the green initiative: improving quality and competitiveness for european smes

Introduction

The contribution of small and medium-sizedenterprises (SMEs) towards economic perfor-mance is now universally accepted as signifi-cant. In terms of the European Union (EU)SMEs dominate the industrial and commer-cial infrastructure with over 70 per cent of theworkforce located in enterprises of fewer than500 employees. SMEs are considered to bethe main source of new jobs, particularly indepressed areas of Europe, such as southernItaly and Jutland in Denmark. In addition, thevitality of SMEs has been significant, as smallfirms in the UK, for example, were still netcreators of jobs even when employment wasfalling in the recent recession (DTI, 1995).

The globalization of markets and increasedinter-dependence of businesses has led to anincreasingly competitive marketplace. SMEsare not exempt from this pressure and Drihlonand Estime (1993) argue that improvingcompetitiveness is now an imperative for smalland large businesses alike. To survive andprosper into the twenty-first century all busi-nesses need to exert conscious and sustainedeffort to continuously improve all facets oftheir operations and empirical evidence sup-ports the argument that by focusing on qualitya business can substantially improve its perfor-mance (Peters and Austin, 1985).

An emphasis on quality means that a busi-ness needs to understand what it is that cus-tomers value in terms of the purchased pack-age. Typical purchase criteria might includereliability, lead time, design aesthetics and after-sales service. However, increasingly, businessorganizations and consumers alike are linkingenvironmental issues to the purchasing decision(Lamming and Hampson, 1995). Consequent-ly, suppliers need to be able to evaluate theimportance of environmental factors in termsof the product/service delivered.

This article argues that:• quality and business performance are

inextricably linked;• environmental issues should be viewed as

an extension of the quality dimension ofboth products and/or services;

• ultimately the customer decides on theimportance to be placed on environmentalissues;

• improvements in “green” attributes whichenhance the relative perceived qualityshould, in the long term, result in improvedperformance for the organization.

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European Business ReviewVolume 97 · Number 5 · 1997 · pp. 208–214© MCB University Press · ISSN 0955-534X

The green initiative:improving quality andcompetitiveness forEuropean SMEs

Kate GreenanPaul Humphreys andRonan McIvor

The authorsKate Greenan is Lecturer in Business Strategy and RonanMcIvor is Lecturer in Operations Management, both at theSchool of Management, University of Ulster, NorthernIreland, UK.Paul Humphreys is Lecturer in Industrial Management,Department of Industrial and Manufacturing SystemsEngineering, the University of Hong Kong, Hong Kong.

Abstract

Attempts to show that environmental issues are becomingincreasingly important as an attribute of the quality of goodsand services. However, although firms appreciate theimportance of good environmental practices there is a lack ofawareness of how this can best be achieved, particularly insmall and medium-sized enterprises (SMEs). Suggests thatone way to enhance understanding among SMEs is toconsider environmental responsibility as part of the qualityattributes which customers may expect from suppliers.Presents a quality profiling approach which is based oncustomers’ perceptions, which should assist an SME to:establish the importance of environmental factors withrespect to other attributes in the purchasing decision; andevaluate the organization’s performance on key product/ser-vice attributes relative to its main rivals. Discusses the role ofgovernments and other bodies in relation to encouraging aproactive environmental approach among SMEs.

Each of these factors is examined in turn anda methodology is proposed to assist SMEs inevaluating the influence of the environmenton purchasing decisions.

Quality and business performance

The published empirical data support thesupposition that by focusing on quality, abusiness can substantially increase its marketshare and profitability. Philips et al. (1983)showed that perceived quality and profitabilitywere positively correlated. This led them toconclude that, in the long run, the relativeperceived quality of an organization’s prod-ucts or services relative to its competitors isthe single most important factor affectingbusiness performance. A quality edge boostsperformance in two ways. In the short term,superior quality yields increased profitabilityvia premium pricing. In the long term, superi-or or improving quality should result inincreased market share.

