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Engaging small- and
medium-sized businesses
in sustainability
Elizabeth Stubblefield Loucks
John Molson School of Business, Concordia University, Montre
´
al, Canada
Martin L. Martens
Faculty of Management, Vancouver Island University, Nanaimo, Canada, and
Charles H. Cho
John Molson School of Business, Concordia University, Montre
´
al, Canada
Abstract
Purpose – The purpose of this paper is to explore how to meaningfully engage small- to medium-sized
enterprises (SMEs) in strategies that improve the social and environmental sustainability of their
businesses.
Design/methodology/approach – This paper is a conceptual review of the business case for
sustainable development that has been offered to the business world. The paper describes the unique
features of SMEs that indicate the need to reframe the case for socially and environmentally
sustainable business practices for SMEs, and, using arguments discussed in the literature,
we summarize the business case for sustainable development that has been specified for SMEs.
Findings – SMEs need particular attention when it comes to business strategies for sustainable
development, since the business case is not the same as for large firms. Furthermore, tools that are
developed to support sustainability in SMEs need to recognize that these companies have different
resources and profiles than larger firms.
Research limitations/implications – Sustainable development as a concept captures most issues
facing our societies, which means there are endless possibilities for companies to find strategies that
will impact – and hopefully improve – their social and environmental performance. While this paper
does not provide empirical evidence and support, it offers some insights on practical and social
implications of SMEs engaging in sustainability.
Practical implications – This overview may help and give ideas to owners and managers of SMEs
to rethink their overall business strategy by not only incorporating sustainability in their core values
and actions but also implementing such strategy. In fact, this diversity of opportunities is where there
is hope for turning the current world trajectory towards healthy and resilient human and natural
communities.
Originality/value – This paper provides review of the current debates and opportunities in business
strategies for sustainable development, and an application to the realities of business operations
for SMEs.
Keywords Management strategy, Small to medium-sized enterprises, Sustainable development
Paper type Conceptual paper
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/2040-8021.htm
The authors would like to thank participants of the 3rd Annual International Conference on
Business and Sustainability held at Portland State University for their helpful comments and
suggestions.
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Received 12 January 2010
Revised 15 March 2010,
22 May 2010
Accepted 21 June 2010
Sustainability Accounting,
Management and Policy Journal
Vol. 1 No. 2, 2010
pp. 178-200
q Emerald Group Publishing Limited
2040-8021
DOI 10.1108/20408021011089239
1. Introduction
It now appears that a majority of the population in developed countries increasingly
recognize that we collectively face severe social and environmental threats around
the world related to global warming[1]. The Living Planet Report published by the
World Wildlife Fund (WWF, 2008, p. 2) states that the planet has a limited capacity
“to support a thriving diversity of species, humans included”. The report indicates that
problems related to the ecological footprint such as deforestation, water shortages,
declining biodiversity and ecosystems, and climate change are currently considered
major threats to human and environmental health across the globe (WWF, 2008).
Engaging more socially and environmentally sustainable practices is essential – and
beneficial – to the well-being of the world and the societies in which we live. Yet, the
Chicago Council on Global Affairs (2007) found that few people, organizations, and
governments appear to be willing to make the changes required to prevent the onslaught
of disasters forecasted if we continue business as usual.
Business researchers examining and addressing the concerns about business as usual
have adopted the terms sustainability and sustainable development as an overarching
concept designed to describe and encompass a broad range of practices. In this paper, we
define sustainability and sustainable development using the dominant definition
established by the World Commission on Environment and Development (WCED) in 1987:
“Sustainable development means meeting the needs of the present without compromising
the ability of future generations to meet their own needs.” Although this definition has
been criticized as vague, naı
¨
ve, and lacking sufficient focus on the social dimension to
sustainability (Littig and Greißler, 2005; McCright and Clark, 2006), it remains the most
commonly used definition. The business sustainable development research literature has
interpreted the WCED definition to encompass three components – social fairness,
environmental responsibility, and financial viability (Etzion, 2007; Peloza, 2008). This
definition means that firms engaged in sustainability need to seek strategies that
simultaneously create economic value and integrate concerns for the human communities
in which they operate the ecosystems where they have an impact.
Our literature review encompasses research that examines either the social
or environmental impact or, in few cases, both. This literature includes other terms,
such as corporate social responsibility (CSR) or colloquial terms such as “a green
company”, to discuss or describe sustainable practices, depending on the focus of the
research.
One set of players that will have a major impact on the future of business and the
planet are small- to medium-sized enterprises (SMEs)[2]. In fact, these organizations
constitute a major element in the world economy[3]. However, when it comes to the role
of business in addressing sustainable development, SMEs have largely been left out of
the picture. Labonne (2006) compared large and small firms in their use of environmental
assessment tools. He found that small firms were far less likely to examine their
environmental impact, primarily because of the financial limitations and costs
associated with tools designed for large firms with significant resources. Condon (2004)
also noted that a lack of financial knowledge and employee resources limited SME
adoption of sustainability practices. Bianchi and Noci (1998) found that SMEs tended to
be reactive in adopting sustainability strategies. Unlike large firms that were more likely
to engage in pre-emptive sustainability strategies, small firms tended to react only to
strong pressures from external stakeholders. Hillary (2000), reviewing her edited
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collection of articles in her book on SMEs and the environment, concludes that SMEs are
“largely ignorant” about their environmental impact and environmental regulation;
“oblivious about the importance of sustainability;” “cynical about the benefits” of
assessment tools designed to improve environmental performance; and “difficult to
reach, mobilise, or engage” on topics related to the environment. In his review of the
literature, Dressen (2009) concludes that small businesses tend to face less pressure from
external stakeholders about their sustainability practices, have limited financial
resources available, and perceive that engaging in sustainability practices is too
complex.
In addition to this consistent list of obstacles faced by SMEs, the literature also
contains a consistent primary opportunity and strength. SMEs who do become engaged
in sustainability have the flexibility to quickly adopt innovative practices.
