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date: 07 December 2019

Innovation for Society

Summary and Keywords

At a macro level, innovation for society refers to innovation of societal institutions. At a micro level, it refers to innovations undertaken by social entrepreneurs as start-ups with a social and/or environmental mission and innovations undertaken by firms in products/services, processes, operations, technologies, and business models to address social and environmental challenges while achieving core economic objectives. The focus here is on firm-level innovations and the drivers for such innovations.

Exogenous drivers include institutional-level influences such as regulations, societal norms, and industry best practices (mimetic forces) and stakeholder-level influences including shareholders, investors, customers, regulators, nongovernmental organizations, media, and others that have power, legitimacy, and urgency of their claims directly or indirectly via other stakeholders. The endogenous drivers include institutional ownership, activist shareholders, boards of directors, ownership, and competitive strategy focused on developing profitable businesses that address societal challenges.

Even when the firm is motivated due to exogenous and endogenous drivers to undertake investments in innovating for society, it needs the capacity to generate and implement such innovations. Innovations for society require motivated managers, managerial capacity, and organizational capabilities that go beyond routine innovations that firms undertake to improve products and processes and enter new markets. This capacity enables firms to reconcile their performance on economic, social, and environmental metrics to address societal challenges while achieving core economic objectives.

Managerial capacity requires firms to overcome cognitive biases and create opportunity frames that convert negative loss bias, where managers perceive lack of control over outcomes, to a positive opportunity bias, where managers perceive the ability to control their decisions and actions. Opportunity framing involves legitimization of innovation for society in the corporate identity, integration of sustainability metrics into performance evaluation, creation of discretionary slack, and empowerment of managers with a relevant and ongoing information flow.

Innovating for society also requires major changes in a firm’s decision-making processes and investments in new organizational capabilities of engaging stakeholders and integration of external learning, processes of continuous improvement of operations, higher order or double-loop organizational learning by integrating external learning with internal knowledge, cross-functional integration, technology portfolios, and strategic proactivity, all leading to processes of continuous innovation.

Knowledge about the role of firms in addressing societal challenges has grown over the past three decades as scholars in multiple disciplines have explained the motivations of firms to undertake innovations for society, processes to build organizational capabilities to adopt and implement sustainability strategies, and linkages of such strategies to financial performance. Nevertheless, such innovations and strategies are far from a universal norm.

Keywords: innovation, innovation for society, sustainable innovation, opportunity framing, organizational capabilities, institutional influences, stakeholder influences, ownership and governance

Innovation for society may happen at the macro level in the form of institutional innovation undertaken either by collective action of a network of actors or by firms and/or individuals acting as institutional entrepreneurs or at a micro level via start-ups undertaken by social entrepreneurs to achieve a social mission or via innovations undertaken by firms. To be considered innovation for society, innovations at both the macro and micro levels need to address and solve or mitigate societal challenges such as those of income inequality, poverty, fair wages, fair trade, environmental pollution, climate change, or clean water, among others.

This article limits its scope to innovations for society at the organizational or firm level in order to avoid overlapping levels of analysis and the myriad literatures that address societal innovation at various levels: global, national, regions, cities, communities, institutional, the firm, and individual. Since firms also bring about changes at macro levels via institutional entrepreneurship, this form of innovation for society is briefly discussed.

Following definitions of innovation and innovation for society, this article examines the drivers for such innovations at the firm level—exogenous institutional and stakeholder drivers and endogenous ownership, governance, and competitive strategy drivers, and the capacity that firms need to innovate for society in terms of managerial motivations and organizationally specific capabilities. The processes of generating ideas and innovations within a firm, such as creativity, ideation, experimentation, and prototyping process are beyond the scope of this brief overview.

Definitions

Innovation for Society

In general terms, innovation is the introduction of something new (American Heritage Dictionary of the English Language, 2000) including new things, ideas, or ways of doing something (Oxford Learners Dictionary). While a firm can choose to address societal challenges via philanthropic activities without fundamentally changing its business model or operations, this article defines innovation for society as new and useful changes by a firm in its business model, technology, practices, operations, processes, products, or services that have a positive societal (social and/or environmental) impact while achieving its financial and operating goals.

At a macro level, such innovation may take the form of innovation of institutions (institutional innovation) in a firm’s organizational field, where the firm or its managers act as institutional entrepreneurs in order to change or create new institutions that solve or mitigate societal challenges. At a micro level, entrepreneurs may start-up firms as enterprises to achieve a social mission or established firms may innovate business models, technologies, processes, systems, products, services, or distribution systems that solve or mitigate social and/or environmental challenges that society faces.

Institutional Innovation for Society

Firms are embedded in organizational fields that comprise of institutions as schemas, rules, regulations, and norms within which they operate (Powell & DiMaggio, 1991; Scott, 2001). Hence institutional innovation is the “novel, useful and legitimate change that disrupts, to varying degrees, the cognitive, normative, or regulative mainstays of an organizational field” (Raffaelli & Glynn, 2015, p. 414). Institutional innovation leads to changes in these rules and norms embedded in society and the creation of new institutions. Institutions innovate and change in order to adapt to changing societal expectations, changing environments, and other sociocultural changes in society (Raffaelli & Glynn, 2015). New institutions may also be created in times of major or disruptive societal change and expectations (Hargrave & Van de Ven, 2006; Selznick, 1957).

An example of an institutional innovation for society is the changes in norms in the financial services industry for the creation of micro-finance institutions for underserved populations and the creation of hybrid institutions as vehicles of micro-finance (Battilana & Dorado, 2010).