Much has been written on the link betweenquality and performance. Murray and O’Gor-man (1994), in a study of 131 SMEs, foundthat relative to competitors, high-growthcompanies were more likely to sell higher ormuch higher quality products than low growthcompanies. Results from the PIMS database,which Tom Peters claims to be, “the mostsophisticated and extensive business informa-tion database in the world”, demonstrateclearly that higher relative quality is a strongdriver of return on investment (ROI), as indi-cated in Figure 1 (Buzzell and Gale, 1987).

The influence of quality seems to be grow-ing, particularly in Europe, and PIMS suggestthat the relationship between relative qualityand margins achieved by businesses hasgrown stronger during the 1980s and early1990s compared to earlier business datacollected prior to 1985 (Clayton and Carroll,1995). The key linkages between quality,profitability and growth are demonstrated inFigure 2 (Buzzell and Gale, 1987).

It should be pointed out, however, thatperceived relative quality is an “external” viewof quality. It goes beyond “conformance”quality (meeting product specifications) andrepresents the customer’s perceptions of thequality of the firm’s products and/or servicesrelative to those of its competitors. This defin-ition of quality holds the key to the properplace of environmental issues in the strategicplanning process of an organization.

The green initiative

Environmental considerations have emergedas a very important issue for business andmanagement in the 1990s (Hutchinson andChaston, 1994; Klassen, 1993). Legal andpublic pressure in Europe on the attainmentof good environmental practice is mountingand a significant proportion of this pressurehas been directed at business which is oftenidentified as the major source of pollution. Inaddition, the British Social Attitudes Report(Jowell, 1996) and a similar consumer studyin Europe (Skrentny, 1993) indicate thatconsumer buying patterns are changing withenvironmental considerations permeatingsociety more widely. Consequently, organiza-tions are having to respond to the demands ofthe modern, environmentally aware consumerby developing products/services which, forexample, use less packaging, cause less pollu-tion and/or reduce energy consumption.

Increasingly, the pressure to improve envi-ronmental performance may emanate fromtrading partners rather than the ultimateconsumer. Companies may begin to applyboth vendor and customer selection criteriawhich set standards of environmental perfor-mance, and buy their resources from or selltheir products/services to organizations whichmeet these environmental standards. It islikely that in the future companies will have tomonitor their environmental performancethrough the application of environmentalmanagement systems, such as ISO 14001,and that this will also be written into contractsbetween the customer and supplier.

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The green initiative: improving quality and competitiveness

Kate Greenan, Paul Humphreys and Ronan McIvor

European Business Review

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Inferior 20 40 60 80 SuperiorRelative quality (per cent)

35

30

25

20

15

10

5

0

ROI (per cent)

Figure 1 Relative quality boosts rates of return

Pressures from investors and insurers may alsoincrease in the future (Polonksy et al., 1992;Teets, 1994; Welford and Gouldson, 1993).Already, ethical investment schemes have beenintroduced which reflect the desire of manyinvestors to provide financial support only tothose companies which behave in an environ-mentally responsible manner. There are anumber of important business reasons whyinvestors may prefer to support companieswhich indicate their readiness to embrace goodenvironmental practices. In general, the struc-ture of legal liability for environmental damageassumes that the party responsible may befined and required to not only bear the restora-tive costs, but also to compensate the affectedparties for any associated losses. Consequently,companies which are responsible for a signifi-cant environmental incident may suffer finan-cial losses, which may be translated into lowerprofit margins and dividends.

In addition, investment institutions gener-ally secure loans to organizations on the basisof their physical assets and the land on whichany investment takes place. If the organization should cease to be viable, thecommercial lenders assume ownership ofthose assets which are then sold to cover anyoutstanding debts. However, if the assets arecontaminated their value is significantlyreduced. In some circumstances, the lendersmay actually inherit environmental liabilitiesgenerated by the liquidated organization.Investment institutions may therefore becomeincreasingly reluctant to lend money to those

organizations which might develop environ-mental liabilities or to secure loans on anyphysical asset which may have become conta-minated.Consequently, in the longer termcommercial lenders may require companies toadopt a high level of environmental perfor-mance, in order to minimize the environmen-tal risk on the loan. Organizations which donot adopt such practices may find it increas-ingly difficult and expensive to attract andretain investment and insurance for theiroperations.

