Lean & Green Operations MSc Dissertation

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The University of Edinburgh
Business School, School of GeoSciences & School of Economics
Lean & Green Operations –
Can an integrated model deliver high performance?
A dissertation submitted in partial fulfilment of the requirements for the degree of Master of
Carbon Management, The University of Edinburgh.
Exam No: 5478146
August 2010

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Declaration of originality
This is to certify that the work is entirely my own and not of any other person, unless
explicitly acknowledged (including citation of published and unpublished sources). The work
has not previously been submitted in any form to the University of Edinburgh or to any other
institution for assessment for any other purpose.
Signed _________________________________________________
Date ___________________________________________________

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Abstract
Purpose: This paper investigates to what extent the integration of Lean and Green
management practices can influence a firm’s competitiveness, including an evaluation of
previous literature and empirical analysis.
Design/methodology/approach: Comparative study of Lean and Green operating systems
and the key concepts and techniques that underlie their implementation using available
literature and critical analysis. In addition, an empirical analysis is carried out to explore the
relationship between lean operations, eco-efficiency and financial performance.
Findings: An evaluation of previous research suggests that an integrated operating model can
result in enhanced financial performance by eliminating all forms of waste. This improves a
firm’s resource utilisation, which in turn reduces environmental impacts, lowers costs,
improves quality and shortens delivery lead times. However, empirical analysis indicates that
while it is possible for a firm to achieve superior performance with an integrated Lean &
Green approach, execution in practice is rare. Most firms tend to focus on only one, or
neither strategy.
Originality: The unique contribution of this paper will be to develop a greater conceptual
understanding of the complementarities between lean operations and environmental
performance.
Keywords: Lean Thinking, Green Operations, TQEM, Natural-Resource-Based-View,
Environmental Performance, Lean Production
Paper type: Research paper.

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Word Count
Number of Pages: 57
Number of Words: 14849

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ACRO YMS A D ABBREVIATIO S
CDP – Carbon Disclosure Project
CSR – Corporate Social Responsibility
DfE – Design for Environment
DfM – Design for Manufacturing
DMAIC – Define-Measure-Analyse-Improve-Control
EMS – Environmental Management System
EPA – Environmental Protection Agency
JIT – Just-In-Time
MCS – Management Control Systems
NIST – National Institute of Standards and Technology
P/E ratio – Price-to-Earnings ratio
RBV – Resource Based View
ROIC – Return On Invested Capital
SPC – Statistical Process Control
TPM – Total Productive Management
TQM – Total Quality Management
WIP – Work-In-Progress
WRT – Waste reducing Technique
3P – Pre-Production Planning
5S – Sort (Seiri), Set in Order (Seiton), Shine (Seiso), Standardise (Seiketsu), and Sustain
(Shitsuke).

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ACK OWLEDGEME TS
I would like to thank Prof. Nick Oliver for his valuable supervisory support, encouragement
and wisdom. I would also like to extend my sincerest thanks to Accenture for generously
sponsoring my studies here at the University of Edinburgh, and particularly my colleagues in
the Dublin and London offices for their help and guidance. Finally, I would like to thank my
parents for their constant support and understanding in all my endeavours. The views
expressed, and any errors, are the sole responsibility of the author.
.

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Table of Contents
CHAPTER 1 ...............................................................................................................2
INTRODUCTION........................................................................................................2
1.1: Introduction.......................................................................................................3
1.2: Aim and Objectives ...........................................................................................3
1.3: Dissertation Structure.......................................................................................4
CHAPTER 2 ...............................................................................................................5
RESEARCH BACKGROUND....................................................................................5
2.1: Competitive Advantage – The Resource Based View .......................................5
2.2: The Evolution of Lean Thinking........................................................................8
2.3: Impacts of Environmental Performance on Financial Performance..............11
CHAPTER 3 .............................................................................................................31
COMPARISON OF EXISTING MODELS...............................................................15
3.1: Introduction.....................................................................................................15
3.2: Lean Operating Model - Overview .................................................................16
3.3: Green Operating Model - Overview ...............................................................16
3.4: Lean Operating Model - Drivers ....................................................................31
3.5: Green Operating Model - Drivers ..................................................................21
3.6: Lean Operating Model - Strategy ...................................................................31
3.7: Green Operating Model - Strategy .................................................................24
3.8: Lean Operating Model – Human Resources...................................................25
3.9: Green Operating Model – Human Resources.................................................27
3.10: Lean Operating Model – Methodologies & Tools........................................31
3.11: Green Operating Model – Methodologies & Tools ......................................31
CHAPTER 4 .............................................................................................................33
EMPIRICAL DATA & METHODOLOGY..............................................................33
4.1: Introduction.....................................................................................................33
4.2: Data Used........................................................................................................32
4.3: Methods and techniques..................................................................................32
CHAPTER 5 .............................................................................................................31
RESULTS – CONCEPTUAL FRAMEWORK.........................................................31

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5.1: Evaluation of Lean and Green Complmentarities ..........................................31
5.2: Integrated Lean & Green Model - Drivers......................................................31
5.3: Integrated Lean & Green Model - Strategy.....................................................40
5.4: Integrated Lean & Green Model – Human Resources....................................42
5.5: Integrated Lean & Green Model – Methodologies & Tools ...........................43
RESULTS – EMPIRICAL ANALYSIS ....................................................................48
5.6: Introduction.....................................................................................................48
5.7: Financial Implications for Varying Operating Characteristicss....................48
5.8: Discussion of Results ......................................................................................51
CHAPTER 6 .............................................................................................................53
DISCUSSION & CONCLUSION .............................................................................53
6.1: Introduction.....................................................................................................53
6.2: Discussion & Conclusion................................................................................43
6.3: Recommendations ...........................................................................................60
APPENDICES............................................................................................................62
REFERENCES...........................................................................................................67

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CHAPTER 1
I TRODUCTIO
1.1: Introduction
The concept of Lean operations has been well established in modern management philosophy
over the past few decades. Aspects of this operating model can be found in many blue chip
companies around the world (e.g. BAE, Toyota, Caterpillar, Dell etc.) largely due to the
benefits that arise from its successful implementation. Many Lean programmes have been
highly effective at increasing efficiency, reducing costs, shortening lead times, and
contributing towards better quality and enhanced competitiveness (Shingo, 2010). Lean
initiatives consider the consumption of resources for any goal other than the creation of
customer value to be wasteful, and thus a target for elimination.
In more recent times, increased pressure from a range of stakeholders has encouraged many
organisations to reassess how their industrial activities interact with the natural environment
in which they operate. Heightened ecological awareness on behalf of corporate entities has
largely been driven by an increasing regulatory push to reduce the impact businesses have on
the environment. Research in the field of environmental performance has predominantly
focused on the operations function, as this is where the majority of environmental decisions
are made by management (Hart, 1995; Gupta and Sharma, 1996; Angell and Klassen, 1999;
Jimenez and Lorente, 2001).
An increasing number of organisations have committed to reducing their ecological footprint,
which has resulted in the development of Green operating models (Rondinelli & Vastag,
2000). These models seek to eliminate waste in operations from an environmental
perspective and in some cases have yielded positive financial returns due to a reduction in
energy consumption, waste generation and hazardous material storage/disposal, as well as
enhanced reputation (Fombrun et al., 2000)
The environmental performance management literature is a relatively recent field of research
(Hoffman, 2001; Bansal, 2005). Antecedent studies have indicated that Lean implementation
also improves an organisation’s environmental performance by being more productive with

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resources and efficient with energy (EPA, 2003; EPA, 2004). Other research illustrates the
many commonalities that exist in the structure and practices of both Lean and Green
operating models in the pursuit of zero waste (Kitazawa & Sarkis, 2000; Bergmiller &
McCright, 2009). Yet, until recently very little attention has been given to investigating the
integration of both systems (Olson & Brady, 2009).
The relationship between eco-efficiency and competitiveness has traditionally been viewed as
involving a trade-off between social benefits and private costs. However, the more recent
paradigm of international competitiveness proposed by Porter and van der Linde (1995) states
that “competitive companies are not those with the cheapest inputs or the largest scale, but
those with the capacity to improve and innovate continually”. They argue that innovations
spurred out of progressive environmental management can offset the cost of regulatory
compliance, and even lead to competitive advantage over industry peers. Underlying this
theory is the presupposition that improvements in productivity will occur as a co-benefit of
pollution prevention efforts, resulting from resources being utilized more efficiently.
With disparate roots but similar goals, Lean and Green operating systems are both effective
on their own. Drawing on the resource-based view (RBV) of the firm, this paper investigates
whether integrating Green programmes into lean operations can help companies outperform
their peers by eliminating all forms of waste. A primary proposition of this paper is to
compare both operating systems, describing the key concepts and techniques that underlie
their implementation and to explore the main constructs of an integrated model. This
discussion will be followed by empirical research providing a preliminary investigation into
the competitive positioning of firms adopting an integrated approach.
1.2: Aim and Objectives
This paper examines to what extent Lean manufacturing models and Green operating models
are complementary in nature. The paper attempts to answer whether a resource-based
perspective of the firm focusing on the elimination of all forms of waste (including those with
environmental impacts) can achieve a sustainable competitive advantage.

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In addition, empirical analysis is carried out to investigate the relationship between
companies displaying varying degrees of leanness and greenness, and their relative financial
performance against industry peers.
With these aims in mind, the key question this paper attempts to resolve is:
Can companies adopting Lean & Green operating strategies outperform their competitors?
The key objectives of this paper are as follows:
- Identify commonalities between Lean and Green operating systems by comparing
their main constructs
- Provide a conceptual framework to better understand the complementarities of Lean
and Green operating systems
- Explore the relationship between a firm’s operating performance and financial
performance in terms of “Leanness” and “Greenness”
1.3: Dissertation Structure
A primary proposition of this research is to explore the question of whether or not Lean and
Green operating models are independent, complementary or perhaps most effective as an
integrated approach towards organisational sustainability. The unique contribution of this
paper will be to develop a greater conceptual understanding of the links between lean
operations and environmental performance in the quest for superior organisational
performance.
The remainder of this paper is organised as follows. First, an overview of prior related
research is given, taking into consideration the theoretical and managerial implications of
interest to this paper.
Second, a comparison of both Lean and Green operating models is carried out to identify any
similarities that may exist between both approaches.

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Following this, the paper outlines several theoretical lines of reasoning that suggest
operational activities, environmental performance and competitive advantage are
interdependent variables. This section also notes several limitations encountered in the
literature and highlights the contribution of this study.
The next section explores empirically the relationship between eco-efficiency, lean
production and financial performance amongst manufacturing firms operating across multiple
sectors. These findings are related back to the literature to assess the paper’s hypothesis for
robustness.
Finally, this is followed by a discussion and conclusion of the study.
In the next chapter, a review of prior research and thought leadership is provided to highlight
the key conceptual paradigms and resultant implications of performance associated with lean
thinking and environmental control. The underlying assumption of this paper is that both
fields enhance a firm’s competitiveness by eliminating all forms of waste which improve
resource utilization and thereby enhance the firm’s bottom line.

