The impact of dynamic capabilities on sustainable performance: theory and evidence from Dutch SMEs

Transcription

1 campus fryslân centre for sustainable entrepreneurship The impact of dynamic capabilities on sustainable performance: theory and evidence from Dutch SMEs M. Eikelenboom & G. de Jong Working paper series 1712-CSE

2 Working paper series Centre for Sustainable Entrepreneurship University of Groningen/Campus Fryslân Visiting address: Sophialaan AE Leeuwarden The Netherlands T Editor: Margo Enthoven Academic director: Dr. Gjalt de Jong Design (cover): David-Imre Kanselaar

3 THE IMPACT OF DYNAMIC CAPABILITIES ON SUSTAINABLE PERFORMANCE : THEORY AND EVIDENCE FROM DUTCH SMES. M. EIKELENBOOM & G. DE JONG JULY

4 ABSTRACT Despite environmental and social goals being identified as new key objectives for small and medium-sized enterprises (SMEs), extant literature lacks explanations on how these goals can be achieved next to sound economic outcomes in small and resource constrained organizations. This paper contributes to the current literature and argues with the use of a case study that, in contrast to the current thought, leaders of SMEs drive sustainable performance through their devotion of resources to dynamic capabilities for sustainability. These dynamic capabilities include internal and external integration capabilities which integrate sustainability into the existing resource base and modify it to adhere to the complex and evolving environment surrounding sustainability. With the use of a survey study among the leaders of 246 SMEs in the Netherlands, we find that transformational leadership behaviors positively relate to the internal integration dynamic capabilities in SMEs. Secondly, we find that the leader s interpretation of sustainability as a threat negatively relates to external integration dynamic capabilities in SMEs. Thirdly, we find that, while internal integration dynamic capabilities do not relate to the sustainable performance of SMEs, external integration dynamic capabilities positive relate to the social, environmental and economic performance of SMEs. Fourthly, our findings indicate direct relationships between leadership and the sustainable performance of SMEs. This paper, among the first to explore the relation between leaders, dynamic capabilities and sustainable performance in SMEs, offers implications regarding the complementary nature of sustainability goals in SMEs and the importance of people in sustainable transitions. KEYWORDS: Sustainable entrepreneurship, dynamic capabilities, SMEs 4

5 1. INTRODUCTION The world economy is facing sustainability issues that offer challenges to balance the interests of people, planet and profit. The UN s new mission offers a detailed overview of the challenges that need to be met in order to sustain planet earth for future generations (United Nations, 2015). In order to meet these challenges, businesses are increasingly required to consider not only economic performance but also new concerns about social and environmental issues (Bocken et al. 2014). This has increased complexity as companies are not only evaluated on their economic outcomes but also on the way these outcomes are realized whilst considering impacts on societies and the environment (Waddock & Graves, 1997). The implementation of sustainability in small and medium-sized enterprises (SMEs) means that firms integrate a combination of environmental, social and economic goals in their organizations in order to become sustainable entrepreneurs (Spence et al. 2011). Truly sustainable entrepreneurs are argued to simultaneously implement high levels of concern for people, planet and profit (Dyllick & Hockerts, 2002). These organizations challenge the traditional thought in the strategic management literature that contrasts social, environmental and economic goals and the alleged required trade-offs between these goals (Baron, 1995: York & Venkataraman, 2010: Belz & Binder, 2015). An example of a sustainable company is Innocent. Innocent is a small juice company which optimally combines a high level of social, environmental and economic goals in its organization. While multiple researchers argue that social, environmental and economic goals can be combined in corporations, it is not yet known how this can be achieved in small and medium-sized enterprises. Scholars are debating whether SMEs can balance social, environmental and economic values in their organizations in the first place (Belz & Binder, 2015: Dyllick & Hockerts, 2002: Spence et al. 2011). SMEs themselves seem reluctant towards adopting sustainability. By 2000 only 0.1% of European SMEs had adopted environmental management systems such as ISO or EMAS (Crals & Vereeck, 2005). Sustainability is traditionally seen as a privilege of large corporations which possess sufficient funds to invest in green and social initiatives. In contrast, SMEs are believed to adopt only 5

