Description
During this such a brief description regarding being good when not doing well examining the effect of the economic downturn.
Being Good When Not Doing Well: Examining the Effect of the
Economic Downturn on Small Manufacturing Firms’ Ongoing
Sustainability-Oriented Initiatives
Panwar, R., Nyabkk, E., Pinkse, J., & Hansen, E. (2015). Being Good When Not
Doing Well: Examining the Effect of the Economic Downturn on Small
Manufacturing Firms’ Ongoing Sustainability-Oriented Initiatives. [Article in Press].
Organization & Environment. doi:10.1177/1086026615573842
10.1177/1086026615573842
SAGE Publications
Accepted Manuscripthttp://cdss.library.oregonstate.edu/sa-termsofuse
1
Being good when not doing well: Examining the effect of the economic downturn on
small manufacturing firms’ ongoing sustainability-oriented initiatives
Rajat Panwar
a
, Erlend Nybakk
b
, Jonatan Pinkse
c
& Eric Hansen
d
a
University of British Columbia;
b
BI Norwegian Business School;
c
Grenoble Ecole de Management;
d
Oregon State University
Organization & Environment, forthcoming
Abstract
How firms behave under conditions of decline and resource constraints has not been considered
in the corporate sustainability literature. This leaves unanswered the question how much we
should rely on firms’ sustainability-oriented voluntary initiatives at a time when the global
economy continues to be weak and firms face persistent threats of decline. In addressing this
question, we first argue that the effect of a decline would be different for peripheral and core
initiatives. Using data gathered from 478 small firms representing multiple manufacturing
sectors in the US through a survey, we empirically demonstrate that a decline in a firm’s
financial performance is associated with a higher decline of peripheral initiatives than of core
initiatives. We further found that a decline in peripheral initiatives was even greater when a firm
operated in a relatively dynamic context. Contextual dynamism, however, did not affect decline
in core initiatives.
2
Introduction
The economic recession of 2008 brought both large and small firms under unprecedented
financial pressure, although small firms were hit much more severely. In the US alone,
approximately 170,000 small firms went out of business during the recession (The Huffington
Post, 2012). As firms were grappling with eroded finances, concerns were also growing about
the fate of their ongoing sustainability—both social and environmental—commitments. The
Economist (2009) noted that the recession was “a test of companies’ commitments to doing
good,” while other media were reporting cutbacks in ongoing sustainability commitments
(Willman, 2008). But, besides such conjectural judgments and reports, there were few attempts
to systematically understand posture toward ongoing sustainability initiatives during this period.
As such, firm behavior under conditions of decline and resource constraints is not a new topic in
the management literature (Levine; 1978; Whetten, 1980); however, to date it has not been
considered in corporate sustainability and corporate social responsibility (CSR) literature.
Previous literature explicitly recognizes the role of slack resources in firms’ sustainability
initiatives (Amato & Amato, 2011; Perez-Batres, Doh, Miller & Pisani, 2012; Ullmann, 1985;
Waddock & Graves, 1997); yet, to the best of our knowledge, no study has so far examined
specifically the effect of diminished resources on firms’ ongoing initiatives. This oversight is
understandable because the prevailing ideology in our society (and the majority of business
literature) emphasizes resource abundance and considers economic growth a normal
organizational condition. Yet, this oversight is severe because it leaves us wondering how much
we should rely on firms’ voluntary initiatives at a time when the global economy continues to be
weak and firms face persistent threats of decline (Trahms, Ndofor & Sirmon, 2013). If
sustainability-oriented initiatives turn out to be disposable with decline in a firm’s resources, our
3
faith in business as a meaningful partner in sustainability is ill-founded. Then again, if these
initiatives were resilient to resource changes, we would have reason to rely on sustained business
commitment to sustainability.
In this paper, the authors set out to examine the resilience of small manufacturing firms’ ongoing
sustainability-oriented initiatives during the economic downturn of 2008. We focused on small
firms for several reasons: they often have small pools of slack resources to draw on during a
period of economic downturn; they constitute the majority of all firms; they are paramount to
environmental and social sustainability; and they are not well-represented in corporate
sustainability/CSR research (Aragón-Correa, Hurtado-Torres, Sharma, & García-Morales, 2008;
Battisti & Perry, 2011). Because sustainability-oriented initiatives are not characteristically
homogenous (Orlitzky, Siegel, & Waldman, 2011), we assumed that they would not be
uniformly resilient to an economic downturn. For example, some initiatives are guided primarily
by normative considerations (Marcus & Fremeth, 2009), and others by instrumental
considerations (Siegel, 2009). Similarly, some initiatives are substantive while others are more
symbolic (Perez-Batres, Doh, Miller & Pisani, 2012). Also, some initiatives could be embedded
in a firm’s strategy and core to a firm’s business, yet others are more peripheral (Hannan &
Freeman, 1984).
In this study, we adopted the core-periphery typology (Fiss, 2011) to examine the effect of a
firm’s declining resources on the resilience of sustainability-oriented initiatives. The core-
periphery typology captures the way in which the human mind fundamentally classifies activities
(Hahn & Chater, 1997). It has been employed to explain knowledge structures that top
management uses in making strategic decisions (Porac & Rosa, 1996), and also in literatures on
organizational decline (Zammuto & Cameron, 1982) and CSR (Aguinis & Glavas, 2013) that
4
are both pertinent to this study. We apply the typology to study the overall effect of the economic
downturn on firms’ sustainability initiatives as an interaction between firm and industry level
changes. In so doing, we first examine the effect of a decline in a firm’s financial performance.
Further, because an economic downturn does not affect a firm’s resources alone, it also creates a
highly dynamic context within an industry that profoundly affects a number of decisions that
firms make (Li & Liu, 2014), we also investigate an interaction effect that a firm’s financial
performance and its contextual dynamism produce on its sustainability initiatives.
The remainder of this paper proceeds as follows. In the following literature review section, we
first briefly review the organizational decline literature particularly focusing on firms’ actions
during a period of decline. We then summarize general characteristics of small firm engagement
in sustainability issues to foreshadow a focused discussion about possible effects of the
economic downturn on core and peripheral initiatives that appears in the subsequent hypotheses
development section. The succeeding data and methodology section, divided into four parts,
details the sampling plan, data sources, study measures, and their psychometric properties. The
analysis and results appear concurrently in the section that follows. Next appears the discussion
section wherein we place our results within larger theoretical and managerial considerations. The
paper concludes with summarizing our contributions and outlining limitations that potentially
restrict the reach of our results.