Although firms acknowledge the impor-tance of environmental issues, they appear tobe experiencing some difficulty in incorporat-ing such factors into the strategic planningprocess. This is supported by a survey con-ducted by one of the authors at the Universityof Ulster to determine management percep-tions of the environmental threats and oppor-tunities, both currently and in the future(Humphreys and Garvin, 1995). Over 400organizations were contacted and a responserate of almost 50 per cent was achieved. Interms of organization size, the SME sectorwas well represented, with companies of lessthan 500 employees covering 90 per cent ofrespondents. In general, this reflects organiza-tion size in the rest of the UK, where 93 percent of UK industrial and commercial compa-nies employ fewer than 500 people. In the EUa similar picture emerges, with over 95 percent of manufacturing and service enterprisesemploying less than 500 employees (ECDirectorate, 1991).

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Served market

Design/technology(attributes and specifications)

Customer-perceivedrelative quality(performance)

Relative priceHigher

Same

Relative effectivenessin conforming tospecifications

Reduce costof quality

Relative cost(lower)

Customer-perceived quality(quality differentiation)

Conformance quality(cost leadership)

Profitability andgrowth

Relativemarketshare

Relativevalue

Scale andexperience

Figure 2 How quality drives profitability and growth

The study demonstrated that:• environmental issues are currently viewed

as important by a large proportion of orga-nizations, with these same issues growingin importance inside the next three years,as indicated in Figure 3;

• larger organizations and the manufacturingsector were at a more advanced stage ofenvironmental management system imple-mentation;

• legislation was identified by 90 per cent ofrespondents as the key driver influencingenvironmental policy within organizationsas indicated in Figure 4;

• although 65 per cent of respondentsshowed an awareness of the existence of BS7750, the UK standard on environmentalmanagement, only 28 per cent were famil-iar with its requirements, and just 19 percent had definite intentions to apply for BS7750 registration.

Analysis of responses indicated that, in gener-al, companies are reacting to environmentalinfluences, such as legislation, and view theenvironmental issue as a threat, rather than anopportunity to enhance competitiveness.O’Laoire’s (1994) “quantum leap” to per-ceive environmental management as a com-petitive tool that enhances a company’s pros-perity in the marketplace, has still not beenachieved. This may be due to the fact thatorganizations, particularly SMEs, are stillconfused over how to internalize environmen-tal management. These organizations, whichoften lack a formal strategic planning processneed clear guidelines for action, as confirmedby Hutchinson and Chaston (1994) in arecent survey of SMEs and their environmen-tal management practices.

Quality and the environment –guidelines for action

For many forward-looking organizationsenvironmental responsibility has become anintegral aspect of the search for total quality(Welford, 1992). The achievement of environ-mental responsibility requires many of thecharacteristics needed in a quality improve-ment system including teamwork, commit-ment, communication, organization andmonitoring, and these are reflected in ISO14001. One of the starting points for SMEs inmoving towards total quality is to understandthose attributes of quality valued by the cus-tomer. If customers perceive environmentalissues as being of importance, then theseshould be incorporated into the product/ser-vice evaluation process.

As indicated previously, it is the customerwho judges the relative quality of the prod-ucts/services, and who determines whichattributes are important. For a firm toimprove its relative quality, it is essential thatthe customer’s views are known on threeimportant aspects:(1) Which attributes are important in the

choice of supplier?(2) How important is each attribute in the

purchase decision?(3) How well does the firm perform on each

attribute relative to its major competitors?

This information can be found through arelatively simple exercise in quality profiling,outlined below.

