Developing an eco-capability through environmental orientation and organizational innovativeness

Industrial Marketing Management 45 (2015) 151–161

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Industrial Marketing Management

Developing an eco-capability through environmental orientation and organizational innovativeness Colin B. Gabler a,⁎, Robert Glenn Richey Jr.

b,1

, Adam Rapp c,2

a

Department of Marketing, College of Business, Copeland Hall 530, Ohio University, Athens, OH, 45701, United States Morrow Faculty Excellence Fellow, Department of Marketing, Culverhouse College of Commerce and Business, PO Box 870225, Tuscaloosa, AL 35487, United States Jones Chair of Services Marketing, Department of Management and Marketing, Culverhouse College of Commerce and Business, University of Alabama, PO Box 870225, Tuscaloosa, AL 35487, United States

b c

a r t i c l e

i n f o

Article history: Received 18 May 2013 Received in revised form 4 September 2013 Accepted 4 March 2014 Available online 12 March 2015 Keywords: Eco-capability Environmental orientation Organizational innovativeness Resource-based view Dynamic capabilities

a b s t r a c t Green marketing has become increasingly prevalent, however, generating profits through green marketing has not. Although firms continue to adopt environmental strategies, they struggle to gain a competitive advantage. This study sheds light onto this discrepancy by introducing the concept of an eco-capability, as well as two antecedents instrumental to its formation (i.e., environmental orientation and organizational innovation). Applying the resource-based view of the firm and dynamic capabilities literature, we investigate this eco-capability which fully leverages a firm's human, business, and technology resources. Using survey data from marketing managers across fourteen industries, we estimate a Latent Moderated Structural model that provides support for these three resource components. Environmental orientation and organizational innovativeness are found to be predictors of this eco-capability. Their interaction is also significant, which suggests that a firm that it is both environmentally oriented and innovative is most likely to develop an eco-capability. Finally, we demonstrate that an eco-capability is positively related to two strategic outcomes — market and financial performance, as well as the perceived quality of the firm's offering. © 2015 Elsevier Inc. All rights reserved.

1. Introduction Whether or not business can lead the charge to a sustainable society depends on a simple question: can companies be both environmentallyfriendly and profitable, or is it a ‘one-or-the-other’ (Polonsky & Rosenberger, 2001) scenario? With an increasing number of CEOs acknowledging the importance of sustainability to the future of their businesses (Lacy, Haines, & Hayward, 2012), firms are beginning to consider more environmentally focused strategies (Peattie, 2001; Sharma & Iyer, 2012). For instance, in 2011, 69% of firms worldwide disclosed some kind of environmental impact data, up from 50% in 2007 (Makower, 2013). Researchers across business disciplines have argued the positive impact of these strategies (Sharma, Iyer, Mehrotra, & Krishnan, 2010); however, many firms have not experienced the financial gains necessary to make the shift worthwhile (Lubin & Esty, 2010). The ‘holy grail’ of the green marketing literature – that is, environmental initiatives that positively impact firm performance – has ⁎ Corresponding author. Tel.: +1 740 593 2024; fax: +1 740 597 2150. E-mail addresses: [email protected] (C.B. Gabler), [email protected] (R.G. Richey), [email protected] (A. Rapp). 1 Tel.: +1 205 310 5973; fax: +1 205 348 6695. 2 Tel.: +1 205 348-7420; fax: +1 205 348 6695.

http://dx.doi.org/10.1016/j.indmarman.2015.02.014 0019-8501/© 2015 Elsevier Inc. All rights reserved.

been studied theoretically and empirically, with neither providing consistent results (e.g., Cantor, Morrow, McElroy, & Montabon, 2013) to justify or inform their implementation. Scholars agree that research is needed to determine how to make environmentally-focused, or green, initiatives profitable. Such an understanding is essential if sustainability is to transition from a special interest topic to a pervasive business norm (Lirn, Wu, & Chen, 2013). Similarly, managers want to know which resources are key to creating a marketplace advantage. Academics and practitioners alike, therefore, agree upon the need for environmentally-focused measures, as well as a deeper understanding of how they impact firm performance (Chabowski, Mena, & Gonzalez-Padron, 2011) and competitive advantage (Banerjee, Iyer, & Kashyap, 2003). Although environmental orientation has emerged as an important construct in this regard, it alone falls short in identifying the full impact of a firm's environmental practices. Cronin, Smith, Gleim, Ramirez, and Martinez (2011) agree, suggesting that research has yet to establish a sound link between environmental strategy and performance. Further, while innovation and green technology go hand-in-hand, there is no consensus that stakeholders even consider green products to be ‘innovative,’ which leads to ambiguous and often undervalued results (Cronin et al., 2011). Together, these points highlight two substantive gaps in the literature. Little is known about (1) how firms determine and utilize the

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proper resources to maximize the performance of environmental initiatives, and (2) the role that organizational innovation plays in such initiatives. Using the resource-based view of the firm (RBV) and dynamic capabilities literature, we integrate theory and findings on organizational orientation and innovation to better understand the drivers of firm success associated with environmental initiatives. We posit that by leveraging these two key resources, firms can create what we refer to as an eco-capability, comprised of human, business, and technology components. An eco-capability has the potential to pay dividends in terms of firm financial and market performance, as well as the perceived quality of its offerings. Further, we consider how environmental orientation and organizational innovativeness interact to influence a firm's eco-capability. We conclude with practical implications for management as well as directions for future research. 2. Theoretical background

Shoemaker, 1993), which, in turn, strengthens the firm's overall performance. In this way, a capability reflects the ability to transform a common resource into a valuable offering (Day & Nedungadi, 1994; Teece et al., 1997). A capability is considered dynamic when it enhances a firm's ability to make decisions, solve problems, identify opportunities and threats, and modify existing resources (Barreto, 2010). Dynamic capabilities, accordingly, represent a firm's ability to build and reconfigure resources to respond to changes in the competitive marketplace (Teece et al., 1997). A firm with a dynamic capability is more adept at handling uncertain competitive or industry forces and better positioned to respond with the creation of new products and services (Teece & Pisano, 1994). Such dynamic capabilities are instrumental in the development and maintenance of a core competency that is rare, unique, non-substitutable, and difficult to imitate and acquire by competitors (Hunt & Morgan, 1996). In sum, the pivotal point in the dynamic capabilities literature is that firms compete based on this ability to create value from resources (Prahalad & Hamel, 1990).

