Developing eco-innovations: a three-stage typology of supply networks

Highlights

• We develop a three stage supply network typology for developing eco-innovations.

• Strong ties to strategic suppliers lead to incremental eco-innovations.

• Weak ties to multiple suppliers lead to radical eco-innovations.

• Weak ties to suppliers bridging structural holes lead to radical eco-innovations.

• Embedding eco-innovation in supplier operations improves sustainability performance.

Abstract

This paper uses grounded theory to develop and deepen our understanding of eco-innovation. It presents, through a series of four propositions, a three-stage supply network typology to help scholars and managers consider how best to develop these innovations. This typology was constructed by reviewing existing sustainability frameworks that argued that innovation was a key factor in sustainability. Moreover we found little consideration given on how to discover and develop eco-innovations. The literature proposes that a firm with strong ties with a few strategic suppliers will benefit from the knowledge and technology that spills over from suppliers to the firm during the new product development process. In contrast, the network literature explains that the creation of multiple weak ties to non-strategic suppliers may increase opportunities for identifying innovation. The network literature further suggests a third and potentially more promising route: building weak ties to suppliers that bridge ‘structural holes’ in the network. We suggest that strong ties with strategic suppliers will lead to the development of incremental eco-innovations while weak ties with multiple suppliers and with suppliers that bridge structural holes will tend to lead to radical eco-innovations. Finally, we suggest that once eco-innovations are developed they should be embedded in the operational processes of other suppliers to increase the sustainability performance of the focal firm.

Introduction

The depletion of the Earth's finite resources through increased consumption, industrialisation and globalisation is causing organisations to reconsider how they should compete in the coming years and decades. Specifically, they are concerned with how they add value and compete through the manipulation of their global value chains or more accurately their global supply networks. Simultaneously, consumers are demanding products and services at increasingly competitive prices, pressuring firms to produce goods and services at lower costs while absorbing the financial impacts of increasingly stringent sustainable legislation (Srivastava, 2007). There is a growing pressure on supply chain managers to provide economical and innovative solutions through waste reduction and the development of new ‘clean’ technologies, in order to support the organisation's goals and strategic objectives and pacify stakeholders (Koplin et al., 2007, Touboulic et al., 2014).

These pressures are derived from the business environment, specifically from a variety of stakeholders that are external, internal and on the fringes of the business. The environment is an increasingly influential driver of change, particularly as the impacts of sustainability issues have a considerable impact on a firm's brand and profitability. The media are awash with examples of prestigious brands, such as Apple, Nike, Body Shop and Tesco being reported for sustainability violations ranging from contamination in food products (the 2013 ‘horsemeat scandal’ in the UK) to slavery and child labour in raw materials production (Copper and Coltan in the Democratic Republic of Congo). These sustainability ‘incursions’ have the ability to affect a firm's share value severely, damaging brands and threatening business survival (Hendricks and Singhal, 2003).

External stakeholders often hold a firm to account for the environmental and social impacts of internal operations and the operations of its suppliers (Sharma and Henriques, 2005, Krause et al., 2009). Responses to these pressures have typically been defensive (tactical rather than strategic), often failing to mobilise resources appropriately in order to build up a strategic competence in sustainability. There are examples of more enlightened proactive firms (see Forbes.com list of 100 most sustainable companies) that have been more strategic in the allocation of resources. These firms appear to view sustainability as a strategic capability rather than as simply a cost to the business. The complexity and global nature of most supply networks makes it difficult to have visibility of all the sustainable implications of doing business (Pagell and Wu, 2009). We therefore suggest that this is a Resource-Based View (RBV) argument. We shall address it using the application and development of the Natural Resource-Based View (NRBV) of the firm, originally proposed by Hart (1995) and recently developed by Hart and Dowell (2011).

We use the definition of sustainable supply chain management provided by Seuring and Muller (2008: 1700), which states that “[sustainable supply chain management] … is the management of material and information flows as well as cooperation among companies along the supply chain while taking goals from all three dimensions of sustainable development, i.e. economic, environmental and social, and stakeholder requirements into account, which are derived from customer and stakeholder requirements.”

By focussing on core competencies and outsourcing parts of the production process, many firms appear to have moved a substantial sustainability burden onto their suppliers. This has a macro level benefit for national governments when supply networks are international, transferring the carbon burdens of production to the supplier's host nation (Klein, 2014). Since such host nations are typically in newly industrialising economies, Western governments appear to be reducing their carbon emissions and at the expense of the developing world, a strategy for offsetting carbon taxes (Klein, 2014). Suppliers of raw materials impact the environment during extraction, manufacturing, and transport processes and affect society through interactions with local communities and the workforce. Attempts have been made in the USA to address this, especially in terms of minerals extractions, via the Dodd-Franks Act 2010. Section 1502 of this act (2013) requires US companies to reveal the sources of their mineral supplies, especially those labelled “conflict.” The response of the industry however was principally aimed at delaying or even defeating this law. Legal disputes continue.