6 reactive strategies towards social and environmental objectives (Bianchi & Noci, 1998). However, more recently scholars have argued that SMEs can not only be the main drivers for sustainable development as they are idealistic, flexible, innovative (Hockerts & Wüstenhagen, 2010) and able to deal with uncertainty (York & Ventkataraman, 2010) but also experts in sustainable entrepreneurship. Research that increases our understanding on the implementation of sustainability in SMEs is far and between but important. Firstly, SMEs contribute as much as 70% of the world s pollution, therefore it is highly important that small-business leaders develop and implement strategic approaches to sustainable development (Johnson, 2015; Rodgers, 2010). Secondly, implementing sustainability can have multiple benefits for SMEs including costsavings, improved relationships with regulators and suppliers, anticipation of future environmental pressures, an enhanced reputation and new market opportunities (Bianchi & Noci, 1998). Thirdly, researchers have acknowledged that the implementation of sustainability in SMEs may not be generalizable from the understanding of sustainability in large organizations (Davies & Crane, 2010). Fourthly, current research has indicated that SMEs face important difficulties when implementing sustainable activities like their propensity to focus on one issue only, limited resources and limited communication capabilities (Hockerts & Wüstenhagen, 2010). Finally, research on the implementation of sustainability in SMEs is limited. For example, Bocken et al. (2014) argue that there is still no comprehensive view on how small firms should approach embedding sustainability in their business models. Gibbs (2009) argues that the concept of sustainable entrepreneurship is still a black box and simply stating that economic, social and environmental goals have to be combined in one business does not help us to understand how businesses can achieve this. Those SMEs that aim to adopt a high level of concern for people, planet and profit goals are often referred to as sustainable entrepreneurs. This research aims to increase theoretical and empirical insights concerning the implementation of sustainable entrepreneurship in SMEs by adopting a dynamic capabilities perspective. 6

7 Scholars have argued that especially firm internal factors or intra-organizational processes are important in order to understand the implementation of sustainability (Arnold & Hockerts, 2011). We therefore adopt the resource-based view and dynamic capabilities theory which argues that dynamic capabilities the firm s processes that use resources, specifically the processes to integrate, reconfigure, gain and release resources, to match and even create market change (Teece et al. 1997) are a source of sustained competitive advantage in situations where the competitive landscape is shifting with rapid and unpredictable changes (Teece, 2007). The environment surrounding sustainability is highly unpredictable as clear guidelines for sustainability are unavailable and technologies, beliefs and institutions regarding sustainability are rapidly changing (O Neil & Ucbasaran, 2016). Therefore, recent research suggests that dynamic capabilities can assist SMEs in implementing sustainability (Arend, 2013; Dangelico et al. 2016). However, there is no understanding on how exactly these internal firm processes are linked to the sustainable performance of SMEs. Furthermore, it is unclear which internal processes are important for sustainability in SMEs and how these internal processes can be developed. In order to increase our insights in the linkage between dynamic capabilities and sustainability in SMEs we will establish new hypotheses with the use of a comprehensive literature review and a case study. These hypotheses will be tested with the use of a survey study among 246 SMEs in the Netherlands. Based on our case studies and literature review we argue that integration dynamic capabilities, processes that can integrate sustainability into the current resource base, are important for the sustainable performance of SMEs. SMEs often possess limited resources, which decreases their ability to develop unique capabilities for social and environmental goals next to economic goals (Hockerts & Wüstenhagen, 2010). Integration dynamic capabilities are particularly useful for the sustainable performance of SMEs as they can enable SMEs to effectively integrate internal and external sustainability knowledge and capabilities within the existing resource base (Ambrosini & Bowman, 2009). We propose that internal and external integration dynamic capabilities will assist SMEs in transferring 7

8 sustainability knowledge across their organizations, avoid duplicative efforts and cooperate with external parties for sustainability. This is important for the social, environmental and economic performance of SMEs as we expect that firms with these dynamic capabilities possess several important advantages, including the ability to (1) effectively integrate sustainability into the organization, (2) recombine existing sustainability knowledge, and (3) reconfigure competencies in line with the changing sustainability environment and market. Strategic management literature has emphasized the role of management in the development of dynamic capabilities. Entrepreneurs are argued to sense new opportunities, get others to share their vision and help them execute upon it in order to develop the right dynamic capabilities (Augier & Teece, 2009). Especially in SMEs the manager is seen as highly important due to his or her central role (Spence et al. 2011). In line with this view and our case study findings, we propose that entrepreneurs lead the development of dynamic capabilities in SMEs as they are the ones who decide where to put resources, which opportunities to grasp, and which capabilities to develop (Augier & Teece, 2009; Zahra et al. 2006). Managers are expected to differ in their abilities to create, extend and modify the resource-base of the organization (Helfat et al. 2007) due to differences in cognitions (Huff, 1990), social capital and human capital (Beck & Wiersema, 2013). In this research we investigate how the cognitions and the social capital of leaders in SMEs influence the development of dynamic capabilities for sustainability in the organization and, in turn, the simultaneous achievement of social, environmental and economic goals. Our research questions are twofold. First, what is the effect of leadership cognitions and social capital on the implementation of dynamic capabilities for sustainability in SMEs? Second, what is the effect of dynamic capabilities for sustainability on the sustainable performance of SMEs? This paper makes three contributions to the literature on strategic management and sustainable entrepreneurship. In contrast to the traditional belief, we argue that SMEs can simultaneously achieve social, environmental and economic value through the implementation of dynamic capabilities. This research contributes to the current literature by investigating the compatibility of social, environmental and economic goals in small 8

