Strategy and Perfomance: Achieving Competitive Advantage in the Global Marketplace

Strategy and Performance Achieving Competitive Advantage in the Global Marketplace Edited by Abby Ghobadian, Nicholas O...

Author: Abby Ghobadian | Nicholas O'Regan | David Gallear | Howard Viney

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Strategy and Performance Achieving Competitive Advantage in the Global Marketplace

Edited by Abby Ghobadian, Nicholas O’Regan, David Gallear and Howard Viney

Strategy and Performance

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Strategy and Performance Achieving Competitive Advantage in the Global Marketplace Edited by

Abby Ghobadian, Nicholas O’Regan, David Gallear and Howard Viney Centre for Interdisciplinary Strategic Management Research Middlesex University Business School London

Selection and editorial matter © Abby Ghobadian, Nicholas O’Regan, David Gallear and Howard Viney 2004 Foreword © Paul Spence 2004 Individual chapters © the contributors 2004 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2004 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 1–4039–1618–7 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Strategy and performance: achieving competitive advantage in the global marketplace/edited by A. Ghobadian . . . [et al.]. p. cm. Includes bibliographical references and index. ISBN 1– 4039–1618–7 (cloth) 1. Strategic planning. 2. Organizational change. 3. Industrial organization. 4. Technological innovations – Management. 5. Competition, International. 6. Globalization – Economic aspects. I. Ghobadian, Abby, 1951– HD30.28.S7382 2004 658.4012—dc22 2003058123 10 13

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Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham and Eastbourne

Contents x

List of Tables and Figures

xii

Foreword by Paul Spence Acknowledgements

xiii

List of Contributors

xiv

1

Creating Value in the New Competitive Landscape Abby Ghobadian, Nicholas O’Regan, Howard Viney and David Gallear Introduction Strategy: dealing with increasing complexity References

Part I

1 1 3 7

Competing in the Global Marketplace

2 Developing and Managing Strategic Alliances, Building Social Capital and Creating Value Michael A. Hitt, R. Duane Ireland and Michael D. Santoro Abstract Introduction Developing and managing strategic alliances as a critical managerial capability Alliance scope definition Partner selection Resource configuration, optimization and exploitation Social capital Value creation Conclusion References

13 13 13 16 18 18 20 21 25 28 30

3 Towards a Theory of Multinational Enterprises and the Civil Society Alan M. Rugman and Alain Verbeke Abstract Introduction v

35 35 35

vi Contents

The World Trade Organization: contrasting perspectives The civil society and globalization The political economy of civil society Towards a theory of MNEs and civil society Multinationals and civil society: managing external stakeholders Conclusion References

Part II

37 40 44 47 48 51 52

Changing Industry Configuration

4 Building versus Acquiring Resources: Analysis and Application to Learning Theory Jay B. Barney and Tony W. Tong Abstract Introduction Resource-based theory of economic rents Resource-based theory of competitive advantage Organizational learning theory Conclusion References

57 57 57 59 63 66 76 77

5 Better Constructs for Analysis and Management of Firm Competence Paul J. Knott Abstract Introduction Application of competence perspectives Empirical basis Observed character of competence Delineation of the competence construct Explanation of the rigidity problem Application of the conceptual scheme Conclusion References

82 82 82 83 85 88 90 92 94 95 96

6 Intangible Resources and Export Marketing Strategy as Determinants of Export Performance: An Empirical Analysis from the Resource-based View Alex Rialp-Criado, Josep Rialp-Criado, Catherine N. Axinn and Sharon Thach Abstract Introduction

98 98 98

Contents vii

General theoretical framework: the resource-based view The model and hypotheses Research methodology Results Discussion Conclusion Notes References

100 105 106 116 123 125 126 127

7 Strategic Planning: The Key to Enhanced Performance? Nicholas O’Regan and Abby Ghobadian Abstract Introduction Operationalizing the strategic planning process Performance measurement Methodology Response Analysis Discussion The operating environment Conclusion Note References

132 132 133 138 140 141 144 146 151 152 156 157 158

Part III Organizational Change 8 Understanding the HR Strategies of the 1990s Craig R. Littler Abstract Introduction: were the 1990s a transformation decade? Shifts in strategic assumptions Downsizing/delayering (DS/DL) Model Work intensification for managers and professionals Teams as heroes Power-shifting Conclusions – the lessons of the 1990s Notes References

165 165 165 167 168 176 177 178 179 180 181

9 Managing in Times of Change: Avoiding Management Myopia Malcolm Goodman Abstract Introduction

185 185 185

viii Contents

Key questions Methodology Data analysis Findings References

187 188 192 199 201

10 Understanding Inertia: Developing a Multi-disciplinary Perspective? Audley Genus Abstract Introduction Ecological/institutional and industry organization economic (IO) theories of inertia Intra-organizational research on inertia Cognitive approaches to the explanation of inertia Discussion and conclusion: a multi-disciplinary approach to analyzing inertia? References

203 203 203 204 208 211 213 216

Part IV Managing Technological Change 11 A Dynamic Resource-based View of the Interaction between Technological Resources, Corporate Diversification and Performance Francisco Javier Forcadell Abstract Introduction Dynamic interaction between technological resources and corporate diversification Technological resources, corporate diversification, and performance Conclusion Notes References

223 223 223 226 234 239 240 241

Part V Innovation 12 Developing a Compass to Navigate the Innovation Journey Zoe J. Radnor, Hannah Noke and Tudor Rickards Abstract Introduction

251 251 251

Contents ix

Methodology The innovation compass Background to case studies Research findings Conclusion References

253 254 256 257 265 267

13 Leadership and Innovation: Surfacing Synergies among Constructs and Theories Elisabeth Wilson-Evered, Charmine Härtel and Matthew Neale Abstract Introduction Theory of group innovation Measuring group innovation Climate for innovation Group innovation Leadership and innovation Integrating active and passive leadership styles Summary of research on leadership and innovation Methodology Group level agreement Results Discussion References

268 268 268 269 269 270 270 272 273 275 277 278 279 281 283

Part VI Conclusion 14 Strategic Management: Its Development and Future Directions Howard Thomas Introduction The academic literature of strategy What are the critical academic ideas and influences in strategy research? Future research in strategic management References

Index

289 289 290 295 299 302 309

List of Tables and Figures Tables 1.1 Factors influencing the activities of firms 4.1 Summary of learning processes and mechanisms in different contexts 5.1 Summary of case studies 5.2 Themes used in interview schedule 6.1 Qualitative variables introduced in the (HOMALS) analysis 6.2 Composite dimensions resulting of HOMALS analysis 6.3 ANOVA export intensity 6.4 Regression estimation results 6.5 Tobit estimation results 7.1 Summary of studies examining the relationship between strategic planning and performance 7.2 Sample demographics 7.3 Emphasis on the characteristics of the strategic planning process 7.4 Emphasis on the characteristics of organizational performance 7.5 Relationships between canonical functions: strategic planning characteristics and performance dimensions 7.6 Emphasis on the characteristics of the strategic planning process by firms perceiving their environment as product and process change or increasing competition 8.1 The DS/DL model and comparison with traditional Taylorism 8.2 Typology of downsizing 8.3 Changing workloads of middle managers with downsizing (DS) and delayering (DL), Australia, New Zealand and South Africa, 1995–98 9.1 CATWOE analysis 9.2 CATWOE analysis interview data 12.1 Factors and associated codes 12.2 Details of the case study companies 12.3 The quantitative data for the structure factors x

4 68 86 87 108 119 120 121 122 134 144 148 149 150

154 171 173

175 190 194 256 257 257

List of Tables and Figures xi

12.4 The quantitative results for the leadership factors 12.5 The quantitative data for the output factors 12.6 The quantitative results for the team factors 13.1 Means, standard deviations and correlations between team climate and leadership styles 13.2 Correlation among elements of transformational leadership and team climate for innovation 13.3 Multiple regression results: managers’ leadership style and team climate

258 260 261 279 280 280

Figures 2.1 Alliance development and management, social capital and value creation 3.1 The different perceptions of the WTO 3.2 The institutional alternatives for trade and investment 3.3 Multinational enterprise strategies and civil society 5.1 Basic conceptual scheme for competence 5.2 Conceptual scheme showing common origins for competence and rigidity 5.3 Conceptual scheme applied to the chemicals case 5.4 Analysis of embedded attributes 6.1 A resource-based model of the determinants of export performance 6.2 Multiple correspondence analysis (HOMALS) results 9.1 Rich picture derived from the questionnaire data 9.2 A conceptual model based on the root definition 11.1 Dynamic relation between technological resources and corporate diversification and performance 12.1 The innovation compass 12.2 Populated innovation compass for Ultra 12.3 Populated innovation compass for Bearings 13.1 Proposed relationship between transformational leadership and team climate 13.2 Conceptual alignment among constructs in MLQ and TCI 13.3 Relationship between leadership styles and innovation climate

16 39 47 50 91 93 93 95 105 117 193 195 227 253 263 264 276 276 282

Foreword Just how many people around the world are involved, directly or indirectly, in formulating or rethinking strategies for their organizations? I’m not sure I could even hazard a guess. Given the development of today’s increasingly volatile, complex and knowledge-based economy, it is clear the number has grown and will continue to grow at a significant rate. For this reason alone, the appearance of a book containing some of the latest ideas on strategy from many of the best-known thinkers from across world is definitely encouraging. Many of the ideas in this book are original, challenging and (perhaps) controversial. Like me, you may not agree totally with each and every idea presented, but I trust that you will find all the chapters stimulating and relevant to your own strategic thinking. It can sometimes be hard to see what the vast range of organizations in our complex world can have in common. There are different national and regional cultures, different sets of goals in the public and private sectors, different outlooks between multinational giants and small startups, different styles of leadership, different needs from sector to sector. Yet it is my view that, despite all these differences, all organizations have two essential needs in common: the need for excellence in their strategic thinking and planning and, equally important, the need constantly to update strategies in a world of rapid change. Whatever the organization, yesterday’s strategy is unlikely to be the right one for today’s, still less for tomorrow’s world. This volume clearly addresses both those needs and I hope and believe that you will find it enjoyable and useful. PAUL SPENCE Chief Executive Officer UK & Ireland Cap Gemini Ernst & Young

xii

Acknowledgements The papers contained in this volume are the product of presentations and discussions held at the British Academy of Management (BAM) Annual Conference 2002 hosted by Middlesex University Business School. Middlesex University Business School gratefully acknowledges the generous support from English Partnerships and Capita.

xiii

List of Contributors Catherine N. Axinn, College of Business, Ohio University, USA Jay B. Barney, Fisher College of Business, Ohio State University, USA Francisco Javier Forcadell, Universidad Rey Juan Carlos, Madrid, Spain David Gallear, Middlesex University Business School, UK Audley Genus, University of Newcastle-upon-Tyne Business School, UK Abby Ghobadian, Middlesex University Business School, UK Malcolm Goodman, Durham University, UK Charmine Härtel, Monash University, Australia Michael A. Hitt, W.P. Carey School of Business, Arizona State University, USA R. Duane Ireland, Robins School of Business, University of Richmond, USA Paul J. Knott, University of Canterbury, Christchurch, New Zealand Craig R. Littler, University of London, Royal Holloway and Curtin University Business School, Perth, Australia Matthew Neale, Queensland University of Technology, Australia Hannah Noke, University of Bradford School of Management, UK Nicholas O’Regan, Middlesex University Business School, UK Zoe J. Radnor, Warwick Business School, UK Alex Rialp-Criado, Autonomous University of Barcelona, Spain Josep Rialp-Criado, Autonomous University of Barcelona, Spain Tudor Rickards, Manchester Business School, UK Alan M. Rugman, Indiana University, Kelley School of Business and Templeton College University of Oxford Michael D. Santoro, Lehigh University, Bethlehem, Pennsylvania, USA Sharon Thach, Tennessee State University College of Business, USA Howard Thomas, Warwick University, UK Tony W. Tong, Fisher College of Business, Ohio State University, USA Alain Verbeke, University of Calgary, Canada Howard Viney, Middlesex University Business School, UK Elisabeth Wilson-Evered, Monash University, Australia

xiv

1 Creating Value in the New Competitive Landscape Abby Ghobadian, Nicholas O’Regan, Howard Viney and David Gallear

Introduction The past two decades have seen the global competitive environment alter dramatically. Competition is now more intense as a result of increasing globalization, greater use of new technologies and the Internet (Amit and Zott 2001, Kanter 2001, McKendrick 2001, Murtha et al. 1998). Other factors include a rapidly and radically changing competitive environment (Eisenhardt and Brown 1998). Nearly a decade ago, Bettis and Hitt (1995) referred to the emerging ‘new competitive landscape’. Around the same time, D’Aveni (1994) propounded the perspective ‘hypercompetition’ when he stated that hypercompetitive conditions are manifested in ‘inherent instability and change’. A dynamic and highly charged environment has some significant consequences for any business, such as the need for greater adaptability and flexibility (Volberda 1996), the changing market rules and processes and the necessary organizational structures and competencies needed for competitive advantage (Eisenhardt and Brown 1998, Hamel 2000). The changing market environment is both acknowledged and well documented in the extant literature. For example, Johnson and Greening (1999) strongly contend ‘strategic decision makers in the 1990s have seen the emergence of a hypercompetitive global market place’. However, while there is little doubt on the changing market environment, there are few straightforward solutions for business. Indeed, in juggling with the factors needed to face the new competitive environment, some firms succeed while others fail. The question as to why this happens has taxed the minds of strategists and researchers for some time (Rumelt et al. 1994). Coulter (2002: 35) states that ‘poor performance can typically be traced to the failure to recognize the impact of important and dynamic 1

2 The New Competitive Landscape

external factors or the failure to capitalize on organizational resources and capabilities’. This means that preparation is needed to enhance the chances of success. Kim and Mauborgne (1997) found that the difference in performance between high growth firms and their less successful competitors lay in their respective approaches to strategy. They found that less successful firms took the more conventional route, where competitors were the main focus, whereas the more successful and profitable firms focused on innovation and customer needs rather than competitor actions. Today, firms increasingly seek new avenues to sustain their competitive advantage based on greater analysis of the external environment, maximizing the use of internal resources or by emphasizing a series of relationships, alliances and networks. Such avenues are the rationale for more strategic research, which Shamsie (2003) eloquently encapsulates as the examination of ‘various forms of advantages that a dominant firm may be able to develop and hold over its competitors for some period of time’. Furthermore, Shamsie suggests that ‘existing competitors or new competitors are usually able to find ways of matching or improving upon most types of advantages that are commonly developed’. The key is therefore to maintain a leading position for a significant period of time. The emphasis on a time frame is consistent with the work of Nair and Filer (2003) who state that a strategic interaction – unlike tactical actions, such as price cuts – tends to take considerable time to plan and implement. In seeking to explain competitive advantage, McNamara et al. (2003) outline the main perspectives of strategy: industry organization and the resource-based view. Each of these perspectives has a strong underpinning literature base. The industrial organization perspective is one of the main theoretical frameworks used to explain organizational performance based on the structure of an industry and the position of a firm within an industry – in other words, competing effectively in a profitable industry (Bowman and Helfat 2001, McGahan and Porter 1997, Nair and Kotha 2001). This perspective suggests that strategy can be either prescriptive – a deliberate plan to pursue an intended course – (Harrison 2003: 8) or emergent – where managers learn what will work through a process of ‘trial and error’. The prescriptive approach considers the observed/apparent strategy to be the result of rational decision making and deliberate planning. On the other hand, emergent strategy considers the observed/apparent strategy to result from a series of accidental or planned decisions that may or may not be

Ghobadian, O’Regan, Viney and Gallear 3

coordinated. After many debates on the merits of prescriptive and emergent strategies, the accepted view is that both types are needed. While the literature lends some support to the industrial organization perspective (McGahan 1999), studies have shown that organizational capabilities are also needed to maximise industrial positioning (Henderson and Mitchell 1997). The resource-based perspective sees the organization as a bundle of resources; financial, physical, human resources, organizational knowledge and learning, and other resources such as patents, reputation, goodwill and relationships with others (Barney 1995, Harrison 2003: 9, Simonin, 1999). These capabilities evolve over time and must be effectively managed (Lee et al. 2001). Hawawini et al. (2003) contend that the resource-based perspective arose from the inability of the industrial organization perspective to ‘provide a rigorous explanation for intra-industry heterogeneity in performance’. They ask ‘if firms within an industry faced identical conditions of supply and demand and operated under the same market structure, then why did some firms within the same industry still perform better than others?’ An additional perspective – the relational view – is an extension of the resource-based view and suggests that the firm’s resources do not stop at the factory wall but extend to alliances and partnerships with other firms (Dyer and Singh 1998).

Strategy: dealing with increasing complexity Both the industrial organization and the resource-based perspectives appear to compete with each other in the eyes of some strategists and academics. The industrial organization view provides a straightforward assessment of the industry structure, whereas the resource-based view includes some of the ‘messy’ areas of organizational development such as culture, leadership, skills and knowledge aspects. Other writers cast some doubt on the validity of these models, and in particular on the industrial organization perspective, in understanding the modern competitive environment (Courtney et al. 1997, Markides 1999). In turn, Peppard and Rylander (2002) state that there is no single strategic theory or model emerging that is appropriate for the competitive environment that is radically different from the industrial organizational and resource-based perspectives previously devised. The authors contend that both the industrial organization and the resource-based perspectives are


critical to strategy development. Indeed, Harrison (2003) suggests that each stage of the strategic management process is heavily influenced by each of the strategic perspectives outlined. The increasingly complex and changing environment will inevitably influence strategy development and deployment. While it is impossible to predict the future, the literature provides a comprehensive listing of the factors that shape our current business environment and that are likely to shape the future. The main influences on the operating environment are outlined in Table 1.1. Each of the factors outlined, taken individually, can have a significant impact on any firm. As each of the factors can have a catalytic effect on any other, the resultant cumulative impact can constitute

Table 1.1 Factors influencing the activities of firms Factor

Literature basis

Commentary

Globalization

Coopers & Lybrand (1997), Ireland and Hitt (1999), Johannessen et al. (1997), Murray and Kotabe (1999), Murtha et al. (1998)

Manufacturing increasingly on a transnational basis impacts on organizational relationships

Changing industry configuration

Datta and Rajagopalan (1998), Dean et al. (1998), Robinson and McDougall (1998), Sampler (1998)

New terms include: boundaryless organization, the virtual organization, the horizontal organization, the networking organization

Managing technological change

Arend (1999), Bettis and Hitt (1995), Christensen and Bower (1996), Scott (2000), Stuart and Podolny (1996), Tegarden et al. (1999), Tripsas (1997)

Rapid rate of technology change Average product life cycle reduced, greater flexibility and integration

Managing change: knowledge and information

Athanassiou and Nigh (1999), De Geus (1997), Hoopes and Postrel (1999), Lindell and Karagozoglu (1997), Rosenkoft and Nerkar (2001), Sampler (1998)

Increased information and knowledge management

Innovation

Acs and Preston (1997), Christensen and Bower (1996), Greenan and Guellic (1995), Kim and Mauborgne (1997), Kochhar and David (1996), Leonard and Straus (1997), Roberts (1999), Stewart (1997)

New ways of thinking and adapting business processes to meet the demands of the future. Involves doing new things in new ways to increase productivity, product development and profitability


a potentially powerful force. Such impact could be seen as both ‘destabilising’ and creating ‘opportunities’ Kim and Mauborgne (1997). Marsh (1998) states that a ‘strong and well-thought out strategy’ is the most critical factor in the achievement of competitive advantage. In an effort to provide the basis of a ‘well-thought out strategy’, the chapters in this volume, drawn from leading contributors, seek to address the main issues outlined above. Chapter 2 by Hitt, Ireland and Santoro begins by suggesting that ‘a single firm rarely has the full range of resources and expertise to develop and market timely and cost effective products or new technologies’. They advocate cooperation with others as the way forward, and emphasize the benefits of strategic alliances as a means of addressing the issues outlined earlier and ‘spreading the risk’ involved in attaining competitive advantage. As a means of addressing the high cooperation failure rate, Hitt et al. develop a conceptual framework for effective strategic alliances centred upon the resource-based, social capital and knowledge-based theories. This theme is broadened in Chapter 3 by Rugman and Verbeke, who focus on globalization and, in particular, trade and investment agreements. They contend that the linkages between the economies of the various trading blocks or ‘triads’ are enhanced by the investment activities of multinational firms. Rugman and Verbeke develop a framework to analyze the different perceptions of NGOs and MNEs, and use this to classify different types of trade and investment agreements. Chapters 4, 5 and 6 deal with the changing industry configuration by focusing on the resource-based view of strategy. Chapter 4 by Barney and Tong refers to the two general approaches available to the firm to develop resources for strategy implementation: that of building resources within the firm and that of acquiring resources from outside the firm. They conclude that for purposes of the analysis of the potential of economic rents, building resources is logically equivalent to acquiring resources. As a source of sustained competitive advantage, resources obtained either way need to be valuable, rare, inimitable and non-substitutable. Barney and Tong develop a framework to analyze the conditions under which organizational learning can and cannot be a source of sustained competitive advantage. In Chapter 5, Paul Knott examines the resource-based perspective and refers to the inherent difficulties with existing constructs. To address these difficulties, the paper provides a breakdown of the concept of firm-level competence into clearer constructs, as well as describing how these can combine to produce different observed outcomes. He outlines how specific resources are linked to competitive advantage.


Continuing the resource-based perspective, Rialp-Criado et al. in Chapter 6 focus on intangible resources as a driver of export capability and performance. They indicate that the impact of intangible resources is a key driver of export capability and develop a resource-based model for analysis of the impact of firm resources on export capability. Their findings indicate that human, organizational, technological or relational capital resources of these firms have a significant impact on export capability. Chapter 7 by O’Regan and Ghobadian reports the outcomes of a study designed to assess the perceived impact of the factors used to craft strategy over a wide range of performance indicators. The results show that a positive relationship exists between a number of the factors used in crafting strategy and some dimensions of performance. The next three chapters deal with organizational change. In Chapter 8, Littler provides a framework for understanding organizational change based on an understanding of the human resources strategies of the 1990s. He concludes that all change processes cannot be treated as equivalent and that some are ‘paradigmatic’, such as downsizing. Littler argues that the logic of downsizing and delayering is a process of labour detachment, power-shifting and work intensification. Goodman in Chapter 9, focuses on managing change, and suggests that a new paradigm is needed to enable managers to think ‘outside the box’ and cope with the changes that will ‘rattle everyone’s view of the world’. He questions why some managers are reluctant to respond to change and suggests ways forward. In a similar vein, in Chapter 10, Genus examines strategic change in terms of inertia and following a review of the various perspectives, deriving a multidisciplinary approach. The next section deals with managing technological change. Forcadell in Chapter 11 focuses on a dynamic resource-based view to enable more effective diversification. He suggests that integrated analysis is beneficial as it contains the dynamic aspects necessary for growth. The main aspect covered by Forcadell in his framework is the accumulation of technological resources and their relationship with strategy and performance. Chapters 12 and 13 deal with the remaining issue impacting on future strategy development – innovation. In Chapter 12, Radnor et al. present a diagnostic tool referred to as the ‘Innovation Compass’. The innovation compass uses a self-audit methodology to identify gaps between current and desired new product development (NPD) performance for an organization. The innovation compass aims to bring an understanding of the underlying characteristics that may contribute to the degrees


of success or failure of new product development. The model provides practitioners and organizations with an instrument that aids them in mapping their own product development practice. In Chapter 13, Wilson-Evered, Härtel and Neale examine the role of group processes on innovation and, in particular, the impact of leadership as a key driver of innovation. Their findings indicate that theories of innovation and theories of transformational leadership share common conceptual dimensions. The final chapter by Thomas strives to encapsulate the essence of the book and suggests future directions for strategy and strategic research. This introductory chapter began by referring to the ‘new competitive landscape’ outlined by Bettis and Hitt (1995). The various contributions to this edited work have outlined various means of dealing with the challenges facing organizations. However, as Grant (2002) eloquently puts it, the ‘low hanging fruit’ has been picked and the big challenge facing managers in the future is to identify new sources of profitability. The final chapter attempts to provide some sense of direction in strategic management to address sustainable competitive advantage, value creation and performance issues.

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Part I Competing in the Global Marketplace


2 Developing and Managing Strategic Alliances, Building Social Capital and Creating Value Michael A. Hitt, R. Duane Ireland and Michael D. Santoro

Abstract When strategic alliances provide firms with access to new knowledge, complementary resources, new markets and new technologies that facilitate their ability to learn, build and enhance resources and capabilities and enlarge their strategic network, they can be a source of competitive advantage. Because of the value created by these outcomes, strategic alliances, as a type of cooperative strategy, are being widely used on a global basis. However, because approximately 50 per cent of strategic alliances fail, a better understanding is needed regarding the effective development and management of these collaborative ventures. Using resource-based, social capital and knowledge-based theories, we offer a conceptual framework that emphasizes the development and management of strategic alliances. The capability that results when the firm is able to create value by how it develops and manages strategic alliances is based on alliance scope, partner selection and resource configuration, optimization and exploitation. In addition, we argue that managing alliances is integrated with social capital to affect the creation of value. We conclude the chapter by examining implications of our model and by providing direction for future research.

Introduction Strategic alliances are cooperative arrangements between two or more firms used to improve their competitive position and performance by sharing resources (Ireland et al. 2002). Both tangible and intangible resources can be shared through alliances. Minimizing transaction costs and reducing technological and market uncertainties are examples of 13

14 Strategic Alliances, Social Capital and Value

ways alliances facilitate firms’ efforts to improve their competitive position and performance (Hagedoorn and Schakenraad 1994, Hitt et al. 2000). In industries characterized by rapid technological change and intense global competition, a single firm rarely has the full range of resources and expertise to develop and market timely and cost effective products or new technologies (Barney 1991, Teece 1992, Zahra et al. 2000). In such environments, firms are motivated to cooperate with one another to access the resources necessary to develop and sustain competitive advantages (for example, to develop and market new products and technologies) (Buckley and Casson 1988, Lengnick-Hall 1992). Strategic alliances spread the risks of failure by helping each firm gain access to needed resources and technologies from its partner without incurring the high costs associated with pursuing internal initiatives alone (Pfeffer and Salancik 1978). Alliances can provide firms with many benefits such as access to new knowledge, complementary resources, new markets and new technologies that in turn enhance the firm’s ability to learn, exploit economies of scale and scope, share risks and outsource various activities along the value chain (Gulati et al. 2000). Consequently, strategic alliances, as a cooperative strategy, are being used with greater frequency on a global basis (Dyer et al. 2001, Gulati 1998, Hitt et al. 2003b). Indeed, evidence shows that there have been significant increases in global alliance activity since the mid-1980s, tens of thousands of strategic alliances being formed in recent years. For example, there were over 10,200 interorganizational alliances developed in 2000 alone (Schifrin 2001). As a key strategic initiative, many large-sized firms often engage in hundreds of alliances (Ireland et al. 2002). Although small-sized firms do not usually have as vast an array of alliance partners as their larger-sized counterparts, small firms also engage in alliances with other organizations, especially to gain access to value-creating resources that are not in their current resource portfolio (Ireland et al. 2003a, Pisano 1990, Rothaermel 2001, Santoro and Chakrabarti 2001, 2002). Strategic alliances are often a preferred growth alternative compared to acquisitions (Harrison et al. 2001), even in light of the evidence that roughly 50 per cent of all strategic alliances fail (Reuer 1999, Reuer et al. 2002, Young-Ybarra and Wiersema 1999). This rate of failure highlights the complexity and difficulty of successfully developing and managing strategic alliances. Effective alliance development and management requires several actions, including the successful coordination and integration of diverse resources and knowledge stocks across different organizations. Moreover, the mutual interdependence between alliance

Hitt, Ireland and Santoro 15

partners, which often manifests itself in a delicate tension between cooperation and competition, means that each party is dependent upon and vulnerable to the other (Ireland et al. 2002). Although more likely to create value as partners work together, managing and integrating intangible assets while engaged in alliances increases the likelihood of tension as both parties attempt to protect their critical assets from inappropriate and unwanted amounts of appropriation. The strategic alliance literature continues to grow with much of the research largely focused on the reasons for dyadic alliance formation and their outcomes (Ireland et al. 2002, Walker et al. 1997). Strategic alliances’ high failure rate suggests the need for scholars and business practitioners to increase their knowledge about the successful development and management of these cooperative arrangements (Harrison et al. 2001, Ireland et al. 2002). Speaking on causes of effective alliances, Reuer (1999: 13) suggested that deriving value from alliances ‘requires companies to select the right partners, develop a suitable alliance design, adapt the relationship as needed and manage the endgame successfully’. Despite recent research results (see, for example, Das and Teng 2001, Hitt et al. 2000, Lane and Lubatkin 1998) that address some of the issues illuminated by Reuer (1999), further work is required to enhance our understanding of this complex phenomenon. The purpose of this chapter is to provide a conceptual framework that depicts the development and management of strategic alliances. We offer a new perspective on this important aspect of strategic alliances by introducing a conceptual model that is grounded in resource-based, social-capital and knowledge-based theories. Presented in Figure 2.1, our conceptual model depicts the development and management of strategic alliances as a key managerial activity that can be a critical capability. Herein, we argue that this critical capability is a product of alliance scope, partner selection and resource configuration, optimization and exploitation. Grounded in earlier definitions (for example, Teece et al. 1997), we view managers’ critical capability regarding the development and management of strategic alliances as their ability to integrate, build and reconfigure organizational resources in ways required for the successful design and use of strategic alliances. Figure 2.1 also illuminates that as a critical managerial capability, the development and management of strategic alliances has a two-way linkage with building social capital. We envision the building of social capital to result from interactions among the constructs of information sharing, trust and norms of reciprocity. Social capital is a critical component in our conceptual framework as it mediates the relationship


Alliance development and management

• Alliance scope • Partner selection • Resource configuration, optimization and exploitation

Social capital

• Information sharing • Trust • Norms of reciprocity

Value creation • Improve firm • performance • Build and enhance • resources and • capabilities • Facilitate learning • Enlarge the strategic network

Feedback

Figure 2.1 Alliance development and management, social capital and value creation

between alliance development and management as a critical managerial capability and the subsequent creation of value. The feedback loops depicted in Figure 2.1 highlight the dynamic rather than static nature of the relationships among alliance development and management, social capital and the creation of value. The remainder of our chapter unfolds as follows. First, we discuss the importance of strategic alliance development and management. We do this by describing alliance development and management’s key activities (that is, alliance scope, partner selection and resource configuration, optimization and exploitation). We next describe social capital, link alliance development and management to the development of social capital and then describe social capital’s mediating role in the creation of value. In the chapter’s final section, we examine the implications of our proposed model for management practice and offer directions for future research that are suggested by our model.

Developing and managing strategic alliances as a critical managerial capability Firms able to develop and manage alliances in a superior manner relative to competitors can enjoy a sustainable competitive advantage, at least until others learn how to imitate the focal firm’s value-creating abilities in terms of alliance development and management (Ireland et al. 2002). Theory supports this outcome. From transaction cost theory, for example, we know that effectively developing and managing strategic alliances can create value by reducing transaction costs (Hagedoorn


and Schakenraad 1994, Hennart 1988), meaning that an effective alliance development and management alliance activity is more efficient than are market mechanisms. Likewise, from resource-based theory, we understand that developing and managing strategic alliances effectively can be a source of competitive advantage by providing partnering firms with complementary resources or expertise (Hitt et al. 2000, Teece 1992). While certainly important, developing and managing strategic alliances are complex activities and the managerial and subsequent organizational ability to do this successfully remains asymmetrically distributed (Ireland et al. 2002). As an idiosyncratic, firm-specific resource, managers able to identify and use the often intangible assetbased routines that are required for successful alliance development and management possess information that is hard for competitors to comprehend, especially if efforts were to be made to imitate them. Following the resource-based view, resources are defined broadly as the knowledge, assets, capabilities, technologies and organizational processes that provide the basis for the firm to develop and implement strategic decisions that create value and provide competitive advantage (Barney 1991). In a more parsimonious view, resources are the tangible and intangible assets the firm controls and uses to implement a valuecreating strategy (Barney 2001). A capability is a bundle of organizational resources that allows the firm to complete important tasks and create value for the firm (Hamel and Prahalad 1994, Prahalad and Hamel 1990). Moreover, a sustainable competitive advantage is created when a capability satisfies the four conditions of being (1) valuable, (2) rare, (3) difficult to imitate, and (4) non-substitutable (Barney 1991, 2001). A managerial capability is exemplified at FedEx, where its capability of logistics management furnishes customers with on-time deliveries and provides FedEx with a competitive advantage relative to its rivals in the express package delivery business. As a second example, we note that at least historically, EDS has a competitive advantage in the information processing industry because of its ability to offer its customers seamless information through the adroit use and exploitation of a systems integration competence (Hamel and Prahalad 1994). As is true for all firms, EDS is challenged to continually upgrade its current competitive advantages while exploring for new advantages to use in the pursuit of growth and value creation. Likewise, based on our earlier specification of managerial capability in terms of the effective development and management of strategic alliances, when this particular set of managerial skills is valuable, rare, imperfectly imitable and non-substitutable, it becomes the foundation


for a sustainable competitive advantage that creates firm value. Firms, through the capabilities of their managers, possess an alliance-related competitive advantage when managers are able to develop and manage alliances in ways that are superior to how their counterparts in rival firms execute these particular managerial actions (Dyer et al. 2001). Conceiving this activity as a critical capability is grounded in managerial logic that, in turn, is based on a shared understanding about how the development and management of the firm’s alliance portfolio should be achieved (Ireland et al. 2002). As a critical capability, the firm must be proficient in three interrelated activities when concerned with the effective development and management of strategic alliances. The three closely related activities for developing and managing strategic alliances as a critical capability are: (1) defining the alliance scope, (2) selecting the right alliance partner and (3) configuring, optimizing and exploiting alliance resources. We describe each of these managerial activities in the following sections.

Alliance scope definition Determining the scope of a strategic alliance is a critical first step towards effectively developing and managing strategic alliances. Because strategic alliances are complex relationships, their scope usually involves a number of dimensions. Determining the technologies to be employed and developed in an alliance, markets to be served, product categories and brands to market, boundary configurations, the governance structure to use to control the operation of the alliance and ownership of resources and assets created by the alliance, are examples of these dimensions (Ireland et al. 2002, Khanna 1998). Moreover, the time horizons for each of the various dimensions must be considered as well. For example, some strategic alliances, particularly those involving smaller, start-up ventures, concentrate on solving immediate problems that are affecting the firm’s survival. Alternatively, partnerships involving larger, more established firms often focus on longer-term deliverables such as network building (Santoro and Chakrabarti 2001).

Partner selection Selecting the right alliance partner is critically important to the successful development and management of a strategic alliance. A key reason for this is that having the wrong partner could negate the achievement of potential synergies in the collaborative venture (Geringer and Herbert


1989). Locating the right or most desirable alliance partner requires substantial effort. Moreover, the search and negotiation process required to find the most desirable partner can be time consuming. Indirect experience with a potential partner informs the focal firm’s understanding regarding the possible success of an alliance if it were to be formed with that particular partner. Skilled firms often rely on current partners’ reputations as a basis for forming future alliances in order to reduce searching costs (Chung et al. 2000). Likewise, recommendations for other alliance partners from a currently valued collaborator are given great weight on the basis of reputation. Partner firms in a strategic alliance should have compatible strategic intents and be able to offer unique resources to the alliance (Hitt et al. 1997). For example, Hitt et al. (2000) found that firms operating in developed markets and firms operating in emerging markets sought different attributes in alliance partners. The reason for this specificity was so the focal firm could maximize its learning by participating in the alliance. Moreover, firms operating in emerging markets need partners (often companies from developed markets) that are willing to share resources and help them learn. Organizations competing in emerging markets need this support primarily because of their inadequate absorptive capacities in such areas as technological knowledge and managerial capabilities (Hitt et al. 2000). Smaller, lesser-known firms are often better served when they ally with larger, more experienced firms with desirable reputations. A key reason for this is that these alliance partners can help the smaller firm achieve results beyond its capabilities, market reach and reputation. Bristol-Myers Squibb, a large, experienced pharmaceutical firm, formed 56 alliances in the bio-pharmaceutical arena between 1985 and 2000. Many of these alliances were with young biotech firms (Gopalakrishnan et al. 2002). While Bristol-Myers Squibb benefited from the alliances by gaining access to their partners’ technologies and technological skills, the smaller alliance partners had opportunities to gain from their larger partner’s market capabilities, reputation and firm-specific capabilities. Acquisition of these skills increases the value-creating potential of the smaller firm as other large organizations consider it as a partner in future alliances. Institutional environments are important in alliance partner selection as well because norms, rules and regulations affect managerial mindsets and strategic choices (Madhavan et al. 1998). Research by Hitt et al. (2003a) addresses this issue. These researchers found that Chinese managers’ institutional environments allow them to take a long-term


perspective, meaning that their focus is on the intangible assets and technological capabilities of their alliance partners. In contrast, when selecting an alliance partner, Russian managers use more short-term time horizons and concentrate instead on the financial capital and the complementary capabilities of their partners in order to address firm survival issues (Hitt et al. 2003a). Finally, research by Hitt et al. (2003c) showed that firms often value potential partners’ prior experience in alliances. Their prior experience with others in an alliance provides several benefits, including information about how they interact with partners and their trustworthiness. The greater is the prior experience potential partners have with alliances, the more likely it is that they will be effective partners (Hitt et al. 2003c).

Resource configuration, optimization and exploitation Due to rapidly changing technologies and increased global competition, it is becoming increasingly difficult for firms to have the amount and array of resources needed to compete successfully, particularly in fastcycle markets (Arino and de le Torre 1998, Bettis and Hitt 1995, Ireland et al. 2003b, Kuratko et al. 2001). From resource-based theory, it follows that a principal benefit of strategic alliances is gaining access to valuable resources and expertise from one’s partner and jointly creating new resources (for example, new capabilities) through the alliance (Das and Teng 2002, Pisano 1990, Rothaermel 2001). Combining and leveraging unique and valuable resource combinations is a prime objective of strategic alliances, indicating that configuring, optimizing and exploiting those resources is a key component of successfully managing strategic alliances. We offer several reasons supporting the importance of these activities. First, firms must effectively configure resource bundles that cannot be perfectly imitated, exactly substituted or completely mobilized (Das and Teng 2002). Second, strategic alliances often involve a pooling of complementary resources that when optimized provide significant competitive advantages (Das and Teng 1998, Glaister and Buckley 1996). Third, alliances allow firms to get close enough to exchange, absorb and utilize tacit knowledge (Lane and Lubatkin 1998). Finally, the uncertainty and ambiguity associated with alliance resource configuration and optimization requires that alliance managers have the capabilities to recognize opportunities and exploit them through the alliance’s resource base (Marino 1996). The preceding discussion illuminates how alliance development and management serves as a critical managerial capability embodying alliance


scope, partner selection and resource configuration, optimization and exploitation. Furthermore, there is a two-way linkage between developing and managing strategic alliances and the building of social capital. As Figure 2.1 shows, social capital is a critical component of alliance development and management because it serves as a mediator of value creation. We discuss the two remaining components of our model; that is, social capital and value creation, and their relationship to alliance development and management in the following sections.

Social capital Recently the concept of social capital has received attention from scholars in multiple disciplines including sociology, economics, political science, organization theory and strategic management. Social capital has been found to affect a variety of important outcomes such as children’s education (Coleman 1988), career success and mobility (Burt 1992, Gabbay and Zuckerman 1998), societal productivity (Woolcock 1998, Woolcock and Narayan 2000), start-up company formation (Walker et al. 1997), resource exchange and innovation (Tsai and Ghoshal 1998) and interorganizational learning (Kraatz 1998). Partly because of the scope of questions it has been used to investigate, the definitions of social capital vary considerably from this large body of social science disciplines. Baker (1990), for example, defines social capital as a resource that actors derive from specific social structures. Bourdieu and Wacquant (1992) contend that social capital is the sum of the resources that accrue to an individual or group from a network of institutionalized relationships. Knoke (1999) describes social capital as the process by which social actors create and use their network of connections within and among organizations to gain access to others’ resources. Nahapiet and Ghoshal (1998: 243) define social capital as ‘the sum of the actual and potential resources embedded within, available through, and derived from the network of relationships possessed by an individual or social unit’. All of these definitions suggest that social capital is a resource that helps actors gain access to resources through networks of social relationships (Ireland et al. 2002). Consequently, social capital is integral to alliance development and management because firms often seek to ally with other organizations having social capital as a path to use to gain access to the resource pools available in a network (or networks) of relationships (Chung et al. 2000). In spite of its generally agreed upon importance, at both the individual and group levels of analysis, there are debates regarding social capital’s


dimensions. Nahapiet and Ghoshal (1998), for example, suggest that social capital includes a structural dimension, relational dimension and cognitive dimension. In contrast, Bourdieu (1985) identifies two critical components of social capital – the size of the network and the volume of capital possessed by network members. Coleman (1988) argues that social capital encompasses trustworthiness, information channels and norms. Similar to Coleman’s (1988) framework, Woolcock (1998) contends that social capital has three dimensions to include (1) information sharing, (2) trust and (3) norms of reciprocity. Because of its richness, we used Woolcock’s suggestion to examine some of the relationships depicted in Figure 2.1. In the following sections, we describe each of these three dimensions and link social capital to alliance development and management.

Information sharing Social capital can provide access to knowledge and enable the leveraging and exploiting of that knowledge. For example, social capital provides access to information sources, thereby contributing to the quality, relevance and timeliness of the information stream (Adler and Kwon 2002, Bolino et al. 2002, Nahapiet and Ghoshal 1998). Coleman (1988) suggests that information and knowledge are often costly to obtain, but social relations can offer participants with a strategic knowledge network with several potentially positive outcomes (Polodny and Stuart 1995). For example, in examining the social connections of public organizations such as the National Institute of Health and pharmaceutical firms, Cockburn and Henderson (1998) found that socially connected firms had higher research productivity. Additionally, Liebeskind, Oliver, Zucker and Brewer (1996) studied two new biotechnology firms to examine individual level exchanges of scientific knowledge and found that interpersonal relationships provided these firms with a key source of new knowledge. Based on their results, Liebeskind et al. (1996) argued that social network exchanges contribute to organizational learning in two important ways. First, their findings showed that each firm was able to expand the scope of its learning by developing networks of scientists from a large number of external organizations. Second, social networks allowed firms more easily to integrate externally obtained knowledge. Thus, firms with larger interpersonal networks have greater access to cutting-edge scientific research and also have the means rapidly to absorb this research into their own research efforts. Kale, Sing and Perlmutter (2000) referred to these close interactions in a partnership as ‘relational capital’. Among other value-creating


outcomes, relational capital facilitates knowledge transfer by providing valuable avenues for gathering knowledge (Mowery et al. 1996).

Trust Firms engaged in strategic alliances must be concerned about the possibility of learning races (Hamel 1991). Moreover, firms in collaborative ventures face ‘relational risk’ that is associated with opportunistic behaviours by partners. ‘Shirking, cheating, distorting information, appropriating resources, and so on’ [emphasis added] (Das and Teng 2001: 253) are examples of potential opportunistic behaviour. Thus, trust is critical for successful strategic alliances (Barney and Hansen 1994). An additional benefit of trust is that it reduces the costs of managing strategic alliances (Hitt et al. 2003b). Trust is a complex construct that has been examined in a variety of contexts. A review of the literature, however, shows consensus on two general components of trust (Rousseau et al. 1998) – a willingness to be vulnerable and positive expectations. Vulnerability refers to the risk of loss should one party place its welfare in the hands of another (Barney and Hansen 1994, Mayer et al. 1995). Positive expectations refer to Party A’s confident beliefs that Party B will behave in a manner that will benefit Party A. Herein, we use Mayer, Davis and Schoorman’s (1995: 712) definition of trust as ‘the willingness of a party to be vulnerable to the actions of another party based on the expectation that the other will perform a particular action important to the trustor, irrespective of the ability to monitor or control that other party’. Following social exchange theory, trust is both a source and key component of social capital because it develops over time and is based on alliance partners’ past experiences and current relationships with one another (Adler and Kwon 2002, Young-Ybarra and Wiersema 1999). Further, social capital, similar to other forms of capital that are grounded in intangible assets, constitutes an accumulated history encompassing investments in social relations and a social structure over time (Nahapiet and Ghoshal 1998). Sustaining a stable relationship over time, therefore, is important for building trust and social capital. Strategic alliances are conduits for conveying information, including an alliance partner’s organizational value-creating routines. Having access to information about potential alliance partners before actually committing to a relationship can substantially reduce the risk of an unsuccessful alliance and can serve to guide a firm’s choices of future strategic ties (Gulati 1995). A firm’s credibility as an alliance partner affects its trustworthiness. In turn, trustworthy firms empower their


partners to accept risk and to believe that the alliance will be mutually beneficial. Thus, trust in one’s partner is critical to facilitating social exchange and building social capital (Tsai and Ghoshal 1998).

Norms of reciprocity Social capital is driven by a normative commitment for exchanges between partners (Adler and Kwon 2002, Putnam 1993). Putnam (1993: 183) clarifies this notion by suggesting that norms of reciprocity entail a commitment to the belief that ‘I’ll do this for you now, knowing that somewhere down the road you’ll do something for me’. Consequently, the building of social capital involves expectations about future obligations and the repayment of those obligations such as between scientists from different firms working on a joint R&D project, where helping others is required for progress on the project (Nahapiet and Ghoshal 1998). Norms of reciprocity involve several facets including shared interests, common identity and shared values that together cement the bonds among alliance partners and form the basis for collective action (Adler and Kwon 2002, Nahapiet and Ghoshal 1998). As Nahapiet and Ghoshal (1998) explain, norms of reciprocity represent a commitment by actors to a social system in which the existence of such norms positively affects social exchange processes by providing the motivation and access for exchanges. Moreover, the norms of reciprocity are modified through positive exchanges to extend the circle of exchange, thereby encouraging further cooperation, increasing risk taking and building more social capital (Coleman 1988). Merging different organizational cultures and integrating diverse skill sets to achieve an alliance’s objectives is a customary hurdle. Norms of reciprocity are often the basis for obtaining cooperation in a collaborative venture with each of the parties balancing its own priorities and goals with the goals and priorities of the alliance. Adler and Kwon (2002) suggest that strong norms and beliefs create a solidarity among partners that encourages compliance and reduces the need for formal controls, especially financial controls. As a result, the emphasis in effective strategic alliances is on cooperation not competition and on strategic controls (Ireland et al. 2002). To summarize, social capital results from information sharing, trust and the norms of reciprocity that are embodied within social relations. The development and management of strategic alliances as a critical managerial capability helps build social capital by providing the structure for social relations. This structure is a product of managerial efforts to facilitate social relationships between alliance partners, by framing


the scope of the alliance, through attention devoted to partner selection as well as to resource configuration, optimization and exploitation. Figure 2.1 shows that the linkage between developing and managing strategic alliances and social capital is dialectical, meaning that social capital affects the firm’s capability to develop and manage strategic alliances; greater social capital increases the likelihood of success in alliances (Hitt et al. 2003a). Successful strategic alliances, in turn, further build and fortify the firm’s capability for developing and managing future alliances. Figure 2.1 shows that value is created via improved firm performance, enhanced resources and capabilities, learning and an enlarged strategic network that result from effectively developing and managing strategic alliances. Next, we discuss each of the value creation components.

Value creation Research shows that strategic alliances create value with positive effects on various outcome measures including stock price, firm survival, growth and innovation. The degree to which any of these outcome measures is reached is a function of the sustainability of the firm’s competitive advantages (Ireland et al. 2003a), including those based on the development and management of strategic alliances. Specific research findings describe the relationship between strategic alliances and firm performance. For example, McConnell and Nantell (1985) showed that equity markets reward parent companies’ share prices when they announce the establishment of joint ventures. Mitchell and Singh (1996) found that alliances increased organizations’ survival rates. Powell, Koput and Smith-Doerr (1996) found that companies involved in multiple strategic alliances experienced accelerated growth rates. Other studies have shown strong linkages between alliances and the level of innovation in high-tech, dynamic industries such as biotechnology (Shan et al. 1994) and electronics (Hagedoorn and Schakenraad 1994). Strategic alliances create value in at least three ways, including (1) building and enhancing resources and capabilities, (2) facilitating learning and (3) enlarging the focal firm’s strategic network. Below, we examine each of these sources of value creation. In the course of doing so, we suggest that the creation of value from strategic alliances is predicated on the firm having the capability effectively to develop and manage strategic alliances. In turn, this managerial capability is predicated on the firm having or owning value-creating amounts and types of social capital.


Build/enhance resources and capabilities The underlying proposition of social capital theory is that connections among social actors provide access to resources and capabilities (Nahapiet and Ghoshal 1998) and that over time, repeated interactions between firms and their human capital reduce the relational risk that often accompanies this access (Das and Teng 2000). Strong ties between firms create social capital and unique resource portfolios that can be valuable, rare and difficult to imitate due to the exclusive nature of the inter-organizational linkages (Granovetter 1985, Gulati et al. 2000). For example, alliances created at the latter stage of a technology’s development cycle (that is, exploitative alliances) often involve integrating complementary knowledge-based and property-based resources from each partner for the development, production, branding, distribution, sales and marketing of a new technology or product (Das and Teng 2000, Rothaermel 2001). The partners in these exploitative, complementary alliances often gain a new or enhanced set of resources and/or capabilities from the sharing of knowledge by partners (Glaister and Buckley 1996). Beyond the benefits derived from integrating complementary resources and capabilities, other tangible and intangible resources can be positively affected as well. For example, alliances that merge supplementary resources and capabilities within the partnership can infuse new know-how that will prevent obsolescence and avoid a firm’s core competence from becoming a core rigidity (Hamel and Prahalad 1994). As another example, a firm can gain legitimacy based on its partner’s reputation and enhance its own reputation when the alliance satisfies various stakeholder needs. In sum, building social capital enhances the firm’s resource inventory and set of capabilities (Ireland et al. 2003a).

Facilitate learning Alliances provide each partner with numerous opportunities to learn. Quite simply, value is created because the participating firms in an alliance gain new knowledge (Dyer and Singh 1998); yet, what firms learn in an alliance can be quite diverse. Firms participating in an alliance will often learn something directly related to the alliance’s goals and mission (for example, the development of a certain technology or product) (Santoro and Chakrabarti 2001, Santoro and Gopalakrishnan 2000). However, firms can learn other things as well. For example, firms allying in an international strategic alliance to produce a good or service may learn how to compete successfully in specific foreign markets.


Or, more pointedly, firms participating in an alliance may strengthen their capability for developing and managing both current and future strategic alliances (Ireland et al. 2002). Following the knowledge-based view, two types of knowledge, tacit knowledge and explicit knowledge, each with different characteristics, are important to firms (Grant 1996, Liebeskind 1996, Nonaka 1994, Spender 1996). Explicit knowledge can be transferred from one individual to another using some type of formal communication system. Thus, explicit knowledge is articulable or codifiable. In contrast, tacit knowledge generally cannot be formally communicated and is learned by doing (Polanyi 1966). Tacit knowledge is deeply rooted in one’s experience and own mental model (Ireland et al. 2003b). The distinction between explicit knowledge and tacit knowledge is important for two reasons. First, because it is more difficult for competitors to understand and imitate (Kogut and Zander 1992), tacit knowledge is more valuable and more likely than explicit knowledge to lead to a sustainable competitive advantage. Inimitability is further increased when the knowledge is complex and combined with other types of knowledge in an unclear fashion; that is, there is causal ambiguity (Barney 1991, Kogut and Zander 1992). Second, and most germane in terms of learning from alliances, a number of scholars (see, for example, Kogut and Zander 1992 and Nonaka 1994) point out a critical dilemma concerning knowledge transfer; namely, that the same characteristics that make tacit knowledge difficult to imitate by competitors also make it difficult to transfer within the focal firm. Because of its value, transferring tacit knowledge in strategic alliances is a critical issue. However, the transfer of both explicit and tacit knowledge is facilitated in alliances through social capital that is based on information sharing, trust and norms of reciprocity.

Enlarge the strategic network While strategic alliances involve dyadic relationships, firms regularly operate in and compete against strategic networks or alliance constellations of three or more firms (Das and Teng 2002, Ireland et al. 2002). For example, research shows that multinational firms often develop and manage relationships with a large external network of firms (Ghoshal and Bartlett 1994). Moreover, strategic networks of multiple partners include both strong ties and weak ties that together provide diversity in learning and other forms of alliance outcomes (Granovetter 1985). Based on the notion of solidarity (Adler and Kwon 2002), strategic networks gain mass and potency as bridges and bonds continue to be


formed with less densely connected groups in the network and with unconnected groups outside the existing network. Similarly, as the visibility and reputation of a strategic network expands, the size of the strategic network enlarges as well. Therefore, the contribution of social capital is important because it facilitates growth of the strategic network. Finally, as Figure 2.1 shows, we contend that a feedback dynamic exists among value creation, social capital and the capability for alliance development and management. The market power, financial wealth and reputation gains obtained from strategic alliances through enhanced resources and capabilities, new learning and an enlarged strategic network serve to fortify and renew the firm’s capability and its social capital.

Conclusion As Gulati et al. (2000: 203) note: the image of atomistic actors competing for profits against each other in an impersonal marketplace is increasingly inadequate in a world in which firms are embedded in networks of social, professional and exchange relationships with other organizational actors … such networks encompass a firm’s set of relationships, both horizontal and vertical, with other organizations – be they suppliers, customers, competitors, or other entities – including relationships across industries and countries. Despite the preponderance of strategic alliances in global markets, the high failure rate for these collaborative arrangements suggests that more must be learned, particularly with respect to the effective development and management of alliances. In addressing the need for better understanding the development and management of strategic alliances, our arguments and model are consistent with the nexus of resource-based, social capital and knowledge-based theories. The intersection among these theories indicates that as a critical capability, alliance development and management routines must embody alliance scope, partner selection and resource configuration, optimization and exploitation. In doing so, the development and management of strategic alliances can become a value-creating capability integrated with the continuous building and nurturing of social capital. The implications of our model for management practice are clear; firms must develop and maintain the knowledge and capabilities


needed for successfully executing this high-level, complex activity. Or, more likely, firms must be willing to dedicate the effort and resources necessary to obtain the requisite tools through the help of external sources. Due to the importance of this management responsibility, our model implies that a dedicated alliance management role and function should be created and directed by a senior-level manager. In this manner, this important organizational function is afforded the proper status, and the executive in charge has the authority to garner the needed resources and properly leverage and institutionalize alliance development and management as a critical capability throughout the organization (Ireland et al. 2002). The materials presented and examined in this chapter suggest questions and issues that can be the basis of future scholarly work. First, we offer a theoretical framework that can be useful in developing specific and testable propositions about the relationships illuminated herein. In addition, our conceptual model provides direction that could be instrumental for operationalizing these constructs (that is, by detailing the dimensions of the constructs). We believe that an initial step for future research might be to examine the direct relationships between alliance development and management and value creation with social capital as a mediator. Our suggestion that there is a two-way relationship between alliance development and management and social capital (see Figure 2.1) brings forth a second research question; namely, determining the extent to which alliance development and management and social capital are linked in a dialectical fashion. Another potentially interesting line of investigation involves the relationships among the various components for each of the constructs. For example, future research could focus on the extent to which alliance scope, partner selection and resource configuration, optimization and exploitation influence the success of alliance development and management. Likewise, future research could concentrate on investigating the role of trust in building social capital versus the roles of information sharing and the norms of reciprocity. The existence and strength of the feedback dynamic generated from the creation of value to social capital and to alliance development and management offer yet another potentially interesting area for future enquiry. The purpose of this chapter is to contribute to our knowledge regarding the effective development and management of strategic alliances. We believe that use of the framework presented herein to specify the nature and direction of research questions has the potential to generate results that will lead to greater insights regarding strategic alliances. Achieving this outcome is desirable, in that strategic alliances are


a complex, yet important phenomenon for academic researchers as well as business practitioners.

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3 Towards a Theory of Multinational Enterprises and the Civil Society Alan M. Rugman and Alain Verbeke

Abstract The criticisms of globalization and multinational enterprises (MNEs) by many non-governmental organizations (NGOs) are examined here with special reference to the role of the World Trade Organization (WTO). The WTO has been identified by NGOs and others in the so-called ‘civil society’ as an institution that supports free trade and globalization. We develop a framework to analyze the different perceptions of NGOs and MNEs, and we use this to classify different types of trade and investment agreements. We find that most MNEs operate on a ‘triad’ rather than a global basis and that regional economic blocks are now more prevalent than globalization. The authors of this chapter acknowledge the helpful comments received from Cecilia Brain, Karl Moore, Michael Gestrin and Susan Segal-Horn.

Introduction Many civil society advocates assume that globalization implies a new form of economic imperialism, grounded in the increased ‘commonality’ (homogenization) of products, manufacturing processes, consumption and regulation, with control over the commonality process concentrated in the hands of (too) few actors, more specifically a limited number of wealthy countries and large MNEs. For an articulation of this viewpoint, see Giddens (1999) and Gray (1998). In contrast, Rugman (2000) has explained the fallacy of this type of perceived globalization process, which allegedly would lead to the development of a homogeneous world market. 35

36 Multinational Enterprises and Civil Society

The economic reality is that even the largest MNEs in the world are faced with equally powerful foreign rivals and usually have weak positions in at least one leg of the triad of North America, the EU and Japan (Govinderajan and Gupta 2001, Rugman 2000). In addition, while the actual economic impact of the United States, the EU and Japan in multilateral negotiations and organizations is undoubtedly enormous, it is always more contestable by other countries than in the case of regional agreements. In NAFTA, the US agenda dominates that of Canada and Mexico. In the EU, the old coalition between Germany and France is still dominant across the Brussels-based administrative structure. In Asia, Japan is still the country with the most MNEs. A variety of stakeholders, including a number of anti-global, nongovernmental organizations (NGOs) in civil society, the ‘mobilizers’, have succeeded in creating a false image of globalization as an instrument of narrow business and economic interests. They also criticize the World Trade Organization (WTO). Unfortunately, in spite of the launch of a new WTO round, agreed to in Doha in November 2001, the tide of criticism by anti-global mobilizers is continuing. This chapter focuses on the activities of MNEs and the criticism of globalization by NGOs focused on the WTO and the related concept of a multilateral agreement on investment (MAI). This NGO perspective, unfortunately, has replaced the more traditional characterization of the WTO as the principal enforcement mechanism of multilateral trade and investment agreements, guided by technical, efficiency driven considerations rather than political and equity related motives (Irwin 2002, Rugman 2001). It has even been suggested that, as a result, the trade and investment liberalization agenda driving globalization over the last 54 years has been reversed. An MAI to provide national treatment for MNEs was indeed defeated in 1998, perhaps partly because of these anti-global stakeholders, but primarily because of a reduced US commitment (at that time) to further global trade and investment liberalization. In its place, we have observed a resurfacing of political and business efforts to strengthen further the regional trading blocks of North America, Europe and Japan. Even in this new era of blocked trade liberalization, the linkages among these ‘triad’ economies have become stronger, as a result of foreign direct investment (FDI) undertaken by MNEs. In this context, it is important to convey a new message to civil society. This is that the demise of global trade and investment liberalization leads to second best arrangements in the form of regional, triad-based government policies and corporate strategies. It is also critical for the

Rugman and Verbeke 37

stakeholder groups involved, especially the moderate, ‘technical’ NGOs, to understand that anti-global rhetoric is leading to regional integration and bilateral agreements as a politically more feasible, but ultimately less efficient, alternative to global integration. This does not benefit the objectives of civil society; rather, from a comparative institutional perspective, it harms the perception of civil society.

The World Trade Organization: contrasting perspectives The World Trade Organization (WTO) is portrayed by many of the critics of globalization as the driver of free trade, but in reality it is primarily an understaffed and overworked technical bureaucracy with little political impact. The WTO is the secretariat to the General Agreement on Tariffs and Trade (GATT), which has succeeded in its 54 years of existence in serving as a facilitator for national governments to cut tariffs, mainly on manufactured goods (but not much on agricultural products and textiles). The history of the GATT/WTO is that of a well-intentioned but small technocratic group acting, often with a relatively short term oriented agenda, to broker concessions by national governments. These are viewed as a stepping stone towards achieving the broader, and more longterm objectives of free trade and global wealth creation, Rugman (2001). But the WTO is not politically powerful. All of its successful eight ‘rounds’ of tariff cuts had to be negotiated, and then implemented by sovereign governments. The WTO has no military support structure or large cadre of administrators to enforce its will. It has a staff of only 200 professionals, mostly trade lawyers and economists. It is little more than a conference organizer for governments, with an appellate body attached to it, in order to monitor the implementation of the negotiated rules. The rules themselves are not much more than governmentlevel agreements, based on reciprocity and trust. The WTO performs the role of an impartial signalling device to guide nation states in the direction of trade liberalization (in accordance with agreements signed), and it also acts as an arbitrator when rules have been broken. Unfortunately, these rules are sometimes unclear, reflecting ‘constructive ambiguity’ introduced by sovereign governments’ trade negotiators to avoid a breakdown in talks. The most common way to infringe the WTO’s rules is by failing to adhere to the principle of granting most-favoured nation (MFN), nondiscriminatory treatment. If the United States allows one of its exporters to ‘dump’ a product in Europe, then the European Commission can launch an ‘anti-dumping’ action, and if successful, impose a tariff duty


on the dumped imports. If the United Kingdom subsidizes an export to the United States, and a US firm complains to the US International Trade Commission, then it may recommend that a ‘countervailing’ duty be imposed to offset the margin of subsidy. Both the anti-dumping and countervailing duty actions are consistent with the WTO and the GATT’s Uruguay Round Agreement of 1994. The WTO-consistent ‘retaliation’ that a country can engage in, always in response to an infringement of its negotiated rights, is to re-impose tariffs or duties against the offending party’s home country. Thus, all the interactions occur between governments. The WTO acts as an arbitrator, monitoring what are really domestic legal actions involving international players. Its only direct role is to hear appeals about failures to observe due process in the application of these trade laws. Yet, many anti-global ‘mobilizers’ have been successful in demonizing the WTO as the architect of globalization. What they mean by globalization is not always clear. It seems to involve the activities of MNEs and the alleged spread of US-led economic capitalism (Giddens 1999). There are the alleged foundations of an unequal distribution of economic power and wealth, at the expense of poorer nations and weaker stakeholder groups in developed economies, such as organized labour and the green movement (Gray 1998). However, more informed institutional knowledge of the WTO leads to the conclusion that the main rationale for the WTO, and also its key outcome, is improved market access to previously protected markets, thereby increasing overall economic efficiency (Irwin 2002). In addition, its actual role is really that of an implementation mechanism of rules of fairness, agreed upon by sovereign states. The above analysis is represented in Figure 3.1. This contrasts the various perceived roles of the WTO and the perceived outcomes of its activities. The institutional reality is positioned largely in quadrant 1, but the anti-global movement has been successful in creating an image of the WTO placed in quadrant 4. An important question is how informed policy makers can now convince civil society and NGOs at large that it is quadrant 1 and not quadrant 4 which provides an accurate picture of this institution. Here, it should be emphasized that all seriously grounded, empirical and analytical evidence actually demonstrates a positioning of the WTO in quadrant 1 of Figure 3.1 (Bhagwati 2002, Deutsch and Speyer 2001, Irwin 2002, Sampson 2001). This is also the institutional reality experienced every day, both by the governments involved in negotiating and implementing agreements, and by the MNEs engaged in international

Rugman and Verbeke 39 WTO outcomes Increased Key role market of access WTO 1

Increased inequality in power and wealth distribution 3

Implementation mechanism of governments’ choices 2

4

Architect of global trade and investment regime

Figure 3.1 The different perceptions of the WTO

trade and investment. The technical NGOs’ perspective is usually positioned in quadrant 2 (Ostry 2001). Here, an assessment of the efficiency outcomes of improved market access is often combined with a belief in the power of the WTO to dictate fundamental national policy choices that could favour the redistribution of wealth. The technical NGOs include those who believe in sustainable development. In contrast, the dominant picture suggested by the stakeholders hurt by free trade and investment is positioned in quadrant 3 (Stiglitz 2002). These stakeholders typically include labour, management and owners of non-competitive, incumbent firms in import-competing sectors, which lack exports or outward FDI. Their view is that the WTO may indeed be an implementation mechanism of sovereign governments’ choices, but its outcome is more rather than less inequality in the international distribution of economic power and wealth. It is also alleged that foreign nations exert excessive influence on the negotiation of international agreements, driven by their exporters and companies engaged in outward FDI. Examples include textiles, steel, resources, agricultural and other mature sectors where there are few competitive advantages left. However, while the impact on the WTO of the staunchest defenders of free trade (especially the United States and the United Kingdom) is undoubtedly enormous and their agendas sometimes driven by short term opportunistic considerations to gain foreign market access, the key building block for their participation in the WTO is the fundamental


belief, grounded in past experiences of actual GATT tariff cut impacts, that in the long run all participants will benefit, not only a few. Finally, public perceptions in many countries have been influenced by ‘mobilizer’-NGOs and they now reflect a positioning in quadrant 4 (Ostry 2001). Mobilizers compare the outcomes of WTO negotiations with the characteristics of a hypothetical ‘better world’, without adopting a reasonable analytical ‘counterfactual position’. From a comparative institutional perspective, a feasible WTOnegotiated result is evaluated in terms of a non-feasible, and often internally inconsistent set of performance standards that may include parameters as diverse as: respect for local customs and traditions (irrespective of their impact on economic efficiency); contribution to sustainable development; redistribution of wealth to developing countries; protection of domestic industries and domestic employment in historically sheltered markets; free availability of MNE proprietary knowledge to all potential users/generic product manufacturers; and so on.

