Leadership strategies for sustainable SME operation

Business Strategy and the Environment Bus. Strat. Env. 15, 30–39 (2006) Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/bse.451 Leadership Strategies for Sustainable SME Operation Ian Rankin Kerr* Department of Engineering Management, School of Aerospace, Mechanical and Manufacturing Engineering, RMIT University, Melbourne, Australia ABSTRACT Research has been completed that explored the issues of sustainable enterprise operation for small/medium-size enterprises and also for larger enterprises. The results provide an understanding of how enterprises develop strategies and policies to manage environmental issues and pressures and how this process influences the development of enterprise management systems, functions and culture. To enable small/medium-size enterprises to facilitate the process of developing their management systems and functions for sustainable enterprise operation, the research has developed a profile of core competencies, which would guide them to operate in a sustainable way. Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment. Received 15 May 2003; revised 4 November 2004; accepted 19 January 2005 Keywords: sustainable; SMEs; environmental; enterprises Introduction ’LAOIRE AND WELFORD (1996) INDICATE THAT SMALL AND MEDIUM-SIZE ENTERPRISES (SMES) account for some 70% of worldwide production and that most are involved in business-tobusiness activities. In the European Union, SMEs account for more than 99.8% of all enterprises, 65% of total employment and 65% of total turnover (KPMG, 1997) and companies of under 100 people are responsible for 60% of all employment in Australia (EPA, 1997). Clearly, smaller enterprises can have a significant role to play in ecological preservation by giving them incentives to match their diversity and adaptability (Welford, 1997). Jones and Welford (1997) suggest that smallness helps enterprise leaders account more accurately for the value of the scarce resources and to use as little as possible of the Earth’s non-renewable resources. Indeed, Trainer (1998) asserts that the growth and development of small firms is an important part of a sustainable world. Porter (1991) informs us that strategy is the act of aligning a company with its business environment to maintain a dynamic balance. Thus, enterprise leadership strategy will be the key tool to consider when looking at how an enterprise relates to the environment. The sustainability-promoting enterprise needs to strike a balance between environmental excellence and business competitiveness. O * Correspondence to: Ian Rankin Kerr, Building 56, Room 56-3-2, Faculty of Engineering, City Campus, RMIT University, Melbourne, Australia. E-mail: [email protected] Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment Leadership Strategies for Sustainable SME Operation 31 According to the Brundtland Report (United Nations World Commission on Environment and Development, 1987), the essential message of sustainable development is that economic development and ecological conservation are mutually interdependent. A key pre-condition for sustainable development is based on a production system that preserves the ecological base for development. The United Nations Conference on Environment and Development held in Rio de Janeiro in 1992 resulted in Agenda 21, which recognized sustainability as a key business imperative (Commonwealth of Australia, 1998). Greeno (1994) advises meeting the needs of stakeholders by continuously improving critical business processes. Thus, enterprises will need to follow strategies in business development that are sustainable and do not result in damage to the environment. Ultimately, certain products (services) and industries should not be developed (Welford, 1993). Sustainable enterprise operation requires strategies and policies that result in fully integrating the enterprise’s environmental functions with its business management systems (Crosbie and Knight, 1995; Business Council of Australia, 1991; Greeno, 1994). The prevailing approach of enterprises takes insufficient account of the rights of the environmental stakeholders (Welford, 1999; Shrivastava and Hart, 1995). The primary management tool linking the enterprise to its stakeholders is a leadership strategy that opens the enterprise to its environment and establishes or reinforces the links with consumers, suppliers, distributors and other stakeholders. There is a need to find out how companies respond to their environmental stakeholders as they move in the direction of sustainability through integrating their management systems and functions. While the research has focused on investigating SMEs, it has also researched the management systems of large and leading enterprises to see what lessons may be learnt that are useful to smaller companies. O’Laoire and Welford (1996) indicate that SMEs are generally not aware of the potential benefits of incorporating a sound environmental management system. Hass (1996) argues that environmental management models fail to lay a link between a company’s business strategy and its environmental strategy. However, Hawken (1993) recognizes that the essential diversity and flexibility of the SME sector give it the potential to be a springboard for sustainability-promoting firms in modern society. Being close to customers, SMEs can show them the worth of sustainable products and services (see also Hart, 1997). The