9 organizations with limited resources. Furthermore, by investigating how specific dynamic capabilities relate to the sustainable performance of SMEs, this paper sheds light on the ways in which SMEs can implement sustainability. Secondly, where the current literature on sustainability often ignores the place of the corporate leader (Waldman et al. 2006), we argue instead that leaders in SMEs drive sustainability. By investigating how a leader s social capital and cognitions affect the dynamic capabilities for sustainability in SMEs, we aim the shed light on the influence of leaders on the implementation of sustainability in SMEs. Thirdly, we contribute to the dynamic capabilities and sustainability literature by offering a more nuanced view on the effect of dynamic capabilities in sustainable entrepreneurship. In this paper we investigate which dynamic capabilities offer important advantages for the sustainable performance of SMEs. Fourthly, our findings will assist SMEs in the implementation of sustainability by indicating which internal firm characteristics relate to the effective execution of sustainability. This can assist SMEs in changing to a more sustainable state, which is important for the sustainable development of their region and planet earth. Specifically, by showing how leadership characteristics and the internal capabilities of SMEs relate to sustainable performance, we help explain why some SMEs succeed in implementing sustainability while others do not. This paper will be developed as follows. We start with a literature review on sustainable entrepreneurship and dynamic capabilities. Thereafter, we present the results of an explorative case study as the literature on sustainable entrepreneurship is still in its infancy. Therefore, we were only able to identify limited information on the internal organizational factors that assist SMEs in implementing sustainability. Our exploratory case study helps to identify the factors that will be adopted in our model and empirical research. Thereafter, hypotheses are developed by combining the insights of the case study and literature review. These hypotheses were tested in a survey study among 246 SMEs in the Netherlands. We proceed by describing the methodology, data analysis and results of our survey study. Finally, we present a discussion of the findings, indicate limitations and give directions for future research. 9

10 2. LITERATURE REVIEW 2.1 Sustainability The most cited definition of sustainability was established by the Brundtland Commission of the United Nations in 1987: Meeting the needs of the present without compromising the ability of future generations to meet their own needs. This definition describes sustainable development as a process in which the exploitation of natural resources, the allocation of investments and the process of technological development and organizational change are in harmony with each other for both current and future generations (Crals & Vereeck, 2005). Sustainability is thus a concept that is oriented to both the present and the long-term. Sustainability has been argued to exhibit three pillars including economic, social and environmental pillars (Elkington, 1998). Economic sustainability is related to financial goals and fundamental to corporate financial success in the long run. Corporations cannot survive if expenditure exceeds income. Social sustainability refers to the humanitarian context of business and relates to issues of poverty and income inequality, for example disease, access to health care, clean water, sanitation, education, and broader problems associated with the impact of economic development. Environmental sustainability considers the impact of business on the quality and quantity of natural resources, including for example global warming, ecological concerns, waste management, reductions in energy and resource use, alternative energy production, and improved pollution and emissions management (Haugh & Talwar, 2010). We investigate in this section what it means for SMEs to implement sustainability, what the definition of sustainable entrepreneurship is, and what a high sustainable performance means Sustainability in SMEs A small or medium-sized enterprise (SME) is a firm that is closely-held, privately owned and operated company usually operating within a single industry, having more than 5 employees but fewer than 500 employees, and that annually conducts some form of internal 10

11 strategic or business planning (Bretherton & Chaston, 2005). Sustainability has often been argued to be a privilege of large corporations which have sufficient funds to invest in green and social initiatives. Furthermore, SMEs are largely believed to adopt solely reactive strategies towards social and economic objectives (Bianchi & Noci, 1998). More recently, interest has shifted towards sustainability in small and medium-sized enterprises, including very small entrepreneurial start-ups, some of which base their entire business rationale on sustainable principles (Rodgers, 2010). SMEs are different from large organizations. These differences primarily relate to defining SME characteristics such as a reactive, fire-fighting mentality, resource limitations, informal strategies, and flexible structures (Hudson et al. 2001; Qian & Li, 2003). Darcy et al. (2014) identify three core areas where SMEs differ including their approaches to strategy development and implementation, the role of the owner/manager and the absence of formalized HR policies and practices. With regard to strategy, SMEs often do not have a focused, deliberate strategic approach to strategy formulation, implementation and planning (Darcy et al. 2014). Furthermore, SMEs often haven little or no techno structure, few support staff, a loose division of labor, minimal differentiation among its units and a small managerial hierarchy (Mintzberg, 1979:306). Due to the differences between SMEs and large firms, SMEs are expected to be most effective in executing the initial phases of sustainable development in society. This is mainly due to their ability to face entrepreneurial risks, flexibility and innovativeness (Hockerts & Wüstenhagen, 2010). SMEs are expected to be able to adopt sustainable entrepreneurship activities and in this way push the market towards becoming more sustainable (Horish, 2015). Current research recognizes that SMEs may face important difficulties when implementing sustainable entrepreneurship activities like their propensity to focus on one issue (either social or environmental) only, limited resources and limited communication capabilities (Hockerts & Wüstenhagen, 2010). Therefore, small and medium sized sustainable enterprises are argued to address sustainability via entrepreneurial activities regarding social and environmental issues of local application but of global relevance (Santos, 11