In combination, this literature supports the need for a business case to convince
SMEs to adopt and use sustainable business practices.
Other researchers have concluded that sustainable development tools were created
with larger firms in mind and are difficult for SMEs to employ (Jones and Tilley, 2003;
Rutherfoord et al., 2000; Spence and Schimdpeter, 2003; Hillary, 2004; Jenkins, 2004,
2006; Fassin, 2008; Bradford and Fraser, 2008; Perrini et al., 2007). While some features of
sustainability strategy may be the same between large and small firms, such as the
importance of ensuring “shared vision, stakeholder management, and strategic
proactivity” (Aragon-Correa et al., 2008), such tools tend to require more rigid business
structures and more resources to devote to developing new business strategies
(Bradford and Fraser, 2008; Fassin, 2008; Jenkins, 2004; Rutherfoord et al., 2000; Spence
and Schimdpeter, 2003; Jones and Tilley, 2003). Hillary’s (2004) review of adoption of
standardized tools in Europe, showed that only a “miniscule” proportion of SMEs were
using these tools, and only a few of those had “patchy at best” results. Bradford and
Fraser (2008) have demonstrated that SMEs need advice and support regarding
sustainability strategies that are tailored to the realities of their businesses. In addition,
many SMEs still list environmental issues as a low priority, expensive to address, and
not financially worth investigating (Bradford and Fraser, 2008). Business structures of
SMEs can also be quite diverse as they operate with very different personnel structures,
budget sizes, as well as corporate strategies and missions. However, Esty and Winston
(2006, p.18) emphasize that “in today’s world, no company, big or small, operating locally
or globally, in manufacturing or services, can afford to ignore environmental issues”.
In this paper, we explore how to meaningfully engage SMEs in strategies that
improve the social and environmental sustainability of their businesses, while creating
economic value. We begin with the business case for sustainable development that
has been offered to the business world as a whole, as well as potential outcomes.
Next, we describe the unique features of SMEs that indicate the need for reframing the
business case for sustainability tailored to their realities. Using arguments discussed in
the literature, we then summarize the business case for sustainable development that
has been specified for SMEs.
2. The business case for large firms and outcomes from sustainable
development
The business case for sustainable development in large firms has evolved in the past few
decades. Largely inspired by Carson’s (1962) Silent Spring, an increasing interest about
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environmental issues developed in the late 1960s and early 1970s (Cole and Foster, 2001;
Hoffman, 1999). Communities recognized that businesses had a role in protecting or
polluting their natural environment as companies started pushing responsibility for
waste elimination onto communities that did not have the political clout to push them
away. In response to mounting accusations, Milton Friedman published a watershed
article in 1970 in the New York Times Magazine, which claimed that businesses do not
have the capacity or expertise to handle social or environmental problems[4]. During the
past few decades, however, active debate and research has moved the role of business
into a more practical position, and now many authors conclude that adopting
sustainability practices is beneficial not just to society, but to businesses themselves in
terms of economic performance. Companies are realizing that part of an economically
successful business strategy is recognizing that all risks and opportunities have roots in
social and environmental issues. Illustrating the social fairness component of
sustainability, Porter and Kramer (2006, p. 83) note that “successful corporations need
a healthy society [...] a healthy society creates expanding demand for business, as more
human needs are met and aspirations grow”. Porter and Kramer (among others) have
noted that businesses and communities have often been falsely pitted against each other.
Placing what is best for the community and the environment along side what is best for
business may lead to numerous positive outcomes. Hence, we draw on concepts
presented by stakeholder theory (Freeman, 1984) to frame these arguments. In the next
subsections, we briefly discuss the notion of a stakeholder before presenting a range of
positive outcomes that may result from engaging sustainable development.
Stakeholder concept and theory
A fundamental question when developing a strategy for social and environmental
sustainability is “who is involved” and more specifically, “who benefits”? An analysis of
the many stakeholders involved in a particular business is essential to implementing a
successful business strategy for sustainability. According to Freeman (1984, p. 46),
a stakeholder is defined as “any group or individual who can affect or is affected by the
achievement of the firm’s objectives”. Ansoff (1965) (as cited by Roberts, 1992)
introduced “stakeholder theory” because one of the ultimate objectives of an
organization is to achieve the ability to maintain equilibrium between the conflicting
demands and needs of its stakeholders. Stakeholder theory and its conceptual
framework generated different streams of research in strategic management theoretical
work (Jawahar and Mclaughlin, 2001; Jones and Wicks, 1999) as well as empirical
studies and applications (Donaldson and Preston, 1995; Kassinis and Vafeas, 2002;
Ogden and Watson, 1999). As such, stakeholder theory provides the “micro framework
in which specific, identifiable groups” may express interest in a firm’s sustainable
development activities (Cormier et al., 2004, p. 146)[5]. In order to achieve long-term
business success, organizations must:
.
address stakeholder expectations (Rowley, 1997); and
.
pay “simultaneous attention to [...] all appropriate stakeholders” (Donaldson
and Preston, 1995, p. 67).
While the debate around how to prioritize different stakeholder groups is
still inconclusive to date, findings from prior research (Agle et al., 1999; Harvey
and Schaefer, 2001) provide enough grounds to define customers, employees
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and governments as the more relevant when it comes to sustainable development
engagement and related issues.
Attracting profitable customers based on social or environmental issues is complex.
Companies wishing to make a profit from offering green services or products must do
more than merely identify a target customer. An individual’s decision to make a
sustainable product purchase is more complex than simply classifying customers based
on simple demographic and psychographic memberships (Reinhardt, 1998; Peattie,
2001). Attracting employees who believe in the values and perceived ethical behaviour of
a company is well supported by research (Hoffman, 2005). Companies with good CSR or
sustainable development performance often find they are able to attract and retain
higher quality employees (Albinger and Freeman, 2000; Battacharya et al., 2008; Branco
and Rodrigues, 2006; Marin and Ruiz, 2007). Additionally, engaging in sustainable
development or other socially oriented activities could also foster and enhance much
needed relationships with governments, especially in terms of public policy exposure
and regulation (Patten, 1991)[6]. Hart and Milstein (2003) argue that companies that are
able to identify the sustainable competencies of the future can enjoy first mover
advantage by being the first to introduce a new product or service. The overall potential
positive outcomes that may arise from sustainable development for large firms above
are summarized in Table I.
