CREATING PRIVATE VALUE Corporate Social Responsibility as a Driver of Innovativeness

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CREATING PRIVATE VALUE

Corporate Social Responsibility as a Driver of Innovativeness

(Master Thesis)

Author: Ivelin Iliev Student No: 2036045

Address: Willem Nakkenstraat 16, Amsterdam E-mail: ivelin.m.iliev@gmail.com

Institution: Rijksuniversiteit Groningen Faculty: Economics and Business Programme: MScBA, Business Development First Supervisor: Dr. J.D. Hans van der Bij

Second Supervisor: Dr. C. Cees Reezigt

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ABSTRACT

Implementing social practices in business can be in the best interests of both society and firms. Aligning business operations with the social needs of customers improves firm competitiveness and creates customer value. Drawing on the resource management view of the firm, this study examines corporate social responsibility as a driving force of innovativeness. Considering the impact suppliers have on this relationship, the ability of the focal firm to build a good reputation for social responsibility and customer satisfaction is thus investigated. To test these propositions survey data of 88 supply chain sets is used. Results indicate that orientation towards corporate social responsibility is positively associated with firm openness to new ideas and overall appeal. Innovativeness and social reputation are therefore key antecedents of firm effectiveness and success of operations in creating private value. As a result, this study offers six contributions to the supply chain management and resource management view.

Key words: supply chain management, corporate social responsibility, innovativeness, resource management view

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ACKNOWLEDGMENTS

In the begging, I wish to thank all the people who made my graduation project possible. I would like to express my special thanks to Dr. J.D. Hans van der Bij for his guidance. I would like to express my gratitude to Mirjam Kibbeling, PhD for sharing her data.

I am very thankful to and fortunate enough to have the constant support of my family Dr. Rositsa Dimitrova, M.D. and Dr. Mladen Marinov, M.D.

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1 INTRODUCTION

The essence of business is about value (Conner, 1991). Creating and sustaining value is the key to firm success and long-term survival (Slater, 1997). Value creation occurs when a firm’s ability to respond to the needs of customers exceeds that of its competitors (Sirmon, et al., 2007). As a result, the firm can differentiate itself from the competitors, which in turn improves its competitive advantage (Porter, 1980). A popular topic at both strategic and operational levels for explaining firm competitiveness is corporate social responsibility (Kibbeling, 2010; Sarkis, et al., 2010).

The concept of corporate social responsibility reflects the notion that a firm should be held accountable for its actions (Bowen, 1953; Carroll, 1979; Pinkston & Carroll, 1994; Wood, 1991). It includes a wide range of social and environmental issues such as social investments, green products, fair trade, safety and health standards, animal welfare, etc. Whether firms are socially responsible depends on the extent to which their practices are aligned with the social expectations of shareholders, employees, suppliers, customers, and other social groups (Maignan & Ferrell, 2000; Sethi, 1975).

Aligning business operations and social expectations can be in both society’s and a firm’s best interests. Many firms adopt practices that go beyond the economic and legal obligations and proactively adopt an orientation towards corporate responsibility directed at satisfying customer social needs. Such orientation enables firms to continuously identify changes in customer social needs (Kibbeling, 2010) and redesign internal processes in response (Sirmon, et al., 2007). Implementing non-animal testing and replacing toxic chemicals in production are examples of changes in business processes that originate from the needs of society. Tackling social sector issues thus reveals openness to novel ideas in developing new products, services and processes, an aspect of firm culture and operations known as innovativeness (Hart & Milstein, 2003; Hurley & Hult, 1998; Husted & Salazar, 2006; Kanter, 1999).

Meanwhile, globalization has made supply chains and suppliers in particular integral parts of firm operations (Waddock, et al., 2002). Working with multiple and diverse suppliers has become a common business practice that has changed the very nature of competition. The advent of information technology, on the other hand, has made supply chains more transparent (Klassen, 2009). A growing number of customers now consider the supplier role in firm operations and demand accountability from the firm and its partners (Brown, 1996; Linton, et al., 2007; Maloni & Brown, 2006; Parmigiani, et al., 2011). Work conditions and safety standards of suppliers are a small part of the issues that have garnered public interest. As a result, firms focus on developing a sustainable strategy that extends to the entire supply chain.

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After a long debate over the role of business in society, corporate social responsibility has become a topic of particular academic interest. This has led to an increased attention to social responsibility issues in the operations management literature (Brown, 1996; Klassen & McLaughlin, 1996; Linton, et al., 2007). A wide body of knowledge has investigated its impact on firm innovativeness and competitiveness (Husted & Allen, 2007). However, most studies have examined this relationship only at an industry level, and empirical research indicating clear results remains inconsistent (Kibbeling, 2010). Further, despite its long history, the corporate social responsibility literature does not provide evidence of how firms create private value and what is the role of suppliers. Thus, the main research question of this study is:

How corporate social responsibility leads to private value in supply chains?

The literature indicates that corporate social responsibility issues can be examined from a resource-based perspective (Russo & Fouts, 1997). The resource-based theories suggest that the ability of a firm to create value is largely attributable to the various tangible and intangible resources it possesses (Penrose, 1959). A more recent resource-based theory is the resource management view, which considers the specific management actions in addition to firm idiosyncratic resources (Sirmon, et al., 2007; Sirmon, et al., 2011).

Using this as a starting point, this study contributes to the existing resource management theory by extending the resource management view to the resources of the entire supply chain. This reveals that innovativeness and reputation are valuable resources for firm operations. The study also contributes to the corporate social responsibility literature by explaining how firms integrate social and environmental practices into operations in order to create sustainable value.

The rest of the study is organized as follows. The next section (Section 2) provides further elaboration on the resource management and corporate social responsibility literature. This leads to the development of 6 hypotheses and a conceptual model (Section 3) reflecting a complete supply chain structure that consists of three partners - a focal firm, one of its key suppliers, and one of its key customers. Using survey data of 88 matched supply chains in a business-to-business context, these questions are investigated including internal policies and external factors as control variables for more accurate analysis (Sections 4 and 5). In the end, the paper presents the results (Section 5), offers implications for theory and practice, and provides a path forward to explore further the findings (Section 6).

