ISO14001 Certification Motivations and Effects

1 ISO14001 Certification Motivations and Effects Iuri Gavronski UNISINOS Brazil (iuri@proxima.adm.br) Ely Laureano Paiva, Dr. UNISINOS Brazil (elpaiva@mercado.unisinos.br) Geraldo Ferrer, PhD. UNC/KFBS USA (geraldo_ferrer@unc.edu) Abstract Why do firms search for an ISO 14001 certification? This study presents the results from a survey of Brazilian companies in the chemical, metal/mechanical and electric/electronic industries. A Structural Equations Model (SEM) was applied to the database of 63 companies to explain the causal relationship between the motivations and effects of obtaining the certification, unveiling new knowledge about the importance of standardized environmental management systems. The exploratory factor analysis identified four sources of motivation to obtain the certification: reactiveness to pressures from the external business environment stakeholders, proactiveness with regard to future customer expectation, legal concerns and internal reasons. Moreover, the effects of obtaining the certification belong to one of four dimensions: operational changes, financial impacts, relationship with immediate business environment (customers, competitors, suppliers) and macro business environment (government, society and NGOs). The path analysis identified causal relationships between motivations and benefits. Keywords Strategic Management Operations Strategy Environmental Management Systems ISO 14001 Introduction This study is an attempt to make operational the current operations management and strategy concepts connected to the natural environment issues. Two main concepts were explored: motivations to the ISO 14001 certification and benefits perceived with the certifications. The data gathered from ISO 14001-certified sites on the chemical, metal-mechanical and electro-electronics industries was submitted to Principal Components Analysis (PCA) with Varimax rotation, in order to assess the construct validity, and the internal reliability was assessed with Cronbach s alpha. The summated scales obtained were inputted in a path analysis model. The causal relationships tested in the model bring some insights to the influence of the natural environment issues in the corporate and manufacturing/operations strategy contents. Theoretical Background Many authors state that the natural environment and the expectations of the stakeholders on it must be taken more in account on the corporate strategy (Hart, 1995, 1997; Porter and van den Linde, 1995, Shrivastava, 1995) and manufacturing strategy (Klassen and Jacobs, 1996b; St. John et al., 2001). Despite of that, managers find it difficult to implement a strategy simultaneously green and competitive (Klassen and Jacobs, 1996a). So, why do manufacturing companies deploy an environmental management system (EMS)? More than that, why they submit their EMSs to an external audit in order to get them certified by ISO

2 14001 standards? What are their motivations and what do they get from it? Is there any causal relationship between the motivations and benefits perceived with the ISO 14001 certification? On a recent survey, Morrow and Rondinelli (2002) identified the major reasons why German companies get an ISO 14001 certification, and the benefits perceived, but no causal relationship was inferred. Other sources for possible motivations and benefits were extracted from NDEMS (2001) and GM (2001). Methodology The data collection instrument was constructed from the concepts identified in the literature, and validated, in Brazilian Portuguese, with the environmental managers at three sites, one from a petrochemical corporation and two from metal-mechanical companies, one of those with surface treatment processes at the site. The concern with the surface treatment came from a statement of a manager that this kind of process in a metal-mechanical plant increases environmental risk and makes the management environmental concerns closer from those at chemical plants. Finally, the questionnaire was submitted to two professors, experts in the field of environmental management at their respective institutions. The names of the 182 ISO14001-certified sites in Brazil on three industries (chemical, metalmechanical and electro-electronics) as of January 2001 were searched on telephone directories, and the sites found were contacted. From those, 130 sites were eligible for the survey, and sent questionnaires over e-mail, directed to the environmental manager at the plant responsible for the top management critical analysis of the EMS. There were 63 responses, achieving a response rate of 48,5%. It seems that this high response rate can be accounted not only because of social exchange theory built-in at Dilmann s (1978) TDM, used at this research, and the possibility of multiple ways of receiving and replying to the survey, as proposed by Klassen and Jacobs (2001), but also for the openness of the companies on their environmental practices, their computer literacy (most of them, almost 70%, are multinational companies, MNCs, and MNCs staff are used to report frequently to their headquarters). The data was then submitted to Principal Components Analysis (PCA) with Varimax rotation, in order to assess the construct validity, and the internal reliability was assessed with Cronbach s alpha. The items belonging to a dimension were then reduced to a summated scale by means of an average score of their values. The summated scales were inputted in a path analysis model. This study used path analysis in order to exploit the holistic and systemic features the technique has, in spite of our limitations on sample size. The sample size was far below the suggested ten-to-one ratio to the variables on the PCA, and below the 100 cases suggested as minimum for path analysis. The generalization of the findings are restricted and must then be taken carefully, regarding the exploratory purposes of this research. Scale Validation and Reliability The items on both scale were submitted to PCA with Varimax rotation for validation purposes. Then, the constructs obtained were tested for reliability by Cronbach s alpha procedure. A summary and a description of the dimensions can be found at the Exhibit 1, below. Exhibit 1: Dimensions for Motivation and Benefits Name Description Meaning AREATIVO Reactive Motivations Measures the extent a site seeks an ISO 14001 certification reacting to an external situation.