2.1. Resource based view of the firm RBV is often the foundation for marketing strategy research because of the relationship between resource deployment and performance (e.g., Barney, 1986, 1991; Peteraf, 1993). It is particularly well-suited to investigations involving green strategy and sustainability (Hult, 2011). A central tenet of the RBV is that firms can enjoy a competitive advantage by acquiring and leveraging a bundle of valuable resources (Day & Nedungadi, 1994). A resource refers to any asset, piece of information, attribute, or process that allows a firm to develop and implement strategies that increase efficiency or effectiveness (Barney, 1991). Operand resources are static entities such as building equipment or warehouse space that do not produce any value unless acted upon. Operant resources, such as employee values and service climate, are abstract, dynamic, and complex (see Madhavaram & Hunt, 2008; Vargo & Lusch, 2004, 2008). Not only are operant resources intrinsically valuable by themselves, but their application is necessary to derive any value from operand resources (Vargo & Lusch, 2004, 2008). As the natural environment becomes a strategic issue, it offers a potential source for firm differentiation. While the RBV explicitly considers external factors such as political and economic conditions, it fails to incorporate the physical environment (Stead & Stead, 1992). Hart (1995) addressed this important omission. Following the traditional RBV perspective, he posited that firms could create a competitive advantage by matching organizational resources and external conditions, including the natural environment. He also viewed the natural environment as not just a key stakeholder, but as a source of competitive advantage for savvy firms. 2.2. Dynamic capabilities Extending from RBV, dynamic capabilities research focuses not on firm resources per se, but on how well firms create new resources or modify existing ones to meet their goals (Eisenhardt & Martin, 2000; Helfat & Peteraf, 2003). Although there is considerable overlap between resources and capabilities, Teece, Pisano, and Shuen (1997) make a clear distinction: a resource represents a tangible stock of available factors a firm controls, whereas a capability represents a firm's ability to deploy those resources for some desired outcome. While resources are available to all firms, capabilities are unique and particular to each firm (Day & Nedungadi, 1994). Further, although a resource may be difficult to imitate, a capability, by definition, cannot be duplicated without the transfer of ownership of the firm itself (Makadok, 2001). Firms may, however, convert a resource into a capability by embedding it within the organization or its marketing strategy (e.g., Zott, 2002). The distinction between a resource and a capability, then, hinges not on possession but on application and utilization (Ngo & O'Cass, 2009). A true capability improves or optimizes the productivity of other resources (Amit &

3. Building an eco-capability Sustainability refers to the idea that, as a society, our actions will meet our current needs and not compromise the ability of future generations to meet their own needs (WCED, 1987). Its focus is on the continual growth of the natural ecosystem system with interrelated human systems (political, business, social, and economic) without the loss or destruction of one system for betterment of another. Recently, Nidumolu, Prahalad, and Rangaswami (2009) predicted that sustainability would be the driver of new product development for the foreseeable future. Indeed, there is increasing innovation and new product development in green sectors such as energy conservation, recycling and remanufacturing, renewable energy, and pollution reduction (Bing, Groot, Bloemhof-Ruwaard, & van der Vorst, 2013; Lubin & Esty, 2010; Pujari, Peattie, & Wright, 2004). But for most firms, these resources have not translated to capabilities (Nidumolu et al., 2009), which represents a considerable gap and a pressing challenge for marketing scholars. Hart (1995) suggests that a firm can develop a capability based on its interaction with the natural environment. Banerjee (2002) and Banerjee et al. (2003) have taken concrete steps in this direction, but the broad nature of their constructs limits their applicability for managers (Menguc & Ozanne, 2011). Marcus and Anderson (2006) describe an environmental capability with four factors, but because two of the factors deal with recycling behavior, it may more accurately describe a reverse logistics capability (Turrisi, Bruccoleri, & Cannella, 2013). Building upon the aforementioned studies as well as the work of Powell and Dent-Micallef (1997), which has also been leveraged in the development of both a sales management capability (Rapp, Trainor, & Agnihotri, 2010) and an e-Marketing capability (Trainor, Rapp, Beitelspacher, & Schillewaert, 2011), we advance the notion of an eco-capability. Based on the WCED's (1987) definition of sustainable development, the first goal of an eco-capability would be to minimize the firm's ecological impact. Drawing from the capability literature, an ecocapability would: (1) embed the environmental resources within the firm so that they are inseparable from the firm itself (Teece, 2009), and (2) use these resources to enhance the productivity of other firm resources (Helfat & Peteraf, 2003). An eco-capability, then, is a multidimensional construct hinging on the possession, application, and utilization of proper resources that reduces ecological impact while creating value and increasing firm performance (Ngo & O'Cass, 2009). Building from Powell and Dent-Micallef (1997), we define an eco-capability as a firm's capacity to deploy environmental human, business, and technology resources to enhance firm performance and conserve the natural environment.