Research Methodology and Research Questions Enterprise leadership strategies (and policies) were explored in relation to environmental pressures to give an answer to the following questions. (1) How does enterprise leadership strategy affect the process of integrating the environmental functions with the management systems of SMEs and larger enterprises to achieve sustainable business? and (2) What are the lessons to be learnt from the above-mentioned process in leading enterprises that may be useful to SMEs? Research Procedures and Development of the Idealized Leadership Model This research is based on a case study approach, following Yin (1994). Applying the methodology, Zikmund (1997) recommends that for in-depth interviews, the moderator should prepare questions, topics or a discussion guide before conducting these. As a discussion guide, the research themes of this paper were based on the idealized enterprise leadership model (Figure 1), in particular issues relating to Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment Bus. Strat. Env. 15, 30–39 (2006) DOI: 10.1002/bse 32 I. R. Kerr Environmental strategies •Competitive advantage, innovation & scope Environmental policies Environmental pressures •Market •Social •Regulatory •Financial •Operate integrated management systems based on continuous improvement •Substitution •Creating core competencies Leadership strategies & policies for sustainable enterprise operation •Practise product stewardship •Collaboration For economic sustainability For environmental sustainability For social sustainability SME or larger enterprise Idealised enterprise leadership model Fig 1 •Practise pollution & waste-discharge prevention Sustainable management systems Management structure QMS, EMS & SMS Sustainable functions Production operations, product design, procurement Marketing, Technology, R&D, Finance Culture •Implement environmental R&D •Practise energy & resource management •Keep communication channels open to stakeholders •Undertake environmental education & training of employees Figure 1. Idealized enterprise leadership model • enterprise leadership strategies and policies for economic, environmental and social sustainability in relation to environmental pressures, • enterprise management systems, • enterprise functions with respect to production operations, product design and procurement, marketing, technology, research and development (R&D) and financial systems and • culture and human resources and other relevant issues that arose during the interviews. Development of the Idealized Enterprise Leadership Model The role of enterprise leaders in their quest for sustainability is to ensure that the enterprises over which they have control operate in accordance with the principles of ecologically sustainable development and thereby fulfill their obligations to the environment, generational equity and the future sustainability of the planet. The key to organizing an enterprise for sustainable operation is for leadership to establish a culture that is proactive in formulating environmental and social objectives, to pursue a strategy of continuous environmental and social improvement and to resource that strategy. Enterprises need to adopt a learning culture that recognizes and reinforces the benefits and value of educating, training and developing their employees to have life-long learning attitudes and skills in thinking creatively and holistically on environmental and social sustainability issues. It is through the mechanisms of communication and stakeholder relationship-building within a supportive enterprise culture that the issues of social sustainability can be addressed. The SME leader has the responsibility to become more aware of environmental and social sustainability issues, of the pressures that have the potential to affect the enterprise and of the sources of Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment Bus. Strat. Env. 15, 30–39 (2006) DOI: 10.1002/bse Leadership Strategies for Sustainable SME Operation 33 resources and partnership networks available to it. The enterprise leader needs to have the vision to set the cultural paradigm for the organization and to involve its stakeholders in undertaking an ongoing process of developing environmental policies and strategies. As an aid to understanding the processes involved, the idealized enterprise leadership model (Figure 1) was developed as a tool for thinking creatively about the research and guiding the collection of data. The model is idealized in as much as few enterprises would exhibit all the elements indicated. The idealized leadership model was developed through a consideration of key approaches adopted in the research literature to modelling the sustainable enterprise. Thus, the enterprise leadership model develops sustainability objectives of economic, environmental and social sustainability, whereas Gladwin’s (1992) approach to the sustainable enterprise considers ecological, resource and socioeconomic security issues and Elkington (1997) adopts the ‘triple-bottom-line’ approach for these objectives of economic prosperity, environmental quality and social justice. The approach of the enterprise leadership model is also more comprehensive and relevant than that of the Gladwin (1992) model, in which the management systems consist of organization, human resources, information, management control and public affairs and which defines enterprise functions as