12 2012). However, little research focusses on how such sustainable entrepreneurship activities can be implemented within SMEs Sustainable entrepreneurship There is an abundance of definitions of sustainable entrepreneurship in the current literature. This is due to the fact that sustainable entrepreneurship is a social construct which makes it impossible to develop one unbiased definition (Berger & Luckmann, 1966). Sustainable entrepreneurship is a contested concept and has a broad range of interpretations (Choi & Majumdar, 2014). Therefore it is important that authors explicitly state their understanding of sustainable entrepreneurship in their papers. In order to develop a consistent understanding of sustainable entrepreneurship, we study the similarities and differences between the current definitions adopted by researchers. Appendix A includes a list of 31 distinct definitions of sustainable entrepreneurship. When examining these definitions we find that three topics are often mentioned in order to define sustainable entrepreneurship including (1) the enactor of sustainable entrepreneurship, (2) the goals of sustainable entrepreneurship (both direct and indirect goals), and (3) the processes by which sustainable entrepreneurship reaches its goals. This is in line with the research of Majid and Koe (2012) who also identify the importance of three topics in a definition of sustainable entrepreneurship: processes (what entrepreneurs do), behaviors (who are entrepreneurs) and outcomes (what entrepreneurs produced). This section investigates how these aspects are adopted in the current definitions of sustainable entrepreneurship. Most definitions include the enactor of sustainable entrepreneurship. Actors that are often named are companies or firms (e.g. Igyun, 2015) and individual entrepreneurs (e.g. Majid & Koe, 2012). There is a difference in the type of firms mentioned in the definitions. First of all, a difference can be found in the commercial character of the business in which some definitions emphasize the importance of a successful or commercially viable business (e.g. Kibler et al, 2015) while others do not address the commercial nature of the firm. Furthermore, a difference can be found in the size of the firm. For example, the definition of 12

13 Wijnker et al. (2015) describes the enactor of sustainable entrepreneurship as an innovative start-up while the definition of Iygun (2015) emphasizes that the company should exceed the start-up phase. To conclude, sustainable entrepreneurship may be enacted by either small or large, commercial or non-commercial firms or entrepreneurs. Most definitions include the direct goals of sustainable entrepreneurship. With direct goals we mean the direct benefits sustainable entrepreneurs are supposed to achieve with their operations. Most definitions highlight that the most important direct goal of sustainable entrepreneurship is the provision of environmental and/or social value. This social or environmental value can indicate different things like socially or environmentally beneficial products (Wijnker et al, 2015), social or environmental problem solving (Schaltegger & Wagner, 2011), social or environmental gains (Belz & Binder, 2015), or sustainable development goals (Pachecco et al, 2010). Definitions vary in their adoption of the words and and or. Where some state that products have to provide environmental or social benefits (e.g. Wijnker et al, 2015) others state that both environmental and social benefits have to be achieved simultaneously (e.g. Schaltegger &Wagner, 2011). Another difference in the definitions is their inclusion of economic value creation. Some definitions explicitly include economic value creation, in which sustainable entrepreneurship has to provide environmental, social and economic gains (Schaefer et al, 2015) or sustainable entrepreneurship has to achieve social and environmental goals while also generating a profit (Bocken, 2015). On the other hand, some definitions do not mention economic value creation at all (e.g. Horisch, 2015). Majid & Koe (2012) add cultural preservation as a fourth goal of sustainable entrepreneurship next to social, environmental and economic goals. However, we feel that cultural preservation can be part of the social value creation goals of sustainable entrepreneurs. Finally, the definitions differ in the importance placed on the different goals. In some definitions achieving social value is the most important goal of sustainable entrepreneurship, while in other definitions social, environmental and economic goals have to be achieved on an equal footing (Majid & Koe, 2012). To conclude, the goal of sustainable entrepreneurship is to create a certain combination of economic, environmental and/or 13

