Deciding on ISO 14001: Economics, Institutions, and Context

ISO 14001 is an international standard for environmental management systems that was introduced in September 1996. It has gained wide recognition among businesses, much like its sister standard on quality management systems, ISO 9000. As a result, managers in almost every organization will evaluate whether the organization should become ISO 14001 certified. However, most analyses of ISO 14001 that are intended to guide managers in their evaluation have focused on the merits of ISO 14001, such as improved competitiveness, management control, and regulatory compliance. Very few articles provide a balanced picture of the costs and benefits of ISO 14001—including the conditions under which adoption will be most effective. This article redresses this gap by providing an analysis of not only why firms may choose to certify based on economic and institutional considerations, but also, when certification might be appropriate based on the firm’s context.In 1998, the Jutras division of Meridian Magnesium Inc., which manufactures magnesium automotive parts, reported that it saved almost $2 million soon after its $45,000 investment on an ISO 14001 certified environmental management system (EMS).¹ The company reduced its use of electricity, natural gas, and lubricants, while producing less solid waste and contaminated water. These were not just one-time savings; they were expected to continue into perpetuity. Not all their ISO 14001 projects were winners, however. Jutras implemented ten projects for their EMS in the first year with an initial goal of saving over $460,000 in costs. Four of the projects did not result in any savings and one had disappointing but positive results. The remaining projects, however, provided larger than expected returns. The cost savings increased the competitiveness of a firm that prides itself on being the low cost leader in an increasingly competitive automotive parts industry. The benefits to the environment were a bonus. And there was yet another bonus from ISO 14001 that had not been anticipated: the preference for ISO certified suppliers by its key customers, Ford and General Motors, and the social legitimacy earned from stakeholders pressuring for greener business practices. The company now posts its ISO 14001 certification on its web site as one of its main achievements.Although this type of vignette presents ISO 14001 in a positive light, not all firms have embraced the standard with enthusiasm. While over 22,000 facilities in 98 countries were ISO 14001 certified by December 31, 2000, many firms had decided to delay certification or reject it altogether.² The significant financial rewards realized by the Jutras Division of Meridian Magnesium have not been perceived by many of its peers, even though most analyses of ISO 14001 attempt to convince the reader that such a system is of significant strategic importance and a panacea of opportunity. Writers typically tout the potential for lower costs, increased competitiveness, market share growth, higher profits, and regulatory compliance, such as those experienced by Meridian Magnesium.³The costs of ISO 14001, however, are not trivial. Managers need to undertake a careful analysis of the relevance of ISO 14001 to their firm before they decide to jump on the ISO 14001 bandwagon. While managers can estimate the direct costs of certification with the help of good internal cost accounting, evaluating the intangible costs and benefits and the indirect impacts on the firm’s performance is more difficult. In this article, we provide background perspectives and evaluation criteria for those aspects of ISO 14001 certification, looking specifically at the marginal benefit of ISO 14001 certification over an in-house EMS. This article, then, identifies why firms may certify and in which contexts, based on economic and institutional considerations. Armed with relevant decision-making criteria, we present managers with an analytical tool to assist them in determining if ISO 14001 is appropriate for their firm.The insights provided here build on three studies:

1.

an investigation of the motivations of environmental responsiveness by interviewing members of 53 firms in the UK and Japan;⁴

2.

an investigation of the factors that influence the adoption of ISO 14001 based on a statistical analysis of 46 matched pairs of certified and non-certified firms and interviews with members of six firms in the US;⁵ and

3.

an investigation of the contexts that explain adoption based on interviews with 16 pulp and paper companies in Canada.⁶

Details of these studies are provided in text boxes later in this paper. While these studies form the foundation of this paper, many of the anecdotes provided here are based on published sources because the interviewees were promised complete confidentiality.     

