Capabilities and financial performance: the moderating effect of strategic type

Abstract

The Miles–Snow (M–S) strategic typology has continued to receive attention in the academic business press, even though it has been criticized for not making explicit the relationships between strategic type and ultimate profit performance. Using the market orientation and Resource-Based View literature, we develop hypotheses regarding relationships between M–S strategic type and four firm capabilities (technology, information technology, market-linking, and marketing capabilities), relationship between the four capabilities and performance, and the moderating role of M–S strategic type. An empirical test involves multiple data collections from 216 firms. The study results suggest that there are significant relationships between capabilities and performance if one does not account for the moderating role of strategic type. When strategic type is used as a moderating variable, we find that only certain capabilities had significant effects on profitability. For example, technology and information technology capabilities increase financial performance for prospector organizations, while a different set of capabilities (market-linking and marketing) are positively related to financial performance for defender organizations. We discuss how our findings are consistent with the expectations of the Resource-Based View of the firm. We conclude with a discussion of theoretical and managerial implications.

Appendices

Appendix A

Study measures

A. Financial performance and capabilities scales

Table 5

Table 5 Financial performance and capabilities scales

B. Strategic typology scale (adopted from Conant et al., 1990)

The following statements describe some characteristics of this selected strategic business unit/division. Please circle the description that best describes this selected business unit.

• 1. In comparison to our competitors, the products which we provide to our customers are best described as: (Entrepreneurial—product market domain)

  • a. Products that are more innovative, and continually changing. (P)

  • b. Products that are fairly stable in certain markets while innovative in other markets. (A)

  • c. Products that are stable and consistently defined throughout the market. (D)

  • d. Products that are in a state of transition, and largely respond to opportunities and threats in the marketplace. (R)

• 2. In contrast to our competitors, we have an image in the marketplace that: (Entrepreneurial—success posture)

  • a. Offers fewer, select products which are high in quality. (D)

  • b. Adopts new ideas and innovations, but only after careful analysis. (A)

  • c. Reacts to opportunities or threats in the marketplace to maintain or enhance our position. (R)

  • d. Has a reputation for being innovative and creative. (P)

• 3. The amount of time our business unit spends on monitoring changes and trends in the marketplace can best be described as: (Entrepreneurial—surveillance)

  • a. Lengthy: we are continuously monitoring the marketplace. (P)

  • b. Minimal: we really don’t spend much time monitoring the marketplace. (R)

  • c. Average: we spend a reasonable amount of time monitoring the marketplace. (D)

  • d. Sporadic: we sometimes spend a great deal of time and at other times spend little time monitoring the marketplace. (A)

• 4. In comparison to our competitors, the increases or losses in demand that we have experienced are due most probably to: (Entrepreneurial—growth)

  • a. Our practice of concentrating on more fully developing those markets which we currently serve. (D)

  • b. Our practice of responding to the pressures of the marketplace by taking few risks. (R)

  • c. Our practice of aggressively entering into new markets with new types of products. (P)

  • d. Our practice of assertively penetrating more deeply into markets we currently serve, while adopting new products after a very careful review of their potential. (A)

• 5. One of the most important goals in this business units in comparison to our competitors is our dedication and commitment to: (Engineering—technological goal)

  • a. Keep our costs under control. (D)

  • b. Analyze our costs and revenues carefully, to keep costs under control and to selectively generate new products or enter new markets.(A)

  • c. Insure that the people, resources and equipment required to develop new products and new markets are available and accessible. (P)

  • d. Make sure we guard against critical threats by taking any action necessary. (R)

• 6. In contrast to our competitors, the competencies (skills) which our managerial employees possess can best be characterized as: (Engineering—technological breadth)

  • a. Analytical: their skills enable them to both identify trends and then develop new products or markets. (A)

  • b. Specialized: their skills are concentrated into one, or a few, specific areas. (D)

  • c. Broad and entrepreneurial: their skills are diverse, flexible, and enable change to be created. (T)

  • d. Fluid: their skills are related to the near-term demands of the marketplace. (R)

• 7. The one thing that protects us from its competitors is that we: (Engineering—technological buffers)

  • a. Are able to carefully analyze emerging trends and adopt only those which have proven potential. (A)

  • b. Are able to do a limited number of things exceptionally well. (D)

  • c. Are able to respond to trends even though they may possess only moderate potential as they arise. (R)

  • d. Are able to consistently develop new products and new markets. (P)

• 8. More so than many of our competitors, our management staff in this business unit tends to concentrate on: (Administrative—dominant coalition)

  • a. Maintaining a secure financial position through cost and quality control. (D)

  • b. Analyzing opportunities in the marketplace and selecting only those opportunities with proven potential, while protecting a secure financial position. (A)

  • c. Activities or business functions which most need attention given the opportunities or problems we currently confront. (R)

  • d. Developing new products and expanding into new markets or market segments. (P)

• 9. In contrast to many of our competitors, this business unit prepares for the future by: (Administrative—planning)

  • a. Identifying the best possible solutions to those problems or challenges which require immediate attention. (R)

  • b. Identifying trends and opportunities in the marketplace which can result in the creation of product offerings which are new to the industry or reach new markets. (P)

  • c. Identifying those problems which, if solved, will maintain and then improve our current product offerings and market position. (D)

  • d. Identifying those trends in the industry which our competitors have proven possess long-term potential while also solving problems related to our current product offerings and our current customers’ needs. (A)

