Bus Strat Env - 2006 - Rao

Business Strategy and the Environment
Bus. Strat. Env. 18, 14–31 (2009)

Published online 25 October 2006 in Wiley InterScience
(www.interscience.wiley.com) DOI: 10.1002/bse.555
A Metric for Corporate Environmental

Indicators . . . for Small and Medium Enterprises
in the Philippines
Purba Rao,1 Alok Kumar Singh,1 Olivia la O’ Castillo,2 Ponciano S. Intal Jr.3 and
Ather Sajid3
1
Washington Sycip Graduate School of Business, Asian Institute of Management,
Makati City, Philippines
2
Asia Pacific Roundtable for Cleaner Production, Makati City, Philippines
3
DLSU–Angelo King Institute for Economic and Business Studies,
Manila, Philippines
ABSTRACT
This paper is an outcome of the empirical research, funded by UNDP Philippines and
National Economic Development Authority (NEDA), done to establish and implement a
metric of corporate environmental indicators for SMEs in the Philippines. SMEs have always
played a vital role in the creation of goods and services in the country. It is therefore
imperative that SMEs adhere to safe environment practices so that the greening of indus-
tries in this region is consummate. In this research we have considered SMEs operating in
the food and beverage, furniture, fashion accessories, hotel and restaurant, automotive
parts and electroplating sectors. The metric adopted in this research follows the framework
given by the Federal Environmental Ministry in Bonn and the Federal Environmental Agency
in Berlin.
The empirical approach develops an exploratory analysis and a structural equation model
to bring out statistically significant linkages between five latent constructs: environment
management indicators, environment performance indicators, environmental performance,
business performance and competitiveness. The research hopes to urge SMEs to imple-
ment this metric with confidence given that this would not only enhance their environmen-
tal performance but also lead to superior business performance and enhanced
competitiveness. Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment.
Received 7 October 2005; revised 15 May 2006; accepted 30 June 2006