Firm Level Innovation for Society

While institutional innovations for society need to be legitimate to be accepted and diffused (Dacin, Goodstein, & Scott, 2002), firm-level innovations for society need to enable the firm to achieve its goals and objectives. Firm-level innovation involves the generation, adoption implementation, and incorporation of new ideas and practices (Axtell et al., 2000; Van de Ven & Garud, 1989) or the processes of invention (emergence of the idea), development (elaboration of the idea), and implementation (the acceptance and diffusion of the idea) (Garud, Tuertscher, & Van de Ven, 2013; Rogers, 2003). Firm-level innovations need to be novel and useful (Amabile, 1988) and lead to improved outcomes in terms of lower costs, higher revenues, access to new markets, or solving problems in order for a firm to allocate resources. Novelty and usefulness are perceived from the perspective of the adopting organization, “even though it (the innovation) may appear to others to be an ‘imitation’ of something that exists elsewhere” (Van de Ven, 1986, p. 592).

An example of a firm-level innovation in the financial services industry is socially responsible or ethical investment or environmental, social, and governance funds that create investment opportunities to address societal challenges by offering consumers investment vehicles with social and environmental screens. Another firm-level innovation for society in the financial sector is impact investing by private equity firms in ventures that are designed to address social and environmental challenges.

This article also uses the term sustainable innovations to refer to innovations by a firm in accordance with the principles of the triple bottom line, including financial, social, and environmental metrics (Sharma, 2014). A firm’s sustainable innovations are designed to achieve not only its economic or core objectives (e.g., for a non-profit organization, the core objective may be the delivery of healthcare or clean water rather than profits) but also its social and environmental performance. Hence, sustainable innovations are ideally broader in terms of considering more than just one social or environmental societal challenge but rather comprehensively assessing and addressing the social and environmental impacts of the firm’s entire value chain while ensuring that the firm achieves its core objectives, which usually are likely to be return on investment at or above industry average (Sharma, 2014). Achieving the desired positive outcomes as a result of innovations on all three dimensions—economic, social, and environmental—is neither a common occurrence nor is it easy. More often than not, innovations succeed in delivering one or two outcomes such as social and economic or environmental and economic, rather than all three.

An existing business that seeks to innovate for society needs to incorporate such innovation processes in its core business strategy. Radical and disruptive innovations may require changes in a firm’s business model and its organizational design. These are deep-rooted changes that require investments in new technologies, entry into unfamiliar market segments such as lower income or base of the pyramid markets in developing countries, or building new capabilities and managerial capacity (Sharma, 2014). Such investments may yield returns over a longer term as compared to investments that firms normally make in incremental product innovations and entry into adjacent new markets.

Drivers to Innovate for Society

At a macro level, institutional innovation for society may be driven via collective action of many actors who construct new institutions through the political behaviors in an organizational field or a network that emerges around a social movement or technical innovation, for example a software platform such as Java or Linux (Hargrave & Van de Ven, 2006), or via individual institutional entrepreneurship. Institutional entrepreneurs are actors who engage in actions and garner and leverage resources to create new institutions or change existing institutions (Battilana, Leca, & Boxenbaum, 2009; DiMaggio, 1988; Garud, Hardy, & Maguire, 2007). Institutional innovation may happen within a firm in the form of changing practices and norms (e.g., employee benefits or integration of diversity into internal hiring and promotion policies), in an industry (e.g., environmental/social best practices, packaging or technology standards), at the national level (e.g., environmental/social regulations, carbon taxes, or emissions trading schemes), or in multiple countries (e.g., human rights laws or international agreements on climate change).

At a micro level, innovation for society can be undertaken as a start-up by social entrepreneurs and by firms as strategic initiatives that require significant investments and resource allocations by a firm’s top management team. Social entrepreneurs innovate business models and/or products and services in order to create social value by providing solutions to social problems (Dacin, Dacin, & Tracey, 2011). It is unclear whether social entrepreneurs primarily follow a social mission or also an economic mission that balances social and financial goals. Anecdotal data indicates that social entrepreneurs usually face the challenges of scalability and often tend to remain small scale and local, indicating either the dominance of the social mission over financial sustainability or the lack of business training and capability to scale their social vision.

Firms are more likely to undertake innovations for society using internally generated funds because conventional financial institutions and equity markets are often reluctant to invest in societal innovations due to their longer term and uncertain paybacks. Firms may be able to tap equity funds focused on impact investing. Firms using internally generated funds have significant latitude in investing in, and allocating resources for, undertaking social/environmental or sustainable innovations.

Firms are motivated to undertake innovation for society by both exogenous and endogenous forces and via the interaction of these forces. The two main exogenous drivers that have been examined in the social/environmental/sustainability literature are institutional and stakeholder influences (Sharma, 2014). The main endogenous drivers are ownership, governance, leadership, and competitive strategy.

Exogenous-Institutional Drivers

The social and environmental issues and challenges that society deems important are socially constructed and evolve over time. How firms in an industry or in a geographic context interpret and understand these challenges as they evolve and their relevance to their business and how they infuse them with meaning depends on institutional fields within which they are embedded (Jennings & Zandbergen, 1995). For example, in the chemicals industry, the evolving regulatory environment and the environmental social movement led to the changing meaning, perceptions, and practices of environmental sustainability for firms in the chemical and petroleum industry between 1960 and 1993 as the industry sought legitimacy within increasing institutional pressures for its regulation subsequent to high visibility industrial accidents including the Union Carbide’s Bhopal pesticide plant gas leak in 1984 and the Exxon Valdez oil spill in Prince William Sound in 1989 (Hoffman, 1997). This led to industry-level innovation to address societal concerns via the development of Responsible Care guidelines.