The civil society and globalization It is important to understand that globalization, as understood by the anti-global mobilizers, has never existed: there is no single integrated world market dominated by a few firms with a monopolistic position and a few rich country governments that conspire to keep wealth accumulation concentrated inside their borders. Instead, there are strong triad blocks in which nation states still make the rules, imposing regulations such as environmental and health codes. As noted above, the different triad blocks regularly engage in trade wars with each other and then turn to the WTO for dispute resolution. Unfortunately, the views of the anti-global mobilizers often prevail in shaping public opinion in many countries (Aaronson 2001, Bartlett and Steele 1998). Even before the Seattle WTO street violence of December 1999, a widely reported example of the organizational capabilities of the antiglobal mobilizers occurred on Friday, 18 June 1999, when a mass demonstration disrupted the City of London. It was organized via an Internet site, J18, which coordinated the separate activities of various anti-global mobilizers. The more radical of these received most of the media attention as the peaceful demonstration planned to coincide with the G7 Summit in Cologne turned into a full scale riot. The major targets were two McDonald’s restaurants, which were trashed, and the London International Financial Futures (and Options) Exchange (LIFFE), which was invaded.


According to press reports, analyzed by Rugman (2000), a handful of young radical extremists organized much of the demonstration, which attracted more than 2 000 people. A group called Reclaim the Streets (RTS) and a Cambridge chapter of People’s Global Action (PGA) were prominent. These groups were able to promote the demonstration by using Internet sites to publish maps and details of London’s financial institutions. On the day of the planned protest, they provided leaders to incite groups to attack property and they led attacks on the police. Radical groups such as these do not appear to differ in any marked manner from the student activist groups of the late 1960s, who organized sit-ins and demonstrations at leading universities from Berkeley (California) to Columbia (New York) to the London School of Economics (UK). If anything, the number of core activists appears to be far fewer. But, at the beginning of the second millennium, they can use Internet sites to gain worldwide attention. Previous generations of individuals, condemning mainstream institutions, spread their ideas via the underground press and small circulation magazines and broadsheets; the current generation can tap into a potentially broader stream of support by using new technology. One of the disadvantages of fast global communications via the Internet is that small activist groups can disseminate propaganda quickly and easily. The Internet has no quality control mechanism; junk sites and politically networked ones count equally with commercial and academic sites. There is no screening mechanism similar to the one provided by the mainstream media, where extremist views would find little space or airtime. This street theatre was repeated, on a massive scale, in Seattle in early December 1999. The protectionist US labour unions were also present, seeing the WTO as an agent of free trade, leading to a coalition of labour, moderate and extreme anti-global stakeholders. Unfortunately, the potentially legitimate concerns of labour and the moderate NGOs, such as OXFAM and WWF, were largely dominated by the extreme views of some anti-global mobilizers who thrive on anarchy and civil disobedience. This promotes a backlash against the NGOs with valid concerns that should receive proper policy attention, and it serves to discredit their agendas. The Seattle anti-global coalition has not been able to repeat its ‘success’ in disrupting subsequent meetings; for example, in demonstrations in London in May 2000, in Washington D.C. against the IMF and World Bank at the Quebec City Free Trade of the Americas Summit in April 2001 and at the G7 Summit in Genoa in July 2001. On all these


occasions, the more extreme mobilizer groups received extensive critical media coverage, which concentrated on the confrontations with police, the damage caused to public monuments, and the violence that would lead to the death of a demonstrator in Genoa. As a result, there was less coverage of the NGO criticism of globalization and more coverage of the anarchy and violence associated with the anti-global movement. After 11 September 2001, the NGOs were less successful, and street demonstrations dwindled for the next year. The distinction made between ‘mobilizers’ and ‘technical’ NGOs was clarified by Ostry (2001). The former group criticizes the global trade and investment regime, and believes that the major international institutions promoting free trade, such as the WTO, IMF and World Bank, should be eliminated or fundamentally overhauled. A number of mobilizers are relatively pacifist and, in general, pursue global equity goals, but they face serious difficulties in dissociating themselves from various anarchist groups attracted by this anti-mainstream philosophy. As a coalition, these groups mobilize for specific events, such as the Seattle WTO meetings, the annual meetings of the IMF and World Bank and the G7/G8 summits. They include the People for Global Action (PGA), the International Civil Society (ICS), N30 and the J18 group mentioned earlier that organized the June 1999 London protests. Greenpeace has also, at times, acted as a mobilizer by using violent protests; at other times it is more technical. The latter group, the technical NGOs, consists of relative insiders, willing to work with the mainstream international institutions in an attempt to reduce perceived ineffectiveness or inequity in policy making processes and to achieve essentially redistributive goals. Technical NGOs include OXFAM, WWF, the Third World Network and various environmental groups. Unfortunately, the WTO has not distinguished between these two groups. At Seattle, some 600 NGOs were accredited, including the first group that used anarchy. The technical NGOs, which participated in major protest actions organized by the mobilizers, are now perceived by many national governments and business lobbies as having a common agenda with the mobilizers. This widespread perception has seriously affected the technical NGOs’ capacity to achieve important objectives on their usually benevolent agendas. As an alternative, lessons can be learned from the successful NAFTA generated cooperation of environmental NGOs with business and government in raising environmental standards and practices in Mexico (see Rugman et al. 1999). The anti-global mobilizers constitute a new and potentially powerful set of actors on the stage of international business. From 1997 to 1998,


they assumed a more effective role than before, which partly led to the defeat of the OECD’s multilateral agreement on investment (Aaronson 2001, Clarke and Barlow 1997, Rugman 2000). With the US and Canadian governments treating the MAI on a technical rather than political level, and ministers receiving little in-depth briefing from senior trade policy civil servants, there was little political will to counter the substantive distortions of facts on the likely societal impact of the MAI offered by unelected and unaccountable anti-global mobilizers. Business leaders were unwilling to speak out on the MAI’s advantages, leaving its defence to a handful of industry association spokespeople, who are mostly perceived as the public relations mouthpiece of narrow business agendas. Finally, the academic world – with a few exceptions – had not researched the issue. This was especially true of trade economists, who build mainly on modern trade theory, useful to study trade liberalization, but fully inappropriate to analyze the impact of investment liberalization. Consequently, almost none were available or willing to debate the substantive issues of the MAI in public while engaged in their full-time professional duties. Graham (2000) has demonstrated the fallacy of the myth that antiglobal mobilizers defeated the MAI. Using careful analysis and insider information as a closely involved and well informed expert on US foreign direct investment policy making, Graham concludes that the draft MAI was a very weak document. In fact, the investment liberalization negotiated in the MAI was so weak that the US business community stopped supporting it long before anti-global stakeholders started to protest against it in Paris. There was also a lack of leadership by the US government, as well as tepid support in the EU and, eventually, hostility to the MAI by the French government of Prime Minister Lionel Jospin, as he was dependent upon left wing ‘green’ support in his political coalition. For a similar analysis, see Rugman (1999, 2000). Graham has useful insights on the environmental provisions of NAFTA, especially the important initial chapter 11 investor-state case on MMT (a gasoline additive). Perhaps what the MMT case really illustrates is the absence of dialogue between genuine trade experts and antiglobal mobilizers (Soloway 2002). The latter used the MMT case as a lever to launch a broader attack on the MAI, and subsequent international trade and investment liberalization initiatives at the WTO and G7 summits. Graham (2000) argues that, as a consequence, the technical NGOs specialized in environmental issues and are now in an uncomfortable position. Graham’s view is that trade negotiators were open and willing to incorporate environmental


concerns into the MAI, but the ideologically based opposition to it, orchestrated by mobilizers, has now closed the window for cooperation between technical NGOs and governments. It is therefore critical for technical NGOs to formally dissociate themselves from the mobilizers, in order to push forward a more sensible cooperative reformist agenda for the civil society. The absence of informed government, business and academic commentary left the media open to the views of the anti-global mobilizers. As noted above, technical NGOs have sometimes played a major positive role in shaping the outcome of international agreements, as exemplified by the notable success of environmental NGOs (entirely US and Canadian) in the North American Free Trade Agreement when the first Clinton administration in 1993 inserted two side agreements, after NAFTA had been successfully negotiated over the 1990–1992 period by the first Bush administration. These side agreements set up an environmental body, the Commission on Environmental Cooperation (CEC) (in Montreal) and a labour standards body (in Dallas) (see Liebler in Rugman 1994). In contrast, The UNCED Rio Earth Summit of 1993 was dominated by environmental NGOs, including many mobilizers. Business was largely absent. This led to an unbalanced agreement, with sets of commitments that would be almost impossible to meet by the governments concerned. Despite these lessons, the Kyoto Summit in December 1997 resulted in standards for reduction of greenhouse gas emissions that, again, most countries and MNEs could not meet. Implementation of the Kyoto protocol has proceeded slowly since the United States did not sign it; only the EU had the political will to do so.

The political economy of civil society The brief description above of recent events in the area of global trade and investment liberalization reflects a wide gap in understanding of the significance of globalization and the role of international institutions therein between, on the one hand, national governments, business lobbies and technical NGOs and, on the other hand, the anti-global mobilizers. The divergence in perspectives is such that a constructive dialogue has become almost impossible. There are two explanations for this situation. First, the political system in most Western countries, especially the United States, Canada and European Union democracies, has traditionally taken on board the concerns of potential ‘losers’ of trade and investment liberalization during international negotiations. This has often resulted in exempted


sectors, long phase-in periods, transition measures to permit structural adjustment, and so on. The failure of the political establishment in many developed economies to restrict the impact of mobilizers on public opinion largely results not from a so-called ‘democratic deficit’, but from insufficient or ineffective communication on the substance, process and likely impacts of further trade and investment liberalization agreements. Second, the intellectual failure of mainstream academic theory should be noted. There is an ‘academic deficit’. The twin basic paradigms of economics and politics are found wanting as explanations of today’s global economy, the behaviour of MNEs and the nature of foreign direct investment. In economics, the traditional efficiency-based neoclassical paradigm (with its associated theory of comparative advantages and the overall country gains from free trade) is unsuitable to describe properly the goals and strategies of MNEs, and the related FDI motivations and patterns. Despite the efforts of international business writers over the last 30 years to develop a modern theory of the MNE, most economists to date have apparently been unable to take on board this perspective, including a grounded analysis of MNE behaviour and the associated FDI (see Rugman 1996). Consequently, the advice of many top level economists to their national governments has been to use the GATT and WTO to achieve ‘shallow’ economic integration through tariff cuts but, in doing so, they have failed to address the ‘deep’ integration that could be achieved through national treatment rules to foster FDI. Similarly, the mainstream political science focus on the nation state is equally inappropriate to deal with the new reality of MNEs and FDI. Despite minor modifications to nation state paradigms, such as incorporating subnational units in decision making, there is only a limited buy-in to the alternative, non-mainstream International Political Economy (IPE) viewpoint first popularized by Susan Strange (1988), which recognizes the important role of MNEs in today’s global economic and political system. As is the case with the economics profession, mainstream political science shows an important ‘academic deficit’ in the sense of being ill-equipped to properly inform policy makers, the media and the public at large on the significance of globalization. Based on prejudice rather than evidence, the thinking of anti-global mobilizers has therefore become more influential with governments in North America and Europe than the grounded work of academic scholars working on MNEs (see Ostry 1997). The issue here is one of process. There is an ‘administrative heritage’ of ideas. Today’s journalists and other


professional communicators are poorly trained in economics, politics and international business. Those few who have any training are usually victims of the paradigms of traditional economics and political science, which cannot accurately explain MNE behaviour and FDI. Business school MBAs, who are now exposed to the new thinking on MNEs, usually have their professional occupation in business rather than the media. Professional intermediaries, such as management consultants, focus on their business or government clients rather than the media and the requirement of confidentiality of their work usually makes them poor advocates, as compared with the ill-informed, but ideology driven mobilizers. Finally, the civil service in most cases cannot engage in a public debate with mobilizers, since the role of public servants is to support and inform ministers, not to enter the public forum. This joint institutional failure of politicians, academics, consultants and civil servants to prepare a credible case in favour of globalization and an MAI and to debate it publicly, leaves the field open to mobilizers to shape public opinion. However, although the mobilizers can be credited partly with the delay of the Seattle Round of the WTO, the main substantive reason for its delay lies in the functioning of the United States institutions. More specifically, it is the US Congress authority to pass trade laws which explains the corresponding lack of presidential power to negotiate international trade and investment treaties. Former President Clinton’s failure to obtain ‘fast track’ negotiating authority from Congress in his second term (for a free trade area of the Americas, but also for a future round of the WTO, and for an MAI) was likely the single most important reason for the WTO’s delay. The mobilizers were then given the opportunity to step into the vacuum and captured the agenda. Multilateral trade and investment agreements are unlikely to succeed without the full commitment of the United States to champion them. This is demonstrated by the WTO process. All participating national governments face pressures from a variety of stakeholder groups, lobbying in favour of narrow interests. The full participation of the United States is vital to broker an international agreement, as it is still the only country powerful enough to pull along other countries. Yet, although former President Clinton pushed through NAFTA in 1993, he was subsequently unable to assemble a coalition to support any new free trade and investment liberalization initiatives. The future of the WTO is undoubtedly linked to the success of President Bush in November 2001 to obtain (fast track) trade negotiating authority for a new round, and for him to provide leadership in moving the trade liberalization agenda forward once again.


Towards a theory of MNEs and civil society This analysis suggests that two parameters critically determine the future options for further trade and investment liberalization. The first is the choice between bilateral/regional and multilateral negotiations. The second is the choice between the pursuit of shallow or deeper integration. The choices to be made are represented in Figure 3.2 on the institutional alternatives for trade and investment liberalization. Here, the vertical axis on the geographic scope of agreements distinguishes between multilateral (top) and regional (bottom) integration efforts. The horizontal axis on the depth of the integration makes a distinction between shallow (left) and deep (right) integration. Quadrant 1 represents the old, highly successful GATT process of tariffs cuts and shallow integration. Quadrant 3 represents the new agenda of the WTO in terms of deep integration, including investment liberalization. Quadrant 2 represents the old regional trade agreements with tariff cuts (the Andean pact, the Caribbean initiative, ASEAN, and so on). Quadrant 4 represents the new type of regional trade agreements, such as NAFTA. These include national treatment for foreign direct investment and also enhanced market access for services and intellectual property. The main point of Figure 3.2 is that quadrant 3, with deep multilateral integration, undoubtedly constitutes an optimal situation for all nations concerned in terms of long term wealth creation, but is at present not

Depth of integration Geographic scope of agreement

Shallow

Deep

1

3

2

4

Multilateral

Regional

Figure 3.2 The institutional alternatives for trade and investment


feasible because of various constraints mentioned above (structure of WTO, US policy preferences, and so on). Quadrant 2 represents the worst case scenario of shallow, regional integration. Fortunately, the history of the EU demonstrates that this may be just a stepping stone towards fuller integration. The EU started in 1958 and has been characterized by a continuous shift from quadrant 2 towards quadrant 4 in terms of depth (for example, the 1992 Single Market Programme and the more recent European Monetary Union, although not including all Member States). The recent thinking about expanding NAFTA into a free trade area of the Americas (FTAA) by 2005 would constitute an important shift towards quadrant 4. The FTAA would be seen as an intermediary situation between conventional regionalism with a limited geographic scope and the full and deep multilateralism of quadrant 3. These two examples suggest that both shallow regionalism and regionalism with a narrow geographic scope may be a stepping stone towards a quadrant 3 situation. However, these examples also demonstrate the perverse effects of mobilizers on the evolution of trade and investment liberalization. Poor countries and groups always benefit more from multilateral than from regional agreements. They cannot be shut out from the former while individual nations, such as the US, always have less power in multilateral than in regional cases, because of the number of countries involved. The strengthening, not the weakening, of mainstream global institutions such as the WTO, so despised by the mobilizers, may well represent the fastest route for poorer countries towards achieving fundamentally higher living standards for their population. In contrast, if NGOs are successful in derailing multilateralism, then poor countries will remain poor.

Multinationals and civil society: managing external stakeholders How should MNE managers respond to the presence of external stakeholders in international trade and investment negotiations? Three suggestions can be offered. The activities of external stakeholders should be discussed at the board and top management level, and an overall strategy should be developed to deal with them. Here, it is important to make a distinction between technical NGOs and anti-global mobilizers. Initiatives should be developed to work with the former. Clear arguments should be developed to appropriately counter the ‘discourse’ of


the mobilizers, and this should be combined with an effective communication strategy to reach relevant audiences. 1 Sustainable development and ethical stakeholder perspectives should be embedded within the organization. More importance should be attached to social values and these should influence the inner workings of the organization. 2 The firm should not engage in a debate with mobilizers (nor even with technical NGOs) through a small set of public relations people; instead, all senior managers should be trained to articulate the concept of stakeholder capitalism, rather than shareholder capitalism and the contribution of the organization to the resulting wealth creation. In other words, all senior managers in the firm should engage with NGOs; then the debate will be more even handed. As a result of the above initiatives, some firms will experience a dramatic improvement of their political strategy results and their economic performance. The firms that will do best in the near future will be likely to be those that take leadership positions with respect to stakeholder management, capture the concept of ‘values driven’ rather than profit driven capitalism, and respect their most important resource, namely, their employees. These are likely to be the most effective tools that can be deployed at the micro-economic level to defend against the actions of ideology driven mobilizers. The above prescriptions are represented in Figure 3.3 on MNE responses to civil society concerns. On the vertical axis, a distinction is made between two types of MNE stakeholder strategy. On the top, a strategy is pursued that differentiates among the various stakeholder groups between those with which a dialogue is possible, and those with which it is not (differentiated response) and on the bottom, a strategy that dictates a uniform response to all outside stakeholders. The horizontal axis on the MNE corporate philosophy, makes a distinction between a broad stakeholder perspective on the right, whereby other goals than shareholder wealth maximization are considered relevant, and a narrower shareholder profit maximizing perspective on the left. Quadrant 2 reflects an outdated perspective on MNEs, paradoxically adopted by most mobilizers. They view MNEs as profit maximizers who will systematically refuse a constructive dialogue with any stakeholder representing the civil society. The quadrant 1 situation represents an equally outdated response that is now being rejected by most large MNEs: here, management has a shareholder perspective and its differential


MNE stakeholder strategy

MNE corporate philosophy Shareholder perspective

Stakeholder perspective

1

3

2

4

Differential response

Uniform response

Figure 3.3 Multinational enterprise strategies and civil society

response is usually a ‘public relations’ exercise whereby an MNE provides lip service to the goals of ‘friendly’ stakeholders but, in fact, is not serious about stakeholder management. In fact, many MNEs are now positioned in quadrant 3: they pursue a stakeholder management model, perhaps driven by sustainable development environmental considerations. Here, MNEs try to identify those salient stakeholders that can contribute to a win-win situation for the firm and society at large. This has been analyzed in Rugman and Verbeke (1998) in terms of developing green capabilities. These firms face the challenge of distinguishing between destructive mobilizers and benevolent, technical NGOs. The main danger for these firms is to fall in the quadrant 4 trap, whereby their stakeholder management approach can be abused by mobilizers, because the firm has not set up proper screening mechanisms to establish which stakeholder demands are legitimate and which are not. This problem is experienced by many companies operating in both developing and advanced countries that are unfairly accused of unethical behaviour; for example, Shell in the disposal of a North Sea oil rig where Greenpeace misrepresented the position in order to win cheap publicity. Here, the civil society should itself strongly react to the dishonest and unfair treatment given to MNEs by the most radical,


ideology driven mobilizers, and give a clear message that such groups reduce the credibility of the civil society as perceived by MNEs and mainstream government institutions.

Conclusion The viewpoints of MNEs and NGOs towards globalization and the WTO have been analysed in this chapter. There is no single viewpoint for business, neither is there one for the civil society; there are different types of MNEs and NGOs. Our analysis can be summarized in Figure 3.1. While the basic ‘business’ viewpoint is in quadrant 1 and the civil society has components with a viewpoint in quadrant 4, there are subtle differences in approach, as discussed in the second half of the chapter. Most large, triad-based MNEs are positioned in quadrant 1 of Figure 3.1. They know that trade and investment liberalization will improve their micro-economic efficiency. However, the losers of free trade and investment (that is, a variety of stakeholders related to inefficient incumbents facing increased foreign competition) are usually well informed about process, but view its outcomes as unfair; they are positioned mainly in quadrant 3 of Figure 3.1. The civil society can largely be segmented into the NGO mobilizers in quadrant 4 in contrast to the technical NGOs in quadrant 2. A useful alliance could take place between MNEs with a quadrant 1 viewpoint and the technical NGOs of quadrant 2. An example of this is the idea of sustainable development, whereby MNEs are the actors making new and environmentally sensitive investments. In contrast, alliances between the protected and inefficient firms in quadrant 3 and mobilizer NGOs in quadrant 4 are not useful. Yet, this was the type of coalition put together in Seattle in 1999 to disrupt the WTO meetings. There, labour, mobilizer NGOs and even technical NGOs made common cause against business and governments. To avoid such negative coalitions and promote the more useful quadrants 1 and 2 linkages, greater transparency is required in international institutions. We hope that this type of analysis, which aims to identify the value judgements about process and outcomes underlying the different perspectives on the WTO, will move the debate on globalization forward. It is necessary to deepen our understanding of the triad-based process of international business, the technical role of the WTO and the divisions in civil society. Free trade and investment liberalization have not yet been achieved due to the vested interests and misperceptions of some components of civil society and affected stakeholders. We need to


recognize and correct these misperceptions as a precondition to achieving an overarching increase in world welfare and incomes.

References Aaronson, S.A. (2001) Taking Trade to the Streets: The Lost History of Public Efforts to Shape Globalization. Ann Arbor: University of Michigan Press. Barlett, D.L. and Steele, J.B. (1998) Special Report: Corporate Welfare, Time.com, 16 November. Bhagwati, J. (2002) Free Trade Today. Princeton: Princeton University Press. Clarke, T. and Barlow, M. (1997) MAI: The Multilateral Agreement on Investment and the Threat to Canadian Sovereignty. Toronto: Stoddart. Deutsch, G. and Speyer, B. (eds) (2001) The World Trade Organization Millennium Round. London: Routledge. Giddens, A. (1999) Runaway World: How Globalization is Reshaping Our Lives. London: Profile Books. Govindarajan, V. and Gupta, A.K. (2001) The Quest for Global Dominance. San Francisco: Josey-Bass/Wiley. Graham, E.M. (2000) Fighting the Wrong Enemy: Antiglobal Activists and Multinational Enterprise. Washington, DC: Institute for International Economics. Gray, J. (1998) False Dawn: The Delusions of Global Capitalism. London: Granta Books. Irwin, D.A. (2002) Free Trade Under Fire. Princeton, NJ: Princeton University Press. Liebler, S. (1994) ‘The Politics of NAFTA’, in Rugman, A.M. (ed.), Foreign Investment and NAFTA. Columbia: University of South Carolina Press, pp. 27–46. Ostry, S. (2001) ‘The Multilateral Trading System’, in Rugman, A. and Brewer, T. (eds), The Oxford Handbook of International Business. Oxford: Oxford University Press, pp. 232–58. Ostry, S. (1997) ‘The Post-Cold War Trading System: Who’s on First? Chicago and London: University of Chicago Press. Rugman, A.M. (2001) ‘The World Trade Organization and the International Political Economy’, in Rugman, A.M. and Boyd, G. (eds), The World Trade Organization in the New Global Economy. Cheltenham, UK: Elgar, pp. 1–22. Rugman, A.M. (2000) The End of Globalization. London: Random House. (Also published in 2001 by AMACOM/McGraw Hill.) Rugman, A.M. (1999) ‘Negotiating Multilateral Rules to Promote Investment’, in Hodges, M., Kirton, J. and Daniels, J. (eds), The G8’s Role in the New Millennium. Aldershot: Ashgate, pp. 143–58. Rugman, A.M. (1996) Multinational Enterprises and Trade Policy. Cheltenham: Elgar. Rugman, A.M., Kirton, J. and Soloway, J. (1999) Environmental Regulations and Corporate Strategy: A NAFTA Perspective. Oxford: Oxford University Press. Rugman, A.M. and Verbeke, A. (1998) ‘Corporate strategies and environmental regulations: an organizing framework’, Strategic Management Journal, vol. 19, no. 4, pp. 363–76. Sampson, G. (ed.) (2001) The Role of the World Trade Organization in Global Governance. New York: United Nations University Press.

Rugman and Verbeke 53 Soloway, J. (2002) ‘Expropriation under NAFTA, Chapter 11: The Phantom Menace’, in Kirton, J. and Maclaren, V. (eds), Linking Trade, Environment and Social Cohesion. Aldershot, UK: Ashgate, pp. 131–44. Stiglitz, J.E. (2002) Globalization and its Discontents. New York: Norton. Strange, S. (1988) States and Markets: An Introduction to International Political Economy. London: Pinter.


Part II Changing Industry Configuration


4 Building versus Acquiring Resources: Analysis and Application to Learning Theory Jay B. Barney and Tony W. Tong

Abstract The resource-based literature has indicated two general approaches available to the firm to obtaining resources for strategy implementation: that of building resources within the firm and that of acquiring resources from outside the firm. But existing research has not critically examined the implications of the two approaches for the potential of resources to generate economic rents and sustained competitive advantage. In this chapter, we review previous work on this issue and analyze the missing link in a critical fashion. Our central argument is that, in a resource-based view, what matters to rent generation and competitive advantage is not the means through which firms obtain resources; rather, to generate economic rents and sustained competitive advantage, resources must be obtained ex ante at a cost lower than their value ex post, and they must be valuable, rare, inimitable, and non-substitutable, whether they are built within the firm over time or acquired from outside all at once. To illustrate the importance of value, rareness, inimitability, and non-substitutability to the sustainability of competitive advantage, we discuss our argument in the context of organizational learning, and analyze the conditions under which learning can be a source of sustained competitive advantage.

Introduction The resource-based view (RBV) of the firm has, over the years, become one of the most important theoretical frameworks in the field of strategic management. Focusing on firm-specific resources, RBV redirects researchers’ attention from the traditional emphasis on the product 57

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market (Caves and Porter 1977, Porter 1980, Scherer 1980) to the factor market in search of persistent superior firm performance (Barney 1986a, 1991, Dierickx and Cool 1989, Peteraf 1993, Rumelt 1984, 1987, Wernerfelt 1984). That some firms enjoy better performance than others presumes the existence of economic rents and/or competitive advantage (Bowman 1974, Porter 1985). Thus, RBV has been suggested to be a theory of economic rents as well as a theory of competitive advantage (Barney and Arikan 2001). Given the central role of resources in the theory, one may ask where these resources come from and how firms can obtain them. There seems to be a consensus in the existing literature that there are two general approaches through which firms can develop resources to implement strategies: building resources internally (within the firm) and acquiring resources externally (from outside the firm). However, different scholars appear to attach different emphasis to the usefulness of such a distinction, and differ on whether this distinction is necessary for the purpose of analyzing economic rent generation and the sustainability of competitive advantage. For example, in introducing the concept of strategic factor markets to develop a resource-based theory of economic rents, Barney (1986a) makes no distinction between the two approaches. Similarly, Barney’s (1991) analysis of firm resources and sustained competitive advantage makes no mention of different approaches to resource development. However, Dierickx and Cool (1989) believe it useful to distinguish resources that can be purchased on the market from resources that must be built internally. They argue that such a distinction is important because it has implications for the applicability of the strategic factor markets model, as well as the analysis of the sustainability of competitive advantage. Divergence among researchers regarding the usefulness and implications of the two approaches to resource development suggests a need to analyze this issue more critically, an undertaking that we attempt in this chapter. We first review previous debates between Dierickx and Cool (1989) and Barney (1986a, 1989) on the applicability of the strategic factor markets model. Consistent with Barney (1989), we conclude that, for purposes of the analysis of rent generation, building resources internally is logically equivalent to acquiring resources externally, and that the strategic factor markets model anticipates both approaches and is applicable to the analysis of the rent generating potential of resources obtained either way. We then compare the two approaches by analyzing the potential of each to generate sustained competitive advantage. We agree with Dierickx

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and Cool (1989) that resources built internally have greater potential to generate sustained competitive advantage, because these resources are more likely to satisfy the conditions of value, rareness, inimitability, and non-substitutability that are necessary for resources to be sources of sustained competitive advantage. These conditions were first proposed by Barney (1986b), and then more formally theorized in Barney (1991), which culminates in what will be referred to as a VRIS framework hereinafter. A general conclusion from this discussion is that, for purposes of the analysis of sustained competitive advantage, it may not be necessary to distinguish between building resources internally and acquiring resources externally. This is because, to be sources of sustained competitive advantage, firm resources need to be valuable, rare, inimitable, and nonsubstitutable (Barney 1986b, 1991, Dierickx and Cool 1989), regardless of whether such resources are built within or acquired from outside the firm. Given the rising interest of strategy scholars in organizational learning theory and the apparent benefits of learning in the form of improved knowledge and capabilities for the firm, we then turn to a discussion of how firms can use different learning processes to obtain knowledge and experiences, and of the conditions under which learning can be a source of sustained competitive advantage. We focus on three major learning processes: experiential learning (learning from own experience), vicarious learning (learning second-hand experience of others), and grafting (learning by directly accessing knowledge and capabilities of others). These learning processes have been highlighted in a large body of literature on organizational learning (Huber 1991, Levitt and March 1988, Miner and Haunschild 1995). Our discussion on learning enriches Dierickx and Cool’s (1989) insights into the process of resource building by discussing specific learning processes that contribute to the development of resources and capabilities within the firm. It also extends existing understanding on the external approach to resource development by mapping out different learning processes in different contexts, by investigating the relationship between various learning mechanisms and the types of resources acquired, and by delineating the conditions under which learning can generate sustained competitive advantage.

Resource-based theory of economic rents By definition, the notion of resources lies at the heart of the resourcebased view of the firm. However, the question of how firms acquire


strategic resources and the conditions surrounding resource acquisition did not occupy a central place in either theoretical roots or early contributions of RBV. Ricardian economics, for example, is mainly interested in the economic consequences of ‘original, unaugmentable, and indestructible gifts of nature’ (Ricardo 1817), focusing largely on natural endowments (exemplified by land) and taking them as given. In her seminal book on the growth of the firm, Penrose (1959) first proposes the idea of viewing firms as a bundle of productive resources, which becomes the foundation of what is now widely regarded as RBV. According to Penrose, firms grow primarily to exploit resources. Although new resources in the form of improved managerial experience can be created during the process of resource exploitation, which may serve as the basis for further expansion, how resources are developed and what implications this has are not the focus of her book. How firms obtain resources was also not highlighted in the two earliest contributions of RBV (Rumelt 1984, Wernerfelt 1984). Wernerfelt (1984) first suggests that given the duality between factor and output analyses, it is legitimate to view a firm from a resource perspective – as opposed to a product perspective – and that such a perspective may shed new light on certain firm behaviours (for example, diversification). Rumelt (1984) outlines a strategic theory of the firm based on the twin notion of resource heterogeneity and resource immobility. This strategic theory views rent generation as resulting from firms’ possession of unique resource bundles isolated by uncertain imitability, and, according to Rumelt, provides better explanatory power on firm behaviours than traditional economic theory. Although Rumelt’s (1984) discussion takes the existence of resources as given, his argument that rents derive from the wedge between the ex ante cost of resources and their ex post value has provided useful directions for research on resource-based theory of economic rents that follows (for example, Barney 1986a, 1988, Peteraf 1993, Rumelt 1987). The question of how and under what circumstances firms obtain resources therefore underlies resource-based theory of economic rents; indeed, it turns out that the answer to this question has important implications for the potential of resources obtained to generate economic rents.

Economic rents and strategic factor markets An economic rent is a payment to an owner of a factor of production in excess of the minimum required to induce that factor into employment (Hirshleifer 1980), or return in excess of a resource owner’s opportunity cost (Tollison 1982). In a resource-based view, economic rents exist

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‘when firms generate more value with the resources they have acquired or developed than was expected by the owners of those resources’ (Barney and Arikan 2001: 140). This implies that resource-based theory of economic rents must endogenize resources and examine the processes by which a firm’s resources are obtained, as well as the implications of the conditions surrounding these processes for the firm’s ability to obtain economic rents. It is for this purpose that Barney (1986a) introduces the concept of strategic factor markets. Firms need resources to implement product market strategies, and whenever the implementation of a strategy requires the acquisition of resources, a strategic factor market develops, defined as the ‘market where the resources necessary to implement a strategy are acquired’ (Barney 1986a: 1231). The central thesis developed here is that, to understand whether a firm can obtain economic rents, one needs to examine not only whether or not the firm is competing in an imperfectly competitive product market, but also the competitive conditions surrounding resource acquisition in the factor market. Indeed, if the factor market were perfectly competitive, then there would not be potential economic rents even if the firm could create an imperfectly competitive product market in its favour, because the full value of the resources used to implement strategies would have already been anticipated and fairly priced in the factor market. Of course, strategic factor markets may not be perfectly competitive. In this situation, Barney suggests that firms could obtain economic rents when they possessed superior insights and thus more accurate expectations about the future value of a strategic resource at the time it was acquired, or when they did not enjoy such insights but were lucky, or both. The strategic factor markets model thus provides a prescription for the analysis of economic rents; that is, such an analysis always involves a comparison of the cost of the resources when they were acquired with their value when they are used to implement the firm’s product market strategies, and only when the acquisition cost of these resources is lower relative to their value do potential economic rents exist. With its focus on resource acquisition and the underlying processes, the strategic factor markets model helps to discriminate the conditions under which resource acquisition can and cannot generate potential economic rents. By resorting to the concept of strategic factor markets, Barney (1986a) appears to suggest that resources used to implement strategies can be purchased or are purchasable, and this has been part of Dierickx and Cool’s (1989) contention. Dierickx and Cool argue that factor markets


are not only imperfect, they are also incomplete; certain resources are simply non-tradable. These non-tradable resources are firm-specific and nonappropriable, and specific examples include dealer loyalty, customers’ trust, and corporate reputation. Because they are non-tradable, these resources have to be built or accumulated internally over time. Also, because they are non-tradable, the only way through which these resources can realize their value is to be used to implement the firm’s product market strategies. As far as non-tradable resources are concerned, Dierickx and Cool suggest, the strategic factor markets model by Barney cannot be applied to analyzing their rent generating potential.

Building vs acquiring resources for economic rents Whether the strategic factor markets model is applicable to resources built internally depends on the nature of underlying economic rents and how they are derived. Resource-based researchers have argued that rents derived from the possession of unique assets or resources can be viewed as either Ricardian rents or monopoly rents (Mahoney and Pandian 1992, Peteraf 1993). Underlying Ricardian economics is the notion that rent-generating resources are scarce and fixed in supply, in the sense that their supply cannot be expanded, both in the short-run and in the long-run. Scarcity results in a greater demand for their service relative to their supply, which in turn induces resources of lesser quality to be brought into production (Ricardo 1817, Rumelt 1987). Therefore, firms fortunate to possess superior resources can enjoy higher returns, compared to firms with inferior resources. Of course, resources are rarely strictly fixed in supply as in the Ricardian model, but researchers have suggested that the argument underlying Ricardian economics can also apply to resources that are ‘quasi-fixed’ (Peteraf 1993, Barney 2002), defined as resources whose supply cannot be expanded quickly but may be increased incrementally, such as firm-specific labour and technical know-how. Rents accruing to firms with superior resources are consistent with the Ricardian model and can thus be viewed as Ricardian rents (Mahoney and Pandian 1992, Peteraf 1993). In contrast to Ricardian rents, monopoly rents result from firms’ purposeful restraint of output rather than the possession of resources inherently limited in supply. Monopoly rents come into being through the exercise of monopoly power, isolated by inter-industry entry barriers (Bain 1956) or intra-industry mobility barriers (Caves and Porter 1977). Although monopoly rents may also result from collusive behaviours, these behaviours still depend on barriers to entry (Peteraf 1993). Rumelt

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(1984, 1987) coins the term ‘isolating mechanisms’ to describe barriers to imitation of firm resources, which protect rent-generating resources from being competed away ex post and preserve the rent streams (Peteraf 1993). Thus, to the extent that one considers ‘isolating mechanisms’ the firm-level counterpart of entry barriers or mobility barriers, unique firm resources and capabilities generate rents that can be viewed as monopoly rents (Mahoney and Pandian 1992, Peteraf 1993). The above analysis suggests that sources of economic rents reside in the possession of resources that are limited in supply and not subject to imitation. However, rarity and inimitability must be examined in concert with another key condition to make valid conclusions about the rent generating potential of resources. First brought out by Barney (1986a) in the strategic factor markets model, this condition is later labelled as ‘ex ante limits to competition’ in Peteraf (1993). According to this condition, the rent generating potential of any resource must be analyzed in the context of the strategic factor markets model, as long as there are some kinds of cost incurred during the resource development process. Even though there may not be direct cost involved in the process, there would be significant opportunity cost (Barney 1989). Thus, analyzing the rent generating potential of resources always involves a comparison between the ex ante cost of these resources and their ex post value (Barney 1986a, Rumelt 1987), whether these resources are built internally over time or acquired externally all at once. The following conclusion can therefore be drawn: in a resource-based view, for purposes of the analysis of the rent-generating potential of resources, building resources is logically equivalent to acquiring resources, because either way firms incur some kinds of cost and the strategic factor markets model applies. Stated formally, that resource development involves some cost is the sufficient condition for applying the strategic factor markets model to the analysis of economic rents. In contrast, market completeness, or tradability of resources, is not a necessary condition. Indeed, even assets whose accumulation process exhibits characteristics of time compression diseconomies, asset mass efficiencies, asset stock interconnectedness, and causal ambiguity would not be able to generate economic rents for the firm, if their ex post value had been fully anticipated and fairly priced in the factor market ex ante (Barney 1989).

Resource-based theory of competitive advantage In contrast to resource-based theory of economic rents that examines how firms develop heterogeneous resources and the conditions underlying


this process, resource-based theory of competitive advantage takes resource heterogeneity as given and explores resource characteristics and their competitive implications. A central inquiry in this literature is what kinds of resources would enable the firm to obtain sustained competitive advantage. For this chapter, a firm is said to have a competitive advantage when it is implementing value-creating strategies not currently being implemented by competing firms. A firm is said to have a sustained competitive advantage when it is implementing value-creating strategies not currently being implemented by competing firms and where efforts to imitate those strategies have ceased. These definitions are consistent with the literature (Barney 1991, Peteraf 1993).

VRIS as a general framework A resource-based theory of competitive advantage centres on the notion of ‘barriers to imitation’ which can be traced back to Rumelt and colleagues. Lippman and Rumelt (1982) first introduced the concept of ‘uncertain imitability’ to describe the inherent ambiguity surrounding the causal relationship between firm actions and performance outcomes. According to this logic, superior performance may be persistent because imitators feel uncertain about what exactly to imitate or how to go about it. The idea of ‘barriers to imitation’ is formalized in the term ‘isolating mechanisms’, which Rumelt (1984) coined to refer to mechanisms that protect individual firms from imitation and preserve their competitive advantage. In this sense, isolating mechanisms can be regarded as firmlevel analogues of Bain’s (1956) entry barriers, or Caves and Porter’s (1977) mobility barriers. According to Rumelt (1984, 1987), isolating mechanisms include such phenomena as causal ambiguity, unique resources or assets, patents and trademarks, firm reputations, and so forth. The first rigorous application of the concept of isolating mechanisms is Barney (1986b). In this article, Barney focuses on a particular isolating mechanism, corporate culture, and examines the conditions under which it can become a source of sustained competitive advantage. Specifically, Barney prescribes three necessary attributes that a corporate culture (and indeed any firm resource) must possess in order for it to be a source of sustained competitive advantage: value, rareness, and inimitability. By mapping different attributes of resources onto different types of competitive advantage, the article sets in motion a future stream of research that aims to develop a resource-based theory of competitive advantage (Grant 1991, Henderson and Cockburn 1994). While Dierickx and Cool’s (1989) argument against the applicability of the strategic factor markets model to non-tradable assets is unfounded,

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their analysis of the process by which strategic assets are accumulated provides important insights into the sustainability of competitive advantage. Their analysis links the imitability of resources to the characteristics of the resource accumulation process, and emphasizes internal resource building as the key to obtain strategic resources with the potential to generate sustained competitive advantage. Specifically, the ease of imitation of an asset stock is related to the flow pattern of asset accumulation. Thus, resources that are subject to time compression diseconomies, that are causally ambiguous, that are characterized by interconnected asset stocks, or that are characterized by asset mass efficiencies are less likely to be imitated and therefore more likely to be sources of sustained competitive advantage. Another crucial yet less noted contribution of Dierickx and Cool (1989) is that they also point to the importance of non-substitutability besides non-imitability for the sustainability of competitive advantage. A more general framework, indeed, a resource-based theory, of competitive advantage is delineated in Barney (1991). This framework – known as VRIS – maintains that only resources that are valuable, rare, inimitable, and non-substitutable can be sources of sustained competitive advantage. While a comprehensive review of the framework is not attempted here, there are two points that are particularly worth noting. First, Barney integrates previous research on resource-based competitive advantage (Barney 1986b, Dierickx and Cool 1989, Rumelt 1984, 1987), and pays particular attention to parameterizing the construct of imitability, based on history, causal ambiguity, and social complexity. Second, Barney further elaborates on the condition of non-substitutability, which addresses the equifinality of resource combinations (Eisenhardt and Martin 2000, Priem and Butler 2001).

Building vs acquiring resources for competitive advantage Within the resource-based literature on competitive advantage, there has been notable variance on the extent to which different researchers attach importance to the means by which firms obtain resources, as reflected in the work of Dierickx and Cool (1989) and that of Barney (1986b, 1991). Thus, a fundamental question is: ‘Does it matter whether firm resources are built or acquired when it comes to the analysis of sustained competitive advantage?’ This question is analogous to the one concerning economic rents discussed above. It may be argued that building resources within the firm is different from acquiring resources from outside the firm, since the location of resources and the process through which resources are obtained are


different. However, it is our belief that for purposes of the analysis of sustained competitive advantage, it may not be necessary to differentiate the two approaches to resource development. This is because, as discussed in the literature in detail, the joint attributes of value, rareness, inimitability, and non-substitutability are necessary conditions for a resource to be a potential source of sustained competitive advantage, whereas the means of resource development is not. For example, resources that are valuable but not rare need not be built internally; they may well be acquired from the market that offers more strategic flexibility. In some cases, resources that are rare can also be acquired externally; indeed, if these rare resources are also inimitable and nonsubstitutable, they may even generate sustained competitive advantage. A concrete example would be Microsoft’s purchase of the QDOS operating system (the precursor to MS-DOS) from Seattle Computer products in 1980. Of course, all this presumes that the firm has superior information acquisition ability (Makadok and Barney 2001). In the following, we apply the VRIS framework and discuss the conditions under which learning can be a source of sustained competitive advantage. Organizational learning theory has recently generated much momentum in the strategy field. Using a learning perspective, strategy scholars have examined firms’ strategic behaviours (for example, alliances, mergers and acquisitions, corporate diversification) and their performance implications. Two notions underlie this stream of research: first, firms can learn from own experience (experiential learning) and knowledge, and capabilities developed during this process can be a source of competitive advantage; second, firms can learn from others – they can either acquire second-hand experience of others indirectly, such as through observation (vicarious learning), or directly access and internalize knowledge and capabilities of others (grafting). Below, we first provide a brief literature review of organizational learning theory, and then focus our discussion on the effects of the three learning processes in organizational contexts that strategy researchers are interested in. We also analyze whether these learning processes can generate sustained competitive advantage for the firm and, if so, under what conditions.

Organizational learning theory It is useful to start with a definition of learning before further discussion of the connections between learning and competitive advantage.

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The literature, however, has not reached a consensus on the definition of learning. So, for the purpose of this chapter, we adopt the definition given by Huber (1991: 89), that ‘an entity learns if, through its processing of information, the range of its potential behaviors is changed’. This definition is more general than others in the literature in that (1) it can be applied to an individual, a group, an organization, a population of organization, or a society, and (2) it maintains that a necessary condition for learning to occur is to have a change of potential behaviours rather than observable improvements in organizational efficiency or effectiveness (Argyris and Schon 1978). This definition is consistent with the argument made by learning theorists in the behavioural tradition (Cyert and March 1963, Levitt and March 1988). While learning can occur at different levels as the above definition implies, for our purpose we mainly focus on learning at the organization level. Underlying organizational learning theory is the notion that organizations, like human beings, can also learn. Although once subject to debate, the notion that organizations acquire, disseminate, and store and retrieve knowledge is now well accepted in current theorizing on learning (Huber 1991). Notice, however, that although the goal of learning is adaptation and efficiency (Dodgson 1993), it may not always be the case that the goal can be achieved. Organizations can incorrectly learn, and they can learn correctly what is incorrect (Huber 1991). Organizational learning can also result in increased efficiency in the short run at the expense of overall effectiveness, jeopardizing its very survival in the long run (Levinthal and March 1993, Levitt and March 1988, March 1991). While itself being an independent field of inquiry, organizational learning theory has been gaining increasing attention in strategy circles. There are several important reasons behind this. First, organizations learn by encoding experience into routines that guide behaviours and form the potential basis of organizational effectiveness (Levitt and March 1988). Therefore, from a broader perspective, formation of routines can be viewed as the nexus between learning, which is the focus of learning theorists, and organizational performance, where the interest of strategy researchers lies (Cyert and March 1963, Nelson and Winter 1982). Second, the beneficial effects of learning found in the manufacturing context (see Argote 1999 for a review) and the associated learning curve research (Boston Consulting Group 1970) provide further momentum for strategy researchers in search of superior firm performance. In particular, recent years have seen research efforts that depart from traditional

68 Building versus Acquiring Resources Table 4.1 Summary of learning processes and mechanisms in different contexts Learning processes

Learning mechanisms

Learning contexts

Experiential learning

Trial and error experimentation: 1. Experience accumulation 2. Knowledge articulation 3. Knowledge codification

Manufacturing (e.g., aircraft production, ship building) Service (e.g., business chains – pizza stores, hotels, nursing homes) Corporate development activities (e.g., alliances, acquisitions)

Vicarious learning

Copy Imitation

Learning from other individual organizations Learning from organizational networks/populations

Grafting

Internalization Integration Institutionalization

Hiring Forming alliances Conducting acquisitions

focus on relatively simple and homogeneous manufacturing and administrative tasks, and examine strategic organizational activities that are infrequent, heterogeneous, and characterized by causal ambiguity, from an experiential learning perspective (Zollo and Winter 2002). Third, recent strategy research has also provided evidence that through learning firms can borrow from second-hand experience of others (vicarious learning), or access and internalize resources or capabilities of others otherwise unavailable (grafting). Specifically, vicarious learning includes learning from other individual organizations (Huber 1991) or learning from a population of organizations (Miner and Haunschild 1995), both of which have been empirically investigated (in the context of business chains such as pizza stores, hotels, and nursing homes). With regard to grafting, there have been empirical studies on learning by hiring, by forming alliances, and by conducting acquisitions. In what follows, we consider experiential learning an internal approach, and vicarious learning and grafting external approaches to resource development. Table 4.1 summarizes the following discussion on different learning processes, mechanisms, and the contexts in which learning occurs.

Experiential learning Experiential learning, or learning from own experience, is a result of trial-and-error experimentation (Huber 1991). Knowledge is created

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through the transformation of personal experience (Polanyi 1966), which is deeply rooted in the value systems of individuals (Nonaka 1994). At the organization level, knowledge is created through organizational experience, which is stored in the organizational memory in the form of routines, or consistent and stable patterns of doing things (Levitt and March 1988). The manufacturing setting provides the first evidence documenting the positive effects of own experience on organizational efficiency. Researchers find that as the volume of production increases, productivity improves as a result of a reduction of production costs (Argote et al. 1990, Dutton and Thomas 1984, Epple et al. 1991, Wright 1936). This has generated a body of literature that examines the rate of productivity increase as a function of cumulative levels of production, known as ‘learning curve’ studies (Boston Consulting Group 1970). It is worth noting, however, that this research has largely focused on manufacturing and related administrative tasks, such as aircraft production and ship building (Argote et al. 1990, Wright 1936), which are more repetitive and homogeneous, and being undertaken on a more routine basis. Recent strategy research has applied the concept of experiential learning to corporate development activities of a more heterogeneous variety. For example, alliances and acquisitions are undertaken less frequently than manufacturing tasks, and these transactions may differ greatly from one another, with significant temporal intervals between them. Given this important difference from manufacturing activities highlighted in earlier research, a direct application of learning curve effects may not be appropriate. Research on experiential learning in joint ventures, for instance, generally has found no direct effects of experience (Simonin 1997, Reuer et al. 2002, Zollo et al. 2002); in acquisitions, researchers have identified an inverted U-shaped relationship between experience and performance (Haleblian and Finkelstein 1999, Hayward 2002), and high levels of experience may actually carry negative effects. Such an inverted U-shape has also been found in other contexts, such as business failure of hotel chains (Baum and Ingram 1998, Ingram and Baum 1997). Can experiential learning lead to sustained competitive advantage? First, from a pure theoretical perspective, experiential learning does not necessarily lead to improved performance. Learning need not be conscious or intentionally oriented towards certain goals (March and Olsen 1979). In addition, organizational learning can generate competency traps, which while facilitating the exploitation of existing routines, hinder the exploration of new knowledge (March 1991). As one example,


moving down the learning curve quickly may lead to this type of fallacy. Also, because effects of learning depend on interpretation, in some situations superstitious learning may result, where certain (possibly inferior) routines are followed invariably to the preclusion of potentially superior routines (Levitt and March 1988). Even though by learning vicariously from the organizational population may avoid an overemphasis on exploitation rather than exploration (Miner and Haunschild 1995), vicarious learning cannot be expected to be a source of sustained competitive advantage, as will be discussed shortly. Second, recent strategy research has argued that experiential learning in the form of semiautonomous accumulation of experience may not be effective for organizational tasks that are infrequent, heterogeneous, and causally ambiguous (Zollo and Winter 2002). These tasks include, but are not limited to, forming alliances, conducting acquisitions, and underwriting initial public offerings. In these settings, more deliberate learning processes need to be in place to help articulate and codify the underlying knowledge and experience (Kale et al. 2002, Zollo and Singh 2002). These deliberate learning processes require investments targeted at enhancing the firm’s absorptive capacity (Cohen and Levinthal 1990). For example, the study by Kale and colleagues (2002) on firms’ alliance capability emphasizes the positive role of a dedicated alliance function, which aims to achieve strategic coordination of alliance activity and the capture/dissemination of alliance-related knowledge. They find that firms with such a dedicated alliance function achieve greater performance compared to firms without such an investment. Similarly, Zollo and Singh (2002) find evidence that the extent to which acquiring firms codify the knowledge from previous acquisition experience is positively related to performance of the focal acquisition. Third, and more importantly, whether experiential learning can lead to sustained competitive advantage ultimately depends on whether experience accumulated is valuable, rare, inimitable, and nonsubstitutable. In the manufacturing setting, for example, while moving down the learning curve quickly is valuable, it is usually not uniquely available to a particular firm. Moreover, to the extent that moving down the learning curve and obtaining a cost advantage require the firm aggressively to acquire market share, the cost of acquiring market share must be taken into consideration. A significant amount of research in economics and strategy has suggested that acquiring market share can be very expensive, such that it fully absorbs any value arising from reduced production costs (Barney 2002).

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Vicarious learning Vicarious learning refers to learning of experience of other organizations through copy and imitation (Huber 1991, Miner and Haunschild 1995). Vicarious learning emphasizes interactions between organizations in an organizational network or population (Levitt and March 1988). There are at least two reasons why organizations may want to borrow second-hand experience from others. First, according to institutional theory, organizations imitate others in conformity with social norms to minimize sanctions from stakeholders, and such behaviour is particularly pervasive in conditions of significant technology uncertainty or goal ambiguity (DiMaggio and Powell 1983, Meyer and Rowan 1977, Zucker 1987). Second, learning theorists have argued that learning from own experience may constrain the organization by leading it into competency traps (Levinthal and March 1993, Levitt and March 1988). A virtue of vicarious learning, therefore, is that it provides organizations opportunities to go beyond local search to gain new knowledge and routines residing in other individual organizations or organizational networks or populations (March 1991). This is because different organizations in the population have different specializations, and even though individual organizations may focus on exploiting old routines, the organizational network or population as a whole may still engage in exploration of new knowledge and routines (Miner and Haunschild 1995). As implied above, vicarious learning works at both organization and population levels. At the organization level, individual organizations imitate the strategies, technologies, and administrative practices of others, especially those successful or prestigious ones (Haveman 1993). At the population level, vicarious learning takes the form of diffusion through broadcasting and contact (Levitt and March 1988, Miner and Haunschild 1995). Broadcasting transmission is the process in which a single source (for example, some regulatory agency or professional association) is responsible for diffusing new rules, practices, or knowledge across an organizational network or population (Scott 1985). In contrast, contact diffusion refers to the process in which knowledge and routines are transmitted through personal and organizational relationships (for example, board interlocks, personal ties, or professional consultants) (Miner and Haunschild 1995). Vicarious learning has been suggested to have positive influence on organizational performance. Ingram and Baum (1997) find that hoteliers benefit from their learning from the operating and competitive experiences of US hotel chains,


resulting in a lower rate of business failure. Similar observations are garnered in their study of the Manhattan hotel industry, where learning from the industry’s experience enhances the likelihood of hoteliers’ survival (Baum and Ingram 1998). Vicarious learning has also been shown to affect firms’ decision making and the quality of decisions made (Baum et al. 2000, Beckman and Haunschild 2002, Haunschild and Miner 1997). Can vicarious learning lead to sustained competitive advantage? While vicarious learning may increase organizational efficiency and enhance organizational survival as shown in some empirical studies, we believe that, at best, vicarious learning may lead to competitive parity, and that at worst, it may result in competitive disadvantage. This is because experience and more generally resources of others, if subject to copy and imitation, would not be rare and thus not be sources of competitive advantage (Barney 1991). In cases where the firm cannot fully understand the causal relationships between actions and outcomes and learn incorrect experience or learn correct experience incorrectly, vicarious learning may even result in competitive disadvantage. Of course, if the firm has superior absorptive capacity, itself rare and inimitable, then learning knowledge and experience of others can be a source of competitive advantage. This is because a firm with superior absorptive capacity can recognize the value of external knowledge and assimilate it faster, and better apply it and integrate it with own existing knowledge, compared to competitors (Cohen and Levinthal 1990). We will discuss this further in the context of learning through grafting below.

Grafting Huber (1991) introduces the concept of ‘grafting’ to describe learning processes where organizations increase their store of knowledge by acquiring and grafting on new members who possess knowledge not previously available within the organization. Grafting has received particular attention of strategy researchers, especially in the context of alliances and acquisitions. Grafting has the advantages of being faster and more complete in knowledge acquisition, compared to experiential learning and vicarious learning, respectively (Huber 1991). Note, however, that sometimes the distinction between grafting and contact learning can be subtle, and indeed learning theorists have not reached a consensus on this. Take the movement of personnel as an example. While Levitt and March (1988) identify it as a mechanism of contact learning, Huber (1991) suggests that hiring individuals with new knowledge is a form of learning by grafting. Other times, the distinction

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is more clear-cut. For instance, interfirm knowledge transfer in alliances, or acquiring capabilities from target firms through acquisitions, are more commonly considered grafting rather than contact learning. For the purpose of this chapter, we consider hiring a form of grafting because, as with knowledge transfer in alliances and acquisitions, it requires the firm to undertake specific, deliberate, and action-oriented activities that facilitate learning. Below we discuss all these three forms of grafting. Hiring is probably the most direct mechanism of grafting, where the firm employs individuals with special knowledge or skills currently not available to it. Strategy researchers have found that firms can take advantage of the mobility of patent inventors to overcome constraints of local search and to reach for knowledge in new geographic and technological domains (Almeida and Kogut 1999, Rosenkopf and Almeida 2002). Researchers have also demonstrated that ‘learning-by-hiring’ strategy applies to both domestic and international mobility of patent inventors (Song et al. 2002). Alliances as a platform for learning have attracted researchers’ attention since the 1980s (Kogut 1988, Lyles 1988, Pucik 1988, Reich and Mankin 1986). For example, researchers have argued that alliances provide firms with a window to access knowledge of other organizations otherwise unavailable (Hamel 1991, Hamel et al. 1989). Alliances are useful instruments for firms to learn embedded knowledge, because their operating and decision-making structure requires constant interactions between personnel from both partners, offering substantial opportunities for knowledge transfer (Inkpen and Crossan 1995). Through analyses of patent citation patterns, researchers have provided quantitative evidence that the use of alliances does contribute to interfirm knowledge transfer (Lane and Lubatkin 1998, Mowery et al. 1996, Rosenkopf and Almeida 2002). Where grafting-on of small numbers of knowledge workers cannot satisfy knowledge requirements, or is not feasible because the underlying knowledge is non-decomposable, firms can acquire the whole organization that possesses the knowledge desired. Indeed, firms often engage in acquisitions to gain new knowledge and capabilities (Capron and Mitchell 1998), and post-acquisition capability transfer is common (Capron et al. 1998). Strategy researchers, however, have long noted the complexities and difficulties involved in the transfer and integration of knowledge and routines during the post-acquisition phase (Cannella and Hambrick 1993, Haspeslagh and Jemison 1991, Walsh and Ellwood 1991).


Can grafting lead to sustained competitive advantage? Regarding hiring, we believe that there are at least two limits to the benefits of learning by hiring. First, hiring means the underlying technological/managerial resources are mobile; mobility by itself makes these resources unlikely to generate sustainable competitive advantage. Thus, a Nobel Laureate may be a unique resource, but unless her knowledge is firm-specific and embedded in the team of researchers of which she is a part, an employment contract with her would not lock in sustained competitive advantage for the firm, simply because of her perfect mobility (Peteraf 1993). Second, not all resources are decomposable and movable. For example, a firm’s technological capabilities are usually embedded in the team of researchers rather than individual researchers in the form of tacit knowledge and cooperative routines. Thus, firms may not be able to gain the same technological capabilities as their competitors unless they can hire the whole team of researchers and, in the meantime, integrate new knowledge and routines with existing knowledge and routines. Whether accessing knowledge through alliances can create sustained competitive advantage depends on whether the firm can internalize knowledge of partners and integrate this knowledge with its existing knowledge and capabilities, and whether new knowledge created is institutionalized within the firm. In other words, mere access to knowledge is no guarantee for competitive advantage. Hamel (1991) draws a clear distinction between accessing knowledge of partners and internalizing knowledge of partners. The former refers to trading access to each other’s complementary skills, while in the latter, the firm makes concerted efforts to acquire a partner’s knowledge that can later be applied to alternative uses for its own strategies and operations. Internalizing knowledge of partners would require intentional, concrete actions on the part of the firm. More specifically, it requires persistent efforts aimed at integrating knowledge of partners with the firm’s existing knowledge and routines (Inkpen and Crossan 1995). Without knowledge integration, at best, the firm may obtain the same capabilities as its partners and gain competitive parity or temporary competitive advantage (Barney 1991); at worst, it may only gain partial insights into its partners’ knowledge base, which would not even lead to competitive parity. The integrated knowledge would further need to be institutionalized at the firm level in the form of its new routines, systems, and cultures, which are available for addressing future organization needs (March 1991). Without knowledge institutionalization, acquired knowledge and newly formed routines are not stored and cannot be retrieved form organizational memory.