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CHAPTER 2
BACKGROU D RESEARCH
2.1: Competitive Advantage – The Resource Based View
The resource-based paradigm is founded on the premise that a firm can achieve a competitive
advantage by applying internal competencies to the bundle of valuable resources at its
disposal, such that competitors cannot imitate or substitute these resources without exerting
considerable effort (Wernerfelt, 1984) (Barney, 1991).
These resources can be classified as being tangible, intangible, and personnel-based (Grant,
1991). Tangible resources include financial reserves and physical assets such as machinery,
equipment, and inventory. Intangible resources include reputation, technology, and
organisational knowledge.
Daft (1983) states that a firm’s resources: "...include all assets, capabilities, organizational
processes, firm attributes, information, knowledge, etc; controlled by a firm that enable the
firm to conceive of and implement strategies that improve its efficiency and effectiveness".
Therefore, competitive advantage is determined by the application of a firm’s internal
competencies and management’s ability to organise valuable assets so that they deliver
superior performance (Grant, 1991). As these assets are not productive on their own, any
integrated model encompassing Lean and Green systems should consider a firm's
organizational capabilities including its ability to assemble, integrate, and manage these
bundles of resources.
- Physical assets and technology.
Physical assets can be a source of competitive advantage if an organisation can utilize them
so that they "outperform" equivalent resources of competitors. Russo & Fouts (1997)
postulate that a physical asset acquired through the open market would not in itself sustain a
competitive advantage as presumably the asset would be available to other competitors.
However, they assert that “if new physical assets are deployed in a way that allows a firm to

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capitalize on and enhance its internal methods for waste reduction and operational and fuel-
efficiency, such advantages are less transparent”.
The resources and competencies required to execute a firm’s environmental strategy are
largely influenced by whether the firm is merely aiming for compliance within its existing
regulatory framework, or alternatively pursuing a more ambitious approach to prevent
pollution at its source. A proactive Environmental Management System (EMS) is more
likely to involve redesigning products and processes, which may require the acquisition and
installation of cleaner, more efficient technologies. In this context, the RBV of a firm lends
support to the proposition that improved environmental performance can have a direct and
positive influence on economic performance (Russo & Fouts 1997).
- Human resources and organisational capabilities.
The successful implementation of a Green operating system that significantly enhances a
firm’s environmental performance necessitates a shift in its cultural paradigm, unless the
human resource and management capabilities of the firm are already based on principals of
continuous improvement, employee involvement and forward planning (Shrivastava, 1995).
As mentioned previously, embracing a proactive strategy may often involve the uptake of
cleaner technologies which add complexity to the manufacturing and service delivery
process, thus requiring increased skills from employees at all levels of the organisation
(Groenewegen & Vergragt, 1991).
- Intangible resources.
Advocates of shareholder wealth maximisation might well argue that CSR activities, such as
investments aimed at improving the environmental performance of the firm beyond legal
obligations, can destroy shareholder wealth by increasing the firm’s operating costs.
However, there are scholars who oppose this view (Spicer, 1978) (Porter & van der Linde,
1995) (Fombrun et al., 2000) by suggesting that CSR activities can deliver intangible benefits
such as enhanced reputation, better use of resources, new market opportunities and improved
investor confidence, all of which are positively received by capital markets.

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Perceived market leaders in terms of providing green products and services will increase
sales by satisfying the demands of environmentally conscious consumers. However, Russo &
Fouts (1997) provide us with the caveat that “environmental reputation must be built on top
of an overall reputation for quality. Once gained, a pro-environment reputation is itself a
valuable inimitable resource”. As a social issue, environmental considerations are very
strongly represented in the marketplace. According to the Roper Organisation (1990), this is
due to the positive correlation that exists between consumer’s eco-awareness and income,
which ultimately corresponds to purchasing power.
- An Integrated Model.
Over the past few decades, many firms have gained leadership positions amongst competitors
through the implementation of Lean programmes e.g. Just-In-Time (JIT) manufacturing or
six-sigma. These programmes have proved to be highly effective by facilitating increases in
operating efficiency, cost reductions, improved lead times and enhanced quality.
More recently, companies have begun implementing Green programmes that seek to reduce
the environmental impacts of their operations in terms of energy consumption, waste
generation, and hazardous materials usage. “Models for both Lean and Green systems all
include management systems, waste identification, and implementation of waste reducing
techniques (WRT) to achieve desired business results” (Bergmiller & McCright, 2009).
To date there has been limited progress integrating both methodologies, with the exception of
recent contributions (Olson & Brady, 2009). There is little evidence to suggest that Lean
practitioners extend themselves beyond their traditional remit of cost, quality and flexibility
to achieve positive environmental outcomes, other than incidental improvements inherent in
the leaning process (Bergmiller & McCright, 2009).
From a series of case studies commissioned by the United States Environmental Protection
Agency (EPA, 2003), it was noted that personnel within organisations were often found
working in silos, focused solely on their own specific operating priorities. The EPA describes
the focus of environmental officers on reducing environmental impacts whilst operating
officers focus solely on Lean operations as “living in parallel universes of waste reduction”.

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A limited number of academic papers exploring the relationship between Lean and Green
operations have indicated that a positive relationship exists between both management
systems (EPA, 2003) (Florida, 1996) (King & Lennox, 2001). These scholarly contributions
illustrate that for each system there are many facets common to both. Florida (1996)
identified techniques for waste reduction (e.g. support from upper management, matrix-based
teams, process and product innovation, integrated supply chains etc.) which were
characteristic of progressive management and as such, were associated with both Lean and
Green programmes. He noted that: “advanced manufacturing facilities, such as those
organized under the principles of lean production, draw on the same underlying principles –
a dedication to productivity improvement, quality, cost reduction, and continuous
improvement, and technology innovation – that underlie environmental innovation”.
2.2: The Evolution of Lean Thinking
Lean Operations is both a methodology and philosophy that focuses on eliminating waste and
reducing the lead time required to deliver a service or product to the customer.
The original concept of lean thinking was pioneered by the Japanese auto-manufacturers, and
in particular Taiichi Ohno, founder of the Toyota Production System as a much faster, better
and less-expensive way of producing vehicles (Shingo, 1981, 1988; Monden, 1983; Ohno,
1988).
Scarce resources and intense domestic competition in the Japanese market spurred
innovations such as the just-in-time (JIT) production system, the kanban method of pull
production, respect for employees and high levels of employee problem-solving/automated
mistake proofing (Hines et al., 2004).
This lean operating approach represented an alternative management philosophy that focused
on the elimination of waste and inefficiency associated with the large production batches and
capital intensive assets required for mass production (Hines et al., 2004).
The scope and application of the Toyota Production System gradually extended from auto
component manufacturing and assembly to encompass the wider supply chain. The trade
secrets of Toyota’s lean approach were shared with its suppliers, and eventually were adopted

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by western manufacturers many years later only after they were translated into English
(Shingo, 1981; Schonberger, 1982; Hall, 1983; Monden, 1983; Sandras, 1989).
In their “Review of Contemporary Lean Thinking”, Hines et al. (2004) note that even then,
the interest taken in lean by the western manufacturing community was limited until the
performance gaps between Toyota and other carmakers were highlighted by the seminal work
of Womack et al. (1990). They postulated that the operating model, values and techniques of
Lean production were “transferable” to non-automotive based companies from any
geographic location as production problems and technologies facing management were, as
they put it, “universal problems”.
Many practitioners view Lean as a tools-based approach that systematically identifies and
eliminates waste, otherwise known as “muda”. By eliminating all forms of waste, both
manufacturing and service based companies achieve better quality, increased productivity,
improved customer interactions and flexibility.
Examples of some of the lean tools employed to achieve these goals include value stream
mapping, 5S, kanban and error-proofing (Monden, 1983).
Lean Operations redefine waste as anything that the customer does not value. The original
seven muda identified by Womack and Jones (2003) are:
• Unnecessary transportation of raw materials for processing
• Excess inventory
• Unnecessary motion of personnel or equipment required for processing raw materials
• Waiting due to bottlenecks in production
• Overproduction
• Over processing due to poor inefficient equipment or over-complicated product /
process design
• Identifying and fixing defects
Gradually the application of “Lean principles” espoused by Womack and Jones (1996)
progressed beyond the shop floor of auto-manufacturers and “extended to all parts of the
single company stretching from customer needs right back to raw material resources” (Hines
et al. 2004).

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These principles were as follows:
• Identify the value desired by the customer
• Identify the value stream for each product and review process to eliminate any wasted
steps not required to produce it
• Ensure the product flow is continuous for the remaining value-adding steps
• Utilize “pull” mechanisms to support continuous flow of materials where possible
• Strive for perfection by continuously seeking to reduce all forms of waste to zero
“Lean production is ‘lean’ because it uses less of everything compared with mass
production: half the human effort in the factory, half the manufacturing space, half the
investment in tools, half the engineering hours to develop a new product in the half the time”
(Womack et al., 1990).
This characterisation of Lean production as presented in the book “The Machine That
Changed the World” by Womack, Jones and Roos, captured the attention of production
practitioners and researchers worldwide. To date, however, there has been a limited number
of research papers examining the implications of Lean operations on organisational
performance line using large sample sizes. Some notable exceptions include the work of
Oliver et al. (1996; 2002) and Schonberger (2007; 2008). The majority of empirical analysis
available has been derived from case studies that were carried out by practitioners in the field
(Shingo, 2010).
As lean thinking continues to proliferate throughout the global economy, leaders are learning
to adapt the tools and principles of Lean beyond manufacturing, to logistics and distribution,
services, retail, healthcare, construction, maintenance, and even government (Hines et al.,
2004). The concept of Lean has been in a constant state of evolution ever since its inception.
As consumers become increasingly sensitive to the environmental impacts of their spending
choices (coupled with lean practitioners’ relentless pursuit of better resource utilisation),
perhaps a broader definition of value and waste that includes environmental concerns would
be more appropriate.

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2.3: Impacts of Environmental Performance on Financial Performance
Since the dawning of the industrial revolution, economic development has advanced at a
staggering pace resulting in the accumulation of great wealth and prosperity. However, this
prosperity has come at the cost of numerous environmental catastrophes such as climate
change, ozone depletion, deforestation, desertification and declining biodiversity
(Shrivastava, 1995).
Although organisations must comply with regulation to limit their contribution to these
ecological problems, proactive pollution prevention could garner additional benefits accruing
privately to the firm such as: reduced costs from resource efficiencies; the development of
green markets; first-mover advantage; improved stakeholder relations; and enhanced
reputation (Guenster et al., 2010; Hart, 1995; Porter & Van der Linde, 1995; Shrivastava,
1995).
As mentioned previously, many sceptics believe that investment in CSR (Corporate Social
Responsibility) activities only serve to distract the organisation from its profit seeking
activities, thus destroying shareholder value. However, many scholars refute this argument
suggesting that CSR activities deliver multiple intangible benefits, which ultimately are well
received by the investment community (Spicer, 1978) (Porter & van der Linde, 1995)
(Fombrun et al., 2000).
Griffin and Mahon (1997) discuss studies linking CSR with financial performance and point
out that even though this topic is well documented; it is poorly structured as “methodological
inconsistencies across studies make most evidence incomparable and inconclusive.”
The empirical evidence linking the environmental aspect of CSR to financial performance
can be broken down into three categories (Guenster et al, 2010):
1) Event studies that observe the immediate effects of short-term environmental
performance on stock price variability
2) Correlation analyses that seek to identify the relationship between the variables of
CSR and financial performance

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3) Portfolio studies that explore the influence CSR has on investment decisions
Up until recently, event studies had provided the most direct link between environmental
performance and financial performance. This body of work, which includes Shane and
Spicer (1983), Hamilton (1995), Klassen and McLaughlin (1996) and Karpoff et al. (2005),
documents stock price variability to news involving environmental events such as the
awarding of third party environmental accreditation, or issuance of a fine due to regulatory
non-compliance.
Interestingly, Klassen and McLaughlin (1996) note that negative news events have greater
influence on stock price than positive events. Karpoff et al. (2005) suggests that the loss of
market value corresponds to the firm’s liability for violating environmental regulations.
Guenster et al. (2010) conclude from these two studies that investors are primarily concerned
with the immediate liabilities accruing to firms for poor corporate behaviour, neglecting the
long term implications of environmental management.
The second cluster of research uses regression analysis to investigate the degree of
correlation that exists between the variables of environmental performance and financial
performance. These studies offer inconclusive evidence in support of the proposition that a
positive relationship exists for environmental corporate behaviour and shareholder value
(Peloza & Yachnin, 2008).
In general, the literature indicates that environmental management systems and firm market
value are positively related (Thomas, 2001) and (Ziegler et al., 2002). However, Dowell et
al. (2000) argue that companies pursuing pro-active environmental strategies have higher
firm valuations than those merely adhering to compliance. Konar and Cohen (2001) support
this notion explaining that the reduced burden of waste disposal (toxic chemicals) and
reduced legal penalties are likely to give firms a higher Tobin’s q.
King and Lenox (2002) reinforce this point by concluding that although eliminating waste at
source correlates positively with firm value, less stringent pollution prevention efforts such as
‘end-of-pipe’ systems do not affect Tobin’s q.