3 AINTERNO Internal Motivations Measures the extent variables internal to the site influence the seek for certification. APROATV Proactive Motivations Measures the extent a site seeks a certification in order to anticipate possible problems with stakeholders external to the company. ALEGAL Legal Motivations Measures the extent a site seeks a certification to BPROD Production (Manufacturing) Benefits comply with regulations, either current or future. Measures the perceived production benefits, from the operations management perspective. BFINC Financial Benefits Measures the perceived financial benefits from the ISO 14001 certification. BMACRO Business Macroenvironment Benefits Measures the perceived benefits in the relationship with the external stakeholders at macro business BIMED Business Immediate Environment Benefits environment (government and society). Measures the perceived benefits in the relationship with the external stakeholders at immediate business environment (customers, competitors and suppliers). The results of scale validation and reliability of the dimensions proposed can be found at Table 1 and Table 2, below. An approximate translation of the questions from Brazilian Portuguese to English can be found at the Appendix. The reliability for BMACRO is slightly below the minimum generally accepted value for Cronbach s alpha, but will be retained, and although this decision can impair the generalizability of the results, the exploratory nature of this research justifies its use. Table 1: Scale validation and reliability Motivations for Certification Factor AREATIVO ALEGAL AINTERNO APROATV A16 obter apoio técnico de órgãos públicos.861.173.232 -.056 (SEBRAE, etc.) A20 responder à solicitação de agências/órgãos.841.034.031.130 governamentais ligados à questão ambiental A15 obter benefícios fiscais.827.006.358 -.191 A19 responder à solicitação de grupos de proteção.827.144 -.029.026 ambiental (ONGs) A14 obter acesso a linhas de crédito especiais,.818.081.366 -.169 com juros reduzidos A21 responder à pressão de fornecedores.733.315 -.053.149 A24 responder à orientação de entidades de classe.665.221.023.027 (CNI, ABIQUIM, etc.) A22 atingir o padrão dos concorrentes.653 -.019 -.115.254 A18 responder à solicitação de clientes.512 -.140 -.199.264 A1 obter melhorias no desempenho ambiental -.136.760.350 -.047 A26 desenvolver produtos e processos inovadores.198.733 -.030 -.009 em relação ao meio ambiente A3 motivar os funcionários para seu trabalho.319.691.072.131 (melhorar o moral, etc.) A25 atender a uma decisão interna do próprio site..028.649.196.053 A2 identificar oportunidades para melhor utilização -.012.645.208 -.049 das nossas fontes de energia A13 obter redução de custos de produção.278.595.208.002 A6 aumentar a certeza do cumprimento da.010.373.801.148 legislação ambiental A10 detectar e minimizar a possibilidade de criar.006.166.738.136