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As with the above two mechanisms of grafting, learning through acquisitions to a large extent depends on the success of integration of knowledge and routines during the post-acquisition phase. Grafting through acquisitions in many respects bears similarity to grafting through hiring, as both approaches provide firms opportunities to obtain resources and capabilities through direct purchase. Most acquisitions involve the transfer to the acquiring firm of knowledge workers of the target – researchers and managers. While this wholesale type of knowledge transfer may retain knowledge integrity, research has shown that integration of newly acquired knowledge within the acquiring firm’s existing knowledge base is necessary for superior acquisition performance. Indeed, knowledge integration in acquisitions proves to be more complex and difficult than that in hiring (Haspeslagh and Jemison 1991, Jemison and Sitkin 1986). This is because, in acquisitions, integration involves direct confrontation of two sets of routines developed independently with distinctive underlying values and cultures. Thus, managed inappropriately, integration may result in disruption of pre-existing knowledge and routines in both the target and the acquiring firm, leading to decreased morale and potential hazards for the performance of the combined entity. In summary, despite significant complexities and difficulties of integration, knowledge and routines obtained from the target, if not successfully integrated within the acquiring firm’s existing knowledge base, would not be a source of sustained competitive advantage. While a large body of research has shown that firms can and do learn by hiring, by forming alliances, and by conducting acquisitions, researchers have only recently begun to investigate empirically the conditions under which grafting can be a source of competitive advantage, or superior performance. For example, Park and Martin (2002) examine the conditions under which accessing alliance partners’ resources can increase the firm’s value. Their empirical evidence suggests that the firm’s value increases most significantly when the resources available through its alliance partners are simultaneously high in revenue enhancing or cost reducing potential, rare, and inimitable. This provides direct support for the VRIS framework as a general tool for analyzing the potential of resources to generate sustained competitive advantage (Barney 1991). In acquisitions, Shanley (1994) offers initial evidence that the level of post-acquisition integration is associated with superior acquisition performance. Consistent with the argument for the importance of post-acquisition integration of knowledge and routines, Zollo and Singh (2002) find that higher levels of integration of the target


within the acquiring firm lead to better acquisition performance, and that replacing the top management team, a proxy for managerial knowhow of the target, actually harms acquisition performance.

Conclusion The resource-based literature has indicated two general approaches available to the firm to developing resources for strategy implementation: that of building resources within the firm and that of acquiring resources from outside the firm. However, existing research has not systematically examined the two approaches with respect to their implications for the analysis of the potential of economic rents and the sustainability of competitive advantage, questions that have long been at the heart of the strategic management field (Rumelt et al. 1991). Our discussion and analysis of major pieces in the resource-based tradition suggest the following general conclusions. For purposes of the analysis of the potential of economic rents, building resources is logically equivalent to acquiring resources, because to be a source of economic rents, resources would need to be obtained at an ex ante cost lower than their value ex post – either through superior insights, pure luck or both – as predicted by the strategic factor markets model, regardless of whether they are built over time or acquired all at once. For purposes of the analysis of the sustainability of competitive advantage, it may not be necessary to distinguish between building resources and acquiring resources, because to be a source of sustained competitive advantage, resources obtained either way need to be valuable, rare, inimitable, and non-substitutable. To illustrate the latter point, the VRIS framework is applied to the analysis of the conditions under which organizational learning can and cannot be a source of sustained competitive advantage. We review three important learning processes (experiential learning, vicarious learning, and grafting) within the learning literature, and various applications of these concepts in strategy research. Our analysis demonstrates that, for internal learning (experiential learning) to be a source of competitive advantage, firms would need to have superior knowledge processing capabilities such as knowledge articulation, codification, dissemination, and integration; for external learning (vicarious learning and grafting) to be a source of competitive advantage, external knowledge would need to be internalized, integrated with the organization’s existing knowledge, and institutionalized in the form of routines stored in organizational memory. These conditions are consistent with the VRIS

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framework: in the parlance of the resource-based view, learning that provides a basis for sustained competitive advantage needs to be valuable, rare, inimitable, and non-substitutable.

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5 Better Constructs for Analysis and Management of Firm Competence Paul J. Knott

Abstract This chapter focuses on the application of resource and competencebased perspectives to managerial decisions in the firm. It identifies reasons why progress in developing applications has been limited and the popularity of the perspective has waned amongst practitioners. Findings from detailed case studies, combined with conceptual work, reveal several inherent difficulties with existing constructs. Competence is seen to have some qualities that are persistent over time, but others that are sensitive to the context and hence potentially short-lived. Furthermore, attributes that may be described as competence are equally susceptible to acting as inhibitors of performance. To address the confusion and vagueness produced by these multiple properties, the chapter describes a new conceptual scheme that breaks down the concept of firm-level competence into simpler, tighter constructs and shows how these can combine to produce different observed outcomes. It also suggests initial applications of this set of constructs as well as pointing to the potential for further development.

Introduction Theoretical development of resource-based perspectives (Barney 1991, 2001) has been accompanied by work on their application to management tasks such as analysis of a firm’s resources and capabilities, and the configuration and exploitation of those capabilities. This chapter aims to contribute to this work by delineating some key issues inhibiting progress and addressing these issues through a clearer and more usable conceptual scheme. 82

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This area has been the subject of confusion over terminology, often associated with problems of definition. To minimize the chances of further confusion, interpretations made here are closely drawn from established sets of definitions. The phenomena with which this chapter is concerned fall within the definition given by Teece et al. (1997) for ‘organizational routines/competences’. These they describe as integrated clusters of firm-specific assets that enable distinctive activities to be performed. This chapter considers such competences to be typically built through experience and embedded in the organizational context, which gives them the potential to form the basis of sustained competitive advantage since it will make them difficult to replicate. This potential as a source of advantage is the reason why firms have sought to identify, nurture and leverage competence. Bogner et al. (1999) suggest a more precise definition in which the term ‘competence’ is reserved for situations where the competence leads to a persistent competitive advantage. This chapter studies phenomena that may or may not satisfy this definition, but proposes a conceptual scheme in which this more precise definition for competence is followed. There is no specific attempt here to address Teece et al.’s ‘dynamic capabilities’ (the ability to build new competence rapidly), notwithstanding their importance in rapidly changing environments in which the value of routine-based competence is likely to erode quickly. Even in this situation, however, the chapter’s findings are relevant since a mature understanding of the basis of a firm’s current competence may have an important role to play in an effective competence-transforming process. Given that competence as described here falls within commonly used specifications for ‘resource’ under the resource-based view (RBV), the findings are relevant to current debates as to the validity and value of this perspective. The findings begin to address the concern expressed by Priem and Butler (2001) that the processes linking specific resources to competitive advantage remain in a black box. They are also designed to address the imbalance in knowledge between the resource and market aspects of strategic analysis, by providing structure to the ‘amorphous heap’ referred to by Wernerfelt (1995).

Application of competence perspectives During the early 1990s, there was considerable interest in the application of concepts such as the resource-based view and core competence, stimulated in part by the widely cited Prahalad and Hamel (1990) paper.

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The essence of this interest was that if establishing and exploiting core competences was a primary driver of long-term performance, then priority should be given to its identification and subsequent management. Papers offering approaches to these tasks included Coates (1995), EIRMA (1995), Gallon et al., Kesler et al. (1993) and Klein and Hiscocks (1994). However, from this flurry of activity concerns began to emerge. Much of the attention was focused on technology, often on specialist knowledge groups rather than capabilities based on complex combinations of attributes (Chester 1994). This reflected the difficulty of usefully applying the competence concept to broad-based, intangible assets. Competence analysis was often found to be politicised within the firm and, furthermore, efforts to overcome this using data sets of constituent skills were found to have limited value (Knott et al. 1996, Klein et al. 1998). The most detailed published application of the concept was that at Kodak (Przybylowicz and Faulkner 1993). Not only did this share some of the limitations described above, but also, with the benefit of considerable hindsight, the exercise does not appear to have been strategically beneficial. It seemed to legitimize the status quo in terms of portfolios of technology and business units, and could be seen as inward looking and backward looking. In trying to impose a core competence interpretation on the existing portfolio, it may even have drawn attention away from important competitive and customer issues. Concerns of the kind described led, by the late 1990s, to a waning of interest in applying the competence concept. Whilst this could be argued to be because of improper application of the original concepts, theoretical reasons can also be found that explain the difficulties that were encountered. Debate within the resource-based view has highlighted that the managerial usefulness of the concept depends on being able to identify key resources and manipulate them for future performance. Retrospective accounts of the contribution of particular resources to firm performance have limited value in strategic decision making. Black and Boal (1994), Godfrey and Hill (1995) and Priem and Butler (2001) all saw the inherent difficulty of working with the kinds of resources that have strategic value through causal ambiguity or inimitability – of which competence would be a prime example. The challenges of identifying and managing competence have been further exacerbated by the problems of defining what is really meant by competence once the concept is applied to a specific case. Common definitions, including those adopted in the introduction to this chapter, are prone to becoming confusing. Scarbrough (1998) pointed out that

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the ability to generate a given type of resource seems to have greater strategic value than the resource itself. Thus, an attempt to identify the basis of a firm’s competence can easily lead to discussion of something closer to the ‘dynamic capabilities’ described by Teece et al. (1997). Such inadvertent broadening of definitions trivialises the exercise. Further blurring of the analysis activity in practice arises from the definition of competence both in terms of desired performance outcomes and in terms of constituent attributes within the firm. (See the definitions of Bogner et al. (1999) and Teece et al. (1997) respectively in the Introduction to this chapter.) This dual definition requires that a rigorous analysis of a firm’s competence must not only take account of external factors (for example, competition, demand) as well as internal factors, but also determine the causal link between the two. In practical situations where resources for analysis are limited, this seems too exacting a process to be undertaken in full. Based on this set of issues, it is suggested that competence itself, no matter how carefully defined, is too multi-dimensional and too amorphous to form the basis of rigorous and insightful analysis in support of managerial decision making. This limitation is addressed in the following sections.

Empirical basis The findings of this chapter are derived from idiographic case studies focused on applying competence-based perspectives and terminology to specific situations, and using these situations to challenge theoretical assumptions. This approach has been advocated by a number of authors in this area, including Bogner and Thomas (1994) and Godfrey and Hill (1995). A pilot study applied the hierarchical model of competence, core products and end products described by Prahalad and Hamel (1990), but it was found that this channelled thinking towards identifying discrete attributes in isolation from their context, and hence failed to generate an insightful representation and did not uncover embedded characteristics across the organization. Three more detailed studies were therefore based on a framework close to that suggested by LeonardBarton (1992) highlighting the potential for individuals, the social setting and tangible systems to contribute to a firm’s competence. The research approach was based on gaining theoretical insight, as advocated by Dyer and Wilkins (1991). The cases were contrasting in nature, with the explicit aims of generating a rich set of data going beyond the values and assumptions of a single organization and presenting a wide range of

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challenges to ideas and concepts emerging through the analysis. Units of analysis in all cases represented organizational sub-units whose resources, performance and direction could be managed with a reasonable degree of independence. Given the widespread, but varied, understanding of terms such as competence or capability, the cases were also each given a specific focus to anchor discussions, as summarized in Table 5.1. In each case interviews were carried out with people from a crosssection of functions and levels until a good level of understanding had been established. The interviews explored beyond the defined focus to the organizational context, using a schedule that specifically probed for uniqueness and for ‘generic’ factors behind the companies’ ability to deliver commercial value (see Table 5.2). To avoid limiting the responses, the structure of the interviews was deliberately loose, but a firm view was kept of the primary objective of bringing out examples informing understanding of the properties and processes contributing to competence. As issues emerged they were fed into later interviews. This progressively built understanding and enabled further probing of responses to stimulate respondents to describe issues at greater depth, going beyond the ‘received wisdom’ to more intangible issues or perspectives. To improve internal validity, interim findings were presented and feedback obtained from a cross-section of the respondents. In addition, use was made of direct observation, documentation and consultation with external parties. A brief synopsis of the outcome of the three cases is given below. In the chemicals case, interviews were carried out with individuals from research, product development, manufacturing, marketing and Table 5.1 Summary of case studies Case

Unit of analysis

Focus

Chemicals

All areas concerned Development and commercialization directly with the product of a successful new generation of range under study products in the specialty chemicals industry

Consulting

Selected parts of the whole organization

Factors influencing project performance in the firm’s diverse activity in technology and business consulting

R&D Centre

The R&D establishment of the company

Development and commercialization of a new instrumentation product for the company’s core business as a utility

Knott 87 Table 5.2 Themes used in interview schedule Introduction

Person, role, background

The company

Developments and pressures; effect of recent changes; strongest features; basis of continued success/distinctive market offer; weakest areas; tensions between areas or objectives; key external linkages

Workgroup or area

How many people; where physically situated; scope of activities; structure; distinctive features; problems faced

The project

How it arose; what happened next; factors in its outcome; whether these factors are changing; whether the outcome could be repeated; anything that inhibited performance; how it could have been better; barriers or problems encountered and how solved

Specific factors

External networks/influences; internal networks; management systems; human resources; culture; equipment and technology

commercial areas who had been actively involved with the products under study. Factors behind the products’ success were identified by their impact on customer profitability, product image, the technology required for cost-effective manufacture, and the focus of disparate functional areas on a common objective. Indirect causes included strong individuals fighting for customer-oriented values, pressure from price competition on current products, and a strong, creative science base. Underpinning these factors were organizational characteristics with implications beyond this product range. The appointment of technically and commercially experienced individuals from the customer industry had precipitated a shift from the traditional focus on manufacture and delivery of a commodity product to a greater focus on drivers of customer value. At the same time, a project management system had evolved integrating research, development, production and marketing into a strong results-oriented system, although it remained limited by functional mindsets that reduced the ability to make trade-offs. Conflict was also perceived with the research flexibility to explore the type of creative opportunities that had given rise to many of the company’s prior innovations. In the R&D centre case, a prominent feature was the degree to which the internal and external environments had changed during the development process. This affected both the market requirements for the device and the internal structures of the research facilities. Key factors behind the product outcome were twofold. The stability and commercial power of the company, and the experience of its managers, allowed

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it to dedicate resources to a forward-looking project. The established skill-sets of the laboratory, its close-knit ‘community’ and the clearly understood objective led to a highly motivated, high-performing team. Changes during the life of the project had profoundly altered these factors. In response to changing corporate circumstances the research facilities had been merged into a much larger facility in which functionally dedicated laboratories and offices were replaced by highly flexible facilities. A corresponding change in management structure was also introduced involving a matrix with devolved accountability. Respondents felt that these changes had compromised the ability to carry out a similar project due to the loss of team identity, loss of priority in the allocation of people and facilities, and the intrusion of financial accountability and ‘bureaucratic obstacles’ on technical roles. The consulting case provided a contrast to the other cases, having little formal structure or hierarchy and intensive employee participation. Respondents were asked about specific projects with which they had been involved, which led to discussion of more generic issues. A central feature of the case was the strong degree of individuality and independence, reflected in contrasting views between individuals despite its unitary structure. Another key theme was innovation, which was not only highlighted by respondents but was also prominent in external and internal publicity, and reflected the company’s origins. This innovativeness was perceived as being driven by individual creativity and cooperative action. One of the effects of these two key characteristics was that projects were typically unique in terms of technique or area of application, rather than building on prior effort and ideas. Other widespread characteristics were an emphasis on science and technology as the basis for innovation, and the capacity to carry out interdisciplinary work combining disparate areas of technology with expertise in its management and application. Analysis, which was as much an intellectual exercise as a ‘mechanical’ one, involved development of case descriptions followed by consideration of their meaning in relation to the theoretical framework under consideration. The diversity of the cases assisted both in the creative process of making theoretical interpretations of the data and in challenging these emergent interpretations. The following section outlines some key questions that emerged during the analysis process.

Observed character of competence A key outcome from the case studies was the observation that some aspects of ‘competence’ in the firms studied seemed to be persistent

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over time and difficult to change, as the literature suggests, but other aspects had altered considerably even during the period studied. The definitions adopted in this chapter stipulate that competence must be a persistent quality within the organization, otherwise it will not have the potential to generate sustained advantage. Previous empirical work has also supported the idea of competence as a quality persisting over time. Boisot et al. (1996) found a repeating cycle of events at Courtaulds leading to the launch of each successful generation of products. Winterscheid (1994) observed that the ways of carrying out product development programmes persisted through product generations by means of new venture information being interpreted in the language of the previous generation, or rejected. In some respects, the cases were consistent with this idea. The chemicals and R&D centre cases in particular highlighted the importance of accumulated experience, in tacit technical know-how and metering specification and technology respectively. This and other aspects of the history of the companies concerned were a necessary part of the explanation of how commercial value had been generated in the instances studied. It was also found that distinctive characteristics had persisted through the significant contextual change that had occurred in each of the companies during the time periods in question. In each case, these features had persisted through significant structural and cultural shifts: Chemicals Consulting R&D Centre

Research-based values; strong functional traditions; established brand reputation Individualism; critical culture; unconventional Retained individuals; retained knowledge of project and method

In other respects the cases challenged the idea of competence as an enduring, robust quality of the firm. Notwithstanding certain persistent features, explanation of the observed outcomes in terms of value generation required reference to one-off factors linked to the context of the specific time period. For example, in the R&D centre case, stability and commercial power, the presence of specific managers and a closeknit community of scientists and engineers were all fundamental to the outcome in question. In the chemicals case, the outcome had drawn on a potentially uneasy balance between the results-oriented system that delivered a valuable innovation to the market and the science culture that had generated the technical basis for this innovation. In both cases, these important supporting factors are easily susceptible to change, and do not show any of the robust character described earlier in this section.

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Changes that occurred during the periods studied bore out this expectation. Both external changes, such as industry structure, and deliberate internal changes had a profound effect on the ability of internal characteristics to support market-valued output. In the chemicals case, changes over the previous five years had led to a greatly enhanced ability to deliver new, ‘premium’ products to the market. In the R&D centre, changes in structure, location and environment were seen to have had a fundamental effect on the ability to execute programmes similar to the one studied. In both cases, competence, in the sense of ability to generate valued output, had been significantly altered by contextual change and had little apparent robustness in the face of this change. The studies led to the conclusion that although many of the features behind competence are persistent and enduring, other factors that may change over a shorter time can have a profound influence on the ability of these established features to manifest themselves in terms of economic value. This implies that competence is a composite construct consisting of elements or factors that behave differently according to circumstances, a finding that perhaps explains some of the difficulties experienced in its application. The following section develops a resolution of this problem in terms of more basic constructs which, it is hoped, will avoid the ambiguities and contradictions that inhibit work on the competence construct itself.

Delineation of the competence construct The framework introduced here, and shown in Figure 5.1, presents a theoretical resolution of the composite behaviour of the competence construct. The framework draws on the epistemology embodied in the ‘domain model’ described by Sayer (1984), which proposes that observed events are driven by unobserved ‘mechanisms’, and that these mechanisms operate on the generic objects and causal powers referred to as ‘structures’. It has been previously noted (Godfrey and Hill 1995) that competence itself is not entirely observable, but the result when it is realized is observable. The domain model provides an approach to representing the entities and workings that give rise to a firm’s competence, to the extent that they are amenable to description. At the ‘observable events’ level in Figure 5.1 is ‘competence’, in the sense given in the Bogner et al. (1999) definition that it is leading to competitive advantage and enabling the firm to generate above-average returns. These returns are both observable and measurable, hence the applicability of ‘competence’ to the observable domain. The term ‘realized

Knott 91 Observable events

Enabling mechanisms

Structures

Competence

Internal context

External context

Internal context

Embedded attribute 1

External context

Embedded attribute 2

The internal and external contexts act upon the combination of embedded attributes in the firm to give rise to its competence. Figure 5.1 Basic conceptual scheme for competence

competence’ could be used here to add clarity, though its use is redundant if the above definition is adhered to. At the next level in Figure 5.1 are the enabling mechanisms, or contextual factors, that enable certain characteristics of the firm to form the basis of competence. For competence to be realized, there must be an effective match with both internal and external contexts. Since competence typically depends on multiple resources within the firm, the context match must be such that it has the characteristics needed of the enabling contexts for all of the resources on which the competence depends. For this reason, context matching is far from trivial – particularly since the context is not observable to the extent that the characteristics enabling the firm’s competence to be realized can be fully understood. Partial understanding of the role and operation of the context in enabling a firm’s competence has significant value, since the context can be directly shaped by managerial decisions. For example, market positioning may be used to shape the external context, and structures and processes may be altered to shape the internal context. Such decisions may actually alter the nature of the resulting competence, since this may be different according to the nature of the contextual factors; this was observed in some of the cases, as described earlier. At the third and most basic level in Figure 5.1 is the concept of the firm’s embedded attributes. This refers to properties that are fundamental to the firm and that are able to persist over time and through significant change. Importantly, the term ‘embedded attribute’ is value-neutral,

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implying no positive or negative judgement. Thus, an embedded attribute in a firm may be described independently of judgements about its applicability given current market conditions or its usability in the current context within the firm. Embedded attributes embody the ‘unknowable’ aspect of a firm’s resources described under the resourcebased view, and for this reason they may defy full description. They are likely to be path dependent and will typically depend on social systems. They may not necessarily result in any currently realized competence and, as a result, their value (if any) may not be readily recognizable. In summary, using the conceptual scheme outlined in Figure 5.1, the multiple character of the competence construct is addressed by expanding the construct to make explicit the more specific constructs of which it is composed. This conceptual scheme can be further developed to explain another aspect of the multiple character of competence, namely its ability to act as rigidity. This application of the scheme is explained in the next section.

Explanation of the rigidity problem Leonard-Barton (1992) described the paradox that core capabilities may both enable and hinder innovation, and may therefore also become ‘core rigidities’. This idea has frequently been referred to, but often as an afterthought, and has not been linked in theoretical terms with its alter-ego competence. Consideration of this problem highlights that the terms competence and rigidity both imply value judgement rather than being neutral descriptors. The same is also true of the term ‘resource’ as used in the resource-based theory, through its specification of external value and rarity. This need for external value judgement in concert with insightful description of complex internal attributes creates difficulties in the analysis process, and may have been one of the inhibitors of successful application of the competence perspective. An approach that resolves this problem is illustrated in Figure 5.2. The same set of embedded attributes within the firm are shown as giving rise either to competence or to a rigidity problem, depending on the internal and external context. Thus, it is clear that both are derived from the same set of basic properties within the firm, but manifest themselves in different ways according to the internal context and will have positive or negative value according to the external context. The practical meaning of this conceptual scheme can be illustrated by applying it to the chemicals case, as summarized in Figure 5.3. In this case, two important attributes embedded in the firm over many years

Knott 93 Observable events

Enabling mechanisms

Structures

Rigidity problem

Competence

IC1

IC2

EC1

EC2

Embedded attribute 1 IC: Internal Context

IC1

IC2

EC1

EC2

Embedded attribute 2 EC: External Context

‘Context 1’ acts on the firm’s embedded attributes to give rise to competence. ‘Context 2’ acts on the same attributes giving rise to a rigidity problem. Figure 5.2 Conceptual scheme showing common origins for competence and rigidity

Outcome

Internal/ External Context

Embedded Attributes

Competence: Ability to generate high-value product range

Rigidity problem: Inability to compete on cost

Managed product pipeline New market awareness

Product-driven culture Commodity-like market

Research-based values

Strong functional traditions

Figure 5.3 Conceptual scheme applied to the chemicals case

are the strength of many of its technical functions and a research orientation. At the time this company was studied, it appeared to have competence (delivering economic value and competitive advantage) through generating a high-value product range. This had come about in the context of new market awareness and a systematically managed product pipeline. This context had been deliberately created; in its

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absence, the key contextual factors may well have been a commoditylike market for the products generated by a predominantly productdriven culture. In these internal and external contexts, the functional traditions and research values would likely have been the basis of a rigidity problem, namely the inability to compete on cost. This application shows how the reasoning introduced in Figures 5.1 and 5.2 not only provides theoretical explanations and clarifies concepts, but also has potential in competence analysis. This potential is developed in the following section.

Application of the conceptual scheme Earlier in this chapter, the limitations were outlined of approaches to analysis based on competence as a construct. Here, the potential of the conceptual schemes described is developed to address these limitations and hence provide better support for managerial decision making. One useful contribution of these frameworks is in clarifying the purpose and focus of analysis. The analysis literature described earlier was often centred on the assumption that the primary requirements in managing competence are to identify it and then exploit or leverage it effectively across external opportunities. The frameworks introduced here incorporate this thinking, but additionally emphasize the importance of managing the organizational context so that competence can be realized. Importantly, they explicitly require that the firm’s attributes be considered in the context of external factors – examples of which could be future demand, competitor capabilities and evolving technology. In doing so, they discourage inward-looking analysis, as competence analysis has sometimes become. At the same time, their separation of the constituent elements of competence reduces the potential for confusion caused by reducing internal and external factors, embedded and malleable factors into a single construct. The role of the context in determining the outcome of a firm’s embedded attributes can usefully be explored further. A simplified scheme exploring the relationship between context and outcome is shown in Figure 5.4. As discussed earlier, an attribute that is well matched with both internal and external contexts generates realized competence. If it is a good match with the internal context only, then it constitutes a rigidity – it functions successfully within the firm, but is not matched with external needs and so generates negative value or no value. If there is a good match with external factors, but the internal context inhibits realization, this can be thought of as a lost opportunity. Finally, if

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GOOD

Lost opportunity

Realized competence

POOR

Vestige or anomaly

Rigidity problem

POOR

GOOD

External context match

Internal context match Figure 5.4 Analysis of embedded attributes

neither context matches in a useful way the attribute is a vestige or anomaly. For attributes placed in a given quadrant there are implied managerial actions: attributes can be shifted – deliberately or otherwise – from one quadrant to another. For example, diagnosis of a ‘lost opportunity’ would suggest intervention that created the internal conditions for these attributes to give rise to realized competence. Diagnosis of a rigidity problem invites consideration of how a different external application might enable the same attributes to be realized as competence. Conversely, environmental change may cause a set of attributes to generate a rigidity problem, when they had previously generated valued competence. Although this approach shares the limitations of other normative matrices, it is suggested that it has value in guiding strategic thought towards a more considered analysis than simply ‘identifying competence’.

Conclusion The chapter has contributed to the development and application of competence-based perspectives on the firm by showing the competence construct to be composite in nature, and teasing out its constituent elements. It has argued that the multi-dimensional character of competence is a key reason for the limited progress, and subsequent loss of interest, in the application of the competence perspective. By advocating the separate consideration of embedded attributes, internal and external context, and realized competence, the chapter

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goes some way towards addressing the ‘black box’ view of firm resources identified by some theorists. It also addresses definitional ambiguities encountered in the practice of competence analysis, including the tendency to define competence both as a set of internal characteristics and as a desired performance outcome. In doing so, it could help to revive an area that has become unfashionable amongst practitioners, although closely related work on the resource-based view continues to generate scholarly interest. Difficulties still remain. A potentially critical problem is that embedded attributes and their identification or description seem destined to remain elusive, limiting the usefulness of the approaches advocated here. However, by separating out the least observable parts of the picture, and separating out value judgement from neutral description, the approaches advocated are likely to perform better than those based purely on the composite construct of competence. Based on the findings, guidelines have been suggested for decision making about a firm’s embedded attributes. A key feature of this guidance is that the same attributes can lead to positive or negative outcomes depending on the context – this context being to a significant degree under managerial control. However, in common with most normative guidelines the value of this is in its application, an aspect that was not researched for this chapter.

References Barney, J.B. (2001) ‘Is the resource-based “view” a useful perspective for strategic management research? Yes’, Academy of Management Review, vol. 26, no. 1, pp. 41–56. Barney, J.B (1991) ‘Firm resources and sustained competitive advantage’, Journal of Management, vol. 17, no. 1, pp. 99–120. Black, J.A., Boal, K.B. (1994) ‘Strategic resources: traits, configurations and paths to sustainable competitive advantage’, Strategic Management Journal, vol. 15, special issue, summer, pp. 131–48. Bogner, W.C., Thomas, H. (1994) ‘Core competence and competitive advantage: a model and illustrative evidence from the pharmaceutical industry’, in Hamel and Heene (eds), Competence-based Competition. Chichester: Wiley. Bogner, W.C., Thomas, H., McGee, J. (1999) ‘Competence and competitive advantage: towards a dynamic model’, British Journal of Management, vol. 10, pp. 275–90. Boisot, M., Lemmon, T., Griffiths, D., Mole, V. (1996) ‘Spinning a good yarn: the identification of core competencies at Courtaulds’, International Journal of Technology Management, vol. 11, issue 3/4, pp. 425–40. Chester, A.N. (1994) ‘Aligning technology with business strategy’, ResearchTechnology Management, vol. 37, no. 1, Jan–Feb, pp. 25–32.

Knott 97 Dyer, W.G., Wilkins, A.L. (1991) ‘Better stories, not better constructs, to generate theory: a rejoinder to Eisenhardt’, Academy of Management Review, vol. 16, no. 3, pp. 613–19. EIRMA (European Industrial Research Management Association) (1995) Management Summary, Core Competences and R&D: Report of EIRMA workshop VII. Gallon, M.R., Stillman, H.M., Coates, D. (1995) ‘Putting core competency thinking into practice’, Research Technology Management, vol. 38, issue 3, May, pp. 20–8. Godfrey, P.C., Hill, C.W.L. (1995) ‘The problem of unobservables in strategic management research’, Strategic Management Journal, vol. 16, pp. 519–33. Kesler, M., Kolstad, D., Clarke, W.E. (1993) ‘Third Generation R&D’, Columbia Journal of World Business, vol. 27, no. 111, Fall, pp. 34–44. Klein, J., Gee, D., Jones, H. (1998) ‘Analysing clusters of skills in R&D – core competencies, metaphors, visualisation, and the role of IT’, R&D Management, vol. 28, no. 1, pp. 37–42. Klein, J.A. and Hiscocks, P.G. (1994) ‘Competence-based competition: a practical toolkit’, in Hamel and Heene (eds), Competence-based Competition. Chichester: Wiley. Knott, P.J., Pearson, A.W., Taylor, R.A., (1996) ‘A New Approach to Competence Analysis’, International Journal of Technology Management, vol. 11, nos 3/4, pp. 494–503. Leonard-Barton, D. (1992) ‘Core capabilities and core rigidities: a paradox in managing new product development’, Strategic Management Journal, vol. 13, pp. 111–25. Prahalad, C. K. and Hamel, G. (1990) ‘The core competence of the corporation’, Harvard Business Review, May–June, pp. 79–91. Priem, R.L., Butler, J.E. (2001) ‘Is the resource-based “view” a useful perspective for strategic management research?’, Academy of Management Review, vol. 26, no. 1, pp. 22–40. Przybylowicz, E.P and T.W. Faulkner (1993) ‘Kodak applies strategic intent to the management of technology’, Research-Technology Management, vol. 36, no. 1, Jan–Feb, pp. 31–8. Sayer, A. (1984) Method in Social Science: A Realist Approach. London: Hutchinson. Scarbrough, H. (1998) ‘Path(ological) dependency?: “Core competencies” from an organisational perspective’, British Journal of Management, vol. 9, Issue 3, pp. 219–32. Teece, D.J., Pisano, G., Shuen, A. (1997) ‘Dynamic capabilities and strategic management’, Strategic Management Journal, vol. 18, no. 7, pp. 509–33. Wernerfelt, B. (1995) ‘The resource-based view of the firm: ten years after’, Strategic Management Journal, vol. 16, pp. 171–4. Winterscheid, B.C. (1994) ‘Building capability from within: the insiders’ view of core competence’, in Hamel and Heene (eds), Competence-based Competition. Chichester: Wiley.

6 Intangible Resources and Export Marketing Strategy as Determinants of Export Performance: An Empirical Analysis from the Resource-based View Alex Rialp-Criado, Josep Rialp-Criado, Catherine N. Axinn and Sharon Thach

Abstract In this chapter, a resource-based model has been developed for analyzing the effect of several firm resources, more concretely those of an intangible character, on the development of both export capability and more appropriate export-marketing strategies in order to improve export performance. Then, this model has been empirically tested among a representative sample of Spanish exporting manufacturers. Results seem to confirm that either human, organizational, technological or relational capital resources of these firms have a significant impact on exportcapability creation which, in turn, moderates both export-marketing strategic choices by management and export performance. Relevant conclusions and implications for future researchers in this field, as well as export policy makers and international managers, are derived from these findings. The paper from which this chapter is derived benefited from public funds received from the CICYT (Research Project No. SEC-99-0843-C02-01).

Introduction Macro-level effects of the current globalization of the economy are creating new opportunities for small and large companies eager to expand internationally. However, many firms appear not to be maximizing their potential gains from foreign trade fully due to their own characteristics. Therefore, to examine the current export behaviour of manufacturing 98

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firms seems to be crucial in order to obtain an accurate assessment of their strategically valuable resources and capabilities as a prerequisite for becoming successful exporters. Thus, for both policy makers, interested in increasing a country’s exports as well as the competitiveness of the firms, and private companies, wishing to improve their international performance, further research on export behaviour aimed at identifying key determinant factors associated with export performance is paramount. Past research on export behaviour of the firm has led, so far, to a large number of studies of a certain conceptual and empirical disparity (Coviello and McAuley 1999, Fillis 2001). Thus, the lack of a generally accepted model of the determinants of export performance remains a clear concern in the field of export literature (Strandskov 1993). Nevertheless, an increasing number of studies about export behaviour seem to identify several variables related to demographic, structural and/or organizational issues of the firms themselves, together with some managerial characteristics and strategic factors as determinants of export performance (Cavusgil and Zou 1994, Louter et al. 1991, Lu and Beamish 2001). In this context, this chapter aims to overcome the conceptual and empirical constraints of previous research by adopting a more powerful and increasingly accepted theoretical framework, the resource-based view of the firm (RBV), for analyzing and interpreting the effect of several resources and capabilities on export performance, more precisely those of an intangible nature which, due to their intrinsic properties, are being widely considered to be critical for the achievement of a sustainable competitive advantage over competitors both in the domestic as well as in international markets. In the last decade, RBV has increasingly been used as a framework of reference in a number of strategic-oriented and international business (IB) studies focusing mainly on global industries and MNEs (Collis 1991, Fladmoe-Linquist and Tallman 1994). Although the application of this theoretical perspective has been extremely insightful for making IB research much more theoretically rigorous, the basic question of ‘what determines the international success of firms?’ is still far from being answered (Peng 2001: 809). Moreover, future research directions in this context also indicate that further knowledge is required in terms of how to extract rents from several resources, especially those with apparently more appropriate traits for becoming sources of a long-lasting competitive advantage. Specifically, linking the resource-based view and marketing perspectives, Bharadwaj et al. (1993) and Srivastava et al. (2001) have also analyzed the role of market-based assets in gaining a competitive advantage.

100 Intangible Resources and Export Strategy

Thus, taking into consideration these previous efforts, our general impression is that the relevance and implications of intangible resources in the development of specific capabilities and export marketing strategies to create superior export performance clearly defines an area of great scientific interest which demands even more intensive research. Furthermore, we also believe that the way in which the resource-based perspective should be applied in analyzing these relationships depends mostly on the empirical context of the application itself. Consequently, in this chapter, we elaborate and empirically test, among Spanish manufacturing firms, a model based on the relevance of firm-specific intangible assets in the creation of ‘export capability’ and a more suitable export marketing strategy in order to achieve superior export performance. With this goal in mind, this chapter is organized as follows: the following section offers an overview of the RBV by focusing on the strategic importance of intangible resources for the development of a sustainable competitive advantage over other firms in a given context. Then, the model and several hypotheses are developed regarding the expected impact that a firm’s endowment of intangible resources, and, consequently, available export strategies (according to the managerial deployment of these resources) may have on its international performance. The third section introduces the empirical methods and operational variables that have been used in this research, while the fourth and fifth sections of this chapter show, and discuss our results. Finally, a number of conclusions and implications, both for academics and practitioners in this field, are derived from these findings.

General theoretical framework: the resource-based view With its antecedents in the seminal work developed by Penrose (1959), the RBV has become, since the early 1980s, a very popular theory of competitive advantage in the strategic management literature against other alternative explanatory frameworks (Barney 2001, Conner 1991, Grant 1998, Priem and Butler 2001, Spanos and Lioukas 2001). Basically, this theoretical framework emphasizes the importance of firm-specific resources and capabilities in the generation and maintenance of a sustainable competitive advantage that allows a firm to earn abnormal economic profits (Ricardian rents). The resource-based approach starts with the assumption that these resources are heterogeneously distributed among firms and that these differences may be long-lasting (Barney 1991). Thus, by identifying specific sources of sustained competitive advantage, the RBV provides a clearer understanding of why


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some firms can consistently outperform their rivals in the marketplace. According to Fahy (2000), the three essential elements of this perspective seem to be: (1) sustainable competitive advantage and superior performance; (2) the types and characteristics of advantage-generating resources possessed or controlled by the firm; and (3) strategic choices by management in the identification, development and deployment of key resources to maximize returns.

Resource-based view, sustainable competitive advantage and firm performance Competitive advantage, always a relative issue, is generally regarded as being either of differentiation or lower delivered cost (Porter 1985). However, the most relevant issue is whether such advantages can be sustainable (Grant 1991). A firm is said to have a sustained competitive advantage when it is able to implement a value-creating strategy not being simultaneously implemented by any current or potential competitor, and when these other firms are unable to duplicate the benefits of such strategy. This does not mean that a sustained competitive advantage will last indefinitely: it only suggests that it will not be eroded through the duplication efforts of other firms (Barney 1991). Whereas the attainment of a sustainable competitive advantage can be expected to lead to superior performance (in terms of market share, profitability, and so on), these superior returns will only persist in a consistent way if those resources and capabilities underlying the advantage are limited or inelastic in supply (Dierickx and Cool 1989, Peteraf 1993). Supply inelasticity of some internal resources implies that firms which possess them may be able to generate above-normal profits even in the long term. Logically, this turns our attention to the types and characteristics of the firm’s resource pool and, more particularly, towards ‘advantage-creating resources’.

Types and characteristics of advantage-generating resources Firm resources usually include a wide variety of assets, capabilities, organizational processes, knowledge flows, and so on. These enable a firm to conceive of and implement value-creating strategies (Wernerfelt 1984). Nevertheless, the RBV is clearly characterized by the variety of labels used to classify the set of resources of the firm. A major difficulty is found in the rather diffuse distinction between the concepts of ‘resources’ and ‘capabilities’. Some authors have usually differentiated these two key issues (Grant 1991, Fernández and Suárez 1996), whereas others have used the term ‘resource’ as a general, all-embracing one


(Fahy 2000). Thus, in order to avoid further confusion, the more integrated classification developed by this last author will be adopted here. In his opinion, firm resources, in turn, comprise three distinct sub-groups; namely tangible resources, intangible resources and organizational capabilities. Tangible resources (or physical capital) refer to the fixed and current assets of an organization which have a fixed long-run capacity (Wernerfelt 1989). They include physical location in terms of plant and equipment, other capital goods and stocks, debtors and bank deposits, other financial assets, and so on. Its value is relatively easy to measure (Hall 1992); however, they are weak at resisting duplication by competitors. That is why tangible resources have not been considered in our model of key determinants of export performance. Intangible resources are, by nature, relatively resistant to duplication efforts by competitors due to the inherent complexity and specificity of their accumulation processes, which hinder imitability and substitutability in the short/medium term (Fahy 2000). They include both people-dependent (human capital) and people-independent intangible resources (organizational capital, technological capital, and relational capital) (Fernández et al. 2000, Hall 1992, 1993, Williams 1992). Human capital is basically defined as generic and specific knowledge, inseparable from its bearer, which increases his/her productivity. Thus, all forms of individual intelligence, skills, personal contacts and relations, training, experience, insight, and motivation of individual managers and workers of a firm are included here. Organizational capital embraces norms, procedures, and guidelines, as well as internal organizational structures, corporate culture, company networks and databases, and its formal and informal planning, controlling, and coordinating systems. The firm’s stock of technological capital includes knowledge related to the internal or external access, assimilation, use and innovation of production techniques and product technology. It basically consists of several forms of intellectual property and regulatory protection, such as copyrights and trademarks, patents and trade secrets, among others. Finally, relational capital consists of those intangible resources more directly related to the marketplace. It logically includes brands and company reputation, customer loyalty, long-term customer relationships, and distribution channels. Finally, capabilities have proved even more difficult to analyze and are very often described as invisible assets (Itami 1987) or intermediate goods (Amit and Shoemaker 1993). Hence, in the context of strategic management research, firm-specific capabilities have been regarded as


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rather ‘unobservable’, path-dependent assets because they are characterized by high levels of tacit and causal ambiguity in their accumulation process. Essentially, they are, in large part, the result of mixing the intangible resources of the firm, because capabilities encompass complex interactions of individuals and groups as well as the organizational routines through which all the firm’s resources are coordinated (Grant 1991, 1998, Wernerfelt 1989). Capabilities are particularly complex in their development and valuation because their usually tacit character makes them difficult to observe and they do not have clear property rights. Generally speaking, the RBV has tended to favour them as the most likely source of sustainable competitive advantage (Collis 1994), mostly because they are learning-based, usually in the form of complex relations of a complementary nature among several resources, and nonsubstitutable. Moreover, they are highly difficult to imitate or replicate by competitors due to uncertain imitability and causal ambiguity issues (Dierickx and Cool 1989, Lippman and Rumelt 1982, Reed and DeFillippi 1990). These arguments clearly account for the strategic significance of these combinations of resources as: the less observable and the more difficult a firm-specific capability is to understand, the greater the likelihood that it will become a relevant source of sustainable competitive advantage. Thus, due to their own characteristics, not all resources possess the same potential to become a source of sustainable competitive advantage. To have such a potential, a firm resource must have, according to Barney (1991), at least four main attributes: value, rareness, inimitability, and non-substitutability in the sense that there must be no strategically equivalent valuable resources that are themselves either not rare or imitable.1 Similarly, other authors have also reported on the specific characteristics of advantage-creating resources (see also Amit and Shoemaker 1993, Collis and Montgomery 1995, Fahy 2000, Grant 1991). In particular, Grant (1991) argues that levels of scarcity, relevance, durability, imperfect mobility and replicability, and appropriability by a firm of the rents generated by these resources and capabilities are crucial issues for examining their potential as advantagegenerating resources, whereas Fahy (2000) underlines these three alternative criteria: value, barriers to duplication and appropriability. Resources are not a potential source of sustained competitive advantage if they are not valuable or enable the creation of value to consumers. Barriers to duplication indicate the inability of competitors to duplicate resource endowments and can be said to exist if the resource is only imperfectly imitable, immobile and non-substitutable. Finally, the firm


must be effective in appropriating a larger portion of their added value and turn it into profit, something that is particularly challenging in the case of intangible resources and capabilities. As can be derived from the above, a firm’s stock of intellectual capital (intangible resources and firm-specific capabilities) seems to include a strategically more relevant list of resources as compared to those of a tangible nature. This class of resources and capabilities can only be developed over long periods of time (that is, path-dependence); it may not always be clear how to develop them in the short/medium term (mostly because of social complexity); and/or cannot be easily transferred among firms or internally replicated by others (due to the associated causal ambiguity).

The role of strategic choices by management: the link between organizational capabilities and export marketing Resources do not confer a persistent competitive advantage unless they are applied to an industry or brought to a market. Thus, several authors have described the specific role played by managers in converting firmspecific resources into something of value to consumers (Fahy 2000, Williams 1992). This involves identifying, developing, protecting and deploying the firm’s resource base (Amit and Shoemaker 1993). Advantage-creating resources must be internally identified in spite of causal ambiguity (Reed and DeFillippi 1990). Furthermore, managers must put some degree of effort into their development and protection. A firm’s accumulated stock of intellectual capital is the result of consistent re-investments of its profits in order to develop this intangible resource base (Dierickx and Cool 1989, Grant 1991). As mentioned above, some intangible resources can also be protected by means of the use of intellectual property rights and the guarding of trade secrets. Finally, firm resources should seek to meet industry success factors or try to create new ones (Amit and Shoemaker 1993, Grant 1998, Lado et al. 1992). This basically denotes a key managerial capability in terms of an effective deployment of resources in the marketplace (that is, the marketing strategy of the firm). In the international business setting, we also believe that by developing a match between the firm’s resources and the export-marketing decisions adopted by managers, such export-capability can be reflected. This implicit capability is an intermediate, non-directly observable factor, due to its usually tacit character and causal ambiguities, but it affects the results of the foreign activities of the companies significantly. In fact, the RBV framework has recently been adopted by several marketing


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writers in their analyses of competition and the role of marketing assets in the international business context (Bharadwaj et al. 1993, Srivastava et al. 2001, Valenzuela 2000). However, in spite of its strong theoretical content, to date, there has been relatively little validation, of the challenges involved in identifying and measuring key firm resources as well as illuminating the role played by management in this process.

The model and hypotheses Hence, according to the general theoretical framework outlined above, in this section is established a basic resource-based model of sustainable competitive advantage which is specifically applied in foreign contexts (Figure 6.1). This model encompasses the hypothetical linkages between the essential elements of the resource-based perspective of the firm as discussed in the previous section. More concretely, it highlights two key issues: (1) that a firm’s intangible resource base may be of the highest strategic importance in generating a certain level of firm export capability; and (2) that export decision makers play, through the formulation and implementation of the firm’s export marketing strategy, a critical role in the process of attaining superior export performance; that is, in converting these resources and capabilities into positions of a highly sustainable competitive advantage abroad. According to the theoretical assumptions of the RBV, intangible resources (human, organizational, technological, and relational capital) are heterogeneously distributed among different (exporting) firms.

Management’s strategic choices

Intellectual capital 1. Structural capital • Technological • Organizational • Relational

Intangible resources

Firm’s export capability

Export marketing strategy

2. Human capital

Sustained competitive advantage in foreign markets (superior export performance)

Figure 6.1 A resource-based model of the determinants of export performance


Consequently, their combination in the development of ‘organizational export capability’ is also likely to be differently managed by these firms, resulting in different levels of accumulation of such capability. Therefore, the first hypothesis to be tested in this study is whether: Hypothesis 1: Due to the heterogeneity of intangible resource endowments, exporting firms differ in terms of their level of export capability. Moreover, due to the salient characteristics of advantage-creating resources mentioned above, an international strategy deeply rooted in such a resource base (that is, the firm’s intellectual capital) can be established without carrying the risk of being easily imitated by other firms, at least in the short/medium term. Thus, from our perspective, a higher value-creating strategy abroad (that is, an export-marketing programme more properly adapted to the different requirements and/or needs of foreign markets and consumers) can be derived from the managerial identification and deployment of the firm’s intangible resource base and export capability. So, our second hypothesis is whether: Hypothesis 2: The firms’ level of intangible resources and export capability is positively related to those exporters who develop valuecreating strategies in the form of highly adapted international marketing strategies. Finally, our expectation is that such value-creating export strategies become a capital strategic argument for the achievement of a sustained competitive advantage in foreign markets, something that can be interpreted in terms of a more successful export performance. Consequently, our last hypothesis is whether: Hypothesis 3: Those firms establishing a more value-creating, intangible-based export marketing strategy are able to obtain a superior export performance as compared to other firms without such a strategy.

Research methodology Sampling issues and general description of the database This section covers a variety of methodological aspects which helped us design our empirical research. First, we indicate the source and main characteristics of the selected database including some relevant sampling issues. Then, a general description of both, the experimental and control variables is offered, as well as of the different indicators of export performance that were chosen (that is, the dependent variables).


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Finally, some details of the statistical procedures for the treatment of our data are also provided. Our empirical research is based upon a general survey carried out by the foreign trade institute of Spain (ICEX) in the year 1992 among the 49 191 Spanish manufacturing firms, which, according to its OFERES database, had performed some form of export operation in the previous year (Alonso and Donoso 1994). Despite some possible changes in the environment since the period of data collection, we believe that the basic nature of the relationships posited in this research should not be drastically affected by this fact. All of the firms were classified into sectors according to the tariff category of their main exported products. Each sector was segmented on the basis of the firms’ export volumes. Then, by means of a stratified random sampling design, discrete exporting units were assigned to the different segments according to the respective weight of each segment in the total amount of exports reached by each sector. This methodological procedure was carefully followed trying to assure statistical national significance of 95.5 per cent, with a sampling error of 2.1 per cent for the whole sample. The final sample of our study consisted of 2 264 exporting firms that covered all of the industrial sectors of the country. Then, these firms were individually approached by means of personal interviews, all of which took place with the firms’ export decision makers and/or top managers-entrepreneurs in charge of international affairs. A detailed questionnaire had been designed that helped to cover different issues throughout each interview. These were related, in broad terms, to firm size and technological systems, organizational and logistical structures, managers’ export attitudes, the firm’s marketing-mix strategies abroad and different indicators of export performance for each company under analysis. Some descriptive statistics characterizing the export behaviour of Spanish exporters in terms of the operational variables that were used in this study are presented in Table 6.1. As can be also seen in Table 6.1, these variables were classified into three main categories in terms of the empirical analysis: intangible resources, export-marketing strategy and control variables.

Intangible resources of exporting firms Technological capital Several studies have previously investigated the relationship between technological innovation and export behaviour/performance, usually confirming a positive relationship between them (Burton and

108 Table 6.1 Qualitative variables introduced in the (HOMALS) analysis* Intangible Resources TECHNOLOGICAL CAPITAL Technological intensity (% of R&D expenditures/total sales): 1. 0% (A) 2. 0% (B) 3. Missing data ORGANIZATIONAL CAPITAL Organizational arrangements for exporting: Foreign Trade/Export Department existence inside the firm 1. Yes (C) 2. No (D) Foreign market knowledge: 1. Foreign market research is syetematically performed by means of several sources of information (E) 2. No foreign market information is systematically collected (F) 3. Missing data Export planning systems: 1. No formal planning for exporting (J) 2. Export activity is formally and systematically planned (K)

HUMAN CAPITAL Level of quality of employees (% of total employees with higher qualifications): 1. Less than 10% (G) 2. Between 10%–20% (H) 3. More than 20% (I) 4. Missing data Perceived relative export profitability: export sales profitability versus domestic sales profitability is perceived as being generally 1. Higher (L) 2. Equal (M) 3. Lesser (N) 4. Missing data

%

36.7 55.3 8.0

48.0 52.0 77.4

22.3

0.4 74.5 25.5

51.4 29.5 13.4 5.7

33.7 41.4 24.0 0.8

Control Variation

%

Firm’s product scope (measured in terms of % 3 main products/ total exports): 1. Up to 85% (Ñ) 2. More than 85% (O) 3. Missing data

19.8 76.2 4.0

Exported product adaptation: relative differences between firm’s exported and domestic products 1. Exist (P) 2. Do not exist (Q) 3. Missing data

15.8 83.5 0.7

Relative export prices: firm’s export prices versus local/domestic prices for its products are systematically 1. Higher (T) 2. Lesser (U) 3. Equal (V) 4. Export prices depend upon foreign country/market characteristics (W) 5. Missing data

12.3 25.5 47.7 12.5 1.9

Export distribution strategy: the firm has proprietary, wholly owned distribution channels available abroad 1. Yes (X) 21.0 2. No (Y) 78.5 3. Missing data 0.5 International promotion and/or advertising policy: the firm promotes itself and/or its products abroad 1. Yes (Z) 2. No () 3. Missing data

46.6 53.1 0.2

CONTROL VARIABLES Product class: 1. Raw materials (␣) 2. Industrial goods (␤) 3. Consumer goods (␹)

32.5 47.7 19.9

Rialp-Criado, Rialp-Criado, Axinn and Thach Table 6.1

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(Continued)

Intangible Resources RELATIONAL CAPITAL Post-sales service performance to foreign clients: 1. Performed (R) 2. Not performed (S) 3. Missing data

%

80.6 19.1 0.3

Control Variation

%

Firm size (measured by number of employees): 1. From 1 to 100 () 2. From 101 to more than 500 (ε)

72.0 28.0

TOTAL NUMBER OF SPANISH EXPORTING FIRMS IN THE SAMPLE (N)

2 264

* Next to the categories, inside the brackets, the corresponding indicators of these categories in Figure 6.2 are shown.

Schlegemilch 1987, Cavusgil 1984a, Cavusgil and Nevin 1981, Cooper and Kleinschmidt 1985, Lefebvre et al. 1998, Wakelin 1998). Although no generally accepted approach to the measurement of technological (knowledge) intensity has yet been developed (Autio et al. 2000), some objective indicators, such as R&D spending or patents, have been mostly preferred. In our research, the firm’s stock of technological capital was captured through the amount invested by each firm in R&D activities in terms of its total sales (percentage expenditures in R&D/total sales), thus distinguishing between those exporting fims which devoted part of their efforts to the improvement of product and/or process quality and degree of technical sophistication, and those which did not, at least on a regular basis.

Organizational capital According to the previous section, this category of intangible assets includes, among others, a firm’s procedures and guidelines, as well as internal structures, company databases, formal and/or informal planning and coordinating systems, and so on. In the specific case of exporting firms, such organizational resources may refer to the existence of export-specialized units inside the firm, as well as export planning systems, decision making processes related to this activity and mechanisms for conducting systematic foreign market research. Some authors have predicted a gradual increase in a firm’s resource commitment towards international operations, where the higher the level of export involvement by the firm is, the higher the allocation of these infrastructural resources will be (Cavusgil 1984b, Johanson and Vahlne 1990, Moini 1995). Moreover, several studies have empirically attributed a higher


level of export performance to those firms making major use of systematic mechanisms for gaining foreign market knowledge (Aaby and Slater 1989, Cavusgil 1984a, Cavusgil and Naor 1987, Cavusgil and Nevin 1981). Similarly, the existence of foreign trade departments inside the firm is also more likely as it approaches exporting in a more proactive and successful manner (Alonso and Donoso 1994, Burton and Schlegelmilch 1987, Christensen 1987, Denis and Depelteau 1985, Diamantopoulos and Inglis 1988, Kirpalani and McIntosh 1980). In this study, organizational capital was measured in terms of three distinct variables, it being our expectation that they were correlated with the firm’s level of export capability and, consequently, export performance. One of them, labelled organizational arrangements for exporting, revealed the existence of an export department inside the firm’s formal organizational structure. Another variable, export planning systems, provided some information about whether export activity was formally and systematically planned by the firm or, on the contrary, if such a formal planning system for exporting simply did not exist. Finally, the foreign market knowledge variable measured the degree in which foreign market research was systematically performed by means of several sources of information, versus the opposite situation where no foreign market information was collected by the exporting firm. This more formally planned, systematic and highly structured exploration of business opportunities abroad should theoretically correlate with a more proactive export behaviour (Albaum et al. 1994).

Relational capital This class of intangible resource is conceptualized as those assets of a firm that are directly related to the marketplace (Fernández et al. 2000). Due to the lack of information in our database concerning aspects such as brand and company reputation, customer loyalty, and so on, we relied on only one proxy variable estimating the firm’s long-term relationships with foreign customers. Such relationships usually demand care, confidence, regularity and frequent communication on behalf of each party, but can also help increase exports significantly (Miesenböck 1988). Our variable, labelled ‘performance of complementary, post-sales service to foreign clients’, basically informed us whether exporters in our sample were able to offer sales services directly to their customers abroad. Very often, this possibility is also related to the use of whollyowned distribution channels abroad; that is, direct export channels established by the firm itself (such as sales subsidiaries, sales branches, and so on), instead of relying on export agents and foreign distributors (external networks) who usually lack customer service capabilities.


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Human capital As previously defined, human capital refers to both generic and specific knowledge which is rather inseparable from its bearer and increases individual productivity. It may then include all of those forms of personal knowledge, skills, experiences, training, and even attitudes or perceptions of both managers and employees. Several studies have already attributed a higher level of export performance to those firms having highly qualified and better motivated staffs. Similarly, the assignment of more qualified personnel to foreign trade departments, as well as their corresponding levels of motivation, technical training and command of foreign languages, for instance, usually correlates highly with a more successful export performance (Aaby and Slater 1989). Also, the importance of key managers and/or decision makers’ perceptions and their influence on their firm’s export behaviour has been widely investigated in the SMEs’ export literature (Axinn 1988, Dichtl et al. 1990, Leonidou et al. 1997, Reid 1981). Thus, the nature of key managers’ expectations and attitudes, including their export-related success perception, generally affects export behaviour and performance (Aaby and Slater 1989, Leonidou and Katsikeas 1996, Louter et al. 1991). Clearly, those firms whose management seems to show higher – but realistic – expectations toward export activities will probably be less reluctant to allocate resources to such operations (Alonso and Donoso 1994). Moreover, further resource-commitment decisions can also be reinforced by ex ante perceptions of some degree of success in evaluating current export performance. Consequently, human capital resources were measured at two different levels inside the firm: employees and export managers. At the employee level, we enquired as to the level of quality of these human resources by computing the percentage of total employees with higher/specialized studies in each firm. At the export management level, we took into account Bilkey’s (1982) finding that a higher estimation of export versus domestic profitability became a potential export success factor. Hence, we asked managers in charge of export decisions and operations in their corresponding firms about the perceived level of profitability resulting from export versus domestic sales.

Firm’s export marketing strategy Firm’s product scope and export product policy Product-line diversification – versus concentration – in the form of a larger number and variety of goods made by exporting firms can help them identify new market opportunities and adjust their marketing-mix


practices to differences detected among geographical markets and/ or segments. Authors such as Cooper and Kleinschmidt (1985) found a significant relationship between the percentage of sales due to the introduction of new products and the growth and intensity of export activity. Similarly, Christensen et al. (1987) also contrasted a higher degree of export success among firms that commercialized multipleproduct lines abroad. Actually, the gradual acquisition of foreign market knowledge all along the export process could be associated with a more specific response to stimuli promoting the introduction of new and/or slightly modified products (Mugler and Miesenböck, 1989). Additionally, in terms of exported products policy, Kirpalani and McIntosh (1980) clearly stressed their adaptation to local markets. Similarly, other empirical results have confirmed that product differentiation becomes a quite common strategic trait among exporters (Cavusgil et al. 1979, Cavusgil and Nevin 1981, Yaprak 1985). Thus, beyond product-line broadness, it could also be expected that a higher degree of product differentiation and/or local adaptation, versus product standardization, would increase product-design quality and, in turn, export performance. In our research, we also estimated these two possible effects of a firm’s product scope and export product adaptation on export performance by means of two different operational variables: the percentage that the three main products of the company represented over total exports (higher or lower than 85 per cent as a cut-off value) and whether relative differences between the firm’s exported and domestic products exists.

Export prices The effects of price decisions on export performance indicators have often been investigated elsewhere and, generally speaking, mixed results have been found (Christensen et al. 1987, Thach and Axinn 1991). Several authors like Fenwick and Amine (1979), Kirpalani and McIntosh (1980), Malekzadeh and Nahavandi (1985) and Piercy (1981) found a positive correlation between the firm’s export price flexibility and export success. However, Bilkey (1982), could not determine an optimal price policy specifically for exports. More recently, Louter et al. (1991) indicated that a firm’s export prices, relative to those charged by competitors, tended to have a more direct impact on export intensity than on export profitability. As price seems to be the marketing-mix variable that may suffer the quickest adaptation to foreign contexts (Miesenböck, 1988), we also


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used the relative export prices variable for measuring the degree to which firms’ export sales prices were systematically higher, lesser or equal as compared with local/domestic prices for these products, or whether export-price selection depended heavily upon the characteristics of each country/market.

Export entry strategy The form and quality of a firm’s export distribution policy is being considered as an increasingly relevant decision for improving export performance (Aulakh and Kotabe 1997). Accordingly, general agreement seems to exist in the sense that the establishment of a good distribution system abroad constitutes another key determinant of export success. In this way, a positive relationship usually emerges between the existence of proprietary export channels (that is, those internalized by the exporting firm itself) and its export performance (Campa and Guillén 1999, Rialp 2000). However, the use of foreign agents and/or independent distributors can also promote foreign sales (Bilkey 1982), especially for smaller firms which usually lack their own export networks abroad. Specifically, to explore the possible effects of the chosen export entry strategy on export behaviour and performance, we included in our research the variable of export distribution strategy, which allowed us to distinguish among firms in our sample with proprietary, wholly-owned distribution channels abroad and those exporters relying on external networks in international markets (basically, foreign agents and/or distributors).

Foreign promotion Kirpalani and McIntosh (1980) found higher export results among those firms stressing promotion and advertising campaigns about the firm itself and/or its products in export markets. Yaprak (1985) found more self-confidence in promotion capability among exporters as compared to non-exporters, while Alonso and Donoso (1994) identified, among those firms with higher export intensity ratios, a more significant number of firms performing foreign promotion and international publicity on a regular basis. As another relevant variable of the exporter’s international marketing strategy, international promotion and advertising policy was also taken into account in this research by establishing whether the exporting firm had promoted itself and/or its products in foreign markets or, on the contrary, lacked such promotional strategy.


Control variables Firm dimension Firm size has usually been taken as a possible determinant of export behaviour (Bonaccorsi 1992, Calof 1994, Cavusgil and Naor 1987, Denis and Depelteau 1985). Generally speaking, insufficient size is seen as a critical handicap for starting and/or conducting export business on a more regular basis (Alonso and Donoso 1994, Miesenböck 1988). Thus, a certain critical mass seems to be necessary before reasonable export results can be reached. Notwithstanding, in spite of the great empirical attention paid to this variable in the last few decades, not much agreement exists on its observed impact on export performance. This lack of consensus in research results calls for the use of several criteria for measuring size (Bilkey and Tesar 1977, Czinkota and Johnson 1983). Consequently, in this research, as control variables in our statistical procedures, firm size measured by the number of total employees (with 100 employees as a cut-off value for distinguishing between larger and smaller firms) and total sales in logarithmic form were also introduced.

Product class The type of industry and/or characteristics of the core activity in which the company competes can also have an impact on its export performance. Actually, the development of a firm-specific, competitive advantage takes place within a particular sector or segment. Thus, the generic class of product/service offered by the company usually becomes a relevant issue in its internationalization process as industries themselves vary in competitiveness and international opportunities (Chetty and Blankenburg Holm 2000). Certain manufacturing activities and, consequently, the resulting types of product are more likely than others to require adaptations to enable export operations (Cooper and Kleinschmidt 1985, Fenwick and Amine 1979). Interestingly, many empirical studies have not considered this factor explicitly, due mostly to their sector-specific character. However, when this variable has been included in previous analyses of a firm’s export behaviour (Alonso and Donoso 1994, Kedia and Chhokar 1986, Louter et al. 1991), some differences were systematically detected, thus confirming its potential influence on the level of export success. Thus, taking this into account, the general product class of the exporters in our sample (raw materials, industrial goods, or consumer goods) was also used as another control variable in our analysis.