Rather than the simplistic, linear supply ‘chain’ concept, researchers have broadly adopted the terminology of industrial supply ‘networks.’ An industrial network refers to all of the actors within one industrial sector, or between related industrial sectors, who may cooperate to add value for the consumer (Håkansson and Snehota, 1995, van Bommel, 2011). Many suppliers within networks may have capabilities to develop innovations that address sustainability issues. We build on the concept of eco-innovations prescribed by Carcillo-Hermosilla et al. (2010: 1075) who state that “[eco-innovation is] … innovation that improves environmental performance.” We develop this argument by examining eco-innovations as a strategic concept that operates within a complex supply network. We argue that these innovations can be product, process and organisational based. In line with the NRBV we suggest that these eco-innovations may fall into one of two categories. Incremental eco-innovations (product stewardship) would include the formation of an agreed standard for sustainable activity, such as the creation of the Marine Stewardship Council, for sustainable fishing. Radical eco-innovations (i.e. clean technologies: see Hart, 1995, Klewitz and Hansen, 2014) would include the development of renewable energy technologies that could replace large parts of the extractive industry.

Process eco-innovations reduce the environmental impact of the manufacturing process by using cleaner production technologies; product eco-innovations ensure products are designed to generate less waste or include renewable energy technologies; and organisational eco-innovations deal primarily with improving working conditions and employee welfare. These can be further segregated into incremental eco-innovations which introduce relatively minor changes to existing products and processes or radical eco-innovations which have the potential to influence the sustainable development of entire industries (Hansen and Große-Dunker, 2013, Klewitz and Hansen, 2014).

Several sustainability frameworks have been introduced over the past fifteen years including: Sustainable Operation Management (Kleindorfer et al., 2005); Green Supply Chain Management (Sarkis, 2003, Zhu and Sarkis, 2004, Rao and Holt, 2005, Cousins et al., 2004); Sustainable Supply Chain Management (Seuring and Muller, 2008, Carter and Rogers, 2008, Pagell and Wu, 2009) and sustainability strategies in industrial supply networks (van Bommel, 2011). All these authors see innovation as a key factor in sustainability yet pay little attention to how firms might find and develop eco-innovations. We argue that sustainability should be embedded as part of the way an organisation conducts its business rather than be seen as something ‘in addition’ to its general business practices and procedures. We therefore seek to address the question: how can firms develop eco-innovations in industrial supply networks?

By drawing on the RBV (Barney, 1991) and specifically the Extended Resource-Based View (ERBV) (Connor and Prahalad, 1996) and Network Theory (Benkler, 2006, Jones et al., 1997), we advance three routes for developing eco-innovations in industrial supply networks. The first route we term ‘tight’ collaborations: developing strong ties with strategic suppliers to benefit from the knowledge and technology that ‘spill-over’ from suppliers to the buying firm during the new product development (NPD) process. We suggest that this route tends to lead to incremental eco-innovations. The second route, we term ‘loose’ collaboration: creating multiple weak ties with suppliers. This increases the opportunities for scanning and securing eco-innovations (Lawson et al., 2009). This requires a comprehensive understanding of the supplier network capabilities, requiring high degrees of supplier market intelligence (Cousins, 2005, Handfield and Lawson, 2007, Handfield et al., 2009). The third route we term ‘bridging’ collaborations: building weak ties with suppliers who bridge structural holes (Burt, 1992) in the network in order to access the novel ideas and technologies that they are likely to possess. We suggest that ‘loose’ and ‘bridging’ collaborations will have the tendency to lead to the development of more radical eco-innovations, which are more product than process based. Because of the weak ties associated with such a network, we would expect to see minimal organisational innovations beyond a basic understanding of compliance. Tight collaborations, because of their strong ties, are more likely to lead to more incremental innovations. These will tend to be more process than product focused: e.g. the use of kaizen workshops to improve design processes, reduce waste and speed up throughput times. We would also expect to see more organisational innovations leading to improvements in working conditions though increased visibility of the supply chain, derived through greater stability and therefore knowledge and information sharing. Therefore we suggest that in the eyes of external stakeholders, the sustainability performance of the firm can be improved by the embedding of eco-innovations as a strategic objective into standard procurement management practices.

The remainder of this paper is divided into four sections. The first section describes the conceptual theory-building methodology. In the second section, we make a distinction between chains and networks, explain the importance of innovation in sustainability, and highlight an important gap in existing sustainability frameworks. Next, we build a conceptual framework examining the role of eco-innovations in supply networks by advancing four propositions. Finally, we suggest ways to test the propositions empirically, highlight limitations of the framework, and discuss some research and managerial implications.