3. Features of SMEs and framing the case for sustainable development
The differences between SMEs and larger firms emerge largely from effects caused by
resource differences in revenues, budgets, and number of employees. At a macro-level,
researchers have found that size matters for social and environmental performance;
according to a European Union survey of over 7,000 European SMEs, the larger the
company, the more frequently the company reported engaging in external socially
Outcome Rationale
Customers Capturing consumers’ social and environmental values; however, the “why”
customers are (and are not) buying green is more important to understand
rather than merely identifying who and where such customers are
Employees Attracting and retaining higher quality employees; in addition, opportunities
for innovation in sustainability enhance managers’ problem-solving skills
and performance, and their ability to innovate, which defines firm
competitive advantage
Government Positive relationships with governments, especially in terms of public policy
exposure and regulation will facilitate positive outcomes
Product and production Three requirements for successful product differentiation are: (1) willingness
to pay a premium for social/environmental benefit offered by product; (2)
credible and reliable information about social/environmental performance of
product; and (3) significant barriers to imitation
Finance Ability and higher likelihood to attract investors who prioritize social and
environmental performance when selecting investment funds
Strategic positioning Enjoying first mover advantages by being first to introduce a new product or
service and potentially make changes before competitors enter the market
and/or leverage government regulations; another strategic advantage is the
stand-alone sustainability reporting but needs to watch out for potential
“greenwashing”
Table I.
Positive outcomes from
sustainable development
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responsible activities (Luetkenhorst, 2004). Aragon-Correa et al. (2008) note that this
finding has been supported by other studies (Aragon-Correa, 1998; Buysse and Verbeke,
2003; Russo and Fouts, 1997; Sharma, 2000). On the other hand, Aragon-Correa et al.
(2008, p. 98) clarified that size “is not a deterministic condition for developing the most
proactive environmental strategies”. In other words, it is not just size alone that
determines an SME’s contribution to sustainable development. Several key internal and
external characteristics of SMEs may distinguish their social and environmental actions
from public companies.
Ownership structure
Unlike public corporations which are beholden to shareholders, privately held SMEs
are often owner operated and responsible to only a single or at most a few shareholders.
The owners’ values are the ones that ultimately drive the organization. Several authors
have found that if individual small business owners prioritize sustainable development,
the business is likely to prioritize sustainable development (Graafland et al., 2003;
Joyner et al., 2002; Luetkenhorst, 2004; Jenkins, 2004, 2006; Beaver, 2007; Sharma and
Nguan, 1999; Spence and Schimdpeter, 2003). The small size means shorter lines of
communication between the top managers, shareholders and employees, which may
make SMEs more nimble and able to implement changes quickly (Aragon-Correa et al.,
2008; Graafland et al., 2003). An example of this is Dansko, a footwear company that
focuses on women’s products. The firm’s two co-founders are able to use their values,
in combination with ownership by more than 50 percent of its 146 employees to quickly
implement new sustainability practices (B Corporation, 2009). King Arthur Flour,
located in Vermont, uses 100 percent employee ownership as a method of keeping all of
its employees informed and trained about company decisions (B Corporation, 2009),
Helping owners and top managers understand and foresee business opportunities
available to companies through sustainability strategies may be an effective way to
attract more SMEs to use strategic sustainable development practices.
Business culture
Smaller companies may also have a less formal business culture and structure (Fassin,
2008; Jenkins, 2004) which means efforts to establish good sustainable development
practices may not have the typical entry points seen in larger firms (i.e. strategy tools
or audits). Researchers have found that SMEs do not tend to use formal strategy tools;
even those that do use them to devise a strategic plan rarely put such plans into action
(Earl, 2006; Meers and Robertson, 2007). Such findings may be due to a number of
reasons, such as not having the budget or the time it takes to make such shifts in
business practice. SMEs may be hesitant to allot precious time to address any issues
that are not directly related to business, and sustainable development is often
misperceived as being outside of core operations (Enderle, 2004; Fassin, 2008; Walker
and Preuss, 2008).
Organizational and capital structures
Studies have found that SMEs are less likely to have “sophisticated divisionalised
structures” (Jones and Tilley, 2003, p. 17). This means they may lack managerial
resources and functional specialists, which may lead to poor management or
underutilized opportunities (Tencati et al., 2004). One study in The Netherlands found
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that small firms were not likely to use sustainable development tools designed for
corporations; they were more likely to assign the task of overseeing sustainable
development to a board member (Graafland et al., 2003). Thus, while it should not be
assumed that smaller size is in itself a barrier to adopting sustainable development
practices, it is clear that strategies for sustainability must be considered on a
case-by-case basis and should not be assumed to scale down to fit the needs of SMEs.
On the other hand, while SMEs may have less room in their budgets or capacity
within their staff, smaller budgets may be less complex, hence involve fewer people in
budgetary decisions. Aragon-Correa et al. (2008) note that SMEs are likely to have more
simple capital structures than larger firms, which may mean there are less restrictions
on access to internal financial resources. Such a financial profile may enable SMEs to
be able to more nimbly adapt to new opportunities.
Employees’ knowledge, values, skills and experience
The knowledge, values, skills and experiences of employees have significant impacts on
the performance of SMEs, particularly with regard to social and environmental
performance. Enderle (2004) emphasizes the fact that the forces driving global commerce
are nothing more than the combined results of contributions made by many individuals.
While the business and management literature is filled with discussions of the impact of
“groupthink” (Janis, 1982) on business decisions, Enderle (2004) reminds us that groups
are made up of individuals, and these individuals together determine the behaviour of a
firm. The importance of individual characteristics of key employees to determining a
business’s approach to strategy is supported by a survey of successful SMEs in the UK.