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2 THEORETICAL BACKGROUND

The fundamental goal of business is to create and sustain value (Conner, 1991). Value is created when the firm’s ability to respond to customer needs exceeds that of its competitors (Sirmon, et al., 2007). This ability is largely attributable to the various resources a firm possesses and uses (Penrose, 1959). Resources are all the tangible and intangible assets controlled by a firm (Barney, 1991). Physical, human, and financial assets are tangible resources while information, knowledge, and reputation are intangible. Firms use various tangible and intangible resources to transform inputs to outputs for customers.

The process of transforming inputs to outputs falls into the area of operations management (Frankel, et al., 2008; Krajewski, et al., 2006). Operations management, in its essence, aims to add value by managing effectively and efficiently that transformation process (Frankel, et al., 2008). First known as factory management and later production management, operation management has developed as an interdisciplinary field that adopts theories from strategic management, finance, and economics among others. Academic studies in operations management focus on macro-oriented topics such as service operations, operations strategy, and supply chain management (Frankel, et al., 2008). Supply chain management has become a particularly interesting area for business research and recently a dominant topic within the operations management discipline (Frankel, et al., 2008; Gupta, et al., 2006).

2.1 Supply Chain Management

The focus of supply chain management (SCM) is understanding the business processes within supply chains. A supply chain is the network of business entities transforming input resources into finished goods delivered to final customers (Christopher, 1992). It can be formally defined as “a set of three or more business entities involved in the upstream and downstream flows of products, services, finances, and information to the ultimate customer” (Mentzer, et al., 2001). Thus, suppliers, manufacturers, distributors, intermediaries, customers, and any other parties involved in the upstream and downstream flows are all parts of the supply chain. Mentzer, et al. (2001) further distinguishes between two common structures of supply chains – direct and extended. A direct supply chain consists of a single firm with one of its suppliers and one of its customers. In contrast, in extended supply chains, one firm is part of many other supply chains forming a more complex structure that can include suppliers of suppliers and customers of customers. This study examines a direct supply chain, which consists of a focal firm, one of its key suppliers, and one of its key customers.

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Supply chains can exist as direct and extended structures or as organized and managed business units (Mentzer, et al., 2001). While the former is simply a business phenomenon referred to as a distribution channel, the latter is the very nature of SCM. Further, being parts of a supply chain suggests that firms are not passively involved members but instead actively adopt joint practices that extend internal business functions and processes to all other supply chain members. Quick response manufacturing (QRM), collaborative planning, forecasting, and replenishment (CPFR), and efficient consumer response (ECR) are examples of such joint practices within supply chains (Min & Mentzer, 2004). Extending functional integration is critical for survival because it improves the competitive advantage of each individual member as well as the supply chain as a whole (Min & Mentzer, 2004; Monczka, et al., 2011). This is in line with previous studies that categorize SCM as an integrative management philosophy, which examines the supply chain as a whole (Cooper, et al., 1997; Ellram & Cooper, 1990; Min & Mentzer, 2004). As an integrative philosophy, SCM views the complete network of individual supply chain members as a single business entity, which operates like an independent firm with its own identity (Ellram & Cooper, 1990; Mentzer, et al., 2001). Thus, the supply chain can be examined as a single, organized, and managed business unit.

2.2 The Resource-Based View

A widely used organizational theory that explains how firms create value is the resource-based view (RBV) (Slater, 1997). Its emphasis is on idiosyncratic resources rooted inside the firm (Wernerfelt, 1984). Although it has a long tradition and application in many different research fields (Slater, 1997), RBV has received less attention in an SCM context due to its internal focus. However, as part of operations management, SCM has also incorporated a diverse set of guiding theories for research, including the resource-based theories (Rungtusanatham, et al., 2003; Barratt & Oke, 2007).

The RBV suggests that resources are the basic building blocks that firms employ in transforming inputs into outputs in order to create value (Mathews, 2002). The main concept is that value creation is largely attributable to firm possession of valuable and rare resources (Barney, 1991). For example, raw materials such as precious metals used in production are both valuable and rare resource. In addition, resources also have to be inimitable and non-substitutable in order to sustain the created value (Barney, 1991). Examples include internal knowledge, intellectual property, and patents. Thus, the RBV is built around internal firm characteristics and views the firm as a set of resources. However, Sirmon, et al. (2007) suggests that merely owning or having access to valuable, rare, inimitable, and non-substitutable resources alone may not be sufficient for creating value. In addition, to having resources, firms should also efficiently and effectively manage them to create value. This makes owning and managing resources equally important for

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the value creation process (Sirmon, et al., 2007; Sirmon, et al., 2008; Sirmon & Hitt, 2009). Since the RBV focuses solely on possession of resources, it does not provide explanation of how the resources are managed to create value (Priem & Butler, 2001). Thus, a resource management view, an extension of the RBV, is usually applied to provide an explanation of how firms manage resources to create value.

2.3 The Resource Management View

The resource management view (RMV) complements the RBV and suggests that in order to create value firms should manage efficiently the resources they possess (Priem & Butler, 2001; Sirmon & Hitt, 2003; Sirmon, et al., 2007; Sirmon & Hitt, 2009). It integrates a comprehensive process of structuring, bundling, and leveraging resources, which firms employ to create value for customers (Sirmon & Hitt, 2003). The process starts with structuring or creating a firm resource portfolio (i.e. acquiring, accumulating, and divesting resources). Value creation, however, is not determined by structuring a resource portfolio per se but rather by bundling and leveraging that portfolio (Sirmon, et al., 2008). In business, it is common for a small firm with fewer resources to outcompete a larger one with substantially more, such as technological start-ups. Therefore, the next component of bundling aims to combine or configure the valuable, rare, inimitable, and non-substitutable resources into capabilities the firm can exploit (i.e. stabilizing, enriching, and pioneering resources). Even when a firm has bundled its resources into capabilities, it still has to leverage those capabilities to realize value (Sirmon & Hitt, 2003). Capabilities introduced at the wrong time or in the wrong market may never create value. The last component of leveraging refers to bringing the developed capabilities to the market (i.e. mobilizing, coordinating, and deploying capabilities). It is important to note that the whole process incorporates feedback loops to continuously readjust firm capabilities in response to conditions of its external environment (Chatzkel, 2002). Changes in the external environment are a result of changes in customer needs. Thus, the RMV is a dynamic process that enables the firm to readjust its processes and direct its activities at satisfying customer needs through continuous needs-assessment (Kibbeling, 2010). The RMV provides academic grounds for this study that can explain how firms make corporate social responsibility part of their operations.