The most salient institutional force influencing a firm’s motivation to innovate for society is social and environmental regulation. Social regulations in the form of labor laws, including minimum wage, workplace environment, and the use of child labor, have been in place for a long time in developed countries while the International Labor Organization has a mission to establish minimum standards across the world. Environmental regulations are relatively more recent. In the United States, Rachel Carson’s 1962 book Silent Spring brought environmental concerns to the attention of the public, influenced institutional changes in regulations, and catalyzed the environmental movement that led to the creation of institutions such as the U.S. Environmental Protection Agency (EPA) in 1970. This societal innovation spread around the world as several European countries established environmental regulations and agencies to implement regulations including the banning and/or regulation of thousands of chemicals and radioactive wastes emitted by industrial operations under clean air, clean water, and human health regulations.

These institutional innovations create norms that spur further pressures for innovation as agencies such as the U.S. EPA make publicly available a toxic release inventory of chemicals and chemical categories for each manufacturing facility in the United States. Nongovernmental organizations (NGOs) and local communities use these data to pressure firms to reduce their emissions. Normative and mimetic forces lead to similar requirements for disclosure of inventories of wastes in countries such as Canada (the National Pollution Release Inventory), several European countries, and even in China, which introduced reporting requirements for emissions from manufacturing facilities in 2014.

While the U.S. EPA regulations are prescriptive in terms of technology and equipment that firms must use to eliminate toxic chemicals, regulations in some countries such as Canada and the Netherlands focus on outcomes in terms of clean water and clean air via a more decentralized regulatory framework based on participatory decision-making, consultation, and consensus. This encourages industry roundtables and public engagement of stakeholders to facilitate innovative normative approaches by firms to address social and environmental challenges in their institutional environments. Firms undertaking discretionary innovations to minimize or eliminate pollution at its source has been shown to have a positive impact on the bottom line as compared to the costs of investments in pollution control, which do not pay back (Hart & Ahuja, 1996; Porter, 1991; Porter & van der Linde, 1995; Russo & Fouts, 1997).

Exogenous-Stakeholder Drivers

The corporate social responsibility (CSR) and environmental sustainability literatures argue that several stakeholder groups, seeking to further their agenda, influence a firm’s strategy to innovate for society. These stakeholders also channel normative institutional forces and make them more immediate for the firm. Mitchell, Agle, and Wood (1997) argue that instrumental importance can be accorded to stakeholders based on their salience for the focal firm. A stakeholder’s salience is a function of its power, legitimacy, and urgency of its claims. Power can be coercive, financial, or material—a stakeholder may have the ability to affect a firm’s sales, brand image, and reputation. Stakeholders such as regulators, governments, shareholders, investors, customers, and the media possess this power. A stakeholder may possess the legitimacy of its relationship with the firm and the legitimacy of its actions in terms of desirability or appropriateness. Stakeholders such as shareholders, employees, suppliers, customers, governments, and regulators all have legitimacy in their interactions with the firm. These stakeholders also have legal rights attached to their relationship with the firm. Finally, a stakeholder may have urgency of its concerns and/or claims in terms of criticality and time sensitivity. For example, the local community or an NGO may stage a highly visible protest at a firm’s facilities, or a customer may file a lawsuit against a firm, or a regulatory agency may impose a crippling fine or issue an order for the shutting down of a firm’s operations, sparking the need for radical innovations by the firm to innovate in order to address the social and environmental challenges that are of concern.

The salience of a stakeholder group for the firm’s innovations for society is determined not only by the attributes—the power, legitimacy, and urgency that the group possesses—but also by the extent to which it possesses these attributes. A stakeholder group that is legitimate and has the power and urgency of its claim is the highest priority for the firm. Therefore, if a government agency mandates that the firm reduce carbon emissions by a certain amount and by a certain date, it has the legitimacy, power, and urgency to spur corporate action. The firm can respond via costly investments in compliance or via innovations that prevent the emissions at its source. These attributes may be gained or lost over time and may strengthen or weaken over time. Moreover, low-priority stakeholders can increase their salience by combining forces with others to boost their power and urgency. For example, an NGO can influence a firm’s customers and the media to increase the salience of their claim (Sharma, 2014). As an example, subsequent to global outrage over the deaths of more than a thousand garment workers in a building collapse in Bangladesh (Greenhouse, 2013), customers and NGOs in North America and Europe developed coalitions to pressure garment manufacturers in Europe and the United States to innovate their social practices. In response, garment manufacturers in Europe and the United States have developed a new institution, the Sustainable Apparel Coalition, to innovate audit and procurement practices (including a metric termed the Higg Index) to prevent such tragedies and improve working conditions and fair wages.

The power of stakeholders to influence the firm’s social and/or environmental innovation also depends on the resource interdependence between the firm and the specific stakeholders. Stakeholders can influence how a firm uses certain resources. For example, shareholders may demand that their funds be invested only in investments to change processes, products, technologies, and business models to prevent pollution at its source versus investments in pollution clean-up and compliance, which do not pay back. Conflicts could be created if certain stakeholders want a firm to divest from fossil fuels and invest in renewable energy projects with long-term payback and its shareholders demand that it invest in booming fossil fuel markets to maximize short-term returns. Shareholders may withhold further investments or demand repayment or sell the company’s shares. Customers can withhold purchasing power and refuse to buy a firm’s products or services (Frooman, 1999).

Endogenous-Organizational Drivers

Innovations for society undertaken by a firm in the form of sustainable processes, technologies, products, and business models often require long-term investments and patient capital. The focus of equity and financial markets on short-term earnings reporting usually deters investments that may realize returns over the medium to long term. A recent study based on a sample of 1,376 firms examining how external financial analyst coverage influenced the time horizon of investments found that firms that experience a decrease in financial analyst coverage lengthen their investment horizon (Desjardins, 2018).