manufacturing, operations, marketing, technology and finance. Gladwin (1992) makes no provision for research and development. The enterprise leadership model also specifically incorporates the elements of environmental pressures and environmental policies, which the approaches of Gladwin (1992), Elkington (1997), Shrivastava and Hart (1995) and Crosbie and Knight (1995) do not address. Again, the enterprise leadership model is more comprehensive and relevant than the Crosbie and Knight (1995) model, although that approach contains the element of culture, which neither Gladwin (1992) nor Elkington (1997) consider. The Shrivastava and Hart (1995) model does include the element of culture but the approach is a broad-brush one that is not as comprehensive and relevant as the enterprise leadership model developed in the research. The component elements of environmental strategies for sustainable enterprise operation are derived from Gladwin (1992) and the policy elements of the leadership model are adapted from the elements of an environmental policy advocated by the Australian Manufacturing Council (AMC, 1992). Collection and Treatment of the Data The process of gathering data involved the principals of mainly SMEs and also of certain larger companies through face-to-face interviews. The fieldwork was conducted in Victoria, Australia. Data collection has broadly followed the recommendations of Borch and Arthur (1995). The enterprises used to obtain primary data are noted in the appendix and the process of filtering data to identify enterprise leadership competencies in environmental and social behaviour is illustrated in Figure 2. Enterprise primary data is reported by Kerr (2002). Concise Overview of the Research Data Enterprise Pressures The SMEs and the larger firms interviewed are similarly subject to economic and regulatory pressures. Unlike SMEs, the larger companies interviewed undergo social pressure to behave in ways that demonstrate corporate responsibility. Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment Bus. Strat. Env. 15, 30–39 (2006) DOI: 10.1002/bse 34 I. R. Kerr Elements of idealised For leading & large enterprises enterprise leadership SME sustainability core competencies model used Enterprise data in as research question data filters Leading & large enterprises’ sustainability profiles For SMEs SMEs’ sustainability profiles Figure 2. Derivation of enterprise sustainability profiles and SME sustainability core competencies Important forces at play in motivating SMEs to operate sustainably are compliance with regulations as a principal driver and pressure from the supply chains. Moreover, regional environmental management systems may be helpful for SMEs to engage in useful networking in the field and to enjoy the synergistic effects of applying environmental management policies to all sectors of activity. This has been explored by the Victoria Environmental Protection Authority (Blutstein, 1998). Enterprise Policies and Strategies The research data indicate that from the outset company leaders need to develop or adopt an environmental policy that gives direction to company operations and to define supportive strategies to implement that policy. The environmental policies to be developed need to incorporate stakeholder communication, integrated basic management systems, environmental impacts, resource management and stewardship, research and development, and education and training. All of the environmental policies and associated strategies of the companies interviewed have an underlying economic rationale. They are usually related to a quality management approach to business. None of these environmental policies fully addresses a company’s environmental or social sustainability issues. The common link for both SMEs and the larger companies alike in practising proactive environmental behaviour is having an environmental policy and pursuing a strategy of continuous environmental improvement to reduce environmental impacts. A key linkage that has to be established for SMEs is that environmental strategies such as ‘green’ competitive advantage, creating core competencies, substitution and collaboration with stakeholders are linked to profitability through reduced costs and increased market penetration. ‘Green’ is used here in the sense of preserving natural capital. Thus, the resource productivity strategy (Porter and van der Linde, 1995; Von Weizsacker et al., 1997; Hawken et al., 1999) is particularly apposite to dealing with resource scarcities, which influence the environmental effectiveness of SMEs. Enterprise Management Systems All of the SMEs in this research operate with some form of a quality management system (QMS), but the utilization of an environmental management system (EMS) is less common. In the main, the larger enterprises utilize both and are looking to integrate them with their safety and business management Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment Bus. Strat. Env. 15, 30–39 (2006) DOI: 10.1002/bse Leadership Strategies for Sustainable SME Operation 35 systems. With appropriate incentives, as suppliers, SMEs are in a position to form environmentsustaining partnerships with environmentally progressive client companies as they decide to evolve to become sustainability-promoting enterprises in their own right. Forming such stakeholder alliances is a key strategy for companies moving in the direction of sustainable operation. The