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3.1. Environmental orientation The most effective business strategy is said to be one that is aligned with the appropriate corresponding orientation (Slater, Olson, & Hult, 2006). Stead and Stead (1992) even assert that a green, or environmental, strategy is only effective when the organizational culture is reflective of those values. But while research shows that an effective environmental strategy and orientation can lead to increased financial performance (Fraj, Martínez, & Matute, 2013), in practice, many firms struggle to adopt, embrace, or convey a green reputation. According to Lubin and Esty (2010), most firms “are flailing around, launching a hodgepodge of [environmental] initiatives without any overarching vision or plan” (p. 154). Accordingly, Dibrell, Craig, and Hansen (2011) acknowledge the need to “explore more thoroughly how the managerial attitudes toward the natural environment are embedded in an organization's culture” (p. 406). The greening of a firm's marketing strategy is a delicate task. If it is not approached authentically, business partners may infer it as greenwashing, or a manipulation tactic where the underlying motive is to earn a profit rather than to help the environment (Laufer, 2003). Environmental orientation shares a foundation with market orientation (Stone & Wakefield, 2000), or a firm's ability to generate, disseminate and respond to knowledge within the market (Kirca, Jayachandran, & Bearden, 2005; Kohli & Jaworski, 1990; Morgan, Vorhies, & Mason, 2009), and focus on primary stakeholders (e.g., business partners and competitors) (Greenley, Hooley, & Rudd, 2005). Environmental orientation differs in two ways. First, it involves knowledge of the natural environment and its role in the business landscape, and second, it gives equal consideration to both primary and secondary stakeholders (e.g., local communities). We use Stone and Wakefield's (2000) definition: “The organization-wide mission to: generate ecological intelligence pertaining to current and future societal environmental needs, disseminate this intelligence throughout organizational departments, and generate acceptance and responsiveness to these needs through the adaptation of internally developed programs which create and foster organizational and public perception of ecological concern” (p. 22). Banerjee (2002) divided the construct into two dimensions — internal and external. Internal environmental orientation is conceptually similar to a pro-environmental culture (Banerjee, 2001), while external environmental orientation shares theoretical underpinnings with organizational climate. Organizational culture involves a set of ideals that is shared by all members of an organization (O'Reilly & Chatman, 1986). Organizational climate, in contrast, refers to how and how well the organization carries out the values and norms assumed in its culture (Denison, 1996), as well as the image being conveyed to external stakeholders (Guion, 1973). It is not only the expectations that firm members place on themselves, it is the expectations that they believe are attributable to their business partners, shareholders, policy-makers, and society at large. Building on Banerjee (2002), we define internal environmental orientation as the values and standards of a firm that relate its level of commitment to the environment, and external environmental orientation as how a firm perceives and responds to the environmental demands of its stakeholders. 3.2. Environmental orientation as an antecedent of an eco-capability Barney (1986) suggests that organizational culture can lead to a sustainable competitive advantage if it satisfies the characteristics of other resources; that is, it must provide economic value, it must be unique, and it must be imperfectly imitable so that competitors cannot copy it. Similarly, organizational climate is a “team-embodied, socially complex organizational resource” which acts as a driver of competitive advantage (Ray, Barney, & Muhanna, 2004, p. 28) and firm performance (Powell & Dent-Micallef, 1997). Environmentalism is a part of an organization's culture and climate when a firm “accept[s] the mantra and fully integrates green initiatives

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across all aspects of the business” (Cronin et al., 2011, p. 164), a process driven by managerial values (Fraj et al., 2013). In essence, that culture and climate become embedded in the firm to such a degree that it would be impossible to extract or copy it. When a firm is recognized as being a “green marketer,” that descriptor acts as a valuable resource, particularly relative to marketing and supply chain management functions (Chan, He, Chan, & Wang, 2012). Environmental orientation, then, may be an environmental resource that is inseparable from the firm itself (Amit & Shoemaker, 1993; Teece, 2009). Using this logic, a firm with an environmental orientation should be more suited to the creation of an eco-capability. Formally, H1. Environmental orientation is positively related to eco-capability.

3.3. Organizational innovativeness as an antecedent of an eco-capability Nidumolu et al. (2009) predicted that a large portion of new product marketing strategy would be in the area of green technology. Green technology includes any technological development that reduces a firm's negative impact on the environment, including processes (e.g., manufacturing, supply chain & logistics, waste disposal), policies (e.g., recycling, energy usage, sustainability initiatives) and products (e.g., new design, improvements, R&D). For instance, General Electric's Ecomagination product line matches green R&D with green policy initiatives to reduce energy usage. Similarly, Sprint and Dell utilize green process and policy technology to address ‘e-waste’ through recycling and buyback programs. While all three initiatives reduce environmental impact, they also provide a competitive advantage. GE's energy efficient products provide the firm with business partners they would not otherwise have access to; the return of materials allows Sprint and Dell to lower their production and manufacturing costs and reallocate those funds to other departments. Between 2007 and 2011, the number of firms that disclosed green R&D expenditures rose from 14% to 32% in the United States and 11% to 27% worldwide (Makower, 2013), lending support to the trend anticipated by Nidumolu et al. (2009). Creating a capability from resources involves making those resources dynamic or affecting some ‘action’ to their possession (Teece, 2007). In a business landscape dominated by innovation, capabilities also necessitate the integration of technology into resource deployment (Powell & Dent-Micallef, 1997; Teece et al., 1997). Although technology itself plays a role in the development of a competitive advantage (Colby & Parasuraman, 2003), its value is only optimized when it is embraced and properly utilized. For this reason, we highlight organizational innovativeness – a capability itself – as a central construct in our model (Luo & Bhattacharya, 2006). Innovativeness is commonly used as a measure of the degree of newness associated with a product or process (Garcia & Calantone, 2002). An organization is considered innovative when it consistently focuses on improving its current processes and procedures (Hurley & Hult, 1998). Therefore, organizational innovativeness can reflect something that is new to the industry and/or the customer, and is an important dynamic capability itself (Gebauer, 2011). These capabilities become evident when firms learn to do something well, such as manufacturing new products or developing effective policy (Nelson, 1991; Spring & Araujo, 2013). Moreover, these capabilities become dynamic when they interact with the business environment and/or change over time to accommodate the needs of stakeholders. Thus a firm must persistently be innovative by upgrading its capabilities to stay competitive (Mahoney, 1995). These upgrades often result from the creation of innovative strategy, the implementation of that strategy, and specifically important to this research — the execution of sustainable policy and processes. Previous studies depict organizational innovation as a capability that positively influences other capabilities (e.g., collaboration, technology, and learning) as well as performance (Berghman, Matthyssens, &

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Vandenbempt, 2012; Ellis, Henke, & Kull, 2012). Calling for additional research on sustainability and innovation, recent case-based studies have attempted to connect firm capabilities to innovation strategies for both sustainability and competitive advantage (Mariadoss, Tansuhaj, & Mouri, 2011). Still, serious gaps exist in our knowledge of how organizational innovation and being eco-friendly interact to influence firm performance. While much of the emerging green innovation at the industry level deals with ways to reduce costs, which should eventually allow firms to pass savings across the supply chain, the newness of the strategy implies risk. As such, the key to realizing the benefits of green innovation may be in the openness to new and sometimes risky ideas (Parasuraman, 2000; Rogers, 1995). Only the most innovative firms, then, would be able to fully embrace and implement green technology. Because organizational innovativeness conveys management's commitment to green initiatives, we posit that it will positively influence an eco-capability. Formally, H2. Organizational innovativeness is positively related to eco-capability.