2.4 Corporate Social Responsibility

Since the 1950s, corporate social responsibility (CSR) has been the subject of many managerial studies (Cruz, 2008; Maignan & Ferrell, 2004; Slater, 1997). It has been addressed in different

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ways, such as the social responsibilities of the businessman (Bowen, 1953) characteristics of social behavior (Carroll, 1979), corporate social performance (Wood, 1991), and corporate citizenship (Pinkston & Carroll, 1994). The generally accepted notion among these academics is that a firm should be held accountable for its actions. Yet there is no consensus on a precise definition of the concept, and which aspects of the firm should be included remains unclear (Galbreath, 2010; Mueller, et al., 2009; van Beurden & Gossling, 2008). One of the leading frameworks offers a four-domain model of CSR, which includes ethical principles and philanthropic support in addition to the traditional economic functions and legal obligations of firms (Carroll, 1991). These domains can be also examined as social obligations (i.e. economic and legal) and social responsibilities (i.e. ethical and philanthropic) a firm has towards its stakeholders (Sethi, 1975). Stakeholders in this context are those “groups or individuals who can affect or are affected by the achievement of the organization’s objectives” (Freeman, 1984). Firm’s stakeholders are categorized as primary and secondary stakeholders (Waddock, et al., 2002). The primary stakeholders are the firm’s shareholders, employees, suppliers, and customers. All other affected parties including governments, NGOs, community groups, and society are secondary stakeholders. Thus, CSR can be defined as “the extent to which firms meet the social obligations and responsibilities imposed on them by their stakeholders” (Maignan & Ferrell, 2000; Sethi, 1975).

3 RESEARCH HYPOTHESIS and CONCEPTUAL MODEL

Clarkson (1995) argues that not all stakeholders have the same impact on firms. He suggests that only the primary stakeholders (i.e. shareholders, employees, suppliers, and customers) are essential for firm survival because they have sufficient power to affect the firm. Suppliers are those stakeholders who provide input resources for the firm operations while customers are the evaluators of those operations. Shareholders and employees, on the other side, are the initiators and recipients of a corporate operations strategy. As such, they play a key role in integrating CSR in firm operations.

3.1 CSR as a Driver of Innovativeness

Corporate social responsibility incorporates the different social expectations of the firm’s stakeholders (Barnett & Salomon, 2006; Carroll, 1991). Social investments, green products, fair trade, safety and health standards, and animal welfare are among the stakeholders’ social expectations with which firms are expected to align their strategies (Mirvis, 2008; Waddock, et al., 2002). Mainly because of the mixed findings of CSR on financial performance (Choi, et al., 2010),

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many firms adopt CSR practices simply to meet their social obligations, failing to realize the potential added benefits. However, previous studies suggest that CSR is associated with firm competitive advantage (Kibbeling, 2010; Orlitzky, et al., 2003; Vilanova, et al., 2009). Thus, other firms go beyond the economic and legal obligations and proactively approach CSR by adopting a CSR orientation. A CSR orientation is “the set of cross-functional processes and activities directed at satisfying customers’ social needs through continuous needs-assessment” (Kibbeling, 2010). Adopting a CSR orientation enables firms to attract resources (Waddock & Graves, 1998) and develop new products (Kanter, 1999), and thus it creates innovation opportunities for firms. Firms spend billions in attempts to find innovation opportunities. Firms that adopt a CSR orientation identify the social sector as a source of innovation (Barnett & Salomon, 2006; Hart & Milstein, 2003; Husted & Salazar, 2006; Kanter, 1999; Nidumolu, et al., 2009). As a result, CSR-oriented firms direct efforts towards a continuous needs-assessment that enables them to identify customers’ social needs. Once the needs are identified, firms can integrate them in operations (Bansal, 2005). This allows firms to recombine existing resources into new capabilities aligned with customers’ social expectations (Husted & Allen, 2007; Sarkis, et al., 2010; Sirmon, et al., 2007). Practices that originate from the needs of society, such as non-animal testing and replacing toxic chemicals in production, are predispositions for redesign of business processes and innovation. Thus, a CSR orientation suggests a change in the way firms manage resources, which enables them to identify customers’ social needs, match those needs with capabilities, and respond accordingly through innovation.

Innovation is essential for survival in today’s highly dynamic and unpredictable landscape (Hamel, 2000; Han, et al., 1998; Hull & Rothenberg, 2008). Firms that adopt CSR orientation realize that innovation is the result of continuous needs-assessment of customers’ social needs. A continuous needs-assessment thus implies openness to new ideas in redesigning capabilities, which is regarded as innovativeness. Innovativeness is therefore “the notion of openness to new ideas as an aspect of a firm's culture” (Hurley & Hult, 1998). It changes the way firms manage resources (McGrath, et al., 1996; Szymanski, et al., 2007), which contributes to firm competitive advantage (Hult & Ketchen, 2001). Adopting a CSR orientation thus leads to openness to new ideas and change of business operations aiming at satisfying customers’ social needs. Therefore,

HYPOTHESIS 1a: Focal firm CSR orientation is positively related to focal firm innovativeness.

The same line of reasoning can be applied to the supplier if the focus is shifted to reflect its point of view. In the supplier’s perspective, the supplier itself is in the center of its supply chain and therefore it is no longer a supplier but the focal firm.

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3.2 CSR Orientation, Innovativeness, and Private Value

Aligning business operations with CSR activities can be in both society and a firm’s best interests. Although a wide range of stakeholders is potentially affected by these activities, the customers are those individuals and groups that evaluate them. Implementing CSR activities in operations, aiming at satisfying customers’ social needs, results in improved innovativeness and CSR reputation. Firm innovativeness and CSR reputation are both criteria for effectiveness and success of firm operations (Ritchie & Kolodinsky, 2003; Roberts, 2003; Zammuto, 1982), and thus key antecedents of customer satisfaction and therefore private value.

Corporate reputation is “the cognitive representation of a firm’s actions and results that form the firm’s ability to deliver valued outcomes” (Fombrun, et al., 2000). It represents the firm’s overall appeal to customers when compared to competitors (Fombrun, 1996). This makes it a valuable firm resource, which is difficult to imitate by competitors. However, reputation is not available by default but instead it is built over time (Dowling, 2001; Fombrun, 1996). This equally applies to building a reputation for CSR orientation.