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Indicators of export performance Measuring a firm’s export performance by means of more than one indicator has been increasingly demanded by export researchers (Aaby and Slater 1989, Fillis 2001). The criteria most usually used for approaching export performance have been classified elsewhere (Alonso and Donoso 1994): export involvement, export dynamism, export profitability, and other related measures. In this study, several types of measurement were also used: 1 The firm’s export-intensity ratio, calculated as the percentage of exports over total sales, was chosen due to the fact that it has been the most widely used indicator for measuring export performance. Nevertheless, the firm’s volume of export sales (in logarithmic form) was also chosen here as another dependent variable in our analysis in order to assess the total amount exported by companies in this sample, though controlling for the firm’s total sales. These two quantitative indicators allowed for the establishing of whether export performance differed significantly among different groups of Spanish exporters. 2 Additionally, the geographical distribution of firm’s sales index (GDSI) was also used, which indicates the geographical scope of the business by calculating the degree of market concentration versus the spread of exporters’ sales in predefined areas. The weight of export versus domestic activity was also indirectly considered as this ratio included the percentage of the firm’s total sales obtained in the local market. Its formalized expression is the following (Alonso and Donoso 1994): GDSI ⌺Vi lnVi / ln(1/7), i 1, … ,7 (geographical markets) where Vi represents the firm’s sales share in each one of the geographical areas under consideration (up to seven). As it is defined, the maximum value of GDSI is 1, which indicates the highest possible degree of market dispersion. However, a lower value of this index, closer to 0, would reveal a maximum level of sales concentration. This would imply a very limited capacity of Spanish exporters for diversifying their geographical markets successfully. Conversely, a greater spread of a firm’s sales in a larger number of markets is understood as a result of its relatively higher commercial strength abroad. Thus, in this study, GDSI is interpreted as an additional indicator of successful export performance, measuring the exporting firm’s projection and expansion capacity towards foreign markets.2


Statistical procedures As we have mentioned above, our database showed information about the resource base and the export strategies of the firms included in the sample under study. According to our model, firm resources determine the firm-specific export capability which, in turn, sustains the export strategy of the firm. However, because of its tacitness and ambiguous origin, such export marketing capability had to be indirectly approached. To do so, the first technique used in this study belongs to the so-called exploratory data analytical techniques. These research techniques, which have become increasingly popular over the last decade, are primarily applied to reveal features in the data by producing low-dimension maps in order to summarize the data (Bond and Michailidis 1997), the most well-known being correspondence analysis (CA). Nevertheless, as we had more than two categorical variables, multiple correspondence analysis (homogeneity analysis, HOMALS), using alternative least squares (ALS) as the estimation method, was applied to our sample of Spanish manufacturing exporters.3 As a research technique, HOMALS offers a set of optimum scores for the different categories of the qualitative variables under consideration, maintaining the highest possible association among them. These scores let us know which categories, within each variable, were either similar or different and, consequently, which ones could be statistically grouped. They also allowed us to identify, among different variables, which categories should be put together and which was the maximum correlation among those variables. As these scores have several metric properties, this statistical technique was then used as a way for quantifying qualitative data. Furthermore, they can be used in other explanatory analyses. In our case, this statistical procedure was run for summarizing the principal information contained in the qualitative variables shown before in Table 6.1. This helped measure the export capability of the firms in the sample as a key factor relating their intangible resources and export-marketing strategies. Then, the scores obtained in the HOMALS analysis were used in several explanatory techniques against a number of export performance indicators. The company’s total sales was also added as a variable controlling performance differences in terms of dimension issues.

Results According to our set of hypotheses, we tested firstly the expected differences between the exporters’ stock of intangible resources in the


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development of organizational export capability (Hypothesis 1), and, additionally, of more value-creating export marketing strategies (Hypothesis 2). Then, we analyzed whether those exporting firms with an intangible-based export strategy really experienced better performance than those without such a strategy in their export markets (Hypothesis 3). As mentioned above, HOMALS analysis was used for testing Hypotheses 1 and 2. This analytical technique revealed two quantitative, non-correlated dimensions, which could be interpreted as the level of the firm’s export capability and degree of export marketing adaptation, respectively. As can be seen in Figure 6.2, Hypothesis 1 was clearly confirmed. HOMALS Dimension 1 (D1), which is located in the horizontal axis, quantified the heterogeneity of intangible resources underlying firms’ level of export capability. Due to the way in which it was computed, the more positive the D1, the lower the stock of intangible resources inside

2.0 T 1.5 P L

1.0 I

D2

W

.5

Ñ 0.0

C

XK

Z B

E R

H

O Q

α

S β δ YJ G φ

A D χ

MV

F

U

ε –.5

N –1.0 –1.5

–1.0

–.5

0.0

.5

D1 Figure 6.2 Multiple correspondence analysis (HOMALS) results

1.0


the firm and, consequently, of export capability (understood as complex combinations of these resources). And the opposite also holds true: the more negative the D1, the higher the stock of intangible resources and associated export capability. Thus, this first dimension allowed us to distinguish between two different groups of Spanish exporters, based upon their differences in terms of intangible resource endowments: those who, while exporting at that time, lacked enough export capability or showed a low level of it (1 208 exporters, representing 53.4 per cent of the total number of firms contained in the database), from those others who offered a higher degree of export capability due to a significant intensity of human, organizational, technological and relational capital (1 056, representing 46.3 per cent of the firms). The second HOMALS dimension obtained in our analysis (D2), which can be interpreted as the degree of export marketing adaptation applied by the firm as a value-creating strategy abroad, showed a much higher impact on those Spanish exporters with a higher degree of export capability and, consequently, managerial deployment of intangible assets, as expected. Thus, Hypothesis 2 was also verified. By examining our sampling of firms according to their corresponding sign of D1, for those in which this factor was found to be negative (meaning a higher degree of export capability based on a considerable level of intangible capital), D2 yielded a significant and very interesting difference in terms of their export marketing strategy. However, it did not turn out to be significant for those exporters revealing null and/or very poor export capability; that is, a positive value in terms of D1.4 Actually, D2 divided this group into those exporters who searched for a more intense adaptation in terms of product and/or price policies towards export markets (323 firms, representing 14.3 per cent of the total sample), and those others who followed a more standardized export marketing programme and perceived a less profitable outcome from their exports, in spite of also being highly export-capable (733 firms, 32 per cent of the total sample). Therefore, we could summarize these results by extracting three different groups of Spanish exporting firms (Table 6.2). The existence of these three groups of exporters was, in our opinion, consistent enough with the first and the second hypotheses formulated in the corresponding section: Spanish exporting firms differ in terms of their level of export capability due to the heterogeneity of intangible resource endowments, and such different levels of intangible assets and export capability also corresponded with exporters developing valuecreating strategies in the form of more adapted export marketing strategies.

119 Table 6.2

Composite dimensions resulting of HOMALS analysis DIMENSION 1: degree of firm’s export capability*

Group 1: exporters who lack export capability or with a low level of it n 1,208 (53.4%)

Exporters with a high degree of export capability DIMENSION 2: degree of export marketing adaptation** Group 2: high Group 3: high capabilited capabilited but nonand adapted exporters adapted exporters n 323 (14.3%) n 733 (32.4%)

Produce either industrial products () or consume goods ()

They are primarily focused on raw materials/commodities ()

The number of employees is 100 or less (␦)

The number of employees is higher than 100 ()

Do not allocate financial resources in R&D activities (A)

Allocate resources in R&D activities (B)

The percentage of employees with higher studies is less than 10% (G)

Percentage of Percentage of employees employees with higher with higher studies studies between surpass 20% (I) 10%–20% (H)

Do not have an export/foreign trade department inside the firm (D)

Have an export/foreign trade department inside the firm (C)

Do not collect foreign market information systematically (F)

Foreign market information is systematically collected from different sources (E)

Perceive the same profitability from the domestic and export sales (M)

Export profitability is perceived to be lower than internal sales return (N)

Do not present a clear export plan (J)

Develop a formal export planning (K)

3 main exported product lines represent more than 85% of total exports (O)

3 main exported product lines over total exports account for less than 85% (Ñ)

Do not introduce any difference into the exported products versus those sold in the national market (Q)

Export profitability is perceived to be higher than domestic sales return (L)

Adaptations are observed between their exported products and products sold in the home market (P)

Do not offer post-sales service to their foreign clients (S)

Offer post-sales service to foreign clients (R)

Do not establish different prices for the products addressed to the domestic market and those addressed to foreign markets (V) or, if they do, export prices are always systematically higher (T)

Export prices are systematically lower than prices for the products in the home market (U)

They establish differences among export prices and domestic prices depending upon countries and/or market characteristics (W)

120 Intangible Resources and Export Strategy Table 6.2 (Continued) DIMENSION 1: degree of firm’s export capability* Do not have proprietary distribution arrangements in the foreign markets (Y)

Have wholly-owned distribution organizations in some foreign markets (X)

Do not perform any international promotion and/or advertising activities ()

Perform promotion and advertising activities of their products and/or of themselves in the foreign markets (Z)

* Eigenvalue Dimension 1 0.2253 ** Eigenvalue Dimension 2 0.1045

Table 6.3

ANOVA export intensity (% exports/total sales)

Exporter groups Non-export capable exporters Capable but nonstrategically-adapted exporters Capable and strategicallyadapted exporters Total F value

Valid N

Mean

Standard deviation

1 154

24.96

24.14

708

34.68

24.33

300

43.88

25.64

30.77 85.073***

25.35

2 162

*** Significance 0.01

At this point, our attention turned to test whether those firms establishing a more value-creating, intangible-based export marketing strategy were also able to obtain, according to Hypothesis 3, superior export performance as compared to other firms without such export strategy.5 It was thus tested whether Spanish firms following a more adapted export strategy for entering foreign markets really exhibited better export performance, as compared to those exporters showing a highly standardized export programme. Furthermore, it was also tested whether these two groups of highly capable, intangible-based exporters achieved better results abroad compared to those other firms that did not seem to manifest sufficient technological, relational, human or organizational capital for implementing a highly successful export plan. Table 6.3 shows the results of this analysis. As can be seen, using the firm’s export intensity as an indicator of export performance, the average export intensity of the strategically

Rialp-Criado, Rialp-Criado, Axinn and Thach Table 6.4 results

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Regression estimation

Coefficients Constant Dimension 1 Dimension 2 LN(SALES) R2

1.569*** 0.635*** 8.978E-02*** 0.550*** 0.651***

*** Significance 0.01. Dependent Variable: LN(EXPORTS)

more adapted exporters resulted significantly higher than the average for the non-adapted ones. Furthermore, the export sales/total sales ratio for exporters who lacked export capability was, on average, significantly lower than it was for the other two groups of capable exporting firms. Therefore, an interesting result emerged concerning export performance, in the sense that the more adaptive and value-creating the export-marketing programme applied by the firm is from the consumer point of view, the better the results obtained from this foreign activity measured in terms of export intensity will be. Moreover, through regression analysis, we were able to determine the individual effect of each one of the HOMALS dimensions on the firm’s export volume. This was done by also including the firm’s total sales as a control variable in our estimations. As shown in Table 6.4, by means of the D1 and D2 HOMALS dimensions and the total sales volume achieved by the firm, the explained variance of the firm’s export volume – expressed in logarithmic scale – dependent variable reached 65.1 per cent (R2). The regression coefficients for both HOMALS dimensions, D1 and D2, were highly significant at the p .01 level and, interestingly, showed the expected sign: negative for the first one, and positive for the second one. This basically means that the lesser amount of technological, relational, human and organizational resources possessed by a firm (that is, the higher the D1), the lower the volume of sales finally gained overseas, measured in absolute terms. On the other hand, the more adapted the export programme applied by the exporter abroad is (that is, the higher the D2), the larger the volume of foreign sales obtained by the firm. Moreover, the coefficient observed for the control variable was also significant. Therefore, the firm’s total sales volume also became a significant predictor of its volume of exports.6 This result was consistent

122 Intangible Resources and Export Strategy Table 6.5

Tobit estimation results Coefficients

Constant Dimension 1 Dimension 2 LN(SALES) Â Log likelihood function

0.31389*** 0.0730*** 0.0125*** 0.1168E-04 0.171*** 708.7934

Threshold values for the model: lower 0, upper 1 *** Significance 0.01 Dependent Variable: GDSI

with previous research also focused on Spanish exporters (Alonso and Donoso 1994). Finally, by means of a Tobit analysis, it was also possible to discern the effect of each one of the HOMALS dimensions on the degree of geographical dispersion of the firm’s sales (GDSI) which, as indicated earlier, was used as an additional indicator of export performance. Total sales volume made by the firm was introduced again as a control variable. Table 6.5 summarizes the results of this analysis. The coefficients for both HOMALS dimensions were, once again, significantly different from zero at the p .01 level, and they also presented the expected signs: D1 showed a negative estimated coefficient, whereas the coefficient for D2 was positive. This implies that the lower the export capability shown by the firm (which tends to happen when D1 rises), the lesser its capacity for spreading to new marketplaces. On the other hand, the more a firm tried to adjust its export marketing strategy to specific contexts, and the more profitable managers perceived such export activity (that is, when D2 tends to increase), the larger the geographical distribution of firm’s sales index and, consequently, the more successful its export performance. In this case, however, the coefficient for the control variable did not become statistically significant. Therefore, the firm’s total sales volume, as a proxy of its dimension, was not found to be a highly consistent predictor of the degree in which those sales spread geographically, at least according to our data. In our opinion, this result would support the so-called ‘contingent-based approach’, which suggests that market concentration or spread depends mostly on each specific situation (Louter et al. 1991, Robertson and Chetty 2000).


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Discussion According to our results, Spanish exporting firms seem to differ in terms of their level of export capability due to the heterogeneity of intangible resource endowments, apart from other considerations regarding size and the class of product in which they compete. Furthermore, some exporting firms with a significant level of intangible resources and, consequently, with a higher export capability, tend to develop more contingent export-marketing strategies. These practices allow them to obtain better results from this foreign activity as well as spreading to new marketplaces. As we have seen, those exporters showing a higher degree of export capability, as opposed to those who lacked it were also characterized by a strong combination of intangible assets, mostly of either a technological, organizational or relational character. In particular, a greater degree of technological intensity; the existence of an export department in charge of this activity inside the firm; the development of an adequate, foreign-market research system; the establishment of highly formal programmes and procedures for conducting export operations, and, finally, the capacity to deliver post-sales services to foreign clients as a way of establishing long-term relationships with them were most important. They were also similar in terms of two key export-marketing decisions: an intensive international promotion and firm-integrated export distribution. However, they showed some differences in terms of human capital intensiveness, measured by the percentage of employees with higher education and the managers’ profitability perceptions associated with exporting, as well as in the development of different practices in, at least, two other core components of the export marketing strategy: product and price policies, which appeared to be the most flexible and differential marketing-mix tools among countries. In particular, those firms paying attention to specific characteristics of each country/market also revealed the greatest percentage of employees with higher studies, the most favourable managerial perceptions in terms of profitability associated with export and were also applying the most flexible international marketing approach in terms of prices and exported products. As a result, a less standardized export product line and a more contingent export price policy were associated, together with other factors, with an improved export performance and geographical market spread. These results seem to indicate a certain relationship existing between the level of human capital inside the firm, as an intangible, knowledgebased resource, and a greater likelihood – in large part due to this


knowledge intensiveness – of establishing more tailored export marketing programmes, which, in turn, increase export performance. On the other hand, those exporters classified in Group 1, also the smallest ones in terms of size, clearly lacked adequate organizational, technological, relational, and human capital resources for improving export behaviour. From a resource-based perspective, these firms were poorly characterized in terms of intangible assets, as they did not invest in R&D activities, tended to show the lowest percentage of employees with higher education in the sample, had not created an export department inside the organizational structure of the firm and did not collect any information from foreign markets in a systematic way. Moreover, their managers conducted export activities without following a structured export plan and, more interestingly, manifested neutral or nondefined attitudes about profitability obtained from export versus domestic operations. Finally, these firms were mostly characterized by their lower product diversification compared to the other two groups, and by a very poorly developed export marketing strategy. Accordingly, their levels of export performance, measured in terms of export intensity, export sales volume, and market spread capacity were significantly lower. An unexpected result was found in the relationship between one of the control variables, the firm’s product class, and the exporters’ classification in terms of export performance. Spanish manufacturing firms centred on raw materials or commodities were also found to be the most intangible-based, strategically-adapted and, thus, successful exporters, while those manufacturers of industrial products and/or consumer goods were not. This result could mean that many Spanish exporting firms, primarily those of higher value-added sectors, are still too undeveloped in their export capability creation, as well as in the adaptation of export marketing activities and, generally, in the way in which they can approach and benefit from exporting. The degree of control over export marketing practices varies according to the export stage the firm has reached (Leonidou and Katsikeas 1996). In addition, the likelihood of performing a higher degree of control over marketing-mix decisions seems to increase as export activity becomes highly regular, systematic and more formally planned by the exporting firm (Cavusgil 1984b, Mugler and Miesenböck, 1989). We therefore can conclude that the poorer level of intangible resources shown by these firms does not allow them to reach a sufficient degree of export capability for implementing more highly adapted export marketing strategies and, as a consequence, to obtain a sustained competitive advantage abroad.


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Conclusion This study has principally shown that the level of intangible resources (whether of a human, organizational, technological or relational character) clearly affects the export capability of Spanish firms. In turn, such capability heavily influences the management’s strategic choices in the context of export marketing decision making. According to our results, the international marketing strategy associated with a major development of competitive advantage in foreign markets by these firms, at least measured in terms of export performance, stressed product and price adaptations. In our opinion, the results of this study shed light on issues relevant to export researchers, practitioners and policy makers. For academics and researchers in the area of export marketing behaviour, we have demonstrated the relevance that recently developed theoretical frameworks such as the resource-based view of the firm, and the issue of intangible resource analysis in particular, may also have for increasing our knowledge about key determinants of export performance. Moreover, the use of more sophisticated research techniques, such as HOMALS analysis, which allowed us to classify Spanish exporters according to their different internal characteristics, can be of great help in gaining further empirical evidence regarding this phenomenon. In addition, evidence generated from this research could also be extremely useful for public policy markers and export promotion agencies, which are very interested in improving a country’s exports, mainly in terms of better estimating and developing the export potential of those firms according to their differences in terms of size and/or resources (including, of course, intangible ones). We believe that the efficiency of these institutions could be significantly enriched by means, for instance, of concentrating their efforts differently on firms showing distinct patterns and prospects towards exporting according to their specific resource endowments, export capabilities and export marketing programmes. Moreover, since this study has also confirmed the importance of intangible resource management for developing export behaviour, further implications of a more managerial nature emerge as well. First, and perhaps most important, just by giving strategic priority to the continuous creation and development of intangible knowledge-based resources, exporting can become a more contributing activity for the firm. Second, it appears that certain resources of an organizational, human and relational dimension (such as market knowledge acquisition,


foreign consumer services, employees training practices, and more effective organizational arrangements for exporting) critically affect firm export capability. This is an interesting result, especially for SMEs’ export managers. Small exporters, who usually lack resources for investing in local sales organizations, for developing intensive foreign-client relationships, for conducting extensive market research, and so on, should focus on improving employee qualification levels, on the one hand, and carefully selecting their distribution partners, foreign agents and/or customers in order to keep more successful relations with them, on the other. This would, in turn, improve their foreign market research mechanisms as well. Similarly, the selection of export marketing programmes, which meet the specific needs of well-defined market niches, can also be an extremely helpful initiative for smaller exporting firms. Finally, we would like to suggest some future research directions which are mostly derived from certain limitations of the present study. Clearly, more research is needed into the concept of sustainable competitive advantage and its operationalization in foreign markets. In this study, we have approximated this advantage by means of several indicators of export performance in one specific year (basically due to the data in our possession). Although these indicators could reflect a valuecreating strategy not simultaneously being implemented by any current or potential competitor (Barney 1991), we believe that the information contained in panel data would allow a better approximation to the idea of sustainable competitive advantage. Furthermore, more research is needed into the contingent factors of export performance, as well as into export marketing orientation, planning and other international marketing strategies available to the firm. Finally, the research project presented here is indeed highly country-specific and should be, in our opinion, extended into more widely defined industries and/or countries of, perhaps, different income levels as compared to Spain.

Notes 1 Firm resources can be imperfectly imitable for one or a combination of three reasons (Barney 1991): the ability of a firm to obtain a resource is dependent upon unique historical conditions; the link between the resources possessed by a firm and a firm’s sustained competitive advantage is causally ambiguous; and the resource generating a firm’s advantage is socially complex. 2 The maximum degree of market concentration would be when all of a firm’s sales are obtained in the same market (usually the domestic one): Vj 1 and Vi 0 for each i different to j. Contrarily, maximum export market diversification is achieved when the firm makes similar sales in all of its market areas (in this case, Vi 1/7 for each i).


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3 When the number of nominal variables is more than 2, HOMALS (multiple correspondence analysis) becomes a highly recommended statistical procedure (SPSS, 1990). 4 It was seen, after further analysis, that the level of variability affecting D2 was significantly higher for those exporters presenting several characteristics associated with a negative HOMALS dimension 1, D1, than for those others whose D1 was found to be positive. More concretely, variance D2 1.126 for the former group, versus variance D2 .917 for the latter. Then, the Levene test was run for testing the difference between both values, which allowed us to reject the null hypothesis assuming equal variance for both subgroups (F 12.568, p 0.000). 5 Three different quantitative techniques were used depending upon the selected indicator for measuring export involvement/performance. ANOVA analysis was applied for testing the difference existing between the mean values of export intensity in each (sub)group, while regression analysis was run by using ln(export volume) as the dependent variable, and controlling by the firm’s total sales volume. Finally, GDSI was defined as a truncated variable, as it took values only between 0 and 1. Thus, OLS estimated coefficients would be biased. Therefore, a Tobit regression model was estimated. 6 In spite of some correlation detected between the HOMALS dimensions and the firm’s total sales volume, we considered as significant the effect of both dimensions on the firm’s total export volume. This is based on the change in its explained variance by the firm’s total sales variable exclusively, and by means of this control variable and the two HOMALS dimensions jointly was highly significant (R2 changed from .585 to .651, being such an increase highly significant according to the F-test).

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7 Strategic Planning: The Key to Enhanced Performance? Nicholas O’Regan and Abby Ghobadian

Abstract Strategy is one of the most over used words in management circles. The fixation with strategy singularly rests on the belief that it has a positive impact on organizational performance. Therefore, not unsurprisingly, many researchers have tested this assumption. The results to date are mixed. Some studies have shown a positive relationship between strategy and performance, while other studies have failed to find any significant relationship. Some commentators have identified the deployment of widely differing strategy constructs for the observed inconsistencies in the relationship between strategy and performance. In this chapter, we report the outcomes of a study designed to assess the perceived impact of the factors used to craft strategy on a wide range of performance indicators. The results show that a positive relationship exists between a number of the factors used in crafting strategy and some dimensions of performance. In particular, the analysis indicates that emphasis on: internal orientation, external orientation, departmental operation, resources for strategy, systems capability/creativity, and strategy as a control mechanism, are associated with the following performance measures: learning/growth, meeting customer demands and providing quality goods on time. We also examined the perceived operating environment of the SMEs surveyed. As a result, two basic environment types emerged. First, an operating environment characterized by product and process change and second, an operating environment characterized by increasing competition. The analysis indicates that there is no significant difference between the emphasis given to strategic planning by firms operating in either environment type. 132

O’Regan and Ghobadian 133

Introduction Today, it is unlikely that one could examine a company report or have a business conversation with senior managers without coming across the word strategy. Having a well thought out strategy is increasingly seen as an important activity for small and medium sized firms (SMEs) as well as large firms (Naffziger and Mueller 1999, Roper 1997). Not surprisingly, the impact of strategy on performance has attracted the attention of many researchers. Ghobadian and O’Regan (2000) carried out a comprehensive review of previous empirical research examining the link between strategy and performance. The following factors directed the review: (a) (b) (c) (d)

sample composition and size; strategic planning measures deployed; performance measures deployed; and outcomes of the studies.

The results of the analysis are presented in Table 7.1. From Table 7.1 it is clear that a multitude of variables were used to measure strategy. These include: • planning formality (Grinyer and Norburn 1975, McKiernan and Pearce 1994, Robinson and Pearce 1983) ● external assistance in strategic planning (Robinson 1982) ● the use of sophisticated planning techniques (Bracker et al. 1988) ● new products introduction, ownership and control (Roper 1997). Similarly, a wide range of different performance measures was used in these studies. These include: • ●

financial measure (Frederickson 1984, McKiernan and Morris 1994) financial performance and profitability (Kargar 1996, Ramanujam and Venkatraman 1987, Veliyath and Shortell 1993).

The conclusion reached by the studies reviewed was mixed (see Table 7.1). A number of writers argue that these mixed results are due to a lack of a clear definition of strategy and a consistent method for measuring strategy (Boyd and Reuning-Elliott 1998, Snow and Thomas 1994). To develop a consistent picture and address the problems identified by Boyd and Reuning-Elliott (1998), Snow and Thomas (1994), we deployed measures of strategy similar to those used by Kargar (1996) and Ramanujam and Venkatraman (1987). On the other hand, we deployed a significantly broader matrix of performance measures and

Table 7.1

Summary of studies examining the relationship between strategic planning and performance Sample and composition

Strategic planning/ process measures

Performance measures

Findings

Ansoff et al. (1970)

93 large manufacturing firms

The systematic formulation and deployment of plans on the success of acquisitions

Financial (sales, earnings, return on equity)

Planners outperformed nonplanners on financial criteria

Kargar and Malik (1975)

8 large industrial firms

Formal integrated long-range planning and objectives

Financial (sales, net income, earnings per share)

Formal planners outperformed non-planners

Burt (1978)

92 large Australian retailing firms

Internal consistency of goals Consideration of risk

Financial

Positive relationship between strategy and performance

Wood and LaForge (1979)

41 large banks

The formulation of a total strategy, a partial strategy and no strategy

Financial

Comprehensive planners outperformed nonplanners

Robinson (1982)

202 small firms

Use of external assistance in strategic planning

Return on sales

Firms employing outside assistance to develop strategic plans performed better

Frederickson (1984)

38 large paint manufacturers

Level of comprehensiveness in the strategic planning process

Financial

A positive relationship between comprehensiveness and return on assets

Bracker et al. (1988)

73 small entrepreneurial firms

Use of sophisticated planning techniques

Profitability

Sophisticated strategic planning firms outperformed other firms

Schwenk and Shrader (1993)

14 studies on small firms

Use of external assistance Use of sophisticated strategic planning Use of planning formality

Sales growth Return on assets

Demonstrated a link between planning and performance across studies

Kargar and Parnell (1996)

47 small banks

Use of planning characteristics: internal and external orientation, functional integration, resources for strategy, planning techniques, creativity in planning and a focus on control

Satisfaction with financial outcome and organizational effectiveness

Findings showed a link between seven strategic planning characteristics and planning satisfaction

134

Study

Baker et al. (1993)

194 small firms

Emphasis on regular strategic planning, written plans and the involvement of top management

Profitability Marketing/product mix Industry leadership Decision making Communication and motivation

Completion of strategic planning is positively associated with profitability

Joyce et al. (1996)

301 small firms

Emphasis on strategic planning, short term planning, informational strategy, evolutionary strategy, investment in new technology

Growth, increase in staff numbers, increased investment in new technology and greater innovation success

Found that ‘strategic’ firms are more likely to grow and have increased employment

Roper (1997)

703 small firms

Emphasis on introducing new products expanding into new export markets, quality, MIS, consensual management centralizing control or ownership

Growth Profitability

Significant link between strategic initiatives and asset utilization/ profitability but no evidence of a link between strategic initiatives and their turnover to asset ratio

Naffziger and Mueller (1999)

71 small firms

Degree of officer involvement, communication methods, degree of formal planning, the collection of information and time spent on planning

Service and quality improvement, changes in productivity and market share

High degree of satisfaction on the use of strategic planning based on the performance measures

Grinyer and Norburn (1975)

21 large UK firms

Common perception of objectives Clarity of role perception Formality of planning Communication

Financial return on net assets

No relationship between strategic planning and performance

Kudla (1980)

Fortune 500 companies (348 large firms)

Absence of formal planning Use of written plans Use of comprehensive, systematic and future-orientated planning

Financial return to shareholders

No significant differences in the returns to shareholders between planners and non-planners

135

136

Table 7.1

(Continued)

Study

Sample and composition

Strategic planning/ process measures

Performance measures

Findings

Robinson and Pearce (1983)

85 small banks

Use of formal planning Written documentation Use of environmental scanning Distinct competency Authority relationships Resource deployment, monitor control

Financial loan growth

No relationship between formal strategy and financial performance

Frederickson and Mitchell (1984)

27 large forest firms (109 executives)

Comprehensiveness of decision making processes Assignment of responsibility Participation, seeking external help

Financial return on assets, return on sales

No relationship between comprehensiveness and performance

McKiernan and Morris (1994)

1380 small firms

Range of techniques used Use of formal planning

Financial sales growth/profit productivity, return on assets

Formality of the strategic planning process does not impact on performance


studied firms from two standard industrial classifications (SICs) not examined before. Therefore, the study presented in this chapter helps us to develop a better understanding of the association between strategy and performance. The deployment of resources to achieve organizational aims and objectives is central to the concept of strategy. In essence, this entails marshalling the firm’s internal resources to meet demands, challenges and threats posed by the external operating environment in pursuit of its objectives. Some might argue that this could be a difficult task, given that managers have little or no control over many of the variables influencing the competitive environment. In reality, SMEs have little choice but to engage in the systematic development of a path to sustainable competitive advantage as an alternative to relying on trial and error. Arguably, a systematic approach is not sufficient on its own to attain success. On the other hand, a trial and error approach is full of inherent risks and highly unlikely to result in long tern sustainable competitive advantage. The alignment of the internal and external operating environment is only one aspect of strategy that is termed ‘strategic context’ by Pettigrew and Whipp (1993) in their ‘trinity of forces’. The other two forces are ‘content’ and ‘process’. Content relates to the distinct elements of the strategic plan, which differ from firm to firm. Process, on the other hand, relates to the nature of the actions deployed in the development of the content of the strategic plan. It involves a succession of interrelated steps, each of which entails the consideration of a series of factors and the deployment of the relevant analytical tools. Clearly, the factors considered during the process can potentially reduce the risks involved and facilitate the more effective deployment of the strategy content. This is a very important consideration for SMEs as even a relatively small margin of error can have a devastating impact on a firm’s progress. Lyles et al. (1993: 42) contended that: the elements of goal formulation, developing distinctive competencies, determining authority relationships, deploying resources, and monitoring implementation receive more effective attention when small businesses engage in formal planning. Sentiments such as this, and the weight of previous studies, lead the authors to formulate the following hypothesis: The strategic planning process has a positive impact on organizational performance.

138 Strategic Planning

This study seeks to examine the association between strategy and performance by assessing the degree of emphasis placed on the factors used for developing the content of the strategy, and their perceived impact on a broad range of performance dimensions. Therefore, in this chapter we test an important component of the above hypothesis. Moreover, we examine the relative emphasis placed on strategic planning factors by firms perceiving their environment as subject to product and process change compared to those characterizing their environment as increased competition orientated. We begin by deriving operational measures for both strategic planning and performance. We then outline the methodology for the study. Next, the results are presented, followed by a discussion on their implications. The chapter then proceeds to consider the emphasis given to both strategic planning and performance dimensions by firms operating in two different types of environment, and closes by presenting conclusions and recommendations for future research.

Operationalizing the strategic planning process Researchers have adopted a number of independent characteristics to delineate strategic processes (Kargar and Parnell 1996, Ramanujam et al. 1986, Ramanujam and Venkatraman 1987, Veliyath and Shortell 1993). Based on the work of these authors, the literature review and qualitative interviews, we identified the following characteristics to describe the strategic planning process: (a) External environment orientation includes ‘the sum total of all the forces that affect a company’s actions’ (De Geus 1997: 35). Such forces include the general economic conditions together with fiscal and regulatory influences and the behaviour of competitors (Covin and Slevin 1989). While many of the forces outlined are beyond the direct influence of SME managers, organizational failure often results from a lack of consideration of the external environment. Mills and Friesen (1992) take the view that the consideration of the external environment is a key ingredient in the development of a robust strategy. Organizations ignore the external environment at their peril. Accordingly, the rationale for including this characteristic is based on the need to prepare for an uncertain operating environment (De Geus 1997). (b) Internal environment orientation refers to the consideration of factors such as the firm’s strengths/weaknesses and the match


between the internal resources of the firm and the firm’s aims and objectives. Porter (1990) stresses the need for effective internal orientation to enable ‘clear trade offs and strategic choices’ to be made, and to ensure that alignment is maintained with the firm’s external environment. Since the late 1980s, the internal environment, or resource-based view as it is now known, has been increasingly emphasized as a key consideration in the process of strategy formulation and an important source of competitive advantage (Barney 1991, Hamel and Prahalad 1994, Peteraf 1993). (c) Functional integration refers to the reduction and elimination of functional boundaries to enable greater competitive advantage (Champy 1995). Butler (1991) describes functional boundaries as ‘abstractions’. Functional integration is a key driver of greater flexibility in meeting customer needs (Hirschhorn and Gilmore 1992). This is a neglected area of research in SMEs, arguably arising from their flatter organizational structures. (d) The use of analytical techniques refers to the deployment of concepts, models and techniques as part of the strategic planning process (Kargar and Parnell 1996, Ramanujam et al. 1986). Analytical techniques are an essential tool to address complex issues or to evaluate dynamic operating environments (De Geus 1997). This is also a neglected area of research in SMEs – techniques are arguably unnecessary in a stable environment but increasing in usage as the operating environment becomes more dynamic and turbulent. (e) Resources for the strategic planning process refers to the resources devoted to the development of strategic plans (Hamel and Prahalad 1994, Steiner 1979). More specifically, this includes the physical and financial resources allocated to the process, and the involvement of the chief executive, top management and line managers in the process (Kargar and Parnell 1996, Ramanujam et al. 1986). The role of the chief executive is seen as crucial as well as symbolic in the strategic planning process (Bracker et al. 1988). (f) Systems capability/creativity refers to how the firm anticipates and prepares to meet potential threats and opportunities. The ability to consider risk, to develop contingencies, to deal with surprises, flexibility and creativity in discovering new and better ways to compete are important considerations in the strategic planning process (Porter 1990). This frequently requires a degree of innovation and creativity (Atkinson et al. 1997). While SMEs are renowned for their creativity and new product development (Barkham et al. 1996), many firms still fail to see the opportunities and advantages that are open to them (Hamel and Prahalad 1994).


(g) Focus on control relates to the ongoing process of monitoring activities to ensure they are carried out in a manner consistent with the firm’s overall strategy. It involves upstream and downstream communication, the elimination of interdepartmental barriers and motivating employees to work better together (Simmons 1991). Hill and Jones (2001: 421) encapsulate the importance of strategic control by stating that it ‘does not just mean reacting to events after they have occurred; it also means keeping an organization on track, anticipating events that might occur, and responding swiftly to new opportunities that present themselves’. On a priori, one would expect SMEs to place less emphasis on this factor because of resource limitations.

Performance measurement An effective performance measurement system ought to cover all aspects of performance that relevant for the existence of an organization and the means by which it achieves success and growth (Champy 1995, Hillman and Keim 2001, Kaplan and Norton 1996). This means that any performance measurement system ought to include more than just financial measures. This point is well established, as many authors contend that any credible model of performance measurement must have more than one criterion (Brown and Laverick 1994, Kargar and Parnell 1996, Veliyath and Shortell 1993). Kargar and Parnell (1996) used two dimensions of performance ‘satisfaction with the financial outcomes perceived to be associated with the planning process’ and ‘satisfaction with the contribution of strategic planning efforts to overall organizational performance’. Our exploratory interviews with the managing directors of six firms indicated that customer satisfaction measures, learning and growth measures, and organizational capability indicators are also important performance dimensions. This study, therefore, uses a broad range of performance dimensions, which include these measures along with organizational effectiveness and financial performance. However, the exploratory interviews and discussions with employer federations suggested that, in general, it was not possible to obtain wide-ranging hard measures of performance. Even if it were possible, it would have been extremely difficult to establish a link between variation in performance and factors used in the strategic planning process because, potentially, many factors contribute to changes in performance. Therefore, we adopted the notion of measurement against purpose


propagated by Steiner (1979). In practice, we assessed the degree of satisfaction with a battery of performance measures arising from individual factors used in the strategic planning process. A similar approach to assessing the level of satisfaction arising from specific factors and actions was adopted by Kargar and Parnell (1996) and Luo and Park (2001). Andersen et al. (2001) suggest that linking strategic objectives with performance helps with the articulation of causality. They state that this approach has clear advantages, such as helping SMEs to gain a thorough understanding of strategy by raising the awareness of strategy throughout the entire organization and by providing a focus to enhance the achievement of the strategic objectives.

Methodology The sample consisted of 1 000 UK based small and medium-sized manufacturing firms operating in the electronics and engineering sectors. This choice was governed by the following considerations: (a) the economic importance of the sectors; (b) the structure of the sectors; and (c) the differences in the product life cycles of the sectors. The European Commission definition of small and medium-sized enterprises was used, which categorizes SMEs as having fewer than 250 employees. As there are 14 842 electronic/engineering SMEs in the UK, it was logical to use a random sampling methodology based on a directory available from a reputable commercial firm. Data was gathered by means of a postal questionnaire. The variables designed to test the emphasis placed on the factors considered in the development of strategic plans and the resources devoted to the process were largely based on the survey instrument devised and tested by Kargar (1996).1 The merits of including these factors and their comprehensiveness were initially tested with the help of the literature, as discussed previously. They were further tested in detailed qualitative interviews held with six managing directors of small and medium-sized firms that met the sample frame specification. These interviews prompted the authors to make a number of small changes to the instrument designed by Kargar. At the pilot phase, these questions were further tested for clarity and completeness. This resulted in some changes to the wording of questions. A comprehensive examination of the literature provided the basis for identifying the potential performance measure constructs. It also provided the basis for the in-depth discussions with the sample of managing directors that participated in the


qualitative phase of the study. As a direct consequence of these interviews, a more comprehensive set of performance dimensions was developed for inclusion in the questionnaire. These dimensions were tested at the pilot phase and modified where necessary. In all cases respondents were asked to state their level of satisfaction with the contribution of different elements of the factors used in the crafting of strategy to the particular performance measure using a five point Likert scale. As was discussed previously, other researchers, such as Luo and Park (2001) and Kargar and Parnell (1996), have adopted a similar approach. In summary, the external validity of the instrument was secured by: (a) using, where possible, elements of relevant instruments tested in previous field work by other researchers; (b) identifying significant support in the literature for the relevance of the concepts used and their attributes; (c) using initial qualitative interviews with the managing directors of SMEs to test comprehensiveness and relevance of the instrument; (d) piloting the questionnaire to test for clarity of questions, relevance, and completeness. The internal validity was established by testing the questionnaire constructs for their ability to yield a significant factor structure. The instrument could be said to have a high degree of reliability when there is a significant association between responses to each of the attributes. In effect, it is ‘an indicator of how well the different items measure the same issue’ (Litwin 1995: 21). Internal consistency was established using Cronbach’s Alpha and factor analysis. The alpha coefficient ‘represents the most widely used and most general form of internal consistency estimate’ (Murphy and Davidshofer 1994: 83). Nunnally (1978) states that a Cronbach’s Alpha value of 0.7 is adequate for internal consistency, while Jones and James (1979) contend that a broader band of alpha value ranging from 0.44 to 0.81 is adequate, as the alpha value tends to give a conservative estimate of the scale’s reliability. SPSS 6.1 was used to calculate Cronbach’s Alpha, using the guidelines that at least three items are included in each scale in order to cover it adequately. Factor analysis was used to reveal underlying common themes, and also as a means of data reduction. Kline (1994: 28) points out that the main aim of factor analysis is to ‘simplify a matrix of correlation such that they can be explained in terms of a few underlying factors’. In only


two cases, internal environment orientation and resources for strategy, the attributes of the characteristics loaded on to more than one factor. In these cases, a decision was made to subdivide the characteristics into two factors. In doing so, the key question was whether both factors should be retained. The most commonly used guidelines suggest that all factors with eigenvalues of over 1 should be retained (Kim and Mueller 1978), as well as all attributes with a factor loading in excess of 0.6. Some authors consider that retaining factor loadings over 0.6 is being a little conservative, and suggest that factors with a loading of over 0.320 should be interpreted (Tabachnick and Fidell 1996). This is broadly in line with the suggestion of Kline (1994: 6) who reports that ‘factor loadings are high if they are greater than 0.6 … and moderately high if they are above 0.3’. In this study, we adopted the more stringent criteria and retained factors with loadings of 0.6 and above. Following the establishment of the construct validity and reliability of the instrument, canonical correlation analysis was used to establish the association or relationships between the factors. Canonical correlation is a statistical technique for studying the association between two variables to form linear combinations of the variables that have maximum correlation. Ramanujam and Venkatraman (1987) compared the three primary approaches usually deployed in examining interrelationships. They choose canonical correlation as ‘it is more insightful’, and discounted factor analysis followed by correlation analysis as being too restrictive. The process of canonical correlation involves finding the set of coefficients that give the maximum correlation, followed by a set that was orthogonal to the first and had the next largest correlation and so on. Kargar (1996) refers to the advantages of canonical correlation as ‘lying in its multivariate (and integrated) treatment of the effectiveness and predictor dimensions’. Lambert and Durand (1975), cited in Ramanujam and Venkatraman (1987), state that ‘for purposes of comparison loading values of 0.30 and above are sufficient for drawing inferences about criterion–predictor relationships’. Canonical roots can also be interpreted by examining the simple correlations between the canonical variates (or factors) and the variables in each set. These correlations are also called canonical factor loadings. The logic here is that variables that are highly correlated with a canonical variate have more in common with it. The degree of variance can be inferred from the proportion of variance extracted from each set of variables by a particular root by looking at the canonical factor loadings. By squaring the correlations, the resulting numbers reflect the proportion of variance accounted for in each variable.


Response From the initial mailing of 1 000 questionnaires, it was found that 298 firms did not meet the size criterion, had ceased operations, or were not contactable. The effective size of the sample was, therefore, 702 SMEs. One hundred and ninety-four completed and usable questionnaires were received representing a response rate of 27 per cent. Bourque and Fielder (1995) state that without incentives, a survey of the general community is unlikely to have a response rate higher than 20 per cent, while Jobber (1990) suggests that a typical response rate to surveys in the industrial sector is around 18 per cent. Accordingly, the response rate is highly satisfactory. Table 7.2 provides the descriptive statistics for the sample. Checks were carried out on the completed questionnaires to ensure that respondent firms: (a) complied with the stipulated size criteria; (b) operated within the engineering and electronics sectors; Table 7.2 Sample demographics % Age of respondent

39 and under 40–49 years 50–59 years 60 and over

21.1 27.3 38.7 12.9

Annual turnover

less than £500 000 £500 000–£1m £1m–£2m £2m–£4m £4m–£6m Over £6m

9.3 12.4 17.0 22.2 14.4 24.7

Employees

1–9 10–19 20–49 50–99 100–199 200–249

11.3 12.4 28.9 24.2 16.0 7.2

Years in operation

5–10 11–20 21–30 31–40 41–50 51 and over

20.8 24.1 25.3 5.2 5.8 18.8


(c) were in existence for over five years; (d) completed the questionnaire fully; and (e) prima facie properly answered all questions; for example, not the same category were selected throughout. The reasons for non-response were examined to establish their potential impact on the results. There are potentially many reasons for non-response to a postal questionnaire. For example, lack of clarity, demanding excessive or sensitive information and questionnaire layout (De Vaus 1996). Clearly, lack of response arising from these factors can potentially bias the outcome. Another set of reasons for non-response is put forward by Bryman (1989), who refers to some firms having: ● ● ●

suspicions about the researchers motives; a reluctance to divulge information; and concerns for the resource implications of completing a questionnaire.

Arguably these factors have a significantly lower impact on potential bias. SMEs that did not return the questionnaire were contacted by telephone to ascertain the reasons for non-response. The following reasons were proffered for non-participation: ●

●

● ●

●

299 firms indicated that they lacked the time and resources needed to complete the survey; 108 firms indicated that it was company policy not to participate in surveys; 51 firms expressed a reluctance to divulge information; the authors were unable to contact the managing director or his/her deputy of 29 firms after four separate attempts; 21 firms refused to participate with no particular reason given.

Clearly, the reasons for non-response in our case are more in line with that put forward by Bryman (1989) than those put forward by De Vaus (1996). Therefore, the potential of bias due to non-response is reasonably small in the study reported here. Another perspective on the potential impact of a non-response was put forward by Ryan (1995). He stated that the ‘seriousness of the non-response bias depends upon the extent to which the population mean of the non-response stratum differs from that of the response stratum’. In our case, the similarities in the response patterns and the number of valid responses across demographic characteristics suggest that response bias is not a serious problem and does not invalidate the results.


Analysis In the earlier sections, the most prevalent factors used to craft strategy were identified and classified under seven broad headings. Attributes classified under each of these headings were in turn factor analyzed to (a) determine scale validity; and (b) reduce the data to a more manageable size. All the attributes have high factor loadings in excess of 0.6. In addition, the alpha scores for each characteristic are in excess of 0.44, and indicate a high degree of internal reliability. The Bartlett test of sphericity and the Kaiser–Meyer–Olkin test of sampling adequacy produce significant results indicating that the data is highly suitable for factor analysis. In the case of each characteristic of strategic planning, the eigenvalues and communalities indicate that there is good evidence for the strength of the structure underlying the individual variables. The majority of the variables have high communalities (50 per cent or more), implying that the factor structure explains the majority of the variance in the remaining variables. The attributes of the following five characteristics load onto one factor in each case, confirming the characteristics derived by Kargar and Parnell (1996): (a) (b) (c) (d) (e)

external environment orientation; functional integration; the use of analytical techniques; systems capability and creativity; a focus on control.

The internal orientation and resources for strategy characteristics each loaded onto two separate factors. The two factors that emerged from the internal orientation characteristics were termed ‘internal capability’ and ‘track record’. The dominant component of the characteristic relates to the attributes of factor one (36.9 per cent of the variance) – internal capability. This factor contains attributes relating to general managerial ability, financial strengths and weaknesses and human resources analysis. The second factor relates to track record and accounts for 17 per cent of the variance. Track record refers to past performance and the strengths and weaknesses of current products. The factors that emerged from the resources for strategy characteristic of strategic planning were termed ‘resources for strategy’ and ‘management time’. The results indicate that the dominant component of the characteristic relates to the attributes of factor one – resources for strategy, which comprises attributes relating to internal working practices,


the use of information, and the involvement of external consultants. Management time refers the managing directors and line managers involvement. Data reduction in respect of perceived performance resulted in the attributes of customer orientation loading onto one factor. Organizational effectiveness loaded onto two distinct factors, ‘organizational effectiveness’ and ‘short term needs’. The distinction drawn by the respondents between effectiveness and short-term needs is logical and in line with expectations. Learning and growth attributes loaded onto one factor. Organizational capability loaded onto three distinct factors, ‘meeting customer needs’, ‘quality goods on time’ and ‘after sales service’. Meeting customer needs includes advertising/promoting the products, delivering a broad product line and distributing the products widely. The quality goods on time factor includes offering consistent quality and delivering the goods on time. After sales service refers to the capability to provide an after sales service. Finally, the opinions of the SME Managing Directors or Chief Executives are used to assess the degree to which the implementation of the strategic plans impact on the overall financial performance of the firm. Data reduction on this measure is not appropriate as only one attribute is used. Tables 7.3 and 7.4 present the statistics relating to the characteristics of the strategic planning process and the performance measures used. Each table shows the percentage of firms, indicating that their emphasis on each attribute was either strong or very strong. The next stage is to determine the association between factors deployed in crafting strategy and performance. In this regard, canonical correlation analysis was deemed to be the most appropriate technique to use, as outlined earlier in this chapter. The associated variables of significance (with canonical cross loading in excess of 0.300) are displayed in bold type. The results, depicted in Table 7.5, indicate that all the factors used in crafting strategy, with the exception of track record are associated to varying degrees with the following dimensions of organizational performance: learning/growth 34.5 per cent, the provision of quality goods on time 18.6 per cent and meeting customers demands 17.37 per cent. Taken together, these three dimensions of organizational performance account for over 70 per cent of the variance. The analysis confirms that a number of the characteristics of strategic planning are associated with a number of performance dimensions. However, the lack of any association between strategic planning factors, organizational effectiveness and financial performance might be

148 Table 7.3 Emphasis on the characteristics of the strategic planning process Characteristic

Attributes

% of firms with strong/ very strong emphasis

Internal orientation

Diagnostic assessment of past failures/successes Past performance of the firm General managerial strengths/weaknesses Financial strengths/weaknesses Human resources strengths/weaknesses Marketing strengths/weaknesses Products/services strengths/weaknesses

51.0 57.5 57.4 49.5 51.6 57.7 83.5

External orientation

Analysis of competitive position/trends Customer trends General economic and business conditions Regulatory and government issues Technological trends/capabilities

72.1 81.5 64.4 26.8 71.7

Departmental cooperation

Efforts to achieve functional agreement Functional coordination Understanding of all functions by employees Cross-functional support

59.8 59.2 56.2 65.0

Resources for planning

Involvement of working groups Relevant and available information Involvement of consultants Involvement of line managers Time spent by the managing director Physical and financial resources

25.2 52.9 14.4 79.9 89.2 45.9

Structured analytical approach

Use of analytical techniques Ability to use techniques Willingness to seek outside assistance

23.7 26.8 29.9

Staff creativity

Ability to cope with surprises/crises/threats Flexibility to adapt to unanticipated changes Ability to identify new opportunities Capacity to generate new ideas Capacity to generate/evaluate alternatives Anticipate/avoid barriers to strategy deployment

54.7 67.5 75.8 55.5 52.6 47.5

Strategy – a control mechanism

Value as a control mechanism Communicate management thinking down the line Communicate staff thinking up the line A monitoring performance techniques A mechanism for revising current strategy A mechanism for managerial motivation A mechanism for integrating functions

43.8 57.7 48.4 37.1 41.7 41.8 34.1

O’Regan and Ghobadian 149 Table 7.4 Emphasis on the characteristics of organizational performance Characteristics

Attributes

% of firms indicating dimension satisfaction levels – fulfilled/ entirely fulfilled*

Finance

Overall financial performance

84.0

Customer orientation

Customer satisfaction Customer retention Market share

86.1 82.9 66.5

Organizational effectiveness

Predicting future trends Evaluating alternatives Avoiding problem areas Improving short-term performance Improving long-term performance

44.9 33.0 39.2 52.1 69.1

Learning/ growth

Manufacturing learning Introduction of new products

57.3 65.5

Organizational capability

Capability to: compete on price make rapid design changes respond to swings in volume offer consistent quality provide high performance goods deliver products quickly deliver products on time provide an after sales service advertise/promote the product distribute the product widely deliver a broad product line

76.3 71.1 58.2 96.9 80.9 79.9 96.4 74.7 39.2 47.9 49.5

* The perception of capability attributes was measured according to the degree of importance (1 no importance, 5 much importance).

considered strange. The authors contend that performance is the outcome of the dynamic interaction between the organizational structure, infrastructure, processes, behaviour and the configuration of resources. The implementation of any strategy results in the conversion of competitive priorities into organizational capabilities. Therefore, strategy affects and influences the intermediate factors that in turn influence performance. Financial results and organizational effectiveness are dimensions of performance. Arguably, this explains the lack of any relationship between strategic planning factors and both financial performance and organizational effectiveness. In terms of financial performance, our finding is in line with the work of Kaplan and Norton

150 Strategic Planning Table 7.5 Relationships between canonical functions: strategic planning characteristics and performance dimensions Variables

L*

L2**

%***

(1)

(2)

(3)

Criterion set (performance measures) Overall financial performance

.239 Customer orientation

.446

0.057 0.199

3.38 11.80

.153

.286

Organizational effectiveness Short-term needs Learning/growth

.377 .310 .763

0.142 0.096 0.582

8.42 5.69 34.50

.242

.199 ⫺.490

Organizational capability Meeting customer demands Provision of quality goods on time After sales service

⫺.541 ⫺.560

.066

0.293 0.314 0.004

17.37 18.61 0.23

⫺.347 ⫺.359

.043

1.687

100.00

Total

Canonical crossloading (4)

Predictor set (strategic planning) Internal orientation Internal capability Track record External orientation Departmental cooperation

⫺.492

.346 ⫺.582 ⫺.619

0.242 0.120 0.307 0.383

8.23 4.08 10.44 13.02

⫺.316

.222 ⫺.372 ⫺.397

Resources for strategy Management time Use of analytical techniques Staff creativity Control mechanism

⫺.501 ⫺.475 ⫺.557 ⫺.846 ⫺.621

0.251 0.226 0.310 0.716 0.386

8.53 7.68 10.54 24.35 13.13

⫺.321 ⫺.305 ⫺.358 ⫺.543 ⫺.398

2.941

100.00

Total

* Canonical loading – correlation of the canonical variate with each variable in their respective sets ** Measure of variance of observed variables with the canonical (unobserved) variate *** Proportion of explained variance accounted for by each variable in both the criterion and predictor sets

(1996) and Naffziger and Mueller (1999). These studies also implied that improved financial performance is the result of improvements in the intermediate processes. The absence of a significant association between the customer orientation dimension of performance and the strategic planning factors is more difficult to understand. A priori, one would expect a strong association between the external orientation dimension of the strategic planning process and the customer orientation dimension of performance.


The authors are unable to provide a satisfactory explanation for the lack of association in this case. The lack of relationship between strategic planning factors and shortterm needs or after sales services is in line with expectations. These two measures are concerned with tactical and operational issues respectively. Accordingly, it would have been surprising to find a relationship between these measures and strategic planning factors.

Discussion The analysis indicates that the strongest characteristics of strategic planning associated with organizational performance include systems capability, strategy as a control mechanism and functional coordination. Systems capability has the strongest association with performance, accounting for 24.35 per cent of the variance. This finding is in keeping with the contention in the literature that new and better ways are necessary to compete effectively and achieve above average returns (Markides 1999). It is also consistent with the work of Karger and Parnell (1996) who contend that systems’ capability should be seen as the ‘primary reference point’ for the evaluation of effective organizational performance. Strategy as a control mechanism accounts for over 13 per cent of the variance, which implies that SMEs need a control mechanism in order to achieve their objectives. The finding is consistent with the work of Goold (1991), which states that control is an important factor in the overall coordination of the strategic plan. The third highest association is with respect to functional coordination, which accounts for 13 per cent of the variance. This implies that all the resources of the SME are needed to meet the requirements of innovation to meet the customer demands and the provision of quality goods on time. This finding is consistent with the literature (Kargar and Parnell 1996, Ramanujam et al. 1986, Ramanujam and Venkatraman 1987). The next highest associated characteristic is the use of analytical techniques, which accounts for over 10.5 per cent of the variance. The importance attached to the use of analytical techniques in this study is unexpected, given the strong views and findings of the secondary literature (Ramanujam and Venkatraman 1987). A possible explanation for the greater emphasis on this characteristic in this study may relate to the type of firms and the sectors that they belong to. For example, electronic and engineering manufacturing firms use analytical techniques to a greater extent than small banks due to their broader range of activities and openness to external competition.


The remaining characteristics (resources for strategy, track record and the use of management time) each account for less than 10 per cent of the variance. It could be argued that elements of these characteristics are included or overlap with elements of the remaining strategic planning process characteristics.

The operating environment The study also sought to ascertain whether firms placed a different emphasis on the attributes of strategic planning dependent on how they perceive their operating environment. A series of variables were used to describe the operating environment. These were subjected to factor analysis to identify common attributes. Two operating environment types emerged. One type was characterized by product and process change and the other by increasing competition. The product and process change environment includes attributes internal to the firms, such as changing product and process technology and product life cycle. The increasing competition environment encompasses attributes that are external to the firm and includes the turbulent and changing operating environment and competition from overseas firms as well as substitute products. The eigenvalues and communalities indicate that there is good evidence for the strength of the structure underlying the individual variables. The majority of the variables have high communalities (50 per cent or more), implying that the factor structure explains the majority of the variance in the remaining variables. The two factors explain 51 per cent of the overall variance. Accordingly, it is possible to conclude that the factor structure is robust. In this sample, 55.2 per cent of SMEs perceive their operating environment as characterized by product and process change and 44.8 per cent of SMEs perceive their operating environment characterized by increasing competition. Statistically, significant differences existed between the perceptions of the operating environment by firms employing less than 50, 50–99, 100–199 and 200–249 employees. Furthermore, within each operating environment, proportions were different for each size classification. However, the patterns that emerged did not have any particular direction. This suggests that size is not a good predictor of the operating environment perceived. This finding is in line with expectations, as there are few logical reasons for correlation between these two factors. On the other hand, operating


environment and SIC categories appear to be dependant on one another. In this sample, 67 per cent of engineering firms in this sample feared increased competition from both national and overseas entrants. The engineering firms operate in a relatively mature product market, therefore the main competitive pressure comes from firms seeking to enter the market. Electronic firms perceived their market as characterized by product and process change. This reflects the short product life cycle of electronic goods. In effect, these findings support the structure and product life cycle logic criteria for the selection of these two SICs. Statistical analysis using the Wilcoxon test was carried out on each attribute, based on the size of the difference between the two pairs of variables. The analysis of the information presented in Table 7.6 shows that there are only a small number of significant differences between firms that perceive their operating environment characterized by product and process change compared with firms that perceive their operating environment characterized by increasing competition. Firms operating in an environment characterized by product and process change place a greater emphasis on all the characteristics of strategic planning than firms perceiving their operating environment as increasing competition. It should be noted that only five attributes are statistically significant at p 0.005 and a further nine attributes are statistically significant at p 0.05. The analysis indicates that none of the attributes of the internal capability, products and performance, departmental cooperation and management time characteristics are statistically significant. A possible explanation for this may lie in the perception of these characteristics by both environment types as core characteristics, which form a foundation for the remaining characteristics. Therefore, these characteristics are important regardless of the perceived environment type. The principal differences between firms operating in the two types of environment are in the following characteristics and their attributes: (a) the external orientation attributes of general economic and business conditions (z 2.86 and p 0.005), followed by technological trends (z 2.74, p .05) and competitive position and trends (z 2.27, p 0.05) are statistically significant. This finding was expected as firms in an environment characterized by product and process change tend to place a greater emphasis on looking outwards by scanning the environment and establishing the necessary actions to ensure a ‘fit’ with the emerging environment. (b) the resources for strategy attributes of involvement of ad hoc working groups (z 0.24, p 0.05) followed by the use of relevant and

154 Table 7.6 Emphasis on the characteristics of the strategic planning process by firms perceiving their environment as product and process change or increasing competition Strategic planning characteristics

Product and process change Mean (N 106)

Increasing competition Mean

Internal capability General managerial ability Financial strengths/weaknesses Human resources strengths/ weaknesses

3.38 3.39 3.42

3.30 3.36 3.41

0.86

0.19

0.40

Products and performance Past performance Current products strengths/ weaknesses

3.78 4.22

3.73 3.94

0.31

0.19

3.94

3.47

2.86*

4.10 4.06

3.58 3.67

2.74**

2.27**

3.60

3.56

0.32

3.81 3.68 3.66

3.70 3.67 3.62

0.71

0.33

0.65

Resources/employee involvement The use of working groups Relevant/adequate information Involvement of consultants Other physical/financial resources

2.52 3.61 2.00 3.25

2.40 3.59 1.70 3.24

0.24**

2.38**

2.36**

0.29

Management time Involvement of line managers Managing directors’ time

4.03 4.38

4.02 4.36

1.50

0.21

Use of analytical techniques Use of analytical techniques Ability to use techniques Willing to seek outside assistance

2.95 2.94 2.78

2.40 2.81 2.56

3.68*

3.22*

0.91

Staff creativity Coping with surprises/crises Adapting to unanticipated changes Identifying new opportunities

3.61 3.78 4.15

3.35 3.63 3.88

1.98**

0.99

1.96**

External orientation General economic/business conditions Technological trends Competitive position and trends Departmental cooperation Understanding of all functions by employees Cross-functional support Functional coordination Efforts to achieve functional agreement

z statistic

(N 88)

O’Regan and Ghobadian 155 Table 7.6 (Continued) Strategic planning characteristics

Identifying key problem areas Generating new ideas Generating/evaluating strategy alternatives Anticipating barriers to strategy deployment Strategy as a control mechanism Value as a control mechanism A monitoring control technique A mechanism for revising strategy Ability to communicate management thinking down the line Communicate staff thinking up the line A mechanism for integrating functions A mechanism for managerial motivation

Product and process change Mean (N 106)

Increasing competition Mean

z statistic

3.66 3.87 3.71

3.50 3.61 3.27

1.56

1.48

3.09*

3.51

3.18

1.86

3.43 3.27 3.35 3.62

2.98 2.91 2.93 3.47

2.61**

1.92

3.39*

0.85

3.49

3.20

1.76

3.08

2.91

0.83

3.39

3.06

2.11**

(N 88)

* p 0.005; ** p 0.05

adequate information from available sources (z 2.38, p 0.05), and the involvement of consultants (z 2.36, p 0.05) are statistically significant. None of these findings are surprising as firms perceiving their environment characterized by product and process change need to consider emerging opportunities/threats. It could be argued that in a product and process change environment the availability of relevant and adequate information is vital to enable changes to be made in the strategic planning process. (c) the use of structured/analytical approach attributes of the use of analytical techniques (z 3.68, p 0.005), and the ability to use techniques (z 3.22, p 0.005) are statistically significant. Both attributes are emphasized to a greater degree by firms perceiving their environment as characterized by product and process change. This can be explained by the need to utilize a range of mechanisms to adjust the strategic planning process to meet the changes in the emerging external environment. Interestingly, the remaining


attribute of this characteristic, willingness to seek outside assistance, does not differ to a degree that is statistically significant. A possible explanation is that most firms have the ability to use a limited number of analytical techniques. (d) the staff creativity attributes of ability to cope with surprises, crises, and threats (z 1.98, p 0.05), the ability to identify new opportunities (z 1.96, p 0.05), and finally, the capacity to generate and evaluate a number of strategic alternatives (z 3.09, p 0.05) are statistically significant. The emphasis on these attributes by firms perceiving their environment characterized by product and process change can be explained by the requirement to deal with constant and varied change in a dynamic environment. (e) the strategy as a control mechanism attributes of value as a control mechanism (z 2.61, p 0.05), a mechanism for revising current strategy (z .339, p 0.005) and a mechanism for managerial motivation (z 2.11, p 0.05) are statistically significant. Control and managerial motivation can be argued to be necessary elements in a dynamic environment to enable firms to compete effectively. A mechanism for revising current strategy has the strongest significance (p 0.005), which arguably reflects the inherent dynamics of strategy in an environment where product and process change are subject to change, and the importance of having an up to date strategic plan at all times. The perception of the operating environment presents some new insights and suggests that both environment types emphasize the characteristics of strategic planning to a broadly comparable extent. These findings are consistent with the meta-analysis carried out by Miller and Cardinal (1994) which concluded that planning has a positive impact on firm performance, but that factors such environmental conditions have little effect on this relationship. It is therefore logical to conclude that the strategic planning process is influenced more significantly by other factors than the operating environment.