14 social value. Some definitions also include the indirect goals of sustainable entrepreneurship. With indirect goals we mean the overarching goals in society to which sustainable entrepreneurship can or should contribute. Several definitions state that sustainable entrepreneurship can assist in achieving sustainable development (e.g. Parra, 2013). Other definitions focus on the ability of sustainable entrepreneurship to bring sectors or institutions to a more sustainable state (Hockerts & Wustenhagen, 2010). However, it has to be noted that the majority of definitions do not include the indirect goals of sustainable entrepreneurship. To conclude, sustainable entrepreneurship can, but does not have to, achieve important indirect goals like sustainable development and sustainable institutional transformations. Finally, most definitions include the processes by which sustainable entrepreneurship reaches its goals. Most definitions highlight the process of discovery, creation and exploitation of opportunities (e.g. Horisch, 2015). Opportunities can be economic in nature (Hockerts & Wustenhagen, 2010) or present in market failures (Dean & McMullen, 2007). However, most definitions do not address the specific nature of these opportunities. Multiple definitions also include the importance of innovation, often disruptive in nature, for the achievement of the goals of sustainable entrepreneurship (e.g. Hockerts & Wustenhagen, 2010: Wijker et al. 2015). The definitions highlight that the processes of opportunity discovery and innovation can lead to the creation of new goods and services (e.g. Patzelt & Shepherd, 2010), management systems, markets, business systems and organizational processes (e.g. Shepherd & Patzelt, 2011). To conclude, sustainable entrepreneurs use processes of discovery, creation and exploitation of opportunities and/or innovation to create new goods or systems in order to reach their goals. We have seen that there are multiple important differences in the definitions of sustainable entrepreneurship, which makes it difficult to provide one uniform definition. By combing the conclusions of the three topics in the definitions we provide the following definition: 14

15 A sustainable entrepreneur is an organization commercial, non-commercial, small or large or entrepreneur whose direct goal is to provide a combination of environmental, social and/or economic value through a process of discovery, creation and exploitation of opportunities economic, non-economic, market failures and/or innovation to create new goods, services, management systems, markets, business systems and/or organizational processes. By doing this sustainable entrepreneurship can, but does not have to, assist sustainable development and institutional change. This definition is broad, which potentially makes specific operationalization difficult. However, the differences found in the definitions and the multiple concepts of sustainable entrepreneurship adopted in the articles highlight that different levels or types of sustainable entrepreneurship may exist Different levels of sustainable entrepreneurship We identified two important differences in the definitions on sustainable entrepreneurship: (1) the different levels of emphasis placed on social and environmental goals and (2) the role of economic/commercial/mass-market goals. The first difference, the emphasis on social and environmental goals, can be explained by the concepts of social and environmental entrepreneurship. Appendix B provides a list of unique definitions of social entrepreneurship. These definitions highlight the importance of social value creation (e.g. Ghauri et al. 2014) and pro-social goals (e.g. Stephan et al. 2015) for social entrepreneurs, excluding environmental goals. Appendix C provides a list of unique definitions of environmental entrepreneurship. These definitions stress the importance of environmental goals compared to social goals (e.g. O Neil & Usbasaran, 2016). These definitions indicate that entrepreneurs that address social goals are social entrepreneurs, entrepreneurs that address environmental goals are environmental entrepreneurs and entrepreneurs that address both social and environmental goals are sustainable entrepreneurs. It is interesting to note that there is a difference in the importance of economic goals in the definitions on social and environmental entrepreneurship. Commercial interests and 15

16 economic goals are not frequently mentioned in the definitions on social entrepreneurship (Ghauri et al. 2014). Haugh s (2007) definition even states that social entrepreneurs are mostly nonprofit organizations. However, a few definitions do stress the importance of economic goals for social entrepreneurs (e.g. Zahra et al. 2014). On the other hand, the definitions on environmental entrepreneurship almost all mention the importance of achieving commercial goals, having a market orientation (Horisch, 2015) and reaching mass markets (Schaltegger, 2002). It thus seems that social entrepreneurship focusses on social goals with a lower emphasis on economic goals, while environmental entrepreneurship focusses on the achievement of both environmental and economic goals. To conclude, social entrepreneurs focus on social goals, environmental entrepreneurs on environmental goals and sustainable entrepreneurs on both social and environmental goals. The focus of these different types of entrepreneurs on economic goals is less clear. Therefore, we provide a typology of different types of entrepreneurship based on their focus on environmental and/or social goals on the one hand, and the focus on economic goals on the other hand; being not important, less or equally important, or more important compared to social and environmental goals (see figure 1). We will describe the different types of entrepreneurship below. 16

17 Both Social & environmental NGO Sustainable entrepreneur Social & environmental responsible entrepreneur Environmental goals Bioneer Ecopreneur Environmental responsible entrepreneur Social goals Social bricoleur Social entrepreneur Social responsible entrepreneur Economic goals not included Economic goals equally or less important than social/environmental goals Economic goals more important than social/environmental goals FIGURE 1: Different types of entrepreneurship according to the focus on environmental and/or social goals and economic goals. There are three forms of entrepreneurship in which economic goals are not included. Social bricoleurs are entrepreneurs that foster social goals only and rely mostly on donations and voluntary contributions in local markets. Zahra et al. (2009) indicate that social bricoleurs address local social needs with locally available resources and volunteers and have limited abilities to expand. Bioneers are entrepreneurs that foster environmental goals only and rely mostly on donations and voluntary contributions in local markets. Hockert and Wüstenhagen (2010) indicate that these bioneers have limited abilities of market growth and are not real environmental entrepreneurs. Social and environmental NGOs are entrepreneurs that address both social and environmental goals but rely mostly on donations. Multiple researchers argue that these entrepreneurs are not sustainable entrepreneurs as sustainable entrepreneurs do not occur out of pure charity (Hockerts & Wüstenhagen, 2010: Weidinger, 2014). Acs et al. (2013) argue that those enterprises that rely on donor funds to operate and hand out resources without getting anything in return, should be defined as charities and not as sustainable entrepreneurs. 17