Institutional Ownership

When institutions own large blocks of shares, they have a higher representation on the board and can influence strategic decisions of a firm to innovate for the long term. However, not all institutional owners share goals of the business as a vehicle for addressing societal challenges and a long-term temporal orientation. In the United Kingdom and France, for example, pension funds and insurance companies are the dominant financial institutions and are more likely to have a long-term investment horizon. In contrast, in the United States, the institutional sector is dominated by mutual funds, which are more likely to have a shorter term (quarterly) outlook on returns. However, the U.S. landscape has begun to change. Larry Fink, the chairman and CEO of Blackrock (the world’s largest asset manager) in his annual 2019 letter to CEOs of companies that Blackrock invests in to adopt long-term sustainable practices, said:

As a fiduciary to these clients [investors in Blackrock’s funds], who are the owners of your company, we advocate for practices that we believe will drive sustainable, long-term growth and profitability. As we enter 2019, commitment to a long-term approach is more important than ever—the global landscape is increasingly fragile and, as a result, susceptible to short-term behavior by corporations and governments alike. (Larry Fink’s 2019 Letter to CEOs: Purpose & Profit)

In the Bordeaux region in France, wineries that had been bought by insurance companies and other financial institutions were able to maintain a long-term strategic perspective and invest in innovations such as organic and biodynamic viticulture and wine-making practices (Sharma & Sharma, 2019). Empirically, the level of institutional ownership of firms has been found to be positively associated with investments in proactive corporate social sustainability practices and strategies (Coffey & Fryxell, 1991; Graves & Waddock, 1994; Johnson & Greening, 1999; Neubaum & Zahra, 2006).

Shareholder Activists

In contrast to institutional investors who have substantial investments in companies, shareholder activists usually hold small blocks of shares to influence a company to invest in addressing issues of concern to them. These often include social and environmental issues such as pollution, sweatshops and child labor, and human rights, among others. Neubaum and Zahra (2006) found a positive relationship between the frequency and the level of coordinated activism and the corporate social responsibility of a firm. Walls, Berrone, and Phan (2012) found that when a firm’s environmental performance is below par, shareholder activism for the firm to invest and innovate to address these societal concern is high, possibly due to concerns regarding environmental violations, fines, remediation costs, and exposure to risk.

Board of Directors

Increasingly corporate boards have committees overseeing investments in innovations to address environmental and social impacts. It is estimated that 25% of the Fortune 500 companies have such board committees, and the number of investor proposals related to investments in social and environmental innovations and practices nearly doubled between 2004 and 2008 (Kell & Lacy, 2010). Outside directors have been found to have a positive influence on a firm’s CSR policies (Ibrahim, Howard, & Angelidis, 2003; Johnson & Greening, 1999) and socially responsible practices of firms (Webb, 2004). Some studies found a positive association between interest group (stakeholder) pressure and an issue management–oriented board committee (Greening & Gray, 1994), or legal pressure and a stakeholder-oriented board committee (Luoma & Goodstein, 1999). A positive association was also found between proportion of women directors and socially responsible firms (Webb, 2004) and CSR (Coffey & Fryxell, 1991; Stanwick & Stanwick, 1998). Walls et al. (2012) found that patient, long-term investments have a positive effect on social and environmental performance only when accompanied by a larger number of outside board members who would independently monitor the firm’s strategy and actions in this regard.

Ownership

Top management teams (TMTs) are likely to have a major influence on a firm’s temporal horizon and investments in innovations for society. In terms of managerial control, the percentage of shares held by the TMT was found to have a positive association with investments in CSR (Johnson & Greening, 1999), and the percentage of shares held by inside directors was found to be positively associated with corporate philanthropy (Coffey & Wang, 1998).

Public versus private ownership influences innovation for society. Publicly owned firms have greater institutional pressures for standardization and consistency in their practices such as the frequency (e.g., quarterly) and the format of their financial reporting requirements versus privately held firms that have wider latitude in which stakeholders’ interests they can respond to and the initiatives they can undertake (Markman, Russo, Lumpkin, Jennings, & Mair, 2016). At the same time, the wider latitude of private firms also implies that such corporations could be as much proactive in their focus on social and environmental performance as they could be in complete disregard of societal impacts and challenges, while publicly owned firms operate within a narrower band of institutional constraints (Markman et al., 2016).

Similarly, family versus non-family ownership and control also matters. In comparison to non-family firms, family firms with transgenerational continuity intentions are more likely to have a long-term orientation toward undertaking innovations to address societal challenges (Sharma & Sharma, 2019). Not only do family firms identify with the family members who founded the firm, but their desire to transition this firm to the next generation motivates the dominant coalition to think beyond the tenure of the current leadership. In addition, the dominant coalition, the decision-making leadership body within family firms that comprises family and non-family members, focuses also on building and maintaining the family’s socioemotional wealth (Gomez-Mejia, Takacs, Nunez-Nickel, & Jacobson, 2007) in addition to its financial performance.

Therefore, family firms are more likely to be focused on transgenerational survival rather than maximizing short-term or quarterly performance. They are more resilient in suffering short-term deprivation for long-term firm survival due to low overheads, flexible decision-making, and minimal bureaucratic process (Carney, 2005; Miller & Le-Breton Miller, 2005). Such firms are also more likely and able to make patient investments in innovations for society with a longer term outlook (Sirmon & Hitt, 2003). Hence, families have an opportunity to bring a level of commitment and long-range investment that most non-family businesses cannot (Gersick, Davis, Hampton, & Lansberg, 1997). Welfare of future generations creates the strategic bridge that allows family firms to undertake investments in long-term societal innovations strategies with long-term paybacks. Not all family firms will have a long-term orientation, but those with transgenerational intentions certainly will (Sharma & Sharma, 2019).

In comparison to non-family firms, because of the significant and enduring family influence in the business, family firms have a stronger identity that is intricately linked with the family’s identity (Dyer & Whetten, 2006). For example, the family name often becomes synonymous with the firm’s name, leading to the amalgamation of the family’s and the firm’s identities (Ward, 2005). Social interaction between family members outside work settings (e.g., family gatherings) reinforces the unified identity, leading to a more coherent, consistent, and unified strategic outlook (Arregle, Hitt, Sirmon, & Very, 2007). Shared identity leads to ease of information exchange, cooperation, and similarity of managerial interpretations of events and circumstances.