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The final group encompasses portfolio studies that compare the average risk-adjusted returns
between two or more mutually exclusive portfolios. The portfolios are characterised by
differing performance attributes (e.g. high growth or environmental stewardship) and are
evaluated for financial performance accordingly.
The body of knowledge from this area is relatively limited with a few exceptions. Cohen et
al. (1997) found that investing in the leading environmental companies did not significantly
influence the portfolio’s return in either direction.
On the other hand, White (1996) found that his ‘green’ portfolio outperformed the overall
market, delivering significantly better market-adjusted returns. More recently, Derwall et al.
(2005) report that eco-efficiency relates positively to operating performance and market
value. Their research found that “the most eco-efficient companies significantly outperformed
their least eco-efficient peers by approximately 6% per annum over the period 1995–2003
after controlling for differences in risk, investment style and sector exposure”.
Derwall et al. (2005) suggest that even though eco-efficiency1
correlates positively with
operating performance, these benefits are only reflected in the share price gradually over
time. Guenster et al. (2010) theorise that this may be a result of the market incorporating
environmental information into investment decisions, now more so than in the past.
Now that the principals and objectives of lean thinking have been established along with the
financial implications of environmental performance, this paper will now explore a
conceptual framework integrating both areas of focus.
1
“Eco-efficiency” refers to creating more value with fewer environmental resources resulting in less
environmental impact (for example, less pollution or natural resource exhaustion).

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CHAPTER 3
COMPARISO OF OPERATI G MODELS
3.1 Introduction
Drawing from the resource-based view, Grant (1991) categorised the resources of a firm as
being tangible, intangible and personnel-based. These resources may include the physical
assets, technologies, organisational knowledge, and reputation of the firm required to achieve
and sustain a competitive advantage (Russo & Fouts, 1997).
As stated previously, Michael Porter identified innovation as a key element of high
performance. By continually innovating products and processes where the majority of
environmental impacts arise, organisations can utilise their resource base more efficiently,
enhance their corporate image and limit exposure from environmental risks. In many cases,
the costs of implementing these innovations can be offset from improvements in operating
performance, environmental performance and stakeholder management creating a win-win-
win situation (Florida, 1996).
Firms in pursuit of sustainability must incorporate environmental requirements into their
overall corporate strategy, rather than merely viewing them as constraints on their
commercial activities (Hart, 1995; Shrivastava, 1995b; Hoffman, 2000). From a resource
based perspective, pollution could be classified as simply another form of waste arising from
poorly designed products and/or processes diminishing company value (Porter and Van der
Linde, 1995; Klassen and McLaughlin, 1996; Rothenberg et al., 2001.) Therefore, reducing
or preventing pollution/waste would not act to weaken but rather strengthen the
competitiveness of a firm (Melnyk et al. 2003).
Some firms may choose to implement Lean operating systems that seek to eliminate waste
from the production process. Others adopt green operating systems that reduce the impact of
industrial activities on the environment. Whilst both approaches have disparate origins, they
share common goals that can enhance firm competitiveness.
Let us now review both of these operating models in greater depth, and assess their potential
impact on the firm’s bottom line.

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3.2 Lean Operating Model:
Overview
Building upon the waste elimination concepts pioneered by Henry Ford in the early 1900s,
Toyota developed an organisational culture that institutionalised the identification and
subsequent elimination of all waste generated from manufacturing activities. In the lean
context, waste was defined as any “non-value adding” activity in the production process from
a customer’s point of view. According to the EPA (2004), such activity “can comprise more
than 90 percent of the total activity” due to unnecessary “touches”, waiting, overproduction,
movement and resource inefficiency.
Womack et al. (1990) define “Lean Production” as a business model that focuses on
satisfying customer needs by producing high quality goods and services at the least cost when
demanded by the customer. “Lean Thinking” is the application of Lean principals across the
entire enterprise, which The Lean Aerospace Initiative (2002) define as: “the dynamic,
knowledge-driven, and customer-focused process through which all people in a defined
enterprise continuously eliminate waste with the goal of creating value”.
In later work, Womack and Jones sought to identify the principles and best practices of Lean
manufacturers from a global perspective. As discussed earlier in the paper, they included:
specifying value; identifying the value stream; flow; pull; and perfection. Value is defined by
what the customer is willing to pay for. According to the Lean philosophy as espoused by
Womack and Jones (1996), any activity that does not directly contribute to the creation of
value is considered to be inefficient and wasteful.
The value stream refers to all the individual tasks that are necessary to provide a good or
service to the customer. By mapping all of these tasks, the company can identify the value
adding activities and target the wasteful activities in need of improvement. The next phase of
the Lean approach is to facilitate the free flow of materials and information from one value
added step to the next throughout the entire enterprise. Pull or “kanban” systems control the
flow of the production process by signalling to preceding operations to produce inventory
only when the following operation needs parts. The application of a make-to-order approach
is used whenever possible. From the perspective of Lean, perfection can only be attained

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when an organisation can produce goods or services at the exact time they are requested by
the customer without creating any waste in the process (Womack & Jones, 1996).
Throughout this paper, the term “Lean” is used to broadly describe the implementation of
several advanced manufacturing methods e.g. JIT, Six Sigma etc. These methods have
predominantly evolved from waste elimination and quality concepts into comprehensive
management systems. In each case, successful adoption necessitates cultural changes within a
firm, a new production paradigm and employee development and empowerment throughout
the entire enterprise (Arnheiter & Maleyeff, 2005).
3.3 Green Operating Model:
Overview
The adoption of management control standards such as the ISO9000 (Quality) and more
recently the ISO14001 (Environment) have become increasingly prevalent with organisations
in recent times (Rondinelli & Vastag, 2000). The ISO14001 is a standardised environmental
management system (EMS) that exists to help companies minimize their negative impacts on
the environment by putting controls in place around the operations for which they can
influence.
The implementation of an EMS involves the management of an organisation identifying all
environmental concerns arising from operational activities, measuring current environmental
performance and developing future goals and targets to deliver the environmental
improvements necessary. An EMS incorporates environmental considerations into corporate
strategy by establishing performance targets, developing polices, and assigning
roles/responsibilities as well as other resources to satisfy regulatory obligations and/or
achieve environmental performance “beyond compliance” of legal requirements (Bergmiller
& McCright, 2009).
The model is based on continuous improvement efforts where performance gets measured,
goals are set and initiatives are implemented accordingly. At this point, progress is assessed

18
and the cycle resumes again with tougher targets being set2
. Effective management of
information systems including well documented procedures are essential to ensure that
initiatives are executed correctly and results are accurately gauged. Furthermore, the process
data captured by the EMS needs to be regularly reviewed so that the most appropriate waste
reducing technique is identified and employed to minimise environmental impacts
(Bergmiller & McCright, 2009).
Russo reviewed the performance of more than 1,500 manufacturers and found that an EMS
(certified or otherwise) was a significant proxy for better environmental performance. The
EPA (2001) encourages the uptake of management systems such as ISO14001 that “establish
and maintain a systematic management plan designed to continually identify and reduce the
environmental impacts resulting from the organization’s activities, products, and services”.
In the same study, Russo also observed a strong correlation between management systems
and environmental performance suggesting that management support is key to achieving
success. Melnyk, Stoufe and Calantone (2003) investigated the impact environmental
management systems have on waste reduction. Their results demonstrated that firms adopting
a formal EMS perceive positive impacts well beyond pollution abatement and experience
improved operational performance (such as reduced lead times and costs, better quality and
less scrappage) from manufacturing.
The EPA (2001) highlights several management system elements that should be included in
any green operating model to assure success. These core elements are:
- Planning
- Leadership
- Metrics and Goals
- Focus on Results
- Information and Analysis
- Process Management
- Employee Involvement (Participation)
- Focus on Interested Parties
2
ISO, 2002, ISO14001 Environmental Management Systems specification, International Organization for
Standardization, Geneva, Switzerland.

19
Drawing from this work and theories put forward by ISO, GEMI and the Melnyk, Stroufe,
and Calantone model, Bergmiller & McCright (2009) synthesised an advanced model of
green systems, shown in table 1 below. This integrative approach illustrates the similarities
of the various green system models, “chiefly their reliance on management systems to drive
waste identification within the organization and the implementation of a comprehensive list
of waste reducing techniques to achieve desired business results.”
Table 1 – Advanced Green System Model (Bermiller & McCright, 2009)
Drivers
A primary driver for adopting lean operations is the need to reduce the resource and time
intensity of manufacturing and/or service processes, thus improving firm profitability and
competitiveness. On top of maximising resource utilisation, organisations also seek better
quality and responsiveness to customer needs from lean programmes. The stimulus for
implementing Lean thinking throughout a business may manifest through increased global
competition or from an evolving customer/supplier relationship. However, Lean practitioners
often cite the need for a real or perceived crisis to facilitate the substantial organisational
changes usually associated with a Lean transformation (EPA, 2004).

20
According to a NIST survey (2003) of 40 companies who had adopted lean manufacturing,
respondents reported improvements in the following areas:
Operational improvement: Shortened lead times, increased productivity and reduced WIP
stock.
Administrative improvements: Fewer errors associated with order processing and streamlined
customer service resulting in better experience for customers.
Strategic Improvements: reduced costs, increased competitiveness, faster product
development etc.
Other outcomes that can be expected when shifting from conventional “batch and queue,”
functionally-oriented manufacturing to a “one-piece flow,” process-oriented kanban system
include (EPA, 2003):
- Reduced carrying costs and losses associated with excess inventory
- Better resource utilisation and decreased production waste
- Optimised equipment utilised for direct production and support purposes (i.e.
repair downtime and changeovers are minimised)
- Reduced need for factory floor space as operations use facilities more
effectively
- Reduced product/process complexity thus avoiding variation and subsequent
errors
Drivers
The drivers for EMS implementation can vary depending on the strategic approach of the
firm and the market dynamics in which it finds itself. According to the EPA (2004), firms
must determine which of the following outcomes are most desirable before planning and
implementing an eco-control system:
- An environmental system that mitigates the risk of non-compliance liabilities
- A system that supports continual improvement of the firm’s environmental
performance
- A system that effectively manages information for internal and external
auditing purposes e.g. voluntary disclosure

21
On top of this, other market pressures exist that can influence EMS adoption such as peer
pressure within an industry, customer expectations, supply chain requirements, economic
opportunities and regulatory compliance etc. (Bansal & Roth, 2000).
Shrivastava (1995) note that some of the potential benefits arising from improved
environmental performance include:
• Reduced Costs
- Better resource utilisation
- Liability mitigation e.g. pollution fines
• Improved Quality
- Process re-engineering
- Product re-design
• Early Adoption of Legislation
- Regulatory shaper rather than follower
• Positive Organisational Culture
- Employee involvement
- Increased morale
• Improved Corporate Image
- Increased brand value and customer loyalty
- Access to new markets
- Better stakeholder relationships
The ultimate goal of these green systems from an organisational viewpoint is the creation of
additional customer value using fewer resources. Dowell et al. (2000) refer to this process of
improving the production process to minimise pollution as “eco-efficiency”. This proactive
form of environmental responsibility seeks to prevent pollution at source from improvements
in operational efficiency, as opposed to costly ‘end of the pipe’ solutions (Guenster et al.
2010).
Strategy

22
Frequently the inter-relationship between corporate strategy and operational activities is
misunderstood. In his seminal paper, Skinner (1969) shows how a “top down” approach
linking manufacturing tasks to a firm’s overall corporate strategy can sustain a competitive
advantage. These manufacturing tasks represent the “competitive priorities” a firm must
focus on to support corporate strategy and include areas such as cost, quality, dependability
and flexibility (Wheelwright, 1984).
Initially, these operating objectives were seen as exclusive approaches to executing a firm’s
corporate strategy (Skinner, 1969). However, this trade-off model has been challenged over
the years with some evidence suggesting that these “competitive priorities” may be mutually
beneficial if pursued in the appropriate sequence (Nakane, 1986; Hall, 1987). The “sand
cone” model proposed by Ferdows and de Meyer (1990) is a cumulative model for
operational improvement which advocates initially focusing on quality and then progressing
through dependability, flexibility and finally cost.
The process of determining a firm’s operating policy necessitates some key factors to be
considered. These include (Skinner, 1969):
• Industry factors
- Competitive situation
- Economic constraints and opportunities
- Technological constraints and opportunities
• Organisational factors
- Assess strategy effectiveness
- Critical appraisal of company skills and resources
- Determine operational competitive priorities
• Policy Formulation
- Evaluate resources
- Plan how to align the organisation to satisfy requirements of
competitive strategy
• Policy Implementation
- Implement basic systems e.g. production planning, use of standards
- Develop controls of cost, quality, flow, inventory and time