Keywords: environment indicator; environment performance; business performance; competitiveness; structural equation
modeling; SME; Philippines; empirical
* Correspondence to: Purba Rao, Washington Sycip Graduate School of Business, Asian Institute of Management, 123 Paseo de Roxas, 1260
Makati City, Philippines. E-mail: purba@aim.edu.ph
Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment
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A Metric for Corporate Environmental Indicators 15
Introduction
T
HE IMPORTANCE OF METRICS FOR MEASURING ORGANIZATIONAL PERFORMANCE HAS LONG BEEN RECOGNIZED
in operations management. Metrics often establish the implementation framework of organizational
strategy and enhance the understanding that value could be created (Melnyk et al., 2004). Though the
development of metrics has been a challenge in theory and practice, once developed, companies can effec-
tively use metrics to measure their performance and can identify gaps between the actual performance and indus-
try standards.
In the face of rising complexities in today’s world, where market forces and supply chain dynamics constantly
keep changing, survival and success dictate that organizations learn to orient their activities to the evolving trends.
One possible way of achieving this task of defining and redefining organizational goals in terms of practical mea-
sures, which can be monitored, bench-marked and used for internal as well as external operational purposes, is
through the proactive design and use of metrics.
Metrics often help to indicate the priorities and goals of organizations in the environment they operate. They
help to indicate where the organization is and where it wants to be. They also indicate mismatches between orga-
nizations, their customers and their activities. While studying the use of metrics in organizations, a source of
complexity has often been encountered in the heterogeneity of methods used for developing the metrics. Some
metrics examine relationships between managerial practices such as quality improvement approaches and busi-
ness performance (Evans, 2004). Some bring out a strategic fit between manufacturing decisions and other strat-
egies (Skinner, 1969). There are others that also explore different strategic fits between operations strategy,
financial strategy and the competitive business environment (Wheelwright, 1984).
Though this paper throws light on the use of different systems of metrics in organizations, its objective is not
to focus on metrics in general. The paper concentrates mainly on the area of interface between use of metrics and
corporate environmental management, as observed in certain sectors of SMEs in Philippines. In essence, the
purpose of this paper is to report the findings of research done on developing and implementing a system of
metrics to measure environmental performance of SMEs, demonstrating how these may be used to enhance the
environmental and business performance as well as competitiveness of these SMEs.
In the past, businesses have implemented innovative managerial initiatives such as Total Quality Management
(TQM), Just in Time (JIT), Business Process Reengineering (BPR) and Balanced Scorecard to stay ahead of com-
petition. However, in recent times managers have adopted a different approach to give strategic direction to their
companies. Their latest undertaking is the greening movement, wherein the managers incorporate environment
friendly initiatives at each level of the company’s operation (Handfield et al., 1997). In order to achieve the green-
ing initiative, at all levels of business, this paper proposes innovative use of metrics for measuring and monitoring
voluntary environmental systems and practices adopted by companies.
It is a common belief that ‘what gets measured gets achieved’. So, once an organization’s environmental per-
formance is measured it is just a matter of time before it achieves excellence in environmental performance.
This paper starts with a section on metrics, followed by a section on metrics for environmental indicators and
a section on SMEs and their environmental performance. Finally, all the sections are combined into one unified
model encompassing the metrics, environmental performance, business performance and competitiveness. This
model is then validated by an empirical research and we present the associated findings on applying this model
for environmental indicators in the context of SMEs in the Philippines.
Using Metrics to Measure Performance of Corporate Activities
As mentioned earlier, metrics and performance measurements form an integrated strategy in preparing a roadmap
for the execution of an organization’s mission into a structured set of goals and performance measures that trans-
lates to action plans (Melnyk et al., 2004). While the necessity and use of metrics is widely acknowledged, their
development and implementation, as well as the guidelines for their use, are yet to be emphasized.
Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment Bus. Strat. Env. 18, 14–31 (2009)
DOI: 10.1002/bse
16 P. Rao et al.
A metric, to be effective, must be a verifiable measure and must be based on a well understood and documented
process. Moreover, it must have reference points, developed internally or externally, that can act as absolute
standards.
In organizations, metrics can be used
(a) to evaluate and control the performance of resources
(b) to communicate performance to external as well as internal stakeholders
(c) to suggest improvement by identifying gaps that require intervention and improvement.
Evans (2004) explores the result of another study to gain insight on how metrics are used by organizations to
monitor and analyze performance and compares the levels between various measures employed in the metrics
and actual performance.
Metrics and Environmental Management
Over the last decade, global businesses of all scales and categories have experienced tremendous change in the
nature of competition that they face (Handfield et al., 1997). To deal with the challenges of competition, companies
have made use of new and innovative management tools throughout. Companies are now adding a newer dimen-
sion by adopting ‘green’ or ‘environment friendly’ ways to enhance their competitiveness.
Handfield et al. (1997) present a study that tries to identify the relationship between the environmental drivers
and the environmental strategies incorporated in the value chain of such firms. In this study the authors develop
a measurement scale that can compare environmental value chain strategies and identify potential areas of
improvement within each industry. This measurement scale can be looked upon as the metric for environmental
indicators introduced at the beginning of this paper.
In modern day industry operations, environmental performance has been a critical area of concern for manag-
ers due to reasons ranging from regulatory compliance, customer satisfaction, cost effectiveness, corporate image
and community pressure to attaining competitive advantage (Theyel, 2001; Rao, 2001). According to Klassen and
McLaughlin (1996), this environmental performance often measures concretely how firms are able to reduce their
environmental impact by benchmarking them to industry standards.
In recent years, a lot of research seeking to establish the linkage between green supply chain management and
environmental performance has been conducted. Walton et al. (1998) consider a case study approach to explore
the role of supply chain management, especially the role of purchasing, in environmental management.
Other authors, such as Handfield et al. (2002), Florida (1996), Florida and Davidson (2001), Geffen and Rothen-
berg (2000), Sarkis (1999), Green et al. (1996) and Rao (2002) have also considered and explored the relationship
between the green supply chain, environmental performance and business performance.
Thus it appears that developing corporate environmental metrics can serve three major purposes in companies’
environmental activities. Such metrics can be used for (1) benchmarking environmental activities against a pre-
scribed standard and identifying gaps between where the company is and where it should be, (2) continuous
monitoring and controlling of items included in the metric, to track performance and check for deviations, and
(3) holding brainstorming exercises with the workers, to find out corrective measures or areas of improvement.
Such an environmental metric can be used in communicating to external stakeholders such as Wall Street, the
Environmental Protection Agency (EPA) or a bank (Melnyk et al., 2004). In other words, use of metrics leads to
corporate environmental reporting (CER), where companies are expected to provide a report on their environmen-
tal performance with respect to regulatory agencies, corporate associations, capital markets, NGOs, regional gov-
erning agencies, consumers, suppliers and other stakeholders. (Marshall and Brown, 2003).
The practice of coming out with corporate environmental reports (CERs) has been a recent phenomenon and
it is totally dependent on the companies as to what kind of environmental content they wish to report on. Since
there is no standard format available for environmental reporting (GRI, 2000; KPMG, 1999), companies use their
own environmental indicators. Lober et al. (1997), Noci (2000) and Stanwick and Stanwick (2000) have considered
environmental indicators used in different firms, in varied geographical locations from different perspectives. None
DOI: 10.1002/bse
of these studies however have been able to include all the aspects of the topic in a comprehensive manner leading
to the need for research on the content and methods of reporting associated with CERs.
Marshall and Brown (2003) attempt to gain a better understanding of the metrics used in CERs and analyze
two environmental indicator schemes established by the European Environmental Agency (EEA) and International
Standards Organization (ISO). They also explore some internal and external factors such as degree of diversification,
geographical location, industry, size of the firm etc., which may be associated with the methods of presenting
CERs.
At many instances in research, environmental indicators also form a core component of sustainable develop-
ment. Several studies have focused on identifying environmental indicators or sustainability metrics, to measure
environmental performance over time and to determine whether the progress is being accomplished.
One such system develops metrics that correlate environmental and economic performance in the production
processes (Schwarz et al., 2002). This management strategy incorporates eco-efficiency, where controlling of the
same metrics that lead to environmental performance also leads to more efficient production processes, and better
quality of goods and services. The indicators of sustainability, in this system called Bridges Sustainability Metrics,
have five basic components, (a) material intensity, (b) energy intensity, (c) water consumption, (d) toxic emissions
and (e) pollutant emissions.
Within each of the above categories, sub-metrics or complimentary metrics can be developed to fulfill the needs
of the different functions under the production area. The system discourages inclusion of too many components
as they make the system less versatile and less useful to the manager. Each metric is developed as a ratio with
the impact in the form of resource consumption or pollution generation as the numerator and an output in
physical or financial terms as the denominator. This usually normalizes all indicators to one pound of product.
In this system the indicators follow the simple rule that the lower the metric the more effective the process. Once
the metrics are evolved and measured, they can be used for benchmarking performance, tracking progress
and evaluating processes. An important characteristic of these metrics is that they can be combined to calculate
the environmental impacts per pound of product for a series of processes that constitute the supply chain. This
allows companies to evaluate and compare metrics for individual processes as well as for the entire supply
chain.
The various possibilities and actual applications in the development of sustainability metrics have been consid-
ered and documented (Tanzil et al., 2003). Essentially they follow the same five-component structure of the metrics.
The items for each metric may differ depending on the operation and the industry.
The authors discuss the complimentary metrics that may sometimes contain impacts not included in the basic
metrics such as use of packaging materials, energy for transportation, amount of rainwater contaminated by the
industrial operation etc. This approach is now being developed for two distinct applications through the use of an
automated metric management tool. The first application is for educational organizations, where the metric man-
agement tool is enriched by case study information and can be used to educate university students as well as
corporate trainees on sustainable development. The second application is for corporate users having various poten-
tial uses for their business.
Recently Sustainability Metrics has also been adopted as a software tool that offers a variety of metrics for
measuring sustainability performance.
The business case for corporate environmental indicators has been widely accepted to assist managerial
decision-making (Bacallan, 1998). The authors talk about how the environmental indicators can actually help in
improving business operations, identifying market opportunities and areas for potential cost reduction.
In addition to the above two taxonomies under EEA and ISO, there is another framework for metrics that is
used for corporate environmental indicators, which is developed by the federal ministry in Bonn, as given below.
This framework, which compliments the ISO 14001 as well as EMAS standards, has been employed for our study
and implemented for SMEs in the Philippines. Though neither ISO nor EMAS requires the development of indi-
cators (Guide to Corporate Environmental Indicators, 1997), this framework supports and develops its own standards
for environmental indicators, which would lead to the environmental performance evaluation system as followed
under ISO 14031. According to this system, the environmental indicators can be divided into three main groups
depending on whether they address the company’s environmental impact, the management’s environmental
activities or the external condition of the environment.
DOI: 10.1002/bse
18 P. Rao et al.
The three categories of indicators are