Such unification of identities triggers the desire to protect and preserve the family name associated with the business and has been shown to influence the propensity of the firm to engage in investments to address social and environmental issues (Dyer & Whetten, 2006). However, such unification of identity in family firms is contingent upon the extent to which family members, who form the dominant coalition of the firm, themselves identify with the family (Sharma & Sharma, 2019). Research suggests that later generation family members tend to identify less closely with the values of the founding generation than the first or subsequent generations (Kellermanns & Eddleston, 2004). Family conflicts and disagreement on core values and beliefs emerge as emotional and physical distance between family members increases over generations (Gersick et al., 1997). This could also be a positive factor for a family firm investing in innovating for society. For example, if the founding generation was not in favor of investing in innovations to address social justice and environmental preservation (as is likely the case for most firms founded before the environmental movement started four decades ago), the later generations that do not identify with the values of the founding generation may be more likely to develop family values and an identity that favors a proactive stance to innovate for society since this does not require a change of the core business philosophy but rather the addition of a sustainability mindset to the business. A move in the reverse direction, that is, from a proactive strategy to a minimum compliance strategy, within the family firm is unlikely since it would require a drastic change in embedded family values regarding caring for the environment.

Endogenous-Competitive Strategy

During the last three decades there has been increasing evidence that while investments in complying with social and environmental legislation lead to increased costs (e.g., Walley & Whitehead, 1994), investments in innovations to prevent negative environmental impacts at their source (Russo & Fouts, 1997) and reduce and prevent waste (Hart & Ahuja, 1996) and the adoption of socially just policies within the company and in its supply chain have the potential to lead to reduced costs and competitive advantage. Klassen and McLaughlin (1996) found a positive relationship between financial performance (as measured by stock market performance) and positive environmental events. Nehrt (1996) found a positive relationship between early environmental investments and profit growth in chemical bleached paper pulp manufacturers. Russo and Fouts (1997) found a positive relationship between pollution prevention investments and financial performance across a multisector sample, showing that the relationship was stronger in high-growth industries.

Unpacking the black box between environmental innovations and financial performance, Klassen and Whybark (1999) showed that environmental investments may generate competitive benefits if accompanied by managerial changes and efficiencies. Similarly, Sharfman and Fernando (2008) found that firms that develop a strategy that improves their total risk management through better environmental risk management were rewarded by the financial markets via a reduction in the cost of equity, specifically through the reduction in the volatility of the firm’s stock. Their results suggested that a strategy to innovate for society benefitted the firm competitively in two ways: via improved resource utilization that accompanies improved social/environmental risk management and via reduced cost of capital in equity and bond markets. As evidence of the direct cost savings from reducing wastes, emissions, and material intensity and positive linkages between proactive environmental and social innovations for society and financial performance grows, an increasing number of firms are willing to adopt a strategy to invest in such innovations for society.

Hart and Sharma (2004) propose an even more radical instrumental argument for firms to innovate for society. They argue that firms that fan out to the fringe of their stakeholder networks to engage even seemingly nonstakeholders (such as the unserved poor at the base of the economic pyramid) are able to generate competitive imagination and disruptive innovations as a basis for future competitive advantage. Several global firms such as GE, Dow-DuPont, Ingersoll Rand, and Pepsi, among many others, have adopted competitive strategies to invest in innovations to meet the needs of underserved consumers and cocreate innovative business models and products/services designed to create micro-entrepreneurship and enhance the incomes of those at the base of the pyramid while also creating positive environmental impacts, including enhancing clean water sources, reforestation, biodiversity, habitat protection, and so on (London & Hart, 2010; Sharma, 2014).

Capacity for Sustainable Innovation

Even when a firm is motivated due to exogenous and endogenous drivers to undertake investments in innovating for society, it needs the capacity to generate and implement such innovations. Innovations for society require motivated managers and capabilities that go beyond routine innovations that firms undertake to improve products and processes and enter new markets, since the outcomes have to not only achieve the firm’s core objectives but also address social and environmental challenges. Managerial capacity and organizational capabilities are linked since capabilities are complex and require managerial knowledge, experience, and abilities in established routines accompanied by assets, systems, and processes within the firm. Studies have shown that managers are an important source of value creation and it is the interaction between competent and skilled managers and firm resources and capabilities that determines success (Holcomb, Holmes, & Connelly, 2008; Majumdar, 1998).

Managerial Capacity

Creative ideas for sustainable products, services, processes, and business models are generated by a firm’s managers. A firm’s managers have the most interaction with, and hence the most intimate understanding of, the firm’s business, customers, processes, and capabilities. At the same time, the managers’ decisions are influenced not only by institutional forces, stakeholders, and organizational governance and leadership but also by their personal values toward sustainability (Bansal, 2003), attitudes toward their roles in solving environmental sustainability challenges (Cordano & Frieze, 2000), cognitive frames as pragmatic or paradoxical (Hahn, Preuss, Pinkse, & Figge, 2014), and interpretations of environmental issues as threats or opportunities (Sharma, 2000; Sharma, Pablo, & Vredenburg, 1999). Studies show that skilled managers have a positive impact on corporate innovation as measured by patents and patent citations (for, e.g., Chen, Podolski, & Veeraraghavan, 2015).