Beaver (2007, p. 16) writes that “strategy [...] is enacted in a highly personalized manner,
and is strongly influenced by the actions, abilities, personality and success criteria of the
key role players”. While this may be true of large firms as well, the small size of a typical
SME likely increases the relative influence of key role players.
The role of external personal relationships and social capital
While most businesses rely to a certain extent on the quality of personal relationships
with customers and business partners, this is even more critical for SMEs. Without a
larger budget to catch the attention of possible clients, SMEs often rely on their network
of personal relationships and reputation as reliable business-people in their market and
community to win customers ( Jenkins, 2006; Niehm et al., 2007; Perrini et al., 2007).
Furthermore, SMEs – especially older firms and family businesses – may benefit from
large amounts of social capital. Social capital is defined as:
[...] those features of social structures – such as levels of interpersonal trust and norms of
reciprocity and mutual aid – which act as resources for individuals [or individual entities]
and facilitate collective action (Kawachi and Berkman, 2000, p. 175)[7].
Putnam (1993) suggests that communities with high levels of social capital have lower
transaction costs and a higher degree of democratic self-regulation. The implication for
businesses operating in communities with higher social capital is that the cost of doing
business may be less. The lower costs may be attributed to a greater sense of
community among stakeholders which may lead to a greater level of trust and a lower
need to create and enact costly enforcement mechanisms. These lower costs can be
transferred either to the customer through lower prices or retained in the business.
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Business networks
Networks can indeed play a vital role in ensuring the success of SMEs (Halila, 2007;
Aragon-Correa et al., 2008; Enderle, 2004). Halila (2007) notes that networks can
provide SMEs with important expertise or resources, which would enable them to take
risks or implement practices they might otherwise have not considered. He also
suggests that networks can offer SMEs a forum for discussing new ideas, help SMEs
overcome isolation, and provide the necessary social and intellectual support for
implementing new strategies or activities. Hillary (2004) cited the absence of a business
network as a barrier to the successful implementation of ISO 14001 (a standardized tool
for implementing environmental management systems). Networks should be a key
element of the development of sustainability strategies for SMEs. One of the consistent
conclusions found in SMEs and sustainability literature is the lack of knowledge about
sustainability practices and tools. Participation in a network of firms involved in
sustainability can provide firms with the resources and expertise needed to overcome
the obstacle created by a lack of knowledge.
Relationship with governments
The influence of governments in changing behaviour in SMEs appears to vary by
jurisdiction. Regarding government relationships, some studies in the UK have shown
that government regulations, benchmark practices and pressure from interest groups
do not have a strong impact on SME behaviour (Jenkins, 2006). Aragon-Correa et al.
(2008) describe studies in Spain which suggest that government regulations promote
better CSR. In the Netherlands, however, SMEs included in a survey about
environmental practices reported they would be less responsive to government
regulations than they would be to public opinion and the desire to meet the demands of
their host communities (Rutherfoord et al., 2000). The main conclusion from this debate
seems to be that the role of government is very localized in nature, and quite vulnerable
to the lobbyists of larger corporations. Given the potential uncertainty of the market
benefits of engaging sustainable development practices, many SMEs may not be able
to take the same risks as larger corporations. While economics certainly matter, it
would be considerably more difficult for SMEs to pilot projects in order to test
economic waters for their ideas (Hillary, 2004).
Visibility
Another important distinction between privately held SMEs and larger, publicly traded
companies concerns the media and public opinion. SMEs have significantly less
visibility when compared to large firms or multinational corporations, and thus are not
likely to attract the same level of attention from the cycle of shifts in public opinion and
media frenzies. SMEs may have very different relationships with the public since their
market impact is of a smaller scale – many SMEs operate in only one market
(Jenkins, 2006) – and the public has different expectations of SMEs than of large
companies. The impact of reputation or brand image regarding sustainability may
be less important to SMEs (Jenkins, 2006). Unlike publicly traded firms that tend to be
prominent targets (Dressen, 2009; Labonne, 2006) and may be forced to respond to
shareholder demands (McWilliams et al., 2006), there may be less of a clear incentive to
respond to the changing values in the broader society, such as the increased demand for
socially and environmentally responsible products (Luetkenhorst, 2004; Jenkins, 2004).
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In other words, the threat of public outcry against an SME is much less, which reduces
the motivation to mitigate such threats by adopting socially and environmentally
sustainable business practices. The reverse is also true; if a large company makes a
sizeable donation to a good cause, it is more likely to attract media attention (Fassin,
2008) as well as social investors (Jenkins, 2004). If an SME spends the same proportion of
their budget on a good cause, the media may be unlikely to notice unless the SME pairs
the gift with a communications campaign (Fassin, 2008). This is not to say there is no
value in SMEs engaging charity or sustainable development practices. There are other
benefits and the business case for CSR will be described in more detail below. Table II
provides a synthesis of the above-discussed internal and external features of SMEs in
comparison to large firms.
4. The business case for SMEs to engage in sustainable development
Before discussing the business case for SMEs, it is important to note that many SME
owners may choose to use strategies for sustainable development for personal and moral
reasons (Castka et al., 2004). Whether they are motivated by the current trends towards
sustainability in businesses or simply acting on a personal commitment to morals of
their community, some SME owners will see the value – despite the difficulty to
quantify it in dollar terms – of the social and environmental impacts of their business.
Given that theoretical grounding of any business is to increase the monetary value of the
firm, however, a clear case for how sustainable development strategies improve the
economic situation of a company may help owners operationalize their values.