Conclusion The results of this study indicate that strategic planning positively influences a number of key performance dimensions in electronics and engineering firms. In particular, the study found that the following characteristics of strategic planning; internal orientation, external orientation,


departmental operation, resources for strategy, systems capability/creativity, and strategy as a control mechanism, have a positive influence on the following performance dimensions; learning/growth, meeting customer demands and providing quality goods on time. These findings largely confirm the results of previous studies such as Karger and Parnell (1996). However, this study indicates that firms place a greater emphasis on internal capabilities as a means of gaining competitive advantage rather than on external orientation because of the strong association between strategic planning and the learning/growth and organizational capability dimensions of performance. The importance given to internal capabilities is consistent with the work of Amit and Zott (2001), Lee et al. (2001) and Ahuja and Lambert (2001). Firms perceiving their environment to be characterized by product and process change place a higher emphasis on the attributes of a majority of the strategic planning characteristics than firms that perceive their operating environment as characterized by increasing competition. While the differences in only a small number of attributes are statistically significant, leading to the conclusion that the operating environment affects the level of influence placed on some dimensions of strategic planning, however, the lack of statistically significant differences in the case of the bulk of factors suggests that the external environment is not a major influence on the range of factors used in the crafting of strategy. The main limitation of the study relates to its focus on only two sector types: mature products and stable technology and products with short life cycles and changing technology. Clearly the conclusions apply primarily to these sectors. Each sector was assumed to be internally homogeneous, with no differences between sub-sectors. This assumption should be tested in future studies. In addition, any future research should consider a more in-depth approach. It would have been beneficial to augment the quantitative data with qualitative in-depth case studies or an ethnographic approach. Further testing should be carried out to confirm the finding’s relevance to practice and, in particular, it’s effective operationalization.

Note 1. The authors acknowledge the kind assistance of Professor Kargar in forwarding a copy of the constructs used and for permission to use the constructs as the basis of this study.


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Part III Organizational Change


8 Understanding the HR Strategies of the 1990s Craig R. Littler

Abstract The 1990s witnessed fundamental changes in organizational design philosophy, work structuring and management. Not all change processes can be treated as equivalent: some processes are paradigmatic. This implies that there are significant differences in terms of diffusion, relative permanence, and scope of effects. The 1990s were characterized by waves of organizational downsizing and delayering, and a model of such change (a DS/DL model) is presented. In some ways, the best parallel for the 1990s was the 1890s and the restructuring associated with Taylorism. The DS/DL model is compared to that of Taylorite prescriptions for change. It is argued that the commonalties outweigh the differences. Common to both is a technology of power-shifting and work intensification.

Introduction: were the 1990s a transformation decade? When the history of the United States during the final 20 years of the 20th century is reviewed, one issue that will be seen as defining the American workforce for the period is downsizing and the loss of the perceived ‘social contract’ of lifelong employment in the public and private sectors with a single employer. According to a March 1996 series of articles in the New York Times, ‘The Downsizing of America’, more than 43 million jobs have been lost in the United States since 1979, affecting nearly one-third of all households. (US Benchmarking Study, 1997) So begins a key study on downsizing in the USA. Organizations in Britain and many other OECD economies have undergone a decade of 165

166 HR Strategies of the 1990s

downsizing, restructuring and transition. Downsizing, or workforce reduction, was a dominant feature of firm behaviour and human resource strategies. At the beginning of the 1990s, there was a widespread view that as organizations continued to restructure, employees and managers would face numerous challenges. As Sparrow and Marchington (1998: 10) point out ‘the 1990s were perceived both by researchers and practitioners as watershed years’. Texts and articles of varying quality appeared in the 1990s attempting to characterize the nature of the transformation. For example, Luttwak (1999) defines the 1990s as a dramatic period of change under the label of ‘turbo-capitalism’. Wolman and Colamosca (1997) adopt a more pessimistic tone and depict the ‘betrayal of work’ and label the decade the period of the ‘Judas Economy’. Wallulis (1998) and Sennett (1998) emphasize the broader social impact of the ‘new insecurity’ on work, life and family. Common to most of the transformation literature of the 1990s is the recognition of the ramifying effects of downsizing, delayering and corporate restructuring. At the organizational level, management gurus and consultants promoted downsizing and flattening the hierarchy. Fewer management layers would mean a concomitant dismantling of entrenched bureaucracies, (Keuning and Opheij 1994, Ostroff and Smith 1992, Peters 1992). This reengineering would generate a series of organizational efficiencies, including enhanced efficiency of information processing, coordination, capital budgeting and resource allocation, (Chou 2001). At the industry level, the firm shifts risk to a network of alliances (Castells 1996, DiMaggio 2001), a process of outsourcing which also implies downsizing and decoupling of the workforce. Some analysts of the decade, such as Jacoby (1999), were more sceptical of qualitative change and emphasized continuity amidst change. Thus, Jacoby argues that ‘institutional arrangements have changed much less than Sennett’s “no long term” would suggest. Put bluntly, the welfare capitalist approach remains in place. Career-type employment practices … are still the norm in the labour market. … [the changes] are changes of degree, not of kind. They do not constitute a phase shift but rather a reallocation of responsibilities within a stable institutional structure’ (Jacoby 1999: 124). Given these different perspectives, in this chapter we wish to examine the understanding of the 1990s change processes. In general, we focus on three key research questions: ●

What were the key features of downsizing/delayering as a model of change for organizations?

Littler 167 ● ●

What was the diffusion, relative permanence, and scope of effects? What is the best parallel for understanding the 1990s?

These questions are important in understanding the changing nature of management, the shape of future organizations, and the nature of the firm in the 21st century. Clearly a ‘decade’ is an arbitrary block of time, and events rarely come in such neat packages. Many of the processes discussed had an earlier starting point in the 1980s.

Methods The analysis and discussion draws on a range of primary and secondary data sets. The Australian Organisation Restructuring Projects co-ordinated by the author has involved a series of cross-cultural surveys, national surveys, case studies, surveys within organisations, and the compilation of a comprehensive longitudinal data set of larger Australian firms for every year 1990–99. This multi-methodology enabled us to probe the issue of restructuring in depth and from a variety of perspectives. It is not possible in a short chapter to provide full details of the range of methods utilised. We outline briefly some of the details of the primary sources for this chapter in the ‘Notes’. The interested reader can consult other publications for further details as indicated.

Shifts in strategic assumptions If we travel back in time to the 1950s and 1960s, then there was no ‘downsizing’ terminology. Examine a typical textbook of the time on ‘manpower analysis’ and the only (brief) reference to workforce reduction occurs under the label ‘running down the staff’ – which conjures up some odd images (Bowey 1974: 14–15). The reason for this was that during this period the performance and effectiveness of enterprises was based on the assumption that unending growth is a natural and desirable process of organizational development (Cameron et al. 1993: 23, Whyte, 1956). Managerial objectives and egos were tied up with the notion that ‘bigger organizations are better organizations’ involving a larger market share and a greater opportunity for ‘empire-building’. Managers who sacked workers – or worse, other managers – had in some sense failed. This context of commitment was the one which saw the diffusion of the traditional white-collar psychological contract. In the 1990s, the language of HR practice changed and the symbols were different. Al Dunlap with his book Mean Business became the cultural icon of lean and mean, macho, machete management (Dunlap 1996). The changes in discourse may have been no more than cultural while labour


market processes remained broadly similar. This raises the issue of whether downsizing was new. It can be argued, rightly, that all employers are faced with the need for workforce adjustments, associated with business cycles, loss of market share, product cycles or capital crises. However, while downsizing is not new to the 1990s, there were some key strategic differences. The targets of downsizing changed from blue-collar workers in the 1960s and 1970s, to white-collar workers, professionals and middle managers in the 1990s. Second, past redundancies were reactive phenomena; a reaction to economic crisis typified by plant closures. In the 1990s, downsizing is disassociated from the business cycle and is just as likely to be a proactive phenomenon. Downsizing is seen to be a restructuring strategy with an intent to achieve a new organizational structure or a new level of competitiveness. We found that profitable firms in Australia were just as likely to downsize as unprofitable ones (Dawkins et al. 1999). This finding echoes the US research (Lurie 1998). Further, tracking firm behaviour over 20 years (1976–mid 1990s: US data), indicates a quantum shift in the nature of downsizing. Earlier periods involved more limited redundancies (500 or 1 000 employees, say). The 1990s are characterized by larger packets of job cuts (15 000, 20 000 or more). British Telecom, for example, downsized from 246 000 in 1990 to 125 000 in 1999 – a reduction of nearly 50 per cent. The costs of labour retention appear to rise for firms across this period. A sequential set of corporate restructuring concepts appeared in the 1980s, to be promoted by gurus, consultants, business schools and senior managers in the 1990s. The argument here is that many key innovations – downsizing, delayering, lean production, reengineering, core competencies, outsourcing – had an underlying commonality, that of workforce reduction. However, most productivity strategies from Taylorism to robotics involve workforce trimming. There must be other commonalities which gave shape to the 1990s organizational innovations and generated the fragmentation of the employment relationship (Sparrow and Marchington 1998). I attempt to analyze this in the next section.

Downsizing/delayering (DS/DL) model A key argument of this chapter is that in the 1990s the major organizational innovation was a downsizing and delayering model of change and that this model underlay the marketing labels of various consultancy firms. Downsizing was not epi-phenomenonal, the outcome of

Littler 169

other processes, but central. In order to establish this, we first clarify key elements of what I have termed the DS/DL model; second, we assess it in terms of diffusion, permanence (as opposed to transience), and scope of impact.

The key elements of the DS/DL model As I have indicated, first, the link between redundancies and the business cycle was severed. Instead, redundancies and lay offs were accepted as an effective means to business restructuring (Downs 1995: 8). It can be argued that this reflects an increased marketization of employment relations (Cappelli 1999, Guest 1998); this is partly true, but the package of change runs deeper. In particular, downsizing was a process of continual change, frequently linked to a cycle of downsizing. Downsizing was rarely a one – off event that could be treated as a discrete episode. Australian survey data showed that over 44 per cent of downsizing organizations in Australia downsized three or more times over the two-year period 1993–95 and 71 per cent, twice or more (Littler 1998: 5). This implies that downsizing needs to be considered, in part, as a continuous process of possibility. This helps to generate a climate of insecurity (Burchell et al. 2002, Heery and Salmon 2000, Littler 2000, Thomas and Dunkerley 1999: 162). This issue is discussed further below. It could be assumed that there are physical limits to downsizing. After all, an organization will downsize to nothingness at some point. However, organizations are dynamic systems involving mergers and acquisitions, frequently followed by another bout of downsizing; or spasms of downsizing followed by stability (or even growth), and then more downsizing. In addition, such a view ignores the fluidity of change. We have shown elsewhere that occupational downsizing can be extensive in the context of organizational stability or growth (Littler and Innes 2001). Some US writers have referred to this phenomenon as the ‘revolving door syndrome’ or ‘burn and churn’ (Cappelli 1999: 117–19). It implies that the continuity of downsizing can occur without the organization shrinking in aggregate size. At first glance, this seems an odd idea, but downsizing is not about size. The significance of downsizing lies in its impact on the employment relationship and managerial control systems. First, downsizing was linked, not in all cases, but frequently, to delayering. Delayering is prescribed by Hammer and Champy (‘organizational structures change from hierarchical to flat’ 1993: 77) and Ostroff and Smith as a basic design principle (‘flatten hierarchies as far as possible’ 1992). In practice, many firms downsized without delayering,


but this was often because of a lag effect. Fewer firms downsized a second or third time without delayering. And few delayering firms did not downsize. In four national surveys conducted between 1995 and the end of 1998 in Australia, South Africa and New Zealand, we found that approximately 10 per cent of firms delayered without downsizing (range of 9.4 per cent to 10.7 per cent; n 2 964 organizations). The data indicates that a package of change is involved. This linkage is integral because this was a key area of work intensification – an increase in workloads for managers, professionals and white-collar workers generally. This does not mean the ‘end of hierarchy’; instead it indicates a different form of hierarchy, with power pulled up the bureaucracy. Second, as indicated, the DS/DL model involved centralization of management, not, as some writers suggest, the ‘diffusion of management’ (Scarborough 1998: 705–8). Here, the rhetoric of ‘empowerment’ obscures the stage. Such rhetoric in the 1990s was not based on any theory or widely accepted values of organizational democracy. In most service organizations, all that employees were ‘empowered’ to do was ‘to carry out the closely specified task with maximum responsiveness to given signals, with minimal discretion in their consequent actions’ (Eccles 1994: 175). Decision and control over resources remained firmly with senior management. Third, the process required a clear rhetorical element in ‘teams as heroes’. Teams, task groups and project groups became the visible language of the new model. (This is discussed further below.) Here, it is important to distinguish rhetoric from practice. In many task situations, ‘teams’ could not function as a workplace reality. Sixth, survivor syndrome and declines in organizational commitment were widely reported involving a two/three year adjustment period (Littler 1998, Littler 2000, Noer 1993). It is important to note what the DS/DL model does not include. The way in which the DS/DL model was implemented did not necessarily involve organization around work processes (Ostroff and Smith 1992) nor ‘multi-dimensional work’ (Hammer and Champy 1993). This may take place, but is not definitive of the 1990s changes. The assumption made in this chapter is that the DS/DL model does not constitute a form of ‘new wave management’, nor a post-Fordist, post-structural, situation. Taylorism has proved to be polymorphic: it constitutes a spectrum of forms (Adler 1997, Littler 1982) and the DS/DL model represents a significant shift within that spectrum. In order to understand this, it is helpful to make explicit comparison of the DS/DL model with that of traditional Taylorism (see Table 8.1 below).

Littler 171 Table 8.1 The DS/DL model and comparison with traditional Taylorism Traditional Taylorism

DS/DL model

Employment Relationship

Job insecurity high; minimum interaction model of least commitment

Labour detachment strategies; job insecurity deliberately increased; elimination of certain employees and selection of stress-tolerant employees

Effort- shift

Work intensification for blue collar, shop-floor workers

Work intensification for white collar, professional and managerial employees. This was linked to delayering

Effort Measurement

Attempted science of effort measurement – work study

Performance measures, but no new science of work measurement

Power-shift

Centralization of managerial control

Centralization of managerial control

Heroes of the new model

‘First-class workers’ (Taylor); super workers; ‘shock workers’

Team-focus; and team rhetoric. ‘Teams as heroes.’

Congruence between rhetoric and practice

Ideology of ‘science’ and expertise (work study) with limited knowledge base. But fundamental congruence.

High levels of incongruence. Team rhetoric; empowerment rhetoric; and high skill rhetoric co-exist with very different practices.

At the level of the organization, Table 8.1 suggests that there were specific structural elements that appeared in the 1990s. But was there a system logic; were there factors that created an affinity among these elements? One lesson of the 1990s was that the DS/DL model is not totally coherent. There are a number of contradictions involved (Cappelli 1999: 43–8, Legge 1995). For example, some of the incongruences and organizational dilemmas can be briefly noted – post-downsizing team building, lateral non-hierarchical careers, the promotion of employability for staff enabling them to leave more quickly, becoming a learning organization under conditions of low trust, the reduction of costs by outsourcing followed by the reduction of costs by insourcing; processes of delayering followed by increased numbers of managers, and so on. A key


characteristic of the DS/DL model is that it is incongruent – the rhetoric does not mesh with the praxis. Many researchers have stumbled into this realization, as does Cappelli (1999: 147). Quoting research by Osterman, he goes on to say that ‘there was no effort to enhance job security where these practices [teamwork with high levels of job-specific skills] were common. The combination of greater skills, including those specific to the firm, and yet declining policies for retaining them is one of the central paradoxes of the new deal at work.’ Organizations can and do live with some level of inconsistency, but whether the contradictions within the DS/DL model and between rhetoric and practice will undermine sustainability remains to be seen. If the DS/DL model is fundamental to the change process of the 1990s, then it requires some evidence in relation to three characteristics: extent of diffusion; relative permanence; and significant scope of effects. We discuss each of these dimensions of change in turn. In the following discussion, we draw on UK and US secondary data, but also primary sources from our own research covering Australia, New Zealand, South Africa and the United States.

Diffusion There is still a relative lack of data on diffusion. No systematic diffusion study exists. Nevertheless, the existing patchy research shows a widespread diffusion across the major OECD economies, including the UK (Worrall and Cooper 2001). We examined diffusion across US firms by constructing a data set from Security Exchange Commission data of continuous reporting firms (1 657 firms with consistent data) for the years 1987–95. This showed a diffusion pattern of 44.5 per cent of US firms involved in downsizing greater than 5 per cent of workforce at least once during the nine year period (Littler et al. 1999). This compares to 69.2 per cent of Australian firms over the six-year period from 1990–95 (1 201 continuous reporting firms, Australian longitudinal data set (ALDS)). Our research also tracked the trends of change in Australia, New Zealand and South Africa: all three countries reported widespread occurrence of downsizing and delayering (Littler 2000, Littler et al. 2003). For Canada, Wagar (1998: 305) found that a mid-1990s survey showed 55 per cent of establishments reported permanent workforce reduction in the previous two-year period, with an average reduction of 16 per cent of the workforce. The existing evidence indicates that during the late 1980s and early 1990s, the USA exported the downsizing mantra to many other countries.

Littler 173

Relative permanence ‘Permanence’ has two dimensions that are relevant here: continuity and reversibility. We deal with each in turn. Continuity is crucial. If we consider case study evidence, then in the UK, Danford et al. (2002: 20) have examined a large aerospace firm that continually downsized between 1978 and 2001. In telecommunications, BT and the Australian Telstra have both continually downsized over ten or more years (Otoo and Littler 2001). The 1990s as a decade built downsizing into the employing organization; this became a paradigmatic process across many industries. We can portray some of the issues and evidence from longitudinal and survey data in Table 8.2 below.

Table 8.2 Typology of downsizing Type of downsizing (DS)

New element in the employment situation

Available data on distribution of type of DS

Continuous/continual DS (operationally defined here as three or more times [ planned] during the 1990s)

Yes

Nearly 20% of all larger Australian firms during the 1990s (ALDS) 1997 National survey* of Australian managers showed higher figures.

Repeated DS (operationally defined here as two times [ planned] during the 1990s)

Yes

39.0% (1995 sample) 34.2% (1998 sample) 36.7% (ALDS)

One-off DS associated with redesign

No, though ‘survivor syndrome’ effects can still occur especially outside of blue-collar work

Trigger DS (i.e. crisisdriven; market shift; business cycle)

No, though ‘survivor syndrome’ effects can still occur especially outside of blue-collar work

No DS (stable or upsizing firm)

No

冧

16.2% (1995 sample)** 19.4% (1998 sample) 25.4% (ALDS)

Approximately 20% of firms during the 1990s

* National survey of Australian managers (n 1 009) conducted as part of this broad group of projects by Marchant (Marchant and Littler 1998). Many managers (over 40 per cent) reported cuts were ‘continuous, repeated, lost track of number of times’, etc. However, this would involve some double-counting. ** Cannot meaningfully distinguish between these categories from data sets. Data Sources: Australian Longitudinal Data Set 1990–99, all larger firms (n 23 021 observations); 1995 national survey n 653; 1998 national survey n 1 222.


In the mid-1990s it appeared that continual downsizing was exceptional, an aberration. The experience across the decade taught us that this is a mistaken belief. Continual or repeated downsizing, which may be interspersed with employment stability or even growth, is part of the new employment realities of the 1990s and beyond. Over 50 per cent of Australian larger firms enter into this category. As indicated in Table 8.2, one-off downsizing does not necessarily shift the employment relationship – survivor syndrome may occur for a transition period, but it is repeated downsizing which creates the job insecurity syndrome that defines the 1990s (Littler 2000: 66–7). Turning to the issue of reversibility, then the ALDS allows us to track the downsizing and delayering behaviour of every larger firm across the decade. The simplest reversibility indicator is that of delayering. If the traditional view of organization associated with the bureaucratic model is accepted (Jaques 1990), then there would be an inevitable tendency towards relayering. The lure of adding layers, functions, and complexity as an attempt to cope with changing markets, globalization and regulatory frameworks is continual. Nevertheless, relayering as an organizational return to the bureaucratic past is unusual. We found 10 or 11 per cent of organizations relayering across four national samples in Australia, New Zealand and South Africa during the 1990s – and many firms see the relayering as temporary. To date, delayering appears to be a one-way process. It could be argued that reversibility requires a longer time-window of change. However, the research captured longer periods of restructuring in the New Zealand sample and the 1998 Australian sample and there were no significant differences. In sum, if we are considering the permanence of the DS/DL model, then the available data indicate that structural reversibility has been limited and that the continuity of the process has been built in to an array of firms. The issues of longer-term sustainability, given the contradictions of the DS/DL model discussed above, will work themselves out in the next five to ten years.

Scope of effects Any package of organizational change will have a range of effects. Most organizational innovations have structural implications, but some have more than others. In the UK, the latest Workplace Industrial Relations Survey (1998) showed that downsizing had affected establishments across all industries, (from 19 per cent of workplaces in Transport and Communication to 69 per cent of workplaces in Utilities (weighted percentages; Cully et al. 1998). (See note accompanying Table 8.3.) The

Littler 175 Table 8.3 Changing workloads of middle managers with downsizing (DS) and delayering (DL), Australia, New Zealand and South Africa, 1995–98 N 2 757 organizations

DS DL %

DL only %

DS only %

Neither DS nor DL %

Totals %

Workload increased Workload decreased Unchanged

90.2

86.2

87.1

62.4

80.0

3.9

6.2

3.6

0.5

3.0

5.9

7.7

9.4

37.1

17.0

Span of control increased Span of control decreased Unchanged

75.7

76.9

46.8

35.4

56.2

9.7

9.2

10.8

3.1

7.8

14.6

13.8

42.4

61.5

36.0

The 1998 WIRS does not uncover strategic intention of the organization: the question asked was ‘Has there been any reduction in the number of employees in any section or sections of the workforce in the last 12 months?’ Workload chi-square 88.178, df 6, Signif 0.0000 Span of control chi-square 116.544, df 6, Signif 0.0000 Source: Littler et al. 2003

Quality of Working Life Surveys also provided us with a snapshot of restructuring in Britain at the end of the 1990s. The repeated surveys conducted through Institute of Management members showed levels of organizational restructuring at 62 per cent with, respectively, 52, 45, 48, 54 per cent of organizations involved in redundancies across 1997–2000. Delayering was running at over 30 per cent per annum (Worrall et al. 2000, Worrall and Cooper 2001). Moreover, ‘The incidence of redundancy and delayering appears to have increased in 2000’ (Worrall and Cooper 2001: 4). The QWL survey showed that organizational restructuring by sector and redundancies by sector was comprehensively spread with an average of 62 per cent of respondents reporting restructuring at their place of work (range of 32 per cent in Consultancy to 88 per cent in Utilities; Worrall et al. 2000: 25–6). The UK, Australian, US and Canadian research all show that both the private sector and the public sectors were affected in the 1990s. No specific industry sector or segment or occupational group was insulated. In general, the available data on diffusion, relative sustainability and reversibility and scope indicate a significant degree of transformation.


In the next three sections, we consider some of the specific effects of the DS/DL model both in terms of scope and intensity of impact.

Work intensification for managers and professionals Changing management structures associated with the DS/DL model involve significant changes in managerial workloads and levels of responsibility (Littler and Maguire 2001, Zemke 1988). Across the four national samples there was surprising unanimity concerning the broad trends in increased workloads, levels of responsibility and span of control. Workloads are the factor that receives the most attention with over 80 per cent of all respondents across all three countries identifying this as a cause for concern. However, there is a general perception of increasing managerial workloads independently of downsizing and delayering change strategies. We try to assess this in Table 8.3: it shows the perceived level of workload increase (62.4 per cent) for firms that have neither downsized nor delayered. If we take this figure as the base, then the impact of downsizing (DS only column) or delayering (DL only column) is about 24 per cent above base. This implies that either change strategy results in a workload increase. Combine the two processes (DS DL column in Table 8.3) and over 90 per cent of firms (28 per cent above base) report a significant impact. Virtually all the available British data reports intensified work regimes for managers with long hours, and constantly on call (Charlesworth 1997, Thomas and Dunkerley 1999, Wheatley 1992). Thomas and Dunkerley (1999: 164) assert that delayering ‘had left some managers with huge spans of control (1 : 270 in one instance)’! Workload impacts can constitute a major blockage to successful restructuring. As one manager responded to the Australian survey, ‘reducing one organizational layer is achieved, but a lot of work is placed on the other layers. More reductions planned and client service has deteriorated significantly’. (1995 Survey Data). Many firms found themselves faced with managerial ‘burnout’ and did not know how to respond to increased stress and labour turnover (Littler and Maguire 2001). For professionals, another group facing intensified work regimes during the 1990s, there is less systematic empirical evidence. However, the 2001 British Skills Survey showed convincingly that over the period 1986–2001 ‘professionals’ experienced a dramatic loss of self-reported job control plus work intensification. In 1986, the proportion of professionals reporting a ‘great deal’ of choice in relation to their job

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situation was 72 per cent. By 2001, it had plummeted to 38 per cent, (SKOPE 2002: 71). The existing evidence suggests that the 1990s were a dramatic period of intensified work regime for professionals.

Teams as heroes While it is misleading to assert that ‘All structural designs are really rhetorical devices’ (Eccles and Nohria 1992: 119), it is true that most packages of change require ‘heroes’ of the new model. For the DS/DL model, it was teams. There is an air of unreality about team rhetoric – most people are not in teams; most work is not conducted via teams – the levels of task interdependence are too variable. And the history of such initiatives in Britain, the United States and Australia is a poor one – as exemplified by the prior research on QC Circles (Bradley and Hill 1983, Dunford and McGraw 1987). Before we see how the 1990s rhetoric worked, let us contrast the ‘heroes’ of the Taylorite system. For Taylorism, it was the super worker who was the hero of the system – the one who broke the output norms. This is seen most strikingly in the Soviet adoptions and perversions of Taylorism, where the ‘shock worker’ was set up as a role model. Stakhanov was a 1935 coal miner who was selected by the Party and government because he had evolved a new method of organizing the extraction of coal which increased the amount of coal cut per shift by an astonishing amount (from 6/7 tons to 102 tons per shift). Stakhanov was quickly given massive publicity by the Party, declared a labour hero, rewarded and decorated (Littler 1984: 90). This process of Stakhanovism was Taylorism in extremis. Labour ‘heroes’ can create labour tensions, and there are several accounts of over-zealous Stakhanovites being murdered (Littler 1982). In Western economies, super workers were even more a matter of individualism. Yet, the DS/DL model of the 1990s ran against the individualism of Western culture and made the team the hero – not to be a ‘team-player’ was the kiss of organizational death. For more traditional management theorists like Jaques, who still believed in the age of hierarchy, the 1990s ways of organizing work (such as teams) are derided by Jaques as ‘gimmicks and fads masquerading as insights’ (1990: 127). What is the evidence on the practice of teams? In the USA, Osterman’s national survey in 1992 found that 55 per cent of all establishments had teams in some form and that 41 per cent had them for the majority of their core workers (Osterman 1994). In the UK, the 1998 WIRS survey reported 65 per cent of workplaces surveyed (25 employees) had some form of ‘team’. However, only 5 per cent of this group had semi-autonomous teams in a meaningful sense (Cully et al. 1998).


In Australia, the 1995 Australian WIRS reported 43 per cent of workplaces (20 employees) had semi-autonomous work groups (Morehead et al. 1997: Table 9.7). Few of the cross-sectional studies explore the proportion of employees involved in teams in detail, the amount of work conducted in teams and the broader significance of teams. The ironic extreme is reached in work contexts such as call centres, where despite the individualistic nature of the work and the high rates of labour turnover, employment is described as ‘team-based’ – such labelling appears to be gestural (Thompson and McHugh 2002: 183). The other key gap in the research is that the link to delayering has not been empirically substantiated. Despite the prominence of teamworking and team-building in the discourse of the DS/DL model, our studies of delayering in four national surveys did not show that the ‘facilitation of team work’ was a major objective of the majority of firms who delayered. The predominant objective was the improvement of decisionmaking (Littler et al. 2003). Nevertheless, insofar as team-working exists, it represents a significant departure from traditional Taylorism.

Power-shifting Taylorism, as a soft technology, was concerned with the perceived ‘overmighty’ role of internal contractors, foremen, and skilled workers. A key objective was to shift shop-floor power to new levels of supervisors, who became, in the passage of time, the middle managers of the 1950s and 1960s. This power-shifting was based on centralization of decision making under the rhetorical rubric of ‘science’ and the operational practice of a planning office. The DS/DL model was concerned with the perceived blocking power of middle managers. The power-shifting of the DS/DL model was the centralization of decision making in the hands of senior managers. In 1958, in a now classic article, Leavitt and Whisler first put forward the notion of the decline of middle management and associated delayering (although they did not specifically use the latter term). The core of the article was a set of predictions concerning management thirty years in the future. The primary cause of organizational change, according to the authors, would be the progressive impact of information technology, which would permit the routinization, or ‘programming’, of middle managers’ jobs and an associated decline in numbers, authority and skills. Leavitt and Whisler’s broad hypothesis has been repeated many times (Cappelli 1999: 5, Noer 1993: 144, Osterman 1996: 18). This delayering thesis suggests that the burgeoning organization structures associated with the

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first sixty years of the twentieth century created layers of management with no other function except to control employees (Gordon 1996). Further, it suggests that no decisions were taken outside simple supervisory and information-switching tasks, and no real strategic or leadership role fulfilled. Thus, the thesis predicts that if it were possible for top management to resume middle managers’ functions, then such roles would be eliminated or substantially restructured. This is the theoretical basis for centralization of management. Osterman (1996: 14) argues that this process of power-centralization did take place in many US firms during the 1990s: ‘much of the reduction in managerial layers has occurred via the elimination of formerly independent operations and concentration of power in more central locations’. According to Osterman, there was little sign of managerial ‘empowerment’. Research in Australia, New Zealand and South Africa also found little indication of empowerment of managers (Littler et al. 2003). Scarbrough (1998: 708) underlines the perceived polarization between middle managers and senior managers within British firms: a view iterated by Sparrow and Marchington (1998: 6). Osterman (1996: 14–15) and Batt (1996: 76) emphasize the same divide for the United States. Middle managers were often staunch opponents of the new discourses of management associated with lean production, empowerment and delayering (Scarbrough 1998, Storey 1992). This echoes the opposition of internal contractors and foremen to Taylorite innovations in the 1890s and beyond (Littler 1982, Taylor 1964 edn, Shop Management: 94). The parallels are striking as the 1890s experiences reverberated through the 1990s.

Conclusions – the lessons of the 1990s The 1990s witnessed fundamental changes in organizational design philosophy, work structuring and HR practices. Not all change processes can be treated as equivalent: some processes are paradigmatic. This implies that there are significant differences in terms of diffusion, relative permanence, and scope of effects. In many ways, the best parallel for the 1990s was the 1890s and the restructuring associated with Taylorism. Disentangling continuity and change is never easy. Nevertheless, some decades represent a greater degree of transformation than others. No model of change will swamp everything; there will be islands of difference, small continents of sameness and inertia, but the 1990s was not the decade of Japanization (which some predicted), but of DS/DL.


The diffusion of downsizing was remarkable and it dwarfed all other organizational innovations of the 1990s. Up to the present, the changes appear to be dyed into the weave of 21st century organizations. The gaps and contradictions between rhetoric and practice may undermine sustainability, but this decade will be the testing ground. As indicated in the US quote at the start of this chapter, the 1990s was the downsizing decade. Redundancies and lay offs were accepted as an effective means to business restructuring, not as a response to a crisis situation. Despite this, there has not been an adequate effort to unpack the elements of the model of change. In our view, the model has involved a DS/DL package and this has been a commonality underlying the management-speak of BPR, lean production, horizontal organization, flattening, rightsizing, and so on (Downs 1995, Obeng and Crainer 1994: 191). What was the inner logic of the DS/DL model? We have argued in this chapter that the inner logic was a process of labour detachment, powershifting and work intensification. Further, that this logic was remarkably similar to the logic of Taylorism despite all the claims of post-Fordism, ‘the new management’, and other discourses. With the benefit of (a little bit of) history, we can see that downsizing as an HR strategy was the Taylorism of the 1990s.

Notes: Methodology Cross-sectional data: One focus of the research was obtaining cross-cultural empirical data with regard to restructuring, delayering and downsizing. The survey method was used to obtain the data. A questionnaire was developed to measure downsizing and delayering in organizations. The questionnaire was standardized and applied in Australia, New Zealand and South Africa. We utilized a virtually identical questionnaire in all three countries. In November 1998, we ran a duplicate survey in Australia with an expanded questionnaire. The latter allowed us to compare effects over time. The 1998 survey was done in conjunction with the University of Melbourne. The details concerning the sample frames, sample size, response rates and respondents are set out in a summarized form in Littler (2000). The rationale for the sampling in this study was to obtain a broad cross-section of larger organizations throughout Australia, New Zealand and South Africa. We focused particularly on the larger organizations (employing 50 or more) and our sample is skewed towards these organizations. This size parameter was

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chosen because of the primary focus on downsizing and delayering. All three economies tend to be small-firm economies compared to the UK or USA. Assessment of non-respondents compared to respondents showed no significant differences to the organizational population in terms of sector, industry segment, or size within our designated size band.

ALDS (Australian longitudinal data set): The Australian longitudinal data set (ALDS) consists of 4 153 Australian larger firms from 1990 to 1999. This generates 4 153 company profiles with 921 profiles for the full ten years, 1 051 firms reporting for nine years, and so on. The dataset has been built from Affirmative Action Agency (AAA) reports, employer information and company reports. Non-government organizations with 100 or more employees were required by Australian equal opportunity legislation to provide information regarding, among other issues, numbers and types of employees year to year. In 1994 reporting year, the Agency estimated 94.8 per cent compliance and in 1995, 96.7 per cent compliance. These response rates constitute a comprehensive coverage.

US longitudinal data set: For the United States the major source was the Disclosure Database, which contains financial and management information on approximately 12 000 public companies in the USA. The company data is extracted from annual and periodic reports filed with the US Securities and Exchange Commission (SEC). The years investigated were 1976 to 1995. The initial sample consisted of all companies that provided financial records for at least two contiguous years. For the later period (1987–95), this consisted of 12 696 cases with at least one ‘pair’ of employee numbers. Changes in employee numbers between contiguous years were calculated only if, in both years of the comparison, employee numbers were larger than or equal to 50. Some of this research was conducted in conjunction with Queensland University of Technology and Professor Boris Kabanoff.

References Adler, P. (1997) ‘Work organization: From Taylorism to teamwork’, Perspectives on Work, vol. 1, no. 3, pp. 61–5. Batt, R. (1996) ‘From bureaucracy to enterprise? The changing jobs and careers of managers in telecommunications service’, in Osterman, P. (ed.) (1996) Broken Ladders: Managerial Careers In The New Economy. New York: Oxford University Press, pp. 55–80. Bowey, A. (1974) A Guide to Manpower Planning. London: Macmillan.

182 HR Strategies of the 1990s Bradley , K. and Hill, S. (1983) ‘After Japan: the quality circle transplant and productive efficiency’, British Journal of Industrial Relations, vol. 21, no. 3, November, pp. 291–311. Burchell, B., Ladipo, D. and Wilkinson., F. (eds) (2002) Job Insecurity and Work Intensification. London: Routledge. Cameron, K.S., Freeman, S.J. and Mishra, A.K. (1993) ‘Downsizing and redesigning organizations’, in Huber, G. and Glick, W. (eds) Organizational Change and Redesign, New York: Oxford University Press. Cappelli, P. (1999) The New Deal at Work. Boston: Harvard Business School Press. Castells, M. (1996) The Rise of the Network Society. Berkley: University of California Press. Charlesworth, K. (1997) A Question of Balance. Corby: Institute of Management. Chou, Eric Szu-Wen (2001) ‘Hierarchy Design with Flattened Resource Allocation’, working paper, December. Los Angeles: UCLA, Department of Economics. Cully, M., O’Reilly, A., Millward, D., Forth, N., Woodland, S., Dix, G. and Bryson, A. (1998) The 1998 Workplace Employee Relations Survey: First Findings. London: HMSO. Danford, A., Richardson, M., Stewart, P. Tailby, S. and Upchurch, M. (2002) ‘High performance work systems and workplace partnership, an aerospace case study’, paper presented at 20th International Labour Process Conference, Strathclyde, 2–4 April. Dawkins, P., Littler, C.R., Valenzuela, R. and Vensen, B. (1999) The Contours of Restructuring and Downsizing. Melbourne: University of Melbourne. Dawkins, P. and Littler, C.R. (eds) (2001) Downsizing: Is It Working for Australia? Melbourne: Melbourne Institute of Applied Economic and Social Research, University of Melbourne. DiMaggio, P. (ed.) (2001) The Twenty-First Century Firm. Princeton: Princeton University Press. Downs, A. (1995) Corporate Executions. New York: AMACOM. Drucker, P. (1989) The New Realities. London: Heinemann. Dunford, R. and McGraw, P. (1987) ‘Quality Circles or Quality Circus?’, paper presented at the International Labour Process Conference, Aston-UMIST. Dunlap, Albert J. (1996) Mean Business. New York: Times Books. Eccles, R.G. and Nohria, N. (1992) Beyond the Hype: Rediscovering the Essence of Management, Massachusetts: HBS. Eccles, T. (1994) Succeeding with Change. Maidenhead, UK: McGraw-Hill. Gordon, D.M. (1996) Fat and Mean: the Corporate Squeeze of Working Americans and the Myth of Managerial Downsizing. New York: Free Press. Guest, D. (1998) ‘Beyond HRM: commitment and the contract culture’, in Sparrow, P. and Marchington, M. (1998) (eds) Human Resource Management: The New Agenda. London: FT/Pitman Publishing, pp. 37–51. Hammer, M. and Champy, J. (1993) Re-engineering the Corporation. New York: HarperCollins. Heery, E., and Salmon, J. (eds) (2000) The Insecure Workforce. London: Routledge. Jackson, B. (2001) Management Gurus and Management Fashions. London: Routledge. Jacoby, S.M. (1999) ‘Are career jobs headed for extinction?’, California Management Review, vol. 42, no. 1, Fall, pp. 123–45.

Littler 183 Jaques, E. (1990) ‘In praise of hierarchy’, Harvard Business Review, January– February, pp. 127–33. Keuning, D. and Opheij, W. (1994) Delayering Organizations: How to beat bureaucracy and create a flexible and responsive organization. London: Financial Times/Pitman. Leavitt, Harold and Whisler, Thomas L. (1958) ‘Managers in the 1980s’, in Leavitt, H. and Pondy, L.R. (eds) (1964) Readings in Managerial Psychology. Chicago: University of Chicago Press, pp. 578–92. Legge, K. (1995) Human Resource Management: Rhetorics and Realities. Basingstoke: Macmillan. Littler, C.R. (2000) ‘Comparing the Downsizing Experiences of Three Countries’, in Burke, R. J. and Coopes, C. (eds), Downsizing, Restructuring and Privatization. Oxford: Blackwell, pp. 58–77. Littler, C.R. (1998) ‘Downsizing organisations: the dilemmas of change’, Human Resources Management Bulletin, September: pp. 1–20, Sydney: CCH. Littler, C.R. (1984) ‘Soviet-type Societies and the Labour Process’ in Thompson, K. (ed.), Work, Employment and Unemployment. Milton Keynes: Open University Press, pp. 87–96. Littler, C.R. (1982) The Development of the Labour Process in Capitalist Societies: A Comparative Study of the Transformation of Work Organisation in Britain, Japan and the USA. London: Heinemann. Reprinted by Gower Press, 1986. Littler, C.R. and Innes, P. (2001) ‘Does Downsizing Improve the Skill-base of Organizations’, in Dawkins, P. and Littler, C.R. (eds) Downsizing: is it working for Australia? Melbourne Institute of Applied Economic and Social Research, University of Melbourne, Melbourne, pp. 5–23. Littler, C.R., Kabanoff, B., Palmer, I. and Brown, S. (1999) Downsizing, Stability and Corporate Performance, working paper, Queensland University of Technology. Littler, C.R. and Maguire, H. (2001) ‘Restructuring in the Australian Banking Industry’, in Downsizing: Is It Working for Australia?, Edited by Dawkins, P. and Littler, C. R., University of Melbourne, Melbourne, pp. 24–47. Littler, C.R., Wiesner, R. and Dunford, R. (2003) ‘The Dynamics of Delayering: Changing Management Structures in Three Countries’, Journal of Management Studies, vol. 40, no. 2, March, pp. 225–56. Lurie, J.M. (1998) Downsizing. Department of Economics, Princeton University. Princeton, New Jersey. Luttwak, E. (1999) Turbo Capitalism: Winners and Losers in the Global Economy. New York: HarperCollins. Marchant, T. and Littler, C.R. (1998) ‘The impact of managerial redundancy’, paper presented at the International Work Psychology Conference, Institute of Work Psychology, University of Sheffield, UK, 1–3 July, 1998. Morehead, A., Steele, M., Alexander, M., Stephen, K. and Duffin, L. (1997) Changes at Work. Melbourne: Longman. Noer, D. (1993) Healing the Wounds: Overcoming the Trauma of Layoffs and Revitalizing Downsized Organizations. San Francisco: Jossey-Bass. Obeng, E. and Crainer, S. (1994) Making Re-engineering Happen. London: FT/Pitman. Osterman, P. (ed.) (1996) Broken Ladders: Managerial Careers In The New Economy. New York: Oxford University Press.

184 HR Strategies of the 1990s Osterman, P. (1994) ‘How common is workplace transformation and how can we explain who does it?’ Industrial and Labor Relations Review, vol. 47, January, pp. 173–88. Ostroff, Frank and Smith, Douglas (1992) ‘The horizontal organisation’, McKinsey Quarterly, vol. 1, pp. 148–68. Otoo, S. and Littler, C.R. (2001) ‘Employee relations and downsizing in the telecommunications industry’, paper presented at 19th Annual International Labour Process Conference, University of London, 26–28 March. Peters, T. (1992) Liberation Management: Necessary Disorganization for the Nanosecond Nineties. London: Macmillan. Scarbrough, H. (1998) ‘The unmaking of management? Change and continuity in British management in the 1990s’, Human Relations, vol. 51, no. 6, pp. 691–716. Sennett, R. (1998) The Corrosion Of Character: The Personal Consequences of Work in the New Capitalism. London: W.W. Norton. SKOPE (2002) The 2001 Skills Survey: Preliminary Report. Universities of Oxford and Warwick. Sparrow, P. and Marchington, M. (1998) (eds) Human Resource Management: The New Agenda. London: FT/Pitman Publishing. Storey, J. (1992) Developments In the Management of Human Resources. Oxford: Blackwell. Taylor, Frederick Winslow, (1964 edn) Scientific Management. London: Harper and Row. Thomas, R. and Dunkerley, D. (1999) ‘Careering downwards? Middle managers experiences in the downsized organization’, British Journal of Management, vol. 10, no. 2, pp. 157–69. Thompson, P. and McHugh, D. (2002) Work Organisations (3rd edn), Basingstoke: Palgrave. Wagar, T. H. (1998) ‘Exploring the consequences of workforce reduction’, in Burke, R.J. (ed.) ‘Organizational downsizing, restructuring and privatization’, Canadian Journal of Administrative Sciences, December, vol. 15, no. 4, special issue, pp. 300–9. Wallulis, J. (1998) The New Insecurity. Albany: State University of New York Press. Wheatley, M. (1992) The Future of Middle Management. Corby, Northants: British Institute of Management. Whyte, W.H. (1956) The Organization Man. New York: Simon and Schuster. Wolman, W. and Colamosca, A. (1997) The Judas Economy: the Triumph of Capital and the Betrayal of Work. Reading, MA: Addison-Wesley. Worrall, L. and Cooper, C. (2001) The Quality of Working Life: The 2000 Survey of Managers’ Experiences. London: Institute of Management Research Report, Institute of Management. Worrall, L., Cooper, C., and Campbell, F. (2000) ‘The impact of organizational change on UK managers’ perceptions of their working lives’, in Burke, R. and Cooper C. (eds) The Organization in Crisis. Oxford: Blackwell, pp. 20–43. Zemke, R. (1988) ‘Putting the squeeze on middle managers’, Training, December, pp. 41–46.

9 Managing in Times of Change: Avoiding Management Myopia Malcolm Goodman

Abstract This chapter argues that in times of discontinuous change, organizations must change their modus operandi to survive. This requires adopting a holistic view of their environment; acknowledging the value of employees and that management responses need to become proactive. Restrictive mindsets need to give way to firm, decisive leadership to avoid management myopia.

Introduction Background In times of discontinuous change, many organizations face a crucial dilemma. Should they seek to manage this change, or change the way they manage? The magnitude of the contextual changes (particularly from ‘growth’ to ‘over-supplied’ markets) poses a serious challenge and as these changes intensify, it will become increasingly difficult for managers to act proactively with traditional management responses. New ways of thinking are called for. Quantitative or scientific management styles no longer yield satisfactory results. Customer awareness is increasing, globalization prevails and information technology is increasingly innovative. Traditional mindsets are a result of the negative perceptions that relate to change in the environment (Brown 1997–98).

Context ‘If change is rocking your industry, chances are you have not seen the worst of it yet. It is possible, however, to anticipate some changes and to be ready for them’ (Morgan 1993). In chaotic times, managers and 185

186 Avoiding Management Myopia

organizations need to detect environmental changes. Reading the environment and understanding how it shapes the way business is done allows managers to manage imminent menaces. Analyzing contextual change is not easy, nor should it be undertaken lightly. By analyzing in depth, managers may suffer from ‘analysis by paralysis’. Although the contextual changes that may affect organizations can be monumental, managers cannot wait for external events, such as improved exchange rates or the reappearance of growth markets, to turn their companies round. The changes they need to implement run deep. Discontinuity abounds, reshaping our future and changing the way we must present ourselves to the world (Handy 1991). Managers must both anticipate contextual changes and face the awkward question of ‘how’ to renew their organizations.

Aims of the chapter Many fear that change means the disappearance of everything familiar. The path to change and the future is not well mapped. However, there are those who are bold enough to challenge the status quo in order to lead managers and organizations forward. They seek to change popular thinking and social priorities by advocating new ideas. Academic and non-academic writers on business management are calling managers to do something about organizations’ inability to change. Employees, led by mid-level managers, increasingly expect senior management to provide comprehensive approaches to cope with change. Researchers have the task of evaluating the effects of change in the environment and organizational responses to it. This chapter examines ideas for promoting mindsets that allow organizations to become more adaptable, creative and innovative. It recognises that knowledge, in a lively expanding field like management, is in flux and that concerned parties are thinking through the latest ideas. Controversial issues are identified and the chapter takes a reasoned stand on the leading ideas. The main drivers of change are discussed but the chapter does not recommend a specific method for change. The research analyzes environmental and inter-organizational contexts and their various relationships with managers and organizations. It cannot predict what is to come or offer a precise prescription to corporate problems. It emphasizes that change and new ideas will challenge everyone’s view of the world. First, the research sets out to discover real problems in organizations and management practices. Second, it deals with open-ended problems, rather than with ‘engimas’ that have recognized solutions. Third, the research attempts to attack these real open-ended problems, realizing

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that there is no one perfect solution. This chapter explores problems that appear to affect organizations worldwide, and uses action research to generate organizational change and managerial development (Argyris and Schon 1978).

Structure The research is presented in four sections: first, the key questions are formulated, second, the methodology is outlined. Third, the data analysis is described and finally, the findings are presented.

Key questions Faced with the challenge of discontinuous contextual change, managers are presented with two key questions. Should they seek to manage the disturbance in their operating environment? Or change the way in which they manage? The former question is a natural reaction to a disturbance. If the magnitude of change is relatively minor (for example a temporary downturn in sales), this is a sensible response. However, in times of rapid and escalating change this approach can be disastrous. Short-term tactical interventions can be successful but dangerous, if managers fail to gauge the severity of the discontinuous change and fail to address the implications adequately. Mindsets and paradigms can blind management into thinking that past successes were due largely to their management expertise. For many, it may have been mainly due to undersupplied markets, which could generate a false corporate confidence. The latter question provides managers with a serious challenge. Re-engineering individual, group and corporate management structures and activities to cope successfully with severe contextual disturbance is no easy matter.

Organizational structure Organizational structure has typically defined management’s task, communication flows, structure and staffing. Organizing and coordinating the efforts of interested parties is essential to preparing and implementing successful plans (strategies). Dixon (1993) gives a clear summary of organizing. For him, it involves determining the physical framework or structure of the company in order to allow staff to work most effectively and efficiently. The structure consists of grouping activities, developing a reporting relationship and establishing the degree of authority. He also states that there is an informal structure of personal relationships. If organizations are going to be effective, their structures should be as flexible as possible in order to adapt to changing circumstances. Inflexibility of organizational structures in many companies is a recurring theme


throughout this chapter. Therefore, the research seeks to inform managers of the need to build organizational structures that are capable of proactive activity in times of discontinuous change.

The role of management In order to change an organization to a more adaptable and innovative one, it is important to plan. Therefore, leadership is critical or the change will fail, and leading will become even more important once the plan is implemented. A crucial task for managers is to get people to act in a proactive way. However, there is often a lack of imagination and ambition in the workplace. Context, timing, personality and history make managers. The challenge is knowing which tool to use. In other words, managers must develop a keen sense of judgement (Crainer 1998). Alternatively, it could be argued that employees do not want to act and are tired of being constantly monitored by managers. This lack of trust creates a demotivated workforce. Important questions that this chapter will try to answer are ‘Why do managers fail to respond to change? How should managers respond to change?’ According to Easterby-Smith et al., management research supplies practitioners with a conduit between practical and theoretical issues (Easterby-smith et al. 1995). Research, much like the ideas and objectives that flow through this chapter, is an enquiry into how people think about their contextual positions. Moreover, it addresses the processes that people require to complete their objectives.

Methodology Rationale for research approach This research is an inquiry into how people have come to know things, and what benefit this knowledge brings ( Jankowicz 1995). It seeks to reveal the detail of people’s awareness of change in the environment. Most managers, comments Morgan, are aware of the environment but at times refuse to recognize it (Morgan 1993). Hence, the chapter explores the question ‘why’ people refuse to recognize change. Research forms, according to Easterby-Smith et al., are distinguished primarily by their outcomes. As Buchanan suggests, research is compromised with uncertainty and risk (Buchanan 1980). Comparatively, Handy claims that the ability to work with and manage uncertainty is a primary role of successful managers (Handy 1991). Easterby-Smith et al. highlight that action research is more of an educational process.

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This chapter describes an action-learning project and attempts to produce useful knowledge, whilst providing understanding of people’s situations. The focus of change and the exploration of problem discovery and solution best describe action research. Easterby-Smith et al. (1995) highlight that action research is best undertaken when collaborative arrangements are made for investigating a problem and improving practice.

Research design The research design included the collection and analysis of both primary and secondary data. The format of the primary research (an interactive questionnaire) made it difficult to measure anything of a physical nature. Unlike a statistically based survey or direct subject observation, that is precise and highly numeric in nature, this chapter aims to evaluate completed questionnaires, submitted via electronic mail, that are personal and interactive in nature. The aim of this type of research is to inform and share learning (Revans 1980). Like learning and change, this kind of research never really ends. It grows in complexity, changes with the times, becomes a store of mounting knowledge, and potentially builds wiser people. Ultimately, the objective of research activity is to help resolve problems, not to build theory. The challenge with collecting secondary data is to ensure that it addresses the research questions. To collect and summarize the necessary data, use was made of books, journals, newspapers, CD ROMS (information databases) and the Internet. The research applied a soft systems methodology rather than a hard systems methodology (that is, a hypothetico-deductive method). A soft system approach is better at tackling complex issues where variables may be potentially interrelated or interdependent. The methodology is holistic using concepts rather than numbers to understand the complexity of organizational problems (Checkland 1981). This type of methodology can be likened to change, it is difficult to measure when, where, and why people decide to change or how they will react or behave. At the core of soft systems methodology is a comparison between the real world and some models of what the world might be (Checkland and Scholes 1990). This type of comparison may increase the understanding of the world through research and create some ideas for change through action. A soft systems methodology is appropriate for the evaluation because it is the external and internal organizational environment that is being evaluated. In other words, soft systems methodology serves well as a process evaluation. Moreover, a flexible


strategy is adopted because the research is looking at some systems and practices that already exist and then making recommendations for change. The greater the change the research encourages, the nearer it moves towards pure action research.

Soft systems methodology – seven step method In a CATWOE analysis, the researcher makes a choice of relevant systems that he/she believes will produce insight into a problem situation. The chosen systems are expressed in statements as ‘root definitions’ which incorporate the views that make the activities and performance of the system meaningful. The formulation of ‘good’ root definitions is decisive in the creation of a conceptual model. Then, the root definitions are tested against a group of elements known as the mnemonic CATWOE (see Table 9.1). The elements of CATWOE emphasize the need for practical options. The root definition and CATWOE provided the researcher with a framework for ensuring that all views and interests were considered in the knowledge extraction process. The essence of the root definition is the transformation (T) process that changes inputs into outputs. It is important that the formulation of root definitions are related to the CATWOE questions so models can be built (Rosenhead 1993). First, the research defined the population to study. Hence, the results are only applicable to and representative of the population. A stratified non-probability sample was selected. This method produces indicative results. In other words, a variety of opinions are presented rather than

Table 9.1 CATWOE analysis Description

Notes

C

Customers

A T

Actors Transformation Process

W

Weltanschauung

O E

Owner Environmental constraints

Who would be victims/beneficiaries of purposeful activity? Who would do the activities? What is the purposeful activity expressed as meaningful What view of the world makes this definition meaningful? Who could stop this activity? What constraints in its environment does this system take as given?

Source: (Rosenhead 1993)

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prescriptive results. Three stratifications were chosen: 1 MBA students (120); 2 Scholars from England, Canada and the United States (40); 3 Management gurus (25). All have a common interest in management. Once the strata were identified they were combined to form the full sample (Jankcowicz 1995, 5: 160). The target population was predetermined. This type of sampling is referred to by Jankcowicz as ‘purposive’ sampling. He describes it as a sample where the researcher selects people’s views that are relevant to an issue (Jankcowicz 1995, 5: 157). Several methods were utilized: 1 The key informant technique – people are selected who have a specialized knowledge of an issue (Tremblay 1982). 2 Taking ‘slices through the organization’ – people are chosen who maintain a specific position (Reeves and Harper 1981). For example, the chapter talks about change in the external environment that affects management responses. Hence, the questionnaire was sent to people occupying senior level marketing, public relations, and human resource positions. 3 ‘Snowballing sampling’ – a questionnaire is mailed to someone who has been recommended by someone else who has received a questionnaire (Reeves and Harper 1981). A structured, open-ended questionnaire was used to gather information. The questions were standardized, with identical questions being asked to control the stimulus, easing the task of analyzing the data. However, respondents were free to interpret the questions, as the open-ended technique encouraged respondents to answer in their own words (Jankcowicz 1995, 5: 21). The questions sought opinion rather than fact, which is invaluable because individuals can respond in different ways (Easterby-Smith et al. 1995, 4: 119). The questionnaire had four limitations: 1 Open-ended questions can be disadvantageous regarding the time needed to categorize responses. 2 The information can be insincere. Moreover, no one is there to interpret the questions to the respondent nor to interpret the responses to the researcher. 3 Questionnaires are inflexible – though an e-mail helps here. 4 Drafting and piloting the questionnaire is time consuming (Jancowicz 1995, 5: 21).


Data analysis Data analysis procedure The most important function in analyzing data is to communicate the value of the findings (Howard and Sharp 1989). Analysis, in this chapter, is an attempt to bring the primary and secondary data to bear on the declared objectives. The results of the analysis support the decision-making process by providing the researcher with a clear understanding of the context within which a decision can be made (MIT 1998). The primary data is indicative and non-numeric. Qualitative analysis was carried out to measure the outcomes of the data. The work of gathering data is distorted because it fails to give the holistic view that is the essence of qualitative data (Easterby-Smith et al. 1995, 4: 105). It would be difficult to analyze the data in this chapter other than by qualitative methods due to the human (behaviour – responses), environmental (changes), and futuristic (outlook) nature of the respondent’s perspectives under study. Grounded theory works because it is derived from the concepts and categories used by social actors themselves to interpret and organize their worlds ( Jones 1987). The basic doctrine of grounded theory is that a theory must emerge from the data. Hence, the approach purports to be inductive rather than deductive (Strauss and Corbin 1990). The purpose behind grounded theory is to search for a pattern of shared meaning between the respondents. The researcher’s job is to check the value or applicability of respondents’ answers whilst maintaining the holistic nature of the information divulged by them (Easterby-Smith et al. 1995: 108–12). Hence, the research questions were open and general rather than framed on specific assumptions. The analysis was conducted in two parts. Firstly, the soft systems methodology seven step method to feature the Weltanshauung in the CATWOE representation. The root definition (RD) adopted takes into consideration alternative worldviews (that is, academic, student, practitioner) and secondly, a dialogue method employing systems thinking. This applied the systems thinking concept where small pieces of a larger whole were evaluated to create an overall picture. There were 163 responses (11 through conversion) and 22 no replies (7 MBA students, 11 scholars and 4 gurus).

Soft systems methodology Requirement 1: Defining the problem situation. Managers and Organizations always have difficulties in responding to changes in the business environment.

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Mindsets (e.g. production orientation)

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Leadership style/decisions

Managers/ organizations

Interorganizational environment/culture/ learning

Business environment

Skills: functional or holistic

Organizational structure

Figure 9.1 Rich picture derived from the questionnaire data

Requirement 2: The Rich Picture (see Figure 9.1) that emerged from the analysis of the key themes in the questionnaire that addresses the ‘Problem situation expressed’. Inside the centre circle, two ovals show the relationship between managers/organizations and the business environment. The research sought to discover how managers and organizations could respond proactively to the business environment. Outside the centre circle are six items that may affect the relationship. For example, many companies operated in market sectors where regular innovation was required. Several organizations needed to let go of their controlling bureaucratic structures and management styles to respond effectively to market pressures. Furthermore, some organizations were failing to respond to the environment competitively because they could not access information or communicate with their subsidiaries quickly enough in comparison with other companies, as they lacked Internet and email expertise. The model shows that several ‘items’ can affect the harmony between organizations and the business environment. Requirement 3: Definition of root definition and CATWOE analysis (see Table 9.2). The root definition defined was: managers and organizations forego traditional management systems and structures and learn how to respond to (that is, manage), organize and build better cultures (that is, change) for their organizations. The data provides some valuable pointers. Requirement 4: A ‘conceptual model’ based on the root definition.

194 Avoiding Management Myopia Table 9.2 CATWOE analysis interview data Description Customers Actors Transformation Worldview Owners Environment

Managers and organizations Academics, students, gurus, consultants and informed practitioners Effective management responses to the internal/external business environment Deal well with uncertainty: innovative, flexible, customer value and competitively positioned. All persons employed in the organization, shareholders, customers and suppliers Continually changing conditions where managers and organizations change accordingly

Requirement 5: ‘Tabular display’ of the questionnaire data that compares the real world with how it is viewed by intellectuals. Requirement 6: Defining changes: a discussion of the differences between the conceptual model (Requirement 4) and reality (Requirement 5). In short, managers and organizations obtained limited amounts of information (research) on management and organizational theory. They obtained information on customer value; what they did with the information was open to question. Managers and organizations expected consultants and academics to provide advice and counselling when things were not going according to plan. Many issues that academics and students took for granted were not easily transferable or important to practitioners; that is, culture, knowledge management, utilization of strategic tools (SWOT, PEST, and so on) and the importance of mindsets. Organizations and managers wanted to know the bottom-line position; were they making profits and were the customers and shareholders happy? They wanted to see quantitative figures not invisible quality deductions. Their objectives were generally recording increased profits, customer retention, repeat business, productivity, efficient supply chain management, new product development, real-time information, silent employees, budget-conscious managers and performance reports that backed up all of these issues. Requirement 7: Taking action. Managers and organizations must move away from these hard, formulistic, traditional management practices and organizational structures to respond to the environment more effectively. Change must be visible and purposeful for managers and organizations to lead (that is,

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3. Collect data on customer value

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4. Obtain data on organizational behaviour 2. Obtain data on management styles

6. Determine reputable and relevant data

7. Appreciate leadership’s decision

11. Order activities; e.g., customers, employees, knowledge

5. Obtain data on organizational culture

8. Decide how to organize and manage differently

12. Record performance

9. Change mindsets

10. Institute new culture

Define criteria for effectiveness efficacy and efficiency of operation

Take control action Monitor 1–12

Figure 9.2 A conceptual model based on the root definition

be innovative) rather than to resist change and so suffer falling fortunes. Organizations should be able to digest information that aids them in changing undesirable practices (see Figure 9.2). This requires building organizations that flow with uncertainty, that accept the paradox of the business environment and move naturally with change (that is, rapid, positive responses).

Systems thinking analysis The dialogue analysis incorporates the primary findings, secondary findings and the research commentary. This type of analysis is subjective due to the interpretation of the researcher. The respondents were not present whilst the researcher analyzed the responses, nor was the researcher present when the respondents analyzed the questions.


Hence, there are bound to be errors in translation. The individual questions (twelve) were analyzed and written up in report form, to create an overview. This chapter does not declare direct names and actual percentages. All issues raised are assumed to be those of the majority unless stated otherwise. The questionnaire asked the respondents to comment on management in the past and compare this with management today and managing tomorrow. Several issues emerged and these are reported below. The questions raised issues on developments that faced managers. In a fast changing environment, many managers were unclear which developments would be relevant to their organizations. Academics and students talk of globalization almost more than any other subject today. However, the respondents thought managers did not fully comprehend the speed of globalization. Management efforts were concentrated on the development of regions. Regionalism is an attitude summed up by ‘lets get in now before it is too late’. Globalization, according to a professor at Cranfield in the UK, meant that organizations chose to compete on value and price and switched from ‘capacitypush’ to creating ‘customer-pull’ through the creation and development of new customer market values. Information technology enables companies to work globally in ways they never could before. Many managers saw information technology (IT) as an important factor in achieving market advantage. A number of them perceived IT as a tool to save on human resources. As one Durham MBA student stated, it increases the pace of change. It has implications for production and operations as well as training staff. IT also increases the availability and magnitude of information. According to Swan Hunter, it speeds up the standardization of processes in the organization and responses to the market. In the field of organizational structure, a clear trend was apparent. A flatter more flexible structure was perceived as the most successful. However, the majority of respondents believed that their organizations were still too bureaucratic. A Johnson & Johnson employee and an MBA student from Latin America felt that flat flexible structures were better, but they had never experienced them. A network structure may be preferable. As in telecommunications, signals are sent and received in order to establish and maintain communication. This requires a number of links in tandem between the end users. One question probed respondents’ opinions on the ‘virtual office’, the Internet and globalization, which are promoting communication and management via computers and telecommunications. A network structure not only accommodates these developments, it increases competitiveness in group decision making, knowledge and information transfer/access, thereby facilitating a quicker response time to other environmental changes.