23
- Select resources and operations critical to success (e.g. employee
skills, equipment usage etc.)
• Analysis & Review
- Review performance
- Assess dynamics of competitive situation
- Analyse and review operating policies and strategy
This approach attempts to design the operating policies of the firm so that they support the
overall competitive strategy. The underlying assumption made here by Skinner (1969) is that
only after the basic production policies have been clearly defined can the operations function
successfully enable corporate strategy.
Strategy
As mentioned previously, the selection of operational objectives employed by the firm should
cover all aspects of production that foster a sustainable competitive advantage. These
parameters should be extended to new areas of the operations function if further opportunities
exist to help the firm deliver superior performance. Capabilities such as innovation and
flexibility should be considered in Swink and Hegarty’s (1998) capabilities based model as
they contribute towards achieving operating objectives: improved quality, reduced costs and
shorter lead times (Jimenez & Lorente, 2001).
In the case of environmental issues, there is sufficient evidence to warrant an increase in the
number of operational objectives available for a firm to choose from (Angell, 1993) (Jimenez
& Lorente, 2001). Environmental capabilities developed from HR and TQM capabilities can
positively impact the operations of a firm (Hanna et al. 2000). In addition to strengthening
the competitive position of the firm, environmental capabilities can also form the basis of a
competitive advantage if they have developed from resources that are difficult to imitate and
slow to diffuse (i.e. employee involvement and operating procedures) (Hayes & Upton,
1998). This perspective indicates that as well as possible synergies existing between
environmental and operational performance, trade-offs from attempting to satisfy both
objectives may also be necessary e.g. “eco-efficiency” versus “end of pipe” solutions
(Jimenez & Lorente, 2001).

24
Sharma and Vredenburg (1998) illustrate the importance of strategic commitment to
achieving maximum environmental performance, whilst developing competitively valuable
organizational capabilities in the process. Hart (1995) and Florida (1996) posited firms
pursuing environmental strategies that progress beyond regulatory compliance towards a
more proactive approach of pollution prevention would benefit from improved financial
performance. A compliance strategy relies on pollution abatement from short-term, “end-of-
pipe” solutions that are required to adhere to environmental regulations (Hart, 1995). Firms
adopting this environmental strategy often fall short of compliance (Russo & Fouts, 1997)
and may incur punitive fines and other related liabilities. The more pro-active environmental
strategy focuses on pollution prevention by emphasizing the systematic elimination of waste
at source through process innovation (Hart, 1995).
In other cases, companies have targeted “low hanging fruit” such as energy efficiency with
their green initiatives in order to positively influence their financial bottom line. DeCanio
(1993) noted that 80% of the projects reported by companies participating in the EPA’s
Green Lights programme had payback periods of two years or less.
Human Resources
Firms attempting to embed the philosophies of TQM (Total Quality Management) and JIT
(Just-in-Time production) into their organisational culture must carefully design, plan, and
execute employee development programmes that overcome what Porter and van der Linde
(1995) describe as “organisational inertia”. According to the EPA (2003), Lean
implementation strongly encourages the incorporation of the following concepts into a firm’s
organisational behaviour:
- Employee involvement with problem-solving
- Matrix based teams spanning traditional organisational functions
- Systematic problem solving approach
- Continuous improvement focused on eliminating waste
- Operations-based focus of activity and involvement
- Open communication and feedback driven by key performance metrics and leading
indicators

25
- Supply chain investment to improve enterprise wide improvement
- Enterprise-wide view and thinking for optimising performance
Grouping employees in cross-functional teams for Lean initiatives can stimulate idea
generation by opening up channels of communication among staff representing all the major
facets of the organisation. Often, the team member most involved with the process under
review will already be keenly aware of opportunities for streamlining or waste elimination.
However, systematically applying problem-solving skills such as cause-effect analysis and
statistical process control (SPC) will ensure that these initial assumptions are thoroughly
investigated. The effective capture and analysis of process metrics ensure that organisational
goals are regularly evaluated for continuous improvement opportunities.
The EPA (2003) argues that these concepts are all “critical dimensions” of Lean
implementation as they enable an organisation to define objectives, support staff in achieving
targets, and systematically improve operating performance. However these core elements of a
Lean system require cultural changes in the following areas:
Changes in mindset:
Schein (1990) argues that culture is built upon the observed behaviour of leading figures
during key moments of an organisation. This implies that management should embody the
lean philosophy and champion its implementation to all other employees.
Improvement in skills:
Employee development is necessary to equip personnel with the skills and knowledge
required to effectively achieve desired outcomes (Goh, 1988).
Changes in Mechanism:
The polices and procedures of an organisation need to reflect “Lean Thinking” by opening up
communication channels across functional boundaries, ensuring effective continuous
improvement practices are in place, as well as periodic feedback loops. These infrastructural
elements buttress the previously stated cultural changes (Hanna & Newman, 1995).
Human Resources

26
Similar to the quality management paradigm espoused by Juran (1988), the participation of
shop floor staff is an integral part of pollution prevention as they are uniquely positioned to
help identify sources of waste and suggest potential opportunities for improvement (Angell &
Klassen, 1999). Institutionalising the concept of eco-efficiency necessitates a significant
change in a firm’s culture, human resources and the organisational capabilities required to
manage them (Russo & Fouts, 1997).
Proactive environmental strategies usually embrace clean technologies and product/process
re-engineering, thus demanding additional skills from employees at all levels of the firm
(Groenewegen & Vergragt, 1991). As such, pollution prevention is a more sophisticated and
culturally complex process than compliance (Shrivastava, 1995), as they require many of the
same critical dimensions discussed earlier for Lean implementation. The prime resources
leveraged by operations to prevent pollution at source usually involve elements of employee
empowerment and cross-functional integration across the organisation through improved
channels of communication (Kitazawa & Sarkis, 2000).
Kitazawa & Sarkis (2000) found that employee participation and management’s commitment
to involve employees in decision making are critical components of an effective
environmental management system. Other studies have emphasised the importance of the
human dimension to source reduction programmes (Rothenburg, 1999). From an internal
operations model, Hoffman (1997) posits that rather than being a separate function,
environmental management should be diffused to all functions throughout the organisation.
This notion underlines the importance of front line staff creating innovative solutions to
improve the environmental performance of a firm.
Methodologies & Tools
“Lean Thinking” is a customer-centric approach to operations that focuses on the creation of
value as defined by the customer through improving process speed and efficiency (George et
al., 2004). The Lean principals identified are applied to a firm’s entire operations as part of a

27
continuous improvement cycle that strives to eliminate all non-value adding activities from
the production process. “There is no end to reducing time, cost, space, mistakes, and effort”
(McCurry & McIvor, 2001).
Andersson et al. (2006) suggest that the main objective of the process specific approach
within quality management is to continuously improve and standardise the process. The
methodology most commonly used in reducing business process variation is the DMAIC
cycle, which first was developed by Shewhart and Deming. The DMAIC methodology
represents the different phases of the improvement cycle, namely:
- Define the problem, the voice of the customer
- Measure relevant process data
- Analyse process to design and develop alternatives
- Improve the current process
- Control the future state process correcting deviations before they become defects
Dr Deming (1982) stated that 96% of all quality problems are built into an organisations
system; therefore it is the responsibility of management to improve the system with the help
of their employees. There are many different methods and tools available to organisations
implementing Lean production systems that either eliminate waste or improve quality. These
methods include:
1) Continual Improvement:
The basic premise of Lean production is to rapidly implement incremental process
improvements in a systematic manner, also known as Kaizen events. The kaizen strategy
employs cross-functional teams in the organisation to identify and eliminate waste using
techniques such as value stream mapping.
2) 5S:
5S is a system that routinely reduces waste and improves productivity through organising the
firm’s workplace facilities and using visual aids to smoothen the flow of operating activities.
The 5S’s represent Sort (Seiri), Set in Order (Seiton), Shine (Seiso), Standardize (Seiketsu),

28
and Sustain (Shitsuke), which provide a framework for cleaning and organising a productive
work environment (EPA, 2003).
3) Total Productive Maintenance (TPM):
TPM aims to ensure that all equipment is effectively maintained in order to prevent accidents,
defects, and breakdowns. A core component of TPM is autonomous maintenance which
trains operating personnel to take care of the machines and equipment with which they work.
This method helps design the production system lifecycle through selecting equipment that
requires little or no maintenance, mistake –proofing equipment to prevent breakdowns, and
correcting equipment/machinery to avoid defects before they arise (EPA, 2003).
4) One-Piece Flow/Cellular Manufacturing Systems:
A one-piece flow system aligns work units sequentially so that product components flow
smoothly throughout the entire manufacturing process with the least amount of transport or
waiting time. Adopting this new shop floor configuration represents the first fundamental
shift away from traditional batch-and-queue production activities for a company as it aims to
manufacture products one-piece at a time, at the rate of customer demand (i.e. pull). This
method affords flexibility to manufacturing capabilities with regards to quick product line
changeovers, as well as reduced waste from excess stock (EPA, 2003).
5) Kanban/Just-in-time Production System:
Just-in-time production (also referred to as the Toyota Production System) is an inventory
reducing strategy that develops one-piece flow systems further by using signals or Kanban at
different stages of the process to indicate when operating officers should initiate the next
step. This system ensures that the organisation produces the right product, at the right time,
in the right amount as requested by the customer. The main benefits from implementing JIT
are typically a reduction in inventory, WIP, and waste associated from over-production (EPA,
2003).
6) Six Sigma:
The Six sigma methodology was developed by Motorola as a response to an unacceptable
level of defects originating from complex inter-dependent manufacturing variables. The UK
Department for Trade and Industry define Six Sigma as "A data-driven method for achieving
near perfect quality.” This methodology emphasises statistical process control techniques to

29
identify the root causes of process variation, and apply the most appropriate solution to
eliminate defects using integrating advanced improvement tools (Andersson et al., 2006).
7) Pre-Production Planning (3P):
3P is an advanced lean method that eliminates waste by re-engineering business processes
and products so that they consume less time, material and capital resources, whilst still
satisfying customer requirements. 3P projects require participation from cross functional
teams to evaluate alternative approaches to product development that meet certain criteria
relating to production quality, delivery time and material cost. These projects tend to result
in products that are less complex, easier to assemble (also known as “design for
manufacturability”), and easier to use and maintain (EPA, 2003).
8) Lean Enterprise Supplier etworks:
Womack and Jones3
(1996) estimated that most firms could not lean their operations beyond
25 to 30 percent without the participation of their suppliers in a similar lean initiative. By
involving supplier networks in Lean programmes, shared benefits from reduced waste such as
improved quality, reduced cost, and quicker delivery times are expected to accrue to the
entire enterprise. Organisations can encourage the diffusion of lean methodologies through
coaching, technical assistance, regular communication, site visits, employee exchanges and
joint projects (EPA, 2003).
While most of these Lean tools and methodologies share many similarities and can be
effectively implemented in parallel of each other, most organisations tend to implement them
sequentially (EPA, 2003) in the order they are presented above (EPA, 2003). Usually
organisations implementing a Lean initiative will select a pilot project that represents “low
hanging fruit” for the company to ensure “buy in” from the entire workforce early on in the
process.
3
Womack, James P. and Daniel T. Jones. Lean Thinking: Banish Waste and Create Wealth in Your Corporation
(New York: Simon & Schuster, 1996).