UNDERSTANDING THE IMPORTANT DIFFERENCES BETWEEN THE MALCOLM BALDRIGE NATIONAL QUALITY AWARD AND ISO 9000 REGISTRATION

Market globalization, higher requirements for improved quality, and tough, faster-pace, price-sensitive competition have led to two parallel and visible quality thrust: the Baldrige Award in the U.S. and, internationally, the ISO 9000 standards. The relationship between the Baldrige Award and ISO 9000 registration is widely confused. Two common misper-ceptions stand out: (1) that they both cover the same requirements and (2) that they both address improvement, relying on high quality results, and thus, are both forms of recognition. Many have concluded that the Baldrige Award and ISO 9000 are equivalent and that companies should choose one or the other. These conclusions are incorrect. The Baldrige Award and ISO 9000 registration differ fundamentally in focus, purpose, and content. The focus of the Baldrige Award is on enhanced competitiveness. The Award Criteria reflect two key competitiveness thrusts: (1) delivery of ever-improving value to customers and (2) improvement of overall operational performance. The Award's central purpose is educational-to encourage sharing knowledge and experience of competitiveness and to drive this learning, creating an evolving fund of knowledge. By contrast, the focus of ISO 9000 registration is on conformity to practices specified in the registrant's own quality systems. Its central purpose is to enhance and facilitate trade. The Baldrige Award addresses competitiveness factors either not addressed in ISO 9000 registration or addressed differently. These factors include a customer and market focus, results orientation, continuous improvement, competitive comparisons, a tie to business strategy, cycle time and responsiveness, integration via analysis, public responsibility, human resource development, and information sharing. Overall, ISO 9000 registration covers less than 10% of the scope of the Baldrige Award Criteria and does not fully address any of the 28 Criteria items. As a result, the national drive to improve competitiveness could be diminished. Companies required to or electing to seek ISO 9000 registration are encouraged to integrate their conformity efforts with the Baldrige Award competitiveness improvement framework.     

INTERNATIONAL DIFFUSION OF ISO 14000 CERTIFICATION

The ISO 9000 series of quality management systems standards and the more recent ISO 14000 environmental management systems standards have generated much controversy among practitioners. Although ISO 9000 has become a de facto requirement for many firms, its effects are poorly understood, and similarly the value and domain of applicability of ISO 14000 have been questioned. This paper reports on an exploratory study into the global spread of ISO 14000. We interviewed practitioners worldwide to identify factors that they believe explain differences between national ISO 14000 certification counts. We then collected quantititive data for these factors and, using regression analysis, we found that exports, environmental attitudes (combined with economic development), and ISO 9000 certification count were significant. The fact that ISO 9000 appears as an important factor explaining diffusion of ISO 14000 certifications suggests that the drivers behind the two have significant overlap. This indicates that, although ISO 14000 is an environmental standard, many of the factors driving national certification patterns are not at all environmental in nature, and that ISO 14000 therefore needs to be studied from a broader perspective than from a purely environmental point of view.     

面向流程的MRPII与ISO9000结合模式

首先从管理理念的相似性、管理职能的互补性和实施的关联性角度说明 MRPII与ISO90 0 0结合的可能性和必要性 ,然后提出了以流程为结合点的结合模式 ,并在 MRPII与ISO90 0 0的几个主要流程及其特点分析的基础上 ,给出了 MRPII与 ISO90 0 0结合的框架     

股东参与治理的私人收益和社会收益的实证研究

本文探讨了股东参与治理所带来的私人收益、特定股权结构的社会收益以及股权集中成本三者之间的关系。我们分析的结果表明,当股东与经理人员之间的利益冲突水平较高、其它治理机制的作用较弱时,股权集中(股东参与治理的积极性较高)可以创造大量的社会收益;反之,股权的集中与分散程度(股东参与治理的积极性较低)对社会收益的影响不明显。本文的研究结论为我国股东参与治理及股权结构改革提供了重要启示。     

The Financial Impact of FSC Certification in the United States: A Contingency Perspective