3.4. Interaction between environmental orientation and organizational innovativeness Hunt and Morgan (1996) note that capabilities impacted by innovations should contribute to related capability development as well as overall efficiency and/or effectiveness. Building from this, an organization characterized by a high level of innovativeness (e.g., developing new green market offerings) is likely to experience an improved market position, and eventually, a competitive advantage (Salunke, Weerawardena, & McColl-Kennedy, 2011; Weerawardona & Mavondo, 2011). Because green innovation has a number of inherent risks, it is considered by many to be quite radical (Story, O'Malley, & Hart, 2011; Verganti & Öberg, 2013). Organizational innovation, or the seeking of creative solutions to problems or needs (Morris & Sexton, 1996), therefore, is an especially important component when connecting environmental practices to environmental capabilities. Both theoretical and empirical research support the notion that innovative approaches are needed to make (environmental) policy work (Damanpour & Evan, 1984; Han, Kim, & Srivasta, 1998); however, little attention has focused on non-technical innovative approaches like strategic orientation (Camisón & Villar-López, 2011). The ‘greening of the organization’ and ‘green innovation’ can be thought of as two separate strategies geared toward the same goal (Cronin et al., 2011). Narver and Slater (1990) suggest that innovative firms with a matching orientation are best-suited to make decisions regarding the adoption of an appropriate strategy. Menguc and Auh (2006) demonstrated that organizational innovativeness enhances the effectiveness of a firm's market orientation. It follows, therefore, that organizational innovativeness should interact with environmental orientation to enhance a firm's eco-capability. The logic underlying this prediction is three-fold. First, environmental orientation is a static construct. It conveys natural environmental priorities, but an innovative firm can match those priorities with an active focus on green technology. Secondly, innovative firms turn threats (e.g., government regulations) into opportunities (e.g., going well beyond the regulations). They view policy regulations not as immovable impediments, but as obstacles to be overcome (Hunt & Auster, 1990). This can occur through a complementary or interactive relationship between capabilities (Sok & O'Cass, 2011). For instance, General Electric's Ecomagination line is not only a successful green innovation. Rather, GE turned the threat of changes in energy consumption patterns and conservation policies into an opportunity to grow a product line which has sold over $12 billion since 2006. Similarly, Dupont reduced its emissions by 63% in the 1990s, meeting the greenhouse gas regulations of the Kyoto Protocol well ahead of the timetable. Both examples demonstrate that the ability to turn a threat into an opportunity represents a potential avenue of

differentiation for firms looking to go green. Third, green innovations may help firms convey a genuine environmental concern to stakeholders. By being proactive in the adoption of green technology, innovative firms may be seen as going above and beyond legal standards (Shrivastava, 1995), which may convey authenticity and avoid a greenwashing label (Laufer, 2003). We posit that when firms support their core green image with a focus on innovation, the resulting capability should be even more deeply embedded within the firm and more difficult for competitors to imitate. Specifically, innovative firms should be better able to convey their environmental orientation to stakeholders. This interaction should strengthen the creation of an eco-capability. Formally, H3. Organizational innovativeness has a positive moderating influence on the relationship between environmental orientation and eco-capability.

3.5. Eco-capability and firm performance Finally, we investigate how an eco-capability relates to two interrelated outcomes — market and financial performance (Morgan & Piercy, 1998). These performance metrics are particularly relevant in the current study because firms are often interested in assessing whether their environmental investments: (a) provide a worthwhile financial return, and (b) help to achieve a larger portion of the market. Further, because green offerings can sometimes carry a stigma of inferiority (Lin & Chang, 2012), we also investigate quality of the firm's offerings (Sprott & Shimp, 2004). Quality is a multi-dimensional concept with various definitions across disciplines (Garvin, 1984). In this study, we use managerial perceptions of the overall quality of their products and services, suggesting that the first step to changing general opinions is to assess the perceptions of those inside the firm. A positive relationship between eco-capability and perceived quality of the offering would indicate that managers see value in their environmental initiatives, which could then be passed along to business partners. A negative or nonexistent relationship, alternatively, would signal that an internal change must precede any improvements in external perceptions. In general, properly deployed capabilities have a positive influence on performance (e.g., Teece, 2007; Zott, 2002). This is particularly true when the capability combines a strategic orientation with innovativeness (Menguc & Auh, 2006). Morgan et al. (2009) demonstrate that marketing capabilities, specifically, can increase a firm's return on assets as well as overall firm performance. We build from this logic and predict that a firm's eco-capability should positively influence performance as well as perceptions of quality. We argue that extant research has not fully realized the effects of environmental orientation, in part, because it has not been operationalized as an antecedent of a dynamic capability. This builds from Dibrell et al. (2011), who suggest that environmental attitudes matched with innovation increase entrepreneurial processes, which then increase performance. An eco-capability strengthened by an environmental orientation and organizational innovativeness should garner the same results. Therefore, we predict: H4. Eco-capability is positively related to (a) market performance, (b) financial performance, and (c) quality of the offering. For an illustration of the expected relationships and hypotheses, please see Fig. 1. 4. Methods 4.1. Sample and data collection We acquired the data for this research by soliciting marketing managers in firms across a broad spectrum of industries located in the

C.B. Gabler et al. / Industrial Marketing Management 45 (2015) 151–161 Technology Resources

Human Resources Internal

Environmental Orientation

External

H1

Business Resources

H4a

H3

Eco- Capability

H2 Organizational Innovativeness

H4b H4c

Market Performance

155

margin. market performance was indexed as managerial evaluations of their firm's ability to increase market share, overall sales, as well as the ability to retain customers relative to competition (Morgan & Piercy, 1998). We measured Quality of the Offering, or manager perceptions of the level of quality of their products and services, using a scale adapted from Sprott and Shimp (2004).

Financial Performance Quality of the Offering

Fig. 1. Hypothesized model.