We acknowledge, however, that SMEs that do not use sustainability strategies could
potentially still value their communities or their natural environment. Some companies
may likely share a Friedmanite philosophy that if a business does well, society will
benefit from the wages employees earn, the taxes businesses pay, and the services and
products a business provides to a community (Friedman, 1970). This perspective,
Internal/external characteristics SMEs Large firms
Ownership structure Often, owner-operated and fewer
shareholders
Large number of “public”
shareholders
Business culture Less formal More formal
Organizational and capital
structures
Less likely to have divisional
structures; capital structures are
simpler
More likely to have divisional
structures; capital structures are
more complex
Employees’ knowledge, values,
skills and experience
Relative influence of key role
players is higher due to the small
size of SMEs
Relative influence of key role
players is lower in large firms
Role of external personal
relationships and social capital
Higher social capital and
reliability on external personal
relationships
Lower social capital and
reliability on external personal
relationships
Business networks Business networks are more
critical for SMEs
Business networks are important
but less critical than they are for
SMEs
Relationship with governments Role of government is more
localized in nature
Higher lobbying power and
influence
Visibility Less attention and exposure to
media
Higher attention and attention to
media
Table II.
Features of SMEs vs
large firms
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however, has been contested in recent years on the grounds that businesses must honour
the contract they implicitly make with society and their host community (Ashforth and
Gibbs, 1990; Deegan, 2002; Dowling and Pfeffer, 1975; Porter and Kramer, 2006).
In return for political and economic stability and environmental and human resources,
businesses must share the responsibility and financial cost of maintaining those
resources for future generations. No matter which perspective one takes regarding this
debate, the fact that there is a compelling business case for sustainability in SMEs means
either side can benefit from engaging business strategies for sustainable development.
As with most issues concerning SMEs, the business case for sustainable development
is unlikely to be the same for each business. Each company must determine its own case
by learning about the social and environmental practices that are most salient for their
line of business and their key stakeholders. Shorebank is a prominent example for
creating its own case. This community-development financial institution uses
investments by people seeking socially focused investment to fund local community
redevelopment. Its conservative lending practices and involvement with the
communities it serves have not only helped it avoid the financial crisis caused by
sub-prime mortgages, it has also helped rescue homeowners hurt by the predatory
practices that caused the crisis (Serwer, 2009).
The benefits of sustainable development business practices – be they financial or
moral or both – will come at various levels and often at differing points in time.
As companies select their strategies for sustainable development, they must keep in
mind that while some benefits certainly may come in the short term, others may take
longer. The following discussion includes possible benefits that could accrue to
companies who make the concerted effort to identify the best strategies for their own
businesses. Most benefits will occur with regards to stakeholders (customers and
business partners, employees, and shareholders) and business practices (production,
marketing, management strategy, and financial performance). However, we also
acknowledge the potential business risks and challenges for SMEs that inherently come
as part of engaging in sustainable development.
4.1 Stakeholders
Customers and business partners. SMEs may have two types of customers; individuals
(i.e. “the public”) and other businesses (including other private firms, not for profit
organizations or government agencies). Engaging in sustainability practices may draw
new customers from both pools as well as increase loyalty and satisfaction of existing
customers. A company that can clearly communicate its goals for social and
environmental impact of its product or service may be more likely to earn the trust of its
community, improve community perceptions of its business, and enjoy increased
number of public customers (Jenkins, 2006). Many SMEs may already engage in
“silent CSR” (Luetkenhorst, 2004); they use sustainable practices without recognizing or
communicating it. For example, just by being an SME, these businesses make a
significant contribution the Millennium Development Goal of halving poverty levels by
2015 (Luetkenhorst, 2004; Walker and Preuss, 2008).
Proven sustainable development practices may attract larger corporations as
customers, since larger firms are under increasing pressure from the public and
regulators to improve the social and environmental impact of their supply chains
(Clemens, 2006; Luetkenhorst, 2004). In addition to improving social and
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environmental performance, Walker and Preuss (2008) found that sourcing from SMEs
also helps larger firms manage governance issues. Their study investigated whether the
purchasing behaviour of government and healthcare agencies in the UK could promote
sustainable development. Walker and Preuss (2008) found that bringing SMEs into the
supply chain can help public sector firms improve their environmental performance,
especially regarding the provisions of organic food and environmental services.
Environmentally friendly products demanded at a larger scale, such as recycled paper
and alternative fuels, were more challenging to source through SMEs because many
larger companies already provide such products, and can offer a lower price due to
economies of scale. However, they note that there are still many opportunities for
environmental and social innovation, and the capacity of many SMEs to innovate
quickly may allow them to be first movers as opportunities arise.
Some business insurers are starting to give reduced rates to companies who
effectively manage environmental and social threats (Van Berckelaer, 1993, as cited in
Clemens, 2006). Clemens notes that there may be two sides to such “green insurance”.
In order to meet environmental standards set by insurers, some companies may incur
costs, which would reduce the financial benefit they may have sought by engaging
sustainable practices (Clemens, 2006). On the other hand, companies that can anticipate
such pressures from their insurance companies and can cost-effectively make changes
in their operations could stand to benefit from these new green insurance policies.
Employees. Perhaps, one the best arguments for sustainable development in SMEs is
the potential to attract and retain better employees (Jenkins, 2004; Branco and
Rodrigues, 2006; Battacharya et al., 2008) and improve organizational culture. SMEs are
actually often lauded for their job creation (Jenkins, 2004). Studies of environmental
performance among small- to medium-sized electronics companies found that
intellectual capital (Hayton, 2005) or even more specifically, “green intellectual
capital” (Chen, 2008) can be key to establishing a competitive advantage. Businesses
with employees trained in environmental technologies and systems were better at
finding cost savings from energy efficient design improvements, and as a result were
more efficient than their competitors (Chen, 2008). The reverse may also be true;
employees’ lack of awareness or understanding of the benefits and availability of
sustainable development strategies may prevent SMEs from considering,
implementing, and finding success with sustainable development strategies (Hillary,
2004). Such observations are likely to be found for any new project in a company. Indeed,
Barney (1991) lists lack of “imitability” as key to sustaining competitive advantage.
However, protecting or increasing intellectual capital among their staff may not be a
priority to an SME manager when hiring or attempting to retain employees. Knowledge
about environmental or social issues in relation to food production, for example, may not
seem to be an obvious benefit to a restaurant owner during the hiring process.