4 passivos ambientais A8 expectativa de aumento futuro da exigência da.006.147.709.128 legislação ambiental A9 atender a legislação ambiental vigente.316.212.687.142 A23 antecipar-se aos concorrentes.118 -.085.027.826 A5 melhorar a imagem da empresa junto aos.033 -.055.349.813 clientes A4 melhorar a imagem da empresa junto à.048.304.258.702 sociedade em geral Percent Variance 30.66 16.36 9.99 6.70 Cumulative Percent Variance 30.66 47.02 57.01 63.70 Eigenvalue 6.75 3.60 2.20 1.47 Cronbach s Alpha.9044.8150.7765.7109 Table 2: Scale validation and reliability Benefits from Certification Factor BPROD BFINC BMACRO BIMED B7 redução no uso de recursos: energia..886 -.019 -.169.028 B8 redução no uso de recursos: matéria-prima..865 -.044.044.104 B9 redução no uso de recursos: água..827 -.003 -.168.061 B12 otimização dos fluxos de processo.777.107.083 -.040 B15 redução de custos de produção.745.074.098 -.056 B6 maior motivação dos funcionários para o trabalho.515.183.216.205 B19 oportunidade de usar fundos públicos para -.007.935 -.021.087 financiamentos B17 obter acesso a linhas de crédito especiais, com juros.056.927 -.018.180 reduzidos B18 redução de custos com seguro.139.760.332 -.105 B4 melhor imagem da empresa junto à sociedade em geral -.036 -.094.773.066 B3 maior certeza de estar cumprindo a legislação ambiental -.077.119.745 -.031 B13 melhor cooperação com as autoridades.229.245.694.273 B16 vantagens em relação a nossos concorrentes -.025 -.041 -.098.832 B14 efeitos positivos no mercado e junto aos clientes -.055.066.212.799 B11 oportunidade de dar bom exemplo aos fornecedores.312.190.126.610 Percent Variance 27.51 18.27 11.74 10.14 Cumulative Percent Variance 27.51 45.79 57.52 67.66 Eigenvalue 4.13 2.74 1.76 1.52 Cronbach s Alpha.8635.8534.5751.6387 Path Analysis The approach used to the path analysis was the model development approach (Garson, 2003), by means of competing models (Hair et al., 1998; Garson, 2003). The model proposed divides the four dimensions of motivations in two levels, which explain the four dimensions of perceived benefits for the company. In this model, internal and legal motivations are the bottom-level motivations. Internal motivations explain reactive motivations and production benefits. Legal motivations explain proactive motivations, financial perceived benefits and benefits in the relationship with the macro business environment. This finding opens a new perspective on the reactive/proactive debate. Until now, environmental strategies were taken as either reactive or proactive. The relationship between both motivations was tested and no significant result was found. That is, there is no empirical evidence that a corporate (natural) environmental strategy must be either reactive or proactive, but they can be both, at different intensities. And what will explain these intensities will be their legal and internal motivations.

5 The top-level motivations, reactive and proactive, can both explain some perceived benefits. Proactive motivations explain benefits perceived in the relationship to the immediate business environment. Both reactive and proactive motivations, together with legal motivations, explain financial perceived benefits. Notice that proactive motivations has an inverse relationship with the financial perceived benefits, that is, it seems that companies that have high scores on proactive motivations and low scores on reactive motivations tend to be few sensitive to the financial benefits of the certification, and perhaps of the whole EMS. Another interesting point here is that perceived benefits in the relationship with the macro business environment explain benefits in the relationship with the immediate business environment. A possible interpretation for that causal relationship is that companies with better relationships with government and society perceives themselves with better relationships with customers, suppliers and competitors, that is, are supposed to be more competitive. A graphical representation of these causal relationships, with the regression and covariate estimates, can be found at Figure 1, below. Next, the parameter estimates, standard errors (S.E.), critical ratios (C.R.) and P values can be found at Table 3, and finally the model summary and fit measures can be fount at Table 4. Figure 1: Path Analysis graphical representation,31 AINTERNO,57,83 e5 1 ALEGAL,75,34 AREATIVO,22 APROATV,45 bprod 1,33 e6,26 1,36 e2,75 bfinc,37 -,48,51 bmacro 1,24 e1 1,63 e3 bimed,31 Table 3: Parameter Estimates for the Model Regression Weights Estimate S.E. C.R. P BMACRO ALEGAL 0,262 0,072 3,613 0,000 APROATV ALEGAL 0,221 0,086 2,585 0,010 AREATIVO AINTERNO 0,342 0,155 2,202 0,028 BFINC AREATIVO 0,751 0,109 6,883 0,000 BIMED APROATV 0,505 0,127 3,989 0,000 BIMED BMACRO 0,313 0,143 2,184 0,029 BPROD AINTERNO 0,452 0,103 4,387 0,000 BFINC APROATV -0,485 0,178-2,716 0,007