United States. An on-line agency provided a random sample of 850 organizations, whom we contacted to complete the questionnaire. Respondents were offered an aggregated summary of the results and an executive summary of the findings in return for providing their responses. The marketing managers represented a wide range of sizes and types of businesses serving business markets. Of the firms contacted, 246 provided full and complete data, yielding a 28.9% response rate. The survey instrument assured respondents that individual responses would remain completely confidential and that only aggregate results would be reported. The final sample consisted of managers from 39 U.S. states. Ages ranged from 26 to 84 (mean = 48), the sample was 53% male, and managers averaged 15.5 years of experience with their current company. Respondents were spread across 14 industries, as shown in Table 1. 4.2. Measures All variables were measured using 7-point Likert scales anchored by 1 = strongly disagree and 7 = strongly agree. We utilized Banerjee et al.'s (2003) scales to measure environmental orientation, a secondorder construct composed of internal environmental orientation (i.e., how managers perceive their company's environmental values) and external environmental orientation (i.e., how managers perceive that the company responds to demands from stakeholders regarding the environment). We measured organizational innovativeness using a scale developed by Hurley and Hult (1998), which assesses managerial perceptions of their firm's likelihood to seek out and implement innovation. Because three types of resources (i.e., Human Resources, Business Resources, and Technology Resources) are required to fully encapsulate the eco-capability construct, we used Powell and Dent-Micallef's (1997) scale in this research. Financial and market performance were measured via self-report scales developed by Morgan and Piercy (1998). Financial performance was operationalized using managers' evaluations of their firm's overall financial success relative to competition, in terms of both current and expected return on investment, as well as profit Table 1 Industry analysis.

4.3. Measurement model estimation While established scales were used for the constructs, we conducted a principal components exploratory factor analysis (EFA) to ensure that the items loaded on their proper factors. Particular attention was paid to the structure of the eco-capability construct, which initially contained 14 items across three factors: Human Resources, Business Resources, and Technology Resources. The EFA results showed that the items did load on these three factors; however, four items cross-loaded (loaded on more than one factor) and were eliminated (Nunnally & Bernstein, 1994), giving the final eco-capability construct a three factor structure with three items loading onto each factor. All other scale items loaded on their appropriate scales. Before moving to the structural model, we performed a confirmatory factor analysis (CFA) to obtain the measurement model (Anderson & Gerbing, 1998). Stewart and Segars (2002) suggest that “the intercorrelations among first-order factors form a system of interdependence (or covariation) that is itself important in measuring the construct” (p. 39). Accordingly, we treat the eco-capability and environmental orientation constructs as second-order constructs comprised of three and two firstorder constructs, respectively. This process treats each scale as a distinct variable but also as part of a broader construct, a process which has been validated in the literature (e.g., Rapp et al., 2010; Trainor et al., 2011). Results from the CFA show that all items loaded onto their intended factors (both first- and second-order) and the model fit statistics were excellent (χ2 = 570.86, df = 301, p b .001; SRMS = .04; RMSEA = .06; CFI = .96). The chi-square test results in χ2/df = 1.90. We conducted reliability analyses to demonstrate convergent validity, or the degree to which items within each scale were measuring the same construct, with each scale achieving a reliability of at least .80 (Nunnally & Bernstein, 1994). Each variable with item loadings, coefficient alphas, and average variance extracted (AVE) can be found in Table 2. Next, we tested for discriminant validity using a procedure developed by Fornell and Larcker (1981). The simple premise is that unrelated constructs should be different from each other, and it is achieved when the AVE from each construct is greater than the squared correlation of that construct with another construct. Table 3 contains the scale means, standard deviations, and correlations among variables with the square roots of the AVEs along the diagonal. Because the square root of the AVE for each construct is greater than the correlations in all corresponding rows and columns, discriminant validity is attained (Fornell & Larcker, 1981). 4.4. Common method variance

Industry

%

Cumulative Percentage

Aerospace Business services Education Energy Government Health care High tech Hospitality Logistics Manufacturing Nonprofit Pharmaceutical Property management Retail

3.0% 18.0% 8.0% 2.0% 9.0% 13.5% 8.0% 4.0% 1.0% 10.0% 5.0% 3.5% 8.5% 6.5%

3.0% 21.0% 29.0% 31.0% 40.0% 53.5% 61.5% 65.5% 66.5% 76.5% 81.5% 85.0% 93.5% 100.0%

Common method variance (CMV) assumes that some amount of the variance in the model is a product of the methodology and not the constructs and proposed relationships (Podsakoff, MacKenzie, Lee, & Podsakoff, 2003). While debate exists to its relevance and presence in empirical research (Spector, 2006), several steps were taken before and after data collection to assess and minimize its impact in this study. First, questions about similar topics were placed in different sections of the survey instrument, with different instructions, formatting, and response choices. This not only reduced priming effects (Podsakoff et al., 2003), but by creating proximal and psychological separation, respondents' minds were ‘reset’ at several points in the questionnaire (Richey & Autry, 2009). Secondly, the survey instrument stated that there were no right or wrong answers, that the answers

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Table 2 Scale items with factors loadings, reliabilities, and AVEs. Coefficient alpha Internal environmental orientation (Banerjee, 2002); AVE = .91 My company has a clear policy statement urging environmental awareness. Environmental preservation is a high priority in my company. Preserving the environment is a central value in my company. My company promotes environmental preservation as a major company goal. External environmental orientation (Banerjee, 2002); AVE = .79 My company has a responsibility to preserve the environment. People expect my company to be environmentally-conscious. My company strives for an image of environmental responsibility. Organizational innovativeness (Hurley & Hult, 1998); AVE = .92 Innovation is readily accepted in our firm. Management actively seeks innovative ideas. Technical innovation is readily accepted in program/project management. Eco-capability: human resources (Powell & Dent-Micallef, 1997); AVE = .80 My company's top management fully supports our environmental initiatives. There is a general consensus among all employees about the importance of the environment. There is a lot of written and oral communication in my company regarding environmental programs. Our people generally embrace our environmental programs. Eco-capability: business resources (Powell & Dent-Micallef, 1997); AVE = .92 We have a formal, long-term plan for environmental initiatives. Our personnel are well-trained in how our environmental initiatives benefit the customer or planet. We actively research the best environmental practices at other firms in our industry. Redesigning processes or products to be more environmentally-friendly has become a key part of our business plan. Eco-capability: technology resources (Powell & Dent-Micallef, 1997); AVE = .87 My company has implemented technology that… …assesses the performance of your environmental initiatives …provides information to front-line employees about our environmental programs …provides information to customers about our environmental programs …helps with energy management (e.g., lights, climate control) …helps manage inventory in an environmentally-conscious way. Market performance (Morgan & Piercy, 1998); AVE = .89 Our market share is much better than our main competitor. Our customer retention is much better than our main competitor. Our sales growth is much better than our main competitor. Financial performance (Morgan & Piercy, 1998); AVE = .96 Our Current ROI is much better than our main competitor. Our Anticipated Average Profits per Customer is much better than our main competitor. Our Anticipated ROI is much better than our main competitor. Quality of the offering (Sprott & Shimp, 2004); AVE = .92 Overall I would say our products/services have excellent overall quality. The products/services we sell have very good quality. Overall, the products/services we sell are excellent.

