Electronic copy available at: http://ssrn.com/abstract=1088323Electronic copy available at: http://ssrn.com/abstract=1088323

OVERCOMING BARRIERS TO SUSTAINABILITY: AN EXPLANATION OF

RESIDENTIAL BUILDERS’ RELUCTANCE TO ADOPT CLEAN TECHNOLOGIES

Jonatan Pinkse1 & Marcel Dommisse2

1 University of Amsterdam Business School, The Netherlands

2 ENECO Energie, The Netherlands

Business Strategy and the Environment, forthcoming

ACKNOWLEDGEMENT

Jonatan Pinkse would like to acknowledge the Netherlands Organization for Scientific

Research (NWO) for financial support.

Correspondence:

Dr. Jonatan Pinkse

University of Amsterdam Business School

Roetersstraat 11

1018 WB Amsterdam

The Netherlands

Tel. +31 20 525 4106

Fax. +31 20 525 5092

E-mail: j.m.pinkse@uva.nl

Electronic copy available at: http://ssrn.com/abstract=1088323Electronic copy available at: http://ssrn.com/abstract=1088323

OVERCOMING BARRIERS TO SUSTAINABILITY: AN EXPLANATION OF

RESIDENTIAL BUILDERS’ RELUCTANCE TO ADOPT CLEAN TECHNOLOGIES

ABSTRACT

The construction industry has great opportunities to significantly reduce CO2 emissions

by improving energy-efficiency of residential buildings. However, in this industry

diffusion of cost-effective clean technologies has been notoriously slow and below

potential. This paper sheds light on factors that explain why construction companies have

been reluctant to adopt energy-efficient technologies. It questions why some companies

have intensified their investments in clean technologies, while others are lagging behind.

Based on a multiple case study of four Dutch building contractors, the paper shows that

contractors that actively gather information and build internal technical capacity are

keener on adopting energy-efficient technologies. Findings also reveal that it will be a

major challenge for the construction industry to communicate the advantages of clean

technologies to (potential) home buyers and create market demand.

Key words: clean technology, energy-efficiency, sustainability, construction industry,

dynamic capabilities, stakeholders

2

OVERCOMING BARRIERS TO SUSTAINABILITY: AN EXPLANATION OF

RESIDENTIAL BUILDERS’ RELUCTANCE TO ADOPT CLEAN TECHNOLOGIES

INTRODUCTION

With global climate change gaining momentum, there is much attention for cutbacks in

energy consumption to reduce carbon dioxide (CO2) emissions. Regarding how emission

reductions are achieved, management research has particularly focused on the industrial

sector by looking at climate change activities of energy-intensive companies that operate

in the oil & gas, automotive and electricity industries (Jeswani et al., 2008; Kolk and

Levy, 2004). However, a recent study by the McKinsey Global Institute (MGI, 2007)

revealed that particularly in the residential sector – responsible for approximately one

quarter of global energy use – there are large opportunities to significantly reduce CO2

emissions by improving energy-efficiency. According to the McKinsey study, this sector

not only has the largest potential to improve energy-efficiency, but can achieve this by

adopting already-existing – ‘off-the-shelf’ – technologies. The reason for adoption to be

below potential is a slow diffusion of cost-effective energy-efficiency technologies (Jaffe

and Stavins, 1994), caused by various market barriers (Howarth and Andersson, 1993). In

the construction industry, the most pressing market barrier has been a classic

principal/agent problem: the home builder that makes the investment in the energy-

efficient technology has no interest in doing so because the benefit – a lower utility bill –

is for the end-user of the building (Shama, 1983; Howarth and Andersson, 1993; Jaffe

and Stavins, 1994; MGI, 2007). Recently, however, green building initiatives have come

to the forefront as well (Pernick and Wilder, 2007), meaning that some construction firms

are trying to circumvent these market barriers, as they expect to gain from technological

innovation and realize a firm-specific advantage in clean building technologies.

With this paper we aim to shed more light on the factors that determine how

contractors deal with technological change concerning energy-efficient technologies for

residential buildings. We question why some contractors seem able to develop a firm-

specific advantage by building dynamic capabilities in adopting clean technologies, while

3

others do not break free from the carbon-intensive technological lock-in they find

themselves in (Unruh, 2000). Based on a dynamic capability framework we argue that the

adoption of energy-efficient technologies is an interplay between existing knowledge,

capabilities, and managerial processes (Helfat, 1997; Teece et al., 1997) and the way

firms integrate stakeholder interests (Sharma and Vredenburg, 1998; Aragón-Correa and

Sharma, 2003). To examine the process of energy-efficient technology adoption we have

conducted a multiple case study in the Dutch construction industry, comparing and

contrasting four contractors; two of which have expressed their intention to invest in

green building, and two others that have not done so. Before turning to the analytical

framework and empirical findings of the case studies, we will first briefly discuss the

background of the adoption of energy-efficient technologies in the Dutch residential

building industry.

DUTCH RESIDENTIAL BUILDERS AND ENERGY EFFICIENCY

A recent report of the European Commission on the environmental impact of products

showed that in Europe space heating and hot water production are among the most

harmful, particularly in their impact on global climate change (EC, 2006). Nevertheless,

this report also concluded that there is much room for improvement in reducing the

environmental impact of the residential sector. In the Netherlands, the largest

improvement can be made by replacing the dominant technology for space heating and

hot water production: the ‘high-efficiency gas condensing boiler’. These boilers use

natural gas, which is not surprising, since due to the presence of local natural gas fields,

energy supply in the Netherlands is dominated by natural gas (Beerepoot and Beerepoot,

2007). Although their efficiency has improved considerably over the past three decades,

these boilers still rely on a carbon-rich fossil fuel.