In their day-to-day work, managers tend to remain locked into everyday routines, patterns of thinking, and cognitive biases that may stifle creativity (Dutton & Jackson, 1987; Tversky & Kahneman, 1974). Most firms do not unleash the creative potential of all their employees and tend to compartmentalize and assign the creative process to a small group of people, often in the research and development function. Firms that are able to develop successful innovation strategies are those that create the opportunities for all or most employees to apply fresh ideas and strategic thinking to address sustainability challenges and environmental and social impacts of their business by enabling them to overcome their biases and everyday routines (Dutton & Jackson, 1987). Empirical research points to the role of leadership vision and values (Egri & Herman, 2000), supervisors (Ramus & Steger, 2000), and organizational design including legitimization of sustainability in corporate identity, incentives and control systems, information availability, and cross-functional coordination (Sharma, 2000; Sharma et al., 1999).

There is a significant relationship between the values of a firm’s leadership and its engagement in proactive strategies (Hart, 1995). Moreover, if managers have personal values about social justice and environmental preservation and if these values are matched by a firm’s values or mission, then it is more likely that the managers will make decisions to view the firm as a vehicle to address the sustainability issues that interface with the firm’s operations (Bansal, 2003). Decision-making by managers is also influenced by their self-evaluations about their ability to influence sustainability practices (Sonenshein, DeCelles, & Dutton, 2014). That is, managers need to believe that they can really make a difference via their decisions and actions. Managerial values or belief systems are deeply ingrained and difficult to change because they are influenced by cognitive frames and biases (Tversky & Kahneman, 1974).

Facing increased complexity, ambiguity, and uncertainty, managers are more likely to default toward perceiving the need to balance difficult to measure social and environmental metrics with well-honed and developed economic metrics as a threat to their everyday operations rather than as an opportunity (Sharma, 2000; Sharma et al., 1999). The more rapidly the external business environment changes in terms of societal demands for greater responsiveness by business to societal challenges, the greater the managers are likely to see this as a challenge and threat to their everyday routines and decision-making. Since innovation requires the quick and timely seizing of opportunities, managers who view external changes as threats will be less likely to develop any creative responses or solutions to sustainability challenges.

During day-to-day operations, managers make decisions based on established heuristics without giving enough thought to the uniqueness of the specific problem or issue (Tversky & Kahneman, 1974). Further, in such everyday decisions, managers tend to rely mainly on available and easily accessible information. They usually do not undertake the effort to conduct research to develop a full set of alternatives based on complete information. Thus managers, often pressed for time, not only adopt rules of thumb but also extrapolate from personal experience and anecdotes and overweigh dramatic and salient events while underweighting rare events. Hence, such automatic decisions do not lead to choices that managers need to evaluate in order to analyze different courses of action and the implications of these courses of action for a firm’s sustainability performance.

Innovative thinking to simultaneously deliver environmental, social, and economic value requires breaking out of routine decision-making and significant cognitive stress and focus. Kahneman and Tversky (1979) have shown that in the absence of cognitive stress that may lead to the generation of creative and new alternatives, it is common for managers to be influenced by halo effect of first impressions that limits debate and discussion. Managers’ personal likes and dislikes often influence decisions for an opportunity. They are also susceptible to an anchoring bias when they use an initial piece of information to make subsequent judgments. In making decisions on sustainability issues, managers may anchor decisions on widely differing notions of existence or extent of climate change, acceptable carbon dioxide emissions, extent of deforestation or endangered species, or the degree to which water resources are secure and clean. Kahneman and Tversky’s prospect theory argues that people make decisions based on the potential value of losses and gains rather than the final outcome and that possible losses loom twice as large as possible gains, and managers usually tend to stick with the status quo to avoid potential loss.

In the context of developing a strategy to innovate for positive environmental impact, it has been shown that when managers interpret environmental issues as a threat, their firm is likely to adopt a reactive environmental strategy that focuses on minimum legal compliance and pollution control, and when managers interpret environmental issues as opportunities, their firm is more likely to adopt a proactive environmental strategy that includes pollution prevention and clean technologies (Sharma, 2000). When managers view environmental issues as threats, they also view them as negative, as a source of potential loss to their performance on the job and to their organizational performance, and as uncontrollable. On the other hand, when they view environmental issues as opportunities, they view them as positive, as a source of potential gain for their performance on the job and for their organizational performance, and as controllable (Sharma, 2000; Sharma et al., 1999).

Firms can foster an opportunity frame to stimulate cognitive stress and creative problem-solving for the generation of innovations for society by managers via leadership values and vision, supervisory behavior, and organizational design and context (Sharma, 2000; Sharma et al., 1999). Ramus and Steger (2000) found that employees who perceived strong signals of organizational and supervisory encouragement were more likely to develop and implement creative ideas for environmental initiatives than employees who did not perceive such signals. Sharma and colleagues (1999) showed that firms fostered an opportunity frame for decision-making by legitimization of environmental sustainability in the firm’s identity, by integrating sustainability metrics into performance evaluation, by creating discretionary slack in terms of time and resources, and by creating the appropriate information flow that empowers managerial decision-making.

Legitimization in Identity

Managers’ perceptions of their company’s identity have been shown to influence how they interpret strategic issues and thus indirectly influence organizational actions and strategies (Albert & Whetten, 1985). When concern for societal issues becomes an integral component of corporate identity, such issues become harder to disown (Weick, 1988). A change in the corporate identity that explicitly includes a concern for sustainability makes it easier and more legitimate not only for the firm but also for managers to channel resources for the development of sustainability practices and innovations and justify further commitment and allocation of resources. When managers perceive their organization’s identity as partially or wholly focused on addressing sustainability challenges, finding solutions to deliver triple bottom-line performance will assume importance and lead to positive emotional linkages to sustainability practices (Sharma et al., 1999).

Firms can affect the legitimization of environmental preservation by changing their mission or vision statement and signaling to its managers that action on sustainability is important for the organization. Firms such as Patagonia and Body Shop were set up with a mission for environmental preservation and promoting social justice. Changing an existing corporate mission to drive managerial decisions requires extensive and repeated communication widely across the organization. Recently Unilever, under its CEO Paul Polman, established a mission to double profits while halving environmental impact. Polman has used every opportunity to publicize this as a part of Unilever’s identity (Confino, 2013).

