Exploring Performance Differentials via Resource Possession and Firm Capabilities

Page 1 of 12 ANZAM 2009 Exploring Performance Differentials via Resource Possession and Firm Capabilities Liem Viet Ngo*, The University of Newcastle, liem.ngo@newcastle.edu.au Aron O Cass, The University of Newcastle, aron.ocass@newcastle.edu.au

ANZAM 2009 Page 2 of 12 Exploring Performance Differentials via Resource Possession and Firm Capabilities ABSTRACT This paper focuses on resource possession and capability building. We argue that possession of valuable resources (resource-possession) does not explain economic rent differentials between firms. Instead, the effect resource-possession has on economic rent depends on what firms do with their resources (capability-building). Importantly, the business orientation the firm pursues influences what resources are to be possessed, and what it does with resources. This argument was tested by examining the relationships between marketing orientation, marketing resource possession, marketing capability, and marketing effectiveness. We show firms which are marketing-oriented place emphasis on possessing marketing-related resources and building marketing-based capabilities. The findings also show that superior possession of marketing resources does not ensure superior marketplace performance, but marketing capability significantly influences this relationship. Keywords: resource possession, capability building, business processes, business orientation INTRODUCTION Over the past 20 years, the resource-based view (RBV) on explaining economic rent differentials between firms has been a central focus of scholars across various disciplines. RBV proponents contend that resources and capabilities are the key drivers of economic rent (Barney, 1991; Barney, Wright, & Ketchen, 2001; Coff, 1999; Hart, 1995; Makadok, 2001; Peteraf, 1993; Wernerfelt, 1984). In essence, one of the most important issues of the resource-based logic is the nature of the interaction between resources and capabilities in rent-creation process (Makadok, 2001). On the one hand, economic rent can be generated on the resource-picking advantage where superior resource-picking skill enables firms to not only acquire good resources but also avoid acquiring bad resources (Barney, 1986; Makadok, 2001; Makadok & Barney, 2001). On the other hand, capability-building advantage enables firms to outperform competitors in deploying possessed resources toward rent-creation (Amit & Schoemaker, 1993; Makadok, 2001). While the extant literature places much focus on the investment phase of resources with resource-picking (Makadok, 2001) or the entrepreneurial phase of resources with resourcediscovering (Foss & Ishikawa, 2007), what missing is the interaction between resource-possession (the acquisition phase of resources) and capability-building in rent creation. Indeed, capabilitybuilding affects economic rent only after the acquisition of resources (Makadok, 2001), which are static and of no value to the firm in isolation (Eisenhardt & Martin, 2000). As such, resourcepossession and capability-building can not be isolated in rent-creation process. While resourcepicking and capability-building are substitutes for each other in most cases (Hitt, Hoskisson, &

Page 3 of 12 ANZAM 2009 1 Ireland, 1990; Hitt et al., 1991; Makadok, 2001), we see resource-possession and capability-building are complementary for each other in creating economic rent. Our study addresses the above gap in the RBV literature, which places much focus on the direct effect of resources on economic rent (see Barney & Arikan, 2001, Newbert, 2007; Armstrong & Shimizu, 2007). In particular, we propose an alternative way of testing the resource-based logic as shown in Figure 1, in which we argue that possession of valuable resources (resource-possession) does not explain economic rent differentials between firms. Instead, the effect resource-possession has on economic rent depends on what firms do with their resources (capability-building). In addition, business orientations firms are pursuing (e.g. marketing orientation) influences what resources to be possessed (e.g. marketing resources possession) and what firms do with possessed resources (e.g. marketing capability). Importantly, we argue that the applicability of the resource-capability logic is context specific and it should be tested at micro levels within the firm. The disaggregation view of measuring capabilities and firm performance indicates that as capabilities reside at the operational level, aggregate firm-level measures are likely to mask much of the variance within firms (see Ray, Barney, & Muhanna, 2004; Ethiraj et al., 2005). As such, we test the proposed resource-capability logic model at the business process level and in the context of marketing processes using marketing orientation, marketing resources possession, marketing capability, and marketing effectiveness as disaggregated, context specific measures (see Figure 1). Figure 1: The Resource-Capability Theory and Its Application The Core Constructs of the Resource-Capability Theory of the Firm Business Orientation Resource Possession Economic Rent Resources are skills and knowledge possessed by the firm Economic rent represents the effectiveness of business processes Business orientations reflects the firm s philosophy of doing business via a set of beliefs that guides the firm s attempt to create economic rent Capability Building Capabilities are business processes that apply resources to create value Business orientations may include marketing orientation innovation orientation production orientation selling orientation Resources are characterized as static operand (produce no effect) people dependent transferable Capabilities are characterized as dynamic operant (produce effect on operand resources) embedded in business processes (process dependent) built up on resources Economic rent measures consist of marketing effectiveness innovation effectiveness production effectiveness selling effectiveness 1