Main alternatives for the gas condensing boilers are solar boilers and heat pumps,

which can both completely replace the gas condensing boilers.1 However, as the latest

figures show, in 2006 solar power’s total contribution in preventing the use of fossil fuels

was 787 TJ, just about 1% of total Dutch sustainable energy supply; while the

contribution of heat pumps was 2566 TJ, approximately 3% of the total sustainable

4

energy supply. Moreover, whereas the number of heat pumps installed each year shows

an increasing trend, this has not been the case with solar boilers, where the added number

has been declining due to the abolishment of a subsidy on their installation (CBS, 2007).

It thus seems that the adoption of energy-efficient technologies in the Dutch residential

market has hardly increased, even though they can contribute significantly to reducing

CO2 emissions (Beerepoot and Beerepoot, 2007). In other words, the industry clearly

reflects a carbon lock-in (Unruh, 2000), as dominance of the gas condensing boiler stands

in the way of more widespread adoption of clean alternatives.

However, the institutional landscape for the promotion of energy-efficiency in

residential buildings has been changing considerably. In 1995 the Dutch government

implemented energy performance regulations that set a norm on the energy performance

coefficient (EPC) of a building, which can be met by adoption of energy-efficient

technologies or improved insulation. Over the past decade this EPC regulation has been

tightened regularly (Beerepoot and Beerepoot, 2007), most recently at the start of 2006.

On top of this, in 2003 the European Commission passed the Energy Performance of

Buildings Directive, which lays down that all EU Member States have to implement a

policy requiring a certificate for new buildings that shows its energy performance (EC,

2003). For the Netherlands, this means that from 1 January 2008 onwards, each new

building requires an energy performance certificate. Alongside these regulatory changes,

public awareness of the climate change issue seems to have increased as well, putting

further pressure on the building sector to improve its ‘green’ credentials. Yet, whether the

building industry is receptive to these institutional changes is open to discussion, because

it has a longstanding reputation for being conservative (Toole, 1998; Kolk and Pinkse,

2006) and is known for a path-dependent technology trajectory. This means that,

technologically, the industry only changes incrementally over time and which path is

followed depends much on a company’s particular history, which in this industry most

often reflects a strong attachment to familiar technologies (Beerepoot and Beerepoot,

2007).

Slow diffusion of technologies in the building industry has been attributed to the

specific structure of the industry and characteristics of its environment (Beerepoot and

Beerepoot, 2007). The structure of the building industry is complex because contractors

5

are mostly engaged in temporary projects, often of a unique character (Miozzo and

Dewick, 2002). What is more, for each project they interact with a huge number of

stakeholders, such as architects, construction engineers, material suppliers, and

subcontractors, who differ per project (Pries and Janszen, 1995). As a result, it is

problematic for contractors to build up knowledge that extends beyond the individual

projects (Miozzo and Dewick, 2002). Another consequence is that contractors are subject

to a high degree of uncertainty. Because they interact with a wide variety of stakeholders

and operate in a strongly regulated market, they often lack the information necessary to

make decisions about the adoption of new technologies (Toole, 1998). Another source of

uncertainty is that consumer preferences are not well-known, because in the Netherlands

residential buildings are not often commissioned privately (Beerepoot and Beerepoot,

2007). It will come as no surprise, then, that one way of responding to uncertainty is to be

reluctant vis-à-vis unfamiliar technologies and to postpone the adoption until more

information is available (Toole, 1998), which in the case of energy-efficient technologies

could explain the carbon lock-in (Unruh, 2000).

ANALYTICAL FRAMEWORK

Over the past two decades, the residential building industry clearly has had difficulty in

adopting energy-efficient technologies. Nevertheless, this industry increasingly faces

pressure to take sustainability into account. In this paper, we argue that the adoption of

clean, energy-efficient technologies depends on the ability of contractors to develop

dynamic capabilities for this purpose. The essence of a dynamic capability is that it

enables a firm to adapt, integrate and reconfigure its organizational competences and

resources to maintain a fit with a changing business environment (Teece et al., 1997). It

not only refers to the competence of developing technological expertise for process

improvement or product development through research and development (R&D) (Helfat,

1997), but also to managerial processes (Eisenhardt and Martin, 2000). Successfully

managing sustainability is a typical example of a dynamic capability because it requires a

path-dependent accumulation of institutional and technological knowledge and

6

integration of diverse stakeholder interests (Aragón-Correa and Sharma, 2003; Russo,

2007).

A question then is what kind of dynamic capabilities the adoption of an energy-

efficient technology requires from a contractor. Adoption of energy-efficient technologies

clearly does not involve developing the technologies itself through R&D, as they are ‘off-

the-shelf’. Nevertheless, it does require a build-up of knowledge about where to acquire,

and how to adopt, these technologies. Much of the uncertainty about technology adoption

comes from a lack of information, which makes the skill of gathering missing

information valuable (Toole, 1998; Tushman and Nadler, 1978). However, being able to

gather information about the adoption of new technologies alone is not enough. It

becomes a dynamic capability only when complemented by related knowledge already

owned by a company (Helfat, 1997), because that enables it to process new information

(Tushman and Nadler, 1978). Yet, when a company’s knowledge base is not

complementary, it can have a negative influence on technology adoption as well, by

actually reinforcing the technological lock-in (Könnöla and Unruh, 2007). We therefore

argue that contractors need to be able to gather information from various stakeholders

and their own complementary knowledge to process the information internally (Toole,

1998; Tushman and Nadler, 1978).