were completely anonymous, and that there was no embedded data that would permit the matching of individuals to responses. Given these precautions, CMV is not likely to affect the data. However, two post-hoc analyses ensured this was the case. Harman's (1976) One Factor test determines if the majority of the model's variance can be explained by one factor, which is assumed to be the method factor (Podsakoff & Organ, 1986). To implement this test, a second EFA was performed, which yielded a 4-factor solution accounting for 76.3% of the total variance with each factor having an eigenvalue greater than 1.0. Because no single factor comprised the majority of that variance, the model passed the Harman One Factor Test. We also conducted a more strict procedure developed by Williams, Cote, and Buckley (1989). Rerunning the CFA, all items were allowed to load on their theoretical constructs as well as a method factor. This method factor accounted for just 2% of the total variance, which is less than the 25% found in most studies (Williams et al., 1989). Given the results of these two tests, we conclude that CMV is not a problem with the data. 4.5. Structural model estimation With a valid measurement model in place, we can infer that the observed scores are good indicators of the latent variables and proceed with the structural model. Structural Equation Modeling (SEM) allows for the testing of all of the variables simultaneously without having to enter them in stages while also accounting for measurement error (Schumacker & Lomax, 2010). In this way, it represents a parsimonious

Standardized loadings

0.95 0.84 0.96 0.93 0.94 0.86 0.57 0.78 0.98 0.94 0.92 0.91 0.93 0.86 0.80 0.77 Dropped 0.83 0.94 Dropped 0.91 0.93 0.91 0.91 0.90 Dropped Dropped 0.78 0.93 0.92 0.87 0.89 0.91 0.97 0.95 0.96 0.97 0.94 0.93 0.89 0.93

way to assess relationships as they relate to all constructs in the study as opposed to viewing these relationships in isolation. Specifically, we implement a Latent Moderated Structural (LMS) equations method (Klein & Moosbrugger, 2000) in Mplus6 for several reasons. First, this maximum likelihood estimation technique analyzes at the latent construct level. Instead of treating constructs as composites, where scale items are averaged to create a new variable, each item is included in each stage of the hypothesis testing. Secondly, LMS incorporates errors of the indicator variables in the measurement model and allows for non-normal distribution among exogenous latent constructs (Satorra, 1992). Thirdly, Schermelleh-Engel, Klein, and Moosbrugger (1998) suggest that estimators in LMS are unbiased and asymptotically normally distributed. First, the linear effects model was created to assess the relationships in Fig. 1 that do not involve interactions. This model examined the relationship between environmental orientation and eco-capability (H1), organizational innovativeness and eco-capability (H2) as well as the relationship between eco-capability and the outcomes of market performance (H4a), financial performance (H4b) and quality of the offering (H4c). The next step was to test the hypothesized model, which included the interaction. In LMS, the newly created interaction term becomes another independent variable with a mean of zero and a standard deviation of one to alleviate concerns of Type I error (Muthén & Muthén, 2010). Similar to using Z-scores, the results are interpreted as standardized weights, a process which also decreases the likelihood of

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Table 3 Scale means, standard deviations, correlations, and AVEs. Variable

Mean

Std dev

1

2

1. IntEnv orient 2. ExtEnv orient 3. Innovative 4. Human res 5. Business res 6. Techno res 7. Market perf 8. Financial perf 9. Offer quality

4.23 4.77 4.93 4.82 3.82 3.92 4.24 4.18 5.63

1.62 1.32 1.40 1.22 1.68 1.68 1.22 1.26 1.14

(.91) 0.77⁎⁎⁎ 0.50⁎⁎⁎ 0.73⁎⁎⁎ 0.79⁎⁎⁎ 0.75⁎⁎⁎ 0.40⁎⁎⁎ 0.42⁎⁎⁎ 0.14⁎

(.79) 0.35⁎⁎⁎ 0.67⁎⁎⁎ 0.65⁎⁎⁎ 0.64⁎⁎⁎ 0.32⁎⁎⁎ 0.33⁎⁎⁎ 0.10

3

4

5

6

7

8

9

(.92) 0.57⁎⁎⁎ 0.52⁎⁎⁎ 0.59⁎⁎⁎ 0.51⁎⁎⁎ 0.49⁎⁎⁎ 0.47⁎⁎⁎

(.80) 0.72⁎⁎⁎ 0.66⁎⁎⁎ 0.35⁎⁎⁎ 0.37⁎⁎⁎ 0.27⁎⁎⁎

(.92) 0.79⁎⁎⁎ 0.41⁎⁎⁎ 0.44⁎⁎⁎ 0.18⁎⁎

(.87) 0.48⁎⁎⁎ 0.49⁎⁎⁎ 0.20⁎⁎⁎

(.89) 0.84⁎⁎⁎ 0.34⁎⁎⁎

(.96) 0.29⁎⁎⁎

ss

N = 246. AVEs in parentheses on the diagonal. ⁎ (p b .05). ⁎⁎ (p b .01). ⁎⁎⁎ (p b .001).

multicollinearity. If the interaction model is significantly better than the linear effects model, the hypothesized moderation should be included in the final model (e.g., Cortina, Chen, & Dunlap, 2001).