Today, public attention to CSR is remarkably high (Hoffman, 1997). Customers value CSR orientation, and that reflects in their positive attitudes and opinions of firms (McWilliams & Siegel, 2001; Roberts, 2003; Sen, et al., 2006). Previous studies show that the more firms engage in CSR activities, the more appealing firms are to customers, suppliers, employees, and shareholders (Capaldi, 2005; Ellen, et al., 2006; Klassen & McLaughlin, 1996). The cognitive representation of a firm CSR orientation that represents how appealing is the firm to customers is the firm CSR reputation (Fombrun, 1996; Fombrun, et al., 2000). Consequently, a good fit between firm operations and customer social needs results in a strong CSR reputation (Brammer & Pavelin, 2006; Galbreath & Shum, 2012; Pfau, et al., 2008). A strong CSR reputation reveals the ability of a firm to align its operations with customer social needs and makes the firm more appealing to the customers. Thus, a firm that adopts CSR orientation also builds a reputation for its CSR orientation. Therefore,

HYPOTHESIS 2: Focal firm CSR orientation is positively related to CSR reputation.

The overall appeal of a firm to customers shapes its corporate reputation. A good reputation is the result of customers’ positive attitudes and opinions of the firm. As a result customers are more willing to buy from the firm (Balmer & Wilson, 1998; Fombrun, et al., 2000), develop a sense of connection, and stay with a firm whose reputation they favor (Bhattacharya & Sen, 2003). However, customers do not simply buy products or services, but they buy offerings that they perceive as valuable (Falkenreck & Wagner, 2011; Gummesson, 1994).

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Customers who actively support socially responsible practices find CSR-oriented firms more appealing (Capaldi, 2005; Ellen, et al., 2006; Klassen & McLaughlin, 1996) and develop a sense of identity with them (Bhattacharya & Sen, 2003; Bhattacharya & Sen, 2004; Luo & Bhattacharya, 2006). As a result, they are more willing to buy from a firm whose offerings are in line with CSR standards (Creyer & Ross, 1997; Roberts, 2003; Sen, et al., 2006) and perceive its offerings as more valuable (Luo & Bhattacharya, 2006). The literature suggests that customer expectations and perceived value of firm offerings are key determinants of customer satisfaction (Fornell, et al., 1996). Thus, from a customer perspective, a firm CSR reputation is an important factor for buying decisions, which represents the ability of the firm to deliver valued offerings and in turn leads to customer satisfaction. Therefore,

HYPOTHESIS 3: CSR reputation is positively related to customer satisfaction.

The second determinant of customer satisfaction is the extent to which a firm has met or exceeded customer expectations (Davis-Sramek, et al., 2008; Fornell, et al., 1996; Homburg & Stock, 2004). It is based on the emotional reaction and post purchase evaluation of the experience with firm offerings (Fornell, 1992; Homburg & Stock, 2004; Kotler, 1991; Spreng, et al., 1996).

Products and services that promote practices of animal welfare, green products, and organic food are quickly making their ways into business (Mirvis, 2008). Particularly in the developed markets, customers’ social expectations are very high and keep rising, which creates constantly growing demand for sustainable innovation. Firms that adopt a CSR orientation are able to constantly redesign their processes and build new capabilities in a way that meets customers’ expectations (Husted & Allen, 2007; Sarkis, et al., 2010; Sirmon, et al., 2007). This reflects their openness to develop new products and services in response to customers’ social expectations (Hurley & Hult, 1998; Rubera & Kirca, 2012). Thus, firms that proactively anticipate customer social needs develop products, services, and processes that are in line with customers’ social expectations. Offerings that have met customers’ social needs trigger a positive emotional reaction and create a positive customer experience, which results in satisfied customers. Therefore,

HYPOTHESIS 4: Focal firm innovativeness is positively related to customer satisfaction.

3.3 The Supplier’s Role

Because of globalization, supply chain partners have become an essential part of firm operations (Waddock, et al., 2002). Today, firm focus on optimizing operations has extended to the entire supply chain (Linton, et al., 2007). Optimizing the complete production cycle of transforming input

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resources into finished goods helps firms in creating better value (Handfield & Nichols, 1999) and makes the supply chain itself a source for competitive advantage (Choi & Hartley, 1996).

As firms rely on supplier input resources to develop new capabilities, supplier CSR activities can also affect customers’ expectations (Carter, 2000; Hietbrink, et al., 2010). With the advent of information technology, firm operations, including operations in the supply chain, have become more visible (Klassen, 2009). External parties can easily gain access to information about a firm and its operations. As a result, customers now consider the supplier’s role and the conditions under which products are manufactured (Brown, 1996; Maloni & Brown, 2006), and demand accountability from the firm and its partners (Brown, 1996; Linton, et al., 2007; Maloni & Brown, 2006; Parmigiani, et al., 2011). A firm with well-established internal CSR practices but unethical suppliers risks being perceived as unethical as well, which can damage its CSR reputation (Collins, 2010; Cruz, 2008). For example, a common issue among well-known and otherwise ethical brands in the apparel industry is the use of child and sweatshop labor at overseas suppliers. Thus, the lack of CSR practices at suppliers affects customers’ expectations, which may result in damage of the firm CSR reputation.

Damage of the firm reputation because of supplier actions can lead to big losses for the firm. Thus, firms cannot afford to neglect suppliers’ actions. To avoid such risks of their CSR reputation (Klassen, 2009; Roberts, 2003), firms are more likely to invest in practices that expand the CSR orientation outside the firm (Cruz, 2008; Hutchins & Sutherland, 2008). Such practices could include asking suppliers to consider labor conditions and use recyclable materials in their factories. Firms can also ensure that those practices are followed by implementing social and environmental standards as supplier control mechanisms (Mathews, 2002; Mueller, et al., 2009). Thus, optimizing operations across the entire supply chain includes extending the firm CSR orientation to suppliers. This is also in line with the RMV that views the supply chain as integrated whole in which a common practice is extending functional integration across the supply chain. Therefore,

HYPOTHESIS 5: Focal firm CSR orientation is positively related to supplier CSR orientation.

