. We test our hypothe-

ses by examining rms’ choices regarding implementation of energy-savings initiatives. We nd

that degree of disruption, number of prior local adopters, and strength of environmental norms

affect the adoption decisions. In addition, the effect of disruption is amplied by the implementa-

tion costs, but is mitigated by the number of prior local adopters.

Managerial summary: Often, in trying to improve rms’ environmentalperformance, academics

and stakeholders have focused on actions that simultaneously improve environmental and nan-

cial performance. This assumes that rms will undertake projects that offer suchdual benets. We

consider what might prevent rms from pursuing such ‘win-win’ initiatives. We focus on how the

degree of disruption of an energy-savinginitiative affects its probability of adoption. We nd that

rms are signicantly more likely to adopt moderately protable, but easy initiatives than more

protable but disruptive ones. We also examine internal and external factors that moderate the

effect of disruption. Our ndings suggest that in order to incentivize rms to improveenvironmen-

tal performance, it might be more benecial make these activities less disruptive than to make

them more protable. Copyright © 2016 John Wiley & Sons, Ltd.

INTRODUCTION

A signicant body of research has investigated the

relationship between nancial and environmental

performance. While conclusive evidence remains

elusive, reviews of the literature suggest that, at

least under some circumstances, there is a positive

association between nancial and environmental

performance (Barnett and Salomon, 2006; Margolis

Keywords: environment; organizational change; energy;

institutional norms; process effects

*Correspondence to: Glen Dowell, Sage Hall, Cornell University,

Ithaca, NY 14853, U.S.A. E-mail: gwd39@cornell.edu

Copyright © 2016 John Wiley & Sons, Ltd.

and Walsh, 2003). That is, there is some evidence

that it can, indeed, ‘pay to be green’ (Berchicci and

King, 2007). In one sense, this result is promising,

because it suggests that rms can simultaneously

improve nancial and environmental performance,

and that a prescription for reducing business’ impact

on the environment is to makemanagers more aware

of this linkage (Esty and Winston, 2009).

However, nding a positive association between

nancial and environmental performance raises a

puzzling, and potentially troubling question: Why

do some rms potentially miss out on protable

opportunities that are socially legitimate and even

desired (King and Lenox, 2002)? We believe

1288 G. W. S. Dowell and S. Muthulingam

that one way to begin to answer this question

is by bringing more research to bear on what is

actually required to implement environmental

initiatives. Prior research has largely examined the

relationship between aggregate measures of envi-

ronmental performance and nancial performance.

These aggregate measures, however, provide little

information on the prots a rm can obtain from

a given environmental initiative, and we lack

sufcient understanding of the relative impact of

prots compared to other factors in inuencing the

adoption of environmentally-friendly initiatives.

In this study, we analyze rm decisions regarding

implementation of individual initiatives, which

enables us to better isolate factors that inuence

rms’ decisions to become more environmentally

friendly. Anecdotal accounts of business’ envi-

ronmental decisions suggest that such decisions

are often fraught with uncertainty, which makes it

challenging, even for businesses that harbor good

intentions on environmental issues, to implement

such initiatives (see, e.g., Schendler, 2009).

Our paper also contributes to the literature on

organizational change. Prior research on change

from a routine-based perspective has examined the

effects of change, and has studied how the disrup-

tions from changes (labeled process effects in this

literature) may offset the benets that accompany

the changes (Barnett and Carroll, 1995; Hannan

and Freeman, 1989; Le Mens, Hannan, and Polos,

2015). We argue that it is fruitful to examine how

such disruption, together with external factors, com-

bine to affect the likelihood that a change will be

undertaken in the rst place, and that the importance

of disruption has been understated, as presumably

only changes in which the disruption is expected to

be worth experiencing will be undertaken. In addi-

tion, we emphasize that the degree of disruption

that a given initiative offers is at least partly per-

ceptual, and that external and internal factors can

inuence the degree to which disruption becomes

salient in the decision to implement the initiative.

Thus, a given initiative that is considered to be too

disruptive in one situation may be seen as worth pur-

suing in another.

We test our hypotheses using data from the

Department of Energy’s (DOE) Industrial Assess-

ment Center (IAC) program, which includes over

12,000 energy assessments and more than 88,000

energy-savings recommendations that resulted from

these assessments. Most importantly for our analy-

sis, the IAC data include information about both the

expected nancial return of a given recommenda-

tion and, through follow-up by the DOE, whether

that recommendation was implemented. Thus, the

data allow us to examine factors that affect imple-

mentation of energy saving initiatives, controlling

for the expected nancial return of those initiatives.

THEORY AND HYPOTHESES

A signicant body of research has attempted to

determine what, if any, relationship exists between

nancial and environmental performance. So many

studies have been undertaken on this topic that

there are several reviews (Berchicci and King,

2007; Etzion, 2007; Margolis and Walsh, 2003)

and meta-analyses of the relationship (Margolis,

Elfenbein, and Walsh, 2007; Orlitzky, Schmidt, and

Rynes, 2003), and most recently, replication efforts

of prior ndings (Zhao and Murrell, 2016). Despite

this volume of research, there is as yet no consensus

on whether, or to what degree, rms can prot from

environmental initiatives. There is, however, signif-

icant evidence that such a positive relationship can

exist (Berchicci and King, 2007), indicating that

at least in some circumstances, rms appear to be

under-investing in environmental performance. If

environmental and nancial performance levels are

positively related, but rms differ in their degree

of environmental proactivity, then (at least) three

explanations exist. First, the positive relationship

is only found under certain circumstances, such as

when there is ‘low hanging fruit’ that can easily and

protably be harvested (Hart, 1995) or when the

rm possesses complementary assets that allows

it to protably undertake environmental improve-

ments (Christmann, 2000). Second, it may be that

the ability to perceive protable opportunities in

environmental improvements depends upon tacit

knowledge that not all managers possess (King and

Lenox, 2002).

Third, there may be circumstances when a

rm possesses the required capabilities and rec-

ognizes the prot available from an initiative,

yet still chooses not to implement it. This study

focuses on the last situation, as we consider fac-

tors that are likely to inuence the adoption of

environmentally-friendly initiatives, controlling

for the prot that the initiatives offer. In order

to explore these factors, we model the decision

regarding adoption of an initiative as a form of

organizational change, in which the prot expected

Copyright © 2016 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 1287–1304 (2017)

DOI: 10.1002/smj