After acquiring a technology, the next difficulty is integrating new technologies

into the project-based structure, characteristic for the construction industry. The dynamic

capability that this requires is architectural innovation (Henderson and Clark, 1990).

Architectural innovation refers to a change in the way that different components which

together form a product are integrated and connected. It is usually initiated by a change in

one of the components (in our case the heating and hot water production of a residential

building), but the core design of the product as a whole stays the same (Henderson and

Clark, 1990). Originally architectural innovation has been understood as a change in

product architecture, but it has been argued that it also entails a change in product

development, meaning that the role of stakeholders in the innovation process changes in

such a way that each stakeholder’s technical capabilities are utilized optimally (Bozdogan

et al., 1998). Architectural knowledge is, therefore, of great value for contractors because

of the complexity of the project-based mode of production and the many stakeholders

7

involved (Miozzo and Dewick, 2002). Adopting new energy-efficient technologies will

mean that stakeholders that are already part of the production process will also be

affected and new stakeholders will be drawn in. Consequently, we argue that contractors

that have more architectural knowledge – either in-house or through relationships with

external architects – about the building process are thereby able to win over their existing

stakeholders as well as integrating new stakeholders (Sharma and Vredenburg, 1998) are

more likely to succeed.

For the development of a dynamic capability in adopting energy-efficient

technologies, gathering information from stakeholders and managing their interests form

essential components. However, this argument rests upon the assumption that the

contractor is always in the position to control its stakeholders, which is not always the

case. A contractor itself also depends on its stakeholders for resources and information,

which enables these stakeholders to influence or control firm behaviour (Frooman, 1999;

Jawahar and McLaughlin, 2001). In other words, by influencing contractors, stakeholders

can be the initiators of dynamic capability development in the sector. There are two ways

for stakeholders to exert influence: a withholding strategy, where they stop supplying a

resource, or a usage strategy, in which case stakeholders continue to provide the resource,

but raise conditions about its use (Frooman, 1999). Because stakeholders with valuable

resources have considerable power, contractors make a selection as to which stakeholders

they give prominence, and are inclined to favour the more powerful stakeholders as they

form the greatest threat to their business (Jawahar and McLaughlin, 2001; Madsen and

Ulhøi, 2001). However, stakeholders that own resources which are crucial for

accomplishing the whole building process are not necessarily also the ones supportive of

the adoption of energy-efficient technologies. Three stakeholders have been identified as

crucial for the adoption of technologies in the construction industry: home buyers, local

governments, and subcontractors (Toole, 1998). How much power these groups have vis-

à-vis contractors and whether they will be an initiator or destroyer of initiatives for

energy-efficiency is open to discussion.

8

RESEARCH METHODOLOGY

For this study we used a case methodology analyzing four Dutch contractors. The Dutch

building industry consists of a large number of small contractors and a few bigger players

(Beerepoot and Beerepoot, 2007). In our study we wanted to particularly focus on

diversity regarding contractors’ position on energy-efficient technologies. For that

reason, we explicitly looked for contrast on this dimension in sampling our case

companies. We first selected two contractors – Fortis Vastgoed Ontwikkeling and

Bouwfonds MAB Ontwikkeling B.V. – that are members of a business association

supporting the adoption of clean technologies (Projectgroep Duurzame Energie

Projectontwikkeling Woningbouw2 (DEPW)). The other two cases that were selected –

BAM Woningbouw B.V. and Ballast Nedam Bouw B.V. – are contractors of similar size,

but did not publicly support the adoption of energy-efficient technologies. Table 1 gives

an overview of the four contractors that participated in the study, also showing the

number of residential buildings they produced in 2006, and how many were equipped

with energy-efficient technologies.

==============

Table 1 about here

==============

In the study we analyzed archival data and conducted interviews with key

informants (two per case). In the first phase, we collected (annual) financial reports and

sustainability reports, and consulted the websites of the case companies. The aim was to

sketch a general picture of the contractors, and identify their motivation for sustainability

initiatives. In addition, it provided a background to make sense of the findings from the

semi-structured interviews that were conducted in the second phase of the study (in the

first few months of 2007). For the semi-structured interviews we compiled a list of topics

based on our analytical framework, to enable a cross-case comparison. The interviews

nevertheless also preserved an open character, allowing new dimensions not identified in

the analytical framework to evolve. On average the interviews lasted about 75 minutes,

were digitally recorded with a voice-recorder, and took place at the interviewees’

9

companies. We analyzed the documents and interview data using a qualitative data

matrix with the theoretical dimensions from our framework, and dimensions that evolved

from the interviews, on the vertical axis, and the case companies on the horizontal axis

(Miles and Huberman, 1994). We first scrutinized the data for each case separately to

subsequently use these findings for a comparative analysis across the cases.

FINDINGS FROM THE CASE STUDIES

In this section we present the findings of our analysis. We will first briefly introduce the

case companies and their general approach towards energy-efficient technologies. Next,

we will look into what view they have about recent trends in the Dutch building industry

and how attention for energy-efficiency fits into these trends. Subsequently, we will focus

on the dimensions identified in our analytical framework, that is, how do contractors

acquire knowledge about energy-efficient technology adoption, what impact does it have

on existing business processes, and which stakeholders influence the adoption process.