ANZAM 2009 Page 4 of 12 2 Business Orientation, Resource-Possession, and Capability-Building Business orientations reflect the firm s philosophy of doing business through a deeply rooted set of beliefs that guides the firm s attempt to create economic rent (Noble, Sinha & Kumar, 2002; Peterson, 1989; Zhou, Yim, & Tse, 2005). For example, a firm may follow a marketing orientation as a way of doing business, based on the belief that planning and executing the marketing mix is of paramount importance in creating customers and satisfying them (Borden, 1984; Drucker, 1954). Another alternative, an innovation orientation is based on the belief of willingness to change that encourages and fosters the adoption of new ideas throughout the firm (Hurley & Hult, 1998). Production orientation focuses predominantly on the production efficiencies to deliver offerings at attractive prices, while selling orientation emphasises short-term sales maximization (Noble, Sinha, & Kumar, 2002). The RBV literature signifies that the creation of resources and capabilities are fundamental to business strategy development (Srivastava, Fahey, & Christensen, 2001). A business orientation provides a context that defines the resources to be used, transcends capabilities, and unifies resources and capabilities into a cohesive whole (Barney, 1997; Day, 1994; Zhou, Yim, & Tse, 2005). Specific resources and capabilities should be driven by selected business orientation because knowing which resources and capabilities necessary for implementing strategies is a managerial concern (Foss, 1997). We offer the following hypotheses: Hypothesis 1: Marketing orientation positively influences marketing resource possession Hypothesis 2: Marketing orientation positively influences marketing capability Resource-Possession, Capability-Building, and Economic Rent The traditional RBV indicates that sustained economic rent differences are the result of heterogeneity in resources (possession of resources) across firms (Barney, Wright, & Ketchen, 2001; Peteraf & Barney, 2003). However, this traditional logic produces equivocal results (see Barney & Arikan, 2001, Newbert, 2007; Amstrong & Shimuzu, 2007). This may be due to the lack of the action 2