Extending functional integration suggests that supply chain partners are willing to collaborate and coordinate their efforts and resources towards a common goal (Azadegan & Dooley , 2010; Cruz, 2008). This can improve suppliers’ performance (Dyer, 1997; Handfield & Bechtel, 2002) and serve as a source of novel ideas for the firm (Parmigiani, et al., 2011). Thus, established coordination efforts are a reflection of both supplier and firm openness to new ideas in managing resources, which can improve the competitive advantage of both partners.

In response to customers’ social needs, firms build new capabilities by recombining existing resources. However, resources are not always internally available. Studies show that firms transact

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with external parties for acquiring new resources when they are not internally available (Lee, et al., 2001). Collaboration between supply chain partners thus enables firms to acquire the resources they do not possess from their suppliers (Lee, et al., 2001; Morrow, et al., 2007). For example, suppliers can provide intangible input resources such as technological knowledge and process innovation for internal firm operations. Thus, suppliers’ innovation capabilities can contribute to the firm innovativeness. Therefore,

HYPOTHESIS 6: Supplier innovativeness is positively related to focal firm innovativeness.

3.4 Control variables

According to the resource management view, owning and managing resources are equally important to create value (Sirmon, et al., 2007; Sirmon, et al., 2008; Sirmon & Hitt, 2009). In regard to managing resources, top management support has a critical role in shaping firm orientation and direction (Basu & Palazzo, 2008; Webster, 1988). Deriving from top management support, lower levels of unethical behavior are associated with establishing reward and punishment based systems (Wood, 1995). External factors like turbulent environments make firms more interdependent for resources (Olson, et al., 1995). On the other hand, highly competitive markets create many purchase alternatives for customers (Jaworski & Kohli, 1993). Therefore, CSR top management support, CSR reward systems, competitive intensity, market turbulence, and technology turbulence are used to control for the results.

3.5 Conceptual model

Figure 1 presents the conceptual model for this study, outlining the six hypothesized relationships. The model consists of three parts that reflect a realistic direct supply chain, which consists of a focal firm, one of its key suppliers, and of its key customers.

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Figure 1 – Conceptual Model

4 METHOD

4.1 Data Collection

The data used for this study was collected through a questionnaire based on existing item scales from literature (Kibbeling, 2010). It captures a set of 88 matched supply chain partners in a business-to-business context. To reflect a realistic structure, each supply chain consists of three partners - a focal firm, one of its key supplier, and one of its key customers. Participants in the study were executives of Dutch and Belgian firms operating in Manufacturing (40.9%), Construction (25.0%), Information and Communications (12.5%), Wholesale and Retail (7.9%), Administration and Support (4.5%), and Other (9.1%) industries.

Supplier CSR Orientation Focal Firm CSR Orientation CSR Reputation Supplier Innovativeness Focal Firm Innovativeness Customer Satisfaction - CSR Top Management Support - CSR Reward System - Competitive Intensity - Market Turbulence - Technology Turbulence H3 H1a H1b H4 H2 H5 H6

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4.2 Measurements

The questionnaire item scales (7-point Likert-type) were adapted from existing literature (Hansen, et al., 2008; Homburg & Stock, 2004; Hurley & Hult, 1998). An exception is a new scale developed for CSR Orientation inspired by Deshpande & Farley (1998). After performing an exploratory and confirmatory factor analyses, items with low factor loadings were dropped and therefore not used for further examination. The selected items are described below while the complete list of scales can be found in the Appendix.

Focal Firm variables

As Focal Firm constructs, Focal Firm CSR Orientation (SO) and Focal Firm Innovativeness (SINN) were assessed. CSR Orientation is defined as “the set of cross-functional processes and activities directed at satisfying customers’ social needs through continuous needs-assessment” (Kibbeling, 2010). To measure CSR Orientation a 7 item scale was selected (α = .87) including items such as ‘We define corporate social responsibility as one aspect of our strategy for competitive advantage’ (Deshpande & Farley, 1998). Innovativeness is defined as ‘the notion of openness to new ideas as an aspect of a firm culture’ (Hurley & Hult, 1998). To measure Innovativeness a 3 item scale was selected (α = .70) including items such as ‘In our firm, innovation is readily accepted in program/project management’ (Hurley & Hult, 1998).

Supplier variables

As Supplier constructs, Supplier CSR Orientation (SSO) and Supplier Innovativeness (SINN) were assessed. Both constructs are built upon the same definitions and original scales of Focal Firm CSR Orientation and Innovativeness. For CSR Orientation a 4 item scale was selected (α = .81) (Deshpande & Farley, 1998), and a 2 item scale was selected for Innovativeness (α = .66) (Hurley & Hult, 1998).

Customer variables

As Customer constructs, CSR Reputation (SOV) and Customer Satisfaction (CS) were assessed. CSR reputation is defined as “the cognitive representation of a firm’s actions and results that form the firm’s ability to deliver valued outcomes” (Fombrun, et al., 2000). To measure CSR Reputation a 7 item scale was selected (α = .90) including items such as ‘This supplier has a good reputation among my colleagues for its environmental engagement’ (Hansen, et al., 2008). Customer Satisfaction is defined as ‘satisfaction that accumulates across a series of transactions of service encounters’ (Lam, et al., 2004). To measure Customer Satisfaction a 4 item scale was selected (α

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= .87) including items such as ‘On an overall basis, we a satisfied with this supplier’ (Homburg & Stock, 2004).

Control variables

The literature suggests that CSR Top Management Support (TMS), CSR Reward System (RSS), Competitive Intensity (CC), Market Turbulence (MT), and Technology Turbulence (TT) are suitable for control variables for this study (Basu & Palazzo, 2008; Jaworski & Kohli, 1993; Olson, et al., 1995; Webster, 1988; Wood, 1995). To measure Top Management Support and Market Turbulence a 3 item (α = .85) and 2 item (α = .71) scales were selected, respectively. CSR Reward System, Competitive Intensity, and Technology Turbulence were measured by a single item scale, and therefore alpha values of 1 were assigned.