We will use the framework not only to shed light on explanations for home builders’

reluctance to adopt energy-efficient technologies, but also to clarify how some

contractors have overcome this reluctance.

Overview of case companies

Fortis Vastgoed Ontwikkeling N.V.

Fortis Vastgoed Ontwikkeling (VO) is owned by the insurance branch of international

financial service provider Fortis. Fortis VO consists of three business units – residential

building, acquisition, and commercial real estate – but in this study we focus only on the

residential building unit. As table 1 shows, this contractor produced 1500 residential

buildings in 2006, but none were equipped with energy-efficient technologies. The

rationale is that although there is internal support for energy-efficient technologies,

adoption does not add value because customers do not demand such technologies.

Nevertheless, this contractor does identify a change in the market in favour of energy-

efficiency, on account of the recent tightening of the Dutch energy performance

coefficient (EPC) regulation, change in local government energy policy, and rising

10

customer demand for more comfort (i.e. cooling in periods of hot weather). Still, so far,

this market change has not led to adoption by Fortis. Important for the reluctance to adopt

energy-efficient technologies is the conviction that it will adversely affect the way Fortis

VO manages building projects. Because Fortis VO has limited internal knowledge about

energy-efficiency, this contractor will need to rely on new external actors, which means

additional risk. Only local governments could convince Fortis otherwise, but their

influence depends much on whether they own the building ground, or not. Nevertheless,

Fortis VO claims to have several projects in preparation in which they intend to adopt

energy-efficient technologies.

Bouwfonds MAB Ontwikkeling B.V.

Bouwfonds MAB Ontwikkeling is one of the leading contractors for residential building

in the Netherlands. It is an old player in the Dutch residential building market that has

been active for more than 60 years. Since 1 December 2006 it has been part of Rabobank,

one of the largest Dutch banks. Bouwfonds is made up of three business units –

residential building, multifunctional projects and commercial real estate – but our study

only looks at residential building, Bouwfonds’ largest business unit. The total number of

residential buildings that were produced in 2006 amounted to 8000, but only a few –

1.9% – were equipped with energy-efficient technologies (see table 1). Adopting energy-

efficient technologies was not an initiative of Bouwfonds, but was a result of local

governments’ stricter energy policies. If government regulation on green building does

not become more stringent, Bouwfonds will not choose large-scale adoption of energy-

efficient technologies. Reason is that acquiring building ground is this contractor’s core

competency, not the technological aspects of project development. Accordingly,

Bouwfonds does not have employees with knowledge and expertise about the adoption of

energy-efficient technologies. Besides, adoption would mean that Bouwfonds has to

provide its customers with information in a different way, leading to a rise in

communication costs. Apart from local governments, influential stakeholders for

Bouwfonds are financial and business development managers, who will only choose

clean technologies when it improves the financial performance.

11

BAM Woningbouw B.V.

BAM Woningbouw is a fully owned subsidiary of Koninklijke BAM Groep N.V., which

is the market leader in the Dutch construction industry. BAM was established in 1869

and is the oldest construction company in the Netherlands. At the group level, BAM has

launched ten themes regarding corporate social responsibility, of which energy/climate

change is one. This is reflected in BAM’s involvement in several project groups on

energy transition in the built environment. In 2006, BAM Woningbouw realized 2400

residential buildings (see table 1). Currently about 15% have energy-efficient

technologies implemented, but the contractor claims that this will grow to approximately

25% in the next two years. One reason why BAM has decided to increase adoption of

energy-efficient technologies is their belief that the public has become aware of global

climate change, combined with initiatives on this by local governments. This has been set

up from within the internal organization, but predominantly with a marketing approach.

This contractor draws on external actors for the technological aspects of energy-

efficiency, but sometimes also consults one of the sister subsidiaries of BAM Groep. For

BAM, influential stakeholders include local governments, the national government, and

(internal) business development managers. This contractor expects that customers will

only become more influential when they face rising energy bills.

Ballast Nedam Bouw B.V.

Ballast Nedam Bouw (BNB) is one of two core activities of Ballast Nedam, one of the

largest Dutch construction companies. Ballast Nedam has a long history as it was

founded in 1899 and became known for eye-catching projects, such as the Peace Palace

in The Hague. In developing projects for residential building BNB has about fifty years

of experience. The main aim of BNB is to provide fully integrated services for residential

building, which means that the company tries to expand its value chain – upstream and

downstream – by taking a life-cycle approach to the building process. As part of this,

BNB has its own subsidiary – Bouwborg – that is specialized in maintenance, renovation

and exploitation of buildings. The number of residential buildings that BNB realized in

2006 amounted to 1384 and half of them were equipped with energy-efficient

technologies (see table 1). BNB indicates that applying energy-efficient technologies is

12

an instrument for their strategic aim to fulfil demand for complete solutions (from design,

building and maintenance to exploitation), which contributes to a differentiation

advantage as well as matching aspirations for corporate social responsibility.

Consequently, BNB is the only contractor that has made efforts to develop knowledge

about energy-efficient technologies internally. Still, BNB recognizes the challenge of

adjusting communication towards home buyers. The stakeholder that BNB considers as

most influential is the national government.