This article focuses on an important and emergent standard for sustainable operations management: the Forest Stewardship Council (FSC) certification. Unlike similar certifications, its focus is on the entire upstream supply chain, reflecting the criticality of supply chain management to ensure sustainable products. We investigate the financial impact from FSC certification, offering valuable decision support for managers considering this certification. Taking a contingency perspective, we view a firm's supply chain position and its prior certification to the ISO 14001 standard as influencing the results. Drawing on signaling theory, we suggest that firms farther downstream in the supply chain realize significantly greater abnormal financial performance benefits than firms upstream in the supply chain. We further hypothesize that firms that were not ISO 14001 certified at the time of FSC certification realize significantly greater abnormal financial performance benefits than firms that did have the ISO 14001 certification. To test these hypotheses, we utilize financial data of all publicly traded firms in the United States that have obtained the FSC certification, and assess whether FSC certification leads to abnormal performance benefits considering the above contingencies. Data collected from the FSC Certificate Database and Compustat, employed in an event study, provide support for our hypotheses. Overall, our findings contribute to research on decision making in the context of sustainable operations management, and offer a plausible explanation for contradictory results in prior studies. We highlight the applicability of signaling theory to decision sciences research, and stress the need to consider contingencies in sustainability management research.     

Cost of quality reporting: Some Australian evidence

The study explored the quality management practices, specifically addressing cost of quality reporting, of Australian manufacturers certified to AS/NZS ISO 9000. The findings suggest that firms have responded to the demands of the new manufacturing environment and have implemented quality management initiatives in an effort to gain a competitive advantage in the marketplace. The minority of respondents prepared cost of quality reports. For those firms reporting quality costs, the motivation was to identify high-cost problem areas. Firms not reporting quality costs cited lack of management support and the belief that quality was part of the firm's culture.     

WHY FIRMS SEEK ISO 9000 CERTIFICATION: REGULATORY COMPLIANCE OR COMPETITIVE ADVANTAGE?

Proponents of iso 9000 certification claim that it is a low-cost signal of a firm's commitment to quality and a meaningful component of total quality management (TQM). Critics claim that it has little relation to TQM and is a tariff on international trade. We test the hypothesis that firms obtain ISO 9000 certification to comply with government and customer demands by estimating a probit model of the certification decision. The results support the view of proponents of ISO 9000. After controlling for regulatory and customer pressures to obtain ISO 9000, other factors related to quality management and quality-based competition explain the adoption decision.     

LEAN AND GREEN? AN EMPIRICAL EXAMINATION OF THE RELATIONSHIP BETWEEN LEAN PRODUCTION AND ENVIRONMENTAL PERFORMANCE

Lean production may have a significant public good spillover—improved environmental performance. However, empirical evidence of the link between lean production practices and environmental performance has not resolved the nature of the relationship. To explore this issue, we conduct an empirical analysis of the environmental performance of 17,499 U.S. manufacturing establishments during the time period 1991–1996. We find that those establishments that adopt the quality management standard ISO 9000 are more likely to adopt the environmental management standard ISO 14000. We also find strong evidence that lean production, as measured by ISO 9000 adoption and low chemical inventories, is complementary to waste reduction and pollution reduction.     

EXPORT‐PLATFORM FOREIGN DIRECT INVESTMENT

A poorly understood empirical phenomenon is export‐platform affiliate production (EP), particularly for sale in third countries rather than in the parent or host countries. We develop a three‐region model, with two identical large, high‐cost countries (collectively called North) and a small, low‐cost country (South). The large countries each have one firm. Our theory section analyzes the conditions under which one or both of these firms uses the South to produce for (a) export back to the parent (home‐country EP), (b) export to the other large country (third‐country EP), or (c) export to both (global EP). A free‐trade area between one of the northern countries and South can lead to the insider northern firm choosing home or global EP and the outsider firm choosing third‐country EP for a range of parameter values. Our empirical section shows the relevance of this outcome. Foreign manufacturing affiliates of US multinationals inside North America concentrate on home‐country EP while affiliates inside Europe concentrate on third‐country EP. (JEL: F12, F23)     

Getting What You Pay For—Strategic Process Improvement Compensation and Profitability Impact