6 BFINC ALEGAL 0,368 0,126 2,925 0,003 Covariances Estimate S.E. C.R. P ALEGAL 1 AINTERNO 0,312 0,094 3,336 0,001 Table 4: Model summary and fit measures Model Summary Chi-square 12,830 Degrees of freedom 18 Probability level 0,802 Fit Measures GFI 0,951 AGFI 0,901 CFI 1,000 TLI 1,080 RMSEA 0,000 Limitations and Future Research Propositions One major limitation of this study is the small sample size used. Due to the small number of sites of the target industries certified in Brazil at the moment of the data collection, and the lack of a complete database of contacts at these sites, the 63 cases used to the data analysis are below the recommended minimum. In futures researches, larger sample sizes would make results more generalizable. Surveying only ISO 14001 certified companies, despite its advantage on the validity and reliability of the questions, brings data with a bias on the environmental policies. Future researches could address this problem using a simpler language and targeting certified and non-certified companies, in order to understand the strategies on different environmental policies. Another limitation to this research is the fact that Brazil only one country, from many that have companies with sites certified in ISO 14001 standards. That perhaps causes some bias in the results. Future researches in other countries, developed and developing, at MNCs subsidiaries and headquarters, can bring more insights and powerful explanations on the implications of the EMSs to the corporate and manufacturing/operations strategy. Finally, the survey was aimed at the environmental manager at the certified sites. Perhaps the board members, CEO, CFO, COO perspectives on the impacts of the natural environment on the companies corporate and manufacturing strategies may enrich the framework that is being proposed. Conclusions This study was an attempt to make operational the current operations management and strategy concepts connected to the natural environment issues. Two main concepts were explored: motivations to the ISO 14001 certification and benefits perceived with the certifications. The motivations were divided in four classes: internal, legal, reactive and proactive. Further causal analyses showed that those motivations could be divided in two levels: internal and legal are the bottom-level and reactive and proactive are top-level, explained from the former

7 motivations. More, there is no relationship between reactive and proactive motivations, that is, both forces can act in the organizations at independent strength levels. The benefits perceived could be divided in two major groups: internal and external. Internal perceived benefits are financial benefits and production benefits. External perceived benefits are benefits in the relationship with the macro business environment and the immediate business environment. Internal motivations seems to explain more the internal perceived benefits and legal motivations, the external perceived benefits. Benefits in the relationship with the macro business environment seem to have positive influence on the immediate business environment relationships. Whether environmental issues are threats or opportunities for the corporate and manufacturing/operations strategy, and if including environmental concerns in the operations management improves the business performance, are still open questions waiting for a way to be measured. But a better understanding of the motivations for, and benefits from, the ISO 14001 certification can bring some light to relationship between the environmental management and strategy. References DILMANN, Don A. (1978) Mail and Telephone Surveys The Total Design Method. New York: Wiley-Interscience. GARSON, G. David (2003). PA 765 Statnotes: An Online Textbook. Raleigh: North Carolina State University. Available online at http://www2.chass.ncsu.edu/garson/pa765/statnote.htm. (25/01/2003). GM (2001). Sustainability Report 2000-2001 Achieving a sustainable balance through innovation, technology and partnership. Available online at www.gmsustainability.com. (13/03/2002). HAIR Jr., Joseph F.; ANDERSON, Rolph E.; TATHAM, Ronald L.; BLACK, William C. Multivariate Data Analysis. 5 th Ed. New Jersey: Prentice Hall, 1998. HART, Stuart L. (1995) A Natural-Resource-Based View of The Firm. Academy of Management Journal. Vol. 20, No. 4, pp. 986-1014, 1995. HART, Stuart L. (1997) Beyond Greening: Strategies for a Sustainable World. Harvard Business Review, vol. 75, n. 1, pp. 66-76, Jan-Feb, 1997. KLASSEN, Robert D.; JACOBS, Jennifer. (2001) Experimental comparison of Web, electronic and mail survey technologies in operations management. Journal of Operations Management. Volume 19, Issue 6 Pages 713-728. November 2001. KLASSEN, Robert D.; WHYBARK, D. Clay. (1999a) The Impact of Environmental Technologies on Manufacturing Performance. Academy of Management Journal. Vol. 42, No. 6, pp 599-615. KLASSEN, Robert D.; WHYBARK, D. Clay. (1999b) Environmental Management in Operations: The Selection of Environmental Technologies. Decision Sciences. Vol. 30, No. 3, pp 601-631. Summer 1999. MORROW, David and RONDINELLI, Dennis (2002), Adopting Corporate Environmental Management Systems: Motivations and Results of ISO 14001 and EMAS Certification. European Management Journal. Volume 20, Issue 2, Pages 159-171. April 2002. NDEMS (2001) Drivers, Designs, and Consequences of Environmental Management Systems Research Findings to Date From the National Database on Environmental Management Systems A Research Compendium. Chapel Hill: University of North Carolina. Available online at www.ndems.org. (15/08/2002). PORTER, Michael E; van der LINDE, C. (1995) Green and competitive: Ending the stalemate. Harvard Business Review. Vol. 73, No. 5, pp. 120-133.