General trends in the Dutch building sector

Although the Dutch construction industry is seen as quite traditional and consists of many

like-minded companies, all contractors agree that the market for residential buildings has

changed considerably over the past three decades. The main innovation for the Dutch

building industry has been a shift from a supply-driven to a more consumer-oriented

market. A BAM respondent argues that architects of buildings used to be dominant in the

building process, yet ignorant of changes in the market. However, their position has been

watered down in favour of customers, which, for example, has led to more attention for

the aesthetic quality of homes. A BNB respondent indicates that while it used to be that

roughly every five years a new innovation emerges, now that consumers have become

more outspoken, this seems to be occurring more regularly. However, this respondent

adds that the increasingly dynamic nature of the residential building market also creates

many uncertainties for his company. For example, pressure on building costs or an

increase in mortgage interest rates can lead to sudden changes in the type of building that

is commissioned or induce realization of cheaper homes.

A stronger focus on customer preferences has not led to an equal increase in

demand for energy-efficient technologies. Based on their research BAM concludes that

only 2% choose an energy-efficient home, if this means spending more money; 15% are

willing to choose such a home when the price is the same; and 83% do not consider

energy-efficient technologies. For most home buyers what prevails are other aspects of a

house, such as geographical location, colour of the exterior and the number of rooms. In

fact quite the opposite is the case. Adoption of energy-efficient technologies further

13

increases risks and uncertainties associated with a dynamic customer-driven market.

BNB argues that it increases the costs of installation of heating and hot water production

systems, which is quite challenging in the context of rising building costs, because this

means that other aspects of a residential building need to be produced less expensively.

Nevertheless, the contractors do observe a trend of increased attention for

sustainability as well. Fortis VO notes that there has been an improvement in the

recycling of building materials. Yet, because recycling mainly affects the building

process (done by subcontractors) and not the end-product, it has almost completely

bypassed Fortis VO. Innovations that BNB identifies which have a bearing on

sustainability, are the adoption of balanced ventilation systems (which according to their

research did not perform properly), and different home architecture that puts the

bathroom in a central location. An important stimulus for this trend is local governments’

integration of sustainability objectives in building policies that contractors have to

comply with.

Acquiring knowledge about energy-efficient technology adoption

To keep in touch with recent trends, all contractors regularly consult their stakeholders.

At the outset, they try to assess whether there is market demand for energy-efficient

technologies. To gather information on the wishes of potential home buyers, contractors

conduct surveys. This is most extensively done by BNB, which surveys home buyers

before, as well as after realizing a building project, to analyze customer satisfaction and

assess changing preferences. For Bouwfonds the outcome of regularly surveying its

customers is given as their reason not to integrate energy-efficient technologies into

business processes, because they have not yet observed any increase in demand for

energy-efficient technologies.

There are various ways for contractors to acquire knowledge about innovations

for sustainability. Fortis VO mentions visiting local real estate agents, investors, and

suppliers and sharing best practices among colleagues. However, what led to integration

of sustainability in their projects were demands from local government, which have

increased considerably over the past five years. Still, Fortis VO respondents state that

14

government pressure has not led to the adoption of energy-efficient technologies; the

company was able to comply with the tightening EPC norm through improvements in

insulation. BAM got acquainted with sustainable building materials through visiting

exhibitions, and by continually staying in contact with suppliers where most innovations

with regard to building materials took place. However, these innovations were not aimed

at energy-efficient technologies, but either involved changes in the production process or

improved forms of insulation. Nevertheless, BAM took a decision to adopt energy-

efficient technologies, and since 2004 has introduced these into its projects. BNB also

gathers information by visiting conferences and exhibitions, and engaging in stakeholder

dialogue. This contractor emphasises that suppliers and consultants play a pivotal role

because of their complementary knowledge and expertise. However, improvements that

have been made in recent years in energy performance have predominantly been based on

better insulation. It was not until recent tightening of the EPC regulation (in 2006) that

BNB chose to adopt energy-efficient technologies.

What differentiates the contractors is how they build internal capacity to

incorporate energy-efficient technologies in existing business processes. Fortis VO and

Bouwfonds are merely developing organizational capacity, but do not acquire technical

skills. Bouwfonds argues, for example, that their core competency is acquiring building

ground on which they can make large profits. Technical aspects of project development

receive much less attention. Nevertheless, this contractor does have a centrally organized

department occupied with innovation, but it only looks at constructional aspects of the

building process. One respondent remarks that, if Bouwfonds were to make larger

investments it would not be in the adoption of energy-efficient technologies, but in

increasing the size of houses. Both Bouwfonds and Fortis VO have no employees at their

disposal with knowledge of, and expertise in, energy-efficient technologies. Even so,

Bouwfonds has gained some experience over the years with adoption, as they have been

used in a few projects.

The other two contractors follow a different approach. In BAM a number of

employees was brought together to further develop innovation in this area, but

predominantly from a marketing viewpoint. This contractor also has no installation

engineers internally, as its focus is on managing projects. What is different though, is that

15

BAM Woningbouw sometimes asks advice from one of the sister subsidiaries within

BAM Groep, of which some are specialized in installation techniques as well as

engineering and consulting. Finally, BNB is the only contractor where stricter regulation

gave rise to efforts to build knowledge about energy-efficient technologies internally,

which resulted in one fulltime position. In addition, use is made of specific knowledge of

its subsidiary Bouwborg about engineering and exploitation of buildings.