environmental performance indicators,
environmental management indicators and
environmental condition indicators.
At this point we take the opportunity to establish the need for developing metrics for environmental indicators
for SMEs in the Philippines.
Philippine SMEs and Environmental Metrics

According to some projections, 70 percent of the world’s manufacturing will take place in Asia in the next decade
(Sector based public policy in the Asia Pacific Region, US-AEP, 1999). If this happens, then there is definitely an
urgent need to make the manufacturing process as clean and green as possible. However, environmental protec-
tion in developing regions such as Asia poses a great challenge for a host of reasons. First, there is a tremendous
lack of environmental awareness, among both the local population and corporations. Besides, there is so much
poverty in Asian countries that there is always a continuous thrust for economic growth at any cost. Finally, there
still remains a lack of funding and know-how to assist companies, in going for wastewater treatment facilities, air
pollution abatement systems, replacing ozone depleting substances and so on.
According to latest projections, a large part of manufacturing activities in Asia will be undertaken by small- and
medium-scale enterprises (SMEs) through subcontracts handed out by large corporations. Projections also state
that many SMEs will be involved as suppliers for parts and materials, original equipment manufacturers (OEMs),
service contractors, waste disposal handlers and other business partners.
In their day-to-day pursuits, SMEs are busy increasing their productivity, concentrating mainly on their bottom
line. When faced with environment-related problems that endanger human health and habitat, they resort to end-
of-the-pipe control measures to achieve compliance. However, many are not aware of the associated benefits of
cost saving, increased productivity, enhanced corporate image and huge marketing and competitive benefits that
are associated with environment-friendly initiatives. Thus, in general, they do not consider these initiatives as part
of their priority concerns.
However, this scenario is fast changing. With the globalization of business operations, SMEs find opportunities
to do business dealings with state-of-the-art global companies. These companies, guided by their own environmen-
tal policies, allow themselves to do business with SMEs that adopt environment-friendly practices. Many such
global companies are now urging, sometimes even requiring, their SME partners to go for environmental manage-
ment systems (EMSs). Sometimes these global companies also go to the extent of holding awareness seminars on
how EMSs would give their partner SMEs exceptional business advantage. By becoming more environment con-
scious, SMEs also become more competitive and attractive in international markets.
It may be pointed out here that since environment protection today is no longer a question of option, but a
matter of necessity, the greening of manufacturing procedures in SMEs has become inevitable. Thus not only do
the SMEs themselves try to volunteer to incorporate environmental initiatives in their activities but also the gov-
ernment environmental agencies, civil society, NGOs, international and multilateral organizations are sponsoring
many efforts to green this sector. In the Philippines, over the last decade, many such advocacy programs have
been in operation. Notable amongst them is the PRIME (Private Sector Participation in Managing the Environ-
ment) Project, which tried to encourage SMEs to develop their own structured environment management systems
(EMSs), which would eventually be certified by third party accreditation bodies such as the ISO 1400 system of
standards. However, this initiative did not work, essentially because of the cost of consultants, auditing and train-
ing involved in it. Moreover, the SMEs found the EMS too overwhelming because of the documentation and
training involved.
The failure of the initiative has uncovered a need to help SMEs turn green using a simpler and easier to imple-
ment system. The SME operations in most cases are not complicated because they usually handle only a module
of the total manufacturing or service providing process. Hence, it appears that a fully comprehensive EMS, which
can appear to be so daunting to the SMEs, is not really required.
DOI: 10.1002/bse
When consulted regarding their perspective on EMS, they often expressed their sincere intention to go for vol-
untary environment initiatives as long as the process was not too expensive and not too daunting. Given this
emerging trend in the environmental outlook of SMEs, it is now pertinent to develop a simple voluntary environ-
ment system, which we label the ‘Environmental Indicator System’ (EIS), a measuring and monitoring system to
help SMEs assess their environmental performance in conjunction with their economic performance.
The purpose of this study is to develop such a measuring and indicator monitoring system to assess the envi-
ronmental performance of the SMEs, and to relate it to their economic competitiveness.
Conceptual Framework
As mentioned earlier, corporate environmental indicators, leading to the Environment Indicator System (EIS),
summarize different forms of environmental data into a set of significant key measurements which help in assess-
ing environmental performance. As indicated earlier, the research follows the framework developed by the Federal
Ministry in Bonn and Federal Environmental Agency in Berlin and hence would reflect their system of indicators.
In this study we present the findings of research that integrates the need to assess and enhance the environmen-
tal performance of SMEs in the Philippines, thereby contributing to the greening of industry in this region, through
the use of indicators in a practical, economical and implementable manner.
Environment indicators allow a firm to make measurements related to its environmental performance. In prac-
tical terms, they can be used to form a measuring, bench marking and monitoring tool to track environmental
performance of SMEs.
Indicators can be used within an EMS to check whether a firm has met the targets it has set for itself. They can
be equally effective in firms that have not developed an EMS. Hence for SMEs, many of which do not have an
EMS yet, we recommend the use of environment indicators, in order to enhance their environmental performance.
Following the publication A Guide to Corporate Environmental Indicators by the Federal Environment Ministry,
Bonn, and the Federal Environmental Agency, Berlin, we developed three categories of environment indicators,
which describe a company’s environmental impact (environmental performance), the management’s environmen-
tal activities or the company’s external environment. The three categories are
Environment Performance Indicators