8 SHRIVASTAVA, Paul. (1995) Environmental technologies and competitive advantage. Strategic Management Journal, Volume 16: Pages 183-200. Summer 1995. St. JOHN, Caron H.; CANNON, Alan R. and POUDER, Richard W. (2001) Change drivers in the new millennium: implications for manufacturing strategy research. Journal of Operations Management. Volume 19, Issue 2, Pages 143-160. February 2001. Appendix Approximate translations for the questions of scales: a. Please classify the following reasons that made your company certificate your site on the ISO14001 standard. Note that these motivations must be previous to the certification. A16 obter apoio técnico de órgãos públicos To get technical support from public institutions (SEBRAE, etc.) A20 responder à solicitação de agências/órgãos To take into consideration a demand from governamentais ligados à questão ambiental government environmental agencies A15 obter benefícios fiscais To get fiscal benefits A19 responder à solicitação de grupos de To take into consideration demands from proteção ambiental (ONGs) environmental protection groups (NGOs) A14 obter acesso a linhas de crédito especiais, To get access to special loan, with reduced interest com juros reduzidos rates A21 responder à pressão de fornecedores To take into consideration demands from suppliers A24 responder à orientação de entidades de To take into consideration demands from class classe (CNI, ABIQUIM, etc.) associations A22 atingir o padrão dos concorrentes To reach the competitors standard A18 responder à solicitação de clientes To take into consideration demands from customers A1 obter melhorias no desempenho ambiental To achieve improvement on the environmental performance A26 desenvolver produtos e processos To enhance process and product environmental inovadores em relação ao meio ambiente innovation A3 motivar os funcionários para seu trabalho To motivate employees to their work (moral, etc.) (melhorar o moral, etc.) A25 atender a uma decisão interna do próprio To take into consideration an internal decision site. from this own site A2 identificar oportunidades para melhor To identify potential use of energy sources utilização das nossas fontes de energia A13 obter redução de custos de produção To achieve production cost savings A6 aumentar a certeza do cumprimento da To increase legal certainty on environmental issues legislação ambiental A10 detectar e minimizar a possibilidade de criar To detect and minimize the possibility of creating passivos ambientais environmental liabilities A8 expectativa de aumento futuro da exigência Due to an expectancy of future strengthen of the da legislação ambiental environmental law A9 atender a legislação ambiental vigente To comply to the current environmental law A23 antecipar-se aos concorrentes To anticipate the competitors A5 melhorar a imagem da empresa junto aos To improve company image for the customers clientes A4 melhorar a imagem da empresa junto à To improve company image for the society in sociedade em geral general b. Please classify the following benefits that your company gained from certificating your site on the ISO14001 standard. Note that these benefits must be perceived after the certification. B7 redução no uso de recursos: energia. Resource usage reduction: energy B8 redução no uso de recursos: matéria-prima. Resource usage reduction: raw material B9 redução no uso de recursos: água. Resource usage reduction: water B12 otimização dos fluxos de processo Optimization of process flows B15 redução de custos de produção Production costs reduction

9 B6 maior motivação dos funcionários para o Better employee motivation for their work trabalho B19 oportunidade de usar fundos públicos para Opportunity to use public funds for financing financiamentos purposes B17 obter acesso a linhas de crédito especiais, Access to special credit, with reduced interest com juros reduzidos rates B18 redução de custos com seguro Insurance costs reduction B4 melhor imagem da empresa junto à sociedadebetter corporate image for the society in general em geral B3 maior certeza de estar cumprindo a legislação Increased legal certainty on environmental issues ambiental B13 melhor cooperação com as autoridades Improved cooperation with authorities B16 vantagens em relação a nossos Competitive advantages concorrentes B14 efeitos positivos no mercado e junto aos Positive effects on the market and with the clientes customers B11 oportunidade de dar bom exemplo aos Opportunity to set the example for suppliers fornecedores