The (expected) impact of energy-efficient technology adoption

Being reluctant vis-à-vis energy-efficient technologies generally comes from a conviction

that it will negatively impact the way a contractor manages building projects. One

challenge contractors identify is that it affects the maintenance of residential buildings

once delivered, because heating and hot water installations become more complex. Fortis

VO, Bouwfonds and BNB all argue that administering and maintaining energy-efficient

technologies entails further outsourcing to new actors, specialized in these technologies.

To illustrate, one Fortis VO respondent states that his company will never integrate this

function because it does not fit the core competencies. However, relying on new actors

will mean additional risk for the company (specifically reputation risk, as the

technological risk will be for the proprietor that exploits the building), which it is

unwilling to take. For Bouwfonds, the reason for outsourcing all activities regarding

energy-efficiency is to deal with technical trouble and complaints, because the

construction company itself does not have sufficient in-house knowledge to follow up on

complaints. Besides, Bouwfonds contends that adoption would also lead to complications

for their internal employees to keep performing their tasks adequately. BNB concurs that

even though outsourcing all activities (both installing the energy-efficient equipment and

maintaining it afterwards) lengthens the equipment’s life; it still has consequences for

internal business processes. However, this contractor, which has already equipped

buildings with energy-efficient technologies on a fairly large scale, holds the view that

the additional risks and uncertainties were particularly challenging for senior managers,

not on-site project managers. Most on-site project managers are younger than senior

management and are more accustomed to swift changes in the environment. BNB’s

16

senior management is only positive about adoption when risks are taken over by actors

that can control them or can be insured against. The proactive role of project managers,

on the other hand, is seen in the many initiatives that they have brought to bear.

Nevertheless, BNB still has to decide whether to integrate or outsource exploitation of

buildings, although the company is tending towards integration as it adds more value

internally.

Another challenge that adoption introduces is a change in communication towards

home buyers. Customers have to be informed about the different way in which energy-

efficient technologies are operated. And, as BNB explains, besides the contractor many

other stakeholders are involved in the communication process, such as real estate agents,

installation engineers and local governments. For Bouwfonds, a rise in communication

costs is decisive in staying put. To be able to communicate to customers, this contractor

sees it as a requirement that all employees and stakeholders have profound knowledge of

all rights and duties that adoption of these technologies brings about, but this is currently

missing. Fortis VO adds that its limited knowledge about the technology means

informing buyers will be an extra effort, causing delays in the building process, and will

reduce financial profits. The importance of good communication is illustrated by BNB’s

experience with the consequences of mistakes made in informing customers. Solar boilers

and heat pumps are operated in a different way than gas condensing boilers, but

customers were not given sufficient advice on how exactly to operate the new equipment.

The ensuing mistakes in operating the equipment led to customer complaints about its

functioning, which immediately created a negative impression among stakeholders such

as real estate agents about the new technology, which then stood in the way of further

diffusion.

BAM offers a more optimistic view. When it was first adopted in 2004, the

impact of energy-efficient technology was seen as complementary to existing business

processes. One respondent explains that it was seen as a way to improve business

processes, and external experts were hired to share knowledge about these technologies

with internal project development teams. What was crucial, though, was an event that

took place in 2004 where BAM’s chief executive officer handed over the Toolkit

Duurzame Woningbouw3 to the then Dutch Minister of the Environment. After this event

17

sustainability became widely supported internally. The reason why BAM is currently in

favour of adopting energy-efficient technologies is that it controls and lowers future

energy costs. This does not mean that adoption is not without risk, and some on-site

project managers are still sceptical, because they do not observe consumer demand and

have no experience with such technologies. Doubts are further fuelled by the fact that the

initial investment is still higher than ‘traditional’ technologies. If competitors are not

following the same route, adoption may pose an extra risk. BAM’s respondents therefore

call for some sort of government regulation. Another risk that they identify is uncertainty

about the functioning of energy-efficient technologies. This has the consequence that on-

site project managers may still choose familiar technologies that haven proven their

success in preceding projects. BAM tries to minimize these risks by good communication

and transparency, thus overcoming project managers’ reluctance.

Stakeholder influence on energy-efficient technology adoption

The specific structure of the building industry is clearly reflected in all contractors’

business processes. They use many different partners in developing and realizing project

for residential building, because these partners possess knowledge and expertise that the

contractors do not have internally. Fortis VO notes that in choosing partners, it

predominantly relies on past experience; no contracts exist that go beyond single projects.

In contrast, Bouwfonds has more continuity built in, as several partners are involved in

more than one project. For the installation of energy-efficient technologies, this

contractor uses several installation consultants and construction engineers on a regular

basis. For the same purpose, BNB also predominantly utilizes the same partner firms. A

danger of this working method, as one BNB respondent remarks, is that they sometimes

accept the advice of external partners too easily, thus making the contractor vulnerable to

external influence. Still, even though installation consultants and construction engineers

have specialized, complementary knowledge on energy-efficient technologies, the other

three contractors maintain that these stakeholders do not have the power to influence

adoption.

18

One stakeholder that Fortis VO, Bouwfonds, and BAM identify as being powerful

enough to influence the adoption of energy-efficient technologies is local government.