Environment Management Indicators
Environment Condition Indicators.
These indicators serve to guide companies in decision making by measuring precise information on matters
such as water usage, air emission, energy consumption etc. They guide in the measurement of performance relat-
ing to the actual environment performance and the actions that the management has decided to pursue, including
the support, financial or procedural, that the top management has extended for the improvement of environmen-
tal performance of the company.
The indicators also measure the impact that the company has on water quality of nearby rivers or lakes,
the area’s air quality, the rate of forest depletion and the level of ozone depletion in the country (Bacallan,
1998).
Constraints/Limitations of the Study

In order to implement them in the Philippine setting, for the SME sector, we conducted a survey, including
the first two sets of indicators only, the environment performance indicator and the environment management
indicator. The environment condition indicators were not included because they were very difficult to quantify
by the SMEs. We label this system of voluntary environment indicators the ‘Environment Indicator System’ or
EIS.
DOI: 10.1002/bse
20 P. Rao et al.
Environment Indicator System (EIS)
Definitions of Environmental Indicators

Environment Performance Indicators
Input indicators (materials).
Consumption/output ratio
Raw material efficiency
Packaging to output ratio
Reusable packaging ratio
Hazardous material ratio
Recyclable raw materials ratio
Input indicators (energy).
Energy cost ratio
Energy consumption ratio
Renewable energy ratio
Input indicators (water).
Water consumption ratio
Output indicators (waste).
Total waste to output ratio
Recycling waste ratio
Waste for disposal ratio
Hazardous waste ratio
Specific waste ratio
Output indicators (air emissions).
Amount of air emissions
Output indicators (waste water).
Waste water ratio
Recycled waste water ratio
Output indicators (non-recycled and non-polluted).
Waste water ratio
Environment Management Indicators (EMI)

Environment cost.
Environment investment per year
Yearly operating cost of environmental protection per year
(specify the kind of investment made)
Training/staff.
Training on environment issues
Environmental training/employee
Environmentally trained employees (number)
Budget for environmental training yes/no
Importance of environment training to employee
Purchasing indicators.
Environment assessment of suppliers conducted
Ratio of purchased goods from environmentally assessed suppliers.
DOI: 10.1002/bse
We postulate that environmental performance of SMEs, as measured by environment performance indicators and
environment management indicators, has a significant impact on the firm’s business performance and competitiveness
(Figure 1).
The model is composed of a set of dependent and independent variables where certain dependent variables
again serve as independent variables to other dependent variables.
Independent variables Dependent variables

1. Environmental performance indicator 1. Firm’s environmental performance
2. Environment management indicator 2. Firm’s business performance
3. Competitiveness
As one may observe at this stage all of the five variables mentioned are not simple observed variables but compos-
ite unobserved latent constructs. The complexity of working with three dependent latent constructs does not allow
for the use of a regression model. To solve these constructs, a technique called structural equation modeling was
applied.
The paper focuses on two major sectors: export oriented and home based industries. These sectors were chosen
because they provide an opportunity for analysis and assessment using environmental indicators. The industries
that form a part of the export oriented sector are (1) the furniture industry, (2) the automotive parts industry and
(3) the fashion accessories industry. On the other hand, the domestic or the home based sector includes (1) the
food and beverage industry, (2) the hotel and restaurant industry and (3) the electroplating industry.
Methodology
Mostly primary research was used. A detailed survey form was administered by research assistants through face-
to-face interviews. The survey required the SME respondents to respond to questions related to the computation
of the environmental performance indicators and environment management indicators.
Sampling Frame
The research considered the sampling frame or population as the SME population spread over the Philippines,
comprising Luzon, Visayas and Mindanao. In total, six industries were considered. The respondents were spread
across the nine zones of the Philippines.
The Philippine Exporters Confederation (PHILEXPORT) and the Philippine Export Processing Zone Authority
(PEZA) provided the list of export oriented companies. The names of domestic companies came from the list
provided by the Philippine Chamber of Commerce and Industry (PCCI) and others.
Sample Size
In the six considered industries a sample of 20 respondents per industry was taken. With target sample size of
120 a margin of error of 8% was considered acceptable.
EPI Firm business

performance
Competitiveness
EMI
Firm env.
performance
Figure 1. Conceptual framework for EPIs and SME competitiveness
DOI: 10.1002/bse
22 P. Rao et al.
Data Collection Method