18 There are also three forms of entrepreneurship in which economic goals are included, being less or equally important to social and/or environmental goals. Social entrepreneurs are entrepreneurs that simultaneously create social and economic value. They pursue social goals by adopting business models and market-based solutions (Acs et al. 2013). Social entrepreneurs can also partly rely on volunteers and donations (Haugh, 2007) and can be called hybrid entrepreneurs as they adopt both market-based and social logics (Lepoutre et al. 2013). Ecopreneurs are entrepreneurs that realize market success and economic opportunities through the achievement of environmental goals only. These entrepreneurs search for business ideas that are created by environmental problems while simultaneously providing economic gains (Schaltegger & Wagner, 2011). Sustainable entrepreneurs are entrepreneurs that simultaneously create economic, social and environmental value. According to Dyllick and Hockerts (2002) a truly sustainable entrepreneur should recognize the business case, the natural case and the societal case of sustainability. These three types of entrepreneurship challenge the idea that there is a trade-off between environmental, social and economic goals (York & Venkataraman, 2010). Jolink and Niesten (2015) argue that it is possible to be completely sustainable and profitable at the same time. Finally, there are three types of entrepreneurship in which economic goals are more important than social and/or environmental goals. These entrepreneurs create social and/or environmental value, however economic value creation is more important. Santos (2012) argues that for these entrepreneurs value capture is more important than value creation. This means that the portion of value created by the activity which is appropriated by the focal actor is larger than the aggregate utility for society. For the other types of entrepreneurship, in which economic goals are less or equally important to social and/or environmental goals, value creation is higher than value capture. Dyllick and Hockerts (2002) argue that only recognizing the business case for sustainability, including how firms can further their economic sustainability by paying attention to social and environmental issues, is not enough to become a sustainable entrepreneur. 18

19 This typology of entrepreneurship could also be viewed as a continuum instead of a strict typology. For example, entrepreneurs may focus mainly on social goals but also slightly include environmental goals, leaving them in between a social and sustainable entrepreneur. Entrepreneurs may also switch between the types of entrepreneurship. For example, a company may start out as a bioneer but later on increase its market focus and business approach and evolve into an ecopreneur. Furthermore, an entrepreneur may start out as a sustainable entrepreneur however lose track of his or her social and environmental goals and transform into a social and environmental responsible entrepreneur. To some extent, it is an open question to indicate when precisely a company is a social, environmental or sustainable entrepreneur. Current research does not provide clear guidelines on how much focus on economic goals is too much or too less. We draw distinctions between the total exclusion of economic goals and the importance of economic goals over social and/or environmental goals. Determining strict criteria and stratifications is beyond the aim of this research. However, researchers have proposed different distinctions. For example, Lepoutre et al. (2013) argue that in social entrepreneurship social objectives should be twice as important as economic objectives. On the other hand, Zahra et al. (2014) argue that a company can be viewed as a sustainable enterprise when in its total decision making it prioritizes social outcomes over financial ones. We feel that a distinction between value capture and value creation may be most plausible (Santos, 2012). Social and environmental NGOs will have higher value creation than value capture with limited involvement of economic goals, sustainable entrepreneurs will have higher value creation than value capture with a significant involvement of business models and economic goals, and social and environmental responsible entrepreneurs will have higher value capture than value creation. This means thus that economic goals are important for sustainable entrepreneurs, but they do not exceed the goals of the firm to provide social and environmental value. To conclude, a sustainable entrepreneur is an organization or entrepreneur whose direct goal is to provide environmental, social and economic value - in which the goals of 19