Local governments are able to exert influence on contractors not only by implementing

tight norms for energy performance, but, according to BAM, also by creating the

conditions in which adoption is stimulated, that is, by including energy-efficiency in

public tenders or issuing competitions4. Fortis VO and Bouwfonds add that it is critical

whether the local government owns the building ground, because only then can it impose

tighter norms on a contractor. Bouwfonds argues, for example, that if the local

government does not own the ground, they will not start sustainability initiatives on their

own behalf, because the company will have to raise its prices thereby loosing market

share. The stakeholder that BNB deems most powerful, and one that BAM also considers

influential, is the national government. To illustrate, one BAM respondent argues that

innovation and tightening of the EPC regulation go hand-in-hand; sufficient adoption of

energy-efficient technologies will naturally be followed by stricter EPC regulation.

Besides external stakeholders, for Bouwfonds and BAM internal stakeholders

such as financial and business development managers also play an important role,

because they are free to choose whatever energy concept they prefer. However, what

influence business development managers have is somewhat uncertain. This internal

stakeholder will only go for adoption when it generates a financial advantage in the short

run, as performance evaluation is predominantly based on a project’s returns.

Finally, the stakeholder with the most dubious role is the home buyer, as all

contractors experience a lack of customer demand for energy-efficient technologies. It

seems that the contractors share the view that home buyers would have the power to

boost adoption, but are currently not taking on this role. Still, Fortis VO has some doubts

about the power of home buyers, and argues that the Dutch residential building market

remains predominantly supply-driven. This contractor argues that as long as energy-

efficient technologies require a higher initial investment, but have no value for potential

buyers, no higher margin can be asked. Only when home buyers start to demand higher

energy-efficiency or more comfort, will the power balance shift towards a consumer-

driven market, potentially leading to higher adoption rates as well. The other contractors

feel that some external factor should lead to a breakthrough in customer awareness.

19

Bouwfonds, for example, believes that the only instance in which urgency to adopt

energy-efficient technologies will increase is when the price of fossil fuels keeps going

up, while BAM expects more urgency when customers face problems in energy supply.

Only when home buyers become aware of rising energy costs will they act and BAM

tries to enhance this by showing them the complete life-cycle of their home. BNB also

sees a role for contractors in making consumers more aware what adverse effects not

using energy-efficient technologies might have for their children, e.g. due to climate

change and air pollution.

DISCUSSION

What came out of the interviews was that there is considerable interest about

sustainability and energy-efficiency in this industry, but that the scale of clean technology

adoption still remains limited. The two contractors we sampled based on their

membership of a ‘clean technology-oriented’ business association (BAM and BNB), are,

as expected, more widely adopting energy-efficient technologies than the other two

(Fortis VO and Bouwfonds). However, reasons contractors give for their actions are quite

similar. They all refer to factors such as a higher risk due to outsourcing, higher

communication costs, and increased complexity of business processes. But, while these

factors are a barrier for some, they are a challenge for others and a point of departure for

dynamic capability development. The dimensions of our analytical framework –

information processing, architectural innovation, and stakeholder influence – helped in

clarifying how the same factors could work so differently.

The case study findings show that one major outcome of surveys that contractors

conduct among home buyers is that energy-efficiency is not topping customers’ wish lists

(see Revell and Blackburn, 2007). Nevertheless, contractors pursue several ways of

information gathering, such as consulting real estate agents and suppliers, but what sets

the early adopters – BAM and BNB – apart is that they more actively go to conferences

and exhibitions where innovations for sustainability are put on display. However, these

two contractors emphasize that building internal technical capacity to be able to

incorporate the new technologies is more important than information gathering. Both

20

companies have the advantage in that they can acquire this knowledge from sister

subsidiaries of the construction companies they belong to (although BNB also built

technical capacity internally). Hence, it is the combination of information gathering and

internal technical capacity, which has been referred to as a firm’s absorptive capacity5,

that forms the first dynamic capability that sets competitors apart from one another, as it

enhances the ability to innovate and the flexibility in adapting to changes in the

environment (del Río González, 2005; Zahra and George, 2002).

For the other two contractors, acquiring technical knowledge is riskier because

they cannot draw on expertise of their group company – both are part of financial

institutions – and thus depend on external actors. The narrow focus on the organizational

aspects of project development alone therefore reduces the absorptive capacity of these

two companies and makes them less able to take up new technologies. The interviews

reveal that uncertainty and irreversibility (adoption generally means no connection to the

natural gas infrastructure) associated with energy-efficient technology adoption are seen

as critical impediments. Consequently, the carbon lock-in remains intact as adoption

would either involve developing technical capacity internally, considered an undesirable

move away from core competencies, or relying on ‘new’ external partners, which is too

risky as failure might damage the reputation of the financial parent. Another reason for

reluctance regarding energy-efficiency is due to the fact that the Dutch building industry

consists of relatively few main companies, which tend to operate in quite similar ways

and often form one front against outside influences (Kolk and Pinkse, 2006). As a

consequence, contractors are influenced by information about projects of competitors, be

it positive or negative. This is illustrated by a remark of one of Bouwfonds’ respondents

that one project of BAM equipped with energy-efficient technologies was generally

regarded as a failure by the industry. It thus seems that followers are more open to

‘negative information’, as it confirms their own view regarding the technology; still,

positive information might also be a route to adoption.