Integration of Sustainability Metrics Into Performance Evaluation

Managers searching for, and experimenting with, sustainability solutions that may require new inputs/materials, processes, product reformulations, logistics, and technologies face high outcome uncertainty. This means that managers are not sure how new innovations will impact the firm’s economic performance and affect their own job performance. Such innovations may yield positive economic performance and returns only over a long-term period and carry a threat of failure for managers. This increases the possibility of a negative impact on their performance and may jeopardize their job, enhancing threat perceptions. Firms need to address managerial interpretations of sustainability issues as potential losses by adding social and environmental criteria to their performance evaluation (Sharma, 2000; Sharma et al., 1999).

For experimental projects or radical new technologies, even the economic performance criteria initially require a lower hurdle rate or rate of return, longer term expectations for the start of payback and a holistic evaluation of employee performance. Balancing the long-term, output-based economic, social, and environmental performance criteria with short-term economic criteria in employee performance evaluation encourages managers to address sustainability challenges as an opportunity for gain rather than as a threat of loss. Rewarding managers for achieving long-term sustainability targets reduces the possibility that managers will associate the unpredictability and risk of their actions in the short term as a threat of loss (Sharma, 2000, 2014).

In 2001, DuPont set four specific goals to evaluate employees on their sustainability performance, each with a target date of 2010. The first was to derive 25% of its revenues from nondepletable resources such as agricultural feedstocks, up from about 10% in 2002 and up from 5% in its base year, 1998. The second was to reduce its global carbon-equivalent greenhouse gas emissions by 65% using 1990 as a base year. The third was to hold total energy use flat, using 1990 as a base year, thereby offsetting all production increases with corresponding improvements in energy efficiency. The fourth was to source 10% of its global energy use in the year 2010 from renewable resources (Holliday, 2001).

Discretionary Slack

To manage the perceived threat associated with the unpredictability inherent in the search for, and adoption of, innovative sustainability solutions (technologies, products, services, business models), managers require a measure of discretionary resources and time. Discretionary slack is a combination of the time and resources that facilitate desired strategic or creative behavior within an organization and allow managers to adjust and respond to changes in the external environment (Sharma et al., 1999).

Not all types of slack may help generate sustainable innovations. Only high discretion slack in the form of free time and resources can be applied to a wide variety of situations and problems and can facilitate problem-solving behavior. In contrast, low discretion slack, in the form of idle machines, excess production capacity, and idle personnel who are highly specialized in specific tasks, has very specific applications and may be difficult to adapt (Sharfman, Wolf, Chase, & Tansik, 1988) for generating sustainable innovations. High discretion slack enables managers to increase their perceived sense of controllability to manage the threats associated with the unpredictability and risk of searching for, and adopting, innovative sustainability practices and technologies (Sharma, 2000).

3M is known for fostering innovation by providing its managers with discretionary slack (Goetz, 2011). Its goal is to generate one-third of its sales every year through new products. Correspondingly, it provides its senior managers with around one-third of their budgets and time as discretionary, enabling them to experiment with, and develop, new products and services. The firm adopts a long-term approach to the new product development process by creating a culture of innovation that encourages risk-taking, tolerates mistakes made along the way, and rewards achievement. In 2008, 3M began strategically investing in start-ups with long-term benefit to the company, resulting in collaborations and increased technological development for sustainable innovations.

Information Flow

In balancing short-term economic performance with long-term economic, social, and environmental metrics, managers face considerable uncertainties and ambiguities regarding the evolving regulations, societal expectations, and appropriate emerging technologies. There is a great deal of uncertainty about the relationship between organizational actions and performance outcomes. Even if managers know the right questions to ask, the information and knowledge necessary to answer these questions is not readily available. Without this information, the financial and technical implications of a decision are difficult to assess. When managers have to deliver on social and environmental metrics, they still have to deliver on financial and technical metrics. Hence managers experience a lack of control and a threat perception in managing sustainability challenges (Sharma et al., 1999).

Firms deal with this uncertainty by developing detailed and specific measures of their sustainability footprint, developing detailed and specific performance targets, and undertaking detailed environmental audits using certified third parties to clearly benchmark the firm as compared to its peers and its goals (Sharma, 2014). Firms make this information publicly available to all employees and sometimes to other stakeholders via sustainability reports. While the staff-level legal and sustainability departments may be responsible for initial generation of this information, subsequent knowledge generation and solutions involve line managers at all levels, sparking a fast pace of learning.

Because line managers tend to emphasize economic and operational targets while staff managers tend to emphasize the interpretation and analysis of sustainability regulations, new technologies, and societal expectations, it is important to strike a balance of influence between line and staff units in formulating sustainability strategies. Companies with successful strategies achieve this via the use of such integrative devices as cross-functional committees, task forces, and rotation of staff officers to the business units (Haugh & Talwar, 2010; Sharma et al., 1999). This balancing of responsibilities for information support has the potential to catalyze processes of learning and knowledge generation for sustainable innovation, alleviating the feeling of lack of control. Armed with sufficient information about the technologies and best practices that can help the firm address sustainability challenges, managers now perceive these as opportunities (Sharma, 2000; Sharma et al., 1999).

Organizational Capabilities

Organizational capabilities are the coordinating mechanisms that enable the most efficient and competitive use of a firm’s resources—whether tangible or intangible. Capabilities are a firm’s set of organizing processes and principles a firm uses to deploy its resources to achieve strategic objectives (Amit & Schoemaker, 1993; McEvily & Marcus, 2005, p. 1034). Capabilities for sustainability are developed and deployed as a firm attempts to achieve optimal fit between the internal and external environments, especially where exogenous forces have been increasingly pressuring the firm to act on sustainability concerns. This requires the firm to develop and deploy capabilities that take into account natural ecosystems and societies, outside of its technical core.