The data was collected through face-to-face interviews.
The Research Instrument

The research instrument was a questionnaire having eight broad sections. The first five questions, which enquired
about the business of the SME, included main customer, size of the company in terms of number of employees
and assets (in the Philippines, micro refers to an asset size of Pesos 1.5 million to 3 million, small refers to an
asset size of 3 million to 15 million and medium refers to an asset size of 15 million to 100 million). The question-
naire also enquired about year of establishment, whether the company had EMS, ISO 14001 certification, ISO
9000 certification etc.
Section 6 of the questionnaire led to the computation of EPIs associated with material efficiency, packaging,
reusable packaging, hazardous materials, recyclable materials, energy use, renewable energy use, water use, waste,
waste for recycling, hazardous waste, air emissions etc., followed by the computation of EMIs comprising envi-
ronmental investment, training of employees on environmental issues, suppliers with environmental policies and
so on.
Section 7 of the questionnaire tried to assess the environmental actions taken by the company in the last two
years on a four point Likert scale while Section 8 tried to assess specific benefits achieved in business performance,
productivity, environmental performance and economic performance.
Based on the data obtained from the survey conducted as explained above, the research considered the following.
(a) Exploratory analysis to compare indicators across the six sectors as well as environmental actions across six
sectors.
(b) Confirmatory study to establish the linkages between environmental performance indicators, environmental
management indicators, environmental performance, business performance and competitiveness. The
confirmatory analysis would first conduct a reliability analysis through the measurement of alpha and then
conduct the structural equation modeling using the latent constructs as indicated above.
Structural Equation Modeling (SEM) Framework for EIS

SEM estimates a series of separate but interdependent multiple regression equations simultaneously. The researcher
draws upon the theory and the research objectives to determine which independent variable will predict which
dependent variable. The proposed relationships are then translated into a series of structural equations for each
dependent variable. The structural model expresses these relationships among independent and dependent vari-
ables. In SEM there is a unique feature of being able to include variables that are not directly measurable and are
thus called unobserved or latent constructs (Joreskog and Sorbom, 1993).
The observed variables, which we gathered from field surveys, are known as manifest variables and are used to
measure our latent constructs.
We list below the latent constructs and the associated manifest variables.
Latent construct Manifest variables

Environment performance indicator Raw material efficiency
Packaging proportion
Proportion of reusable packaging
Recycling rate
Disposal rate etc.
Environment management indicator Environmental investment
Yearly operating cost
Environmental training/employee
Proportion of suppliers with
environmental policy
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Firm’s business performance Increased efficiency

Quality improvement
Productivity improvement
Cost saving
Rate of return
Firm’s environmental performance Reduction of solid waste
Reduction of liquid waste
Reduction of emissions
Recycling
Improvement in environmental
Compliance
Competitiveness New market opportunities
Improved corporate image
Increase in market share
Increase in sales
Increased market access
It may be noted that the environmental initiatives, which were considered in between all of the latent constructs,
are not necessarily concerned with the EMS under ISO14001 standard. Rather we consider the linkages between
environmental initiatives of any structured nature, as measured by the environment indicators and the firm’s
environment performance, business performance and competitiveness, as defined above. The justification for not
restricting to EMS/under ISO14001 is that SMEs do not have a highly structured documented system; instead,
they often have their own customized environmental initiative program, the impact of which can be measured by
their performance.
Before using the latent variables in the model, a reliability analysis using Cronbach alpha helped to determine
the relevant manifest variables, to be used in measuring the latent variables. Here only those indicator variables
were included that cumulatively contributed to a Cronbach alpha of at least 0.8.
Upon running the SEM the overall significance of the model would be given by a Chi-square value with the
appropriate degrees of freedom. The p-value of the Chi square should be >0.05.
The link between any two variables is given by a statistic called the critical ratio. For any link, if the critical ratio
is >1.96 (obtained from the table at the 5% level of significance) the link is considered statistically significant,
thereby implying that a causal relationship between the variables exists. If the critical ratio is less than 1.96, the
model is run again without the link. The process continues iteratively, until the model converges at a p-value >0.05.
Other indices measuring the goodness of fit such as GFI and AGFI are also considered. Another rule of thumb
for the model is that Chi square/degrees of freedom should be <2.
Results of the Survey
Final sample obtained/sample profile:

Sample size = 126
Margin of error = 8.73%
Proportion of companies having ISO14001 = 4.76%
Proportion of companies having EMS = 15.08%
Average proportion of output exported or sold to exporter = 26.4567%
Average number of employees = 117.333
11 from Davao/Mindanao, 3 from Cebu/Visayas, 112 from Luzon
Food products 42 companies
Fashion accessories 28
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24 P. Rao et al.
Furniture 25
Hotel and restaurant 13
Automotive parts 12
Electroplating 06
Data Analysis
The data analysis for the above sample will be presented in two parts:
(1) exploratory analysis
(2)confirmatory analysis.
Exploratory Analysis
Descriptive Analysis
When the survey was conducted, we got an overall sample size of 126. However, many of the returned question-
naires were incomplete. This was especially true for the questions dealing with computation of some of the envi-
ronment management indicators. Based on the questions which were answered fully, the environment indicators
emerged as given in the following chart. This chart could be looked upon as an inter industry analysis constituting
a comparison of environmental/conservational practices as carried out by SMEs in the six industries of the
Philippines.
At the onset, the environmental indicators computed for each industry were tabulated. Selected environmental
indicators were computed for six industries (Table 1).
Some of the findings that our observations revealed were that raw material efficiency was best in the hotel and
restaurant industry, reusable packaging is being implemented mostly in the furniture industry, hazardous inputs
percentage is very high in the furniture industry, the hotel and restaurant industry and the electroplating industry
and energy consumption is best in the furniture, fashion accessories and automotive parts industries.
Again, in Table 1 there are missing entries such as recycling packaging/total packaging, waste for recycling/total
waste, reusable packaging/total packaging etc., because in the following cases the SMEs either felt that the indica-
tor was not relevant to them or they did not have any data on them.
Furniture Food Hotel Fashion Electroplating Auto
Consumption/output % 78.45 40.787 69.77 83.16 56 47.77