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Technology is also increasing the work hours in a day from the traditional eight to 48. IBM calls this ‘Java around the clock’. For example, a group of IBM computer programmers in Beijing is writing software using Java technology. At the end of each day, they send their work over the Internet to an IBM facility in Seattle. The programmers there build on it and use the Internet to transfer it to Latvia, to India and back to Beijing, never ceasing until the project is done (IBM 4). Technology enables workers in different locations to use computer networks. The Web is facilitating the ease of working apart from but still being connected to the organization. Therefore, suppliers and customers can also be connected and be anywhere. However, the majority of respondents did not foresee a future where there was no social interaction. A KPMG employee stated that while workers today may enjoy more leisure in the future, work will still be important and human contact would still be required. The respondents expected the development of information technology to shrink the world further, with organizational structures becoming more flexible. Such a structure would probably only be able to function in an environment where (technological) communication devices were installed. Furthermore, the research revealed that organizations will increasingly provide additional education (that is, training) in order to maintain their flexibility. The respondents saw people beginning to be organized around processes rather than functional departments. This implies that managers will have to be more responsible in regard to the end-products. This fits with a leadership style in which a manager is less authoritarian. The manager in a flat flexible, network, or organic organization is more like a sports coach. According to the CEO of a pharmaceutical company, the ideal organization of the future will be market driven, with a structure that responds to customers. He reckoned that some employees would have to reside at the customer’s site. Furthermore, he believed that the ‘makeor-buy’ issue would become the norm. Organizations, according to him, should stay with their core competencies. This is not merely a costbenefit issue anymore; it is a strategic one where managers must understand markets and know how to build long-term relationships. Formal strategic planning appeared to be suffering as operating conditions became more turbulent. One respondent from ICI was bitterly disappointed that the company had fought for so long to preserve the corporate culture when any casual observer could see that the corporation was losing its way in the marketplace. The respondents felt that most managers were unaware of modern management aids (such as creative thinking and the use of creative problem solving tools) that would


allow them to rethink their positions and make a difference in highly competitive markets (Goodman 1995). Management ability was moving from managing to motivating. Managers were beginning to realize the importance of employee knowledge. Management should be more about encouraging self-development rather than an imposed control function. The respondents felt that there was a need to change the structure of their organizations to prevent the retention of the ‘sovereign culture’ syndrome. All agreed that the ‘customer is king’. Thus, organizations needed to become marketoriented, continuously creating and delivering customer value. The results indicated that managers were either unaware of their mindsets or were not generally aware of the definition of mindsets. A critical mindset issue, as an example, is the difference between management and leadership. This is a major cause of many of the current problems the respondents’ organizations faced. Organizations were overmanaged and underled. The difference was that managers were slow to respond to change whilst leaders envisioned, created and shaped change. The interpretation of the responses disclosed that few people felt that they had any influence on the present, let alone the future. It is a fatalistic view, based on the thought that things will just happen and that no one can shape the way things are done. The research questions were designed to reveal how managers proposed to lessen or remove current problems in order to work toward a better future. This required an evaluation of their awareness of change in the interorganizational and external environment and its affects. Generally, respondents were positive about the future. This was an expected response and could be interpreted as an imbalance between probable and preferred futures. The majority of the responses on the future were myopic and failed to acknowledge that change was discontinuous. The future is best described as one that is free from the illnesses of the present. However, this cannot be interpreted as a healthy future free of problems. Most of the respondents concentrated on repairing ‘what was’ rather than concentrating on ‘what to do’. The research sensed that a substantial number of respondents feared the future, and that managers would not and could not respond effectively. There was far too much mediocrity in the management ranks summed up by an American guru who complained that many of his clients wanted ‘quick-fixes’ that did not change their organization’s cultures or that required them to rethink their management practices.

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Findings Reflections This chapter has sought to act as a guide, pointing out a number of issues that need consideration if organizations are going to manage their futures positively. The key is to understand the task of management, and for it to respond to context by learning to discern it. Managers can no longer decree, command and complain about ‘external inconveniences’. Managers must be leaders who induce organizations to respond to change with a futuristic perspective based upon realistic initiatives. This is not a time to be complacent. However, the image that is so often projected in boardrooms is one of no change at all. Resisting change actively or passively is futile. People cannot idly wait for things to return to ‘normal’. Many live and think as if the world were static, or as if it should be (Flower 1996). The findings revealed that most companies should begin everything they do with: ‘is this going to provide true customer value in today’s market conditions?’ Many companies have embraced the importance of customer value, but unfortunately many others rely solely on ‘seat of the pants’ methods. For example, most traditional methods relate to creating a desire for a product and getting it sold, and do not provide detailed information on how people operate or use the product or service. Listening carefully to customers will often reveal frustrations that can turn into opportunities. Moreover, the findings revealed that employees were organizations’ most valuable asset. Employees and customers are two of the most important determinants for the way business is conducted now and in the future. Managers should know how to use management tools and technology creatively, so that they produce market-perceived value in a costeffective way. This requires multidisciplinary people who practice up-to-date customer service skills. Many successful corporations have abandoned hierarchical structures and are organizing themselves in new ways to discover and deliver ‘market-perceived value’. Such corporations have foregone traditional thinking about the role of the centre as a directing force (Quinn et al. 1996).

Quo vadis? The respondents agreed that many organizations were in transition. Almost every aspect of the industrial paradigm seems threatened. There is a recognition of the need to move from a hierarchical functional management approach to a cross-functional process.


A change programme leads to changes in behaviour. The level and depth of behaviour change will therefore correspond to the shift in individual familiarity (Porras and Silvers, 1991). Change cannot be executed without implicitly addressing the corresponding affect on the people in the organization. The interrelationships of people, organizations, culture and technology are such that changes in the environment require: • changes in vision, work culture and value ... which require • changes in skill and competencies at all levels ... which require • changes in process, resource allocation and other organizational levers ... which lead to • management of the integrated enterprise and valued outcomes. This chapter acknowledges that individuals are becoming the currency of the future and that leadership should be visionary. In an uncertain future, managers should respect their employees and leaders should shape organizational responses. A company with both attributes is in a better position to create a strong unified culture with a shared vision. It is difficult in this research to offer a prescription or to design a convincing blueprint when the researcher still does not truly understand what an organization is. The way managers define an organization determines what they understand an organization to be. For example, organization is characterized generally with the use of metaphor. The twentieth century has the ‘mechanistic’ metaphor attached to it. Alternatively, the 2000s and the near future could be labelled as ‘hyperarchy’. The World Wide Web and Intranets are hyperarchies. Deconstructed supply and value chains are also hyperarchies. These are fluid structures where team-based collaboration is commonplace. Hyperarchies challenge hierarchies, creating rich information exchanges, random access, ownership trading and clandestine management (Evans and Wunster 1997). There is no well-defined definition of organization in this chapter, nor is it possible to give a concrete recommendation. The research merely informs the practitioner of change and how they should best get ready for it. It champions sense and sensibility and points out the dangers inherent in management practice built on pride and prejudice. Research revealed that, in the past, managers could command people to change, resulting in resentment and superficial commitment. It is difficult to make change a reality without the commitment and energy of employees. Successful change management requires openness to unexpected problems and solutions. People should be innovative and creative in their thinking, reacting spontaneously to random change.

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Today, organizations face fragmentation, competition and reactive dysfunction. Many cultures are incapable of supporting learning or creative organizations. These types of behaviours have been programmed in people since birth (Kofman and Senge 1993). It is clear that success is tied to an organization’s corporate culture: that is especially true in times of discontinuous change. No organization is safe, all need to continually reinvent themselves. Learning enables managers to respond effectively, provided they master the relevant new skills. Authority must be earned. The true learning organization is held together by shared beliefs and values, and by people who are committed to each other and to common goals. It is a culture that needs support from its structure. The structure may be a hyperarchy in the future but it is safe to say, as the research shows, that a flat flexible and/or network structure is relevant for organizations facing the future. Structural explanations are important because they address the underlying causes of behaviour and indicate where patterns of behaviour can be changed. What managers and organizations need in order to avoid management myopia is less pride and prejudice, and more sense and sensibility.

References Argyris, C. and Schon, D. (1978) ‘Organizational learning: a theory action perspective’, in Morgan, G. (1993) Imaginization. London: Sage. Brown, T. (1997–98) ‘The anatomy of fire’, Online: Management. http://www. mgeneral.com/4-ebook/97-ebook/aofmap.htm Buchanan, D. (1980) ‘Gaining management skills through academic research work’, Personal Management: vol. 12, no. 4, pp. 45–8. Checkland, P. (1981) Systems Thinking, Systems Practice. Chichester: John Wiley. Checkland, P. and Scholes, J. (1990) Soft Systems Methodology in Action. Chichester: John Wiley. Crainer, S. (1998) ‘Here come the new gurus’, Management Today, February, vol. 5, p. 30. Dixon, R. (1993) The Management Task. Oxford, Butterworth-Heinemann: pp. 56–7. Easterby-Smith, M., Thorpe, R. and Lowe, A. (1995) Management Research. London: Sage. Evans, P.B. and Wunster, T.S. (1997) ‘Strategy and the new economics of information’, Harvard Business Review, September–October, p. 75. Flower, J. (1996) Change Happens. http://www.well.com Goodman, M.R.V. (1995) Creative Management. London: Prentice Hall. Handy, C. (1991) The Age of Unreason. London: Penguin Books. Howard, K. and Sharp, J.A. (1989) The Management of A Student Research Project. Aldershot: Gower. Jankowicz, A.D. (1995) Business Research Projects. London: Chapman and Hall, pp. 88, 194.

202 Avoiding Management Myopia Jones, S. (1987) ‘Choosing action research: a rationale’, in Mangham, I.L. (ed.) Organisation Analysis and Development. Chichester: Wiley, p. 25. Kofman, F.Y. and Senge, P.M. (1993) Communities of Commitment: The Heart of Learning Organizations. http://world.std.com MIT (1998) Data Analysis & Management. Cambridge, MA: MIT. http://yerkes. rnit.edu/narc/Definitions/data_analysis_mgt Morgan, G. (1993) Imaginization. Newbury Park: Sage. Porras, J.I. and Silvers, R.C. (1991) ‘Organizational development and transformation’, Annual Review Psychology, vol. 42, p. 58. Quinn, J.B., Anderson, P. and Finkelstein, S. (1996) ‘Managing professional intellect’, Harvard Business Review, March–April, p. 76. Reeves, T.K. and Harper, D. (1981) Surveys at Work: Student Project Manual. Maidenhead: McGraw-Hill. Revans, R.W. (1980) Action Learning: New Technology for Management. London: Blond and Briggs. Rosenhead, J. (1993) Rational Analysis for a Problematic World. New York: John Wiley, pp. 85–8. Strauss, A. and Corbin, J. (1990) Basics of Qualitative Research: Grounded Theory Procedures and Techniques. Newbury Park: Sage. Tremblay, M.A. (1982) ‘The key informant technique: a non-ethnographic application’, in Burgess, R. (ed.) Field Research: A Sourcebook and Field Manual. London: Allen and Unwin.

10 Understanding Inertia: Developing a Multi-disciplinary Perspective? Audley Genus

Abstract It is widely accepted that organizations need to be flexibly adaptive to cope with dynamic environmental and competitive conditions. However, where some contributions to the literature emphasize successful adaptation, others address the limits to adaptation, or inertia. This chapter reviews studies from four broad perspectives of inertia (ecological/institutional, industry organization economic, organizational, and cognitive) identifying factors promoting or hindering organizational change. The chapter discusses the potential benefit to insight accruing from the complementarity of such approaches. However, it finds these to be outweighed by difficulties related to differences in their preferred focus or approach. Therefore, whilst the pursuit of multi- and inter-disciplinary approaches to research on inertia would seem desirable, several obstacles have to be cleared if the potential gains of such research are to be realized.

Introduction With reference to strategy, inertia may be defined as hyperstability in mission, product-market portfolio, boundary relationships, and resource use, where these are fundamental to long-term organizational wellbeing. It has also been defined as the adoption of change while continuing to ‘elaborate an existing core policy’ (Miller and Chen 1994), and as continued commitment to ‘questionable strategy’ (Schwenk and Tang 1989). What makes inertia of interest to students and practitioners of strategic management? Well, one response is that much of the strategy literature 203

204 Understanding Inertia

is predicated upon the assumption that organizations operating in dynamic environments need to be adaptable if they are to remain competitive. On this view, successful firms will have been able to maintain strategic fit through adaptive change. A less sanguine viewpoint emphasizes the limits to adaptability, related to worsening firm performance or failure. Population ecology theory represents one strand of this literature, being concerned with the liabilities of change and newness and, paradoxically, the benefits of inertia (cf. Amburgey et al. 1993, Hannan and Freeman 1984, Stinchcombe 1965). The basic rationale for this chapter is to contribute to a better understanding of this debate, and indeed the practical dilemma presented to managers by the stability/change paradox. Further, recognizing the potential contribution of ‘paradoxical theory’ to synthetic theory development (cf. Poole and Van de Ven, 1989), the chapter reviews a wide range of contributions, culminating in a discussion of the merits of, and obstacles to, developing a multi-disciplinary perspective of inertia. In this chapter perspectives of inertia are considered as they pertain to different levels of analysis – population/sector, organizational, and individual. Ecological, institutional and industry organization (IO) economic; intra-organizational; and cognitive perspectives are reviewed based on this distinction. The chapter identifies lines of inquiry associated with groupings of such disciplines and the contribution they may make, either singly or in an integrated manner, towards understanding inertia. Thus, in the following three sections of the chapter, contributions from each of the broad perspectives are discussed and evaluated in turn. The fifth and final section concludes on the potential benefit to insight accruing from any complementarity of the approaches discussed. It is also, however, concerned with identifying the difficulties to be surmounted for a multi-disciplinary view of inertia and effective management of change to be realized. This is apposite, given growing demands for management research and practice to be multi-disciplinary and the view that this represents the ‘only game in town’ for management studies (Brown 1997).

Ecological/institutional and industry organization economic (IO) theories of inertia Previous work within population ecology, institutional theory and the IO school has suggested possible explanations of inertia, focusing on field, sector but sometimes also some firm level analysis. The summary here begins with population ecology research on structural inertia, the

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liabilities of newness and density dependence, before moving on to consider ecological and other related work on carrying capacity of munificent environments and various barriers to exit.

Structural inertia, liability of newness and density dependence theories Research on population and organizational ecology has addressed inertia from several directions concerned with age, founding and mortality. One view holds that organizational aging corresponds to a kind of stickiness, which makes adaptation with environmental change difficult – older organizations are more inert therefore and their mortality increases. Here, inertia may be thought of as implicated in the need for reliability and accountability in organizations, and reflective of the liabilities of change. Where this is the case, certain mechanisms or rules may be incorporated to govern and to account for the use of resources and to ensure the reproducibility of skilled performance. One of the sources of ‘structural inertia’ thus arises from the initial combination of resources acquired by the firm from its task environment (Stinchcombe 1965) and the inability of organizations to change effectively as quickly as the environment in which they operate. In addition, liabilities of change may stem from the need to alter core and non-core aspects of an organization at the same time, a task subject to great uncertainty, which might deter decision makers from implementing change (Greve 1999). A second approach concerns the liabilities of newness; younger organizations do not have the accumulated learning or positional advantages of older ones and so are prone to be selected out. Results on structural inertia and liabilities of newness are mixed. A number of studies have found organizational age and size to be associated with lack of change in core features (most notably, Hannan and Freeman 1984). However, contrary to this, studies have failed to support the argument that age and size are associated with decreasing likelihood of change (Boeker 1989, Kelly and Amburgey 1991). Boeker (1989) points to the ‘intuitive notion’ that older organizations will be more likely to have moved away from their initial strategy than younger ones. Moreover, studies have failed to support the thesis that changes in core features adversely affect survival chances (Kelly and Amburgey 1991). The notion that organizational change is positively related to success is supported, for example, by Delacroix and Swaminathan’s (1991) research on change and performance in the Californian wine sector; and a later, similar study by Stoeberl et al. (1998) on the Missouri wine industry.


Density dependence research has, over a number of years, attempted to explain inertia indirectly by analyzing the effect of legitimation and competition on founding and mortality rates. Basically, increasing density (the number of organizations in a population, or sector) serves to increase the legitimation required to get new organizations (or organizational forms) ‘up and running’, up to a point after which the effect of competition ‘overwhelm[s] the effect of legitimation’ to decrease founding and increase mortality rates (Hannan et al. 1995). Legitimation is referred to as ‘social taken-for-grantedness’; for example, the social acceptability which enabled the growth of multi-national automobile manufacture in Western Europe from the late-nineteenth century onwards (Hannan et al. 1995), the lack of which hindered early efforts at internet retailing (Barron 2001). The study of legitimation is itself the subject of rapprochement between two distinct research streams which have recognized their complementarity: population ecology research focusing on external legitimacy as a key criterion through which environment selects organizational forms for retention (see above); and institutional theory which analyzes the nature of institutional links within an organization’s community which affect its prospects for survival (DiMaggio and Powell 1991, Meyer and Rowan 1977). Studies which bridge these approaches include: Baum and Oliver 1991, Hannan and Carroll 1992, Hannan and Freeman 1989, and Singh et al. 1986. However, even within this narrow version of multi-disciplinarity the harmony has been punctured, with institutionalists accusing ecologists of having too restricted a concept of legitimacy, promoted by a reliance on density dependence arguments (see Baum and Powell 1995). For their part, ecologists have argued that institutionalists’ plea for a more multi-dimensional, processual approach to studying legitimation is ‘cheap talk’, which ignores the practicalities and costs of acquiring data (Hannan and Carroll 1995).

Environmental carrying capacity and barriers to exit The notion of environmental carrying capacity has been invoked by population ecology theorists and others who have sought to determine factors affecting industry entry and exit. Some of this research has generated findings regarding environmental carrying capacity and the types of strategic decisions failed firms follow (Hambrick and D’Aveni 1998). First, bankruptcy is associated with a sudden decline in environmental carrying capacity (sales growth) in the years immediately preceding failure. Secondly, the strategic response of failing firms may take the form of inaction or hyperactivity, or an inconsistent, ad hoc blend

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of the two (Hambrick and D’Aveni 1998). What is more, a difference in available slack resources between good performers and poor performers may explain why the former may be better shielded from economic downturns, while the latter are unable to act (Singh 1986). On exit barriers three types may be identified: structural, corporate, and managerial (Harrigan 1985, Porter 1976, Schwenk and Tang 1989, van Witteloostuijn 1998). Structural exit barriers may be addressed via notions of asset specificity and problems of appropriating rent from specialized assets, which might be disposed of in a market with few buyers. Attention to corporate exit barriers brings into focus potentially ‘negative’ implications of synergistic operations or shared resources in organizations. Schwenk and Tang refer to shared production facilities or distribution channels as ‘strategic interdependencies’ which constrain freedom of exit (1989), whilst Porter (1976) draws attention to synergies across activities which prevent exit from loss-making ventures. Managerial exit barriers may be conceived of in terms of differences in goals, and ‘attachment’ to existing strategy. These tend to receive much less attention from researchers working from economics-based perspectives or ecological approaches than do structural and corporate exit barriers.

Bridging ecological and economic theories The previous sub-section has referred to some work incorporating economic and cognitive approaches on inertia (Hambrick and D’Aveni 1998, Schwenk and Tang 1989). There has also been a move to integrate economic and ecological theories of inertia and decline. Arguably, Arjen van Witteloostuijn (1998, 2000; with Boone, 1995) has been the most vociferous advocate for this version of multi-disciplinarity, seeking the integration of population ecology, industrial organization economics, and strategic management. Using formal modelling, van Witteloostuijn (1998) has incorporated what he calls ‘behavioural’ assumptions into an economic model of decline, aiming to combine the richness of sociological theory with the analytic precision of industrial economics. The result has been to enrich ecology’s view of intra-population variation, employing concepts such as strategic groups and Porter’s generic strategies taxonomy to try to understand organizational strategies and mobility barriers (Boone and Witteloostuijn 1995). Similarly Geroski (2001) has explored ‘niche overlaps between organizational ecology and industrial economics’. He, though, rehearses some reservations regarding multi-disciplinarity. So, whilst organization ecology could helpfully be brought to the attention of economists studying adaptation and inertia, some limits on its application include


the ‘unreasonable premise’ that organizations do not change, a view which has been denied by Freeman and Barley (1990), for example, who go as far as to say that this is rather a shortcoming of ‘static’ approaches to the study of organizations and environment. Other objections refer to what Geroski calls ecology’s reliance on survival as a performance measure, a focus on density dependence rather than choices made in organizations and a failure to specify just what is being ‘legitimated’. At the same time, ecology research does have the benefit of employing longitudinal rather than cross-sectional designs and incorporating a wider range of organizations in studies than would typically be the case in industrial economics (Geroski 2001). The following section delves more into the ‘black box’ to address intra-organizational research on inertia.

Intra-organizational research on inertia From the literature concerned with internal aspects of organizational adaptation, a number of factors have been cited as contributory to inertia. These include: characteristics of the top management team and strategic decision-making processes, initial and prevailing productmarket strategy and performance, and resource dependencies.

The top team and strategic decision-making processes On the first of the above-mentioned factors, attention has been drawn towards the relationship between characteristics of the top management team and strategic decision-making processes, as well as the influence of boards on CEO selection and strategic choice. Studies of structural inertia have implicated the influence of characteristics of organizational founders (Mintzberg and Waters 1982) and the top management team Eisenhardt and Schoonhaven (1990), Frederickson and Iaquinto (1989). Additionally, the link has been made between executive team continuity, changes in the comprehensiveness of strategic planning processes and/or the degree of change, which might occur in stable or dynamic environments. The length of team tenure and continuity has been associated with the phenomenon of ‘creeping rationality’, whereby planning and information systems become increasingly sophisticated and specialized as the firm evolves and grows. This may be appropriate in simple or static environments (Frederickson 1984) but may appear inertial in complex, dynamic ones (Frederickson and Mitchell 1984). Further, such executive team continuity belies a stability, which serves to shield top managers from critical sources of information (in both senses of the word ‘critical’). This results in

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non-comprehensiveness, a boundedness of view, which may necessitate removal of the top team for change to occur (Frederickson and Iaquinto 1989). The notion of ‘executive team clocks’ has been invoked to explain this lack of senior management sensitivity to the need for strategic redirection, focusing on the time elapsing since a previous ‘reorientation’ of strategy, or environmental discontinuity (Keck and Tushman 1993, Tushman and Anderson 1986). Yet another strand of work in this area concerns the role of boards of directors. Board member influence on strategy may vary according to the length of tenure individual directors enjoy at their ‘home’ company and the performance of that firm (Golden and Zajac 2001). More directly pertinent to the topic of inertia is the suggestion that outside directors on a firm’s board conceive strategies reflective of their home firm’s strategy, and thus select CEOs who have previous experience with implementing these director-preferred strategies (Westphal and Frederickson 2001).

Initial and prevailing product-market strategy and performance A number of studies have investigated connections between past and current strategy, performance and inertia. For example, strategy is argued to be inertial when organizations pursue a single, dominant initial business strategy at their founding, as distinct from the simultaneous pursuit of multiple strategies requiring development of a variety of competences, which might allow for greater subsequent mobility (Boeker 1989). Also, the taking of ‘tactical’ rather than ‘strategic’ decisions is considered in circumstances where performance is poor, the former being easier to undertake, partly due to lower internal resistance (Miller and Chen 1994, cf. Boeker 1989). The latter may not feature on the agenda for change as they could represent a challenge to the egos of managers who will have implemented prior strategy (Miller and Chen, 1994). The impact of past success on organizational adaptation to environmental change may be manifest in structural, strategy and process inertia, characterized by extreme process orientations, ill-attention to intelligence gathering and processing, and failure to adapt strategies to changed competitive conditions (Miller 1994). Meanwhile, continued and escalated commitment of managers to a ‘losing course of action’ has been ascribed to ‘managers’ bias toward optimism and sense of control over risk’ (Boulding et al. 1997, cf. Staw and Ross 1987, on the role of biased interpretations in escalating commitment to current strategy).


Resource dependencies A key development in management research over the past thirty years concerns resource dependency theory. As conceived by contributors such as Pfeffer and Salancik (1978), most organizations need to develop stable links with others in order to provide the resources required to realize production of goods and services. These linkages enable exchange between parties but at a cost, which varies at least according to the importance to the focal organization of the items being sourced. Inertia might be thought of here as pertaining to the extent to which an organization becomes dependent on others, or builds up routines around prevailing arrangements which ossify (Nelson and Winter 1982). It also directs attention to ways in which organizations search (or not) for improvements that may be made to inter-organizational repertoires of knowledge and experience, as these become ill-suited to the market environment in which a focal firm operates (Cyert and March 1992). Some researchers have attempted to integrate strategy, or resource dependency, and ecological perspectives. For example, Boeker (1991) applies ecological arguments to the study of environmental influences on strategic groups of US brewers, a development with which Zammuto (1988) concurs. A number of authors consider the complementarity of literature on adaptation and inertia, pointing to the need for inertia to enable short-term survival and for adaptation over the longer term (Burgelman 1991, Hrebiniak and Joyce 1985, Kale and Arditi 1999, Levinthal and March 1993). Specht (1993) meanwhile combines resource dependency and population ecology to develop a model of organizational formation drawing on concepts of environmental munificence and carrying capacity. Such multi-disciplinarity is not without its pitfalls, however. Betton and Dess (1985), for example, have cited three problems of applying ecology arguments to organizations: the paradox that inertia is associated with large firms but natural selection models apply more to small, powerless ones; reference to ‘species’ defined in biology by their differences when population studies focus on shared characteristics; and the measurement of environmental selection and how to deal with strategic choice. Smith (1991) has doubts about searching for positivistic laws regarding the (deterministic) relationship between organizations and environment, particularly when this is at the cost of developing an historical understanding of organization evolution, although ecology can correct the assumption of choice found in organizational research. Finally, Wholey and Brittain (1986) recognize ecology’s lack of detail on

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internal organizational characteristics, compared with organizational studies research but consider its stringency of method to be advantageous. In the following section, contributions that have sought to connect organizational and cognitive research on inertia are discussed.

Cognitive approaches to the explanation of inertia Recent developments have put issues of sensemaking, interpretation and cognitive inertia centre-stage to uncover possible inhibitors and facilitators of organizational adaptation. The implications of cognitive similarity and dissimilarity at the functional, organizational and industry level are especially relevant. These are revealed in studies bridging strategy and cognition research, which rescue the former from ‘the baleful influence of economics’ (Stubbart 1989: 342).

Cognitive similarity and cognitive inertia The study undertaken by Porac et al. (1989) of competitive group definition in the Scottish knitwear industry exemplifies the link between cognitive similarity and inertia. Its significance lies in the extent to which the study sheds light on processes by which managers ‘enact’ or socially construct their environment and share interpretations of environmental cues. These mental models serve to narrow definitions of what counts as the competition, and to limit perceptions of what strategic actions, if any, are appropriate to maintaining competitive position. Such studies draw upon the ideas of Weick (1979, 1995) and others to build what is termed a ‘social constructionist’ approach to competitive enactment (Hodgkinson 1997).

Cognitive heterogeneity and social aspects of developing shared perceptions It is possible to overstate the homogeneity of mental models at the industry or strategic group level. Indeed, a disclaimer is made by Porac and his associates to that effect, reminding us that ‘Although social enactment processes inevitably press toward shared mental models, each individual manager within a cognitive community has a unique set of problems to work out and a unique informational base from which to generate possible solutions. Thus to speak of the mental model shared by all competing firms within a sector or group is problematic since variation exists from firm to firm in how managers conceptualize the details of the competitive environment’ (Porac et al. 1989: 405). This theme is taken up in a number of studies (Daniels et al. 1994,


Reger 1990, Reger and Huff 1993) and in critical reviews such as Hodgkinson’s (1997). By contrast, the stream of research that develops our understanding of cognitive heterogeneity and implications thereof for inertia is outlined below. The first aspect of this to be addressed relates to the supplyside bias of many studies in the area (Hodgkinson 1997). Arguably such a tendency neglects analysis of the mental models of some stakeholders (customers, for example) which may be convergent or divergent with those of other industry participants. Research undertaken by Hodgkinson, Tomes and Padmore has employed cognitive mapping techniques to uncover differences in consumers’ mental models regarding the grouping of competitors in the grocery retail industry. Acknowledging that their study and research design fail to cater for the dynamics of consumer choice, changing cognitive maps, and comparison between managerial and consumer perceptions, the authors nevertheless identify an important issue for strategists to consider. Thus, ‘the key parties [may be] operating from fundamentally different frames of reference’, which may be indicative of market failure. Alternatively, ‘the discovery of a strong convergence of mental models, amongst suppliers and consumers, might signal another danger, the danger of inertia. Under these conditions, either or both parties might fail to adapt sufficiently quickly to changing market conditions, in order to reap the benefits of such change’ (Hodgkinson et al. 1996: 19). A general conclusion from a number of recent studies is that there is ‘significant statistical dissimilarity between which companies managers name as competitors within an industry’ (Daniels et al. 1994: 26, Hodgkinson and Johnson 1994, Hodgkinson 1997, Reger 1990). One might also consider the extent to which there is similarity between mental models within organizations. One outcome of research in this area is the finding that, compared to analyses at the industry level, there is less diversity in mental models among managers working in similar management functions, and least diversity where they work for the same company (Daniels et al. 1994). If shared understandings are indeed required for coordinated action and response, one needs to examine the extent of such sharing and processes by which differing cognitive schemes are reconciled or negotiated (cf. Barr and Huff 1997). Walsh (1988, 1995) refers to managers’ indirect, vicarious learning about organizational life, through stories for example. As well as connecting to the possibility for cognitive overlap, Walsh’s point may have relevance to ‘cognitive recognition’ (Daniels et al. 1994). The role of chief executive officers acting as ‘cognizers’, who integrate diverse mental

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models around key themes which can be more widely shared, has been identified in this regard (Calori et al. 1994). A practical difficulty for managers lies in how to make sense of the strategies of apparently maverick firms. One reading of competitor strategies which diverge from the industry ‘recipe’ shared by industry rivals is that idiosyncratic firms have failed to grasp or implement the actions required for success. However, another, more pessimistic reading is that mainstream competitors have failed to recognize the innovative strategy of the maverick. The latter may be pursuing a strategy perfectly suited to changing competitive conditions but that does not fit the cognitive map of other sector competitors. (Indeed, Reger and Huff refer to Timex’s first entry into the watch industry, in this regard.) The first of these constructions looks, for the core members of the group, like the distillation of experience and understanding into a recipe, which enables them to cope with uncertainties of competition and of developing intra-firm strategy. However, the second construction points to the potentially debilitating effects of cognitive inertia.

Discussion and conclusion: a multi-disciplinary approach to analyzing inertia? This chapter has identified diverse potential influences and implications of inertia for strategy, taking in factors defined in research from ecological/institutional and IO economic, organizational and cognitive perspectives. Previous work has attempted mainly to integrate a narrower range of ecological/organizational, economic/ecological or cognitive/organizational approaches within a single framework, to analyze strategy or mental models of competition (Aldrich 1990, Boeker 1991, Bogner and Thomas 1993, Hodgkinson and Johnson 1994, Johnson 1987, 1988, Schwenk and Tang 1989, van Witteloostuijn 1998), and to integrate resource dependency and population ecology models (Specht 1993), resource-based approaches to strategy and organizational ecology (Pennings et al. 1998), and adaptationist and ecological approaches which previously had been considered to be contradictory (Hrebiniak and Joyce 1985, Kale and Arditi 1999, Levinthal and March 1993, Zammuto 1988). Despite these developments, some contributors have complained of a lack of integration, or the absence of multi-level analysis (Hodgkinson 1997, cf. Huber 1991, Walsh 1995). Contrary to this, organizational learning research has warned against attempting to integrate the diverse disciplinary efforts in that area. The implication is that rather than attempt to establish any single,


overarching framework for understanding a topic, a subject area should instead be understood on the basis of a multi-disciplinarity in which the contributions and agendas are seen as complementary (Easterby-Smith 1997). The position of this chapter is to be mindful of such comments, but also to take seriously the view that ‘we are working alone together’ (Walsh 1995: 284). There is a need for consolidation or, more realistically, for ‘points of contact’ (Porac et al. 1995) between the diverse perspectives that inform the work that is being conducted. As Bogner and Thomas (1993) put it, the contribution of each perspective should vary according to what part of any integrating model is being researched and the research question(s) being posed. From the standpoint of this chapter, researchers may need to become more deeply familiar with contiguous work, which ordinarily they might neglect, if a richer picture and understanding of the causes and implications of inertia are indeed to be gained. So, for example, accounts of inertia emanating from an organizational studies perspective may be put to good use to uncover the ‘social and political pressures [which] mediate individual cognitive diversity’ (Hodgkinson and Johnson 1994: 546). These pressures may be manifest in attempts to reinforce central control or the values of a ‘dominant elite’ through sanctions to enforce compliance, and may be reflected in organizational resource allocation patterns. Huff (1997) meanwhile identifies a role for more ‘objective’ approaches in complementing cognition research on inertia. Essentially, she, along with Bogner and Thomas (1993), supports the point made by Pfeffer and Salancik (1978) regarding the external environment providing the ‘raw material’ out of which the enacted environment is constructed, but of which the latter is but a partial construction. Such analyses may also provide the basis for a more informed view of the structure, complexity or partiality of mental models, and the extent to which these remain stable or develop with environmental change (Huff 1997, Walsh 1995). At the same time, analyses of market environments and competition and dynamics of organizational populations can be usefully employed to ‘paint in’ a richer picture of the context in which organizations operate and in which strategic decisions are made. Prospects for multi-disciplinarity are advanced when, for example, organizational ecologists identify conditions under which arguments supporting environmental selection based on inert reproducibility of structure should be relaxed. These include acknowledging the capacity of organizations to learn about environmental change and to alter strategies or structures in a timely manner, or the significance of (peripheral)

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dimensions (such as collaborative inter-firm innovation) rather than reproducibility of (core) structure, to enable dynamic strategic fit (Hannan and Freeman 1989). In these ways, ecologists’ analysis of the capacity of organizations to learn and speedily reorganize may be complementary with organizational and cognition research emphasizing both learning and unlearning (cf. Barr et al. 1992, Johnson 1988). However, there are a number of barriers to even multi-disciplinary research on inertia, which are of significance to how effective strategic management practice should be understood and which, contrary to Brown (1997), do require attention. For example, to take a point made by Burgoyne et al. (1997), harnessing diverse perspectives may come at the cost of a loss of richness or insight from specific disciplinary perspectives. Further, there is a danger that researchers venturing into strange terrain may misconceive or misapply concepts from ‘foreign’ fields (take for instance Geroski’s (2001) well-meaning attempt to bring organizational ecology to the attention of industrial economists, misunderstandings in which are corrected by Barron 2001). Another issue concerns the degree to which disciplinary approaches are not complementary in methodological or other terms. Borrowing from Burrell and Morgan (1979), a number of paradigmatic differences can be observed which reflect conflicting underlying ontological, epistemological, methodological and agency assumptions guiding research on inertia. For example, the literature on population/organizational ecology reflects a realist ontology; reality is ‘out there’ and ‘objective’ in nature (Burrell and Morgan 1979: 1), whereas cognition research owes more to a view that sees reality to be the product of individual consciousness. In terms of epistemology and methodology, much of the work on inertia seen by this author adopts either an explicit or implicit positivism, particularly research connected with ecology or economics. Here, researchers take on the role of the neutral scientific observer attempting to find causal connections and generalizable laws, employing systematic techniques for hypothesis testing. Other work, such as cognition and case-based organizational studies, is anti-positivist and ideographic character. Such work is more concerned with developing an understanding of a situation through immersion with it and the protagonists’ sense of what’s going on and what to do about it. As for assumptions about human nature, clearly there is a conflict regarding the extent to which inertia is the product of the choices of human agents (as in the mainstream strategy literature and ‘weak’ versions of organizational ecology), or the by-product of environmental selection mechanisms (‘strong’ forms of population ecology).


Finally, the phenomenon of researchers in one camp to want to ‘colonize’ other disciplinary areas needs to be acknowledged (Knights and Willmott 1997). Whilst there is an almost equal split between ‘integrators’ and ‘colonizers’ amongst papers on inertia having some disciplinary boundary-crossing content, prospects for genuine multidisciplinary development in the area will be negated by any tendency to undermine work in rival disciplines and to push forward the claims of one’s own. Overall, this and other factors cited in this chapter suggest areas of tension regarding the complementarity or incompatibility of research, which could illuminate the topic of inertia in a multi-disciplinary fashion.

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Meyer, J.W. and Rowan, B. (1977) ‘Institutionalized organizations: formal structure as myth and ceremony’, American Journal of Sociology, vol. 83, pp. 340–63. Miller, D. (1994) ‘What happens after success: the perils of excellence’, Journal of Management Studies, vol. 31, pp. 325–58. Miller, D. and Chen, M. (1994) ‘Sources and consequences of competitive inertia: a study of the US airline industry’, Administrative Science Quarterly, vol. 39, pp. 1–23. Mintzberg, H. and Waters, J.A. (1982) ‘Tracking strategy in an entrepreneurial firm’, Academy of Management Journal, vol. 25, pp. 465–99. Nelson, R.R. and Winter, S.G. (1982) An Evolutionary Theory of Economic Change. Cambridge, MA: Harvard University Press. Pennings, J.M., Lee, K. and Witteloostuijn, A. van (1998) ‘Human capital, social capital and firm dissolution’, Academy of Management Journal, vol. 41, pp. 425–40. Pfeffer, J. and Salancik, G. (1978) The External Control of Organizations: A Resource Dependence Perspective. New York: Harper and Row. Poole, M. and Van de Ven, A.H. (1989) ‘Using paradox to build management and organization theories’, Academy of Management Review, vol. 14, pp. 562–78. Porac, J.F., Thomas, H. and Baden-Fuller, C. (1989) ‘Competitive groups as cognitive communities: the case of Scottish knitwear manufacturers’, Journal of Management Studies, vol. 26, pp. 397–416. Porac, J.F., Thomas, H., Wilson, F., Paton, D. and Kanfer, A. (1995) ‘Rivalry and the industry model of Scottish knitwear producers’, Administrative Science Quarterly, vol. 40, pp. 203–27. Porter, M. (1976) ‘Please note location of nearest exit: exit barriers and strategic and organizational planning’, California Management Review, vol. 19, pp. 21–33. Reger, R. (1990) ‘Managerial thought structures and competitive positioning’, in Huff, A.S. (ed.), Mapping Strategic Thought. Chichester: Wiley, pp. 71–88. Reger, R. and Huff, A.S. (1993) ‘Strategic groups: a cognitive perspective’, Strategic Management Journal, vol. 14, pp. 103–24. Schwenk, C. and Tang, M.-J.E. (1989) ‘Economic and psychological explanations for strategic persistence’, OMEGA, International Journal of Management Science, vol. 17, pp. 559–70. Singh, J.V. (1986) ‘Performance, slack and risk taking in organizational decision making’, Academy of Management Journal, vol. 29, pp. 562–85. Singh, J.V., Tucker, D.J. and House, R.J. (1986) ‘Organizational change and organizational mortality’, Administrative Science Quarterly, vol. 31, pp. 587–611. Smith, C. (1991) ‘Organization Ecology – Hannan, M.T. and Freeman, J.’, book review, Business History, vol. 33, no. 2, pp. 355–6. Specht, P.H. (1993) ‘Munificence and the carrying capacity of the environment and organization formation’, Entrepreneurship, Theory and Practice, vol. 17, pp. 77–86. Staw, B.M. and Ross, J. (1987) ‘Behaviour in escalation situations: antecedents, prototypes and solutions’, in Cummings, L.L. and Staw, B.M. (eds), Research in Organization Behaviour. London: JAI Press, pp. 39–78. Stinchcombe, A.L. (1965) ‘Social structure and organizations’, in March, J.G. (ed.), Handbook of Organizations. Chicago, IL: Rand-McNally, pp. 142–193. Stoeberl, P.A., Parker, G.E. and Joo, S.-J. (1998) ‘Relationship between organizational change and failure in the wine industry: an event history analysis’, Journal of Management Studies, vol. 35, pp. 537–55.

220 Understanding Inertia Stubbart, C.I. (1989) ‘Managerial cognition: the missing link in strategic management research’, Journal of Management Studies, vol. 26, pp. 325–47. Tushman, M. and Anderson, P. (1986) ‘Technological discontinuities and organizational environments’, Administrative Science Quarterly, vol. 31, pp. 439–65. Walsh, J.P. (1995) ‘Managerial and organizational cognition: notes from a trip down memory lane’, Organization Science, vol. 6, pp. 280–321. Walsh, J.P. (1988) ‘Selectivity and selective perception: an investigation of managers’ belief structures and information processing’, Academy of Management Journal, vol. 31, pp. 873–96. Weick, K.E. (1995) Sensemaking in Organizations. London: Sage. Weick, K.E. (1979) The Social Psychology of Organizing, 2nd edn. Reading, MA: Addison-Wesley. Westphal, J.D. and Frederickson, J.W. (2001) ‘Who directs strategic change? Director experience, the selection of new CEOs and change in corporate strategy’, Strategic Management Journal, vol. 22, pp. 1113–38. Wholey, D.R. and Brittain, J.W. (1986) ‘Organizational ecology: findings and implications’, Academy of Management Review, vol. 11, no. 3, pp. 513–33. Witteloostuijn, A. van (2000) ‘Organizational ecology has a bright future’, Organization Studies, vol. 21, no. 2, pp. v–xiv. Witteloostuijn, A. van (1998) ‘Bridging behavioural and economic theories of decline: organizational inertia, strategic competition, and chronic failure’, Management Science, vol. 44, pp. 501–19. Zammuto, R.F. (1988) ‘Organizational adaptation: some implications of organizational ecology for strategic choice’, Journal of Management Studies, vol. 25, pp. 105–20.

Part IV Managing Technological Change


11 A Dynamic Resource-based View of the Interaction between Technological Resources, Corporate Diversification and Performance Francisco Javier Forcadell

Abstract This work analyzes the relationship between corporate diversification, technological resources and performance, proposing a theoretical dynamic framework. To do this, a dynamic approach of the resourcebased view of the firm is taken as a basis. It can be said that strategic management in general, and the resource-based view in particular, lack an integrated analysis of diversification strategy. An integrated analysis examination of the consistency and coherence of the arguments of diversification studies on the sources of superior performance, which have been put forward in different studies from a partial perspective. This work aims to contribute to a more effective and realistic resourcebased theory on diversification, proposing a ‘diversification-capability’ view of the multibusiness firm. The integrated view proposed reveals the coherence of the reasons used to explain the superior performance of related, as opposed to unrelated, diversification. To achieve this objective, the work provides a review of research on diversification from different research topics in strategic management. The work forming the basis of this chapter was financed by funding from CICYT, Fundación Banco Herrero, and Cátedra Iberdrola de Investigación en Dirección de Empresas at the Rey Juan Carlos University. The study was awarded the Renau Piqueras Prize in 2002.

Introduction This chapter analyzes the relationship between corporate diversification, technological resources and performance. It proposes a theoretical 223

224 A Dynamic Resource-Based View of Interaction

dynamic framework. To do this, a dynamic approach of the RBV is taken as a basis (Foss 1997, Mahoney 1995). The work is included in the line of thought which uses this focus to explain the growth and development of multi-business firms (Peteraf 1993: 188). A well known and considerable disagreement about precisely how and when diversification can be used to create value still exists (Markides and Williamson 1994: 149). The RBV offers responses to the question about whether there are certain types of diversification that lead to superior performance. This view attributes superior performance to the competitive advantage based on idiosyncratic internal factors in a firm, suggesting that diversification based on these factors will generate a superior performance1 (Conner 1991, Henderson and Cockburn 1994: 63, Teece et al. 1997). This statement implicitly includes the elements analyzed in the current study: idiosyncratic resources (technological), diversification strategy, and performance. Nevertheless, it can be said that the RBV, and strategic management in general, lacks an integrated analysis of these elements. Such an integrated analysis would allow examination of the consistency and coherence of the arguments on the sources of superior performance which have been put forward in different studies from a partial perspective. The framework proposed here aims to contribute to a more effective and realistic theory on diversification, in such a way that one can speak of a ‘diversification-capability’ view of the multibusiness firm. This is undertaken by providing a review of research on diversification from different investigation topics in strategic management. A dynamic relation is proposed between resources and corporate diversification in both directions, interacting together over time in a recursive way (Teece 1980: 244). The endogenous character of the relationship is emphasized.2 The possession of a ‘diversification capability’ by a multi-business firm will mean the existence of a dynamic link between diversification (of a related nature) and resources (technological). Possession of this capability will allow firms to take advantage of the resources of the different businesses, as well as contributing to the accumulation of strategic resources over time, so leading to the achievement of superior performance. The diversification analysis carried out uses one single framework to consider aspects of resource generation from strategy, use of these through the diversification pattern and the influence of this relationship on performance. In addition, this ‘diversification-capability’ view may help to overcome the conceptual limitations in the prevalent view of diversification, which can be considered to be partial and non-dynamic.

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Many studies have suggested that the RBV is ‘tautological’ (Priem and Butler 2001, Schendel 1994), since it suffers from circularity: resources drive strategy and competitive advantage, but at the same time are defined by strategy. From a dynamic RBV perspective, this aspect has been covered to some extent (Barney 2001). Given the circular nature of the relationship between resources and diversification strategies, the framework proposed shows that resources determine the strategy and that this then determines the accumulation of further (technological) resources. This recursive relationship is maintained continuously over time. Thus, a strategy based on high-value (strategic) resources will have a greater chance of success, while a successful strategy will generate high-value resources which will be usable in the future and which will create superior performance. This perception may be the way to overcome the problem of apparent tautology in the RBV. The theoretical dynamic framework proposed aims to integrate a group of research topics in strategic management. The main points of the framework are: 1 The accumulation of resources (technological) and their characteristics influence a firm’s performance, in general from an RBV perspective (Amit and Schoemaker 1993, Barney 1991, Coff 1997, Hall 1993, Makadok 2001, Penrose 1959). An assumption which is present in the RBV (Conner 1991: 1321, Schulze 1994: 130–3) refers to the existence of a causal relationship between the differences in a firm’s base of resources and the differences in its performance. The RBV constitutes a synthesis effort in explaining the existence of persistent profits (Rumelt et al. 1991: 12). Within the empirical work done on the RBV, Kor and Mahoney (1998) find the general hypothesis that a greater accumulation of strategic resources has a positive influence on a firm’s growth and performance. 2 It is relevant to analyze the relationship between a firm’s portfolio of resources and the strategies which can be developed from them, such as diversification. Resource accumulation (technological) determines corporate diversification in relation to its extent and its direction (Chatterjee and Wernerfelt 1991, Grant and Jammine 1988: 335, Montgomery 1995: 9, Montgomery and Hariharan 1991, Penrose 1959, Reed and Luffman 1986: 34, Silverman 1999). The most widely accepted theory on diversification can be characterized as resourcebased (Peteraf 1993: 188, Rumelt et al. 1991). 3 Also of interest is the analysis of strategies which contribute to the development of resources which give a competitive advantage


(Dosi et al. 2000). Corporate diversification determines the accumulation of resources (technological). This is an aspect which does not appear in an explicit way in many studies under the RBV, but which must be considered under a dynamic view (Chen 1996, Davis and Thomas 1993, Scott 1993, Teece 1998). 4 Corporate diversification and its influence on performance. This is a topic in strategic management which has been widely analyzed and on which there is no agreement (Dess et al. 1995, Palich et al. 2000, Ramanujam and Varadarajan 1989). These topics make up different aspects of one single reality, the growth of the firm. An integrated analysis is therefore useful, especially one which introduces the dynamic aspects inherent in growth. On these lines, Itami and Numagami (1992) analyze the interaction between strategy and resources, centring their attention on technological resources. They suggest that at least three perspectives exist: (1) strategy capitalizes on resources; (2) strategy cultivates resources; and (3) resources cultivate strategy. Falkenberg (1996) extends this model to all types of resources and adds a fourth perspective between future strategy and future resources. Given the decisive role of technological resources in ensuring business success (Franko 1989, Itami and Numagami 1992: 119, Schoemaker 1990: 1181–2, Zahra and Covin 1993: 451), the attention of this work is focused on analyzing their dynamic interaction with the direction of corporate diversification and its influence on performance. The chapter is structured as follows. Firstly, the relationship between diversification strategy and technological resources elements is analyzed separately, in the direction of technological resources to diversification strategy and vice versa. Evidence is then presented on the interaction between the two variables, aiming to combine the two perspectives in a dynamic way. A demand view of diversification is then analyzed. The influence of technological resources and diversification strategy on performance is then analyzed. This influence is determined both by the two elements separately, as generally reflected in the literature, and by the interaction between the two. The chapter closes with a series of implications derived from the theoretical framework.

Dynamic interaction between technological resources and corporate diversification Some resource-based studies have shown an influence by diversification strategy on technological resources, or technological accumulation.3

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Corporate diversification

P6

P1

P3 P4

P2

P7 Performance

P5 Technological resources

Figure 11.1 Dynamic relation between technological resources, corporate diversification and performance

Another series of studies has concluded that technological resources influence diversification strategy. The influence of each within a cycle, as proposed in the framework of Figure 11.1, occurs in a continuous way, each reinforcing the other over time. Thus, R&D investment will generate results (technological resources) which are applicable more widely than the initial proposal (diversification). At the same time, a greater degree of diversification, preferably related, will provide a greater number of opportunities to offer new products and aim at new markets. This will require new R&D investment in order to compete in these new business areas. In the industrial economics literature, there are two principal hypotheses on the relationship between R&D and diversification (Hughes 1988: 251): (1) R&D may lead to diversification; and (2), diversification may result in a higher level of R&D, since it is more likely that a diversified firm will make use of R&D output and reduce its risk (Pavitt et al. 1989: 82). Baysinger and Hoskisson (1989) suggest a bi-directional conception for the diversification and R&D relation, based on two affirmations: (1) analysis of why firms diversify is frequently based on the relationship between diversification and R&D investment (Chandler 1962, Penrose 1959); (2) firms can improve the efficiency of their R&D spending through diversification (Hambrick and MacMillan 1985). Work carried out under the RBV has a tendency not to include explicitly the bi-directional hypothesis between diversification and technological resources. However, the RBV’s logic does find space for this bi-directional relationship, thus suggesting a third hypothesis for a dynamic relation between the two. Also, this third hypothesis serves


as the link for the analysis under the RBV of the sources of better performance.

The influence of technological resources on corporate diversification Chandler (1962) proposes that the resources accumulated from past business activities are converted into forces which direct diversification strategy. The concept of relatedness as such concentrates on relationships such as shared activities among business units as providing the means of determining the underlying logic of an organization’s strategy (Rumelt 1974: 54). Three types of relatedness are found by Rumelt (1974: 17): (1) relationships among markets served and distribution systems; (2) relationships based on similar production technologies; or (3) the exploitation of science-based research. Chatterjee and Wernerfelt (1991) analyze the influence of the type of resources available to a firm for its growth in the type of diversification followed, concluding that physical and intangible resources favour related diversification, while financial resources favour unrelated diversification. Penrose (1959: 114, 142) makes clear the role of technological resources in growth and diversification. She considers that technology is an important source of new opportunities for product diversification (Penrose 1959: 137–8). Amey (1964), Gort (1962), Merino and Rodríguez (1997), Montgomery and Hariharan (1991), Pitts (1977), Porter (1987: 54), Reed and Luffman (1986: 34) or Sutton (1973) underline the use of technological resources related to R&D investment among the reasons given for diversification. Firms with intensive R&D can use their experience in other businesses, which is consistent with the use of synergies or economies of scope (Helfat 1997, Henderson and Cockburn 1996). Diversification strategy depends on the extendable technology that a firm has accumulated (Kim and Kogut 1996: 284, Silverman 1999, Teece 1982), in such a way that the firm’s core business is the result of a natural underlying trajectory in its knowledge base (Teece 1988: 264). R&D investment leads towards related diversification (Burguelman 1983: 225), which may indicate that innovative ability is not very flexible (Chatterjee and Wernerfelt 1991). R&D investment will permit the achievement of results (outputs) in related technological areas, supposing an exploitation in related business (fundamentally at the strategic assets level). Starting from the analyzed literature, the framework proposed here sustains the well-known proposition that the development and accumulation of technological resources will influence corporate

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diversification, favouring a related diversification. This relationship is represented in the Figure 11.1. The above leads to the following proposition: Proposition 1: The accumulation of technological resources influences the pattern of corporate diversification, favouring a greater diversification and a higher degree of relatedness in the future.

The influence of corporate diversification on technological resources For Markides and Williamson (1994), the really important long-term benefits of diversification depend on its contribution to creating and/or accumulating, rapidly and efficiently, new strategic resources. For Cohen and Mowery (1984: 113–14), one of the determinants of R&D activity is corporate strategy (Rosenberg 1976), including diversification. Chandler (1990: 601–2) suggests that the greater part of (Schumpeterian) creative destruction is the result of related diversification. The business base and the firm’s associated capabilities limit the directions in which it can look for exploitation of technological opportunities and acquire competences (path dependence) (Coriat and Dosi 1998, Patel and Pavitt 1994: 20). For Itami and Numagami (1992: 121), the decision to enter or strengthen a given business area forces the firm to invest in the development of technology to be competitive in that business (Lunn and Martin 1986, Scherer 1984). Nelson (1959) affirms that a firm’s degree of diversification should positively influence the expected profit from its R&D effort (especially as regards basic industrial research), because a more diversified set-up is in a better position to use its research outputs (Kamien and Schwartz 1975: 26, Teece 1980: 243). Davis and Thomas (1993) propose a direct measure for synergy degree which includes the effect of diversification on innovation level. Chen (1996) analyzes technological expansion by examining the interaction between a firm’s diversification strategy and its internal capabilities, affirming that adoption of technology is facilitated through related diversification; this is coherent with Jovanovic (1993), Link and Long (1981), Scott (1990, 1993) or Scott and Pascoe (1987). Related diversification promotes a long term, centred orientation, thus favouring the R&D investment (Hill and Snell 1988). Other works find a negative influence of (unrelated) diversification on R&D intensity (Hitt et al. 1997, Stimpert and Duhaime 1997). Unrelated diversification tends to promote an orientation towards the short term, which inhibits investment in projects such as R&D (Hitt et al. 1996).


The literature suggests that the influence of diversification strategy on the accumulation of technological resources will depend on the relatedness of the businesses involved. Related diversification will mean entry into related technological areas, to the extent to which this diversification is based on the relationship between the firm’s technological activities. Such an entry will allow the use of synergies and will provide incentives for new R&D investment. An unrelated diversification will imply non-related technological areas and thus no synergies between the firm’s technologies. The following proposition can be extracted from the above discussion: Proposition 2: The pattern of diversification followed by a firm influences the accumulation of technological resources, so that related diversification will encourage accumulation of technological resources and synergy to be produced between them in the future. The evidence in the literature is that an influence exists between corporate diversification and technological resources, in both directions. It is thus reasonable to suppose that this relationship is mutual and dynamic. Over time, the development of technological resources will influence the path of corporate diversification, and vice versa, in a recursive way.

The interaction between technological resources and corporate diversification A dynamic competitive (Schumpeterian) system is characterized by two aspects (Teece 1982: 46): (1) firms accumulate knowledge via R&D and the learning process; and (2) market conditions mean that firms are constantly changing, creating profit opportunities in differing markets at different times. This affirmation is underlain by a dynamic relationship over time between technological resources and diversification. The diversification-capability view of the framework proposed in Figure 11.1 is consistent with the dynamic interaction between strategy and technology proposed by Itami and Numagami (1992).4 A firm can be seen as being composed of a set of businesses (or product/market combinations), which together make up its business base, and of a set of resources, which are its resource base (Granstrand 1998: 481–5). A firm can then carry out diversification of two fundamental types (Granstrand 1998): (1) business diversification (with product, service and market diversification as special cases); and (2) resource diversification (with technological diversification as a special case).

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In the analysis of diversification, one can establish relatedness in three dimensions: industry, technology and firm (Piscitello 2000). Consideration of these three levels may serve to illuminate the diversification dynamics involved, as influenced by aspects at the resource and corporate level and by the firm’s industry. Analysis of the interaction between diversification strategy and technological resources calls for reference to the concepts of the firm’s technological base, technological trajectory, technological platform, technological diversification, corporate coherence and purposive diversification. These elements represent the interaction between diversification strategy and technological resources, and the rationality of the diversified firm on the basis of the development of this resource type. A firm’s technological base (Adler and Shenbar 1990: 26) significantly influences its diversification decisions (Silverman 1999). This base shows ‘contextual coherence’ (or fit) when there is a correspondence between it and the firm’s corporate level strategy among other elements (Christensen 2000: 139). A direct relation exists between the coherence of a firm’s technological base and the relatedness of its businesses. Technologies tend to develop along technology trajectories (Dosi 1982, Nelson and Winter 1977, Sahal 1981). These are the paths of the evolution and broadening of a core technology, as the conjunction of technological and market factors. The platform technologies also represent the coincidence of market and technological opportunities (Kim and Kogut 1996). Firms with experience on a platform have significantly greater opportunities and a greater tendency to diversify into related sub-fields, than those firms with products aimed at one single market. Technological diversification represents the expansion of a firm’s technological resources (technological base) into a wide range of technological areas (Kodama 1986, Patel and Pavitt 1994, Pavitt et al. 1989, von Tunzelman 1995). The idea comes close to the concept of core competences (Granstrand et al. 1997) and refers to the diversity of the technologies possessed by a firm, not to its product diversification. There is a relationship between technological diversification and corporate diversification (Piscitello 2000). If a bi-directional relationship is established between corporate diversification and technological resources, it can be supposed that a firm will diversify in related technological areas (Hughes 1988, McDonald 1985), presenting a given degree of technological diversification and developing a technological base into a determined technological trajectory. The concept of corporate coherence (Teece et al. 1994) is based on the technological relationships between the businesses of a diversified


corporation. Teece et al. (1994: 4) establish that a firm exhibits coherence when its lines of business are related, in the sense that there are certain technological and market characteristics common to each. A firm’s coherence increases as the number of common technological and market characteristics found in each product line increases. The purposive diversification of R&D (Scott 1990: 7) is a concept very closely related with that of technological diversification. Scott and Pascoe (1987) have suggested that firms engage in ‘purposive diversification in R&D’ in order to exploit technological complementarities among research activities. This idea makes clear that corporate diversification is linked to technological diversification, which aims to make use of synergies in the R&D of different industrial categories, so that the diversification followed drives technological development (Scott 1993). The degree to which R&D synergies are sought in different industrial categories determines the pattern for purposive diversification. A firm’s pattern of corporate diversification is determined to a large extent by the technological connections between the different industries where it has a presence (Hughes 1988: 253, Lemelin 1982, McDonald 1985). These connections are the result of spillovers between industries (Jaffe 1986) or inter-industrial technology flows (Griliches and Lichtenberg 1984, Robins and Wiersema 1995, Scherer 1982). Technological diversification is more likely in technology-intensive industries (Hughes 1988, McDonald 1985), which can be considered as the possessors of technological opportunity. For R&D-intensive industries, firms create more value if they follow a related diversification (Hill and Snell 1988), since they will have developed intangible resources that can be transferred to other industries (Lecraw 1984: 182). From the literature analyzing the technological resources and corporate diversification relationship, it is possible to extract the notion that the accumulation of technological resources promotes related diversification. Studies on the relationship posit that a related diversification eases synergy generation and the accumulation of technological resources. One can therefore conclude that the two interact over time (recursive relation), reinforcing one another and generating synergies through entry of new activities which will facilitate the accumulation of new intangibles. The following dynamic proposition can then be established on the reciprocity between technological resources and diversification strategy: Proposition 3: Technological resources and diversification strategy show a dynamic and recursive relationship. That is, both will evolve

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over time by mutual reinforcement, in such a way that the accumulation of technological resources will encourage a related diversification, allowing generation of synergies; these will favour the accumulation of strategic technological resources in technologically related areas. The analysis supports the idea of the existence of a dynamic relationship between technological resources and corporate diversification. The evolutionary path of a firm’s technology will push the firm into new business areas, to take advantage of the opportunities offered by the technology that is available. At the same time, the corporate diversification path will encourage research in new technology areas, in order to take advantage of the available market opportunities. A firm that has developed a diversification capability will maintain, over time, a dynamic relationship between diversification and technological resources. This attribute will put it in a good position to possess a strategic resource portfolio applicable to different businesses. The businesses that the firm is involved in will promote research into new areas where there is a market opportunity. The relation as analyzed will make sense to the extent to which it helps better to explain the causes of superior performance. This superior performance is promoted by both the possession of strategic technological resources that follow a certain development path and by the diversification path which is the cause and effect of the above. Thus, the next aspect to be analyzed, derived from the above relation, is the influence of this process on firm performance.

Demand view of diversification The analysis of a firm’s diversification and its relationship with technological resources may be improved when the analysis is completed with a demand viewpoint of diversification. The classic activity field analysis schemes of Ansoff (1965) and Abell (1980), with their definition of the concept of business, suggest that the diversity of firm activities should be analyzed from offer (products) and demand (markets). The entry in a new business may mean the combination of the two perspectives; for example, in the case of international expansion (‘geographical diversity’ in the terms used by Dess et al. (1995: 359)) which involves serving new customers (demand perspective or market diversification) but which also requires adaptation of the products offered, by modifying existing items or adding new ones. The ‘technological bunch’ model (G.E.S.T. 1986) conceives of a product portfolio as a more or less dispersed


cluster of products and markets which are fed by a series of technologies as market opportunities are found, all turning on the core competences (Prahalad and Hamel 1990). In this way, the base of a set of technologies, generic or susceptible to application in diverse activity areas, makes possible an in-house technological potential which the firm can use for different products and/or markets. As established earlier, the concepts of corporate coherence, technology trajectories and platform technologies represent the coincidence of market and technological opportunities. Barney (1992) suggests that managerial understanding of relatedness can be the source of sustained competitive advantage. Stimpert and Duhaime (1997: 121) suggest that managers do think of relatedness in terms of product-market similarities across their firms’ portfolios of businesses. This may help to make operative, in a simple way, the ‘strategic relatedness’ measure proposed by Markides and Williamson (1994). In the definition of a firm’s limits, offer factors are not the only important ones; one must also consider that from the demand side (Langlois and Roberston 1995: 143, Teece 1982: 46). Markides and Williamson (1996) establish that firms with related diversification obtain superior performance than their rivals with unrelated diversification only if they compete in a set of markets in which similar types of assets are important. The following proposition can be formulated, based on the above arguments: Proposition 4: The relationships established in the framework must be considered to cover both the products (offer view of diversification) and markets (demand view of diversification).