20 economic value creation do not exceed the goals of social and environmental value creation - through a process of discovery, creation and exploitation of opportunities and/or innovation to create new goods, services, management systems, markets, business systems and/or organizational processes Sustainable performance Researchers have been debating about the meaning of a high performance for sustainable entrepreneurs. Parrish (2008) argued that success in entrepreneurship means the ability of the enterprise to outlive failures and accumulate success over time. However, is merely surviving also enough for sustainable enterprises? We feel that this is not the case as also important environmental and social goals play a role next to mere survival. In line with this Dees (1998) argues that survival or growth of the social enterprise is no proof of its efficiency or effectiveness in improving social goals. In this section we focus on defining success for sustainable entrepreneurs. We have seen that these entrepreneurs have to reach social, environmental and economic goals simultaneously. What does the achievement of important social, environmental and economic goals mean? First of all, sustainable entrepreneurs have to reach important social and environmental goals. Some researchers argue that reaching social and environmental goals means that enterprises limit their negative impact on the environment and society as a whole. However, multiple researchers argue that limiting negative impacts is not enough for sustainable entrepreneurs and also value or benefits for the environment and society have to be created (Arnold & Hockerts, 2011). For example, Zahra et al. (2014) argue that some mutual benefit for society has to be created, however the authors do not indicate what this mutual benefit entails. What the authors do mention is that social value creation is highly firm specific, meaning that each firm has to identify his or her own social goals that fit to the organization. Other researchers argue that also the creation of some benefit for society and the environment is not enough as sustainable entrepreneurs should significantly contribute to sustainable development in order to reach their goals. For example, Iygun (2015) proposes 20

21 that only when reaching mass markets sustainable entrepreneurs can make a difference, transform institutional environments and make a real contribution to social and economic development. Finally, some scholars argue that reaching environmental and social goals means establishing effective and sustainable solutions for social and environmental problems. Santos (2012) even argues that sustainable entrepreneurs should formulate solutions for social and environmental problems that internalize market failures for the benefit of society, deeming the work of the sustainable entrepreneur redundant. Next to social and environmental goals, sustainable entrepreneurs have to reach economic goals. York and Venkataraman (2010) argue that sustainable entrepreneurs are only successful when they can survive financially without relying on donations and volunteers. In line with this Katre and Salipante (2012) define successful sustainable entrepreneurs as those that have conceptualized social and economic opportunities, developed market-driven products/services, and are fully launched with a functional socialbusiness track record for at least three years. Dyllick and Hockerts (2002) argue that the economic goals of the firm not only include firm survival but a broad range of aspects including all monetary flows, financial debt, tangible assets, intangible capital, the creation of employment, fair trade principles and investments in research and development. The achievements of social, environmental and economic goals have to be combined in order to know how successful a sustainable enterprise is. Zahra et al. (2009) argue that the total wealth created by a social entrepreneur is its economic value creation plus its social value creation minus the sum of economic costs, opportunity costs and social costs. This total wealth should be positive in order for social entrepreneurs to be successful. This implies that economic gains may offset the social costs of the company. However, other researchers do not agree with this and argue that a threshold value of all goals should be achieved where different goals cannot offset each other (Dees, 1998). Furthermore, some scholars argue that all goals should be equally important (Majid & Koe, 2012). In line with this research, we argue that social, environmental and economic goals should all be achieved simultaneously and cannot offset each other. 21

22 Multiple researchers argue that social, environmental and economic goals do not have to be achieved immediately. For example, Miller and Wesley (2010) argue that effective social entrepreneurs are those that have stablished a venture, become autonomous and deliver social value within 10 years. Furthermore, multiple scholars argue that sustainable entrepreneurs may often be not profitable in their early stages. This has to be taken into account when the performance of sustainable entrepreneurs is addressed. To conclude, a good sustainable performance means that sustainable entrepreneurs have to reach firm-specific social, environmental and economic goals. The achievement of social and environmental goals includes the limitation of the negative impacts of the firm on societies and environments and the provision of some firm-specific value for society and the environment. It may also include attaining sustainable transitions of regions or even whole societies and the complete elimination of important social and environmental problems. The achievement of economic goals includes the financially sound business practices and survival of the enterprise, without full reliance on donations and volunteers. While multiple researchers stress the importance of a good sustainable performance, limited knowledge has been developed on how this can be achieved in SMEs (Bocken et al. 2014, Gibbs, 2009). 2.2 Dynamic Capabilities This section addresses the dynamic capabilities theory including definitions and different types of dynamic capabilities. Thereafter, we will explore how the dynamic capabilities perspective can be applied to sustainable entrepreneurship What are dynamic capabilities? The dynamic capabilities theory is an extension of the resource based view of the firm (RBV). The essence of the RBV lies in the emphasis on resources and capabilities as the foundation of competitive advantage. The RBV proposes that unique combinations of resources held by firms are mobilized and managed in a firm to achieve sustainable competitive advantages. Firms are seen as collections of resources including all assets, 22