Profit‐maximizing firm owners who incentivize their managers with a bonus for process improvement create an intentional misalignment of their own objective and management attention. From the viewpoint of a single firm, such a local misalignment can never be profitable, but in this study we take a wider strategic perspective by investigating cost‐reducing process improvements of two firms competing in a Cournot market. We find that the use of a process improvement bonus (by firm A) can be profitable, by affecting the competitor's decision making. Informed about the reward structure at firm A, which provides an incentive for process improvement and thereby for increased production at that firm, the manager of the competing firm (B) is inclined to produce less if the owner of firm B only rewards profit. This leads to a higher profit for firm A. However, we also show that firm B's best strategy is to also offer a process improvement bonus, even if that firm is a cost laggard (with higher costs for process improvement), and that this leads to reduced profit for both firms in many situations unless one of them is sufficiently superior in its ability to improve processes. These results are robust for uncertain process improvement outcomes, multidimensional process improvement decisions, and information asymmetry in the owner–manager relationship.     

Implementing ISO 14001—An International Survey Assessing the Benefits of Certification

The costs and benefits of ISO 14001 certification result in firms choosing this route as a tool for proactive environmental management, according to a survey of 131 companies across the world. The following paper examines the motivation to pursue ISO 14001 certification for companies in developed and developing countries. While the costs of ISO 14001 certification vary widely, almost all respondents report substantial cost savings as a result of implementation. This was especially the case in developing countries, where enthusiasm about the standard (among certified firms) is very high. Contrary to the concerns voiced by skeptics, many firms stated that they decided to implement an ISO 14001 in order to “be a good neighbor” and to raise their employee's level of environmental awareness. Surprisingly, very few respondents stated that their primary motivations for implementation were profit-related. The majority of firms appear to be using ISO 14001 as a tool for proactive environmental management, as its creators intended.     

STAKEHOLDERS AND COMPETITIVE ADVANTAGE: THE CASE OF ISO 14001

This paper integrates a stakeholder perspective into the resource‐based view of the firm, to analyze the mechanisms that link the adoption of the international Environmental Management Standard ISO 14001 to firms' competitive advantage. This paper shows that the perceived competitiveness impact of the standard depends mostly on the involvement of firms' external stakeholders (distributors, customers, community members, and regulatory agencies) in its design. ISO 14001 is a process standard, and it is difficult for stakeholders to get credible information on the effectiveness of the standard if they are not involved in its design. Stakeholders' involvement in a firm's ISO 14001 standard becomes a valuable organizational capability, which is difficult to imitate by competitors. The analysis is supported by primary data collected from a questionnaire mailed to 152 firms, resulting in 55 observations representing 30% of the total number of firms certified in the U.S. in August 1998.     

敏捷竞争环境中TQM与ISO 9000标准比较研究

本文对全面质量管理TQM、ISO 9000质量管理保证标准和敏捷竞争进行了深入的对比分析，探讨敏捷竞争、TQM以及ISO 9000的融合机理，为敏捷竞争质量管理的实施提供思路和途径。     

Response to “Revisiting ISO 14000 Diffusion: A New ”Look“ at the Drivers of Certification”

In Corbett and Kirsch (2001), we used a simple regression in an exploratory investigation of drivers of global diffusion of ISO 14000 certification. We found that ISO 9000 certification levels, environmental treaties ratified, and exports as a proportion of GDP were the main significant variables, where the environmental measure may be moderated by GDP per capita. In his replication study, Vastag (2004, in this issue) analyzes the same data using more visual techniques, specifically regression trees, and finds support for the significance of ISO 9000 certification levels and environmental treaties ratified, but not for export‐propensity. Vastag raises a number of relevant methodological issues, to which we add some perspectives here.     

The Effects of Cost and Asset Retrenchment on Firm Performance: The Overlooked Role of a Firm’s Competitive Environment

When firms face declining financial performance, research suggests that cost and asset retrenchment can lead to improved performance among poorly performing firms. However, previous studies have largely focused on firms operating in mature industries. This research develops and tests arguments that cost and/or asset retrenchment strategies will have different effects on firm performance in competitive environments characterized as growing and declining. In growth industries, asset retrenchment was positively related to performance improvement while cost retrenchment was unrelated. In declining industries, cost retrenchment was positively related to improved performance while asset retrenchment had a negative effect on firm performance. Implications of these findings for turnaround strategies are discussed.     