Literature review
Organizational decline
Organizational decline refers to a broad range of conditions that could negatively impact a firm.
While some scholars consider decline only when the impact is sustained over a longer period of
5
time (Bruton, Oviatt & White, 1994), others consider it as a substantial deterioration in a firm’s
resource base that impacts a firm in both short and long terms (Mone, Mckinley & Barker,
1998). Organizational decline presents a threat to an organization’s viability and may manifest as
reductions in market share, financial losses, or reduced demand and sales (Mone et al. 1998). It
may either occur as a result of external factors such as a gradually diminishing industry or a
suddenly emerged crisis (Park & Mezias, 2005), or of internal factors such as outmoded
strategies or operational inefficiencies (Morrow, Sirmon, Hit & Holcomb, 2007). Moreover,
most firms face decline at some point (Trahms, Ndofor & Sirmon, 2013).
A decline is associated with a number of firm-level dysfunctions. Declining firms experience
higher levels of internal conflict, low organizational morale, and self-protective behaviors among
employees—all of which ultimately cause a firm to conserve resources. According to
Schoenberg and colleagues (2013), firms’ various actions to cope with the decline, can be
summed up as targeting cost efficiencies, retrenching low performing assets, focusing on core
activities, and preparing for the future. Firms may pursue these actions separately or in
combination.
Cost efficiency-oriented measures are often taken first as firms grapple with resource constraints.
Such measures, characterized as “belt tightening” or “fire-fighting”, are aimed at stabilizing
finances by improving cash flow (Sudarsanam & Lai, 2001). But, when the “low hanging” fruits
of cost efficiency are not enough, firms resort to the asset retrenchment route wherein they divest
their low performing assets. Retrenchment is useful only when firms are able to generate cash
flow from any disposal (Filatotchev & Toms, 2006), which is often difficult due to asset
specificity, liquidity in the second hand market, and exit barriers. Retrenchment decisions are
inevitably complex because, on the one hand, firms bear the risk that asset sales might
6
compromise future strategic options, while facing compulsions to generate cash for meeting
current demands (Schoenberg et al., 2013).
A focus on the firm’s core activities is repeatedly identified as a decline management strategy
and is often used in parallel with asset retrenchment (Boyne & Meier, 2009). This strategy
essentially translates into determining and focusing on the markets, products and customers that
have the potential to generate the greatest profits for a firm. Focusing on core activities might
also entail organizational restructuring so a firm can align more effectively with its core purpose.
Such a restructuring often involves closure of those operations, products, or markets that do not
fit with the firm’s purpose (O’Neill, 1986) Finally, firms may also pursue a “prepare or build for
the future” strategy, but often only when the immediate crisis has passed and the financial
position has somewhat stabilized (Filatotchev & Toms, 2006). These promotion-focused firms
invest in market development and asset acquisition during a decline and lay the foundation of a
competitive advantage that they would hope to have over their competitors in a post-decline era
(Gulati, Nohria & Wohlegezogen, 2010).
In view of the courses of action proposed to deal with organizational decline (Schoenberg et al.,
2013), it is not surprising that firms’ sustainability-oriented initiatives can come under pressure.
Notwithstanding the appeal of the business case for sustainability, so far the evidence remains
inconclusive as to whether such initiatives lead to substantial financial gains and whether they
are part of core business activities (Devinney, 2009). But before we develop our hypotheses
about the relation between organizational decline and the resilience of sustainability initiatives,
next we clarify the idiosyncrasies of sustainability in a small-firm context.
Small firms’ sustainability-oriented behavior
7
In contrast to previously held views, it is now well understood that small firms’ sustainability-
oriented behavior is not just a scaled down version of large firms’ behavior but is rather
characteristically different (Spence & Lozano, 2000; Tilley, 2000). Emphasizing this uniqueness,
Lepoutre and Heene (2006) even coined the term small business social responsibility. The extant
literature highlights key characteristics of small firms’ commitment to sustainability. First of all,
there is a substantial overlap between business relationships and personal networks of small firm
owners (Longenecker et al., 2006). A commitment to sustainability is therefore a matter of
personal pride to them. In fact, small firms view any negative press concerning their impact on
the community and environmental wellbeing as “indelible stains on themselves” (Dyer &
Whetten, 2006: 789) and thus take sustainability-oriented initiatives seriously with a clear
intention to make a positive difference in their local environment. Relatedly, small firms
approach these initiatives in a personalized and informal manner (Russo & Tencati, 2009;
Spence & Rutherfoord, 2003), and often intervene in areas that both align with the values of their
owners and the needs of the surrounding community (Smith & Oakley, 1994).
In terms of sustainability focus, small firms are traditionally well-known for their close
community connections (Lähdesmäki & Suutari, 2012). In fact, they often view success in terms
of legitimacy granted to them by local stakeholders (Perrini, 2006) and by their reputation in the
surrounding community (Darnall, Henriques, & Sadorsky, 2010). Small firms tend to support
and sponsor community wellbeing programs (Amato & Amato, 2007). In the US, for example,
three-quarters of small business owners donate to a number of causes, and with a much higher
percentage of profits than that of larger firms (The Chronicle of Philanthropy, 2008). Many also
try to have a positive impact in a number of other ways (Blackburn & Ram, 2006), such as by
8
extending their support to local non-profits through their employees’ time and expertise
(Fitzgerald et al., 2010).
For a long time, however, it was held that small firms engage in environmental activities only at
a modest level because of their resource constraints (Aragón-Correa et al., 2008), cost
disadvantage in implementing environmental initiatives relative to larger firms (Darnall et al.,
2010), subpar levels of eco-literacy (Schaper, 2002), and the minimal pressure they face from
society and activist groups to improve environmental performance (Wehrmeyer, 2000). Over the
past decade this belief has changed though, and several recent surveys conclude that small firms
proactively address environmental challenges (Battisti & Perry, 2011; Revell, Stokes, & Chen,
2010).