The importance of intellectual capital to achieving and sustaining competitive
advantage may be especially salient for small firms, which may have the capacity
to make changes to retain key employees with important intellectual capital
(Battacharya et al., 2008). Furthermore, efforts to remain on the competitive edge
could promote innovation regarding social and environmental practices and keep firms
ahead of their competitors (Reinhardt, 1999; Hoffman, 2005). From the perspective of
doing what is best for society and the environment, SMEs who have discovered a
“green advantage” may then share that with their competitors. The risk is losing their
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competitive advantage. However, if managed well, they could use it to keep their own
firm ahead; sell rights to those products or services, license them out, or lobby local
governments to require their sector to adopt those practices and enjoy first-mover
advantage (Reinhardt, 1999; Hoffman, 2005).
Shareholders. In contrast to larger firms, which may have hundreds of thousands of
shareholders, SMEs – especially privately held SMEs – are likely to only have a few
shareholders, and in some cases only one, the owner-operator. As a result, the dynamics
that are at play between the public and large corporations may not operate at the level of
SMEs. The main goal of most shareholders, however, is still to see an increase in the
value of their investment. Beyond the non-economic value that comes with engaging
sustainability, firms that take the time to identify quality business strategies for
sustainable development are expected to see financial reward in due time. The challenge
will be to convince shareholders to wait long enough to see the gains that can come from
engaging a mid- to long-term sustainability strategy. As noted earlier, ShoreBank is a
good example to illustrate this practice. Unlike typical financial institutions that sell
loans for securitization, Shorebank retains its loans on their balance sheets (Beans and
Martin, 2008). This financial institution refused to change its lending and development
practices even though it was losing clients to competitors offering sub-prime loans
(Serwer, 2009). Retaining the sustainability focus created at its founding in 1973 helped
Shorebank survive and prosper during the sub-prime financial crisis.
As will be described below, there are many easily implemented strategies that can
translate into immediate cost reduction, such as improved energy efficiency or recycling.
4.2 Product
Often, the first target that comes to mind when seeking a way to improve a firm’s
environmental and social performance is the products or services they offer. The
literature debates the efficacy of strategies that aim to attract customers based on
offering products with better environmental and social profiles. Product or niche
differentiation can be difficult to achieve on any basis; environmental and social profiles
are no exception (Reinhardt, 1998; Peattie, 2001). However, consumer behaviour is
ever-evolving, and recently some companies (e.g. Patagonia) have been successful in
appealing to consumers who prioritize social and environmental impacts over cost
(Chouinard, 2006).
Owing to their small size, SMEs may be flexible enough to move quickly to offer
“greener” products in order to appeal to consumers who are increasingly concerned
with environmental or social issues. One example is Revolution Foods, a company
based in Oakland, California that provides meals to schoolchildren that are made from
“local, organic ingredients whenever possible” (Kirsten Tobey, Co-Founder, Revolution
Foods). Co-founders Kirsten Tobey and Kristin Richmond conducted interviews with
teachers, students, families and school leaders from over 40 schools to understand the
needs and demands for fresh, healthy food at school on a daily basis. They believe that
providing such “food service and responsible practices go hand-in-hand” and
constitute a “revolution” in the school system in general (Revolution Foods, 2010).
There may have been plenty of companies that supplied school lunch programs, but
none of them were doing what Revolution Foods proposed. Indeed, if they were even to
pilot a program like it, they risk cannibalizing their existing school lunch programs.
Tobey’s team invested in developing meals that use as many organic and locally grown
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ingredients as possible – a requirement that no doubt drives up the cost of their supplies.
The profit margin on such a model may be much too small for a company that is already
pursuing another model to produce school lunch programs. Larger companies are less
likely to have the manoeuvrability to spend time evaluating how they could improve
their final products or change what already seemed to please their clients.
4.3 Production
A second target is the cost savings from implementing energy efficient production.
Aragon-Correa et al. (2008) list this strategy as one of the first that an SME should try.
Research done by the Carbon Trust in the UK found that reducing energy consumption by
10-20 percent translates to the same benefit as a 5 percent increase in sales (Bradford and
Fraser, 2008). Although such actions are simple and not as glamorous as more innovative
sustainability strategies, the bottom line is that they do reduce costs through energy
savings, and the actions of many SMEs each deciding to reduce energy consumption does
make a difference (Monbiot and Prescott, 2007). Simpson et al. (2004) found that many
SMEs in the UK were motivated to use sustainable development by reducing costs
through energy efficiency, and found such savings through “efficiency drives, in meeting
environmental legislation and from greater energy efficiency” (2004, p. 168).
Setting reduced energy targets can also be a way to promote innovation (Bradford
and Fraser, 2008; Castka et al., 2004; Porter and Kramer, 2006). Simpson et al.’s
(2004, p. 168) UK study of SMEs found that 60 percent of companies surveyed felt that
efforts to reduce energy consumption provided opportunities for innovation, and that
the best candidates for cost savings are manufacturing firms:
These companies were able to gain a competitive advantage via improved energy efficiency,
reduced waste, increased recycling, increased quality, better environmental credentials,
greater customer satisfaction, new business opportunities, gaining local community support,
gaining increased staff commitment, positive pressure group relations, improved media
coverage or a combination of these benefits.
Given the predictions that the recent increases in energy prices seen world-wide will
not end anytime soon, strategies that reduce energy consumption are likely to help
both a company’s bottom line as well as environmental performance.
Markets. Even, established SMEs are on the lookout for new opportunities emerging
in new markets in order to ensure future survival. As the importance of social and
environmental preservation becomes more broadly understood in the public sphere,
new markets are developing to meet the newly emerging sets of needs, wants and
tastes (Monbiot and Prescott, 2007; Sand, 2001). SMEs that keep track of the trends
emerging from this groundswell of interest in social and environmental sustainability
may be able to identify new opportunities, and – due to their small size – may also be
able to organize more quickly than larger companies to take advantage of new markets
(Baron et al., 2008; Esty and Winston, 2006; Jenkins, 2006). Furthermore, being able to
offer sustainable products, processes or services may improve a company’s positioning
in existing markets ( Jenkins, 2006).