Technological resources, corporate diversification and performance The effect on performance of the elements analyzed in the previous sections appears in a triple sense: (1) there is an effect of corporate diversification on performance; (2) technological resources affect performance; and (3) it is possible to give simultaneous consideration to the evolution of diversification and the accumulation of technological resources over a period of time, how the two interact and how they influence performance. The three effects are analyzed in the following three subsections. The RBV attributes superior performance to competitive advantages based on a firm’s internal, idiosyncratic factors, and suggests that diversification that widens the market for these factors will generate even better performance (Geringer et al. 2000: 54). Greater diversification will offer superior performance over time to the extent to which it is based

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on the accumulation and usage of complementarity between intangible resources, around technologies and their relationship with the corporate diversification. Specific resources (such as technology) explain a significant part of the relation between performance and diversification strategy (Schulze 1994: 141), which agrees with the findings of Wernerfelt and Montgomery (1988: 246), who propose that the superior efficiency of specific resources will offer higher profitability if they are used in closely related markets. Chatterjee and Wernerfelt (1991) offer as one of their main conclusions the idea that firms with superior performance, ex-post, have a better fit with the model that they propose, which relates resource characteristics with direction of diversification. Hitt and Ireland (1986) find that the development and exploitation of distinctive competences improves performance, and that this relationship is moderated by the type of diversification strategy.

Technological resources and performance Pisano (2000: 129) points out that the last decade has seen an increase in studies covering the link between organizational capabilities and competitive performance. Rumelt (1991: 168) concludes that the loci of business profitability are to be found basically in the provision of resources and capabilities. Technological resources are seen in the literature as one of the key factors determining firm’s performance (Capon et al. 1990, Lenz 1981, Zahra and Covin 1993). Technology is one of eight factors which Schoemaker (1990: 1181–2) considers to be the most important in determining the creation and distribution of profits. Some authors have found a positive link between R&D intensity and performance or sales growth, whether at the firm level (Branch 1973, 1974, Capon et al. 1990, Franko 1989, Geroski 1994, Griliches 1995, Stimpert and Duhaime 1997) or at the industrial level (Leonard 1971, Mansfield 1968, Scherer 1965). Industrial economics as such suggests that R&D spend is an important determinant of a firm’s profitability (Hay and Morris 1979). Granstrand and Oskarsson (1994) observe a mutually reinforcing tendency between R&D spend and sales over time, although with varying time lags and different causal intensities. R&D is specific to a firm, which leads to two consequences (Helfat 1994): firstly, a heterogeneity is generated in the R&D applications within a given industry; and secondly, it contributes to increasing the appropriability of the R&D results. The following proposition can be extracted from the above discussion: Proposition 5: Technological resources at a given moment in time (t) and their accumulation during period n will determine corporate


performance in the future (t n). A positive influence on performance is to be expected from the accumulation of technological resources.

Corporate diversification and performance The firm’s growth as described by Penrose (1959: 134) leads to priority being given to related diversification as against unrelated. The main hypothesis which has been investigated is the positive link between profitability and relatedness. In general, work analyzing the influence of diversification strategies on performance has shown the superiority of related diversification as against unrelated (Datta et al. 1991, Dess et al. 1995, Palich et al. 2000, Ramanujam and Varadarajan 1989), since the former allows the exploitation of synergies (Davis and Thomas 1993). However, there are other studies which do not find significant differences between the two strategies (Amit and Livnat 1988, Bettis and Hall 1982, Hoskisson and Hitt 1990, McDougall and Round 1984), or which find that unrelated diversification is superior (Chatterjee 1986, Michel and Shaked 1984). There are even some authors who assert that diversification has a negative influence on performance, such as Hill and Hansen (1991) or Hoskisson et al. (1993). The results of the investigations cannot be considered as conclusive when taken as a group (Montgomery 1994, Palich et al. 2000: 161, Ramanujam and Varadarajan 1989, Seth 1990). Ramanujam and Varadarajan (1989) suggest an explanation for the absence of conclusive results, based on the fact that the majority of the studies make use of cross sectional data, which suffers from an incapacity to determine the real relationship between diversification and performance.5 It appears that the relationship between changes in diversification and performance may vary over time according to a definite pattern (Bergh 1995). For Dess et al. (1995: 359), diversification studies in general are centred more on results than on causes. On the other hand, the limit or optimal extent of diversification will be different for each firm and will depend on that firm’s resource portfolio, the environment, the diversification type and other factors (Lenz 1981: 172, Markides 1995). The framework proposed here confronts the problems considered in various ways, and is the result of a dynamic analysis between diversification and technological resources: (1) the framework implicitly includes a longitudinal analysis of diversification; (2) it is centred on the causes of diversification and on its result; (3) it includes the notion that related diversification contributes to the accumulation of strategic

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resources (technological); and (4) the path of diversification depends on the path followed by the firm’s technology. The revision made by Palich et al. (2000) concludes that related diversification is superior to unrelated. This result is coherent with Dess et al. (1995) in such a way that the relationship between diversification and performance shows an ‘inverted-U’ form. This means that performance improves as a firm changes from a single business strategy to related diversification, but that performance falls with the move from related diversification to unrelated. Some other studies support the ‘inverted-U’ model (Grant et al. 1988, Hoskisson and Hitt 1990, Lubatkin and Chatterjee 1994, Markides 1992, 1995, Rumelt 1974, 1982), while others do not (Simmonds 1990). Analysis of diversification from the RBV is helpful in explaining the superior performance of related as opposed to unrelated diversification (Montgomery and Wernerfelt 1988). The ‘inverted-U’ model is coherent with the RBV and with the approach of the framework offered in this present study. The RBV argues that in order to generate superior performance, related diversification must make possible the exploitation of synergies between businesses. The generation of these synergies is covered by Propositions 1–3, and the implications for performance appear in the following proposition: Proposition 6: Diversification strategy at a given moment in time (t) and its evolution during period n will determine corporate performance in the future (t n). A positive influence on performance is to be expected from related diversification. The analysis described above on the influence of diversification on performance, common in work which investigates this relationship, would be incomplete if the following were not taken into account: (1) the causes or origin of the diversification pattern (technological resources) – Proposition 1; (2) the influence of technological resources on performance – Proposition 4; and (3) the influence on performance of the dynamic relation between related diversification and technological resources derived from Proposition 3, as analyzed in the next section.

Corporate diversification, technological resources and performance Miller (1984: 51) finds that a wide body of literature affirms the existence of strong links between a firm’s technology, strategy and


performance. A very large number of studies which analyze diversification on an RBV basis implicitly recognize the existence of a relationship between corporate diversification, technological resources and performance. The RBV’s treatment of diversification supports precisely this idea of the explanation for the superior performance associated with related diversification. To understand the link, one must consider a firm’s resource portfolio (Busija et al. 1997, Chatterjee and Wernerfelt 1991: 41, Hitt and Ireland 1985, 1986). Farjoun (1998) and Hoskisson and Hitt (1990) consider resources, diversification and performance in such a way that the related diversification, as determined by the resource portfolio, is associated with performance, in a positive way. For Bettis (1981), Bettis and Mahajan (1985) and Jose et al. (1986) firms with strategies that pursue a related diversification have higher levels of investment in marketing, R&D and capital, and obtain superior performance than those investing in unrelated activities. Some studies, such as those of Harrison et al. (1993), Hill and Hansen (1991) or McDougall and Round (1984), find that diversification which is based on the use of technological resources appears to give superior performance. Technological diversification is a fundamental causal variable which is to be found behind business diversification and business growth, and which brings with it an increase in R&D spending (Granstrand 1998: 484, Granstrand et al. 1997: 21, Robins and Wiersema 1995). Some of the studies analyzed find that firms carry out a related diversification strategy on the basis of the exploitation of the synergies generated from their intangible resource base. Such studies, while not explicitly recognizing the fact in their analysis, are implicitly recognizing that the interaction between diversification and intangibles produces superior performance, as suggested by the framework proposed here. This is because the superior performance is determined by the dynamic interaction between diversification and technological resources shared between businesses; these in turn determine the pattern of diversification followed. Chatterjee and Wernerfelt (1991: 36) establish that the use of the right resources, via the right diversification, will contribute to better performance. Technologically based diversification appears to result in superior performance; the combination of technological opportunities and diversified firms gives improved performance. The right hand side of Figure 11.1 proposes a dynamic relationship between the generation of technological resources by the firm, the direction of corporate diversification and performance. The dynamic

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relationship shown in Proposition 3 supposes a series of implications for performance that are brought together in the following proposition: Proposition 7: The interaction between technological resources and diversification strategy during time period n will determine corporate performance in the future (t n). A positive influence on performance is to be expected from the dynamic interaction between technological resources and related diversification.

Conclusion This work has analyzed the relationship between corporate diversification, technological resources and their influence on performance, proposing a theoretical dynamic framework between the three. This approach may contribute to obtaining a more integrated resource-based vision of the relationship between resources, strategy, and performance. The work has integrated several research topics in strategic management. In addition, it may help to overcome the conceptual limitation on some work which analyzes the factors influencing performance, since such work does not consider the simultaneous influence of the two factors and their interrelations. The framework proposed is coherent with the RBV postulates, considered from a dynamic perspective. Also, the framework has revealed the coherence of the reasons used to explain the superior performance of related, as opposed to unrelated, diversification. The proposed framework contributes to the strategic management literature and, in particular, to the resource-based view, via a series of aspects which have not been explicitly covered by other work. Explicit recognition has been given to the dynamic relationship between diversification strategy and resources, and a set of testable propositions has been presented in an integrated framework. Until now, the idea of combining the previous dynamic perspective with performance had not been considered either. A firm’s performance will not depend exclusively on the individual, separate influence of diversification and technological resources, but rather on the interaction of the two elements. The concept of the diversification capability view of the multibusiness firm may serve to unify research on diversification within the RBV. The circular nature of the relationship between resources and diversification strategy suggested shows that resources determine diversification strategy, and that this determines the accumulation of resources


(technological) and the development path of these resources. This recursive relation is held over time in a continuous way. A strategy which is sustained by valuable resources will have more possibility of being successful; a successful strategy will create valuable new resources, capable of being used in the future and which will lead to superior performance. In the framework proposed, resources determine strategy and strategy is determined by resources. The relation makes sense to the extent to which it takes place over time and in a recursive way. Given a successful outcome, one can say that a firm possesses a diversification capability. That is, the firm’s resources have characteristics which make them strategic and able to support a strategy successfully; the strategy as developed contributes in an effective way to the accumulation of further strategic resources and the firm achieves a superior performance. This relationship will tend to be produced and maintained over a period of time; it is path dependent. It will be possible to test the propositions derived from the theoretical framework proposed in subsequent studies. Econometric techniques such as simultaneous equations systems or structural equation models may be suitable for this purpose. Also, a case study may be appropriate in order to add depth to some of the process aspects, which have not been analyzed here because of the general and integrative nature of the framework. Other future work could focus on the theoretical aspects of the process of constructing a diversification capability, starting from the general propositions included in the framework expounded here.

Notes 1 Mahoney and Pandian (1992: 365), citing Penrose (1959), affirm that firms obtain profits not by possessing better resources but by making better use of them through the development of competences. 2 Baldwin and Scott (1987: 112) underline the major challenge involved in proposing relevant hypotheses in which the key variables will be endogenous. Schendel (1997: 1) establishes that ‘organizational capabilities, competition, strategy, and performance are fundamentally endogenous’, and that ‘this endogenous character means that reciprocal interactions among environment, strategy, capabilities, and performance confound the answers … involved around these complex, recursive, interactions, which make it difficult to answer the question’ (emphasis added). In this sense, dynamic investigation (where the conditions under which resources are developed or acquired in one period, have implications for the strategic advantages of firms in subsequent periods) is particularly important in the work of resource-based theories of competitive advantage (Barney 2001: 51).

Forcadell 241 3 Technological innovation is accumulative and specific (Pavitt 1990: 18) as is learning (Teece et al. 1994). 4 These authors (1992: 121) refer to this type of relation as interactive in the following terms: ‘the product portfolio that the firm currently has influences the kind of technology that the firm tries to maintain or develop and thus affects the firm’s future technological base available to the firm, for its next strategic moves’. 5 If the analysis of resources and capabilities is made only on a cross sectional basis, only incorrect inferences will be obtained on why some firms have better resources than others (Helfat 2000: 955).

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Part V Innovation


12 Developing a Compass to Navigate the Innovation Journey Zoe J. Radnor, Hannah Noke and Tudor Rickards

Abstract This chapter will present a diagnostic tool referred to as the ‘innovation compass’. The innovation compass uses a self-audit methodology to identify gaps between current and desired new product development (NPD) performance for an organization. The innovation compass aims to bring an understanding of the underlying characteristics that may contribute to the degrees of success or failure of new product development within organizations that could be used to develop an action plan to improve performance. The innovation compass comprises five core elements that represent the characteristics of the innovation process – structure, leadership, output and teams (SLOT) and context. In this chapter, the innovation compass will be used to illustrate the findings from two case studies that differ on certain characteristics. It permits the quantitative data gathered from the research to be directly compared, facilitating organizations to benchmark. The qualitative data substantiates and elaborates on the quantitative findings, providing a contextual understanding of the companies’ new product development process. The chapter concludes that understanding the context is an important factor in ensuring an effective new product development process. The tool presented in this chapter is called the ‘innovation compass’ and was developed as part of an EPSRC funded research project, EPSRC grant number GR/N21833. The authors would like to acknowledge co-researchers on the grant; Dr Qi Xu and Dina Akhmetova.

Introduction Various models have been designed to aid organizations in the NPD process (Barclay et al. 2001, Cooper 1996, Hughes and Chafin 1996, 251

252 The Innovation Compass

Wheelwright and Sasser Jr 1989). It has been argued that Cooper’s Stage Gate Model (Cooper 1996) is one of the most popular. According to a survey conducted by Griffin (1997), nearly 60 per cent of US firms used a cross-functional stage gate process for NPD. However, it could be suggested that the stage gate model presents a view of the NPD process as being linear, static and mechanistic. Today, the rules of the game in new product development are changing (Nonaka and Takeuchi 1995). Nonaka and Takeuchi (1995) explain that many companies have now discovered that it takes more than the accepted need to develop new products to excel in the competitive market environment. The research described in this chapter attempts to respond to this change by providing organizations with a self-audit tool that supports the traditional models of managing NPD process, such as the stage gate model (Cooper 1996). The tool presented within this chapter draws on work from previous audit tools (Burgelman et al. 1988, Chiesa et al. 1996, Rickards and Bessant 1980); for example, the Technical Innovation Audit, which proposes a model for auditing a firm’s innovation capability based on a process model of technical innovation (Chiesa et al. 1996). The premise behind the innovation compass was not only to consider NPD in terms understanding the process of formulating new product development/innovation strategies, but also to understand how the capabilities of a firm in implementing such strategies either aid or hinder the practices of NPD/innovation in response to changing contexts. The analogy behind the innovation compass is that a compass helps a traveller to navigate their journey. Therefore, by using the innovation compass as a self-audit tool, companies can support and even go beyond the linear process of NPD often represented by approaches such as the stage gate model. The tool was developed to identify gaps between current and desired performance, identify where problems and needs arise as well as allow benchmarking with other organizations. It is hoped that then this ‘gap analysis’ and benchmarking could help provide information that could be used to develop an action plan to improve NPD performance. This chapter focuses on the presentation of two cases from the EPSRC research project. It will describe the methodology that governed the research, and then continue to describe the background to the innovation compass, detailing its development and the factors that constitute it. The chapter then presents the quantitative and qualitative results from two case studies that illustrate the innovation compass in its populated form. The chapter concludes with a discussion of the results

Radnor, Noke and Rickards

253

highlighting the need to understand the context of the new product development process.

Methodology This study adopted both a quantitative and qualitative approach to the research design. The former allowed for comments to be generated based on a large sample group; the latter offered rich data through interpretive means. The EPSRC project encompassed approximately six case studies completed over a two year period, and provided an in-depth analysis and understanding of the new product development process. The data collection methods employed throughout the EPSRC project comprised semi-structured interviews and a short questionnaire. The semi-structured interviews and questionnaires were based around five themes; structure, leadership, outputs, teams and context, that are identified in the diagnostic model (see Figure 12.1). A short questionnaire/inventory, titled ‘Innovation Factors Inventory’ (IFI), based on 42 statements, was the main quantitative collection tool. Each of the 42 statements called for a response on a five-point Likert scale (strongly agree/disagree). The inventory was designed to consider four of the five themes: structure, leadership, outputs and teams (SLOT). Context was omitted from the IFI as this theme aimed to understand

Teams

Structure

A B C

Leadership Outputs

Context

Figure 12.1 The innovation compass


the specifics of the individual firm which was analyzed through the qualitative data. The data collected on SLOT through the IFI allowed for an extended quantitative database to be generated. This was referred to as the ‘IMP database’ and included self-report materials from over a hundred respondents and roughly two hundred projects. Within the database, there was a control sample of non-stage-gate projects as well as further comparators by including other European and non-European sources to that of the UK. The average of the IMP database, therefore, was derived from calculating the mean using all the data collated from the IFI to that date. The semi-structured interview script was loosely based around all five themes (SLOT and context). The nature of qualitative research dictated that further themes within these main categories emerged of their own accord. As a consequence of a diverse range of people being interviewed, the semi-structured interview facilitated the necessary flexibility to delve into the relevant experiences of the interviewees. To gain a fuller understanding of the organization, tours of their facilities were conducted in addition to the semi-structured interviews and inventories. Therefore, throughout the visits a vast amount of data was recorded that also included supplementary data from sources within the organization detailing their new product development strategy. The completion of this data provided the basis for analysis and interpretation that was carried out by following Radnor’s (2002) six-stage technique. Following the analysis of the case study, the organization was presented with a corporate report. This provided the opportunity for validation of the research findings. It permitted the organization the opportunity to observe the researchers interpretation of the findings in relation to their organization. The IFI also acted as a confirmatory tool, permitting access to a large perspective to be sought. This enabled identification of any general patterns or trends in the organization. This was subsequently correlated against the qualitative data to substantiate the findings.

The innovation compass The diagnostic tool entitled the ‘innovation compass’ acts as a tool to aid the hypothetical travellers on the journey of new product development (see Figure 12.1). The model endeavours to provide practitioners and organizations alike with an instrument that aids them in mapping their own product development practice. The design of the model is such that it encourages the organizations to record their own characteristics,


255

rather than desired characteristics. The compass has been developed to facilitate organizations in understanding and appreciating their product development process. It is intended that the compass provide an aid to understanding their process from which they can draw their own conclusion. The intention is not to create a tool that dictates a model solution leading an organization down a route where their strengths may not lie. As mentioned, the data gathered from the short questionnaire (IFI) concentrated on four of the themes – structure, leadership, outputs and teams (SLOT). These are charted in the first inner circle of the innovation compass. The inner circle has two distinct functions. It is designed to allow organizations to observe their own new product development pattern on the four themes, as well as acting as a benchmarking tool. The inner circle (Figure 12.1, Circle A) offers the opportunity for an organization to compare on a quantitative basis against other groups from the IMP database. This ability to benchmark was considered an important function of the compass by the companies involved in the research. The middle circle (Figure 12.1, Circle B) of the innovation compass presents the qualitative research, generated from the case study itself. The outer circle (Figure 12.1, Circle C) labelled ‘context’, presents specifically unique features of the individual organization generated from the case study. Figure 12.1 illustrates how the compass is formed using the five dimensions. Each of the themes consists of a number of factors. The quantitative data relating to four of the themes consist of a number of factors and are presented in Table 12.1. Further explanation of the factors can be found in Radnor and Noke (2002), Rickards et al. (2001) and Rickards and Moger (1999). However, the consideration of the fifth theme ‘context’ in relation to this research and new product development needs further explanation. The context section is dedicated to the specifics of the individual firm ensuing from the qualitative data. It is an attempt to understand new product development at the organizational level as well as at generic level. Therefore, this section is dynamic, changing according to the individual organization being studied. The rationale for the context section is to acknowledge that the innovation process is not generically applicable to all organizations (Amabile et al. 1996). Innovation does not exist in a vacuum (Van de Ven et al. 2000), therefore the context section is made to encompass both the inner and middle circles reflecting that context transcends all the dimensions of innovation on the innovation compass. It can be argued that the context is the internal being of an

256 The Innovation Compass Table 12.1 Factors and associated codes Structure • Dedicated Teams (TEAMS) • Decision Autonomy (DEC) • Creativity (CREA) • Maturity (IMM) • NP’s Proximity (PROXY) • Formality of Structure (STR) • Novelty (NOV) Teams • Platform of Understanding (POU) • Shared Vision (SV) • Climate (CLI) • Resilience (RES) • Idea Ownership (IO) • Network Activators (NA) • Learning from Experience (LFE) Output • Innovation (INNO) • Knowledge (KNOW) • Productivity (PROD) Leadership • Transactional (TRANSAC) • Transformational (TRANF)

organization as it impacts the organization’s ability and willingness to develop new products. By the inclusion of ‘context’, this acknowledges that not all companies and new product development processes are identical. Arguably, though, similar factors that allow for successful new product development could exist, and understanding the context may help in identifying these.

Background to case studies Ultra is the first of two case studies to be described in this chapter (Table 12.2). Ultra operates in the field of infrared technology, enabling car manufacturers and car repairers to dry the paint on cars. The case study involved the researchers spending a total of five days within the organization, interviewing six people spanning the whole company. To increase the researchers’ understanding of Ultra’s activities, a full plant tour was carried out. The second case study to be discussed is referred to as Bearings (Table 12.2). In 1999, Bearings was sold and now acts as an independent


257

Table 12.2 Details of the case study companies Company name

Ultra

Bearings

Location

Headquarters: North East of England

Headquarters: North East of England, Sales operates from London

Type of company

Develops and manufactures infrared technology units for drying car paint

Manufacturer of clutch and brake systems

Size of company

Small; approximately 80 people

Small; 75 people at both its sites

Management structure

Semi-hierarchical

Flat management structure

Operations span

Global

UK and Europe

Table 12.3 The quantitative data for the structure factors Dedicated Decision teams autonomy (TEAM) (DEC)

Creativity (CREA)

Maturity (IMM)

NP’s proximity (PROXY)

Formality of structure (STR)

Novelty (NOV)

Ultra Bearings

3.6 3.4

3.2 3.2

2.8 2.9

2.8 2.7

4.0 4.1

4.0 4.1

3.4 3.6

Average of database

3.1

3.3

2.5

2.3

4.3

3.8

3.3

small to medium enterprise (SME). The visit encompassed interviewing a cross-section of seven employees from product design to the factory floor as well as differing levels within the organization. To aid the researchers’ appreciation of Bearings and its operations, a tour of the factory and offices was undertaken.

Research findings This section compares and contrasts the results of the data collected from two case studies accompanied with populated versions of the innovation compass (Figures 12.2 and 12.3).

Structure From the quantitative data in Table 12.3, it was evident that Ultra were in line with the IMP database average with exception of the ‘immaturity


of projects’ and ‘dedicated team’ factors. The response from Ultra regarding maturity of projects indicates that the organization regards itself as having projects that are nearer to completion compared with the average. Relating to ‘dedicated teams’, the qualitative data supported the IFI results in that teams are strongly advocated within the company. The quantitative data generated for Bearings deviates little from the average of the IMP database. Therefore, little can be interpreted from these results. The qualitative data from the case study highlighted that the new management were keen to develop a structure and atmosphere of sharing and innovation. The managing director had adopted a policy of giving small presentations to encourage the culture of innovation within Bearings. The response to the presentations were mixed but on the whole positive ‘It was very good there was a formal overview of (parent company) as well as what is happening next year. There was a lot of positive feedback from those who kept an open mind’. The structures in place within Bearings were similar to those seen in Ultra. New product development consisted of a combination of the formal and informal practices. In the case of Bearings, this was largely attributed to its size, as the new product development process involved a small group of people, so using their discretion was a necessity. It was often regarded that ‘there was no formal meeting’. Therefore, it could be argued that Bearings was beginning to adopt a culture permitting autonomy, leading to decision making that extended to ‘everybody’ being involved.

Leadership It was evident from Table 12.4 that within Ultra both the leadership dimensions were lower than the IMP database. Neither of the factors are particularly low; however, it is worth noting that the respondents of the questionnaire viewed their leadership to show more transformational qualities. Table 12.4 The quantitative results for the leadership factors Transformational (TRANSF)

Transactional (TRANSAC)

Ultra Bearings

3.3 3.1

3.1 3.2

Average of database

3.7

3.8


259

This was supported by the qualitative interviews, with the new management style of the directors deemed to be approachable: for example, ‘the directors are informal, more relaxed. It is a nicer atmosphere’. The people interviewed were extremely positive about the new management in place: ‘they looked very bright. I thought that we would do ok now’. Leadership was also discussed at the level of project leadership, where confusion was evident: ‘Sometimes as project leader I have 100 per cent control over the design, how it is done and the contact I have with the customer, but I don’t have direct control over production. Once I have the designs and plans I then pass these over to production, but then I lose it because I am not sure what they do with them’. The root of the problem was attributed to a lack of procedure. It was felt to be ‘a bit woolly at the moment – it does work or it has worked but sometimes things do get missed and forgotten’. The leadership factors for Bearings (Table 12.4) revealed that respondents were unsure about leadership of the organization. The quantitative data shows both factors, transformational and transactional leadership, were significantly below that of the IMP database average. The qualitative data discovered, as a result of the new management, employees felt ‘we are missing the informal pipeline’. The need for change for growth was understood at managerial level. However, employees on the factory floor were struggling with these changes: for example, ‘It definitely affects morale negatively’. In addition, the new parent company were considered ‘formal in their way of doing things, in my opinion too formal for a little company’. The consequence of this formal leadership style led to bureaucracy, considered ‘too intensive’, which was felt to be dominant within Bearings. The data from the interviews provided evidence to support the quantitative data by understanding the new and old management style. The workforce presented the previous managing director of Bearings as a mother figure. In addition, she was viewed as being proactive ‘if we were busy she would come down and put components together’. In contrast, the new managing director was acknowledged to be proactive, but this was not valued in the same positive light as the previous MD.

Output The quantitative data illustrated for Ultra views differed marginally to that of the IMP database average (Table 12.5). It is, however, worthwhile highlighting that it would appear people felt the ‘knowledge’ factor was lower than average. The interviews indicated that Ultra attempted to produce learning as a visible output of projects by revisiting projects

260 The Innovation Compass Table 12.5 The quantitative data for the output factors Innovation (INNO)

Knowledge (KNOW)

Productivity (PROD)

Ultra Bearings

3.7 3.4

3.2 3.1

3.7 3.8

Average of database

3.8

3.7

4.1

that did not proceed as planned, but this was rarely achieved. The qualitative data depicted that it would also be rare to have the chance to use initiative as normally time was involved in making either a better or cheaper product. For example, as one interviewee said ‘people would like the luxury of free time to work on ideas to try new ideas’. The perception generated from the case study was that the type of innovation carried out was incremental. It was felt that ‘what we are normally doing is adapting products. We are not fully developing them from a blank piece of paper – we are definitely modifying existing designs’. The respondents from Bearings also scored the organization lower on the factor for ‘knowledge’. Again, this could indicate that the team’s perception of their intellectual property produced is lower than that of an average IMP team. An interesting factor in the output dimension for Bearings was ‘innovation’. Employees confessed that this had been changed considerably by the new management since the takeover: ‘The group management and the Managing Director are both very keen on this product development’, to the extent that one member felt that he had ‘been criticized in management meeting for spending too much time in assembly’. However, the type of new product development in place at Bearings was still regarded as ‘periodic is closer to the mark, and we would like to think that we are doing continuous improvement … Don’t have time for continuous improvement’. Although it was felt Bearings had become ‘a lot more dynamic’ and ‘forward thinking’.

Teams Table 12.6 illustrates that Ultra scored higher than both the IMP database average and Bearings on two of the team dimensions. The respondents from Ultra felt a high degree of idea ownership, signifying that ideas were shared and understood, and network activators, which would


261

Table 12.6 The quantitative results for the team factors Platform of Understanding (POU)

Shared Vision (SV)

Climate (CLI)

Resilience (RES)

Idea Network Ownership Activators (IO) (NA)

Learning from Experience (LFE)

Ultra Bearings

3.2 3.4

3.4 3.7

3.6 3.4

3.6 3.6

4.2 3.7

4.1 3.6

3.5 3.0

Average of database

3.6

3.9

3.7

3.8

3.6

3.5

3.9

indicate that the team felt the team leader provided a knowledge enhancing role rather than an information-restricting one. The qualitative data revealed that the teams were formed on an ad hoc basis determined by the managing director. These small teams, which at times may be only two people, would then be responsible for a project. Often, due to lack of time, projects were quoted for and accepted without R&D being involved: for example ‘from my point of view this is a complete disaster because apart from the customer is not getting an ideal solution’. This lack of communication was also reflected with production not being involved with the project in the early stages. The interviews uncovered the fact that the Sales and R&D departments appear to have very different views on providing solutions to the customer. Remarks noted from the R&D department regarding Sales were that ‘they sell dreams’. However, the Sales department highlighted that sometimes R&D felt the need to produce products that were far more complicated, which then required more work. These remarks from the qualitative section of the case study may provide a possible explanation for the slightly lower than average score for shared vision. The quantitative results for Bearings showed the respondents scored lower than average on learning from experience. There are two possible interpretations of this result. The first is that the organization felt that they did not have anything to learn, as their work was routine, requiring no change. The second interpretation could be that the respondents felt the organization had much to learn but was doing so ineffectively. The qualitative data would lead us to pursue the second option, as Bearings had recently been taken over and new product development was at the forefront of the organization’s objectives as they were entering a dynamic new era. The introduction of new product development manifested itself in teams becoming cross-functional; that is, ‘everybody gets involved’.


Context From the analysis and description above it could be presented that the cultures of the two companies resulted in two different views to innovation/NPD strategy and process. The approach to new product development from Bearings was that the development of new products was the ‘way to go’ in order to maintain their market position. However, through management decisions, they were torn between the present (meeting customer needs) and the future (innovation). Therefore, the reward systems, career progression and communication did not create an environment conducive for creating new products. Alternatively, Ultra were more concerned with producing their product cheaper or ‘tweaking’ it to meet customer requirements. Therefore, a minimal new product development policy was evident. It was recognized that both organizations experienced problems relating to communication. Within Ultra, communication was deemed to be extremely ineffective ‘the order will be taken and we will get 6 weeks down the road and the first thing that I know about it is that it is to be dispatched in 6 weeks, obviously that is half of my lead time’. Consequently, this resulted in people having to rush jobs, amend incorrect records and have poor quality products leaving the factory. Ultra felt that they did not have an adequate system in place to aid the sharing of information about customers. The consequence was that customer enquiries were not dealt with as quickly or efficiently as they would have liked. As previously stated, innovation within Ultra was not viewed as an essential objective for the organization. Therefore, the reward system was not designed to reward for innovation. Throughout the interviews, it was stated, ‘people always want more money, yeah, I think that the pay system could be better’. Alongside the previous comment, it was felt that ‘certain people down there really do work hard, but they don’t necessarily get the same amount of money’. However, employees may be given a ‘well done’ but one manager only mentioned this. It would appear that the management aspect of the business ‘do get recognized but that is not an issue to me – I think that we could do something a little more visible – for the lads on the shop floor’. The innovation compass for Ultra is shown in Figure 12.2 and draws on the quantitative, qualitative and contextual issues that have been discussed. The management of Bearings did not relate their reward system with innovation. However, throughout the interviews, it was evident that Bearings had a particular problem concerning pay amongst the workers

Context ‘People still don’t trust management’ Teams Job rotation: due to size of workforce

Structure Lack of structure: ‘it is the way things are done’

NOV

‘not like a formal thing’ STR Training: on the job Reward: • Intrinsic: ‘well done’ • Extrinsic: ‘I think that the pay system could be better’

Changes in top management/ Board of Directors

Ad hoc formation

Ideal for production and engineering to be involved from the beginning: POU

SV

‘at the early stages of any project development engineering have got to get involved’ CLI Receivership RES ‘need to get production involved earlier, because they need to know what it is we have asked them to IO make’

PROXY

IMM Decisions: not communicated CREA to employees

NA LFE

DEC

Leadership TRANSF New style: approachable, TRANSAC friendly

TEAM PROD

Sales filter enquiries

Conflict between R&D and sales: Sales ‘sell dreams’ R&D ‘too technical’

INNO KNOW Outputs

Do not open explain decisions

Cultural changes

Not inspirational innovation ‘why bother to come up with new ideas’ Attempt to learn from experience Adapt products

Old style: dictate Uniform no specified parking spaces Av. Database Av. Of of database

Seasonal element to work

Ultra Ultra

263

Figure 12.2 Populated innovation compass for Ultra

264

Previous Managing Directors’ did not invest in the company to maintain its position

Context

‘is not a bad place to work – a bit lax sometimes’ New management – New culture: ‘no blame’ Attempting to move towards building relationships with customers

Teams Cross---functional approach would help identify problems sooner ‘everybody gets involved’

Structure

2 forms of idea generation: • customer needs • brainstorming process

‘the same sort of process that we had 2 years ago. Although we do have more contact with the customers now then we did then’

Brainstorming session involved the management team and specially selected staff members

NOV

STR

Company visit to Holland ‘What we try to do for every new PROXY project and what we try and do for Bearings all our customers on a whole is to appreciated the close relationship manufacture samples so that we can IMM test and so that they can also test between their them’ supplier and themselves The size and philosophy within Bearings CREA permits a ‘ culture’ of autonomy within the decision making process

‘always a good idea to try and get The approach of the DEC involved with customer and get them new management to do the tests and they supply us within Bearings with the results’ TEAM appeared to be a philosophy that Decision making informal and formal PROD involved everyone Financial decisions were ‘thrown open in design brief meeting’ Company did not have a policy of new product development

POU

Parent company place a big importance on new product development Combining design with the technical side of the organisation it was stated that the drawings could be turned into workable ‘the lads need to design quicker see things happening’ SV ‘It is something that we will need if we get bigger its just CLI another hat for me to wear’ ‘even if they give us the pay raise the RES Focus on NPD was creating stress pay is still behind amongst certain members of the other factories’ workforce ‘teams just work’ IO Speciality of certain products Issue of pay was can sometimes cause frustration a negative subject and conflict between sales and at Bearings NA design

‘It is pretty difficult for design to LFE make sales 100% understand what we are supplying and why Training ethos we are supplying it’ adopted at Bearings Lea stems from the der TRANSF ship management group

KNOW

INNO

Outputs Projects were formally managed using Microsoft Project

Conflict of opinions regarding communication

Company-wide presentations

TRANSAC Change in management style since takeover ‘we are missing informal pipeline it is not a criticism it is just the way things are’

Output changed considerably since company takeover

‘the group management and the MD are both very keen on this product development’ ‘a lot more dynamic’ and ‘forward thinking’. ‘new product is the lifeblood of organisation’

Open plan office

‘periodic cost reduction. Don’t have time for continuous improvement’ Period of cultural transition

‘quite busy and quite noisy and for a design department it isn’’ t very good but sometimes’

Company’s main objective of growth

Figure 12.3 Populated innovation compass for Bearings

at parent company

On the job training Parent company ‘are formal in their way of doing things, in my ‘I love it! That’s the opinion too formal for little bottom line’ company’ ‘it definitely affects morale Investors in people: negative’ Bearings was actively trying to encourage people to receive extra training

Av. of database

Bearings Bearings


265

‘even if they give us the pay raise the pay is still behind other factories’. The assumption made was that pay was an extreme dissatisfier at Bearings, creating unrest amongst employees. Although it is hard to create a clear empirical link between pay and new product development in this case, the issue of pay was a negative subject at Bearings. Figure 12.3 illustrates the innovation compass for Bearings.

Conclusion This chapter has presented a diagnostic tool that can help an individual organization to identify gaps between their current and desired innovation management performance. It could be suggested that the innovation compass can aid in two distinct ways. Firstly, the innovation compass can help organizations to understand their new product development process through the qualitative interviews and quantitative data generated. This can facilitate organizations to understand how NPD is carried out in their organization. Secondly, the tool can provide organizations with the ability to benchmark their performance. The case studies have been used to illustrate the tool’s usefulness to practitioners. The populated forms of the innovation compasses for Ultra and Bearings (Figures 12.2 and 12.3) illustrates how the inner circle of the compass allows organizations to compare and contrast themselves with others (see Radnor and Noke’s (2002) article). Through comparing and contrasting themselves, Ultra and Bearings can determine for themselves where they feel improvements are required. The compass allows the organization to take a participative role in the process of improving its new product development performance, thus hopefully enhancing the often rigid prescriptive models such as the stage gate model (Cooper 1996). By mapping and highlighting the organization’s characteristics against those in the IMP database, an organization is able to reflect against the practices of other organizations. The inner circle (Figure 12.1, Circle A) illustrates that Ultra differed marginally on certain factors within all four of the themes. Whereas Bearings deviated from the average on three of the four themes. In particular, within the team theme, the factors of idea ownership and network activators were where Ultra performed higher than the IMP database average. In relation to the leadership theme, both Ultra and Bearings perceived their leadership to be lower than the IMP database average for both factors. However, Ultra perceived their leadership to be slightly more transformational than transactional. The output theme allowed Bearings and Ultra to understand that, in terms of the


innovation factor, neither organization perceived itself to produce innovative products. Ultra deviated from the average of the database in the structure theme specifically on the team dedication and maturity of projects factors. This result could illustrate that Ultra did not perceive itself as performing as an innovative company, with the majority of the projects towards the end of their life. The qualitative data (Figure 12.1, Circles B and C) in Figures 12.2 and 12.3 allowed the companies to substantiate and elaborate on the characteristics highlighted by the quantitative data. This provided the organizations with the opportunity to understand in more detail all aspects of the compass, as well as the context that each of them was operating within. The qualitative data verified the quantitative data, illustrating that the interviewees did not perceive Ultra or Bearings as innovative organizations. As a direct consequence of the richness of qualitative data, the researchers could determine why this might be the case. There are various novelties implied in this work. The model created from the research has shown that formulating the bigger picture allows organizations to understand where they need to try to go, rather than a model that prescribes where they ‘must go’. The compass highlighted for Ultra where their strengths lie, which was being able to produce their products cheaply and provide quick solutions for customers using their existing technology rather than innovate. Therefore, the senior management can ask themselves the question ‘Is new product development where we want to be?’ If the answer is ‘yes’, then they have the information that allows them to see where and what they need to change in order to achieve this. The contributing factor to Bearings perception of its lack of innovation was that they had recently been taken over. Therefore, the remnants of the old management style were still in place, which had not actively encouraged new product development. However, this was recognized to be changing, but was a slow process, with people struggling with the changes being imposed by the new management. However, the innovation compass has helped them realize that they are moving in the right direction. The innovation compass illustrates to organizations where they are performing effectively or otherwise. It is this mapping of individual organizations and their context that provides organizations with a useful ‘aid’. Future research in this area will involve further work with further case studies. These will allow the research group to take the research to the next level, by attempting to see if there are any ‘patterns’ or ‘connections’ between organizations’ compasses regarding what


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characteristics make an organization more or less successful at new product development. Such insights will enable comparison of the compasses from all the studies. This could provide understanding into whether there are any generic patterns regarding new product development.

References Amabile, T.M., Conti, R., Coon, H., Lazenby, J. and Herron, M. (1996) ‘Assessing the work environment for creativity’, Academy of Management, vol. 395, pp. 1154–84. Barclay, I., Dann, Z. and Holroyd, P. (2001) New Product Development: A Practical Workbook for Improving Performance. Oxford: Butterworth-Heinemann. Burgelman, R.A., Kosnik, T.J. and Poel, M.v.d. (1988) Toward an Innovative Capability Audit Framework. Strategic Management of Technology and Innovation. Homewood: R.A. Burgelman and M.A. Maidique, pp. 31–4. Chiesa, V., Coughlan, P. and Voss, C.A. (1996) ‘Development of a technical innovation audit’, Journal of Product Innovation Management, vol. 13, pp. 105–36. Cooper, R.G. (1996) ‘Overhauling the new product process’, Industrial Marketing Management, vol. 25, pp. 465–82. Griffin, A. (1997) ‘PDMA research on new product development practices: updating trends and benchmarking best practices’, Journal of Product Innovation Management, vol. 14, pp. 429–58. Hughes, G.D. and Chafin, D.C. (1996) ‘Turning new product development into a continuous learning process’, Journal of Product Innovation Management, vol. 13, pp. 89–104. Nonaka, I. and Takeuchi, H. (1995) The Knowledge Creating Company. New York: Oxford University Press. Radnor, H.A. (2002) Researching Your Own Professional Practice: Doing Interpretive Research. Buckingham: Oxford University Press. Radnor, Z.J. and Noke, H. (2002) ‘Innovation compass: a self-audit tool for the new product development process’, Creativity and Innovation Management, vol. 111, pp. 122–32. Rickards, T. and Bessant, J. (1980) ‘The creativity audit: introduction of a new research measure during programmes for facilitating organisational change’, R&D Management, vol. 102, pp. 67–75. Rickards, T. and Moger, S. (1999) ‘The development of benign structures: towards a framework for understanding exceptional performance in project teams’, International Journal of New Product Development and Innovation, vol. 1, no. 2. Rickards, T., Radnor, Z., Xu, Q. and Noke, H. (2001) Assessing and enhancing innovative design using the stage gate model, 8th International Product Development Management Conference, University of Twente, Netherlands. Van de Ven, A.H., Angle, H.L. and Poole, M.S. (eds) (2000) Research on the Management of Innovation. Oxford: Oxford University Press. Wheelwright, S.C. and Sasser Jr, W.E.S. (1989) ‘The new product development map’, Harvard Business Review, vol. 76, no. 3, May/June, pp. 112–24.

13 Leadership and Innovation: Surfacing Synergies among Constructs and Theories Elisabeth Wilson-Evered, Charmine Härtel and Matthew Neale

Abstract West’s (1990) theory of group innovation holds that innovation occurs through group processes. The role of leadership in the group innovation process is not clearly defined; rather, group processes are identified without reference to the leader’s influence on those processes. In contrast, theories of leadership suggest that leaders have a major role in achieving innovation and that innovation is a product of transformational leadership style. Nonetheless, the leadership–innovation relationship has not been clearly demonstrated at the group level of analysis. This chapter presents an empirical field investigation of the theoretical linkages between group innovation and leadership style using West’s (1990) typology of group innovation and Bass and Avolio’s Full Range Leadership model (1990, 1994). By examining the points at which the models juxtapose, the chapter contributes to the development of a new perspective on the leadership–innovation connection with respect to groups. The findings demonstrate that theories of innovation and theories of transformational leadership share common conceptual dimensions.

Introduction The literature is unclear about the relative contribution of leadership or group processes to innovation. For example, West’s theory of group innovation (1990) holds that innovation occurs through group processes involving norms for producing high level work, an orientation to the team, shared vision or objectives and an environment in which staff put forward new ideas that are supported and encouraged 268

Wilson-Evered, Härtel and Neale 269

and where staff feel safe to participate in all aspects of the team. The role of leadership in the group innovation process is not made explicit; rather, group processes are identified without reference to the leader’s influence on those processes. On the other hand, theories of leadership suggest that leaders have a major role in achieving innovation and, moreover, that innovation is a product of transformational leadership style (House 1977, Kanter 1988, Lovelace 1986). Transformational leadership is linked with excitement and creativity among followers (Bass 1985, Bass and Avolio 1994, House 1977, Kanter 1988). In order to address these theoretical inconsistencies, we posit that the elements of transformational leadership theory are conceptually analogous to those of West’s (West 1990) model of group innovation. In doing so, we argue that transformational leadership is an important element of the group processes involved in innovation.

Theory of group innovation West (1990) defines innovative teams as those teams that regularly practice four processes: creating a shared understanding of goals and commitment to excellent task performance; enabling and encouraging participation in decision making and making it safe to do so; articulating and demonstrating support for the contribution and development of new ideas from all team members; and group task orientation. These constructs are expanded upon further in the measures section. Innovation for the purposes of our study follows the example of West and Farr (1990) and includes both the generation and introduction of a new idea or process. Such innovations may have been introduced elsewhere but the defining characteristic is that they are new for that particular work group (West and Farr 1990). West’s theory (1990) has been validated in a range of teams and work groups such as executive, manufacturing and health care teams (Anderson and West 1996, West et al. 1997).

Measuring group innovation Addressing an identified omission in the study of work group innovation, Anderson and West (1996, 1998) developed the Team Climate Inventory, a multidimensional measure of facet-specific climate for innovation within the proximal work group environment. Proximal work group environment is defined as the group to which individuals are assigned either permanently or temporarily (Anderson and West 1998).

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The Team Climate Inventory (TCI) is based on West’s four factor theory of group innovation (West 1990) and focuses on shared objectives or vision; group participation and safety; team support for innovation; and the group’s task orientation. The TCI has been employed in a number of case studies, longitudinal studies, research programmes and teambased interventions (Agrell and Gustafson 1996, Anderson and West 1996, 1998, Bain and Mann 1997, Bain et al. 1999, Pirola-Merlo et al. 2002, West 1990, 1997, West and Anderson 1996, West et al. 1998). The strength of the TCI lies with its ability to determine the relative contribution of processes that predict or are important for a facet-specific climate for work group innovation.

Climate for innovation The concept of organizational climate for creativity and innovation proposed by Ekvall (Ekvall 1996) is described as an attribute of the organization that embraces attitudes, feelings and behaviours. His model includes dimensions of challenge, freedom, idea support, trust/openness, dynamism/liveliness, playfulness/humour, debates, conflicts, risk taking and idea time. A test of his model (Ekvall 1996) demonstrated that change-oriented leadership style consistently showed strongest correlations with climate for innovation. In contrast, structure oriented style showed weak or no correlation because that style includes both creativity inhibiting and promoting elements. He concluded that the climate of the organization is tied in the hands of the manager. The type of environment or climate that is favourable to innovation might be one that involves participation, freedom of expression and demanding performance standards (Bunce and West 1995), which may include establishing norms for producing high quality work (West 1996). Innovation theorists such as Amabile (1988) and Kanter (1988) suggest that climate may channel and direct both attention and activities towards innovation. Building on this notion, Scott and Bruce (1994) developed and tested a model arguing that leadership, work group relations and problem-solving style affect individual innovative behaviour directly and indirectly through perceptions of a climate for innovation.

Group innovation West and Anderson (1996) used dimensions similar to those tested by Scott and Bruce (1994) as criterion measures in a longitudinal study of innovation in the top management teams of 35 major hospitals in


the United Kingdom. Within an input–process–outcome framework, these authors found that group processes best predicted the overall level of innovation among top management teams. However, the proportion of innovative team members predicted the degree to which the innovation was judged as radical. Contrary to conventional wisdom, the study found that resources did not predict innovation. Team composition primarily determined the quality (radicalness, novelty and magnitude) of team innovation, and social processes influenced the overall level of team innovation (West and Anderson 1996). The finding is important because it challenges notions that resources, age, tenure and team size are more probable determinants of innovation. In support of the contention that group processes are more influential than structural factors, Poulton and West’s (1999) study of health care teams found that size and tenure did not predict effectiveness. However, team processes (shared objectives, experience participative safety, shared quality emphasis in task orientation and support for innovation) accounted for 23 per cent of the variance in teams’ innovation. Further, shared team objectives were identified as the most powerful predictor of overall effectiveness. West and colleagues’ (West et al. 1998) study of the relationship among elements of the climate in universities and their success as measured by ratings of student numbers, external research grants, research planning and research quality was predicted more by prior performance than climate factors. In contrast, a study conducted by Bain, Mann and Pirola-Merlo (1999) using the Team Climate Inventory (TCI) and measures of innovativeness showed stronger relationships between the four climate dimensions of the TCI, and both individual and team innovation for research teams compared to development teams. These studies show that team type affects the relationships observed, how important climate is for innovation and the effect of the experience of being innovative on innovation itself. Agrell and Gustafson (1996) present a review and an analysis that leads to a model of the facilitating and inhibiting factors at the three levels of analysis; individual, group and organization. At the group level, these authors argue that positive or facilitating factors may occur within three dimensions: structural, climate and member’s beliefs in their team’s potency. Structural factors include size and diversity, which is broken down into longevity, tenure, demographics and function. Climate variables are those proposed in West’s theory (West and Farr 1990). Group potency refers to the group’s belief in its strengths and ability to innovate. Factors that inhibit innovation, according to


Agrell and Gustafson (1996), are communication style and psychodynamic influences. The former inhibits innovation when the characteristic communication among members can be described as insensitive, intolerant, closed to ideas, argumentative, uninquisitive and unreflective. Psychodynamic influences operate below the level of consciousness and are tied to the ‘basic assumptions’ of group members. Negative psychodynamic influences are revealed when members present neurotic behaviours and defensive routines (Agrell and Gustafson 1996). Leadership is not identified as a group level construct in the Agrell and Gustafson (1996) model. Rather, leadership is nominated as an organization level variable. Agrell and Gustafson (1996) make an important comment that is relevant to our work. They argue that leadership style should coincide with the four-factor model of group climate proposed by West (1990) to predict innovation (Agrell and Gustafson 1996). Leaders of innovative groups are expected to be participative whilst exerting moderate control, to encourage and support new ideas, to develop objectives and visions, and to manage boundaries so that the group can work effectively. Leadership research has focused on the effectiveness of top management teams and, in particular, the style that leads to organizational success (Bass and Avolio 1994, Howell and Avolio 1993, Yammarino 1996). However, the field is troubled by difficulties in explicating influences at the group level of analysis from those at individual or organizational levels (Yammarino 1996). The present research addresses this gap.

Leadership and innovation Creativity, innovation and exceptional performance are a consequence of inspirational or charismatic leadership because, theoretically, transformational or charismatic leaders engage followers’ affective and cognitive processes and thereby generate an environment of excitement (Berlew 1974). In support of this notion, Howell and Avolio’s (1993) study of 78 managers found that transformational leadership positively predicted business performance over a one-year interval. Similarly, a study of female nursing leaders found leader effectiveness to be positively related to transformational leadership but negatively related to a fault finding management style (Bycio et al. 1995). Berlew (1974) proposed that organizational excitement or finding excitement and meaning in work underpins organizational innovation. He suggested three stages of leadership: custodial, managerial and charismatic. Confronting change and innovation with excitement, Berlew


(1974) argued, requires the influence of a stage 3 or charismatic leader. On the other hand, House (1977) proposed a two-factor model in which task or instrumental leadership behaviour serves to achieve productive outcomes for the organization, whereas social emotional leadership determines the leader’s relationships with subordinates. However, these dimensions of leadership do not explain why some leaders inspire people to rise above mundane concerns and become unified in pursuit of objectives that extend the individual to unpredicted levels of performance (Gardner 1965). Few leadership theories integrate both positive and negative styles of leadership. Such integration is important when considering leadership in relation to a criterion such as effectiveness or innovation, as it is only by comparing leadership styles that it is possible to ascertain differential effects on the criterion.

Integrating active and passive leadership styles In contrast to many leadership theories, Bass and Avolio (1994) and Avolio (1996) developed a model that integrates both active and passive leadership styles. In doing so, they provide a framework for conceptualizing leadership in terms of both active–passive and effective– ineffective continua as well as the context or situation within which the leadership occurs. Five major types of leadership are incorporated into their Full Range Model of Leadership (Bass and Avolio 1994). Laissez faire leadership is the most passive form of leadership and is characterized by avoidance leadership and abdication of responsibility. The less passive, management by exception (passive), focuses on mistakes and waiting for errors to emerge before taking action. Moving to more active styles, Management by exception (active) is characterized by searching for those errors and taking active steps to fix them. The more positive constructive transactions or contingent reward sets up an exchange situation between leader and follower so that rewards are provided in response to the achievement of agreed outcomes. The transactional leadership style is usually derived from combining contingent reward and the active form of management by exception (Bass 1998). Transformational leadership is defined by four elements (Bass 1998, Bass and Avolio 1994): 1 Idealized influence (or behavioural charisma or charismatic leadership). Such leaders display high standards of ethical and moral conduct and so become role models for employees. These leaders are trusted and highly respected and though willing to take risks, do so in a consistent rather than erratic way;


2 Inspirational motivation, which involves motivating and inspiring people by providing meaning and challenge in relation to work. The leader’s ability to define and communicate a clear vision encourages team spirit and esprit de corps as members enthusiastically work towards a shared goal. In factor analytic studies, idealized influence and inspirational motivation usually combine to form a single factor charismatic-inspirational leadership (Bass 1998); 3 Intellectual stimulation involves stimulating followers’ searching and enquiring into their work, and challenging the ways things are done even when at the peak of success. Followers feel safe to put forward new ideas and experiment with creative solutions to old and new problems although they may be at odds with those of others, even the leader. Above all, innovation is encouraged and supported; 4 Individualized consideration is experienced by followers as concern for and knowledge of what is important for them as individuals. Interactions are personalized and new opportunities created. Such consideration helps followers to develop and achieve their full potential and performance through delegation of tasks and responsibilities that enable growth and development. Attributed charisma is a fifth element of Bass and Avolio’s (1997) transformational leadership model and occurs where leaders are perceived by followers to display extraordinary capabilities. These components of transformational leadership, as we discuss later, can be viewed as parallel to West’s (1990) model of group innovation; namely, climate for excellence, vision, support for new ideas and participative safety respectively. Being a transformational leader does not necessarily imply that such a leader is always participative in approach to implementing change. Transformational leaders may also take an authoritarian stance should the situation require it (Bass 1998). For innovation, a blend of authoritarian and participative styles of leadership may be appropriate. Indeed, West and colleagues (West et al. 2001) found that centralized decision making at the strategic level (authoritarian) was required to ensure innovation was a strategic goal of the organization. Then, a more decentralized and participative approach was needed amongst work groups for building the innovative potential in the company. Avolio, Bass and Jung (1995) developed and refined a measure incorporating the five leadership styles of Avolio (1996) and the elements of transformational leadership proposed by Bass and Avolio (1994). Since its development, the Multifactorial Leadership Questionnaire (MLQ) (Bass and Avolio 1997) has been used widely in research and in leadership


development programmes (Bass and Avolio 1994) as evidenced by the number of publications and research theses that employ this instrument (Bass 1998). Parry and colleagues’ research (1996, 2001) employed the MLQ and considered it to be appropriate for the Australian and New Zealand contexts. A focus on cultural considerations in recent years has led scholars from Australia (Carless et al. 2000) and Britain (Alimo-Metcalfe and Alban-Metcalfe 2001) to develop new measures of transformational leadership. However, the latter scales did not include a range of leadership styles important to the consideration of the differential effects of leadership styles in a criterion. Adopting the leadership typology proposed by Bass and Avolio (1994), a positive relationship would be expected between transformational leadership and a climate that supports innovation. Conversely, a negative or no relationship would be expected between innovation and a non-transformational style of leadership, particularly a leadership style that is fault finding (management by exception) or that abdicates responsibility (laissez faire).

Summary of research on leadership and innovation Our review of theoretical models suggests those leaders who are perceived to be charismatic or transformational are effective in providing the necessary stimulus motivation and encouragement to inspire innovation among followers. Nonetheless, where leaders adopt transactional style, innovativeness occurs because there are clear structures, rewards and supports for employees who have a clear understanding of their role and expectations. Participative styles of leadership nurture innovation through managing relationships and boundaries and by providing resources that enable innovation. Participative leaders ensure that the group members are involved in issues that are important to them, enabling them to focus on the creative task unencumbered by irrelevant duties. We have reported research that indicates a positive relationship between innovation and both supportive or facilitative (Guastello 1995) and transformational leadership (Howell and Avolio 1993). We were not able to identify many studies that have compared a range of active–inactive, effective–ineffective styles of leadership in terms of their differential effect on innovation in work groups (Flood et al. 2000). In particular, the effect of non-supportive and non-transformational leadership styles on innovation has received little research attention. Our research addresses those deficits by comparing the influence of


TRANSFORMATIONAL LEADERSHIP

CLIMATE FOR INNOVATION

INNOVATION

Figure 13.1 Proposed relationship between transformational leadership and team climate

Transformational leadership (based on Bass and Avolio 1995)

Climate for innovation (based on West 1990)

Inspirational motivation

Vision

Individualized consideration

Participative safety

Idealized influence

Climate for excellence

Intellectual stimulation

Support for new ideas

Figure 13.2 Conceptual alignment among constructs in MLQ and TCI

supportive, transformational, management by exception and laissez faire leadership styles on team climate for innovation in natural work groups. Together, the theories of transformational leadership and innovation provide the framework for establishing a theoretical link between the two constructs and the climate for innovation in the team (see Figure 13.1). In order to identify synergies between the theories of transformational leadership and climate for innovation, we paired concepts according to their similar meanings. This process resulted in the construct alignment shown in Figure 13.2. The first dimension common to the two theories is climate for excellence (idealized influence). That is, when leadership influence is gained through gaining trust, respect and confidence, setting high standards of conduct and providing a role model, then the group will share an orientation for excellence in task performance. The second dimension common to the two theories is vision or support for team objectives (inspirational motivation). That is, in the presence of a leader who inspires and motivates by articulating the future desired state and a plan to achieve it, the group is likely to share a common vision and develop shared common objectives. The third dimension common to the two theories is support for new ideas (intellectual stimulation). In other words, a leader providing intellectual stimulation, which involves questioning the status quo and continually


innovating, even when at the peak of success, enables an environment where there is group support for ideas. The fourth common theoretical dimension is participative safety (individualized consideration). Leaders who energize people to develop and achieve their full potential and performance will generate a climate where group members feel safe to participate and contribute to decision-making. Although we have aligned pairs of theoretical constructs below, there are clearly other alignment pairs that would be equally as valid given the theoretical descriptions of the consequences of each type of leadership. In the present study, we aim to establish which leadership style is most conducive to innovative practice. To achieve this, we chose team climate for innovation – a composite of team orientation, support for new ideas, support for team objectives and team participation (participative safety) – as the outcome variable. Prior research shows a strong connection between team climate and innovation (Ekvall 1996).

Proposed research hypotheses Hypothesis 1: The conceptual similarity of the theories of transformational leadership (Bass and Avolio 1994) and West’s (1990) theory of work group will be evidenced by positive correlations among the theoretical facets of each theory. Hypothesis 2: We predict that supportive, transformational and transactional styles will have a positive influence on climate for innovation, whereas leaders who are rigid, focus on errors or abdicate responsibility would have negative or no impact on group climate for innovation.

Methodology Participants were 955 employees in 45 work groups at a hospital specializing in care for women and neonates. There was an average of 11.38 people in each work group, and an average of 56 per cent of the people in each work group responded in full (range 20 per cent to 100 per cent). Analyses were conducted on two datasets; one included all groups and the other excluded groups where less than one third responded to the survey. There were no substantive differences between the results; therefore, only results using the full data set are reported. A survey compiled by the researchers in consultation with staff members was used to measure all variables. The variables were measured on either 7- or 5-point Likert-type scales. Scores were rescaled prior to analysis to a 100-point scale, as this was the scale used by the hospital


for reporting group level data. Using the MLQ 5X (Bass 1998), the following leadership styles were examined: transformational, active management by exception (active MBE), passive management by exception (passive MBE) and laissez faire. Note that the transactional style was not measured, because it was correlated in excess of .9 with transformational leadership, a finding consistent with previous research using earlier versions of the MLQ (Hunt 1991, Smith and Peterson 1988). The four factors measured in the Team Climate Inventory are group processes that have been used to predict innovation (Anderson and West 1996). A supportive leadership scale was extracted from the Queensland Public Agency Staff Survey (QPASS), developed by Hart et al. (1996). The instrument assesses employee evaluations of the work environment such as leadership, participative decision making, recognition and appraisal, goal congruence, professional interaction, professional growth, workload and role clarity. The tool is most often used to examine the impact of organizational climate on factors such as turnover intentions, sick leave, job satisfaction, morale and distress levels. In our study, we extracted subscales measuring supportive leadership from the organizational climate scale.

Group level agreement For each group, responses from employees within the work group were averaged to provide a single score for the group. The degree of within group agreement was examined using mean rwg(j) (James, Demaree and Wolf 1984). Rwg(j) ranges from 0, which indicates the level of agreement expected by change, to 1, which indicates perfect agreement. The statistic revealed moderate to high levels of agreement for all variables. The rwg(j) index was below the recommended cut off value of .7 for active MBE (.5), passive MBE (.5), laissez faire (.6) and contingent reward (.6). However, transformational leadership, which was aggregated over a greater number of items than was true for the other leadership styles, reached a value of .8. The deflated values of the other leadership scales were probably due to the effect of combining managers’ ratings of their leader with subordinates’ ratings of the work group manager. This could have created two targets for the leadership items within each group, which would have reduced agreement. Unfortunately, it was not possible to identify responses from the group manager and remove them. However, whilst low, we consider these levels of agreement to be adequate for treating the aggregated data as a group level construct.


Results Correlational analysis Means, standard deviations and correlations between variables in the analysis are reported in Table 13.1. Note that the following results are based on subordinates’ ratings of their manager’s leadership style. The correlation matrix shows clearly that managers adopting a transformational style are very likely to have a positive team climate. The other leadership styles were not related to team climate. Correlations of the leadership styles with transformational leadership were high, with laissez faire and passive MBE showing strong negative correlations, and supportive leadership showing a strong positive correlation. Analysis of the relationship among elements of transformational leadership and group climate for innovation showed strong positive correlations, all of which were significant at the p .01 level (range r .400 to r .998). From Table 13.2, we note the following correlations in accordance with hypothesis 1: idealized influence and team orientation were positively correlated r .545; inspirational motivation and team objectives at r .481; intellectual stimulations and support for new ideas at r 454; individualized consideration and participative safety at r .512. High intercorrelations were also observed among the subscales of the TCI and the transformational leadership scale of the MLQ (see Table 13.1).