RM efficiency I/O % 64.98 41.95 20.42 69.37 56 41.73
Packaging proportion pkg/output % 2.34 45.9 0.86 6.53 0.2 1.59
Reusable pkg/total pkg % 29.16 2.43
Hazardous input/total input % 8.26 1.47 10.77 1.27 8.929 1.286
Recyclable matl/input % 0.1766 8.18 3.37
Energy consumption/output % 5.72 21.07 16.91 3.528 66 4.24
Water consumption/output pso % 0.36 2.05 12.11 0.556 1.116
0.072
Total waste/output % 1.424 16.17 2.21 1.42 1.5 7.95
Waste for recycling/total waste % 16.846 5.25 3.67 0.65
Hazardous waste/total waste % 3.42 8 3.86 80 0.2
Waste water/output pso % 7.08 0.142 5.22 0.04789 0.446 0.033
Table 1. Inter-industry analysis on key environmental indicators
DOI: 10.1002/bse
Subsequent to the above findings, we looked at the environmental actions, as measured in item 7 with a four
point Likert scale, across the six industries, where we took
no action = 1 little action = 2
moderate action = 3 heavy action = 4.
Table 2 gives the average scores on selected environmental actions.
These scores could be interpreted according to the following criteria:
1.00–1.49 no action 1.50–2.49 little
2.50–3.49 moderate 3.50–4.00 very much.
From the tabulated data, it can be said that none of the industries are actively engaged in undertaking environ-
mental actions. However, we see that some moderate action is being taken by the hotel and automotive parts
industry and that the environmental design is being adopted in the automotive industry.
Principal Component Analysis on Environmental Actions for all Six Industries

Based on the responses obtained on environmental actions undertaken by SMEs in the sample, a principal com-
ponent analysis was carried out, which came up with four factors (Kaiser–Meyer–Olkin test, yielding a measure
of sampling adequacy = 0.916).
Factor Eigenvalue % of variance explained

1 13.032 31.905
2 1.660 16.545
3 1.262 12.332
4 1.234 10.836
Total 71.618
Looking at the rotated component matrix (Varimax, converged in eight iterations) the four factors that emerged
were the following:
Factor 1 Q7.1 Improvement of process to reduce generation of waste

Q7.2 Improvement of processes to comply with emission standards
Q7.3 Improvement of processes to comply with effluent standards
Q7.4 Environment friendly raw materials
Q7.8 Taking environmental criteria into consideration
Q7.9 Design considerations
Food Fashion Furniture Hotel Auto Electroplating
Reduce waste 1.97 1.6 2.28 2.77 2.66 2.33

Env. friendly raw material 2 1.75 2.32 2.77 2.67 2
Reduce emissions 1.71 1.28 1.8 2.46 2.41 1.5
Recycling 1.26 1.67 2 3.1 2.67 2.33
Environ. packaging 1.59 1.78 2.1 1.61 2.08 1.67
Clean technology 1.67 1.6 2.32 2.77 2.67 2.67
Environ. design 1.81 1.53 2 2.92 2.83 2.167
Reduce water use 1.81 1.46 1.8 2.77 2.83 1.33
Table 2. Environmental actions (average scores)
DOI: 10.1002/bse
26 P. Rao et al.
Q7.10 Improvement of processes to reduce solid waste

Q7.11 Improvement of processes to reduce water use
Q7.12 Improvement of processes to reduce air emissions
Q7.14 Use of cleaner technology processes to make savings
Q7.15 Recycling of materials internal to the company
Factor 2 Q7.6 Choice of suppliers by environmental criteria
Q7.7 Urging/pressuring suppliers to take environmental actions
Q7.18 Helping suppliers to establish their own EMS
Factor 3 Q7.21 Environmental improvement of packaging
Q7.22 Taking back packaging
Q7.23 Providing consumers with information on environment friendly products and/or
methods
Factor 4 Q7.16 Use of waste of other companies
Q7.17 Use of alternative sources of energy
Q7.19 Recovery of the company’s end-of-life products
In the case of the first factor, the most relevant variables were Q7.2, Q7.11 and Q7.3, followed by Q7.9 and Q7.1.
These variables represent the company’s commitment towards compliance to environmental standards through
resource conservation and pollution reduction at source. Hence this factor was named ‘cleaner production’, which
signifies pollution prevention at source.
In the second factor, the three most relevant variables were all associated with suppliers and SMEs’ initiative to
help them adopt environment friendly practices in their operations, hence this factor was labeled ‘greening of
suppliers’.
The variables in factor 3 relate to outbound logistics, mainly with consumers and the company’s effort towards
promoting green consumerism and conservational ideology in outbound logistics.
In factor 4 the relevant variables emerge as using alternative sources of energy, recovery of company’s end-of-life
products for possible remanufacturing, use of waste of other companies, promoting industrial ecology etc. These
variables relate to advanced, new and innovative concepts in environmental management. Thus we label this factor
‘advanced/innovative environmental initiatives’.
Thus the factor labels are
Factor 1 cleaner production (prevention of pollution at the source)

Factor 2 greening of suppliers
Factor 3 green marketing/outbound logistics
Factor 4 advanced/innovative environmental initiatives.
Segmenting the SMEs with reference to Environmental Actions

K-Means Cluster Analysis
With reference to the four factors that emerged, the asset size of the companies and number of employees in these
companies, a k-means cluster analysis was performed, where two clusters emerged.
Cluster 1 89.68% of the sample