In summary, sustainability-oriented initiatives of small firms are fundamentally different from
those of large firms. At face value, one might expect that their resilience is more vulnerable to
organizational decline due to the limited resources small firms have to maintain them in difficult
times. Then again, the initiatives small firms undertake tend to be more a matter of personal
pride which they cannot suddenly stop, as this would hurt their position in the local environment.
The question remains, therefore, what would happen to small firms’ ongoing sustainability
initiatives within an economic downturn?
Hypotheses development
In developing our hypotheses, we first consider the effect of organizational decline as a firm-
level variable, i.e. a decline in financial resources. Although it is not uncommon to view
sustainability initiatives as an added cost of doing business (Siegel, 2009), such initiatives are
also recognized for the various tangible and intangible benefits they could offer to a firm (Hart,
9
1995). This business case view has so deeply permeated contemporary management thinking
(Hahn, Preuss, Pinkse & Figge, 2014) that, for a majority of firms, it is unlikely they will
consider all sustainability initiatives as a dispensable cost item. Instead, we believe that firms
would categorize the various initiatives as core and peripheral (Yuan, Bao & Verbeke, 2011).
Core initiatives are essential for firms in that they rely on them for their marketing and also for
achieving their mission (Hannan & Freeman, 1984); peripheral initiatives, in contrast, remain
expendable or even exchangeable (Fiss, 2011). Any distinction between core and peripheral
activities is highly context-dependent (Gilley & Rasheed, 2000). While both contribute to an
organization’s success in the long run, peripheral activities are not critical. Janitorial services
within an organization, for example, are not critical for an organization’s success and are
therefore peripheral. Customer service for a service oriented firm, on the other hand, is a core
activity. Thus, our proposition here is that when firms face a decline in their financial resources,
they would strive to conserve their core sustainability initiatives, while retrenching the peripheral
ones.
But which sustainability initiatives are core and which ones are peripheral? While such a
classification might entail a separate study, here in the context of small manufacturing firms, for
several reasons, we contend that it is primarily the environmentally-oriented initiatives that befit
the definition of core initiatives, whereas community initiatives are better classified as
peripheral. Firstly, many environmental initiatives typically determine a firm’s production
processes or product features (Gilley et al., 2000). Secondly, because environmental initiatives
typically consort formal environmental management systems (Gonzalez-Benito & Gonzalez-
Benito, 2005), they interact with many sub-systems of a firm (Siggelkow, 2002) and inter-
connect them (Hannan, Burton & Baron, 1996). Similarly, environmental initiatives are often
10
tied to firms’ marketing strategies (Aragón-Correa, 1998). Furthermore, environmental initiatives
of small firms are often driven by demands of their downstream supply chain partners (Hall,
2000; Schaper, 2002) and hence a key component of a firm’s marketplace competitiveness.
Consider, for example, a Forest Stewardship Council certified furniture manufacturing firm. Eco-
labeled products affect its marketing strategy and its choice of buyers and suppliers. Similarly, a
firm that is committed to becoming more energy-efficient or strives to reduce its waste would
often employ new technology or machinery. Overall, many environmental initiatives penetrate
deep into a firm’s internal management, operations, and marketing domains, and are therefore a
core part of the organization.
By comparison, community initiatives are relatively more peripheral because too often small
firms engage in community initiatives in an ad hoc manner such that community initiatives are
neither tied to their business strategy (Jenkins, 2006), nor to market development or brand
promotion plans (File & Prince, 1998; Varadarajan & Menon, 1988). During a period of decline,
while small firm owners might still remain motivated toward community initiatives on a personal
level, this ad hoc nature of community initiatives would press them to reconcile their personal
motivations with their firm’s financial necessities. Previous research also confirms that during a
period of decline, firms typically choose to dedicate their resources to core operations, focus on
short-term survival strategies centered on budget tightening (Ofek, 1993; Latham & Braun, 2011;
Staw, Sandelands, & Dutton, 1981), and curtail their expenditures associated with nonfinancial
stakeholders (Maksimovic & Titman, 1990; Opler & Titman, 1994). We argue that small-firm
owners would resolve the dilemma between their personal motivations to engage in community
initiatives and the immediate need for survival through a “put on hold” strategy by temporarily
discontinuing their community initiatives. Certainly, not all environmental initiatives are core,
11
nor are all community initiatives peripheral, but we believe that for an average small-sized
manufacturing firm, environmental initiatives would more aptly fit as core and community
initiatives as peripheral.
Overall, it would be relatively easier for firms to downscale or discontinue peripheral community
initiatives because discontinuing or cutting back core environmental initiatives would disrupt
existing equilibriums, result in organization-wide changes, and would leave far-reaching impacts
on a firm’s marketing mix. Core environmental initiatives essentially create a strategic lock-in
for a firm. Peripheral community initiatives, though still important to a firm, could be more
easily decoupled since they are often not strongly connected to a firm’s sub-systems. Moreover,
various costs associated with core initiatives exhibit stickier behavior relative to those associated
with ancillary or peripheral functions (Balakrishnan & Gruca, 2008), making the discontinuation
of core initiatives disproportionately expensive and the discontinuation of peripheral initiatives a
more likely option for small firms, as a consequence. Overall, we contend that while a decline in
firms’ financial resources might negatively affect both core and peripheral initiatives, the effect
would be stronger for peripheral initiatives. Therefore, we hypothesize:
H1: A decline in small firms' financial performance is associated with a higher decline in
their peripheral sustainability-oriented (i.e. community) initiatives than in their core
sustainability-oriented (i.e. environmental) initiatives.
An economic downturn does not only affect a firms’ financial situation, but it also dramatically
transforms the organizational contexts in which firms operate as they adopt different strategic
postures in response to changes in general economic conditions. For example, some firms take
12
defensive postures by focusing on cost or asset reduction (Gulati, Nohria, & Wohlegezogen,
2010), while others take aggressive postures by engaging in price competition, innovative
differentiation, entrepreneurial practices, and new market penetration (Miles et al, 2000; Miller,
1988). Reaction of competitors to such hastened actions may create a domino effect ultimately
leading to a highly dynamic organizational context.