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Current

80

60

40

20

0

53

Future

72

Very importantImportant

Key

Figure 3 Importance of environmental issues

Legislation

Public opinion

Management

Customers

Employees

Suppliers

Competitors

Investors

92

92

87

86

82

65

0 20 40 60 80 100

59

53

Per cent

Very importantImportant

Key

Figure 4 Important influences on environmental policy

Quality profilingStep 1. Which attributes are important in thechoice of supplier?Quality profiles are established on the basis ofcustomers’ views. Management often thinkthey know these views, but unless and until theyactually ask the customers they do not knowthey know. Successful acquisition of customers’true views often reveals unique insights intopurchasing behaviour and, if repeated at regu-lar intervals, may also help to keep manage-ment abreast of changing patterns.

Ideally all customers should be met, butwhere this is not practical then the mostimportant customers, in terms of order quan-tity, value and/or repeat purchases should beseen. The purpose of the meeting would be todetermine the product and associated serviceattributes which influence the buying deci-sions. The service attributes should always beincluded since, for example, speed and relia-bility of delivery may be crucial in the choiceof supplier.

The procedure can be illustrated through asimple hypothetical example. Consider thepurchasing decision for a family saloon car.The characteristics which consumers demandmight include functionality, comfort, style,safety and efficiency (Gouldson, 1994). Theenvironmental concerns of consumers has notbeen reflected in a reduction in the demandfor cars. However, in an attempt to differenti-ate their products from those of competitors,some car manufacturers are beginning tofocus on environmental performance in theirsearch for competitive advantage. Hence, afurther characteristic which might influenceconsumers’ purchasing decisions is environ-mental friendliness.

Table I illustrates a quality profile drawn upfor Company A comparing customers’ viewsof its performance against three main com-petitors B, C and D.

The product/service attributes may beincomplete, and the authors respectfullyacknowledge their ignorance of the familysaloon market! Any omissions only serve toreinforce the necessity to address the actualcustomer, rather than a surrogate.

Step 2. How important is each attribute in thepurchase decision?Once the attributes have been identified, theirinfluence can be established by asking thecustomer to assign “importance weights” toindicate their relative importance in the

purchasing decision. In general, these weightssum to 100.

Step 3. How well does the firm perform on eachattribute relative to the firm’s major competitors?Finally, the customers can rate the businessproduct/service category and those of leadingcompetitors on each of the performancedimensions identified in Step 1. In this case, ascale of 1 to 10 was used, with 1 representingvery poor performance and 10 signifying highperformance. It is important to stress that it isthe customers, and not the firm itself, whomust identify the leading competitors. This isconfirmed by research conducted by theNorthern Ireland Economic Research Centre(1996) into the competitiveness of SMEswhich indicated a surprising lack of overlapbetween the firms cited by a supplier as itsmajor competitors and those cited by thecustomers. This would appear to reflect a lackof awareness on the part of suppliers andemphasizes the need to communicate closelywith customers to identify the true nature ofcompetitive rivalry.

From these attribute scores, each weightedaccording to its importance, an overall relativequality index is calculated, as illustrated inTable I. However, from the company’s per-spective the most important information onrelative performance is contained within thetable. For example, Company A performsmuch worse than its competitors in terms ofenvironmental friendliness. If the companywishes to improve its relative perceived qualitythen the detail contained within the Tablesuggests that one key area for improvement isto focus on environmental factors.

Where Company A’s current performanceon this criterion could be viewed as beingunsatisfactory, the future prospects for thiscompany might be doubtful since the evidencesuggests that environmental friendliness isbecoming increasingly important. This view issupported by a recent study of multinationalcompanies and the factors which influencetheir purchasing decisions (Humphreys et al.,1996). The survey found that, within the nextfive years, over 90 per cent of these large firmswould expect the network of smaller suppliersto be taking into consideration the environ-mental effects of their products.

Due to the dynamic nature of customerdemand, this evaluation process needs to beconducted on a regular basis in order to identifychanging consumer needs. As the environment

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becomes increasingly important, company Amay find that it is essential to disagregate thisattribute into actionable constituent elements.This could include, for example, the investiga-tion of emission levels, waste management, andproduct recycling.