Table 13.1 Means, standard deviations and correlations between team climate and leadership styles Variables

Mean

(1) (2) (3) (4) (5)

59.26 28.07 52.01 32.80 53.92

Transformational Laissez faire Active MBE Passive MBE Supportive leadership (6) Team climate Note: *p .05 ** p .01 n 45 work groups

63.22

SD

1

2

3

4

11.53 – 13.87 .65** – 12.62 .03 .15 – 12.44 .41** .81** .28 – 12.82 .47** .49** .32* .57** 7.96

.53** .19

.13

.17

5

6

– .16

–

280 Leadership and Innovation Table 13.2 Correlation among elements of transformational leadership and team climate for innovation Variables

1

2

3

4

5

6

7

8

(1) (2) (3) (4) (5) (6) (7) (8)

– – – – – – – –

.783** –. – – – – – –

.770** .717** – – – – – –

.823** .779** .782** – – – – –

.545** .407** .493** .527** – – – –

.531** .399** .481** .514** .998** – – –

.554** .454** .488** .543** .962** .956** – –

.508** .400** .451** .512** 987** .986** .950** –

Team orientation Support for ideas Team objectives Participative safety Idealized influence Inspirational motivation Intellectual stimulation Individualized consideration

** p .01 n 45 work groups

Table 13.3 Multiple regression results: managers’ leadership style and team climate R2

Leadership style Transformational Laissez faire Active MBE Passive MBE Supportive leadership

.93** .67*

.23

.42 .27*

.43**

Note: * p .05 ** p . 01

Regression analysis To examine the effect of manager’s leadership style on team climate, team climate was regressed on all five leadership styles simultaneously. The results are shown in Table 13.3. As one would expect from the zero order correlations, transformational leadership had the largest effect on team climate, with a beta weight of .93 (p .01). Laissez faire leadership also had a significant beta weight; however, it had a nonsignificant zero-order correlation with team climate, and a large negative correlation with transformational leadership. Given this set of results, it is apparent that laissez faire leadership is acting as a suppressor variable, and its contribution to the regression is an artefact of its high negative correlation with


transformational style. In other words, laissez faire leadership has no real effect on team climate.

Discussion The analysis shows that employees who rate their leaders as demonstrating a transformational style tend also to report a positive team climate. A limitation in the design of the study is that data on all variables were obtained at the same time, using the same measure. Therefore, we are unable to conclude that transformational leadership causes a positive team climate; however, they are significantly related. Our research supports and extends the findings of other scholars who have found a link between leadership and innovation specifically, or superior performance more generally (Bain et. al 1997, Bass 1985, 1998, Bass and Avolio 1994, Flood et. al. 2000, Guastello 1995, Howell and Avolio 1993, Parry 1999, Yammarino et al. 1993). We found clear evidence for arguing that transformational leadership and climate for innovation are likely to occur together. The highly significant correlations indicate a strong association among constructs of both theories. This finding provides support for Agrell and Gustafson’s (1996) argument that leadership style should coincide with the four-factor model of group climate proposed by West (1990) to predict innovation (Agrell and Gustafson 1996). However, we extend the proposal of these authors by explicating which leadership style has the stronger influence on climate for innovation. This brings us to our second major finding, which supported hypothesis 2, that supportive, transformational and transactional styles would have a positive influence on climate for innovation. On the other hand, we proposed that leaders who are rigid, focus on errors or abdicate responsibility would have negative or no impact on group climate for innovation. When comparing the differential effect of leadership style on team climate for innovation, we made two predictions. First, we expected to find a strong positive relationship between transformational leadership and climate for innovation, and second, we expected a negative or zero relationship would be observed between laissez faire leadership and climate for innovation. Our results supported both predictions. First, we observed that a leader demonstrating transformational qualities .53 (p .001) is more likely to produce a climate for innovation than other leadership styles. The literature has produced little work comparing leadership styles on an outcome such as innovation. However, a notable exception is Howell and Avolio’s (1993) study of predictors of


consolidated business unit performance. These scholars found the three transformational measures were significantly positively related to business unit performance over a one-year interval, and that transactional leadership was negatively related to business unit performance. Of relevance to our work is their finding that transformational leadership behaviours and unit performance were moderated by the level of support for innovation in the business unit (Howell and Avolio 1993), and that transactional leadership including contingent reward and active and passive management by exception were negatively related to unit business performance. Our findings digress from those of Howell and Avolio (1993) on the latter point, as we found contingent reward to be highly correlated .9 (p .001) with the transformational scales. The contingent reward scale was therefore removed from further analysis. However, active MBE (r .13) and passive MBE (r .17) were negatively related to innovation, though not significantly so. The relationship between innovation and laissez faire leadership was also negative (r .19). Although nonsignificant, these results show, as predicted, that if we let the leadership styles sit on a continuum between most active and most passive, the strength of the relationship to innovation climate declines in concert with the increasing level of passivity in leadership style (see Figure 13.3). Supportive leadership though highly correlated with transformational leadership .47 (p .001) was not related to climate for innovation .16, although previous work had suggested that this might be the case. These results support our second hypothesis that innovation is least likely to occur with very passive styles of leadership or ‘hands off’ leaders. Transformational leadership is an important factor in producing a climate for innovation and the claim that systems that are working well should not be changed is unequivocally disputed.

Strong Innovation climate

Weak Transformational Active style

MBE active

MBE passive

Laissez faire Passive style

Figure 13.3 Relationship between leadership styles and innovation climate


References Agrell, A. and Gustafson, R. (1996) ‘Innovation and creativity in work groups’, in West, M.A. (ed.), Handbook of Work Group Psychology. Chichester: John Wiley, pp. 317–44. Alimo-Metcalfe, B. and Alban-Metcalfe, R.J. (2001) ‘The development of a new transformational leadership questionnaire’, Journal of Occupational and Organizational Psychology, vol. 74, pp. 1–27. Amabile, T.M. (1988) ‘A model of creativity and innovation in organizations’, Research in Organizational Behavior, vol. 10, pp. 123–67. Anderson, N.R. and West, M.A. (1998) ‘Measuring climate for workgroup innovation: development and validation of the team climate inventory’, Journal of Organizational Behavior, vol. 19, pp. 235–58. Anderson, N.R. and West, M.A. (1996) ‘The Team Climate Inventory: development and its applications in team building for innovativeness’, European Journal of Work and Organizational Psychology, vol. 5, pp. 53–66. Avolio, B.J. (1996) ‘What’s all the Karping about down under? Transforming Australia’s leadership systems for the twenty-first century’, in Parry, K.W. (ed.), Leadership Research and Practice: Emerging Themes and New Challenges. Melbourne: Pitman, pp. 3–15. Avolio, B.J., Bass, B.M. and Jung, D.I. (1995) MLQ Multifactor Leadership Questionnaire: Technical Report. Palo Alto, CA: MindGarden. Bain, P.G. and Mann, L. (1997) ‘Project leadership in Australian R&D: perceptions of performance and effectiveness’, Australian Industrial and Organizational Psychology, Melbourne, Australia, Australian Psychological Society. Bain, P.G., Mann, L. and Pirola-Merlo, A. (1999) The Innovation Imperative: The Relationship between Team Climate, Innovation, and Performance in Research and Development Teams, 3rd Australian Industrial and Organisational Psychology Conference. Brisbane: Australia. Bass, B.M. (1998) Transformational Leadership: Industrial, Military and Educational Impact. New Jersey: Lawrence Erlbaum. Bass, B.M. (1985) Leadership and Performance beyond Expectations. New York: Free Press. Bass, B.M. and Avolio, B.J. (1997) Full Range Development: Manual for the Multifactor Leadership Questionnaire. Palo Alto, CA: MindGarden. Bass, B.M. and Avolio, B.J. (1994) Improving Organizational Effectiveness through Transformational Leadership. Newbury Park: Sage. Bass, B.M. and Avolio, B.J. (1990) Transformational Leadership Development: Manual for the Multifactor Leadership Questionnaire. Palo Alto, CA: Consulting Psychologist Press. Berlew, D.E. (1974) ‘Leadership and organizational excitement’, in Kolb, D.A., Rubin, I.M. and McIntyre, J. (eds), Organizational Psychology: A Book of Readings, 2nd edn. Englewood Cliffs, NJ: Prentice Hall, pp. 265–77. Bunce D.A. and West, M.A. (1995) ‘Self perceptions and perceptions of group climate as predictors of individual innovation at work’, Applied Psychology: An International Review, vol. 44, no. 3, pp. 119–215. Bycio, P., Hackett, R.D. and Allen, J.S. (1995) ‘Further assessments of Bass’s conceptualization of transactional and transformational leadership’, Journal of Applied Psychology, vol. 80, pp. 468–78.

284 Leadership and Innovation Carless, S.A., Wearing, A.J. and Mann, L. (2000) ‘A short measure of transformational leadership’, Journal of Business and Psychology, vol. 14, pp. 389–404. Ekvall, G. (1996) ‘Organizational climate for creativity and innovation’, European Journal of Work and Organizational Psychology, vol. 5, pp. 105–23. Flood, P.C., Hannan, E., Smith, K.G., Turner, T., West, M.A. and Dawson, J. (2000) ‘Chief executive leadership style, consensus decision making, and top management team effectiveness’, European Journal of Work and Organizational Psychology, vol. 9, pp. 401–20. Gardner, J.W. (1965) The Antileadership Vaccine. New York: Carnegie Foundation. Guastello, S.J. (1995) ‘Facilitative style, individual innovation and emergent leadership in problem solving groups’, Journal of Creative Behavior, vol. 29, pp. 225–39. Hart, P.M., Griffin, M.A., Wearing, A.J. and Cooper, C.L. (1996) The QPASS Survey and Manual: Improving the quality of life in the Queensland Public Service. Brisbane: Queensland Public Service. House, R.J. (1977) ‘A 1976 theory of charismatic leadership’, in Hunt, J.G. and Larson, L.L. (eds), Leadership: The Cutting Edge. Carbondale: South Illinois University Press, pp. 189–297. Howell, J.M. and Avolio, B.J. (1993) ‘Transformational leadership, transactional leadership, locus of control and support for innovation: key predictors of consolidated-business-unit performance’, Journal of Applied Psychology, vol. 73, pp. 891–902. Hunt (1991) Leadership a New Synthesis. Newbury Park, CA: Sage. James, L.R., Demaree, R.G. and Wolf, G. (1984) ‘Estimating within-group interrater reliability with and without response bias’, Journal of Applied Psychology, vol. 69, pp. 85–98. Kanter, R.M. (1988) ‘When a thousand flowers bloom: structural, collective and social conditions for innovation in organizations’, in Straw, B. and Cummings, L.L. (eds), Research in Organizational Behavior. London: JAI Press, pp. 169–211. Lovelace, R.F. (1986) ‘Stimulating creativity through managerial interventions’, R&D Management, vol. 16, pp. 161–74. Parry, K.W. (ed.) (1996) Leadership Research and Practice: Emerging Themes and New Challenges. Melbourne: Pitman. Parry, K. (ed.) (2001) Leadership in the Antipodes: Findings, Implications and Leader Profile. Institute of Policy Studies and Centre for the Study of Leadership, Victoria University of Wellington, Wellington, NZ. Parry, K. (1999) Transformational Leadership: Developing an Enterprising Management Culture. Warriewood: Business and Professional Publishing. Pirola-Merlo, A., Härtel, C.E.J., Mann, L. and Hirst, G. (2002) ‘How affective events and affective team climate relate to work-related satisfaction in R & D teams: a longitudinal analysis, Leadership Quarterly, vol. 13, no. 5, pp. 561–81. Poulton, B.C. and West, M.A. (1999) ‘The determinants of effectiveness in primary health care teams’, Journal of Interprofessional Care, vol. 13, pp. 7–18. Scott, S.G. and Bruce, R.A. (1994) ‘Determinants of individual innovative behavior: a path model of individual differences’, Academy of Management Journal, vol. 37, pp. 580–607. Smith, P.B. and Peterson, M.F. (1998) Leadership, Organizations, and Culture. New York: Sage.

Wilson-Evered, Härtel and Neale 285 West, M.A. (1997) Developing Creativity in Organizations. Leicester: BPS Books. West, M.A. (ed.) (1996) Handbook of Work Group Psychology. Chichester: John Wiley. West, M.A. (1990) ‘The social psychology of innovation in groups’, in West, M. and Farr, J.L. (eds), Innovation and Creativity at Work: Psychological and Organizational Strategies. Chichester: John Wiley, pp. 309–34. West, M.A. and Anderson, N.R. (1996) ‘Innovation in top management teams’, Journal of Applied Psychology, vol. 81, pp. 680–93. West, M.A. and Farr, J.L. (eds) (1990) Innovation and Creativity at Work: Psychological and Organizational Strategies. Chichester: John Wiley. West, M.A., Patterson, M., Pillinger, T. and Nickell, S. (2001) Organizational and Environmental Predictors of innovation, working paper. Birmingham: Aston Business School. West, M.A. Smith, H., Lu Feng, W. and Lawthom, R. (1998) ‘Research excellence and departmental climate at British universities’, Journal of Occupational and Organizational Psychology, vol. 71, pp. 261–81. West, M.A., Patterson, M., Pillinger, T., Lawthom, R. and Nickell, S. (1997) Innovation and Change in UK Manufacturing, research report. Sheffield: Institute of Work Psychology. Yammarino, F.J. (1996) ‘Group leadership: A levels of analysis perspective’, in West, M.A. (ed.), Handbook of Work Group Psychology. Chichester, UK: John Wiley, pp. 189–224. Yammarino, F.J., Spangler, W.D. and Bass, B.M. (1993) ‘Transformational leadership and performance: a longitudinal investigation’, Leadership Quarterly, vol. 4, pp. 81–102.


Part VI Conclusion


14 Strategic Management: Its Development and Future Directions Howard Thomas

Introduction The field of strategic management has developed strongly in the past forty years. It has progressed significantly from its beginnings as an applied, practical capstone course in the business school curriculum to its present more rigorous state, with a strong disciplinary and academic focus on the relationship between strategies and their performance. It has also generated a highly regarded academic journal, the Strategic Management Journal (SMJ), rated second in 2002 for citations and impact in the ISI Web of Science listing of Social Science journals. Strategic Management (Bowman 1974) has three elements: its roots in practice, its methodology, and its theoretical underpinnings. Practice is typically captured in cases and business histories describing firms’ strategies and their evolution. Methodology is identified in the implementation of planning systems, and associated tools for strategic analysis, in the process of strategic decision making. Theoretical roots come primarily from economics and/or the social and behavioural sciences. However, practice and theory are not always well connected. Bettis (1991) notes that our research in strategic management has not yet produced the volume of useful results expected by managers. Indeed, the battle for ‘thought leadership’ in the field remains balanced between ‘cutting-edge’ business school academics, such as Michael Porter and C.K. Prahalad, and the leaders of the major strategy consulting firms, such as McKinsey, Bain, Boston Consulting Group, or Booz, Allen & Hamilton. It is important, therefore, to investigate the evolution of the strategy field and thoroughly examine its future potential. Such a critical review of the field, focusing particularly on its academic growth, should take stock of both its progress in terms of clear principles and findings, and 289

290 Strategic Management: Future Directions

its theoretical orientation. Following Bowman (1990), it is agreed that theoretical pluralism (that is, the ability to view the problems and issues of the field through multiple theoretical lenses) is necessary for the development of the field. In this pluralistic spirit, it is relevant to take note of Bowman’s (1990) suggestion that processes of dialogue, intellectual exchange and argument should be used to advance the field (see also Thomas 1984). Indeed, the many articles examining and reflecting the elements and content of strategy research: (for example, Bourgeois 1984, Bowen and Wiersema 1999, Camerer 1985, Chakravarty and Doz 1992, Hirsch et al. 1990, Langley 1999, Montgomery et al. 1988, Pettigrew 1987b, 1992, Rumelt et al. 1994, Spender 1992, Zaheer et al. 1999) have each advanced a set of propositions and criticisms about the field and its development. In this chapter the academic literature of strategy is briefly reviewed and the critical ideas/issues in the field are identified. Current and future research directions are then assessed and discussed. The paper from which this chapter derives draws heavily on some of the author’s previous writings in this area, most notably Bowman, Singh and Thomas (2002); Pettigrew, Thomas and Whittington (2002); and Thomas and Pollock (1999). He is grateful to those collaborators, and also John McGee and Don Antunes of Warwick Business School for their help and insight. The perspective taken here is to focus on the theoretical development of the field and not specifically to address the influence of strategy practice on theory development. This could, however, be the subject of a separate paper. Obviously, the author is solely responsible for the contents of this work.

The academic literature of strategy It is quite clear that the strategy field’s growth has reflected a tradition of theoretical pluralism (Bowman 1990) in its borrowing of concepts and theories from other disciplines (for example, economics, psychology, politics and the behavioural sciences) and in the evolution of its concepts and frameworks in parallel with changes in the styles and practice of management. Writers in the strategy field have offered a wide range of alternative models of strategy (for example, Bowman 1974, 1990, Chaffee 1985, Gluck et al. 1980, MacCrimmon 1993, McKinsey on Strategy 2000, Pettigrew et al. 2002, Porter 1996, Rumelt et al. 1994). Despite the

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wide range of sometimes confusing definitions, conceptualizations and models, serious communication among strategy scholars has nevertheless continued and allowed progress to be made in the development of empirical, theoretical and methodological traditions in strategic management research (Thomas and Pruett 1993). And each of these different views of strategy has influenced the development of alternative research streams in the field. Earlier concepts of strategy were somewhat mechanistic in orientation and could be described in terms of the notion of ‘organizational fit’; for example, ‘strategy as integrating organizational functions’ (for example, Barnard 1938, Chandler 1972) or ‘strategy as fit between the organization and the environment’ (Andrews 1971) or ‘strategy as a planning perspective in terms of ends-means’ (for example, matching policies to organizational goals, MacCrimmon 1993). The ‘strategy as integration or organizational fit’ theme developed from a substantial tradition of writing in scientific management and the management of organizations (for example, Barnard 1938, Fayol 1949, Taylor 1947). Chandler (1962, 1972) built on this tradition in a finegrained study of the historical evolution of management and strategy processes in a small number of firms. His model of corporate development and structure examined diversification and growth patterns in those firms and identified, through a process of induction and interpretation, a generalized set of relationships between strategy and structure of exceptional richness and depth. It was a major and path-breaking study grounded in the tradition of economic and business history research, as Nelson and Winter (1982) pointed out much later, in their important book ‘History Matters’. This single exemplar study motivated a stream of research involving a generation of researchers at Harvard Business School (for example, Channon 1978, Pooley-Dyas 1972, Rumelt 1974, Thanheiser 1972, Wrigley 1970), which teased out more thoroughly the character of Chandler’s organizational forms and examined diversification strategies in the US and other Western European countries including France, Germany and the United Kingdom. It also generated a typology of diversification strategies based on the concept of ‘relatedness’ among different business units (Rumelt 1982). Chandler’s pioneering efforts, therefore, created a unique direction for strategy research involving both in-depth, historical, longitudinal research of certain strategy processes and empirical testing of alternative diversification strategies suggested by the inductive, interpretive propositions drawn from longitudinal research. This stream was a dominant


one in the strategy literature in the 1970s and 1980s and provided the intellectual underpinnings for much of the later work in strategy process research. Almost simultaneously, another stream of research involving the ‘strategy as planning, strategy as ends-means’ viewpoints emerged from the development of strategic planning systems in organizations. Writers such as Ansoff (1965), Ackoff (1970) and Steiner (1979) pioneered this deductive modeling stream and incorporated concepts drawn from operational research (OR), decision theory, game theory and economics to model strategic situations. They focused on firm-level planning using the OR tradition of modelling the web of economic relationships characterizing the firm, and then devising frameworks to address firm level policy and strategy questions (Thomas 1984). An outgrowth of this modelling tradition was the use of the so-called SWOT analysis (Andrews 1971) – the analysis at the firm-level of strengths(S), weaknesses(W), opportunities(O) and threats(T). This SWOT framework in its earliest applications led firms to search for their distinctive competences (Newman and Logan 1971) and, thus, assess their competitive positioning. SWOT was also an early example of the ‘organization-environment’ notion of ‘fit’ and linkage; that is, matching a firm’s strengths and weaknesses to its opportunities and threats. In turn, this led to the adoption of further analytical models, including those attempting to analyze and forecast environmental opportunities and threats (Fahey and Naranayan 1989). Indeed, Porter’s analytical ‘five-forces’ model (Porter 1980) was a classic example of such an ‘organization-environment’ model and framework. Using the industry as the unit of analysis, it analyzes how a firm’s strategy can match, or be constrained by, its industry environment. The ‘five-forces’ model is anchored theoretically in Joe S. Bain’s (Bain 1956) industrial organization economics model, known colloquially as the structure-conduct-performance (SCP) paradigm. As a consequence, the analysis focuses on such industry characteristics as the ‘five forces’ of entry/exit barriers, competitive rivalry, supply, demand and substitution in order to assess the structure and competitive dynamics of the industry competitive landscape from the perspective of the firm. The Porter model and the literature on industry economics, in turn, has spawned a huge stream of literature on competitive strategy (McGee and Thomas 1986, Thomas and Pollock 1999) in order to understand the many puzzles of competitive strategy (for example, Who competes

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with whom? How do they compete and why? What constitute successful competitive strategies?). Some of the research in the analytic planning stream – particularly that grounded in the logical positivist and rational tradition of OR – drew criticism from students of organizational behaviour and strategic decision processes. They observed that strategizing is a political process (for example, Pettigrew 1987) and must involve a thorough understanding of organizational and political processes in its formulation. As a consequence, a range of more ‘organic’ perspectives of strategy were proposed, based on the premise that strategy is, in part, a work of art and not a science, and is not intendedly rational. Rather, it emerges as a pattern in a stream of conscious, managerial decisions (Miles and Snow 1978, Mintzberg 1978), aimed at ensuring organizational adaptation to strategic events. In this sense, it is often associated with a ‘learning by doing’ mode and processes or organizational learning (Lyles 1988, Lyles and Thomas 1988). Quinn’s (1980) set of rich, fine-grained case studies of strategic decision processes is an exemplar study of research on strategizing and organizational processes. It is in the spirit of Chandler’s early work (1962) in the business history tradition, and also builds upon Miles and Snow’s (1978) notion of bounded rationality. In this research, Quinn identifies an incremental strategy process which is step-wise and evolutionary, and characterized by organizational processes of logical incrementalism and well-developed organizational routines (March and Simon 1958). In addition, a number of key writers have also contributed to this view of strategy as an emergent, evolutionary process. Perhaps the most noteworthy is Henry Mintzberg, whose paper ‘Structure of Unstructured Decision Processes’ (Mintzberg et al. 1976) is a modern classic. It identifies the uncertainty inherent in the strategy process and the iterative, feedback nature of organizational decision processes. Another cohort of strategy process researchers led by Andrew Pettigrew (1987) and Joseph Bower’s (1970) descriptive model of the capital budgeting process followed the Chandlerian tradition of processual research and tried to identify patterns of strategy development and organizational learning (for example, Johnson 1987). The method here is to opt for rich, detailed descriptions of process that create insight and develop a range of inductive, interpretive hypotheses that can guide future research.


Nelson and Winter’s (1982) theoretical evolutionary models of strategy build upon these concepts of emergent decision processes and bounded rationality to examine the path dependent and evolutionary nature of strategy processes. They re-framed important theoretical perspectives – particularly March and Simon’s (1958) seminal work – and promoted the importance and role of organizational routines and recipes (also Quinn 1980, Spender 1980) in framing organizational strategy. Cognitive psychologists (for example, Porac and Thomas 1990, Porac and Thomas 2002, Weick 1987) expanded on these concepts and incorporated cognitive perspectives into thinking about strategies. They developed notions of organizational sense-making; of collective strategies and of organizational meaning and learning. These notions were a natural outgrowth of a closer examination of individual and organizational roles in the strategy process. The exemplar study of Porac et al. (1989), quoted in Weick (1995), pointed out how the interplay between individual and organizational cognition plays out in the processes of strategy making in the Scottish knitwear industry. More recent integrative perspectives have identified the firm as a rent seeking mechanism (Barney 1991, Bowman 1974, 1990) and have advanced the resource-based view of the firm (Amit and Schoemaker 1993, Peteraf 1993, Wernerfelt 1984). Following Coase (1937) and Penrose (1958), they have asked what the role of the firm is and what the critical resources to make it grow are. In this viewpoint, strategy is the ability to define and create uniqueness and, as a consequence, it is argued that research should focus on firms (not industries) and their distinctiveness. This is turn, leads to an examination of how to predict success based on those critical resources and characteristics, often called ‘core competences’ (Prahalad and Hamel 1990) and identifying how those core competences may be leveraged effectively in the competitive market place. It is also instructive to note that, as the strategy literature has evolved, there has been an interesting convergence between analytical and process views of strategy. For example, Porter (1996) has moved from his earlier analytic focus to a more balanced view of strategy and the strategy process. He defines the notion of ‘strategy as fit’ as the key construct, and stresses the importance of understanding the roles of the top management team and strategic leadership alongside strategic analysis in the strategy process. Clearly, it is important to stress that induction and deduction both matter in studying strategy – in other words, both strategy content and strategy processes matter in gaining a rich

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understanding of strategic management and the task of strategizing in an organizational context. In summary, therefore, it is clear from this review that shifts in the ideas and emphases of strategic management research are clearly discernible over the last forty years. In the mid-1960s, the Firm was the primary focus of strategic management research, with its strengths and weaknesses as a key element. Moving on to the late 1970s through the early eighties, the Environment and its relationship to the firm was the emphasis, with industry analysis at its center. Later in the 1980s, Industries and Markets and Firm Scope were the dual foci, with the strategy performance relationship as the focus. Throughout the 1990s, Firm Capabilities and Core Competences (Prahalad and Hamel 1990) became the development of central concern and led, more recently, to Knowledge as an emphasis, with its links to the building of capabilities and competitive advantage as the focus (Nonaka 1991, Spender and Grant 1996). All the factors listed above are, of course, given consideration in an analysis of the strategy of the firm. For instance, Robert Hayes (1985) suggested, ‘In short, the logic here is: Do not develop plans and then seek capabilities; instead build capabilities and then encourage the development of plans for exploiting them. Do not try to develop optimal strategies on the assumption of a static environment; instead seek continuous improvement in a dynamic environment.’ Early in the 1990s, Prahalad and Hamel (1990) argued, ‘In the 1990s they [top executives] will be judged on their ability to identify, cultivate, and exploit core competencies that makes growth possible – indeed, they’ll have to rethink the concept of the corporation itself’.

What are the critical academic ideas and influences in strategy research? At this point it is important to take note, not only of the challenges for the field identified by Robert Hayes, Gary Howell and C.K. Prahalad, but also the important theoretical frameworks and ideas that leading researchers have used in their work. Indeed, strategic management research has been characterized by multiple influences: of industrial economics on the study of positioning in industries, of the economics and the sociology of organization on the study of firm resources and capabilities, and of game theory on the study of competitive interactions. Each of these ideas and influences has shaped some of the key


critical debates and dialogues in the field in areas such as competitive positioning, competitive strategy, resource-based views and competence and knowledge development. In the area of positioning, the earliest work was best exemplified by Porter (1980), and by a large number of studies of strategy and its link to performance. This was also a period in which many researchers explored the relationships between various strategies and financial performance or market share (see, for example, Hambrick et al. 1982). In addition, there was the study of economic uncertainty, and guides to action in such settings. Porter and Spence (1982) provided a distinctive, simulationbased, scenario study of capacity expansion in the corn wet-milling industry under conditions of uncertainty of demand, prices, and technology in relation to a product called High-Fructose Cane Syrup – typically used as a sweetener, particularly in the soft-drink industry. Based on assumptions of rational expectations and equilibrium (standard fare in economic analysis), the several companies in this oligopoly and their choices could be approximated based on modelling their competitive characteristics. Several other industry-specific studies have followed, such as Lieberman (1989) on the factors influencing first mover advantages in the specialty chemical industry, and Thomas (1990) in the study of research productivity in the pharmaceutical industry. There was also a lively debate on the existence and predictive value of the concept of strategic groups (McGee and Thomas 1986) – which argues that firms in an industry form groups according to the similarity of their strategies and, normatively speaking, these strategic groups show persistent performance differences. While researchers such as Hatten and Hatten (1987) and Barney and Hoskisson (1990) have questioned the existence and stability of the construct, Tang and Thomas (1992) link theories of strategic choice (Child 1972), spatial competition (Hotelling 1929) and cognitive taxonomy (Porac and Thomas 1990, Weick 1995) to demonstrate that the concept of strategic groups is not an analytical convenience but a valid theoretical construct in its own right. Fiegenbaum and Thomas (1995) further develop the notion of strategic groups as reference groups (or benchmarks) for industry strategy in the insurance industry. On a more behavioural front, Frederickson and Mitchell (1984) investigated the efficacy of comprehensiveness in strategic planning under different conditions of industry turbulence. Their use of scenarios for executive questionnaires was instructive for other researchers. Hirsch’s (1975) comparative study of institutional strategy in the phonographic

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records and pharmaceutical industries showed how important the government and critical gatekeepers can be in the implementation of strategy throughout a whole industry. He argues average profits differ by a factor of three, largely due to the influence of these factors. In the area of capabilities and resources, the early work in strategic management very clearly had an institutionalist flavour, focusing on strategy and the choices of firms. The work of Penrose (1958) was seminal in its treatment of the drivers of corporate growth through the generation and utilization of firm-level resources. Rumelt’s book on the efficacy of diversification used the Fortune 500 companies to show how some kinds of diversification (related) were more effective than others, and how the organization structure of these companies was influenced by these moves. In many ways, Rumelt’s (1974) arguments about the benefits of particular types of diversification (related linked and related constrained) pointed to the development and exploitation of firm-level critical resources that could be used effectively only in a defined range of markets. Later work by Montgomery (1982) showed that industry effects also influenced returns, and not just the resource profile of the firm. A large amount of research, therefore, developed around the area of resources and the scope of the firm, including studies of risk and return (Amit and Livnat 1988, Montgomery and Singh 1984). At about this time, Wernerfelt (1984) wrote the first paper on the resource-based view of the firm from a strategic management perspective. It was strongly based and grounded in the seminal work of Penrose (1958). This paper received substantial interest because it was a crisp articulation of the conditions under which a firm’s resources could be used to generate rents. Rumelt’s (1984) Strategic Theory of the Firm was also framed from a similar resource-based view and advanced concepts such as isolating mechanisms (Lippman and Rumelt 1982) which created uniqueness at the firm level. Indeed, isolating mechanisms at the firm level are analogous to mobility barriers at the strategic group level and entry/exit barriers at the industry level. Later work by Barney (1986, 1991) provided more of a texture on the conditions under which firm resources could generate sustainable rents; for example, that such resources are firm-embedded, rare and inimitable. Subsequent applications to areas such as acquisitions (Barney 1988, Lubatkin, 1987, Seth 1990, Singh and Montgomery 1987) explored how firms could generate rents from significant decisions involving changes in firm scope, and found support for the idea that firms generate value only from unique configurations of rent-generating resources. Teece et al. (1997) came up with the idea of dynamic capabilities, and argued


that core competences and capabilities could not be static and needed reinvestment over time to stay as significant sustainable sources of rents for the firm. More recently, research on the development of firm-level capabilities has evolved into the examination of the processes of knowledge creation and knowledge management within the firm. The early work of Nelson and Winter (1982) and Spender (1989) was already pointing in this direction, through the concept of routines and recipes, which embody systematic, codified knowledge within the firm. Later research, such as Winter (1987), identified the conditions under which knowledge could be a strategic asset. Dierickx and Cool (1989) offered the argument that knowledge can be thought of in terms of stocks and flows. Accumulated stocks of knowledge can be a source of advantage, while flows of knowledge may change the configuration of stocks over time. Kogut and Zander (1993), along with other authors, suggested that knowledge as a source of advantage is path-dependent in nature. A way to continue to generate advantage is not only to allow knowledge to be easily replicable, but also to recombine knowledge in creative ways to pursue new market opportunities. Other theoretical work by Grant (1996) hypothesizes that tacit knowledge is the source of sustained competitive advantage. Further empirical work (Szulanski 1996) identified the role of the firm as an entity in managing the transfer of knowledge among divisions, and found support for the notion of ‘stickiness’, that it was actually very difficult to transfer specialized knowledge within the firm. Later work has further explored the role of knowledge management in developing key firm-level capabilities in many contexts, such as the development of alliance management capability (Kale et al. 2000). Cohen and Levinthal’s (1990) study of the absorptive capacity effects of R&D spending offers a new look at learning in the critical fields of technology as supporting the competence of the firm. The work of Henderson and Cockburn (1994) distinguishes between architectural and component competence of the firm, and stresses the importance of coordination mechanisms in positively influencing research productivity in the pharmaceutical industry. Game theory, despite its avowedly theoretical perspective, has also played a significant role in deepening our understanding of competitive interactions (Camerer 1991, Furrer and Thomas 2000, Saloner 1991). Although competitive interactions have often been at the heart of teaching and practical discussion of strategy, the research in this area has been slow in developing teachable insights. Arguments about competitive interaction were implicit in Porter and Spence’s (1982) modelling

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of strategy decisions under uncertainty in the corn wet-milling industry. Due to the high level of rationality and information processing capability imputed to decision makers in game-theoretic models, many researchers in strategy have been somewhat sceptical of the insights obtainable from this set of tools. However, Camerer (1991) addresses this concern by indicating that game theory can be used to think formally about interdependence of competitive moves in an industry. A careful application of game theoretic thinking can be very helpful in this sense. The work by Ghemawat (1991) on large strategic commitments as sources of competitive advantage is illustrative. Saloner (1991) offers the perspective that rather than using game theoretical modelling for global generalizations, researchers would find it productive to use this technique to solve specific, stylized competitive problems. Additionally, Weigelt and Camerer (1988) have found empirical evidence supporting the idea that even though individual players in a game do not solve for the equilibrium, a collection of players arrives at the theoretically calculated equilibrium through their collective moves. Clearly, there is unexploited potential in the broad area of the study of competitive interaction, through multiple theoretical lenses. In summary, the areas chosen here to reflect continuing debates in the strategy field reflect this author’s continuing interest in competitive strategy, and in processes for managing strategizing processes to leverage new knowledge and dynamic core capabilities. In the final section, some conjectures about directions for future research are developed.

Future research in strategic management Hoskisson et al. (1999) describe research in strategic management as similar to the swinging of a pendulum. It has shifted from a focus on the firm’s internal structure in the 1960s, to industry structure in the 1970s and 1980s, and back to a focus on the firm’s capabilities, knowledge and resources in the 1990s. Indeed, the existing evidence (Furrer et al. 2002) shows six dominant clusters of research in SMJ over the last twenty years; namely: ●

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Strategy in its environment: keywords in this cluster include the concept of strategy as fit; environmental modelling – governmental, social and political influences on strategy; organization – structure, strategy and change, and strategy, mission and vision; Strategy processes and top management: keywords in this cluster include leadership, top management, methodologies, planning, cognitive modelling, and decision making;

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●

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Performance and corporate strategy: keywords in this cluster include corporate strategy, financial theory, corporate restructuring, diversification strategy and performance; Growth and market entry: keywords in this cluster include entry modes and strategic advantage and growth models; Industry and competition: keywords in this cluster include competition and competitive analysis, industry analysis and strategy typologies and strategic groups; The resource-based view of the firm: keywords in this cluster include alliances, joint ventures and cooperation, capabilities, competencies and resources, R&D, technology and innovation, and global, international and multi-national strategies.

Summarizing the findings, the clusters represent six main issues: strategy and its environment, strategy process and top management, performance and corporate strategy, growth and market entry, industry and competition, and the resource-based view of the firm. There is an increase over time in the number of articles concerning capabilities and alliances, and a decrease in those concerning environment and fit. Further, the research agenda evolves towards two poles: financial models and capabilities. This evolution means that, during the last twenty years of SMJ publications, the research topics represented by the keywords are more and more studied through financial models or the resource-based view of the firm (capabilities) lenses, and less and less through the strategy process and environmental view of a firm. In order to provide some conjectures about the future of strategic management research, we should identify some of the main reasons for the evolution in the field over the last twenty years. First and foremost, the field of strategic management has been influenced by other academic disciplines. At least three types of academics contributed to its development (Bowman et al. 2002). In the middle of the 1960s and early 1970s, strategic management was influenced by field researchers who focused on a rich description of the elements of strategy and the strategy process from a top manager’s perspective. In the late 1970s and 1980s, the influence came from economists who focused on the role of industry structure on the strategic management of the firm. The third set of influences came from behavioural scientists who gained increased momentum in the 1980s and the 1990s. While all three types of academic influences co-exist and thrive today, their relative significance and importance has changed over time (Bowman et al. 2002). Another endogenous factor that has influenced the development

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of the field is the evolution of the methodologies used by researchers. Hoskisson et al. (1999) recognized that ‘although normative, inductive case-based studies had dominated the early history of strategic management positivistic, deductive empirical research became dominant during [the early 1970s]. Therefore, concern with explanation and prediction, rather than prescription, was strongly advocated by strategy scholars with the aim to elevate the field to a more rigorous, “scientific” academic discipline’ (p. 413). More recently, the use of sophisticated research methods such as structural equation modelling has started to increase dramatically. On the other hand, exogenous factors may also have influenced the evolution of research in strategic management. Bowman et al. (2002) noticed a parallel evolution between strategic thinking and the nature of the environmental challenges faced by senior managers over time. They showed that the 1960s, the continuation of a strong economy during the period of post World War II recovery, paralleled the evolution of the form of the modern business enterprise, the development of the conglomerate organizational form and the view of the firm as mini-capital market. The 1970s were characterized by a combination of stagnation and inflation that influenced the development of portfolio management approaches. In the 1980s, the increased foreign competition and globalization of markets pushed research towards internationalization strategies as well as financially driven strategies. During the 1990s, rapid and discontinuous economic and political changes in the international environment suggested that academic research should deal with multinational alliances, corporate ventures, technology changes, and continuing restructuring (Bowman et al. 2002). Changes in the practice of management from financial planning in the 1950s and earlier, to long-range planning in the 1960s, then to strategic planning in 1970s, and finally to strategic management in the 1980s and onwards, also influenced research in strategy (Bowman et al. 2002). As we take environmental influences into account, we can foresee that there will be no long stable periods in which firms can achieve sustainable competitive advantages. Instead, the hyper-competitive context (D’Aveni 1994) will allow only short periods of advantage making the rethinking of strategy more or less continuous. As a consequence, these conditions call for new approaches able to capture the new dynamism in the field of strategic management. Thus, the resource-based theory of the firm needs to move from a static view of existing stocks of resources, towards an appreciation of innovation and renewal implied by ‘dynamic capabilities’.


Developments in this direction can benefit from greater crossfertilization of the field with other disciplines. Barney (1992) has argued that the rise of the resource-based theory of the firm offered new opportunities to bring more organizational theory into the strategy domain to help disentangle the origins and development of socially complex competitive resources such as trust, change and choice, capability and creativity. Thus, we can already observe a narrowing of the dichotomy between economic and behavioural science approaches to strategy, with thinking in economic terms being enriched by the identification of complementary behavioural questions and issues. Over the twenty or so years of publication in S.M.J., we can begin to identify the integration between the different academic influences on the field of strategic management and we will probably see a strengthening of this integrative trend over the next decade. As for the future evolution of the methodologies used by strategy researchers, Hitt et al. (1998) observe the movement away from industrial organization work and its derivatives, which incorporated the econometric analysis of surveys and databases, to a return to smaller sample in-depth studies of strategizing and strategy processes. This switches the focus of interest towards the particularities and idiosyncrasies involved in resource acquisition and knowledge development processes at the level of the individual firm. These developments bring opportunities for researchers to reverse the picture present before the rise of resource-and knowledge-based views, many times characterized as a period of little experimentation in theory and method (Schwenk and Dalton 1991). Indeed, it seems sensible to forecast both increased sophistication of quantitative methodologies and considerable use of longitudinal qualitative analysis in the field. If this prediction is true, the field should reach a new level of research maturity in which research results from different studies can be evaluated and, if necessary, re-examined to ensure thorough accumulation of knowledge and findings from a range of studies. In time, therefore, key theories and ‘lawlike’ relationships will emerge from cutting-edge research and help guide strategic thinking and practice at the firm and organizational level.

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Index Abell, D.F. 233 Ackoff, R.L. 292 Adler, P. 24 advantage-generating resources, capabilities 102–3; concept 101–2; intangible 102, 104; and intellectual capital 104; internally identified 104; international strategy 106; and sustainable competitive advantage 103; tangible 102; and VRIS framework 103–4 Agrell, A. 271–2 Ahuja, G. 157 Alonso, J.A. 113 Amey, L.R. 228 Amine, L. 112 Amit, R. 157 Andersen, H. 141 Anderson, N.R. 269, 270 Ansoff, H.I. 233, 292 Avolio, B.J. 268, 272, 273–5, 281–2 Bain, J.S. 64, 292 Bain, P.G. 271 Baker, W. 21 Baldwin, W.L. 240 Barley, S. 208 Barney, J.B. 58, 59, 61, 63, 64, 65, 103, 234, 296, 297 barriers to exit 207 Barron, D.N. 215 Bass, B.M. 268, 273–5 Batt, R. 179 Baum, J.A.C. 71, 206 Berlew, D.E. 272–3 Bettis, R.A. 238, 289 Bharadwaj, S. 99 Bilkey, W.J. 111, 112 Black, J.A. 84 Boal, K.B. 84 Boeker, W. 205, 210 Bogner, W.C. 83, 85, 90, 214 Boisot, M. 89 Bower, J. 293 Bowman, E.H. 290 Boyd, B.K. 133 Brittain, J.W. 210

Bruce, R.A. 270 Bryman, A. 145 Burgoyne, J.G. 215 Burrell, G. 215 business environment Butler, J.E. 83, 84 Butler, R. 139

4–5

Camerer, C. 299 capabilities, concept 102–3; link with marketing 104–5; managerial 16–18, 20–1; organizational 147; strategic 295, 297, 298 Cappelli, P. 172 Cardinal, L.B. 156 Carroll, G.R. 206 CATWOE analysis 190–1, 193 Caves, R.E. 64 Champy, J. 169 Chandler, A.D. 228, 229, 293 change management 6; approaches 186; background 185; context 185–6; and customer value 199; data analysis 192–5; and definition of organization 200; findings 199–201; key questions 187; organizational structure 187–8; people, organization, culture, technology interrelationship 200, 201; problems 186–7; rationale for research approach 188–9; research design 189–90; and role of management 188; soft systems methodology 190–1, 192–5; systems thinking analysis 195–8 Chatterjee, S. 228, 235, 238 Chen, R. 229 civil society, and globalization 35–6, 40–4; and managing external stakeholders 48–51; and MNEs 47–8; NGO perspective 36; political economy of 44–6; and second best arrangements 36–7; and WTO 38–40 Coase, E.H. 294

309

310 Index Coates, D. 84 Cockburn, I. 298 Cockburn, I.M. 22 cognitive approaches 211; heterogeneity/social aspects of developing shared perceptions 211–13; objective 214; similarity/inertia 211; and strategic management 294 Cohen, W.M. 229 Colamosca, A. 166 Coleman, J.S. 22 Cologne G7 Summit (1999) 40 Commission on Environmental Cooperation (CEC) 44 competence 82; application 83–5, 94–5; case studies 85–8; context 91, 94–5; definitions 83, 84, 96; delineation of construct 90–2; domain model 90; embedded attributes 91–2, 95, 96; empirical basis 85–8; enabling mechanisms 91; explanation of rigidity problem 92–4; firm-level 5; identifying/managing 84–5; limitations/difficulties 84, 85; observable events 90; observed character of 88–90; and observed outcomes of value generation 89; persistence over time 88–9; realizable 90–1 competition, changing environment 1; success/failure 1–2 competitive advantage, achieving 5; cooperation with others 5; explanations for 2–3; and globalization 5; and isolating mechanisms/barriers to imitation 64–5; maintaining 2; and managerial understanding of relatedness 234; resourced-based theory 58–9, 63–6, 76; spreading the risk 5; and strategic alliances 17; and superior performance 224; sustainable 7, 101; and value-creating strategies 64 Cool, K. 58, 59, 61, 63, 64, 65, 298 Cooper, R.G. 112 Coulter, M. 1 customer knowledge 198, 199 Danford, A. 173 D’Aveni, R. 1 Davis, R. 229

De Vaus, D.A. 145 Delacroix, J. 205 Dess, G.G. 233 Dierickx, I. 58–9, 61, 64–5, 298 diversification-capability 224 diversification/technological resources interaction, analysis of 230–3; background 223–6; circular nature of 239–40; corporate coherence 231–2; demand view 233–4; diversification influence 229–30; dynamic proposition 226, 232–3; hypotheses concerning 227–8; influences 226–7; pattern of diversification 232; and performance 234–9; proposed model for 239–40; purposive diversification 232; technological base 231; technological diversification 231; technology influence 228–9 Doha (2001) 36 Donoso, V. 113 downsizing, continual/repeated 174; as dominant feature 165–6; industry level 166; organizational level 166; physical limits 169; research questions 166–7; shift in nature of 168; terminology/ discourse 167–8; typology 173; welfare capitalist approach 166 downsizing/delayering (DS/DL) model 168–9; assumptions 170–2; and centralization of management 170; comparison with Taylorism 171, 177; diffusion 172, 180; key elements 169–72; linking of concept 169–70; power-shifting/ centralization of decision-making 178–9; redundancy 175; relative permanence 173–4; and reversability 174; scope of effects 174–6; and teams as heroes 170, 177–8; workload impact on managers/professionals 176–7 Duhaime, I.M. 234 Dunlap, A. 167 Dyer, W.G. 85 ecological theory 204–7; and economic theory 207–8; multi-disciplinary approach 214–15; and resource dependencies 210–11, 213

Index economic rents 294, 297–8; background 59–60; and resource heterogeneity/immobility 60; and strategic factor markets 60–2 economic theory 207–8 Eisenhardt, K. 208 Ekvall, G. 270 environmental carrying capacity 206–7 experiential learning, and competitive advantage 69–70; concept 68–9; and corporate development activities 69; effectiveness of 70; positive effects 69; and VRIS 70 export performance, background 98–100; control variables 114; discussion concerning 123–4; entry strategy 113; firm dimension 114; foreign promotion 113; hypotheses 106; indicators of performance 115, 124; intangible resources 107–11, 123–4, 125–6; lack of model for 99; marketing strategy 111–13; organizational capabilities/marketing link 104–5; prices 112–13; product class 114, 124; product scope/policy 111–13; RBV model 105–24; research methodology 106–16; results of research 116–22; sampling issues/general description of database 106–7; statistical procedures 116; use of RBV framework 99–100 exports 6 Fahy, J. 101, 103 Falkenberg, J. 226 Farjoun, M. 238 Farr, J.L. 269 Fenwick, I. 112 Filer, L. 2 foreign direct investment (FDI) 39, 45 Frederickson, J.W. 208, 296 free trade 39 free trade area of the Americas (FTAA) 48 Freeman, J. 205, 206, 208 Friesen, B. 138

36,

311

G7 summits 40, 41 Gallon, M.R. 84 game theory 298–9 General Agreement on Tariffs and Trade (GATT) 37, 45 Genoa G7 Summit (2001) 41, 43 Geroski, P.A. 207, 215 Ghemawat, P. 299 Ghobadian, A. 133 Ghoshal, S. 21–2, 24 Giddens, A. 35 globalization 5, 196; and anti-global mobilizers 40–4; and civil society 40–4; diverging perspectives 44–6; mis-perception of 40; and shaping of public opinion 45–6 Godfrey, P.C. 84, 85 Goold, M. 151 Gort, M. 228 grafting, advantages of 72; and alliances 73, 75; an knowledge 73, 74; and competitive advantage 74; concept 72; and contact learning distinction 72–3; and hiring 73, 74, 75; and learning through acquisition 75; and technological capability 74; VRIS framework 75–6 Graham, E.M. 43 Granstrand, O. 235 Grant, R.M. 103, 298 Gray, J. 35 Greening, D.W. 1 Greenpeace 42, 50 Gulati, R. 28 Gustafson, R. 271–2 Hambrick, D.C. 296 Hamel, G. 74, 83, 295 Hammer, M. 169 Hannan, M.T. 205, 206 Hansen, G.S. 236, 238 Hariharan, S. 228 Harrison, J.S. 4 Hart, P.M. 278 Hatten, K.J. 296 Hatten, M.L. 296 Hayes, R. 295 Henderson, R. 298 Henderson, R.M. 22 Hill, C.W.L. 84, 85, 140, 236, 238 Hirsch, P.M. 296 Hiscocks, P.G. 84 Hitt, M.A. 19–20, 238, 302

312 Index Hoskisson, R.E. 236, 238, 296, 299, 301 House, R.J. 273 Howell, G. 295 Howell, J.M. 272, 281–2 Huber, G.P. 67, 72 Huff, A.S. 214 human resources (HR), 1990s as transformation decade 165–7; data analysis 167, 180–1; DS/DL model 168–76; lessons of 1990s 179–80; and power-shifting 178–9; shifts in strategic assumptions 167–8; teams as heroes 177–8; transformation literature 166; work intensification for managers/ professionals 176–7 hyperarchies 200, 201 hypercompetition 1 Iaquinto, A.L. 208 industry organization (IO) theory 204–8 inertia, background 203–4; bridging ecological/economic theories 207–8; cognitive approaches 211–13; density dependence 206; disciplinary approaches 215; ecological/institutional theories 204–8; environmental carrying capacity/barriers to exit 206–7; industry organization theory 204–8; initial/prevailing productmarket strategy/performance 209; intra-organizational research 208–11; liability of newness 205; multi-disciplinary approach 213–16; resource dependencies 210–11; social/political pressures 214; structural 205; top team/strategic decision-making processes 208–9 information technology (IT) 196–7 Ingram, P. 71 innovation 6–7, 89 innovation compass 251; background 251–3; Bearings 264, 266; and benchmarking performance 252, 265, 266; case studies 256–7; concept 254–6; context 262, 265; leadership 258–9, 265–6; output 259–60; quantitative/ qualitative approach 253–4, 265–6; research findings 257–65;

structure 257–8; teams 260–1, 266; Ultra 263, 265–6; and understanding NPD 265–6 intangible resources 6; and export capabilities 107–11, 123–4, 125–6; HOMALS analysis 108–9, 116–22; human capital 111, 123–4; organizational capital 109–10; relational capital 110; technological capital 107, 109, 123 intellectual capital 102, 104 International Civil Society (ICS) 42 International Monetary Fund (IMF) 41, 42 International Political Economy (IPE) 45 Itami, H. 226, 229, 230 Jacoby, S.M. 166 Johnson, R.A. 1 Jones, G.R. 140 Jose, M.L. 238 Jovanovic, B. 229 Kale, P. 22, 70 Kaplan, R.S. 149–50 Kargar, D.W. 133 Kargar, J. 140, 141, 142, 143, 146, 151, 157 Kesler, M. 84 Kim, W.C. 2, 5 Kirpalani, V.H. 112, 113 Klein, J.A. 84 Kleinschmidt, E.J. 112 Kline, P. 142 knowledge, creation/management 298; and grafting 73, 74; tacit/explicit 27 Kogut, B. 298 Kor, Y. 225 Kwon, S.W. 24 Kyoto Summit (1997) 44 Lambert, C.M. 143, 157 leadership, laissez-faire 273; management by exception 273; supportive 282; transactional 273; transformational 273–5, 276, 281–2 leadership/innovation connection 268–9; climate for 270; correlational analysis 279–80; discussion 281–2; and group level agreement 278; group

Index leadership/innovation connection – continued theory 269, 270–2; influences 272; and integrating active/ passive styles 273–5; measuring group innovation 269–70; methodology 277–8; and organizational excitement 272–3; positive influences 281–2; regression analysis 280–1; research hypotheses 277; summary of research on 275–7; support for predictions 281–2 Leonard-Barton, D. 92 Lieberman, M.B. 296 Liebeskind, J.P. 22 Link, A.L. 229 Lippman, S.A. 64 Littler, C.R. 180 Long, J.E. 229 Louter, P.J. 112 Luffman, G.A. 228 Luo, Y. 141, 142 Luttwak, E. 166 Lyles, M.A. 137 Mahajan, V. 238 Mahoney, J.T. 225, 240 Malekzadeh, A. 112 March, J.G. 294 Marchington, M. 166, 179 market uncertainties 13–14 marketing, export strategy 111–13; link with organizational capabilities 104–5 Markides, C. 229, 234 Martin, X. 75 Mauborgne, R. 2, 5 Mayer, R.C. 23 McConnell, J.J. 25 McDougall, F.M. 238 McIntosh, N.B. 112, 113 McNamara, G. 2 mechanistic organization 200 mental models see cognitive approaches Merino, F. 228 Miles, R.E. 293 Miller, A. 237 Miller, C.C. 156 Mills, D.Q. 138 Mintzberg, H. 293 Mitchell, T.R. 296 Mitchell, W. 25

313

MMT case 43 Moger, S. 255 Montgomery, C.A. 228, 235, 297 Morgan, G. 215 most-favoured nation (MFN) 37 Mowery, D. 229 Mueller, C.B. 150 Multifactorial Leadership Questionnaire (MLQ) 274–5 multilateral agreement on investment (MAI) 36, 43, 44, 46 multinational enterprises (MNEs) 5, 35; and civil society 47–8; and external stakeholders 48–51; failure of academic theory 45, 46; and focus on nation state 45; perception of WTO 38–40; theory of 47–8 Naffziger, D.W. 150 Nahapiet, J. 21–2, 24 Nair, A. 2 Nantell, T.J. 25 Nahavandi, A. 112 Nelson, R.R. 294, 298 new product development (NPD) 6; case studies 256–67; changes in 252; and innovation compass 252–66; models 251–2; Stage Gate model 252, 265; and Technical Innovation Audit 252 Noke, H. 255 non-governmental organizations (NGOs) 5, 35; criticism of globalization 42; effective working relationships 48–9; environmental 42–3; mobilizers 40–2, 43, 51; moderate 41; perception of WTO 38–40; technical 42, 43–4, 51 Nonaka, I. 252 North American Free Trade Agreement (NAFTA) 43, 44, 48 Norton, D.P. 149–50 Numagami, T. 226, 229, 230 Nunnally, J. 142 Oliver, C. 206 O’Regan, N. 133 organizational change see change management; downsizing; inertia organizational learning 5, 59, 66, 213–14; benefits 67–8; definition 67; experiential 68–70; grafting 72–6;

314 Index organizational learning – continued interest in 67–8; nexus of concept 67; types of 68; vicarious 71–2 Oskarsson, C. 235 Osterman, P. 179 Ostroff, F. 169 Palich, L.E. 237 Pandian, J.R. 240 Park, N.K. 75 Park, S.H. 141, 142 Parnell, J.A. 140, 141, 142, 146, 151, 157 partner selection, compatibility aspect 19; critical importance of 18–19; institutional environment 19–20; search/negotiation process 19; small/big advantage 19 Pascoe, G. 229 Penrose, E.T. 60, 100, 228, 236, 240, 294 People for Global Action (PGA) 41, 42 Peppard, J. 3 performance 6, 14, 234–5; and corporate diversification 236–7; corporate diversification/ technological resources combination 237–9; and technological resources 235–6 Peteraf, M.A. 63 Pettigrew, A. 137, 290, 293 Pfeffer, J. 210, 214 Piercy, N. 112 Pisano, G. 235 Pitts, R.A. 228 Pollock, T. 290, 293 population ecology 205–6, 215 Porac, J.F. 294 Porter, M.E. 64, 207, 228, 289, 294, 296, 298–9 Poulton, B.C. 271 Powell, W.W. 25 Prahalad, C.K. 83, 289, 295 Priem, R.L. 83, 84 product-market strategy/performance 209 Quality of Working Life Surveys 174–5 Quebec City Free Trade of the Americas Summit (2001) 41 Quinn, J.B. 293

Radnor, Z.J. 254, 255 Ramanujam, V. 133, 143, 236 Reclaim the Streets (RTS) 41 Reed, R. 228 resource dependencies 210–11, 213 resource-based view (RBV), application 82; background 57–9; building/acquiring distinction 5, 58, 62–3; comparison of approaches 58–9; and competence 83; and competitive advantage 58–9, 63–6, 76; concept 100–1; definition 17; and diversification 224, 227–8; dynamic perspective 224–6; economic rents 59–63; export model 105–24; and firm performance 101; and organizational learning 59, 66–77; and resource acquisition 60; resource/capability distinction 101–2; and role of strategic choices 104–5; and strategy 300, 301–2; and sustainable competitive advantage 101; tangible/intangible 13, 102; as tautological 225; types/characteristics of advantage-generating resources 101–4; usefulness/implications of approaches 58 Reuer, J.J. 15 Reuning-Elliott, E. 133 Rickards, T. 255 Rio Earth Summit (1993) 44 Rodríguez, D.R. 228 Round, D.K. 238 Rugman, A.M. 35, 41, 43, 50 Rumelt, R.P. 60, 64, 235, 297 Ryan, C. 145 Salancik, G. 210, 214 Saloner, G. 299 Sayer, A. 90 Scarbrough, H. 179 Schendel, D. 240 Schoonhaven, C. 208 Schwenk, C. 207 Scott, J.T. 229, 240 Scott, S.G. 270 Seattle (1999) 40, 41, 42, 46, 51 Sennett, R. 166 Shamsie, J. 2

Index Shanley, M.T. 75 Simon, H.A. 294 Singh, H. 70, 75 Singh, J.V. 206 Singh, K. 25 skill acquisition 19 SLOT (structure, leadership, output, teams) see innovation compass Smith, C. 210 Smith, D. 169 Snow, C.C. 133, 293 social capital, concept 21; definitions 21; dimensions 21–2; information sharing 22–3; norms of reciprocity 24–5; and trust 23–4 soft systems methodology, appropriateness of 189–90; CATWOE analysis 190–1, 193; conceptual model 193; define changes 194; define problem situation 192; real world/possible world comparison 189; Rich picture 193; root definition 193; tabular display 194; take action 194–5 Sparrow, P. 166, 179 Specht, P.H. 210 Spender, J.C. 298 Srivastava, R.K. 99 Steiner, G.A. 141 Stimpert, J.L. 234 Stoeberl, P.A. 205 Strange, S. 45 strategic alliances, benefits from 14; and competitive advantage 17; concept 13–14; developing/ managing as critical managerial capability 16–18; effective 15; failure 14–15, 28; future research 29; model for 15–16, 28–9; motivations for 14; partner selection 18–20; as preferred option to acquisition 14–15; resource configuration, optimization, exploitation 20–1; resourced-based view 17; scope definition 18; and social capital 21–5; and value creation 25–8 strategic management, academic literature 290–5; alternative models 291; analytic/process convergence 294–5; cognitive perspectives 294; and competitive interactions 298–9; core competencies 295,

315

298; critical ideas/influences 295–9; diversity/growth patterns 291–2; and efficacy of planning comprehensiveness 296–7; as emergent/evolutionary process 293–4; and environment 295, 299, 301; firm capabilities/ resources 295, 297, 298; firm as primary focus 295, 297; five forces model 292–3; future research 299–302; and game theory 298–9; and growth/ market entry 300; incremental process 293; industries, markets, firm scope 295; and industry/ competition 300; influences on 300–2; and integration/ organizational fit 291; and knowledge creation/management 298; methodology 289; organic perspectives 293; and performance/corporate strategy 300; planning/ends-means viewpoints 292; and positioning 296; practice 289; quantitative/ qualitaive analyses 302; rent-seeking mechanisms 294, 297–8; resourced-based view of firm 300, 301–2; smaller sample indepth studies of 302; and strategic groups 296; theory 289–90; and top management 299; and uncertainty 299 strategy, analysis of attributes 146–51; analysis of research 133, 134–6; background 132; company response 144–6; customer orientation 147, 151, 157; data-collection methodology 141–3; dealing with increasing complexity 3–5; decision-making process 208–9; discussion 151–2; dynamic perspective 225–6; effect of change on 197–8; external environment 138, 156–7; focus on control 140, 151; functional integration 139, 151; industrial organization perspective 2–3; internal environment 138–9, 146, 156–7; learning/growth attributes 147, 157; operating environment 152–6; operationalizing planning process 138–41; organizational

316 Index strategy, analysis of attributes – continued capability 147; organizational effectiveness 147; performance measures 133, 137–8, 140–1; positive influence 156–7; product 209; product/technology link 157; resources 3, 5–6, 139, 146–7; systems capability/creativity 139, 151; use of analytical techniques 139 Swaminathan, A. 205 systems thinking analysis, and awareness of mindset 198; fatalistic view 198; and fear of future 198; and formal strategic planning 197; and globalization 196; and information technology 196, 197; and management/ leadership difference 198; and managing/motivating shift 198; market driven organizations 197; and organizational structure 196; and positive view of future 198; process/function shift 197; subjective 195–6; and use of modern management aids 197–8 Takeuchi, H. 252 Tang, M.-J.E. 207, 296 Taylorism 165, 171, 177, 178 technological, change 6; uncertainties 13–14 technological resources see diversification/technological resources interaction Teece, D.J. 83, 85, 297 Thomas, H. 85, 214, 290, 293, 296 Thomas, J.B. 133 Thomas, L.G. 229, 296 top teams 208–9 transaction costs 13, 16 transformational leadership, attributed charisma 274; idealized influence 273; individualized consideration 274; and innovation 276–7; inspirational motivation 274; intellectual stimulation 274; and positive team climate 281–2 triad economies 35, 36, 40, 51 Uruguay Round Agreement (1994) 38 value creation 16–17, 19; build/enhance resources/ capabilities 26; concept 25;

enlarge strategic network 27–8; facilitate learning 26–7 van Witteloostuijn, A. 207 Varadarajan, P. 236 Venkatraman, N. 133, 143 Verbeke, A. 50 vicarious learning 71–2 VRIS (value, rareness, inimitability, substitutability) framework 64–5, 76–7, 103–4; and experiential learning 70; and grafting 75–6; and vicarious learning 71–2 Wagar, T.H. 172 Wallulis, J. 166 Walsh, J.P. 214 Weick, K.E. 211, 294 Weigelt, K. 299 Wernerfelt, B. 60, 228, 235, 238 West, M.A. 268, 269, 270, 271, 281 Whipp, R. 137 Wholey, D.R. 210 Wilkins, A.L. 85 Williamson, P.J. 229, 234 Winter, S.G. 294, 298 Winterscheid, B.C. 89 Wolman, W. 166 Woolcock, M. 22 workforce reduction see downsizing Workplace Industrial Relations Survey (1998) 174 World Bank 41, 42 World Trade Organization (WTO) 35, 51; and anti-dumping/ countervailing duty actions 37–8; as arbitrator 38; contrasting perspectives 37–40; demonization of 38; infringement of rules 37–8; lack of political power 37; and multilateral trade/investment agreements 46; re-positioning of 38–40; role of 37, 38; strengthening of 48; as understaffed/overworked technical bureaucracy 37; and US commitment 46 Yaprak, A.

113

Zammuto, R.F. 210 Zander, U. 298 Zollo, M. 70, 75 Zott, C. 157

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