The dynamism in the organizational context, defined as the extent of unpredictable changes in a
firm’s business environment (Baum & Wally, 2003; Sirmon, Hitt, & Ireland, 2007), creates a
boundary condition for the effects of a number of firm-level actions on performance (Li & Liu,
2014). Previous studies find that contextual dynamism moderates the relationship between a
firm’s financial performance and its capital structure (Simerly & Li, 2000), CEO’s scanning
emphasis (Garg, Walters, & Priem, 2003), and strategic posture (Miles et al., 2000). More
directly relevant to our study, Goll & Rasheed (2004) find that dynamism moderates the
relationship between a firm’s community and environmental initiatives and its financial
performance. But what role may contextual dynamism play when small firms are scaling down
their core and peripheral initiatives because of a decline in financial performance, as
hypothesized above?
In order to remain competitive in highly dynamic organizational contexts, firms focus on product
and process innovation, find new markets, and create innovative differentiation (Sirmon et al.,
2007). Innovation and differentiation are thus two major areas of competitive focus for firms
operating within dynamic contexts, and core environmental initiatives can offer a firm
capabilities to innovate and differentiate as outlined in previous literature (Cronin et al., 2011;
Dangelico & Pujari, 2010). Moreover, a highly dynamic context forces firms to quickly respond
to macro-level changes (Wallace et al., 2010), also pushing them to seek benefits through
13
emergent policy frameworks such as those embedded in green recovery in recent years (Stiglitz
& Stern, 2009). Overall, we contend that a dynamic industry context would tend to stabilize the
decline in firms’ core environmental initiatives associated with a decline in their financial
performance.
On the other hand, firms’ community initiatives that are considered more peripheral would - by
definition - not enhance their innovation and differentiation capabilities that are much valued
amidst dynamic organizational contexts. This is particularly true for small firms that approach
community initiatives less instrumentally and more normatively (Fitzgerald et al., 2010). In fact,
their established reputation for community initiatives may even allow them to have a temporary
abeyance without any threats to legitimacy; and thus free up some of their community-oriented
resources to allocate to areas of higher priority. We would thus expect that the decline in small
firms’ peripheral community initiatives associated with a decline in their financial performance
would be even greater when firms operate within a dynamic as opposed to a stable context.
Therefore, we hypothesize:
H2a: The decline in core sustainability-oriented (i.e. environmental) initiatives as a result
of a decline in firms’ financial performance is lower when firms operate in a relatively
dynamic organizational context
H2b: The decline in peripheral sustainability-oriented (i.e. community) initiatives as a
result of a decline in firms’ financial performance is higher when firms operate in a
relatively dynamic organizational context
14
Data and methodology
For our empirical analysis, we chose to focus on small manufacturing firms in five industry
sectors: food, wood products, furniture, paper, and chemical products. These five sectors were
selected because together they represent a variety of organizational contexts to study firms’
community and environmental initiatives. The wood, paper, and furniture sectors, for example,
represent a context where community and environmental initiatives are especially important for
organizational legitimacy (Panwar, Hansen & Kozak, 2014). The food sector was included
because of a likely presence of supply-chain drivers for small firms to pursue such initiatives and
also for enhanced consumer visibility of these firms (Hartmann, 2011; Maloni & Brown, 2006).
The chemical sector represents a capital-intensive context where environmental concerns are
paramount (Delmas, Hoffmann, & Kuss, 2011). Moreover, these sectors are populated by a large
number of small firms and hence appropriate for this study.
Measures
Because of the small-firm context of this study, we did not use the readily-available indicators
(such as the ones used in the KLD database or Fortune Rankings) to assess community and
environmental engagement. Instead, drawing on the existing literature pertinent to the five
industry sectors, we first developed a list of eight initiatives each in community and environment
categories. We then sent this set of initiatives to a select group of experts drawn from academia,
NGOs, and industry organizations with a request to indicate the relevance of these initiatives for
small firms across the five industry sectors. We ended up with three community and four
environmental initiatives, which we used in this study to assess changes in a firm’s community
and environmental initiatives (see Table 2). We argue that these environmental and community
15
initiatives represent the core and peripheral sustainability initiatives respectively, as previously
discussed. Survey recipients were asked on a bipolar scale to indicate the degree of change in
these seven initiatives for the period 2008-2011 (see Table 2).
Because of the small-firm context of the study, we assessed changes in financial performance
using subjective measures, which were recommended by previous studies (Dess & Robinson,
1984; Morgan & Strong, 2003). Specifically, we included the following five financial
performance items: return on sales, return on investment, rate of sales growth, net profit, and
cash flow. Respondents were asked to indicate the changes in financial performance that had
occurred in their firms over the period between 2008 and 2011 (see Table 2).
Contextual dynamism in the organizational context was measured using a three item scale
developed by Khandwala (1976-77). This scale has been widely used in organizational theory
and strategic management literatures (Calantone, Schmidt, & Benedetto, 1997; Sim & Teoh,
2011) and has consistently yielded good reliability. Respondents were asked to characterize the
dynamism in their organizational context for the period 2008-2011 (see Table 2). For data
analysis purposes, we considered scales as continuous ranging from decreases to increase, which
is in line with previous studies involving bi-polar scales (Schewe, 1976). Additionally, because
previous studies have established that a firm’s ownership type (public versus private), its age,
sales volume, and its industry sector affected its engagement in community and environmental
activities (Callan & Thomas, 2009), we included these variables as controls. Age and sales
volume were assessed as continuous variables; industry sector and firm ownership type were
assessed as categorical variables.
Pretesting and study sample
16
The questionnaire
1
was first pretested on a group of ten academic colleagues and subsequently
on a group of six industry representatives. Based on their feedback, we made minor changes in
wording for improved clarity. We sought data for final study in the fall of 2012 from the
CEOs/owners of 3408 small manufacturing firms (firms with less than 500 employees, as
stipulated in the Small Business Administration criteria) from the five selected industry sectors
using a commercial database purchased from the North American Industrial Classification
Association. We requested individual site-level information for firms that had multiple
manufacturing sites. We collected data in the fall of 2012 following the general principles of the
Tailored Design Method (Dillman, 2007). Four hundred and seventy nine valid responses were
received for an adjusted response rate of 14.06%. We tested for nonresponse bias by comparing
early and late respondents (first one hundred versus last one hundred responses) as recommended
by Armstrong & Overton (1977) and found no significant differences in any of the constructs
between the two groups (p
During this such a brief description regarding being good when not doing well examining the effect of the economic downturn.