3.3 Analysis

The starting point of the analysis was an explanatory factor analysis (EFA) in SPSS (version 19) aiming to purify the measurement scales by dropping items with absolute factor loading values lower than .40 (Field, 2000). The EFA indicates that 2 Supplier, 5 Focal Firm, and 8 Customer variables should be dropped. To ensure the sample size remains large enough, additional sampling adequacy test was performed. Next, the robustness of measures was checked by a confirmatory factor analysis (CFA) with maximum likelihood estimation (MLE) model in LISREL (version 8.8). A separate CFA was performed for each respondent group (supplier, focal firm, and customer) because of the limited number of matched supply chains. The results are shown in the next three tables (Tables 1-3).

Table 1 - Confirmatory Factor Analysis, Supplier Variables

Item Factor Loadings T-Value

Supplier CSR Orientation SSO1 .78 7.83

SSO3 .67 6.48

SSO4 .76 7.62

SSO6 .64 6.09

Supplier Innovativeness SINN1 .92 5.11

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Table 2- Confirmatory Factor Analysis, Focal Firm Variables

Focal Firm CSR Orientation SO1 .79 8.44

SO2 .69 7.00 SO3 .62 6.10 SO4 .77 8.16 SO6 .69 6.90 SO8 .65 6.46 SO10 .63 6.24

Focal Firm Innovativeness INN1 .58 4.98

INN2 .68 5.74

INN3 .74 6.16

Table 3 - Confirmatory Factor Analysis, Customer Variables

CSR Reputation SOV1 .86 9.63 SOV2 .62 6.27 SOV3 .90 10.49 SOV4 .67 6.88 SOV5 .74 7.89 SOV6 .67 6.91 SOV7 .80 8.89 Customer Satisfaction CS1 .80 8.66 CS2 .89 10.17 CS3 .68 6.89 CS5 .84 9.25

Further examination of the CFA output was required to assess how well the measurement model for each respondent group reflects the underlying theory. For that purpose, multiple fit indices have been developed, but there is no consensus on which indices to report and what the cut-offs for those indices are (Hair, et al., 2009). Since reporting every index is neither necessary nor realistic (Hooper, et al., 2008), the index selection depends on the field of study, personal preferences of the author, and reviewer (Diamantopoulos & Siguaw, 2000). For the purpose of this study, 11 of the most commonly reported fit indices were selected (Baumgartner & Homburg, 1996; McDonald & Ho, 2002; Ping, 2004). Normal Theory Weighted Chi-Square (χ2_{), Degrees of}

Freedom to Chi-Square Ratio (χ2_{/df), Root Mean Square Error of Approximation (RMSEA),}

Goodness of Fit index (GFI), are absolute fit indices which determine how well the model fits the sample data based on a covariance matrix (Hair, et al., 2009). Normed Fit Index (NFI), Non-Normed Fit Index (NNFI), Comparative Fit Index (CFI), and Incremental Fit Index (IFI) are incremental fit indices which compare the model to a null model that assumes the observed variables are

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uncorrelated (Hooper, et al., 2008). Parsimony Normed Fit Index (PNFI), Adjusted Goodness of Fit Index (AGFI), and Parsimony Goodness of Fit Index (PGFI) are parsimony fit indices, which penalize saturated and complex models (Hooper, et al., 2008). Cut-off values greater than .90 (NFI, NNFI, CFI, IFI, and GFI), lower than .08 (RMSEA), lower than .85 (PNFI, AGFI, and PGFI), and ratio lower than 2:1 (χ2_{/df) are generally accepted (Bagozzi & Yi, 1988; Tabachnick & Fidell, 2007). Based on}

the selected goodness of fit indices and corresponding cut-off values, all three CFAs demonstrated a good fit, and therefore, the main constructs was appropriate for further testing. Table 4 summarizes the results.

Table 4 - Goodness of Fit

Supplier Focal Firm Customer

Degrees of Freedom Df 8 34 41

Normal Theory Weighted Chi-Square χ2 9.99 38.29 51.49

χ2 to df Ratio χ2/df 1.25 1.13 1.26

Root Mean Square Error of Approximation RMSEA .053 .038 .054

Expected Cross-Validation Index ECVI .41 .92 1.17

Normed Fit Index NFI .95 .94 .95

Non-Normed Fit Index NNFI .98 .99 .98

Parsimony Normed Fit Index PNFI .51 .71 .71

Comparative Fit Index CFI .99 1.0 .99

Incremental Fit Index IFI .99 1.0 .99

Goodness of Fit Index GFI .96 .92 .90

Adjusted Goodness of Fit Index AGFI .90 .87 .84

Parsimony Goodness of Fit Index PGFI .37 .57 .56

Table 5 shows descriptive statistics for the six main constructs based on the selected items from the sample - the mean (M), standard deviation (SD), Cronbach’s alpha (α), average variance extracted (AVE), composite reliabilities, and Kaiser-Meyer-Olkin sampling adequacy (KMO). Acceptable construct reliability larger than .70 is suggested as a benchmark in literature (Nunnally, 1978). This indicated that all constructs except one (SINN = .66) are in the acceptable range. The composite reliability values indicated that all constructs are above the recommended threshold of .70 (Fornell & Larcker, 1981). All but two constructs (SO = .48 and INN = .45) did not pass the .50 threshold for average variance extracted (Fornell & Larcker, 1981). All constructs have KMO values larger than .50 and therefore were considered adequate (Field, 2000).

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Table 5 - Descriptive Statistics

Mean Std. Deviation Cronbach’s α KMO N

Supplier CSR Orientation 4.99 1.18 .81 .79 88

Supplier Innovativeness 5.40 1.19 .66 .50 88

Focal Firm CSR Orientation 4.50 1.23 .87 .88 88

Focal Firm Innovativeness 5.28 1.13 .70 .67 88

CSR Reputation 4.64 0.96 .90 .87 88

Customer Satisfaction 5.70 0.84 .87 .82 88

The next Table 6 shows a bivariate correlation matrix with Pearson correlation coefficients for each pair of investigated constructs. The investigated constructs demonstrated a convergent validity because of highly significant (p < .001) factor loadings greater than .50 (Fornell & Larcker, 1981).