5. Results 5.1. Structural model comparison The linear effects model demonstrated acceptable fit (χ2 = 690.98, df = 333, p b .001; RMSEA = .07; CFI = .95). When estimating latent interactions, the linear model is nested in the hypothesized model. Because LMS fits the model to raw data, while the statistics reported are relevant for the linear model, they are not used in model comparison. The statistics most important for LMS are the log likelihood (LL) value and Akaike Information Criterion (AIC) value (Akaike, 1974). The AIC does not determine an absolute model fit by testing against a null hypothesis; rather, it constitutes a relative measure of the goodness-of-fit between two or more models. The AIC is particularly useful because it penalizes scholars for adding parameters to over-fit a model. When comparing multiple models, the one with the smallest AIC value is preferred (e.g., Vogel & Feldman, 2009). In model comparison where all parameters are known, such as this one, the log likelihood ratio test is considered the most powerful (Neyman & Pearson, 1933). In LMS, the log likelihood ratio statistic determines how many times more likely the data is to occur with the hypothesized model than with the linear model (Klein & Moosbrugger, 2000). After adding the interaction term, a chi-square difference test is conducted using the log likelihood statistic, scaling correction factor, and number of parameters from each model (Satorra & Bentler, 2010). The resulting chi-square statistic can be used to compute a p-value which will determine whether or not the hypothesized model represents a significant improvement over the nested model (Marsh, Wen, & Hau, 2004). The linear effects model produced a log likelihood statistic of 7870.99 and an AIC of 15,939.99, while providing support for the hypotheses. Specifically, environmental orientation was positively related to eco-capability (H1; β = .54, p b .001); organizational innovativeness was positively related to eco-capability (H2; β = .24, p b .001); and eco-capability was positively related to market performance (H4a; β = .56, p b .001), financial performance (H4b; β = .56, p b .001), and quality of the offering (H4c; β = .29, p b .001). The hypothesized model produced an AIC of 15,929.42. Because this value is less than the AIC of the linear model, 15,939.99, it is the preferred model. The hypothesized model also produced a log likelihood statistic of 7864.71. Using the change in log likelihood values as well as the change in degrees of freedom, a p-value was calculated which demonstrated that the hypothesized model was a significant improvement over the linear model (Δ −2LL = 18.04, Δ df = 1, p b .001).

5.2. Alternative model comparison In SEM, the testing of a theoretically-driven alternative model lends support to the hypothesized model. However, alternative models must contain the same nested linear model as the hypothesized model to be able to compare using LMS. Because organizational innovativeness has been shown to be a predictor of performance outcomes (e.g., Hult, Hurley, & Knight, 2004), we positioned it as a moderator between ecocapability and the performance metrics. Rerunning the analysis with the new interaction term, the alternative model produced an AIC of 15,938.77 and a log likelihood statistic of 7867.38. This represents a better fit than the linear model, but not significantly better (Δ − 2LL = 7.22, Δ df = 3, p = ns). More importantly, it is a poorer-fitting model than the hypothesized model. Therefore, the hypothesized model is preferable to the alternative model, allowing for the interpretation of coefficients from the output. See Table 4 for statistics of all three models. 5.3. Hypothesis testing Examining the hypothesized model, the results remain significant. The interaction between environmental orientation and organizational innovativeness was a significant predictor of the eco-capability (H3a; β = .07, p b .001). Regarding outcomes, eco-capability was positively related to market performance (H4a; β = .56, p b .001), financial performance (H4b; β = .56, p b .001), and quality of the offering (H4c; β = .30, p b .001). Table 5 contains results of the hypotheses tests. The support for H3 suggests that organizational innovativeness has more of an influence as a moderator than an antecedent. Using a procedure developed by Aiken and West (1991), the interaction between environmental orientation and organizational innovativeness was plotted with information from the hypothesized model. The graph shows the interaction at low (1 standard deviation below the mean), average (the mean), and high (1 standard deviation above the mean) values of organizational innovativeness with environmental orientation as the independent variable. The positive slope for environmental orientation was steepest for those managers who reported high levels of Organizational Innovativeness. This means that the positive relationship between environmental orientation and eco-capability is strongest for innovative firms and weakest for firms that are not innovative (Fig. 2). 6. Discussion and conclusion For decades, the ‘holy grail’ of environmental marketing research has been: ‘does it pay to be green’? As environmental strategies evolve from first mover tactics to the mere costs of doing business, many firms are struggling to derive an advantage from their green initiatives. This study offers four contributions that both advance our theoretical understanding of environmental marketing strategy and provide practical

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Table 4 Results of model comparison. Model description

AIC

Linear Hypothesized interaction Alternative interaction

15,939.99 15,929.42 15,938.77

AIC difference

Log likelihood statistic (LL)

−2LL difference

Scaling correction

−10.57 −1.22

−7870.99 −7864.71 −7867.38

– 12.56 7.22

1.60 1.59 1.61

solutions to marketing managers who wish to see returns on their green investments. First, we build from the work of Powell and Dent-Micallef (1997) to introduce a construct we refer to as an eco-capability, or a capability that makes full use of a firm's environmental human, business, and technology resources. Second, we conceptualize environmental orientation as an antecedent of this capability, thus demonstrating the necessity for firms to not just “talk the green talk,” but “walk the green walk.” Third, we highlight the importance of organizational innovativeness, proposing that firms that are both innovative and environmentally-oriented are the most likely to develop an ecocapability. Fourth, we investigate the influence of an eco-capability on two performance outcomes (i.e., market and financial performance), as well as the perceived quality of firm offerings (as assessed by managers). Our findings indicate that firms that leverage an eco-capability see positive gains in their market and financial performance. In addition, the managers of these firms also perceive their offerings to be of higher quality. Taken together, these results have the potential to help businesses more accurately predict performance based on their environmental initiatives, and give scholars a new construct to incorporate into the sustainability discussion.

6.1. Theoretical implications The topic of the natural environment has become conspicuous in business literature across disciplines; but perhaps nowhere is the issue as imperative as in marketing (Kotler, 2011). The first, and perhaps most important, theoretical contribution to the marketing literature is the development of the eco-capability itself. Over twenty years ago, Oliver Williamson (1991) predicted that the resource-based and capability-based views would coalesce to address strategic management. By developing the eco-capability construct through the dual lenses of RBV and dynamic capabilities, we extend Williamson's (1991) prediction to environmental strategic management. Building upon Powell and Dent-Micallef's (1997) capability conceptualization, we identify human, business, and technology resources as distinct and necessary components of the eco-capability. In doing so, we advance what we believe to be the most accurate representation of an environmental capability in the literature to date, and one that offers a more complete assessment of the effectiveness of firm environmental initiatives. Additionally, we highlight two constructs that are instrumental to the creation of an eco-capability —environmental orientation and

