Environmental Engineering Reference
In-Depth Information
and putting one million plug-in hybrid cars on
the road by 2015. Furthermore, The Brundtland
Commission has indicated the need for sustain-
able development in order to meet the needs of
the present without compromising the ability of
future generations to meet their own needs. At
the grassroots level; employees, environmental
activists, communities, and non-governmental
organizations are increasingly applying pressure
to companies to consider sustainability principles
as they manage the material and information flows
along their supply chains. Even consumers are
making sustainability-focused decisions when
they purchase vehicles or decline plastic bags
at supermarkets. According to a recent Deloitte
survey
1
of more than 1,000 business travelers in
April 2008, 95 percent of respondents thought
that lodging companies should be undertaking
green initiatives.
A company's strategic plan provides guid-
ance for the decisions it makes regarding its
products, processes, and its supply chain. An
example of a decision that is greatly influenced
by company strategy is the make-buy decision.
The make-buy decision is particularly critical for
firms pursuing a sustainability-focused strategy
because such companies require that every aspect
of the supply chain have a similar focus (i.e.
such firms view sustainability holistically). This
requirement introduces an additional constraint
that is unique to firms pursuing such a strategy.
For example, while a sustainability-focused firm
may want to outsource a particular product or
service, if there are no sustainability-focused
suppliers of the product or service they may opt
to develop the capability internally. As a result,
sustainability-focused companies may tend to be
more vertically integrated relative to their non-
sustainability-focused counterparts, particularly
in the early stages of the sustainability movement
life cycle when there are a limited number of
suppliers committed to this strategy. In this topic
chapter, we examine this hypothesized trend to-
for sustainability-focused companies. Vertical
integration may enhance performance, profit-
ability, and market competitiveness because of
better supply chain coordination. The literature
indicates that an increased level of integration
across the supply chain is necessary in order to
pursue a sustainability-focused strategy (e.g. see
Hart, 1995; Russo and Fouts, 1997). However,
under some industry, product, and market condi-
tions, having a vertically-integrated organization
structure is not reasonable. These conditions will
be discussed in “Reasons for Vertical Integration
or Diversification”.
Thus, there appears to be a potential for ten-
sion for some companies that set out to pursue a
sustainability-focused strategy. That is, while firm
capabilities, firm culture, and industry dynamics
may make outsourcing the preferred solution, there
is dual pressure to vertically integrate simply as
a result of the pursuit of a sustainability-focused
strategy. This topic chapter will explore this issue
and determine if sustainability-focused companies
tend to be more vertically integrated regardless of
industry. As an empirical study, we will analyze
the vertical integration level of 116 sustainability-
focused companies in the United States Dow Jones
Sustainability Index. Unlike previous studies that
employed surveys, we use objective economic
data and employ the measurement method of
Fan and Lang (2000), which is a widely used
and accepted index in recent literature. Fan and
Lang use the sales of companies in primary and
secondary industries and benchmark input-output
(I-O) tables. We utilize the Compustat database to
collect the sales information of companies. The
Bureau of Economic Analysis (BEA) publishes
the input-output tables every five years. We use
the 2002 I-O table, which is the most recently
published table at the six digit NAICS code level.
Following Fan and Lang (2002), we also analyze
the relationship between the integration level and
their industry types to provide insight regarding
the make-buy decision for sustainability-focused