research shows that the SMEs have an informal QMS as a minimum and this provides the basis for both efficiency and market competitiveness. The QMS is oriented towards customer satisfaction as an objective but will also have resource conservation, such as water, energy and materials usage, firmly in sight. The QMS needs to be customized to deliver the elimination or reduction of environmental impacts, ultimately using ‘green’ designs and process modifications, identified by means of a basic environmental auditing of the system along with the development of environmental procedures based on the quality system procedures. The importance of an EMS is its potential as a system to embrace environmental issues beyond strict compliance and it is the realization of this aspect that motivates the larger enterprises to invest in EMS development, not least as a hedge against stricter environmental regulation in the future. The research indicates that there is a role for government, industry organizations and the environment protection authorities to support the process of the evolution of capacity-building in enterprises towards environmentally and socially sustainable operation including using the supply chain for environmental change. KPMG (1997) and ANZECC (1998) identify the areas in which SMEs need supportive measures as • creation of a framework of legislation and regulation that encourages environmentally and socially sustainable operation, • support for the development of environmentally sound products and services and • development and promotion of environmental information and advice, especially in the areas of environmental research and development, technology, marketing, educational training and basic environmental financial management. Enterprise Functions None of the companies interviewed has any effective environmental procurement policy. None of the manufacturing or supplier companies interviewed utilizes design dedicated to the purpose of environmental sustainability, and related to this none of them utilizes life-cycle analysis (LCA) or research specifically for environmental purposes. Yet design and research for the environment are fundamental to sustainable development and are practised by enterprises that are environmental leaders (RMIT Centre for Design, 1998). The general approach of the manufacturing and supplier companies interviewed to production functions such as waste reduction, energy conservation, materials reduction and recycling is motivated primarily by economic sustainability, directly linked with regulatory compliance, rather than by environmental sustainability. Their approach to the application of technology is also motivated principally by economic sustainability, directly linked with regulatory compliance, rather than by environmental sustainability. Yet technology that is protective of the environment is utilized by environmental leaders as one of the principal means of delivering sustainable development (Florida, 1996). The research also found that no company interviewed is practising an environmental approach to marketing or operating environmental financial management systems with the consequential loss of the capability for environmental communication and identifying environmental opportunities and costs. Yet SMEs could utilize environmental reporting to develop a ‘green’ profile to give them a competitive edge in the marketplace (Palmer and van der Vorst, 1997; ANZECC, 1998). Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment Bus. Strat. Env. 15, 30–39 (2006) DOI: 10.1002/bse 36 I. R. Kerr Enterprise Culture The SMEs with a strong quality, environmental or social ethic linked to a philosophy of continuous improvement tended to be more progressive in confronting the issues of environmental and social sustainability. The research indicates that internal cultural pressure is the most important element for sustainability when it is linked to fostering an awareness of environmental and social sustainability issues. In the main, environmental education and training of employees are not practised by the SMEs interviewed and a largely informal approach is adopted to developing environmental stakeholder relationships. While the larger enterprises need the support of the CEO on environmental issues, the functional work of developing an EMS is normally delegated to a key environmental officer supported by an environmental committee or environmental consultant. Environmental education and training of employees are generally practised by the larger enterprises. Where the larger enterprises interviewed had US or UK parent companies, their influence on the culture of the Australian business units was generally supportive of environmental initiatives. All the larger Australian companies interviewed involved in developing an EMS were highly focused on this activity, however, to the exclusion of the wider issues of environmental and social sustainability. A consequence of this approach to sustainability for the Australian business units is a general lack of approach to developing environmental stakeholder relationships. Indeed, the core of their cultural thrust to the environment derives from a quality management approach to production, suppliers and customers motivated by economic sustainability, which is directly linked with regulatory compliance. In contrast, the US and UK enterprises exemplify varying approaches to leadership in environmental and social