30
Methodologies & Tools
Gupta and Sharma (1996) defined environmental operations management as “the integration
of environmental management principles with the decision-making process for the conversion
of resources into usable products.” It has been well established that the operations function
significantly impacts the environmental performance of an organisation as it determines how
resources are used and what technologies are employed in the production process (Florida,
1996; Angell & Klassen, 1999; Kitazawa & Sarkis, 2000; King & Lenox, 2002). Numerous
studies have explored the relationship between the application of quality management tools
and corporate environmental performance (Kitazawa & Sarkis, 2000; King & Lenox, 2002).
In addition, there have been studies looking at the effectiveness of operations involving
information management systems (King & Lenox, 2002), and the importance of employees in
waste reducing programmes (Kitazawa & Sarkis, 2000; Rothenberg et al., 2001).
As environmental considerations should be included as part of a modern operating strategy
(Angell & Klassen, 1999; Jimenez & Lorente, 2001), it then follows that many of the tools
and methodologies used to improve a firm’s operating performance can also be applied to
reduce waste from an environmental perspective. The EPA (2004) illustrates this point
detailing case studies of how green operating models can leverage Lean methods to reduce
the environmental impacts of industrial activities. However, the fundamental difference in
their application is the incorporation of environmental performance as the firm’s primary
operating objective.
Having compared the models for both Lean and Green operations, it is clearly evident that
many similarities exist within the conceptual framework developed throughout the chapter.
Exploring this potential synergy further, the literature research section of the results chapter
aims to explore these ostensible complementarities by evaluating an integrated approach to
Lean and Green operations using previous academic studies and practitioner reports.

31
CHAPTER 4
EMPIRICAL DATA A D METHODOLOGY
4.1: Introduction
In a systematic review of 159 academic papers and practitioner reports examining the
relationship between sustainability and financial performance, Peloza & Yachnin (2008)
report that there is a lack of consistency for measuring sustainability within the body of
research, and that more attention needs to focus on establishing causality between both
variables.
The vast majority of literature draws on “end state outcome metrics”, such as share price or
return on assets. Interestingly, practitioner reports have a greater propensity towards using
“intermediate metrics” measuring activities which ultimately generate value in end state
outcomes (Peloza & Yachnin, 2008). For example, better resource utilisation should lead to
increased profits positively influencing the firm’s share price. Accessibility to data could be
a factor influencing the adoption of intermediate metrics. The remaining studies capture how
the “mediating variables” create value for the firm (Peloza & Yachnin, 2008). These are the
outcomes specific to sustainability initiatives such as reduced energy consumption reducing
operating expenses, thus increasing profits and the firm’s share price.
As previously mentioned, further work needs to be done to improve our understanding of the
mediation process between the environmental component of sustainability and financial
performance. The chain of value creation arising from environmental initiatives needs to be
clarified, including all costs and benefits impacting end state financial metrics.
To do this empirically, a complete examination of structures and processes employed by
firms to engage in sustainability would be required. To support the hypothesis that an
integrated Lean & Green operating model can facilitate high performance a thorough analysis
of the benefits (directly and in-directly) accruing from the implementation of a double
barrelled approach would be necessary.

32
Unfortunately, much of the data necessary to quantify the tangible benefits arising from Lean
& Green investments is either not collected due to inadequate reporting structures, or in other
cases is simply not disclosed as the data is process specific and potentially sensitive
information (EPA, 2003). Furthermore, when Lean & Green metrics are disclosed, it is likely
that the indicators will be aggregated to a company-wide perspective making it difficult to
isolate the precise metrics from statistical noise for particular processes.
Due to the aforementioned issue of data availability and within the time constraints of a
Master’s dissertation, this research methodology is beyond the remit of this paper and as such
is left for future investigation.
Instead, this paper puts forward a conceptual framework integrating the structures and
processes for both Lean & Green operations, which in theory can foster innovation and
competitive advantage. This literature evaluation is synthesised from previous academic
studies, case studies, and practitioner reports.
The validity of this theory is then empirically tested by exploring the relationship between the
variables of “Lean” and “Green” for companies listed on the Carbon Disclosure Project
Index. Companies characterised as being both Lean & Green are assessed and their
performance is compared with that of their peers to determine whether or not a double
barrelled approach can lead to superior financial performance. The aim of this analysis is to
asses the relationship between both operational objectives and financial performance in order
to evaluate whether sufficient correlation exists to warrant further investigation.
4.2: Data Used
The dataset is compiled using secondary data that is publicly available for companies listed
on the Carbon Disclosure Project CORE4
and Osiris5
databases. Research was supported with
4
The Carbon Disclosure Project publishes the emissions data for 1550 of the world's largest corporations,
accounting for 26% of global anthropogenic emissions. Company specific data can be retrieved from the
following url: https://www.cdproject.net/en-US/Results/Pages/overview.aspx

33
information retrieved from financial statements, annual reports and CSR reports from
company websites.
The following end state outcome metrics were captured:
1) Market based indicator e.g. Price-Earnings Ratio (P/E)
2) Accounting based indicator e.g. Return on Invested Capital (ROIC)
Market based indicators are useful as they facilitate companies to compare their performance
with that of their peers across markets, industries and geographies. Also, market indicators
are readily available so companies can assess the performance of initiatives that are expected
to generate value in the market place, such as enhanced reputation or product innovation.
This metric implies that to some degree, stakeholders must assign a positive value to
sustainable activities (Peloza & Papania, 2008).
Internally based accountancy metrics demonstrate how efficiently the firm generates value
from the resources available to it. For example, they can be used to determine the value
generated from an environmental initiative such as reduction in CO2 emissions or reduced
operating expenses.
- Financial Indicators
To capture the financial performance of a firm we use Return on Invested Capital (ROIC)
which is fundamental in measuring how much value a company creates, and the Price-
Earnings Ratio (P/E), which is a proxy for firm valuation. While both measurements
encompass a firm’s financial performance, ROIC represents historical performance achieved,
whereas P/E reflects investor’s expectations of the firm’s future earnings potential.
ROIC gauges how efficient management is at allocating the capital under its control to
profitable investments. The return on invested capital measure gives a sense of how well a
company is using its money to generate returns.
5
Osiris is an online resource with financial information on 55,000 listed and major unlisted/delisted companies
which can be accessed at the following url: https://osiris.bvdep.com

34
P/E is a valuation ratio of a company's current share price compared to its per-share earnings.
In general, a high P/E suggests that investors are expecting higher earnings growth in the
future compared to companies with a lower P/E competing in the same industry.
End state metrics are useful to determine the overall financial health of a company, but are
not always suitable for evaluating the effectiveness of initiatives that have a relatively minor
impact on the company’s share price. For the remaining variables of “Lean” and “Green” we
used the following intermediate metrics:
- Lean Indicator
Stock turnover captures the operating efficiency of a company by measuring how well it
converts stock into revenues. A quicker turnover of stock means that the company generates
sales from its inventory quicker, and so should be more competitive. It is a reasonable proxy
for “Leanness” but is most appropriate to manufacturing based companies, or at least
companies engaged in the transformation of physical products e.g. construction companies or
retailers.
- Green Indicator
As a measure of greenness, companies are benchmarked within their industry based on their
carbon intensity ($US Turnover/ tC02e) relative to one another. This metric is calculated by
dividing the annual turnover of a firm by its scope 1 & 2 carbon emissions as defined by the
GHG protocol. This figure is an expression of how much revenue is generated for every
tonne of carbon dioxide equivalent that is emitted, and therefore is an approximation of the
firm’s carbon efficiency.
4.3: Methods and techniques
The data sample comprised of companies who had submitted responses to the Carbon
Disclosure Project from the Auto, Beverage, Multi-line Retail, Aerospace and Electronic
sectors for the period 1/01/2008 – 31/12/2008.
Carbon emissions for each company were obtained from the CDP Core database. Revenue
and stock turn ratios were then obtained from Osiris. Using these metrics, Lean and Green
indicators were defined for each company.

35
Some companies were filtered due to insufficient data for the time period. Other companies
had their carbon intensity metric pro-rated to take into account operational boundaries and
incomplete disclosure of emissions e.g. if a company reported only 80% of its total emissions
due to lack of reporting capacity, then the revenue figure for that company was reduced
proportionately to account for this.
All companies were grouped within their respective sectors and benchmarked on their “Lean”
and “Green” operating performances accordingly. Industry averages for each variable were
calculated and subsequently, company characteristics were defined according to whether they
were above or below the industry average. For example, companies with carbon intensity
figures ($US / C02e) above the industry-wide average were grouped as being “Green”, and
companies below the industry average were grouped as being “Non-Green”.
Similarly, companies with a stock turnover ratio above the industry average were grouped as
being “Lean”, and companies below the industry average were grouped “Non-Lean”.
These variables were then ranked according to the corresponding financial performance of
the company to determine the operating strategies adopted by “leaders” and “laggards” within
each industry. In this context, a “leader” represented a company which attained above
average performance based on the accounting and market based metrics. Similarly, a
“laggard” represented a company whose financial performance was below their respective
industry average.
Finally, we aggregated the performance of these “leaders” to establish if there was a
consistent trend between Lean and Green company profiles and superior financial
performance across all industries.
In the next chapter, the findings of this empirical analysis are detailed and discussed.

36
CHAPTER 5
RESULTS
6.1: Evaluation of Lean and Green complementarities
The comparison of Lean and Green operating models has highlighted many similarities that
exist between both approaches. The next section explores the main constructs of both models
and evaluates whether commonalities can be exploited to deliver high performance. Previous
academic papers, case studies and industry reports were used to synthesise this conceptual
framework.
Integrated Lean & Green Model:
Drivers
The main stimulus for incorporating both Lean and Green considerations into the operations
of a firm is fundamentally based on creating additional customer value, using fewer
resources. By reducing the waste associated with corporate activities, organisations improve
resource productivity, lowering the costs for raw materials and waste disposal (Young, 1991).
As stated previously, Lean implementation can have many positive impacts on the
environmental performance of a firm, such as fewer resources required for production,
reduced energy consumption and reduced scrappage. Similarly, pollution prevention can
buttress Lean initiatives (e.g. reduced cycle times) by removing unnecessary steps from the
manufacturing processes.
The main benefits arising from each model have been well documented earlier in the
comparison section. However, an additional motivation for adopting a double-barrelled
approach might be to maximise the use of existing structures, processes and tools to further
enhance the competitiveness of a firm by using an alternative perspective. Given the
complementarities between Lean and Green operating systems, it may be possible to
accelerate the accumulation of resources in the former by incorporating it into the latter
(Roome, 1992).

37
Research performed by the EPA (2003) indicates that environmental performance is not
considered as an objective when implementing Lean programmes because the financial
rewards of improved environmental performance are often not sufficiently material in size.
The business case for Lean is instead made on the basis of “improving flow and linkage in
the production process, and reducing the capital and time intensity of production” (EPA,
2003). Even though source reduction programmes can effectively improve the
competitiveness of a firm, in many cases they struggle to compete for the limited resources
available as Lean impacts on profitability can be so potent.
Thus, in reality Lean is fundamentally concerned with enhancing firm competitiveness, while
improvements in environmental performance result as a co-incidental side benefit. That
being said, the value of integrating environmental considerations should not be
underestimated. As discussed previously, there are many direct and indirect ways in which
superior environmental performance can positively influence the financial performance of a
firm ranging from waste disposal cost savings to increased customer loyalty. As suggested
by the EPA (2003), perhaps the most appropriate pitch for an integrated model might be to
enter through the “operations door” and take advantage of environmental considerations and
tools where it fits within the overall context of “Lean Thinking”.
Strategy
The field of operations management has been the main focal point for studies exploring the
relationship between organisations and environmental sustainability (Angell & Klassen,
1999). This is due in part to the fact that the most effective way a firm can contribute
towards sustainable development is by routinely integrating environmental considerations
into the production process (Porter & van der Linde, 1995).
As this paper has illustrated already, there are many common elements and synergies between
Green operating systems and Lean production. Thus, source reduction programmes, zero
waste or design for the environment (DfE) may actually leverage traditional quality
management techniques such as statistical process control (SPC), JIT, or design for
manufacturability (DfM) (Jimenez & Lorente, 2001).