All contractors agree that even though energy-efficient technologies would not

mean a radical innovation as the end-product stays the same, it would still have a

significant impact on their existing business processes. In other words, adoption seems

predominantly an architectural innovation (Henderson and Clark, 1990) that is only

21

within the capabilities of BAM and BNB. These contractors seem to have the ability of

actively using employees to assess the impact of adoption for the whole value chain, and

communicate to all stakeholders – potential home buyers in particular – what adoption

brings about. As BAM’s case illustrates, this is quite an effort as even now several

employees still have to be won over. Communication to home buyers is particularly

challenging as it also relies on either having technical knowledge in-house, or being able

to hire a trustworthy external proprietor that is responsible for maintenance of buildings.

BNB’s approach of providing fully integrated services, also after delivery of the

residential building, might be an important tool for the contractor to convince customers

of the added value of energy-efficient technologies in the longer run. Consequently, the

second dynamic capability key to home builders is having the communicative skills to

convince internal and external stakeholders of the merits of changing residential

buildings to make these more energy-efficient. This departs somewhat from the existing

literature which particularly emphasizes the capability of integrating various stakeholder

interests (Sharma and Vredenburg, 1998). Stakeholder integration only contends with

taking in views of stakeholders in favour of sustainability such as regulators, non-

governmental organizations, and local communities. However, this leaves out that those

stakeholders not as supportive of sustainability will have to be won over as well.

To conclude, then, the role of stakeholders stays rather ambiguous and firms have

quite some leverage in deciding how to deal with their requests (Madsen and Ulhøi,

2001). It is clear that the local and national government are considered as powerful and

have considerable influence. However, the national government’s only instrument is the

EPC regulation, which up till now contractors can comply with by merely improving

insulation, so it is not creating a compelling need for energy-efficient technologies. The

local government, on the other hand, can demand implementation of specific

technologies, thus applying a usage strategy (Frooman, 1999), but only has the power to

do so when it owns the building ground, a critical resource for contractors (Jawahar and

McLaughlin, 2001). Whether the customer is a powerful stakeholder is highly debated.

Even though a trend can be observed of a stronger customer-orientation, there seems to

be some disagreement whether this already means that the Dutch home market is no

longer supply-driven. Moreover, even if home buyers have the power that contractors say

22

they have, it seems that this group does not feel the urgency to choose energy-efficient

technologies. A change in consumer preferences is only believed to occur after an

external shock, such as faltering energy supply, rising energy costs, or large-scale

environmental disasters.

CONCLUSION

With this paper we have tried to shed light on factors that explain why some contractors

are still reluctant to adopt energy-efficient technologies, while others seem to be building

dynamic capabilities for this purpose. We can conclude that up till now adoption is still

occurring in incremental steps, but contractors do see prospects for a new market based

on energy-efficient technologies. To be able to take advantage of the opportunities that

will arise, it seems important for contractors to actively gather information and build

internal technical capacity to be able to incorporate new technologies in existing business

processes. Taking control over the technology to some extent minimizes the risks that it

may bring about. A major challenge will be to make home buyers aware of the

advantages of clean technologies and to inform them about the exact consequences of

adoption. Although this will increase communication costs at the outset, once the

stakeholders involved have built up the required knowledge, it can significantly improve

the relation with home buyers; a valuable capability in a customer-oriented market.

Although the study has focused on the Dutch construction industry, the findings

have implications for other sectors (in other countries) as well. At the start of this study

we believed that the main problem for the construction industry would be the

principal/agent problem that the adoption costs are for the contractor, while home buyers

enjoy the benefit. However, what formed a significant barrier as well was the structure of

the industry. Because technological activities have been outsourced, it is difficult for a

contractor to appraise and communicate about new technological innovations when they

emerge. This seems particularly challenging for innovations for sustainability, because

they are considered exceptionally risky as they often involve breaking loose from the

prevailing technological lock-in. This process is also likely to occur in many other sectors

where companies have limited internal technical capabilities because they outsourced

23

production activities or where a few main players have a dominant position. For example,

the power generation sector will to have to cope with similar barriers, since most national

markets are controlled by a few power companies, customers seem more conscious of

cost than sustainability, and departing from the dominant technologies is seen as highly

risky. It would be worthwhile to study whether companies in power generation or other

sectors facing similar barriers to sustainability as construction companies, can also

overcome these by developing absorptive capacity and communicative skills. More

generally the effect of outsourcing on the diffusion of sustainability innovations also

merits further study. If outsourcing adds to companies’ risk averse behaviour, this would

seriously impede the adoption of clean technologies.

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TABLES

Table 1 Overview of cases and interviews

Case Constructor Number of

interviews

Member

DEPW

Houses

produced 2006

Clean

technology

adoption 2006

1 Fortis Vastgoed

Ontwikkeling N.V.

2 No 1500 0%

2 Bouwfonds MAB

Ontwikkeling B.V.

2 No 8000 1.9%

3 BAM

Woningbouw B.V.

2 Yes 2400 15%

4 Ballast Nedam

Bouw B.V.

2 Yes 1384 50%

Source: annual reports of case companies and interview data

NOTES 1 Another way to improve energy efficiency of residential buildings is to intensify the use of insulation

materials. In this paper, however, we focus on the adoption of technologies for space heating and hot water

production. 2 For more information see http://www.depw.nl. 3 This Toolkit about sustainable residential building is a book that sets out 28 concepts for an energy

transition that should lead to a 50% reduction of CO2 emissions. 4 One of the respondents makes note of the fact that BAM has won many competitions that involve green

building. 5 Zahra and George (2002: 186) have defined absorptive capacity as ‘a set of organizational routines and

processes by which firms acquire, assimilate, transform, and exploit knowledge to produce a dynamic

organizational capability.’

28