Cluster 2 10.32% of the sample.
Looking at the factor scores for the two clusters, one observed that Cluster 1 companies, comprising 89.68% of
the SMEs, were practicing some degree of green marketing, which was seen to be slightly higher than the average.
However, they were not practicing cleaner production, non-traditional environmental initiatives or the greening
of suppliers. They scored positively on green marketing, which includes greening their outbound logistics and
DOI: 10.1002/bse
pleasing their environmentally conscious customers. The asset size and the employee headcount of the companies
were smaller than those in Cluster 2.
Cluster 2, comprising only 10.32% of the SMEs, were seen to be doing very well on cleaner production and
moderate on greening of suppliers and non traditional initiatives.
They received a negative score on green marketing, referring to their outbound logistics. These companies have
an asset size close to the category of medium scale companies and employees more than 500 in number.
(In the research the asset size categorization was

Pesos 1.5 million to 3 million scale = 1 micro
Pesos 3 million to 15 million scale = 2 small
Pesos 15 million to 100 million scale = 3 medium).
The ANOVA table associated with cluster analysis showed that the two clusters are quite dissimilar, especially
on Factor 1 (cleaner production), employee size and asset size.
Conclusion from the Principal Component and Cluster Analysis

The principal component analysis and k-means cluster analysis helped to segment the population of SMEs into
two dissimilar clusters, one comprising 89.68% of the population and the other comprising 10.32% of the popu-
lation. Thus we decided to carry out the next part of our analysis on the consolidated data, belonging to SMEs in
the first segment (89.68%) of the population, in order to achieve homogeneity.
Hence the reliability analysis and structural equation modeling, the results of which will be presented below,
relate to the data from the responses belonging to the first cluster, which emerged above.
Confirmatory Analysis
(1) Reliability analysis
(2) structural equation modeling.
Reliability Analysis using Cronbach Alpha

To test the reliability of the five latent constructs, as given in the conceptual framework, we used SPSS 10.00 and
obtained the Cronbach alpha. Using the reliability analysis, we included only those manifest/indicator variables,
under each construct, that contributed positively to the Cronbach alpha and thereby contributed to the internal
consistency of each latent construct. The final set of indicator variables for each construct is given below with the
associated Cronbach alpha.
Final latent constructs with the Cronbach alpha.

Environmental performance indicator (EPI)
6.1d consumption/output %
6.2d RM efficiency: input/output %
6.3d packaging/output %
6.10d total energy consumption/total output %
6.12d total water consumption/total output %
6.13d total amount of waste/total output %
6.14d waste for recycling/total amount of waste %
6.15d waste for disposal/total amount of waste %
Cronbach alpha = 0.7788
Environment Management Indicators
6.23 environmental investment
6.24 yearly operating cost of environmental protection
DOI: 10.1002/bse
28 P. Rao et al.
Business Performance
8.7 increased efficiency
8.8 improvement in product quality
8.9 productivity improvement (output/worker)
8.10 cost saving
8.17 increased rate of return
Environmental Performance
8.1 reduction of solid/liquid waste
8.2 reduction of emission
8.3 recycling
8.4 environmental compliance improvement
Competitiveness
8.12 increased market access
8.13 new market opportunities
8.15 increase in sales
8.16 increase in market share
Cronbach alpha 0.9463
Structural Equation Modeling

In this analysis the model proposed in the conceptual framework section was considered and evaluated. The model
was run using AMOS Graphics for Windows Version 3.6 (Arbuckle, 1997), estimating the regression weight of
each link (arrow) and the associated significance. This significance was evaluated with the statistic called ‘critical
ratio’ associated with the regression weight.
If the critical ratio was greater than 1.96 then we considered the link to be significant. If the critical ratio was
less than 1.96, it implied that there was no statistical evidence to say that there was a cause and effect relationship
between the two latent constructs concerned.
The convergence of the model was given by the Chi square value, the degrees of freedom with the associated
probability level and the p-value. The model was considered acceptable at the 5% level of significance if p-value >
0.05.
In addition to the p-value, chi square/degrees of freedom <2.
GFI and AGFI were additional indicators to evaluate the validity of the model.
The latent constructs that were used in the model and the associated indicator variables were the same as given
in the conceptual framework section. Several sets of analyses were conducted, with input being the descriptive
statistics of the indicator variables and correlation matrix for all.
Moreover, several sets of structural equation models were run to test variations of the model with alternate paths
deleted to assess the importance of model aspects.
Results and discussion for structural equation modeling. The finalized model yielded the following regression
weights between the latent constructs.
Convergence was achieved

Chi-square = 386.522
Degrees of freedom = 225
Probability level = 0.00
Regression weights are shown in Table 3.
In the structural equation model, as given in Figure 2, the overall fit for the model is acceptable and significant
as seen in the ratio
DOI: 10.1002/bse
Estimate S.E. Critical ratio
EMI --------------------------------------------------------- → EPI 0.799 0.061 13.060

EPI----------------------------------------------------------- → environmental perf. 0.214 0.105 2.045
Env. perf.--------------------------------------------------- → business perf. 0.265 0.114 2.314
Business perf. ------------------------------------------ → competitiveness 0.961 0.161 5.954
Table 3. Significant linkages in the structural model