38
Therefore, the performance objectives of operations should be expanded so that management
include environmental considerations to reinforce corporate strategy (Angell & Klassen,
1999; Jimenez & Lorente, 2001). The operations function is significant in terms of
environmental performance because this is where the majority of the firm’s impacts originate
(Gupta, 1995). As such, the selection of resource inputs, waste outputs and treatment/disposal
of these outputs, as well as environmental costs and implications, should be evaluated as part
of a firm’s operating model. Environmental concerns should be endemic rather than treated as
constraints imposed externally on the firm (Angell & Klassen, 1999).
Furthermore, when considered in isolation, the strategy and operations of a firm have been
found to exert only limited influence on the environmental performance of a firm (Simpson &
Samson, 2010). It has been observed that environmental expertise, when applied to data
intensive practices (e.g. SPC) helps link corporate strategy with operating procedures, thus
augmenting their combined influence on environmental performance (Simpson & Samson,
2010). The presence of environmental personnel integrated throughout the organisation is
thought to represent the practical and visual application of management’s strategic
commitment to environmental performance. The data intensive practices associated with
management control systems (MCS) facilitate systematic data analysis and continuous
improvement relevant to operational and environmental performance (Simpson & Samson,
2010).
In terms of securing competitive advantage, a pre-emptive strategy may be the best approach.
Progressive companies working closely with government bodies to establish regulations or
standards can effectively lobby to have rules uniquely tailored to the firm’s specific
capabilities (Hart, 1995). For example, BMW achieved first mover advantage by pre-
empting the German governments “take-back” auto policy through the initiation of its own
“design-for-disassembly” process. This allowed BMW to enjoy cost advantages over their
competitors as well as eventually succeeding in establishing the BMW approach as the
national standard.
The orientation of a firm’s operating strategy should gradually shift from pollution prevention
to resource productivity (Porter & van der Linde, 1995). Corporate strategies that promise
priority to environmental concerns over industry, or policies that always put the interests of
industry ahead of environmental concerns, are destined to end in failure as both

39
considerations are interlinked. Instead, success must involve innovation-based solutions that
balance the legitimate concerns and objectives of both environmentalism and firm
competitiveness in order to foster a sustainable competitive advantage (Porter & van der
Linde, 1995). The continuous alignment of both Lean and Green objectives should thus
provide competitive advantage to a company.
Human Resources
During interviews conducted by the EPA (2003), Lean practitioners expressed employee
cynicism and aversion to change as being the principal stumbling blocks to successful Lean
implementation. These issues can similarly be expected to arise when introducing green
initiatives, as this paper’s author has observed employee ambivalence towards new
programme roll-outs from previous client engagements. It was observed that over-exposure
to increasingly frequent top-down campaigns that subsequently faded in relevance (generally
due to a lack of supporting operating practices) created a sense of faddism amongst
employees. This type of inertia is commonly experienced by environmental experts
attempting to integrate environmental objectives into an organisation’s culture (Brown &
Larson, 1998).
Therefore, the successful implementation of an integrated Lean and Green approach will
depend on management leadership and commitment in the following areas
(Kitazawa & Sarkis, 2000):
- Empowerment of employees through job training, upskilling and open
communications, in particular operations personnel
- Bottom-up decision making that promotes employee participation in accordance with
management guidelines
- Incentive programmes that encourage employee involvement and improve morale
- Team based approach that facilitates cross functional knowledge sharing and
continuous improvement activities
- Engagement with the supply chain to improve enterprise-wide performance
However, as discussed for Green operating models, these critical dimensions will necessitate
changes in areas such as corporate culture, employee skill sets and organisational structure.

40
The foundations of a successful Lean and Green operating strategy are rooted in an operation-
based, employee-involved organisational culture that systematically eliminates all forms of
waste through continuous improvement cycles (EPA, 2003). Due to the similarities that exist
between both models, assimilating both cultures together should, at least in principal, be
relatively straightforward.
Tools & Methodologies
Florida (1996) studied the relationship between Lean and Green operating models and found
that progressive organisations employed advanced management techniques to eliminate waste
from their products and processes. He observed that Lean production facilities were
organised according to the same principals that underlie environmental innovation i.e. “A
dedication to productivity improvement, quality, cost reduction, and continuous
improvement, and technology”.
Similarly, Kitazawa and Sarkis (2000) identified common elements within the ISO
management systems relating to both quality and environmental performance. Both the IS0
9000 and ISO 14001 engender the same critical dimensions such as clear role responsibility,
establishment of key performance metrics, employee empowerment, and systematic
corrective actions.
In addition, both ISO standards are premised on Deming’s (1986) PDCA (Plan-Do-Check-
Act) cycle. Once awareness and value have been established into the organisation’s culture,
management can begin the planning process. Strategic planning is then executed throughout
the firm’s operational procedures. The final step in the process is to review performance and
correct the root cause of deviations from goals. As experience and knowledge accumulate
from repeated cycles, organisational learning should enable management to progress from
reactive responses to proactive innovation (Post & Altman, 1992).
In 2004, the EPA conducted interviews comparing environmental management systems
(EMS) with Lean production systems in the shipbuilding sector and observed the following:

41
- Managers interviewed believed that Lean and Green systems were compatible and
synergistic
- Managers considered green systems as value-adding activities that improve
environmental performance. Therefore, they are not considered muda within the lean
context
- Respondents believed that green systems enhance the effectiveness of Lean activities
by expanding its scope beyond the Lean definition of production waste to address
“environmental blind spots”
- Respondents also believed that Lean adds value to green systems because the
marginal effort of integrating environmental performance objectives into Lean
programmes is substantially less than the effort required to achieve those
environmental goals independently
As is the case for many of the other components of an integrated model, the advantages
accrued from implementation are a combination of the advantages arising from each
independent model. For example, quality management practices provide standardisation
benefits to the environmental data capturing process (Simpson & Samson 2010). Other
research has identified employee involvement and willingness to participate in problem-
solving activities as a crucial factor for successful pollution prevention programmes
(Kitazawa and Sarkis, 2000).
Other opportunities for integrating the tools and methodologies of Lean and Green systems
include (EPA, 2004):
- Integration of environmental aspects into value-stream mapping. This helps identify
all value and non-value adding activities within a process from a more holistic point
of view, satisfying all operating objectives
- Alignment of Lean management practices with environmental performance and
compliance considerations
- Engagement of environmental specialists in Lean activities (such as kaizen events, 3P,
value stream mapping etc.) concerning environmentally sensitive processes
- Cross-training operating and environmental personnel on green system goals and
procedures, Lean system tools and techniques, and how both systems work together

42
This chapter concludes the conceptual framework investigating the complementarities of
Lean and Green operating systems. The Lean and Green operating model is based upon the
premise that carbon efficiency6
is valuable for all companies because it reduces operating
inefficiencies, lowers costs, supports Lean thinking and fosters innovation.
This operating model description illustrates how an integrated approach can positively
influence the capabilities of an organisation, thus affording it a competitive advantage. Now
that a conceptual framework integrating Lean and Green operating systems has been
established, an empirical analysis is performed in the next section to verify its robustness.
EMPIRICAL RESULTS
5.6: Introduction
To address the third research objective presented at the beginning of this paper, the empirical
analysis involved analysing the financial performance of 55 companies with varying degrees
of Leanness and Greenness. The study looked at five manufacturing based sectors, with
results being aggregated in order to provide a preliminary investigation into how these
variables impact organisational competitiveness.
Indicators for each of these variables were defined according to whether they performed
above or below the sectoral average for the variable in question. Companies were defined as
being Lean or Non-Lean depending on whether they were above or below the sectoral
average for inventory turns. Likewise, Green indicators were based on the carbon intensity of
companies relative to their sector peers.
Financial performance was assessed using both accounting and market based metrics. As
mentioned previously, while both measurements encompass a firm’s financial performance,
ROA represents historical performance achieved, whereas P/E reflects investor’s expectations
of the firm’s future earnings potential.
6
The FTSE CDP Carbon Strategy Index is partially founded upon the Carbon Efficiency Hypothesis.

43
5.7: Financial implications for varying operating characteristics
Table 2 reports a summary of how various combinations of Lean and Green operating
indicators corresponded with financial performance. This table represents the aggregated
results observed from each of the following sectors: Auto; Beverage; Multi-line Retail;
Aerospace; and Electronics. Companies were compared against their sectoral counterparts as
Lean and Green indicators may vary significantly depending on the nature of the industry.
These results were then aggregated to give a high level overview of how companies with
different operating characteristics performed in terms of accounting and market based
evaluations.
Table 2 – Summary analysis of relationship between Lean and Green indicators and financial performance
* Company excluded due to insufficient market data
With regards to the frequency of specific operating traits, there was a relatively even split
between companies that did not exceed the sectoral average for either Lean or Green
indicators (38.2%), and companies that exceeded the sectoral average for Lean, but not for
Green (34.6%). Approximately one quarter of the sample set outperformed their respective
sectoral averages in relation to the indicator for Green, but not for Lean (23.6%). There were
only two companies of the sample population that achieved higher than average performance
for both Lean and Green variables within their sectors (3.6%).
The following observations were made pertaining to the financial performance of companies
evaluated under each of the four operating groupings:
on-Lean & on-Green Companies
Company
Characteristics:
Total
Aggregate
(ROIC)
Below
Average
(ROIC)
Above
Average
(P/E Ratio)
Below
Average
(P/E Ratio)
Above
Average
Non-Lean & Non-
Green
Lean & Non-Green
Non-Lean & Green
Lean & Green
21
19
13
2
11
12
7
0
10
7
6
2
12
11*
8
1
9
7
5
1

44
On average returned mixed financial results with weighting leaning marginally towards
underperformance: 52% of companies were below average ROIC and 57% were below
average P/E ratio within their respective sectors.
Auto Sector: This approach was ranked 2nd
in absolute terms for auto manufacturers from
both an accounting and market based perspective.
Beverage Sector: These operating traits were consistent with above average performance in
the beverage sector.
Multi-Line Retail Sector: Retailers operating below the industry average in terms of Lean
and Green indicators predominantly underperformed financially as well. Exceptions included
Best Buy Co. and Target Corporation in terms of ROIC and Hakon Invest which was the
highest performing company in terms P/E ratio.
Aerospace Sector: The market perspective reflects positively on this grouping as Cobham
and BAE Systems were ranked 2nd
and 3rd
respectively in terms of P/E ratio.
Electronic Sector: This group did not generally perform well in terms of ROIC, but delivered
above average performance based on P/E ratio.
Lean & on-Green Companies
Overall delivered a below average financial performance: 63% of companies were below
average ROIC and 58% were below average P/E ratio within their respective sectors.
Auto Sector: Hyundai Motors was ranked first with these operating characteristics in terms
of P/E ratio for the sector.
(Please note that Toyota were not included in this sectoral analysis due to lack of carbon
emissions data)
Beverage Sector: Almost all companies adopting Lean & on-Green operating strategies
delivered below average performances.
Aerospace Sector: Boeing Company was the 2nd
highest financial performer in terms of
ROIC.
Electronic Sector: Quanta Computer Inc. significantly outperformed all its peers in terms of
ROIC but did not have sufficient data available to calculate the market based equivalent.
Samsung was the top performing company based on the P/E ratio.