Being Good When Not Doing Well: Examining the Effect of the
Economic Downturn on Small Manufacturing Firms’ Ongoing
Sustainability-Oriented Initiatives
Panwar, R., Nyabkk, E., Pinkse, J., & Hansen, E. (2015). Being Good When Not
Doing Well: Examining the Effect of the Economic Downturn on Small
Manufacturing Firms’ Ongoing Sustainability-Oriented Initiatives. [Article in Press].
Organization & Environment. doi:10.1177/1086026615573842
10.1177/1086026615573842
SAGE Publications
Accepted Manuscripthttp://cdss.library.oregonstate.edu/sa-termsofuse
1
Being good when not doing well: Examining the effect of the economic downturn on
small manufacturing firms’ ongoing sustainability-oriented initiatives
Rajat Panwar
a
, Erlend Nybakk
b
, Jonatan Pinkse
c
& Eric Hansen
d
a
University of British Columbia;
b
BI Norwegian Business School;
c
Grenoble Ecole de Management;
d
Oregon State University
Organization & Environment, forthcoming
Abstract
How firms behave under conditions of decline and resource constraints has not been considered
in the corporate sustainability literature. This leaves unanswered the question how much we
should rely on firms’ sustainability-oriented voluntary initiatives at a time when the global
economy continues to be weak and firms face persistent threats of decline. In addressing this
question, we first argue that the effect of a decline would be different for peripheral and core
initiatives. Using data gathered from 478 small firms representing multiple manufacturing
sectors in the US through a survey, we empirically demonstrate that a decline in a firm’s
financial performance is associated with a higher decline of peripheral initiatives than of core
initiatives. We further found that a decline in peripheral initiatives was even greater when a firm
operated in a relatively dynamic context. Contextual dynamism, however, did not affect decline
in core initiatives.
2
Introduction
The economic recession of 2008 brought both large and small firms under unprecedented
financial pressure, although small firms were hit much more severely. In the US alone,
approximately 170,000 small firms went out of business during the recession (The Huffington
Post, 2012). As firms were grappling with eroded finances, concerns were also growing about
the fate of their ongoing sustainability—both social and environmental—commitments. The
Economist (2009) noted that the recession was “a test of companies’ commitments to doing
good,” while other media were reporting cutbacks in ongoing sustainability commitments
(Willman, 2008). But, besides such conjectural judgments and reports, there were few attempts
to systematically understand posture toward ongoing sustainability initiatives during this period.
As such, firm behavior under conditions of decline and resource constraints is not a new topic in
the management literature (Levine; 1978; Whetten, 1980); however, to date it has not been
considered in corporate sustainability and corporate social responsibility (CSR) literature.
Previous literature explicitly recognizes the role of slack resources in firms’ sustainability
initiatives (Amato & Amato, 2011; Perez-Batres, Doh, Miller & Pisani, 2012; Ullmann, 1985;
Waddock & Graves, 1997); yet, to the best of our knowledge, no study has so far examined
specifically the effect of diminished resources on firms’ ongoing initiatives. This oversight is
understandable because the prevailing ideology in our society (and the majority of business
literature) emphasizes resource abundance and considers economic growth a normal
organizational condition. Yet, this oversight is severe because it leaves us wondering how much
we should rely on firms’ voluntary initiatives at a time when the global economy continues to be
weak and firms face persistent threats of decline (Trahms, Ndofor & Sirmon, 2013). If
sustainability-oriented initiatives turn out to be disposable with decline in a firm’s resources, our
3
faith in business as a meaningful partner in sustainability is ill-founded. Then again, if these
initiatives were resilient to resource changes, we would have reason to rely on sustained business
commitment to sustainability.
In this paper, the authors set out to examine the resilience of small manufacturing firms’ ongoing
sustainability-oriented initiatives during the economic downturn of 2008. We focused on small
firms for several reasons: they often have small pools of slack resources to draw on during a
period of economic downturn; they constitute the majority of all firms; they are paramount to
environmental and social sustainability; and they are not well-represented in corporate
sustainability/CSR research (Aragón-Correa, Hurtado-Torres, Sharma, & García-Morales, 2008;
Battisti & Perry, 2011). Because sustainability-oriented initiatives are not characteristically
homogenous (Orlitzky, Siegel, & Waldman, 2011), we assumed that they would not be
uniformly resilient to an economic downturn. For example, some initiatives are guided primarily
by normative considerations (Marcus & Fremeth, 2009), and others by instrumental
considerations (Siegel, 2009). Similarly, some initiatives are substantive while others are more
symbolic (Perez-Batres, Doh, Miller & Pisani, 2012). Also, some initiatives could be embedded
in a firm’s strategy and core to a firm’s business, yet others are more peripheral (Hannan &
Freeman, 1984).
In this study, we adopted the core-periphery typology (Fiss, 2011) to examine the effect of a
firm’s declining resources on the resilience of sustainability-oriented initiatives. The core-
periphery typology captures the way in which the human mind fundamentally classifies activities
(Hahn & Chater, 1997). It has been employed to explain knowledge structures that top
management uses in making strategic decisions (Porac & Rosa, 1996), and also in literatures on
organizational decline (Zammuto & Cameron, 1982) and CSR (Aguinis & Glavas, 2013) that
4
are both pertinent to this study. We apply the typology to study the overall effect of the economic
downturn on firms’ sustainability initiatives as an interaction between firm and industry level
changes. In so doing, we first examine the effect of a decline in a firm’s financial performance.
Further, because an economic downturn does not affect a firm’s resources alone, it also creates a
highly dynamic context within an industry that profoundly affects a number of decisions that
firms make (Li & Liu, 2014), we also investigate an interaction effect that a firm’s financial
performance and its contextual dynamism produce on its sustainability initiatives.
The remainder of this paper proceeds as follows. In the following literature review section, we
first briefly review the organizational decline literature particularly focusing on firms’ actions
during a period of decline. We then summarize general characteristics of small firm engagement
in sustainability issues to foreshadow a focused discussion about possible effects of the
economic downturn on core and peripheral initiatives that appears in the subsequent hypotheses
development section. The succeeding data and methodology section, divided into four parts,
details the sampling plan, data sources, study measures, and their psychometric properties. The
analysis and results appear concurrently in the section that follows. Next appears the discussion
section wherein we place our results within larger theoretical and managerial considerations. The
paper concludes with summarizing our contributions and outlining limitations that potentially
restrict the reach of our results.