Three decades of research on organizational capabilities underlying the relationship between innovations for society and financial performance have unpacked these relationships by considering how organizational performance is linked to valuable and rare organizational capabilities and resources. Research adopting the resource-based view (Barney, 1991; Wernerfelt, 1984) addressed the limitations of trying to establish the direct strategy–financial performance link, opening up the black box of the firm to examine the organizational capabilities that were associated with developing competitive strategies.

Shrivastava (1995), Porter (1991), and Porter and van der Linde (1995) argued that proactive environmental strategies would drive down operating costs by reducing waste, conserving energy, reusing materials, and reducing activities in the product life cycle. These authors also argued that ecological sustainability was a differentiating factor for a growing segment of consumers who wanted products with low or no packaging and a low environmental footprint in their operations. Firms could become first movers and environmental leaders in their industries via inimitable strategies and innovations. Proactive environmental practices would inoculate firms against the long-term risks of resource depletion (especially for firms that were dependent on natural resources), fluctuations in energy costs, product liabilities, and pollution regulations. Employee morale would be higher, especially for those who valued a healthy ecosystem and clean air and water. Finally, these firms would also reap reputational advantages and legitimacy that would place them in a better position to participate in shaping the regulatory environment and preempt regulations.

Klassen and McLaughlin (1996) found a positive relationship between the environmental awards won by a firm and its stock prices, and Judge and Douglas (1998) found a link between investments in emissions reductions by firms and above-average financial performance, partially explained by investments in emissions reductions that led to cost savings as a result of reduced material and energy use. However, such savings reached a plateau after the low-hanging fruit of excessive and easy to eliminate waste was harvested (Hart & Ahuja, 1996). This was confirmed by Nehrt’s (1996, 1998) findings that first movers into clean technologies were able to reap competitive advantage but not late adopters.

Causal linkages between investments in environmental practices and strategies and financial performance are not easy to establish without controlling for other internal and external variables that could affect financial performance and for lagged effects of investments and strategy implementation. Moreover, the payback from a proactive environmental strategy is often intangible, difficult to quantify, and slow to emerge. Proactive environmental strategies (Sharma, 2000; Sharma & Vredenburg, 1998) or pollution prevention environmental strategies (Russo & Fouts, 1997) include long-term, patient investments in innovations for the redesign of processes and products to reduce material and energy use, adoption of cleaner technologies with lower or zero wastes and lower material and energy inputs, product stewardship for take-back, dismantling, recycling and reuse of products, and ultimately the redefinition of business models as firms enter completely new markets. An example is Interface’s major organizational and business model redesign to lease services generated by a product rather than sell higher volumes of the product. Interface’s servicization of its operations required switching from manufacturing and selling carpets made from virgin material to the leasing of “floor comfort” based on a closed loop customer linkage and take-back of fully recyclable carpet tiles (Sharma, 2014).

The natural resource–based view (Hart, 1995) proposed that environmental strategies based on capabilities of total quality management, cross-functional capability, and a shared vision of sustainability would contribute to competitive advantage. Innovating for society requires major changes in a firm’s decision-making processes and investments in new organizational capabilities of engaging stakeholders and integration of external learning (Hart, 1995; Marcus & Geffen, 1998; Sharma & Vredenburg, 1998), processes of continuous improvement of operations (Hart, 1995), higher order or double-loop organizational learning by integrating external learning with internal knowledge (Russo & Fouts, 1997; Sharma & Vredenburg, 1998), cross-functional integration (Russo & Fouts, 1997), technology portfolios (Klassen & Whybark, 1999), and strategic proactivity (Aragon-Correa, 1998), all leading to processes of continuous innovation (Christmann, 2000; Russo & Fouts, 1997; Sharma & Vredenburg, 1998). Finally, Hart and Sharma (2004) proposed a dynamic mega-capability of radical transactiveness that integrates a flow of seeking information from fringe stakeholders via cocreation of sustainable business models and products with interfirm double-loop learning processes.

Innovating for society requires investments not only in the development of new organizational capabilities (Hart, 1995; Marcus & Geffen, 1998; McEvily & Marcus, 2005; Sharma & Vredenburg, 1998) but also in the deployment of the new and existing capabilities (Christmann, 2000; Russo & Fouts, 1997). Firms have multiple strategic choices and opportunity costs for deploying an existing capability to undertake one strategy versus another. This article has presented an overview of the literature linking organizational capabilities to firm strategies for addressing social and environmental challenges. This literature is considerable and would merit a separate review.

Conclusion

This review began by defining the terms innovation and innovation for society and restricted its scope to innovations for society undertaken at the firm level of analysis. It then discussed the drivers or motivators for such innovation in the form of exogenous institutional and stakeholder influences and endogenous ownership, governance, leadership, and competitive strategy influences. Finally, this article discussed the capacity that firms must develop and deploy to innovate for society via building managerial motivations and capacity and valuable organizational capabilities that enable firms to reconcile their performance on economic, social, and environmental metrics to address societal challenges while achieving core economic objectives. Equally important are the processes of ideation, creativity, experimentation, prototyping, and evaluation systems for such innovations that firms must develop and deploy to innovate for society. These processes are beyond the scope of this review.

Knowledge about the role of firms in addressing societal challenges has grown over the past three decades as scholars in multiple disciplines have explained the motivations of firms to undertake innovations for society, processes used to build organizational capabilities to adopt and implement sustainability strategies, and linkages of such strategies to financial performance. Nevertheless, such innovations and strategies are far from a universal norm. Hopefully, this article, among other such writings, will further an understanding of why and how firms can successfully innovate for society.

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