45
on-Lean & Green Companies
Overall delivered a below average performance: 54% of companies were below average
ROIC and 61% were below average P/E ratio within their respective sectors.
Auto Sector: Fiat was ranked first from an accounting perspective delivering the highest
ROIC in the sector.
Multi-Line Retail Sector: On average, companies outperforming their peers in terms of
carbon intensity, but not in terms of Leanness tended to achieve financial results below the
industry average.
Aerospace Sector: MTU Aero Engines Holding was ranked 1st
in terms of P/E ratio and 3rd
in terms of ROIC.
Electronic Sector: Both companies under this grouping were high performers in terms of
financial performance from both accounting and market based perspectives.
Lean & Green Companies
Due to the small subset illustrating Lean & Green characteristics, the averages vary
dramatically. However, three out of the four financial metrics applied to both companies
rated them as superior performers when compared with their industry peers: 100% of
companies were above average ROIC and 50% were above average P/E ratio within their
respective sectors.
Auto Sector: The Pepsi Bottling Group which classified as a Lean & Green company
performed the best in terms of ROIC and ranked third in terms of P/E ratio for the sector.
Electronics: Samsung Electro-Mechanics outperformed the sectoral ROIC average.
However, it was poorly placed amongst competitors in terms of P/E ratio.
Financial Metrics
In absolute terms for the aggregated analysis, companies tended to display bias towards weak
financial performance, with the exception of the Lean & Green grouping. This can be
explained by a small sub-set of companies significantly outperforming their industry peers
and thus raising performance averages considerably higher for the sector. For example, Clas
Ohlson’s carbon intensity score is far greater than other multi-line retailers in the sector. This
anomalous environmental rating may be explained by the company’s successful on-line and
telesales distribution channels, as well as not operating a grocery division (which contributes

46
a large proportion of carbon emissions for competing multi-retailers). As a result, the
average carbon intensity score is significantly higher for the sector than what it would be in
the absence of Clas Ohlson.
Moreover, as with previous studies, this research observed a significant variation with regards
to the market valuation of environmental performance (Derwall et al. 2005; Guenster et al.
2010). The number of companies achieving above average performance in terms of market
based metrics (i.e. P/E ratio) from the on-Lean & on-Green group dropped by 4.8% when
the same companies were compared their accounting based metric (ROIC) sectoral average.
There was no difference between both metrics for the Lean and on-Green group, (excluding
the absence of Quanta Computer Inc. from the market based assessment). However, the
number of companies representing both groups above the average environmental
performance (i.e. on-Lean & Green and Lean & Green) in terms of P/E ratio, dropped by
7.8% and 50% respectively when compared to ROIC. (Please refer to table 2)
The market valuation difference of 3% between the on-Lean & on-Green and on-Lean &
Green groups resemble the abnormal returns observed by Derwall et al. (2005) and Guenster
et al. (2010). Derwall et al. concluded from their findings that eco-efficient firms were
initially undervalued by the market relative to the least eco-efficient firms. This price
differential was later corrected as the market incorporated environmental information with a
drift. The variation between ROIC and P/E ratio performance for the Lean & Green group,
although significant, should be considered with caution due to the small sub-set it represents.
Table 3 illustrates the operating characteristics of the top performing companies in both
measures of ROIC and P/E ratio.
5.8: Discussion of results
Company Characteristics:
Total
Aggregate
(ROIC)
Top 3 Performers
(P/E Ratio)
Top 3 Performers

47
Table 3 – Top
performing company operating characteristics
From table 3 there is evidence to suggest that superior environmental performance is more
positively interpreted by a company internally than what is reflected in market sentiment i.e.
future company valuations. This resembles the findings of Peloza & Yachnin (2008) that
observed “70% of accounting-based metrics demonstrated a positive relationship between
sustainability and financial performance, compared to 53% of market-based metrics.”
These findings may lend support to the proposition that environmental initiatives are value
relevant but take time to become incorporated into the share price (Guenster et al., 2010).
Conversely, Leanness as a measure of inventory turns appears to have more value attached to
it by the market than is reflected by ROIC.
Table 4 below illustrates the interchangeable nature of operating characteristics associated
with high performance. Indeed, almost all the sectors’ superior performers could be
classified as having strengths in either Lean or Green operations when both financial metrics
are taken into consideration. However, it also worth noting the prevalence of on-Lean &
on-Green companies in the top performer rankings. These companies may have gained
competitive advantages successfully pursuing other strategies e.g. product innovation,
product differentiation, marketing etc.
Sub-Sector Ranking
Financial Performance Indicators
Accounting based (ROIC) Market based (P/E Ratio)
Automobiles 1 Non-Lean & Green Lean & Non-Green
2 Non-Lean & Non-Green Non-Lean & Non-Green
3 Lean & Non-Green N/A*
Beverages 1 Lean & Green Non-Lean & Non-Green
Non-Lean & Non-Green
Lean & Non-Green
Non-Lean & Green
Lean & Green
21
19
13
2
5
3
6
1
5
6
2
1

48
2 Non-Lean & Green Non-Lean & Non-Green
3 Non-Lean & Non-Green Lean & Green
Retail 1 Non-Lean & Green Non-Lean & Non-Green
2 Non-Lean & Green Lean & Non-Green
3 Lean & Non-Green Lean & Non-Green
Aerospace 1 Non-Lean & Non-Green Non-Lean & Green
2 Non-Lean & Non-Green Lean & Non-Green
3 Non-Lean & Green Lean & Non-Green
Electronics 1 Lean & Non-Green Lean & Non-Green
2 Non-Lean & Green Non-Lean & Non-Green
3 Non-Lean & Non-Green Non-Lean & Green
Table 4 – Company operating characteristics ranked according to sector
*Company was not included as operating characteristics returned below average industry performance
In the next chapter the results of the empirical research are discussed to assess the robustness
of the conceptual framework developed earlier. Finally, this is followed by a conclusion and
areas for future research.

49
CHAPTER 7
DISCUSSIO & CO CLUSIO
6.1: Introduction
This paper examines to what extent Lean manufacturing models and Green operating models
are complementary in nature. The paper attempts to answer whether a resource-based
perspective of the firm that focuses on eliminating of all forms of waste (including those with
environmental impacts) can achieve a sustainable competitive advantage. More specifically,
it uses previous academic literature and practitioner reports to synthesise a comparison of
both Lean and Green operating models to identify complementarities that may exist between
both approaches. These elements and their relationships were then summarized in a
framework. How well this framework described the relationships in actual settings was
validated against empirical research. The framework was then re-evaluated after completion
of the studies. Overall, this study confirms the merit of implementing Lean and Green
operating strategies independently. However, even though an integrated approach should
deliver superior operating performance in principal, execution in practice is rare.
6.2: Discussion & Conclusion
The main stimulus for incorporating both Lean and Green considerations into the operations
of a firm is fundamentally based on creating additional customer value, using fewer
resources. By reducing the waste associated with corporate activities, organisations improve
resource productivity, lowering the costs of raw materials and waste disposal (Young, 1991).
Given the complementarities that exist between Lean and Green operating systems, it may be
possible to accelerate the accumulation of resources in the former by incorporating it into the
latter (Roome, 1992).
The resource-based view states that strategically important resources should be valuable, non-
substitutable, firm specific, and above all, difficult to imitate. Physical or financial resources
may provide an advantage in the short-term, but these assets can often be acquired in the
market place by competitors or new entrants (Barney, 1991). The foundations of successful
Lean and Green operating practices are deeply rooted in an operation-based, employee-
involved organisational culture that systematically eliminates all forms of waste through

50
continuous improvement cycles (EPA, 2003). Tacit resources such as these derived from
human capital tend to be more difficult to imitate as they are accumulated over time through
organisational learning and gradually refined with experience (Hart, 1995).
Other contributions have emphasised how important it is for firms to focus on their “core
competencies” when planning for the future (Prahalad & Hamel, 1990), supported with
resources that raise “barriers to imitation” for competitors (Rumelt, 1984). Thus, it is the
bundle of resources available to a firm (e.g. technology, human resources, physical assets
etc.) applied to specific value-adding activities that shape the firm’s capabilities.
Due to the constraints of global warming and rapid population growth, Hart (1995) suggests
that strategic advantage in the future will increasingly be based upon new and emerging
capabilities such as waste minimisation, innovative product designs (that reduce associated
environmental impacts), and technology co-operation. These capabilities represent pollution
mitigation strategies that can be achieved either through a pollution reduction approach
(which utilises expensive, non-productive “end-of-pipe” solutions) or alternatively, a
pollution prevention approach (that proactively reduces pollution at source during the
manufacturing stage) (Hart, 1995). It has been noted in the literature that pollution
prevention bares many similarities to Total Quality Management (TQM) as it relies upon
employee participation and continuous improvement to achieve its goal (Roome, 1992).
As this paper has illustrated, there are many common elements and synergies between Green
operating systems and Lean production. Thus, Green operating models can leverage Lean
methods to reduce the environmental impacts of industrial activities. However, the
fundamental difference in the application of these Lean techniques is the incorporation of
environmental performance as one the firm’s primary operating objectives. Source reduction
programmes, zero waste or design for the environment may actually leverage Lean operating
techniques such as statistical process control, JIT, or design for manufacturability (Jimenez &
Lorente, 2001).
According to Suzaki (1987), there are seven types of manufacturing waste within the Lean
context. Table 5 illustrates the negative impacts each of these waste types can have on the
environment. Lean production seeks to address these inefficiencies through continuous
improvement in productivity and quality by minimizing all waste types through employee

51
involvement. Thus, Lean also shares many commonalities with TQM and as such should be
seen as a collection of concepts and tools supporting general TQM principles (Andersson et
al., 2006). Ultimately, lean systems reduce the intensity of resources required to deliver a
good or service to meet customer needs, indirectly improving the environmental performance
of a firm.
Drawing from the major models of Lean production and Green operations, Bergmiller &
McCright (2009) conclude that both systems are parallel by nature and share many common
elements such as dependence on management systems, waste identification techniques, waste
reduction techniques, and measures of various business results. They suggest that due to
similarities in structure and processes, companies who have experience in implementing one
system should in theory be better equipped in developing the other, when compared to
companies adopting neither approach.
In terms of scope, Lean takes a broad view on waste elimination as minimising the non-value
adding activities inherent in organisational structures and processes. Lean implementation is
driven by the need for organisations to improve their competitiveness by lowering costs and
improving quality as defined by the customer. Although Green operating systems aim to
reduce waste arising from a firm’s activities, it is only concerned with waste that has
environmental impacts. In addition, the drivers for green operations, while often significant,
are not usually as salient to decision-makers as those driving Lean initiatives within an
organisation (EPA, 2004).

52
Table 5: Environmental Impacts Linked with Manufacturing Waste (EPA, 2003)
The remaining gaps between both operating models according to the EPA (2003) include
insufficient cross-functional integration of employees from environmental and operational
perspectives, as well as limited adoption of environmental knowledge and practices by lean
practitioners.
While the research recognises that both systems differ along several dimensions, there
remains sufficient overlap in the structures and content to intuitively suggest that a
synergistic relationship may exist (Bergmiller & McCright, 2009). Both Lean and Green
models are fundamentally based on TQM principles, both are focused on eliminating waste,
and both seek to leverage human capital through employee involvement to achieve their
respective goals.
There is a growing body of evidence to support the purported synergies linking both models.
However, most of the evidence relies on case studies that have been carried out by Lean

53
practitioners, or disclosed publicly by organisations. For example7
in 2009 BAE reported
that Lean implementation since 2004 had improved quality (in terms of reducing number of
complaints received) by 88%, reduced the amount of time spent resetting equipment by 89%
and reduced the cost of scrap by 76%. Also, the Boeing Company observed increases in
resource productivity ranging from 30 to 70 percent after successfully implementing lean
initiatives back in 2000.
However, the case for integrating Lean and Green operating systems is less clear from the
empirical research of this paper. The infrequency of companies displaying Lean & Green
operating characteristics raises an important question - if the assumed benefits from
incorporating environmental decisions into Lean practices are so compelling, why are so few
companies pursuing this approach? Is it because executing the theory into practice is not
feasible or worthwhile? Is it because companies choose to concentrate on other operational
objectives? Or perhaps the results indicate a latent opportunity for organisations to improve
their competitiveness?
Another salient aspect of the empirical findings was the prevalence of organisations
outperforming their industry peers with operating characteristics that were classed as being
on-Lean & on-Green. Due to the narrow scope of the analysis only Lean and Green
indicators were assessed, but presumably these organisations were prioritising other
operational objectives as a basis for competitive advantage, such as quality or innovation. It
may also be the case that non-operational based capabilities contributed towards their high
performance, for instance, marketing.
Another consideration is that certain sectors, more so than others, rewarded companies
possessing on-Lean & on-Green traits with superior financial performance (e.g.
Aerospace). A primary goal of the empirical study was to identify the significant trends
occurring in manufacturing based industries related to firms’ operational characteristics and
competitiveness. Hence, identifying the underlying causes of companies implementing on-
Lean & on-Green operational objectives represents an opportunity for future investigation.
7
For further information about these case studies and other Lean implementation projects refer to
http://www.shingoprize.org/