Literature review
Organizational decline
Organizational decline refers to a broad range of conditions that could negatively impact a firm.
While some scholars consider decline only when the impact is sustained over a longer period of
5
time (Bruton, Oviatt & White, 1994), others consider it as a substantial deterioration in a firm’s
resource base that impacts a firm in both short and long terms (Mone, Mckinley & Barker,
1998). Organizational decline presents a threat to an organization’s viability and may manifest as
reductions in market share, financial losses, or reduced demand and sales (Mone et al. 1998). It
may either occur as a result of external factors such as a gradually diminishing industry or a
suddenly emerged crisis (Park & Mezias, 2005), or of internal factors such as outmoded
strategies or operational inefficiencies (Morrow, Sirmon, Hit & Holcomb, 2007). Moreover,
most firms face decline at some point (Trahms, Ndofor & Sirmon, 2013).
A decline is associated with a number of firm-level dysfunctions. Declining firms experience
higher levels of internal conflict, low organizational morale, and self-protective behaviors among
employees—all of which ultimately cause a firm to conserve resources. According to
Schoenberg and colleagues (2013), firms’ various actions to cope with the decline, can be
summed up as targeting cost efficiencies, retrenching low performing assets, focusing on core
activities, and preparing for the future. Firms may pursue these actions separately or in
combination.
Cost efficiency-oriented measures are often taken first as firms grapple with resource constraints.
Such measures, characterized as “belt tightening” or “fire-fighting”, are aimed at stabilizing
finances by improving cash flow (Sudarsanam & Lai, 2001). But, when the “low hanging” fruits
of cost efficiency are not enough, firms resort to the asset retrenchment route wherein they divest
their low performing assets. Retrenchment is useful only when firms are able to generate cash
flow from any disposal (Filatotchev & Toms, 2006), which is often difficult due to asset
specificity, liquidity in the second hand market, and exit barriers. Retrenchment decisions are
inevitably complex because, on the one hand, firms bear the risk that asset sales might
6
compromise future strategic options, while facing compulsions to generate cash for meeting
current demands (Schoenberg et al., 2013).
A focus on the firm’s core activities is repeatedly identified as a decline management strategy
and is often used in parallel with asset retrenchment (Boyne & Meier, 2009). This strategy
essentially translates into determining and focusing on the markets, products and customers that
have the potential to generate the greatest profits for a firm. Focusing on core activities might
also entail organizational restructuring so a firm can align more effectively with its core purpose.
Such a restructuring often involves closure of those operations, products, or markets that do not
fit with the firm’s purpose (O’Neill, 1986) Finally, firms may also pursue a “prepare or build for
the future” strategy, but often only when the immediate crisis has passed and the financial
position has somewhat stabilized (Filatotchev & Toms, 2006). These promotion-focused firms
invest in market development and asset acquisition during a decline and lay the foundation of a
competitive advantage that they would hope to have over their competitors in a post-decline era
(Gulati, Nohria & Wohlegezogen, 2010).
In view of the courses of action proposed to deal with organizational decline (Schoenberg et al.,
2013), it is not surprising that firms’ sustainability-oriented initiatives can come under pressure.
Notwithstanding the appeal of the business case for sustainability, so far the evidence remains
inconclusive as to whether such initiatives lead to substantial financial gains and whether they
are part of core business activities (Devinney, 2009). But before we develop our hypotheses
about the relation between organizational decline and the resilience of sustainability initiatives,
next we clarify the idiosyncrasies of sustainability in a small-firm context.
Small firms’ sustainability-oriented behavior
7
In contrast to previously held views, it is now well understood that small firms’ sustainability-
oriented behavior is not just a scaled down version of large firms’ behavior but is rather
characteristically different (Spence & Lozano, 2000; Tilley, 2000). Emphasizing this uniqueness,
Lepoutre and Heene (2006) even coined the term small business social responsibility. The extant
literature highlights key characteristics of small firms’ commitment to sustainability. First of all,
there is a substantial overlap between business relationships and personal networks of small firm
owners (Longenecker et al., 2006). A commitment to sustainability is therefore a matter of
personal pride to them. In fact, small firms view any negative press concerning their impact on
the community and environmental wellbeing as “indelible stains on themselves” (Dyer &
Whetten, 2006: 789) and thus take sustainability-oriented initiatives seriously with a clear
intention to make a positive difference in their local environment. Relatedly, small firms
approach these initiatives in a personalized and informal manner (Russo & Tencati, 2009;
Spence & Rutherfoord, 2003), and often intervene in areas that both align with the values of their
owners and the needs of the surrounding community (Smith & Oakley, 1994).
In terms of sustainability focus, small firms are traditionally well-known for their close
community connections (Lähdesmäki & Suutari, 2012). In fact, they often view success in terms
of legitimacy granted to them by local stakeholders (Perrini, 2006) and by their reputation in the
surrounding community (Darnall, Henriques, & Sadorsky, 2010). Small firms tend to support
and sponsor community wellbeing programs (Amato & Amato, 2007). In the US, for example,
three-quarters of small business owners donate to a number of causes, and with a much higher
percentage of profits than that of larger firms (The Chronicle of Philanthropy, 2008). Many also
try to have a positive impact in a number of other ways (Blackburn & Ram, 2006), such as by
8
extending their support to local non-profits through their employees’ time and expertise
(Fitzgerald et al., 2010).
For a long time, however, it was held that small firms engage in environmental activities only at
a modest level because of their resource constraints (Aragón-Correa et al., 2008), cost
disadvantage in implementing environmental initiatives relative to larger firms (Darnall et al.,
2010), subpar levels of eco-literacy (Schaper, 2002), and the minimal pressure they face from
society and activist groups to improve environmental performance (Wehrmeyer, 2000). Over the
past decade this belief has changed though, and several recent surveys conclude that small firms
proactively address environmental challenges (Battisti & Perry, 2011; Revell, Stokes, & Chen,
2010).