Table 6 - Correlation Matrix

SSO SINN SO INN SOV CS

Supplier CSR Orientation SSO 1.0

Supplier Innovativeness SINN .349** 1.0

Focal Firm CSR Orientation SO .152 .216* 1.0

Focal Firm Innovativeness INN -.100 .217* .316** 1.0

CSR Reputation SOV .126 .085 .324** .039 1.0

Customer Satisfaction CS .039 -.098 0.197* .243* .405** 1.0

**. Correlation is significant at the 0.01 level *. Correlation is significant at the 0.05 level

The construct reliability and convergent validity values indicated that the measures fit the data well and testing of the hypothesized relations was appropriate. Testing of the relations was performed with LISREL Path Analysis using Maximum Likelihood Estimates. Based on the set of fit indices presented earlier, the main conceptual model fits within the accepted thresholds and suggests a good fit. However, further examination of the modification indices revealed an additional relationship from Supplier CSR Orientation to Focal Firm Innovativeness, which is also in line with previous research (Kibbeling, 2010). Testing the modified conceptual model with the additional relationship, returned better results compared to the original model: Normal Theory Weighted Chi-square (χ2_{) = 44.49, Degrees of Freedom (df) = 32, Chi-Square to Degrees of}

Freedom ratio (χ2_{/df) = 1.39, Root Mean Square Error of Approximation (RMSEA) = .067, Goodness}

of Fit Index (GFI) = .92, Normed Fit Index (NFI) = .85, Non-Normed Fit Index (NNFI) = .91, Comparative Fit Index (CFI) = 0.95, Incremental Fit Index (IFI) = .95, Parsimony Normed Fit Index (PNFI) = .50, Adjusted Goodness of Fit Index (AGFI) = .82, and Parsimony Goodness of Fit Index (PGFI) = .44. The conceptual model with standardized estimates (β) is shown in Figure 2.

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Figure 2 – Conceptual model with Standardized Path Estimates

**. Correlation is significant at the 0.01 level *. Correlation is significant at the 0.05 level

χ2_{= 44.49, df = 32, χ}2_{/df = 1.39, RMSEA = .067, GFI = .92, NFI = .85, NNFI = .91, CFI = 0.95, IFI = .95, PNFI = .50, AGFI =}

.82, PGFI = .44 *p < .05 **p < .01

5 RESULTS

Figure 2 presents the six hypothesized relationships and five control variables that form the conceptual model for this study. With one exception, the test results provide support for the complete conceptual model. The first hypothesis suggests a positive relation between CSR Orientation and Innovativeness. The results confirm this relation at a Focal Firm level (Hypothesis 1a) with a β-coefficient of .31 (p<.01) and Supplier level (Hypothesis 1b) with a β-coefficient of .34 (p<.01). Further, Focal Firm CSR Orientation is also suggested to be positively related to its CSR

Supplier CSR Orientation Focal Firm CSR Orientation CSR Reputation Supplier Innovativeness Focal Firm Innovativeness Customer Satisfaction - CSR Top Management 1.08** Support - CSR Reward System -.18ns - Competitive Intensity -.09ns - Market Turbulence .22ns - Technology Turbulence .41** .47** .31** .34* .22* .32** .14ns .33*

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Reputation (Hypothesis 2) which is also confirmed (β=.32; p<.01). The positive impact of Focal Firm CSR Orientation on CSR Reputation is expected to positively affect Customer Satisfaction (Hypothesis 3) which is supported with a β-coefficient of .47 (p<.01). The results (β=.22; p<.05) indicate that Customer Satisfaction is also positively affected by the Focal Firm Innovativeness (Hypothesis 4). In contrast to the expected positive relationship between Focal Firm CSR Orientation and Supplier CSR Orientation (Hypothesis 5) the results do not provide significant support (β=.14; ns). The last suggested relationship (Hypothesis 6) is between Supplier Innovativeness and Focal Firm Innovativeness which is confirmed (β=.33; p<.01). The additional relationship between Supplier CSR Orientation and Focal Firm Innovativeness reveals a negative and significant result with a β-coefficient of -.24 (p<.05). Among the selected control variables, two indicate an influence on the model. One of the control variables for Focal Firm CSR Orientation, CSR Top Management Support, has a positive and significant effect (β=1.08; p<.01) while CSR Reward System is not significant (β=-.18ns). Further, Technology Turbulence (β=.41; p<.01) has a positive and significant effect on Customer Satisfaction while Market Turbulence (β=.22) and Competitive Intensity (β=-.09) are both insignificant.

6 DISCUSSION and CONCLUSION

With focus on supply chains, the main goal of this study was to investigate how corporate social responsibility impacts innovativeness. The findings reveal that implementing socially responsible practices in business is a driver of innovativeness. The findings also reveal the importance of supply chain partners and their role in firm operations. Although suppliers’ orientation towards such practices does not directly affect the firm, their innovative capabilities result in a greater firm innovativeness. Further, CSR orientation fosters a reputation for social responsibility, which is valued by customers. Finally, CSR reputation and innovativeness are both criteria for effectiveness and success of firms’ operations (Ritchie & Kolodinsky, 2003; Roberts, 2003; Zammuto, 1982) and key antecedents of customer satisfaction and private value.

6.1 Theoretical Implications

From academic perspective, the study offers insights for the supply chain management stream and thus contributes to the operations management literature. The field of operations management studies the processes firms implement in transforming inputs to outputs aiming to create value (Frankel, et al., 2008; Krajewski, et al., 2006). To explain how firms create value, this study rests on the broadly used resource management view, which emphasizes on owning and

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managing the idiosyncratic resources rooted inside firms (Sirmon, et al., 2007; Sirmon, et al., 2008; Sirmon & Hitt, 2009; Wernerfelt, 1984). Thus, due to its internal focus the RMV is generally applied in a firm context. However, it has been suggested that resource-based theories can be applied in a supply chain context as well (Rungtusanatham, et al., 2003; Barratt & Oke, 2007). Adopting supply chain management as an integrative management philosophy enables academics to examine the complete network of individual supply chain partners as one business entity, which operates like a single firm with its own identity (Cooper, et al., 1997; Ellram & Cooper, 1990; Mentzer, et al., 2001; Min & Mentzer, 2004). This implies that individual firms can extend internal business functions and adopt joint practices, which can improve the competitive advantage of the entire supply chain (Min & Mentzer, 2004; Monczka, et al., 2011). Therefore, this study provides support of the suggestion that supply chains can be examined as single business units and shows that the RMV can be extended to the resources of the entire supply chain.