Management strategy. Engaging sustainable development concepts can help
companies improve their management strategies through at least two ways:
(1) acquiring competitive advantage; and
(2) managing risk.
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Companies can obtain a competitive edge through achieving knowledge or skills that
other companies do not have. That is, using a sustainability lens may offer a perspective
on resources and opportunities that otherwise may have lain uncovered (Chen, 2008;
Etzion, 2007; Porter and Kramer, 2006). Again, due to their small size, SMEs may have
the chance to enjoy “first mover advantage” if they can take advantage of new
opportunities arising in sustainable development before larger firms can get organized
(Wicklund and Shepherd, 2003). A study in the Netherlands suggests that as
sustainability strategies become one of the company’s core competencies, engaging such
strategies “can be a positive factor in overall strategies that rely on the ‘high road’
towards competitiveness” (Luetkenhorst, 2004, p. 165).
Borga et al. (2009) argue that a sustainability-focused strategy for small businesses
can help firms attract and retain employees, build a high level of commitment with its
customers, and strengthen relationships with other stakeholders such as suppliers and
the community. Greyston Bakery is one example of a firm using sustainability as a
strategy to create a unique niche in social products. This firm produces the “Do-Goodies”
line of bakery products and has used its sustainability focus to win an exclusive supplier
contract to Ben & Jerry’s (B Corporation, 2009).
The sustainability lens can help firms identify new, more effective strategies that
help them obtain a competitive advantage without having to stray over the line
between good and bad business ethics. Indeed, a benefit to the broad scope of
sustainability is that there are likely to be many effective strategies. There may be
endless possibility for companies to develop individual core competencies in relation to
their business and sustainability, which will help them obtain and maintain a
competitive advantage in their markets.
Firm financial performance. Many studies have linked firm financial performance
(FFP) to firms’ performance regarding social and environmental sustainability
(Castka et al., 2004; Clemens, 2006; Niehm et al., 2007; Orlitzky, 2001). Critics suggest
that firm size may determine the financial success of adopting sustainable practices due
to economies of scale, better control over external stakeholders and resources, and higher
media profile (which may attract higher quality employees); larger firms that use
sustainable practices will achieve higher financial returns (Orlitzky, 2001). In a
meta-analysis of studies that examine the relationship between firm size and “corporate
social performance” (CSP), Orlitzky (2001) found that the size of the firm does not
determine whether there is a positive relationship between financial and social
performance. He did not investigate whether firm size was a moderator of the relationship
between financial and social performance (i.e. variations in size would impact the size of
relationship between financial and social performance). However, Orlitzky (2001) posits
that the size of the relationship between CSP financial and social performance is less
likely to be determined by size than by the quality, mission fit and implementation of the
business strategies for sustainable development that a firm pursues.
Clemens (2006) notes the lack of research regarding FFP and environmental
performance for SMEs. His study of US steel yards revealed two encouraging
observations:
(1) a positive relationship between environmental and financial performance for
small firms; and
(2) a positive relationship between green economic incentives set by regulators and
financial performance for small firms.
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Niehm et al. (2007) found that family-owned businesses with higher reported
community social responsibility enjoyed better financial performance than those with
weaker support for their communities. Clemens (2006) also noted research by
Christmann (2000) and Eisenhardt and Martin (2000) who identified the importance of
slack time in the short term to allow firms to identify sustainable strategies and to
update their practices. SMEs as well as large firms could lobby governments for
support during such periods in order to promote the development of sustainable
practices and position them for financial gain in the medium and long term.
4.4 Business risks and challenges
Risk management is important to any company. Managing risks in relation to direct social
or environmental threats has been a recognized feature of organizational management
literature for decades (Zadek, 2004).Recognizing that threats to business may emerge from
more nuanced social or environmental problems or opportunities, however, is not likely to
be standard procedure for most SME managers. Increasing threats from advocacy groups
emerge as these groups demand that small businesses – not just media-weary giants like
Nike or ExxonMobil – address their social and environmental impacts (Esty and Winston,
2006). Thanks to rapid improvements in information systems and communication
technologies, “even tiny enterprises now find it hard to fly under the radar” (Esty and
Winston, 2006, p. 19). Keeping track of trends in the focus of advocacy groups may help
SMEs avoid attracting negative attention from such groups.
Challenges to businesses may also come from government regulations regarding
pollution or production practices (Luetkenhorst, 2004). Regulators in Europe increasingly
include SMEs within the scope of new legislation that require reduced negative social and
environmental impacts(Castkaet al., 2004; Esty and Winston, 2006). Controls put in place to
reduce pollution or practices with negative social impacts can lead to costly production
changesforlargeandsmallfirmsalike(Castkaet al., 2004). Large corporations have created
strategies for managing government involvement in their business practices; as described
above, companies with greener technologies may be able to lobby governments to require
that the industry adopt those practices (Kemp, 2000). The company that already has green
practices may benefit from being the first mover into the new requirements by licensing
their technology or simply gaining market share on the newly rearranged playing field
(Kemp, 2000). On the upside, SMEs may also learn to benefit from changes in regulations by
working to adjust their business practices in anticipation of such controls, and may
network together to seek government support in the form of tax breaks or subsidies
(Luetkenhorst, 2004). Finally, SMEs are also disadvantaged by the lack of information
about the changes in the marketplace that can make the pursuit of sustainability an
opportunity to become an innovator and to inspire employees (Condon, 2004).
As environmental and social concerns become more and more important to global
societies, failure to recognize such issues as key business concerns could expose SMEs
to business-threatening risks. Condon (2004, p. 8) concludes that:
[...] working with SMEs continues to challenge educators and environmentalists and
[research] has indicated that this will continue unless sufficient support and advice is
provided to facilitate long-term behavioral change towards more sustainable practices.