In summary, sustainability-oriented initiatives of small firms are fundamentally different from
those of large firms. At face value, one might expect that their resilience is more vulnerable to
organizational decline due to the limited resources small firms have to maintain them in difficult
times. Then again, the initiatives small firms undertake tend to be more a matter of personal
pride which they cannot suddenly stop, as this would hurt their position in the local environment.
The question remains, therefore, what would happen to small firms’ ongoing sustainability
initiatives within an economic downturn?
Hypotheses development
In developing our hypotheses, we first consider the effect of organizational decline as a firm-
level variable, i.e. a decline in financial resources. Although it is not uncommon to view
sustainability initiatives as an added cost of doing business (Siegel, 2009), such initiatives are
also recognized for the various tangible and intangible benefits they could offer to a firm (Hart,
9
1995). This business case view has so deeply permeated contemporary management thinking
(Hahn, Preuss, Pinkse & Figge, 2014) that, for a majority of firms, it is unlikely they will
consider all sustainability initiatives as a dispensable cost item. Instead, we believe that firms
would categorize the various initiatives as core and peripheral (Yuan, Bao & Verbeke, 2011).
Core initiatives are essential for firms in that they rely on them for their marketing and also for
achieving their mission (Hannan & Freeman, 1984); peripheral initiatives, in contrast, remain
expendable or even exchangeable (Fiss, 2011). Any distinction between core and peripheral
activities is highly context-dependent (Gilley & Rasheed, 2000). While both contribute to an
organization’s success in the long run, peripheral activities are not critical. Janitorial services
within an organization, for example, are not critical for an organization’s success and are
therefore peripheral. Customer service for a service oriented firm, on the other hand, is a core
activity. Thus, our proposition here is that when firms face a decline in their financial resources,
they would strive to conserve their core sustainability initiatives, while retrenching the peripheral
ones.
But which sustainability initiatives are core and which ones are peripheral? While such a
classification might entail a separate study, here in the context of small manufacturing firms, for
several reasons, we contend that it is primarily the environmentally-oriented initiatives that befit
the definition of core initiatives, whereas community initiatives are better classified as
peripheral. Firstly, many environmental initiatives typically determine a firm’s production
processes or product features (Gilley et al., 2000). Secondly, because environmental initiatives
typically consort formal environmental management systems (Gonzalez-Benito & Gonzalez-
Benito, 2005), they interact with many sub-systems of a firm (Siggelkow, 2002) and inter-
connect them (Hannan, Burton & Baron, 1996). Similarly, environmental initiatives are often
10
tied to firms’ marketing strategies (Aragón-Correa, 1998). Furthermore, environmental initiatives
of small firms are often driven by demands of their downstream supply chain partners (Hall,
2000; Schaper, 2002) and hence a key component of a firm’s marketplace competitiveness.
Consider, for example, a Forest Stewardship Council certified furniture manufacturing firm. Eco-
labeled products affect its marketing strategy and its choice of buyers and suppliers. Similarly, a
firm that is committed to becoming more energy-efficient or strives to reduce its waste would
often employ new technology or machinery. Overall, many environmental initiatives penetrate
deep into a firm’s internal management, operations, and marketing domains, and are therefore a
core part of the organization.
By comparison, community initiatives are relatively more peripheral because too often small
firms engage in community initiatives in an ad hoc manner such that community initiatives are
neither tied to their business strategy (Jenkins, 2006), nor to market development or brand
promotion plans (File & Prince, 1998; Varadarajan & Menon, 1988). During a period of decline,
while small firm owners might still remain motivated toward community initiatives on a personal
level, this ad hoc nature of community initiatives would press them to reconcile their personal
motivations with their firm’s financial necessities. Previous research also confirms that during a
period of decline, firms typically choose to dedicate their resources to core operations, focus on
short-term survival strategies centered on budget tightening (Ofek, 1993; Latham & Braun, 2011;
Staw, Sandelands, & Dutton, 1981), and curtail their expenditures associated with nonfinancial
stakeholders (Maksimovic & Titman, 1990; Opler & Titman, 1994). We argue that small-firm
owners would resolve the dilemma between their personal motivations to engage in community
initiatives and the immediate need for survival through a “put on hold” strategy by temporarily
discontinuing their community initiatives. Certainly, not all environmental initiatives are core,
11
nor are all community initiatives peripheral, but we believe that for an average small-sized
manufacturing firm, environmental initiatives would more aptly fit as core and community
initiatives as peripheral.
Overall, it would be relatively easier for firms to downscale or discontinue peripheral community
initiatives because discontinuing or cutting back core environmental initiatives would disrupt
existing equilibriums, result in organization-wide changes, and would leave far-reaching impacts
on a firm’s marketing mix. Core environmental initiatives essentially create a strategic lock-in
for a firm. Peripheral community initiatives, though still important to a firm, could be more
easily decoupled since they are often not strongly connected to a firm’s sub-systems. Moreover,
various costs associated with core initiatives exhibit stickier behavior relative to those associated
with ancillary or peripheral functions (Balakrishnan & Gruca, 2008), making the discontinuation
of core initiatives disproportionately expensive and the discontinuation of peripheral initiatives a
more likely option for small firms, as a consequence. Overall, we contend that while a decline in
firms’ financial resources might negatively affect both core and peripheral initiatives, the effect
would be stronger for peripheral initiatives. Therefore, we hypothesize:
H1: A decline in small firms' financial performance is associated with a higher decline in
their peripheral sustainability-oriented (i.e. community) initiatives than in their core
sustainability-oriented (i.e. environmental) initiatives.
An economic downturn does not only affect a firms’ financial situation, but it also dramatically
transforms the organizational contexts in which firms operate as they adopt different strategic
postures in response to changes in general economic conditions. For example, some firms take
12
defensive postures by focusing on cost or asset reduction (Gulati, Nohria, & Wohlegezogen,
2010), while others take aggressive postures by engaging in price competition, innovative
differentiation, entrepreneurial practices, and new market penetration (Miles et al, 2000; Miller,
1988). Reaction of competitors to such hastened actions may create a domino effect ultimately
leading to a highly dynamic organizational context.