GFI = 0.733
AGFI = 0.672
NFI = 0.803
e6.3d e8.7 1
e6.2d 1e6.10de6.12de6.13d
1 1 1 e8.8
e6.1d 1 q8.7 1
q6.3d
1 q6.12dq6.13d e8.9
q6.2d e6.14d 1
q6.10d 1 q8.8
q6.1d q6.14d q8.9
e6.15d
1 1
1 1 q6.15d q8.10 1 e8.10
1
1 q8.17 e8.17
business
performance
e5 1
e8.12
1 1
epi
1 e3 q8.12
e1 competitiveness
e2
1 q8.16
1 1
emi e8.16
q8.15
1
q8.13 1
environ 1
q6.23 q6.24 1 performance e8.15
e4 e8.13
1 1
1
e6.24
e6.23 q8.4
q8.3 1
q8.1 q8.2
1
1
1 e8.4
e8.2 e8.3
e8.1
Figure 2. The numbers in the diagram have been defined in the previous sections
Chi-square/degrees of freedom = 1.72
which is less than 2, the maximum recommended value.
GFI = 0.733
NFI = 0.672
AGFI = 0.803
The links EMI → EPI and EPI → environmental performance, environmental performance to business perfor-
mance and business performance to competitiveness are significant, since their critical ratios are much higher
than 1.96.
DOI: 10.1002/bse
30 P. Rao et al.
This model shows that environment management decisions, taken by the firm’s management and captured by
the latent construct EMI, significantly lead to specific environmental initiatives, captured by the latent construct
EPI. This in turn significantly leads to actual environmental performance, business performance and competitive-
ness. Hence not only are the EPIs significantly correlated with actual environmental performance but they also
serve to lead the SMEs from environmental performance through business performance to competitiveness.
This finding would tell the firm that if it goes for environmental indicators, both management indicators and
performance indicators, its environmental performance would undoubtedly be enhanced and they would also
improve their business and competitiveness. The SMEs in this country can thus enhance their environmental
performance by implementing the environmental indicators. This correlation between indicators and environmen-
tal performance also makes it possible for environmental indicators to represent environmental performance and
thus they could be used as a set of effective benchmarking and monitoring tools.
Conclusion
There is significant linear linkage between EMI and EPI and between EPI and environmental performance, busi-
ness performance and competitiveness. Hence one can statistically observe that environmental indicators or EIS
do lead from management initiatives to competitiveness through environmental and business performance. Also
note that significant correlation was observed between environmental indicators and environmental performance.
Thus the environmental indicators are able to capture the effectivity of environmental performance significantly.
From the model one observes that, in effect, the structural model emerges as a chain of latent constructs start-
ing with EMI leading to EPI, then to environmental performance to business performance and finally to com-
petitiveness. The fact that the latent construct EMI, environment management indicators, is at the start of the
chain is totally logical and expected because the process of environmental initiatives in any SME would start with
the involvement and leadership of the management decision makers, which get captured in the indicators under
EMI. Their decision to go for environmental initiatives in their operations involve environmental investment,
environmental training for employees, providing a budget for such environmental training, urging their suppliers
to develop environmental policies, investing in environmentally clean processes, relevant technology and so on.
Since all of these constitute the latent construct EMI one may observe that this is of course the starting phase.
Management decisions to green the SME operations lead to initiatives toward reducing waste, conserving natural
materials in the production process, raw material efficiency, reducing hazardous materials as input and as waste,
increasing proportion of recyclable materials and renewable energy, conserving water and energy, reducing solid
and liquid waste, reducing air emissions etc, all of which make up the latent construct EPI, the environment
performance indicators. These EPI indicators next lead to the achievement of environmental performance in the
form of achievement of the reduction of solid and liquid waste and air emissions, improvement of compliance
and so on. The latent construct environmental performance measures this achievement, leading in turn to busi-
ness performance and competitiveness. In any SME operation, or for that matter in any company’s operation, this
would be the logical chain of activities. What constitutes a unique finding is the fact that for SMEs the EMI factor
does lead to EPI and thereafter ultimately does lead significantly to competitiveness. This should urge SMEs to
initiate environmental activities with a lot of confidence knowing that these activities would not only enhance their
environmental performance but also lead to superior business performance and ultimately to competitiveness.
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Business Strategy and the Environment

Bus. Strat. Env. 18, 14–31 (2009)

A Metric for Corporate Environmental

Received 7 October 2005; revised 15 May 2006; accepted 30 June 2006

Using Metrics to Measure Performance of Corporate Activities

Metrics and Environmental Management

The three categories of indicators are

Philippine SMEs and Environmental Metrics

Environment Performance Indicators

Constraints/Limitations of the Study

Environment Indicator System (EIS)

Deﬁnitions of Environmental Indicators

Environment Management Indicators (EMI)

Independent variables Dependent variables

EPI Firm business

Figure 1. Conceptual framework for EPIs and SME competitiveness

Data Collection Method

The Research Instrument

Structural Equation Modeling (SEM) Framework for EIS

Latent construct Manifest variables

Firm’s business performance Increased efﬁciency

Results of the Survey

Final sample obtained/sample proﬁle:

Furniture Food Hotel Fashion Electroplating Auto

Consumption/output % 78.45 40.787 69.77 83.16 56 47.77

Table 1. Inter-industry analysis on key environmental indicators

Principal Component Analysis on Environmental Actions for all Six Industries

Factor Eigenvalue % of variance explained

Factor 1 Q7.1 Improvement of process to reduce generation of waste

Food Fashion Furniture Hotel Auto Electroplating

Reduce waste 1.97 1.6 2.28 2.77 2.66 2.33

Table 2. Environmental actions (average scores)

Q7.10 Improvement of processes to reduce solid waste

Factor 1 cleaner production (prevention of pollution at the source)

Segmenting the SMEs with reference to Environmental Actions

Cluster 1 89.68% of the sample

(In the research the asset size categorization was

Conclusion from the Principal Component and Cluster Analysis

Reliability Analysis using Cronbach Alpha

Final latent constructs with the Cronbach alpha.

Structural Equation Modeling

Convergence was achieved

Estimate S.E. Critical ratio

EMI --------------------------------------------------------- → EPI 0.799 0.061 13.060

Table 3. Signiﬁcant linkages in the structural model

Chi-square/degrees of freedom = 1.72

which is less than 2, the maximum recommended value.

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