We provide a visual depiction of the benefits and risks/challenges for SMEs to engage
in sustainable development in Figure 1.
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5. Conclusion
The purpose of this paper was to review of the current debates and opportunities in
business strategies for sustainable development, and apply them to the realities of
business operations for SMEs. The sources used here are not exhaustive and some
relevant sources may have been missed. Our main conclusions from this review are
that SMEs do indeed need particular attention when it comes to business strategies for
sustainable development, since the business case is not quite the same as for larger
firms. Furthermore, tools that are developed to support sustainability in SMEs need to
recognize that these companies have different resources and profiles than larger firms.
Indeed, the scale of diversity among SMEs reflects the scale of diversity of business
ideas that are put into practice across the globe. A company’s orientation regarding
sustainability is likely to vary significantly even from close competitors. Sustainable
development as a concept captures most issues facing our societies, which means there
are endless possibilities for companies to find strategies that will impact – and
hopefully improve – their social and environmental performance. The best strategy for
sustainability that a business can find will be one that not only can be incorporated
into a company’s overall business strategy, but one that advances the business
strategy, and helps the company identify new opportunities for business development.
In fact, this diversity of opportunities is where there is hope for turning the current
world trajectory towards healthy and resilient human and natural communities.
Businesses are a sum of parts, just as a bucket of water is nothing but a collection of
individual raindrops. The impact of the bucket of water gently poured on a garden is to
make it grow; the impact of the collective humanity represented in any organization –
for profit or not for profit, large or small, public or private – is what we see in our
world today, and what we will see in our future. To say that the “business of business
is business” may give individuals who work for corporations the permission to duck
their heads and let “the rest of us” handle the world’s problems. Such a split is a false
opposition. Any business should keep an eye on what is happening in its external
environment, in both the short and the long term. Engaging in strategies for sustainable
Figure 1.
The business case for
SMEs to engage in
sustainable development
Engagement in
sustainable development
by SMEs
Benefits
• Threats from advocacy groups
• Government regulations on pollution or
production practices
• Costly production changes
• Lack of information about marketplace
changes
Stakeholders
• Customers and
business partners
• Employees
• Shareholders
Business practices
• Product
• Production
• Markets
• Management
strategy
• Financial
performance
Risks and challenges
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193
development requires that businesses do nothing more than to recognize that the
well-being of their community and natural resources has everything to do with the
well-being of their businesses, to plan accordingly, and reap the rewards. Given
that environmental and social change is inevitable, those businesses that are prepared
will be those who survive and lead their industries. The next step is for SMEs to adopt
sustainable business practices not just because it will drive their businesses to the
leading edge, but because the planet matters to them as businesses, as individuals, and
members of their community.
Notes
1. www.worldpublicopinion.org/pipa/pdf/mar07/CCGAþ _ClimateChange_article.pdf
2. Definitions of SMEs vary, although most concern number of employees or budget size.
Industry Canada defines an SME as any business with fewer than 500 employees (Industry
Canada, 2008).
3. In Canada, small businesses (less than 100 employees) contribute an average of 30 percent of
the Canadian GDP and employ 48 percent of the total labour force in the private sector while
medium-sized businesses employ 16 percent (Industry Canada, 2008). This means that SMEs
employ almost two-thirds (64 percent) of Canadians working in the private sector. Not all of
SMEs contributions are positive, however. Rutherfoord et al. (2000) refer to a British study
that estimates SMEs are responsible for 70 percent of industrial pollution in the UK.
4. Friedman also argued that the chief role of business in relation to social and environmental
needs is to create jobs and products that would drive the economy and that asking
businesses to manage social and environmental issues would expose them to an undue
economic burden that could their businesses to fail.
5. It is also important to acknowledge Ullman’s (1985) three-dimensional conceptual model of
corporate social responsibility and sustainability grounded in stakeholder theory, which
suggests that: (1) stakeholder power will drive the emphasis on meeting the intensity of
stakeholder demands; (2) firm strategic posture describes the mode of response of a firm’s
decision makers in regards to social demands; and (3) the firm’s past and current economic
performance must be taken into account.
6. See Peltzman (1976) and Stigler (1971) for a more detailed discussion on the theory of
economic regulation.
7. Social capital can take a long time to build. It comes from relationships that have built trust
and mutual understanding over time and can be a key resource for SMEs. Hence, companies
with strong support from their communities are more likely to survive times of financial
strain (Niehm et al., 2007).
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About the authors
Elizabeth Stubblefield Loucks (“Betsy”) is a public health and environmental professional
seeking to address social inequalities and promote environmental sustainability by facilitating
the collaboration of public and private organizations. She is currently the Manager of the Rhode
Island Research Alliance, a program of the Science and Technology Advisory Council at the RI
Economic Development Corporation. Betsy has a Masters of Science (ScM) in public health (2003)
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in social epidemiology from the Harvard School of Public Health and also an MBA from
Concordia University’s John Molson School of Business.
Martin L. Martens is currently a Professor at Vancouver Island University in the Faculty of
Management. His research falls within the intersection of the business sustainability and
corporate governance literatures. He is interested in investigating how internal and external
social forces shape organizational structure and form, with an emphasis on situations in which
organizations face new or unfamiliar institutional circumstances. This includes changes to the
firm’s structure, strategy, and governance as well as group dynamics in the top management
team.
Charles H. Cho is currently an Associate Professor of Accountancy and RBC Professor in
Responsible Organizations at the John Molson School of Business, Concordia University. His
primary area of research is social and environmental accounting and reporting, which falls under
the umbrella of CSR, and consists of examining the process of communicating social and
environmental information and activities of an organization to its various stakeholders. He has
published several referred academic articles in journals such as Accounting, Auditing &
Accountability Journal, Accounting, Organizations and Society, Critical Perspectives on
Accounting,theEuropean Accounting Review,andtheJournal of Business Ethics.
Charles H. Cho is the corresponding author and can be contacted at: ccho@jmsb.concordia.ca
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