The dynamism in the organizational context, defined as the extent of unpredictable changes in a
firm’s business environment (Baum & Wally, 2003; Sirmon, Hitt, & Ireland, 2007), creates a
boundary condition for the effects of a number of firm-level actions on performance (Li & Liu,
2014). Previous studies find that contextual dynamism moderates the relationship between a
firm’s financial performance and its capital structure (Simerly & Li, 2000), CEO’s scanning
emphasis (Garg, Walters, & Priem, 2003), and strategic posture (Miles et al., 2000). More
directly relevant to our study, Goll & Rasheed (2004) find that dynamism moderates the
relationship between a firm’s community and environmental initiatives and its financial
performance. But what role may contextual dynamism play when small firms are scaling down
their core and peripheral initiatives because of a decline in financial performance, as
hypothesized above?
In order to remain competitive in highly dynamic organizational contexts, firms focus on product
and process innovation, find new markets, and create innovative differentiation (Sirmon et al.,
2007). Innovation and differentiation are thus two major areas of competitive focus for firms
operating within dynamic contexts, and core environmental initiatives can offer a firm
capabilities to innovate and differentiate as outlined in previous literature (Cronin et al., 2011;
Dangelico & Pujari, 2010). Moreover, a highly dynamic context forces firms to quickly respond
to macro-level changes (Wallace et al., 2010), also pushing them to seek benefits through
13
emergent policy frameworks such as those embedded in green recovery in recent years (Stiglitz
& Stern, 2009). Overall, we contend that a dynamic industry context would tend to stabilize the
decline in firms’ core environmental initiatives associated with a decline in their financial
performance.
On the other hand, firms’ community initiatives that are considered more peripheral would - by
definition - not enhance their innovation and differentiation capabilities that are much valued
amidst dynamic organizational contexts. This is particularly true for small firms that approach
community initiatives less instrumentally and more normatively (Fitzgerald et al., 2010). In fact,
their established reputation for community initiatives may even allow them to have a temporary
abeyance without any threats to legitimacy; and thus free up some of their community-oriented
resources to allocate to areas of higher priority. We would thus expect that the decline in small
firms’ peripheral community initiatives associated with a decline in their financial performance
would be even greater when firms operate within a dynamic as opposed to a stable context.
Therefore, we hypothesize:
H2a: The decline in core sustainability-oriented (i.e. environmental) initiatives as a result
of a decline in firms’ financial performance is lower when firms operate in a relatively
dynamic organizational context
H2b: The decline in peripheral sustainability-oriented (i.e. community) initiatives as a
result of a decline in firms’ financial performance is higher when firms operate in a
relatively dynamic organizational context
14
Data and methodology
For our empirical analysis, we chose to focus on small manufacturing firms in five industry
sectors: food, wood products, furniture, paper, and chemical products. These five sectors were
selected because together they represent a variety of organizational contexts to study firms’
community and environmental initiatives. The wood, paper, and furniture sectors, for example,
represent a context where community and environmental initiatives are especially important for
organizational legitimacy (Panwar, Hansen & Kozak, 2014). The food sector was included
because of a likely presence of supply-chain drivers for small firms to pursue such initiatives and
also for enhanced consumer visibility of these firms (Hartmann, 2011; Maloni & Brown, 2006).
The chemical sector represents a capital-intensive context where environmental concerns are
paramount (Delmas, Hoffmann, & Kuss, 2011). Moreover, these sectors are populated by a large
number of small firms and hence appropriate for this study.
Measures
Because of the small-firm context of this study, we did not use the readily-available indicators
(such as the ones used in the KLD database or Fortune Rankings) to assess community and
environmental engagement. Instead, drawing on the existing literature pertinent to the five
industry sectors, we first developed a list of eight initiatives each in community and environment
categories. We then sent this set of initiatives to a select group of experts drawn from academia,
NGOs, and industry organizations with a request to indicate the relevance of these initiatives for
small firms across the five industry sectors. We ended up with three community and four
environmental initiatives, which we used in this study to assess changes in a firm’s community
and environmental initiatives (see Table 2). We argue that these environmental and community
15
initiatives represent the core and peripheral sustainability initiatives respectively, as previously
discussed. Survey recipients were asked on a bipolar scale to indicate the degree of change in
these seven initiatives for the period 2008-2011 (see Table 2).
Because of the small-firm context of the study, we assessed changes in financial performance
using subjective measures, which were recommended by previous studies (Dess & Robinson,
1984; Morgan & Strong, 2003). Specifically, we included the following five financial
performance items: return on sales, return on investment, rate of sales growth, net profit, and
cash flow. Respondents were asked to indicate the changes in financial performance that had
occurred in their firms over the period between 2008 and 2011 (see Table 2).
Contextual dynamism in the organizational context was measured using a three item scale
developed by Khandwala (1976-77). This scale has been widely used in organizational theory
and strategic management literatures (Calantone, Schmidt, & Benedetto, 1997; Sim & Teoh,
2011) and has consistently yielded good reliability. Respondents were asked to characterize the
dynamism in their organizational context for the period 2008-2011 (see Table 2). For data
analysis purposes, we considered scales as continuous ranging from decreases to increase, which
is in line with previous studies involving bi-polar scales (Schewe, 1976). Additionally, because
previous studies have established that a firm’s ownership type (public versus private), its age,
sales volume, and its industry sector affected its engagement in community and environmental
activities (Callan & Thomas, 2009), we included these variables as controls. Age and sales
volume were assessed as continuous variables; industry sector and firm ownership type were
assessed as categorical variables.
Pretesting and study sample
16
The questionnaire
1
was first pretested on a group of ten academic colleagues and subsequently
on a group of six industry representatives. Based on their feedback, we made minor changes in
wording for improved clarity. We sought data for final study in the fall of 2012 from the
CEOs/owners of 3408 small manufacturing firms (firms with less than 500 employees, as
stipulated in the Small Business Administration criteria) from the five selected industry sectors
using a commercial database purchased from the North American Industrial Classification
Association. We requested individual site-level information for firms that had multiple
manufacturing sites. We collected data in the fall of 2012 following the general principles of the
Tailored Design Method (Dillman, 2007). Four hundred and seventy nine valid responses were
received for an adjusted response rate of 14.06%. We tested for nonresponse bias by comparing
early and late respondents (first one hundred versus last one hundred responses) as recommended
by Armstrong & Overton (1977) and found no significant differences in any of the constructs
between the two groups (p