Extending resource management to the resources of the entire supply chain has provided academic grounds for this study, the findings of which reveal a second theoretical implication for the resource management theory in supply chains. The resource management view builds upon the concept that creating and sustaining value is largely attributable to the firm’s possession of valuable, rare, inimitable, and non-substitutable resources (Barney, 1991). It further suggests that firms should manage effectively and efficiently those resources during the transformation process of inputs to outputs (Mathews, 2002; Priem & Butler, 2001; Sirmon & Hitt, 2003; Sirmon, et al., 2007; Sirmon & Hitt, 2009). The findings of the study reveal that firm and customer innovativeness and firm reputation are valuable, rare, inimitable, and non-substitutable supply chain resources, which firms can exploit in order to create private value.

A third implication for academics, in response to the increased attention (Brown, 1996; Klassen & McLaughlin, 1996; Linton, et al., 2007) and lack of consistent results (Kibbeling, 2010), provides empirical evidence for the relationship between CSR orientation and innovativeness. The findings show that CSR orientation is a driver of innovativeness at firm and supply chain levels. The study further contributes to the findings of previous empirical research on that topic (Kibbeling, 2010) by taking into account additional internal and external factors that could have a potential impact on the conceptual model. The tests reveal that three of the control variables (competitive intensity, market turbulence, and CSR reward system) have no effect and two (CSR top management support and technology turbulence) influence the model. The influence of top management support on CSR orientation and technology turbulence on customer satisfaction are not surprising. Adoption and implementation of CSR orientation in operations is an executive decision and therefore depends on firm’s top management and requires its attention and support. On the other hand, technology rapidly changes in turbulent markets, which results in a constant increase of customers’ social needs and in turn affects their satisfaction with firm’s offerings.

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6.2 Practical Implications

Corporate social responsibility as a driver of novel ideas is also a key finding of this study for managers. Firms with a proactive CSR orientation direct their efforts at satisfying customers’ high and rising social needs through continuous needs-assessment (Kibbeling, 2010). This enables them to identify customers’ social needs, integrate those needs in their operations (Bansal, 2005), and build new capabilities (Husted & Allen, 2007; Sarkis, et al., 2010; Sirmon, et al., 2007). Consequently, firms continuously readjust their management processes of structuring a resource portfolio, bundling resources into capabilities, and leveraging capabilities to the market (Chatzkel, 2002; Sirmon & Hitt, 2003). A continuous needs-assessment thus enables firms to redesign existing processes in order to meet customers’ expectations of environmental standards and sustainable production. However, it is important to note that although CSR orientation increases innovativeness, it can come at a cost to firms. Innovations that originate from the needs of society, such as organic food, green and eco-friendly products may require a substantial and expensive change of business processes.

The second managerial implication emphasizes on the role of suppliers, and suppliers’ innovativeness in particular, in redesigning firm processes. Innovativeness is a valuable and difficult to imitable by competitors resource since it comprises firm specific knowledge and skills. Thus, it is a key to survival in today’s highly dynamic and unpredictable landscape (Hamel, 2000; Han, et al., 1998; Hull & Rothenberg, 2008). However, firms do not innovate in isolation (Porter, 1990). The resource management view suggests that when resources are not internally available, a firm transacts with suppliers to acquire the resources it does not possess. Innovative suppliers can provide intangible resources such as intellectual property and technical skills that can improve firm processes. Thus, suppliers’ innovativeness is a valuable and non-substitutable resource for firm operations.

With the help of suppliers, a firm can align its processes with customers’ social needs (Hurley & Hult, 1998; Rubera & Kirca, 2012). A firm that proactively anticipates customers’ social needs develops processes such as equitable treatment of employees and customers that promote corporate social responsibility. This reveals the ability of the firm to respond to customers’ expectations and deliver valued outcomes, which creates a positive customer experience with the firm. Therefore, considering customers are those individuals and groups that evaluate business operations, a firm that have met or exceeded their social expectations creates value (Davis-Sramek, et al., 2008; Fornell, et al., 1996; Homburg & Stock, 2004). This leads to the third managerial implication of this study, which reveals that innovativeness and reputation are both criteria for effectiveness and success of firm operations (Ritchie & Kolodinsky, 2003; Roberts, 2003; Zammuto, 1982), and key antecedents of private value.

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6.3 Limitations and Future Research

Finally, this study presents its limitations, which provides a path forward for further exploration of the findings and future research. The research method of the study has been designed to capture the interactions between three parties in a supply chain. This is a direct supply chain structure, which includes a single firm, one of its key suppliers, and one of its key customers (Mentzer, et al., 2001). However, many supply chains consist of more than three members, which could include many more members, such as suppliers of suppliers and customers of customers (Mentzer, et al., 2001). It would be interesting and challenging to explore how members behave, interact, and influence one another in such complex networks. Future research in this direction could investigate the breadth and depth of CSR in such setting and provide answers if it is worth being CSR oriented if none of your partners are.

The second limitation of the research design is its generalizability. The study empirically analyses a data collection of 88 Dutch and Belgian firms operating in manufacturing, construction, information and communications, wholesale and retail, administration and support, and others. This is a significant sample of firms in diverse industries and two European countries. However, this is also the limitation for its generalizability. Developed countries are characterized by a high management and CSR standards, which are often very low in developing countries (Jiang, 2009). CSR standards even in developed countries may differ from one another due to cultural differences (Basu & Palazzo, 2008; Maignan & Ferrell, 2004). Therefore, the findings presented in this study should be taken with caution if applied to other significantly different parts of the world, and future research can explore a broader set of geopolitical and cultural regions.

6.4 Conclusion

The fundamental goal of firms is creating and sustaining value, which is a key to success and long-term survival (Conner, 1991; Slater, 1997). A wide range of stakeholders and customers in particular are pushing firms to more socially responsible practices. As a result, many firms adopt social and environmental practices that go beyond the standard economic and legal obligations and are in the best interests of both firms and society. Meanwhile, suppliers have become an integral part of firm operations, which has changed the competition in a way that is no longer between firms but rather between supply chains (Christopher, 1992). Therefore, aligning business operations with customers and suppliers improves firm competitiveness and creates private value. Thus, the focus of CSR has shifted from whether firms should engage in social activities to what are the best practices of doing so.

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CREATING PRIVATE VALUE Corporate Social Responsibility as a Driver of Innovativeness