23 capabilities, organizational processes, firm attributes, information and knowledge controlled by the firm. These resources include tangible resources - financial, physical, human capital and organizational resources (Barney, 1991) and intangible resources - organizational styles, values and leadership (Grant, 1991) as well as intellectual property rights, contracts, reputation, knowledge and culture (Hall, 1992). Resources and combinations of resources that are valuable, rare, imperfectly imitable and non-substitutable can generate sustained competitive advantages (Barney, 1991). Sustained competitive advantages can be achieved through (1) a low cost position or a differentiated product (Porter, 1985), (2) adopting new standards or ensuring access to preferred resources (Ghemawat, 1986), or through (3) the adoption of a unique strategy (Prahalad & Hamel, 1994). A shift in focus from an exclusive examination of external environmental factors has led to a growing acceptance that internal resources could be a potential source of competitive advantage (Darcy et al. 2014). The propositions of the RBV have been criticized for being static and neglecting the influence of market dynamism (Eisenhardt & Martin, 2000). The theory of dynamic capabilities emerged to enhance the RBV. The dynamic capability perspective extends the resource-based view argument by addressing how valuable, rare, difficult to imitate and imperfectly substitutable resources can be created and how the current stock of valuable resources can be refreshed in changing environments (Ambrosini & Bowman, 2009). The theory states that the changing nature of the environment suggests that resources cannot remain static and still be valuable. In order to gain a persistent competitive advantage, firms must continually evolve and develop their resources otherwise firms may only be able to be competitive in the short term. Dynamic capabilities assist firms in achieving this constant change and development of resources (Ambrosini & Bowman, 2009). Originally dynamic capabilities were defined as the firm s processes that use resources, specifically the processes to integrate, reconfigure, gain and release resources to match and even create market change (Teece et al. 1997, p.516). According to this definition dynamic capabilities are the organizational and strategic routines by which firms achieve new resource configurations as markets emerge, collide, split, evolve, and die. For example, 23

24 absorptive capacity can be seen as a dynamic capability as it influences the firm s ability to create and deploy the knowledge necessary to build other organizational capabilities: it allows firms to create and exploit new knowledge and gives them the flexibility to change and compete in dynamic and changing markets (Zahra & George, 2002). Since the establishment of the original definition of dynamic capabilities, multiple other definitions have been proposed. For example, Wang and Ahmed (2007) define dynamic capabilities as a firm s behavioral orientation constantly to integrate, reconfigure, renew and recreate its resources and capabilities and, most importantly, up- grade and reconstruct its core capabilities in response to the changing environment to attain and sustain competitive advantage. The multiple different definitions and contradictory arguments in the literature complicate the definitional issue of dynamic capabilities. For example, Zollo and Winter (2002) argue that dynamic capabilities are structured and persistent, while Rindova and Kotha (2001) conclude that dynamic capabilities are emergent and evolving. In a review of the literature Ambrosini and Bowman (2009) define several overlapping notions in the different definitions on dynamic capabilities. Firstly, dynamic capabilities are organizational processes in the most general sense and their role is to change the firm's resource base. Thus dynamic capabilities can be seen as processes that impact upon resources. Secondly, dynamic capabilities are built rather than bought in the market, are path dependent, and embedded in the firm. Finally, the authors conclude that dynamic capabilities are intentional efforts to change the firm s resource base, so the dynamism of the capabilities refers to their ability to change the resource base and the renewal of resources. In line with these overlapping notions we will define dynamic capabilities as built organizational processes that intentionally modify, change and renew a firm s resource base by integrating, reconfiguring, renewing and recreating resources. Different groups or types of dynamic capabilities have been identified in the literature. Teece et al. (1997) distinguish between four main types of dynamic capabilities: reconfiguration (the transformation and recombination of assets and resources), leveraging (replicating a process or system that is operating in one business unit into another), learning 24

25 (allows tasks to be performed more effectively and efficiently as an outcome of experimentation, reflecting on failure and success), and creative integration (the ability of the firm to integrate its assets and resources, resulting in a new resource configuration). Eisenhardt and Martin (2000) identify similar categories of dynamic capabilities including those that integrate resources, those that focus on the reconfiguration of resources within firms, and those that are related to the gain and release of resources. Other researchers have also included sensing (the ability to spot, interpret and pursue opportunities in the environment) and coordinating (the ability to orchestrate and deploy tasks, resources and activities in the new operational capabilities) dynamic capabilities (Pavlou & Sawy, 2011). However, other research has argued that sensing and searching are not dynamic capabilities but the managerial and organizational processes that underpin and enable the deployment of dynamic capabilities (Ambrosini & Bowman, 2009). In line with Ambrosini and Bowman (2009) and Teece et al. (1997), we will adopt four general types of dynamic capabilities in this research: reconfiguration of resources, leveraging of resources, integration of resources, and learning. It is important to note that some researchers argue that small or entrepreneurial ventures do not possess dynamic capabilities. For example, Teece and Pisano (1994) argue that it takes years or even decades to establish dynamic capabilities, which cannot be met by new entrepreneurial firms. However, other authors argue that entrepreneurial firms can possess dynamic capabilities. For example, Newbert et al. (2008) argue that small ventures possess different dynamic capabilities. Arend (2014) found in a survey among US SMEs that entrepreneurial ventures self-reported the existence of dynamic capabilities in their organizations. These levels were similar to the levels of dynamic capabilities in the large, traditionally studied, corporations. In line with these findings, we argue that entrepreneurial and small enterprises can possess dynamic capabilities. 25