Page 5 of 12 ANZAM 2009 3 component (what firms do with their resources) that the resource-based work has not fully explored where and how those actions matter (Barney, 2001; Holcomb, Holmes, & Connelly, 2008; Ketchen, Hult, & Slater, 2007). We further argue that resource-capability complementary is a distinctive feature of the resource-based logic that helps explain economic rent differentials. On the one hand, resources are skills and knowledge possessed by the firm. They are characterized as static, operand (produce no effect), people dependent, and transferable. On the other hand, capabilities are business processes that apply resources to create value. They are characterized as dynamic, operant (produce effect on operand resources), embedded in business processes (process dependent), and built up on resources. Possessing valuable resources is not sufficient in generating economic rent. Instead, business processes are essential as they facilitate the manipulation of resources into the rent creation process (Ray, Barney, & Muhanna, 2004; Eisenhardt & Martin, 2000; Teece, Pisano, & Shuen, 1997; Helfat, 2000; Wiklund & Shepherd, 2003). Thus, we hypothesize that Hypothesis 3: Marketing resource possession itself has no effect on marketing effectiveness; instead the effect is taken place with the existence of marketing capability. METHODS A sample of 1000 firms was selected from the IncNet Business Database, Australia. We used a selfadministrated questionnaire as the primary means for data collection, followed the procedure adopted by Ray, Barney, and Muhanna (2004). Senior marketing managers were key respondents because of their specific knowledge and expertise of how their marketing resources and capabilities are being managed. We received 301 useable surveys, producing a response rate of 30 percent. We followed the scale development and testing procedures suggested by Hinkin (1995) and adopted by Ray, Barney, and Muhanna (2004). We used literature in RBV and strategic marketing (e.g. Amit & Schoemaker, 1993; Borden, 1984; Chaudhuri & Holbrook, 2001; Makadok, 2001; Noble, Sinha, & Kumar, 2002; Ray, Barney, & Muhanna, 2004; Vorhie, Harker, & Rao, 1999) as a guide to generate the item pool and for refining the scales. To examine face validity, we provided six senior academic experts in the area of RBV and strategic marketing with the conceptual definitions of 3

ANZAM 2009 Page 6 of 12 4 the constructs, corresponding items, and a set of instructions for judging. We then pretested the draft survey with five senior executives in marketing and management positions. Executives were asked to complete the draft survey and discuss the items of the survey for comprehension, logic, and relevance. Specifically, they were asked whether they could think of more than one way to interpret what each item was asking and to report these interpretations. They were also asked to explain why they responded the way they did on each item. We measured marketing orientation using six items. The respondents indicated the extent to which they agreed or disagreed with the six statements about being marketing-oriented, with 1 indicating strongly disagree and 7 strongly agree. Cronbach s alpha for this scale was.92. We measured marketing resource possession using four items. The respondents indicated the extent to which they agreed or disagreed with the four statements about the availability of knowledge and skills necessary for the engagement of marketing mix activities, with 1 indicating strongly disagree and 7 strongly agree. Cronbach s alpha for this scale was.97. We measured marketing capability using four items. The respondents indicated the extent to which their firms applied possessed knowledge and skills to implement marketing mix activities. We used a 7-point scale ranging from 1, not at all, to 7, extensively. Cronbach s alpha for this scale was.98. We measured marketing effectiveness using four items. The respondents rated the effectiveness of marketing mix activities (e.g. sales, market share, profitability, and overall performance) relative to their major competitors. The response set for these items was a 7-point scale ranging from 1, very poor, to 7, very good. The Cronbach s alpha was.91. RESULTS We used PLS for the estimation of outer-measurement models. All indicators in the outermeasurement models had acceptable bootstrap critical ratios (> 1.96) with loadings (0.77 to 0.96) greater than the recommended 0.5 (Hulland, 1999). AVEs for all constructs were uniformly acceptable ranging from 0.67 to 0.91 as outlined in Table 1. We examined convergent validity to assess the adequacy of outer-measurement models (see Hulland, 1999). All composite reliabilities (0.91 to 0.98) fell within accepted limits, indicating convergent validity. Based on Fornell and Larcker 4