Implications and conclusions

The guidelines put forward should assistSMEs to evaluate the importance of the envi-ronment in the purchasing decision. However,a proactive approach which incorporatesenvironmental issues into strategic decisionmaking may require expertise and financialresources beyond the existing capabilities ofthe organization. Since environmental consid-erations are rapidly emerging as a key issue,assistance should be provided to SMEs to dealwith environmental issues. Even though it maybe argued that their individual influence on theenvironment may be small, when combinedtogether SMEs have a significant impact.

One clear way forward revolves around co-operation and networking. This may entailcreating stronger links between small firmsand between firms and institutions. For exam-ple, a useful and often unexploited link mightbe between small enterprises and local univer-sities or between firms and public bodies.Humphreys and Garvin (1995) indicated thatonly a small proportion of companies – 14 percent – had even considered using theresources of a university to assist them indeveloping and implementing effective envi-ronmental practices. In addition, trade associ-ations could provide assistance to SMEs todisseminate the vast amount of environmentallegislation and to determine which sectionsare relevant to individual members.

Where SMEs are suppliers to large compa-nies it is likely that the driver of environmental

change is going to be these more enlightenedand influential organizations. For instance, arecent UK survey by KPMG showed that 77of the FTSE 100 have addressed environmen-tal issues in their annual report (Cleaver,1996). In addition, over a third of these areproducing specific environmental reports withdata and targets for progress, which marks ahuge change in business culture. These com-panies are likely to have adopted environmen-tal improvement programmes which in somecases include the implementation of ISO14001. Suppliers to these larger organizationsare going to come under increasing pressureto improve their environmental practices;those failing to do so are likely to lose busi-ness. SMEs which decide to adopt a proactiveapproach to environmental issues may need toconsider their inclusion within the strategicmanagement process. This might include theimplementation of an environmental manage-ment system, conducting environmentalimpact assessments and the provision oftraining for staff.

European governments also have a role toplay in providing assistance and direction tofirms who are attempting to be proactive withregard to environmental issues. There are anumber of areas which would benefit fromgovernment support or intervention and theseinclude:• providing financial support towards achiev-

ing ISO 14001 or a national environmentalstandard;

• the provision of funding for environmentalmanagement training;

• the provision of funding for environmental-ly related product development;

• setting up effective regional environmentaladvisory centres to provide information onlegislation and business opportunities;

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Table I Quality profile of Company A against competitors for the product/service attributes

Product/service Weighting Company Company Company Companyattributes (%) A score B score C score D score

Functionality 20 9 8 8 9Comfort 15 8 8 9 9Style 10 9 8 9 9Safety 12 8 9 8 8Efficiency 18 8 7 8 6Environmental friendliness 5 2 6 6 7After-sales service 8 7 7 8 8Warranties 12 7 8 7 8Relative quality index 7.80 7.76 8.03 8.04

• placing a legal obligation on companies toreport annually on their environmentalperformance.

Organizations have always been faced with awide range of competitive market conditionswhich threaten their survival. In many cases,being required to improve environmentalperformance may be perceived to add to thisthreat. However, it is becoming clear that thedemands placed on business to improve itsenvironmental practices will continue to grow.Instead of viewing these demands as a threat,businesses should seize the opportunity toimprove their environmental performance,where quality profiling shows that customersview this as an important attribute. It is antici-pated that those organizations which respondto this challenge, and thus improve the rela-tive perceived quality of their products/ser-vices, will see themselves gaining a competi-tive edge over rivals who fail in this respect.Hence, not only is it ethical for a company toimprove its environmental performance, but itmay also be sound business practice. Suchchanges cannot be expected to take placeovernight, but a gradual and continuous effortby SMEs to improve relative environmentalpractices should result in both an improve-ment in the quality of their products/services,and enhanced competitiveness.

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the green initiative: improving quality and competitiveness for european smes

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