sustainability. Conclusions The usefulness of the idealized leadership model (Figure 1) was not only in providing structure in gathering data in the face-to-face interview situations but also in enabling the interview data to be filtered in terms of the research questions. In the main, the large and leading enterprises or their parent companies utilized the environmental strategy elements of the idealized leadership model. Similarly, the environmental policy elements of the idealized leadership model were being developed or being utilized by the large and leading enterprises or their parent companies. From the process of filtering the data in terms of the research questions (Figure 2), sustainability profiles for the large and leading enterprises and the SMEs were obtained, and these led to the development of a profile of core competencies for SMEs that would guide them to operate in a sustainable way. In essence, the research determines that the key elements of an SME core competency profile to enable sustainable operation comprise the following. Enterprise Leadership • Practising environmental leadership within a strong quality, environmental and social ethic linked to a philosophy of continuous improvement of environmental policy and strategy development to reduce environmental impacts allied to a strategy of resource productivity. Enterprise Management Systems • Creating environmental goal-setting management systems typically using an existing QMS benchmarked on a basic environmental auditing system. Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment Bus. Strat. Env. 15, 30–39 (2006) DOI: 10.1002/bse Leadership Strategies for Sustainable SME Operation 37 Enterprise Functions Production Operations, Product Design and Procurement Practices • Practising creative pollution and waste discharge prevention, product stewardship, energy and resource management. • Utilizing design for the environment principles. • Encouraging suppliers and distributors to comply with an enterprise EMS and environmental legislation. Marketing Practices • Adopting environmental reporting as an aid to marketing a ‘green’ reputation; • Rationalizing product distribution journeys. Technology and R&D Practices • Collaborating with stakeholders as an aid to undertaking research and development and for utilizing technology protective of the environment. Finance Practice • Adopting basic environmental accounting. Enterprise Culture • Developing a culture focused not only on customer service and business performance but also on practising continuous improvement in core environmental and social areas and utilizing achievements to strengthen enterprise culture. • Collaborating and communicating with stakeholders on environmental management issues and implementing the environmental education, training and review of employees. • Utilizing the benefits of association with industry associations and environmental protection authorities, and forming regional and industry alliances. Acknowledgement My gratitude is due to Associate Professor Graham Redding, Department of Engineering Management, School of Aerospace, Mechanical and Manufacturing Engineering, RMIT University, Melbourne, for making constructive comments on the themes of this paper. Appendix 1: Participating Enterprises and Data Sources The activities and employee numbers of the SMEs and those of the larger enterprises are shown in Table A1 and Table A2 respectively. Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment Bus. Strat. Env. 15, 30–39 (2006) DOI: 10.1002/bse 38 I. R. Kerr Organization Business activities Castings manufacturer Consulting firm specializing in environmental management systems Environmental science and engineering consulting firm Government printing firm (corporatized) Process equipment supplier Victoria shire council Victoria water authority (corporatized) Waste water treatment firm Employees Manufactures aluminium die-castings Seals leaking aluminium & metal castings Supplies turnkey contract sealing plant Environmental management systems and cleaner production (CP) advisory services Environmental science and engineering services Prints banknotes Designs, manufactures and supplies chemical & environmental process equipment Provides local community services and local employment Provides high quality water, sewerage and trade waste services Process design and installation of waste treatment plants 6 16 60 300 100 170 195 35 Table A1. Australian small/medium-size enterprises: activities and employees Company Beverage can manufacturer Beverage manufacturer Car engine manufacturer Petroleum manufacturer Photographic paper manufacturer Business activities Employees Manufactures beverage cans Manufactures carbonated beverages, frozen beverages and bottled water Manufactures engines and auto-castings Manufactures petroleum, oil and gas; head office administration Manufactures photographic colour paper and markets a variety of imaging products and chemicals 10 000 2 000 2 400 1 200 3 000 Table A2. Larger Australian enterprises: activities and employees References Australian Manufacturing Council (AMC). 1992. The Environmental Challenge: Best Practice Environmental Management. AMC: Victoria. Australian and New Zealand Environment and Conservation Council (ANZECC). 1998. Towards Sustainability: Achieving Cleaner Production in Australia, 16th Meeting, Hobart, Tasmania. Blutstein H. 1998. 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