Page 7 of 12 ANZAM 2009 5 (1981), we found that the discriminant validity of the constructs was exhibited as the square roots of the AVE values were greater than all corresponding correlations. Table 1: Measurement Model Results Constructs and manifest variables Loading Marketing Orientation (MARKO) AVE:.66 Reliability:.92 Marketing orientation is a firm s belief that engaging in marketing mix activities is of paramount importance. MARKO1: our business holds the belief that executing the marketing mix is of paramount importance..78 MARKO2: our business endeavours to plan its product lines strategy (quantities, design, etc.)..77 MARKO3: our business endeavours to plan its target market strategy (whom, where, when, and in what.87 quantity). MARKO4: our business endeavours to plan its pricing strategy (price level and specific prices)..78 MARKO5: our business endeavours to plan its distribution channels strategy..85 MARKO6: our business endeavours to plan its marketing communication strategy (advertising,.81 personal selling, sales promotion, and public relations). Marketing Resource Possession (MRP) AVE:.88 Reliability:.97 Marketing resource possession refers to the extent to which a firm possesses skills and knowledge necessary for the engagement of marketing mix activities MRP1: availability of knowledge to engage in marketing activities (product, price, distribution, and marketing communication). MRP2: availability of skills to engage in marketing activities (product, price, distribution, and marketing communication). MRP3: availability of knowledge to engage in marketing management (market intelligence management, marketing planning, and marketing implementation). MRP4: availability of skills to engage in marketing management (market intelligence management, marketing planning, and marketing implementation). Marketing Capability (MC) AVE:.91 Reliability:.98 Marketing capability refers to the extent to which a firm apply possessed skills and knowledge to implement marketing mix activities MC1: application of knowledge to engage in marketing activities (product, price, distribution, and marketing communication). MC2: application of skills to engage in marketing activities (product, price, distribution, and marketing communication). MC3: application of knowledge to engage in marketing management (market intelligence management, marketing planning, and marketing implementation). MC4: application of skills to engage in marketing management (market intelligence management, marketing planning, and marketing implementation). Marketing Effectiveness (ME) AVE:.71 Reliability:.91 Marketing effectiveness refers to marketing-centric performance indicators resulted from marketing resource possession and marketing capability ME1: total sales.86 ME2: market share.76 ME3: profitability.84 ME4: overall marketing effectiveness.89 The predictive relevance of the structural model was examined via the average variance accounted for (AVA), which was of acceptable magnitude at 0.29. Marketing orientation had positive effects on marketing resource possession (β=.53, t=10.98) and marketing capability (β=.60; t-value=15.57), in support of H1 and H2 (see Table 2). While marketing resources possession had no effect on marketing effectiveness (β=.01; t=0.07), the interaction between marketing resource possession and marketing capability positively influenced marketing effectiveness (β=.82; t=2.93), supporting H3..93.94.94.94.95.95.96.95 5

ANZAM 2009 Page 8 of 12 6 Table 2: Partial Least Squares Results for Theoretical Model Predictor Variables Predicted Variables Path weights Variance due to path R 2 Critical ratio H1 Marketing Orientation Marketing Resource Possession.53.281 a 0.28 10.98 b H2 Marketing Orientation Marketing Capability.60.360 a 0.36 15.57 b H3 Marketing Resource Possession Marketing Effectiveness.01.004 0.22 0.07 Marketing Resource Possession X Marketing Capability.82.361 a 2.93 b AVA 0.29 Note: a exceeds minimum acceptable level 0.015; b exceeds minimum acceptable level 1.96, p <.01 DISCUSSION AND CONCLUSIONS The primary goal of this paper is to examine the nature of the interaction between resource-possession and capability-building in rent creation process. Our findings contribute to the literature in three ways. First, we found that possessing resources does not explain economic rent differentials, instead this effect depends on how firms deploy and utilize possessed resources. Resource-possession and capability-building are complementary in generating economic rent. This is an extension of the previous study by Makadok (2001), in which resource-picking and capability are substitute for each other in most cases. Second, our findings suggest that there is a contingent relationship between a business orientation and its corresponding resources and capabilities. For example, firms with the belief that planning and executing marketing mix activities are essential for superior economic rent should possess marketing-related resources and develop marketing capabilities. Third, our findings advise resource-based logic scholars that investigations of the relationship between resources, capabilities, and firm performance should be conducted at micro levels within firms. Our findings complement Ray, Barney, and Muhanna (2004) and Ethiraj et al. (2005) and suggest that the considerable body of research on firm s business orientation (e.g. innovation orientation, production orientation, selling orientation) and business processes (e.g. innovation, production, and selling) can be used for greater exploration of the resource-capability logic at business process level. 6

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