存在信息更新时的双源采购和后备生产结合策略研究

在现实的采购运作中,双源采购和后备生产是两种最常见的风险应对策略。本文在考虑信息更新的情况下,探讨了一个两阶段动态采购决策模型：第一阶段,制造商向存在供应风险的一个或两个主供应商订货;第二阶段,制造商根据主供应商风险信息的更新,决定是否向供应可靠但价格较高的后备供应商订货。本文得到了两阶段的最优采购策略,分析发现,当固定采购成本较低时：若潜在市场需求较小,双源采购将排斥后备生产;若潜在市场需求较大,双源采购和后备生产共存;若潜在市场需求适中,后备生产可能排斥双源采购,两者也可能共存。特别地,在潜在市场需求适中时,可靠性改进概率的增大或后备供应商生产成本的降低,将使后备生产趋于排斥双源采购;反之,可靠性改进概率的减小、固定采购成本的降低或后备生产成本的增加,将使两者趋于共存。     

MANAGERIAL HEDGING AND PORTFOLIO MONITORING

Incentive compensation induces correlation between the portfolio of managers and the cash flow of the firms they manage. This correlation exposes managers to risk and hence gives them an incentive to hedge against the poor performance of their firms. We study the agency problem between shareholders and a manager when the manager can hedge his compensation using financial markets and shareholders can monitor the manager's portfolio in order to keep him from hedging, but monitoring is costly. We find that the optimal incentive compensation and governance provisions have the following properties: (i) the manager's portfolio is monitored only when the firm performs poorly, (ii) the manager's compensation is more sensitive to firm performance when the cost of monitoring is higher or when hedging markets are more developed, and (iii) conditional on the firm's performance, the manager's compensation is lower when his portfolio is monitored, even if no hedging is revealed by monitoring. Moreover, the model suggests that the optimal level of portfolio monitoring is higher for managers of firms whose performance canbehedged more easily, such as larger firms and firms in more developed financial markets. (JEL: G30, D82)     

Does it pay to be eco? The mediating role of competitive benefits and the effect of ISO14001

Eco-innovation has become an important instrument to help companies reduce their environmental impact and gain a competitive advantage in increasingly competitive environments. Despite recent research conducted in this field, findings concerning the relationship between eco-innovation and firm performance remain conflicting, inconclusive and incomplete. This study aimed to clarify this relationship by incorporating competitive benefits as a mediator between eco-innovation and firm performance. Three core questions are examined: How does eco-innovation influence competitive benefits and firm performance? Do competitive benefits mediate the relationship between eco-innovation and firm performance? How does ISO14001 influence competitive benefits and firm performance? The study finds that competitive benefits mediate and strengthen the relationship between eco-innovation and firm performance. In addition, the results reveal that ISO14001 positively affects competitive benefits and thus leads to greater competitive benefits, while the association between ISO14001 and firm performance is not found to be statistically significant. The paper concludes with a discussion of implications for policy makers and companies, limitations, and future research directions.     

The Value to the Customer of RFID in Service Applications*

This article examines how customer value may be affected by deploying radio frequency identification (RFID) technologies within service environments. Business articles promote operational cost savings and improved inventory management as key benefits of deploying RFID. In response, service firms are using RFID to reengineer service transactions and customer touchpoints. Customers may view these RFID applications to offer both benefits and drawbacks. This article demonstrates that individuals will recognize far more value from RFID service applications than just cost savings and inventory availability. The article analyzes qualitative survey responses on the value gained from RFID to identify a broad list of value objectives—benefits and drawbacks—associated with RFID service applications. The article contributes to academic literature by providing salient value dimensions for return on investment models of service RFID applications and for future empirical analyses of means‐ends and value‐profit chain models. Managers can use the list of dimensions to develop rich business cases for evaluating the benefits and costs from enhancing service operations with RFID. The identified drawbacks also provide managers with a resource for understanding potential risks of RFID applications.