54
There is some evidence to support the notion of an integrated model, albeit indirectly. For
example, there was no performance penalty associated with environmental performance. In
fact, in terms of ROIC, it was the most common characteristic observed amongst the top
performing companies sampled (see table 4). As this accounting-based metric gives a sense
of how well a company is using its money to generate returns, observations from the
empirical study would suggest that it pays for companies to be eco-efficient. This evidence
supports the notion that environmental management can accrue benefits privately to the firm
such as: reduced costs from resource efficiencies; the development of green markets; and
first-mover advantage; improved stakeholder relations; and enhanced reputation (Guenster et
al., 2010; Hart, 1995; Porter & Van der Linde, 1995; Shrivastava, 1995).
However, Jimenez and Lorente (2001) point out that it is important to differentiate between
pollution control and pollution prevention when evaluating environmental performance as an
operations objective. The former assumes that environmental issues are taken into account at
the end of the process after other objectives have been considered. The latter suggests that
environmental goals are included at the very beginning of the planning process. Klassen and
Whybark (1999b) found that pollution prevention has a positive relationship with the
operating objectives of cost, speed and flexibility. However, pollution control negatively
influenced the same objectives. Ferdows and de Meyer (1990) posit that environmental
performance can have a positive influence on the other operating objectives so long as it is
considered first along with quality.
Interestingly, the indicator for Lean was the most prevailing characteristic in terms of market
valuation (i.e. P/E ratio). This may be partially explained by the market appropriating
additional value to companies exhibiting Lean qualities, such as: high stock turnover; short
delivery lead times; low cost operating base; and superior quality product/service. In
addition, the differential between Lean and Green indicators in terms of market valuation
may be widened further due to abnormal returns observed for eco-efficient firms (Derwall et
al., 2005; Guenster et al., 2010).
The findings of the empirical study clearly illustrate the interchangeable nature of operating
characteristics associated with the top performing companies (see table 6). Indeed, almost all
of the sectors reviewed demonstrated the ability for companies with relative strengths in
either Leanness or Greenness to achieve high performance. This might be viewed as a

55
corollary to the benefits accruing to a firm from adopting either operating model
independently, as discussed earlier in the comparison section of the paper.
Finally, even though the occurrence of companies demonstrating above average industry
performance for indicators of Lean and Green was rare, those that did realised favourable
financial returns. In fact, the Pepsi Bottling Co. represented the overall top performing
company in the beverage sector employing these operational traits. However, this
observation was not highly significant in the context of the overall analysis, as companies
deemed Lean & Green represented only 3.6% of the sample population.
This outlying observation may simply be indicative of a statistic anomaly, perhaps the result
of multiple strategies being executed in parallel. Alternatively, it may offer some evidence to
support the notion that high performance in terms of Lean operations and environmental
performance are, at the very least, not mutually exclusive in the pursuit of competitive
advantage. However, as Porter & van der Linde (1995) suggest, success must involve
innovation-based solutions that balance the legitimate concerns and objectives of both
environmentalism and firm competitiveness in order to foster a sustainable competitive
advantage.

56
6.3: Recommendations
As in any exploratory research, there is plenty of scope for improvement. There are multiple
findings presented here that require further development. Due to the limitations of data
availability, the empirical research undertaken in this study relied upon high level indicators
for Leanness and Greenness, as well as end-state financial metrics. Firms were evaluated on
the basis of whether they performed above or below their respective industry average for each
variable. Although this methodology proved useful as a preliminary investigation into the
relationship between a firm’s operations, environmental performance and competitive
positioning, a more rigorous empirical study is now required to expand on some of the key
issues raised.
First, more attention needs to focus on establishing causality between the operating variables
being examined and financial performance. A limitation of this paper is that the empirical
methodology does not account for other factors contributing towards financial performance,
other than inventory turns and carbon intensity. The inclusion of additional operational
objectives such as cost, quality, innovation etc. would illuminate future research. In addition,
a more comprehensive assessment of each variable using multiple criteria would enhance the
robustness of such an approach.
Second, further work is required to better understand the chain of value creation arising from
the integration of Lean and Green initiatives. The analysis here should focus on the
mediation process, including all costs and benefits impacting end state financial metrics.
Finally, a deeper dive into this paper’s salient findings is warranted. There was significant
variation observed between both the market and accounting based evaluations of a firm’s
operating performance. The inclusion of a time varying dimension when assessing
performance would help determine if this differential is a result of the market slowly
incorporating the value of environmental initiatives slowly into the market price, as posited
by Guenster et. al. (2010).
In addition, the prevalence of on-Lean & on-Green operating traits, as well as the rarity of
firms classed as Lean & Green should be a focus for future investigation. Perhaps this

57
reflects the limitation of the industry average based methodology employed, as in some
sectors outlying observations tended to disproportionately influence the level at which
companies were defined for a given variable. A more sophisticated approach as described in
the first recommendation, may offer a fruitful avenue of research.

58
APPE DICES
Appendix A - Sectoral analysis of the relationship between Lean and Green indicators and
financial performance
Auto Sector Aggregate
(ROIC)
Below Average
(ROIC)
Above Average
(P/E Ratio)
Below Average
(P/E Ratio)
Above Average
Non-Lean & Non-
Green
2 1 1 1 1
Lean & Non-Green 2 1 1 1 1
Non-Lean & Green 4 3 1 4 0
Lean & Green 0 0 0 0 0
Beverage Sector Aggregate
(ROIC)
Below Average
(ROIC)
Above Average
(P/E Ratio)
Below Average
(P/E Ratio)
Above Average
Non-Lean & Non-
Green
3 0 3 1 2
Retail Sector Aggregate
(ROIC)
Below Average
(ROIC)
Above Average
(P/E Ratio)
Below Average
(P/E Ratio)
Above Average
Non-Lean & Non-
Green
6 4 2 5 1
Aerospace
Sector
Aggregate
(ROIC)
Below Average
(ROIC)
Above Average
(P/E Ratio)
Below Average
(P/E Ratio)
Above Average
Non-Lean & Non-
Green
5 2 3 3 2
Electronic
Sector
Aggregate
(ROIC)
Below Average
(ROIC)
Above Average
(P/E Ratio)
Below Average
(P/E Ratio)
Above Average
Non-Lean & Non-
Green
5 4 1 2 3

1
AppendixB-Sectoralbreakdownofdatausedinempiricalanalysis–Automobiles
ameSub-SectorIndex($m/tCO2)IndustryAvg.
Turnover
Ratio
Industry
Avg.
ROIC
%
Industry
Avg.
P/CE
Ratio
Industry
Avg.
BMWAutomobilesGlobal5000.059Green5.17Non-Lean0.65Leader1.41Laggard
ContinentalAGAutomobilesGermany2000.016Non-Green6.93Lean-2.34Laggard2.39Leader
DaimlerAGAutomobilesGlobal5000.037Green4.35Non-Lean1.91Leader2.83Leader
FiatAutomobilesItaly600.067Green4.42Non-Lean8.23Leader1.34Laggard
FordMotor
CompanyAutomobilesS&P5000.027Non-Green11.56Lean-5.33Laggard0.44Laggard
GKNAutomobilesFTSE2500.006Non-Green4.71Non-Lean-2.3Laggard2.59Leader
HyundaiMotorAutomobilesKorea1000.001Non-Green13.28Lean3.05Leader8.42Leader
PSAPeugeot
CitroenAutomobilesFrance1200.079Green5.79Non-Lean-0.08Leader0.98Laggard
RenaultAutomobilesFrance1200.043Green5.11Non-Lean1.75Leader1.44Laggard
RieterHolding
AGAutomobilesSwitzerland1000.008Non-Green4.95Non-Lean-28.82Laggard-6.81Laggard
VolkswagenAutomobilesGlobal5000.023Non-Green5.31Non-Lean5.56Leader6.93Leader
Industry
Average0.0336.51-1.612.00
AppendixC-Sectoralbreakdownofdatausedinempiricalanalysis–Beverages

2
Turnover
Ratio
Industry
Avg.
ROIC
%
Industry
Avg.
P/CE
Ratio
Industry
Avg.
AltriaGroup,
Inc.BeveragesGlobal5000.022Green1.39Non-Lean25.48Leader6.09Laggard
AmbevBeveragesGlobal5000.016Non-Green3.94Non-Lean13.67Laggard0.01Laggard
Brown-Forman
CorporationBeveragesS&P5000.014Non-Green1.22Non-Lean17.22Laggard15.27Leader
CarlsbergA/SBeveragesNordic2000.010Non-Green6.22Lean6.91Laggard3.21Laggard
Coca-ColaCo.BeveragesGlobal5000.006Non-Green4.60Non-Lean20.02Leader12.80Leader
Coca-Cola
HellenicBeveragesEuro3000.011Non-Green7.75Lean5.79Laggard4.86Laggard
HeinekenNVBeveragesGlobal5000.010Non-Green6.86Lean4.47Laggard6.27Laggard
MolsonCoors
BrewingCo.BeveragesS&P5000.004Non-Green9.14Lean5.13Laggard8.59Leader
PepsiBottling
Group,Inc.BeveragesS&P5000.060Green7.81Lean25.64Leader12.68Leader
Reynolds
AmericanInc.BeveragesGlobal5000.025Green1.72Non-Lean13.24Laggard7.40Laggard
SouzaCruz
S.A.BeveragesBrazil800.056Green2.62Non-Lean62.88Leader0.01Laggard
SwedishMatchBeveragesNordic2000.026Green2.25Non-Lean23.87Leader12.07Leader
Industry
Average0.0224.6318.697.44
AppendixD-Sectoralbreakdownofdatausedinempiricalanalysis–Multi-lineRetail
Turnover
Ratio
Industry
Avg.
ROIC
%
Industry
Avg.
P/CE
Ratio
Industry
Avg.
Axfood
Multiline
RetailNordic2000.073Green16.06Lean25.41Leader7.10Laggard
BestBuyCo.,
Inc.
Speciality
RetailS&P5000.043Non-Green6.98Non-Lean23.68Leader5.52Laggard

3
BigLots,Inc.
Multiline
RetailS&P5000.010Non-Green3.76Non-Lean18.86Leader4.75Laggard
HakonInvest
AB
Multiline
RetailNordic2000.000Non-Green4.43Non-Lean2.08Laggard31.32Leader
Kesko
Corporation
Multiline
RetailNordic2000.109Green9.88Lean9.5Laggard7.89Laggard
LimitedBrands,
Inc.
Speciality
RetailS&P5000.023Non-Green4.65Non-Lean6.78Laggard4.63Laggard
Lowe's
Companies,Inc.
Speciality
RetailGlobal5000.015Non-Green4.00Non-Lean10.25Laggard7.68Laggard
Massmart
HoldingsLtd
Multiline
RetailSouthAfrica1000.020Non-Green8.24Lean49.07Leader9.97Leader
Target
Corporation
Multiline
RetailGlobal5000.003Non-Green4.88Non-Lean20.02Leader0.00Laggard
Wal-Mart
Stores,Inc.
Multiline
RetailGlobal5000.001Non-Green7.34Lean11.91Laggard10.14Leader
Woolworths
HoldingsLtd
Multiline
RetailSouthAfrica1000.187Green6.79Non-Lean8.6Laggard6.51Laggard
Industry
Average0.0447.0016.928.68
AppendixE-Sectoralbreakdownofempiricalanalysiscontd.
Turnover
Ratio
Industry
Avg.
ROIC
%
Industry
Avg.
P/CE
Ratio
Industry
Avg.
BAESystems
Aerospace&
DefenseGlobal5000.037Non-Green13.76Lean20.84Leader9.13Leader
Boeing
Company
Aerospace&
DefenseGlobal5000.036Non-Green3.86Non-Lean25.16Leader6.91Leader
CobhamAerospace&FTSE1000.011Non-Green4.68Lean8.34Laggard10.06Leader

4
Defense
Embraer.
Aerospace&
DefenseBrazil800.094Green1.57Non-Lean5.71Laggard4.95Laggard
Goodrich
Corporation
Aerospace&
DefenseS&P5000.016Non-Green2.48Non-Lean18.85Leader7.69Leader
ITT
Corporation
Aerospace&
DefenseS&P5000.039Non-Green9.65Lean13.94Leader4.23Laggard
Meggitt
Aerospace&
DefenseFTSE2500.015Non-Green2.21Non-Lean7.89Laggard3.08Laggard
MTUAero
Engines
HoldingAG
Aerospace&
DefenseGermany2000.069Green3.30Non-Lean21.48Leader10.21Leader
Rockwell
Collins,Inc.
Aerospace&
DefenseS&P5000.036Non-Green3.13Non-Lean37.2Leader5.81Laggard
Rolls-Royce
Aerospace&
DefenseFTSE1000.020Non-Green2.92Non-Lean-29.93Laggard4.27Laggard
SAAB
Aerospace&
DefenseNordic2000.116Green3.40Non-Lean0.17Laggard6.73Leader
Thales
Aerospace&
DefenseFrance1200.061Green1.85Non-Lean11.04Laggard0.00Laggard
Industry
Average0.0464.4011.726.09

5
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