Chi-square difference

Δ df

p-value

18.04 3.49

– 1 3

– b0.001 =0.32

organizational innovativeness. Environmental orientation proved to be a strong predictor of the eco-capability, which extends the literature on behavioral orientations to the natural environmental context. Further, it underlines the importance of adopting an organizational culture and climate that matches overarching firm goals. Organizational innovativeness, also emerged as an important driver of an eco-capability. While technology is important when assessing an environmental capability, we suggest that a firm's willingness and ability to adopt technology is more useful because it demonstrates a commitment to that organizational goal. Perhaps more interesting than the direct effects of these two antecedents is the positive interaction between them. Our analyses indicated that the interaction model (with organizational innovativeness positioned as a moderator) was a better fit than the linear model (with organizational innovativeness positioned only as an antecedent). Further, the relationships between the eco-capability and the performance outcomes were stronger in the interaction model. Based on this, we can conclude that organizational innovativeness is more accurately conceptualized as a moderator of the relationship between the orientation and capability than simply as an antecedent. In addition, we tested an alternative model which demonstrated that the construct was more effective in the formation of the capability than in the utilization of that capability to achieve performance outcomes. This finding validates the importance of integrating sustainability and innovation in theory and practice while supporting the fundamental premise of dynamic capabilities and how they contribute to competitive advantage. Achieving an accurate and valid measurement of performance continues to be an obstacle for scholars studying environmental business initiatives. By demonstrating a positive relationship between an eco-capability and both market and financial performance, we provide a global assessment of the value of green investments. A more substantive theoretical development, however, concerns the assessment of the firm's offering as perceived by its managers. Green products have long suffered from the stigma of low quality. Our results indicate that managers perceive offerings created through an eco-capability to be of better quality compared to those that are not. This finding offers a counterpoint in the low quality debate and could provide scholars with the basis for other self-assessed interpretations of green product quality.

Table 5 Results of hypothesis testing. Relationships

Linear effects Interaction model effects model

H1: Environmental orientation → eco-capability H2: Organizational innovativeness → eco-capability H3: Environmental orientation × Org Innovativeness → eco-capability H4a: Eco-capability → market performance H4b: Eco-capability → financial performance H4c: Eco-capability → quality of the offering

0.54⁎⁎⁎ 0.24⁎⁎⁎ ‐‐

0.55⁎⁎⁎ 0.25⁎⁎⁎ 0.07⁎⁎

0.56⁎⁎⁎ 0.55⁎⁎⁎ 0.29⁎⁎⁎

0.56⁎⁎⁎ 0.56⁎⁎⁎ 0.30⁎⁎⁎

n = 246. ⁎ p b .05. ⁎⁎ p b .01. ⁎⁎⁎ p b .001.

Fig. 2. Organizational innovativeness moderation effect.

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6.2. Managerial implications While scholars work to uncover theoretical explanations for the slow adoption of green products, marketing managers simply want tangible, implementable solutions. Our results show that an eco-capability can lead to increased performance. Moreover, because an eco-capability consists of three types of resources, each with three dimensions, managers have nine specific areas in which to pinpoint their firms' strengths and weaknesses: (1) the human resources of (a) committed upper management, (b) a flexible workforce, and (c) a general consensus among employees; (2) the business resources of (a) properly trained personnel, (b) benchmarking against competition, and (c) redesigning processes with environmental strategy; and (3) technology resources that (a) assess performance, (b) assist with inventory management and climate control, and (c) provide employees with information on the environmental programs. By examining these specific resources, managers can determine which areas require more attention and investment. The potent influence that environmental orientation exhibited in our study suggests that when an environmental focus is embedded within a firm's DNA, that firm is better able to turn its environmental resources into a capability. For firms looking to achieve an eco-capability, therefore, the first step involves embracing an authentic, unified image that is visible to its stakeholders. Next, firms should foster an innovative culture. Adopting environmental technology is inherently risky, but firms that are willing and able to accept that risk put themselves in a position to gain the most from their environmental resources. Innovative firms not only become the pioneers of green technology, they also dynamize their static green resources, making these resources more difficult to imitate and more difficult to separate from the firm itself. Just as innovativeness amplifies the influence of market orientation on firm performance (Menguc & Auh, 2006), we find that eco-oriented firms that are also innovative are best suited to develop and optimize the human, business, and technology resources necessary in the formation of an eco-capability, and ultimately achieve a competitive advantage in a green-washed marketplace. One final implication arises from our outcome variables. The positive relationship between the eco-capability and the performance measures indicate that not only are environmental strategies sound investments, they also help garner a larger segment of the market. This finding suggests that the prioritization of an eco-friendly business model has an appreciable impact on a firm's bottom line. The ‘quality of the offering’ measure, on the other hand, allows us to advance the simple idea that managers do place value in their green strategies. This is not a trivial finding. If managers perceive higher quality in their firm's environmental products, this represents an important first step in conveying that message to business partners and refuting the low quality myth that has followed green products. 6.3. Limitations and future research There are several limitations associated with this research that provide opportunities for future research. First, although this study captures data from 14 industries and 39 U.S. states, it would benefit from replication with more industries and different countries. In addition, our model was not exhaustive in the potential predictors, outcomes, and/or moderating variables that could be examined. Ray et al. (2004) suggest that more specific performance metrics should be used instead of global outcomes such as financial and market performance. For example, environmental performance or environmental competitive advantage may be better indicators of changes in performance resulting from green strategies. Matching these constructs with objective performance metrics would be a robust replication of the perceptual measures studied here. Further, quality is a multi-dimensional construct (Garvin, 1984). While our study examined managerial perceptions of overall quality, we neglected to consider perceptions or specific dimensions.

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Future studies that investigate different quality dimensions as well as different perspectives (e.g., customers, partners, suppliers) and sources of data would be useful. Other moderators may be beneficial as well. For instance, being a first mover in regard to resource acquisition and deployment is often considered a competitive advantage (Lieberman & Montgomery, 1998). Therefore, program timing is a construct worth studying in regard to an eco-capability. Trustworthiness, organizational learning, and other dimensions of Parasuraman's (2000) technological readiness scale may also enhance the understanding of these constructs. Alternatively, scholars could investigate the repercussion of focusing too many resources on an environmental capability. Leonard-Barton (2007) describes a ‘core rigidity’ that may emerge from overemphasizing one aspect of a firm at the expense of another. Surely, the time, effort, and capital necessary to create an eco-capability may hinder a firm's ability to implement another process, which presents an interesting research question. Finally, environmentalism is a broad topic with implications far beyond firm profitability. While this study demonstrates that the two can be linked, clearly, the planet is in crisis and Corporate Social Responsibility (CSR) and sustainability initiatives are not sufficient (Fleming & Jones, 2013). Future scholars should address the overarching issue of sustainability as it pertains to the greater good and not solely firm performance.

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