• 10. In comparison to our competitors, our organization structure is: (Administrative—structure)

  • a. Functional in nature (i.e., organized by department-marketing, accounting, personnel, etc.) (D)

  • b. Product or market oriented. (P)

  • c. Primarily functional (departmental) in nature; however, a product or market oriented structure does exist in newer or larger product offering areas. (A)

  • d. Continually changing to enable us to meet opportunities and solve problems as they arise. (R)

• 11. Unlike our competitors, the procedures we use to evaluate performance are best described as:

  • a. Decentralized and participatory encouraging many organizational members to be involved. (P)

  • b. Heavily oriented toward those reporting requirements which demand immediate attention. (R)

  • c. Highly centralized and primarily the responsibility of senior management. (D)

  • d. Centralized in more established product areas and more participatory in new product areas. (A)

Note: In parentheses, we indicate for each scale item the answer that corresponds to strategic type (P = prospector, A = analyzer, D = defender, R = reactor). In the questionnaire, the letters P, A, D, and R were not provided to the respondents.

Appendix B

Additional Tables

Table 6

Table 6 Firms illustrating Miles–Snow strategic types

Table 7

Table 7 Item-to-total correlations

Table 8

Table 8 Summary of discriminant validity tests

Appendix C

Additional statistical tests

Inter-rater reliability

Inter-rater reliability was assessed in two ways. First, the percentage of correct placement of items was calculated as the proportion of items placed by the seven judges within the intended theoretical construct. Higher percentages indicate higher degree of construct validity, and a higher potential for good reliability. The minimum percentage obtained was 84%. Five items were responsible for “incorrect” placement, and were deleted from the pool. Second, we calculated Cohen’s Kappa (Cohen 1960) for each pair of judges to measure their level of agreement in categorizing items into capability types and product competitive advantages. The Kappa scores ranged from 0.97 to 0.82, greatly exceeding the acceptable level of 0.65 (Jarvenpaa, 1989). We concluded that the scale items were consistently placed within the correct constructs. Therefore, the items demonstrated convergent validity with the related capability, and discriminant validity across the capabilities. Furthermore, because the judges’ categorizations of items into strategic types were consistent, we concluded that the scales demonstrated convergent and discriminant validity (Davis, 1986).

Common method bias test

We followed the method proposed by Podsakoff, MacKenzie, Lee, and Podsakoff (2003) and test whether common method bias is present in our data. To do so, we perform an additional CFA on our data, incorporating a common method factor that loads on each item in the final measurement model with all four capabilities. The coefficient for the paths from this additional factor and the four capability constructs are restricted to be zero.

The results suggest that χ ² (157 d.f.) = 688.61. The difference in chi-square between this hypothesized model with a common factor and the original model is 165.74 with 21 degrees of freedom. In addition, the common method factor loadings are statistically significant in only 8 of 21 paths. Thus, the hypothesized model with a common factor model is rejected at the 90% confidence level. We conclude that common method bias is not present in the data.

Based on the above measurement validation procedures, we conclude that the measurement model has good fit and the constructs possess convergent and discriminant validity. Thus, it is appropriate to use the measures for testing our research hypotheses.

Confirmatory factor analysis

The measures were further subjected to confirmatory factor analysis using the procedure recommended by Anderson and Gerbing (1988). We used AMOS 4.0 to conduct confirmatory factor analysis. The model results in χ ² (178 d.f.) = 854.36. While the chi-square statistic is significant, indicating the rejection of the null hypothesis that the model results in perfect fit, the chi-square statistic is not an adequate test of model fit (Bentler & Bonett, 1980). Thus, we complement the chi-square statistic with other, more appropriate measures of fit : Normed Fit Index (NFI) = .84, Incremental Fit Index (IFI) = .87, Tucker–Lewis Index (TLI) = .85, and Comparative Fit Index (CFI) = .87. These results indicate a good fit of the models because the overall fit indices are greater than the acceptable standards (Arbuckle & Wothke, 1999; Bentler & Bonett, 1980; Bollen, 1989). The measurement model was evaluated on the following criteria: unidimensionality, reliability, convergent validity, and discriminant validity.

Unidimentionality, Reliability, and Internal Consistency of the Measures

Examinations of the modification indices, residuals, and overall fit indices revealed no substantial departures from unidimentionality. The construct reliabilities are as follows: 0.97 for Technology Capability, 0.83 for IT Capability, 0.84 for Market-linking Capability, and 0.90 for Marketing Capability, respectively. These reliabilities exceed the critical value of 0.70, suggesting that the measures are highly reliable (Peter, 1979, 1981; Nunnally, 1978).

Table 7 in Appendix B reports the item-to-total correlations. Examination of the patterns of item–item correlations and item–total correlation further indicated that there were no deviations from the internal consistency and external consistency criteria suggested in the literature (see Anderson & Gerbing, 1982). Thus, we conclude that our constructs possess unidimensionality, have high reliability, and have internal consistency.

Convergent validity

To examine the convergent validity, we further assess the standardized loadings of all measurement items to their respective constructs in the measurement model (i.e., the Lambda Xs) (Anderson & Gerbing, 1982). Results indicate that the standardized loadings were highly significant because the smallest t value was 5.4. Thus, we conclude that the scales for the constructs have convergent validity.

Discriminant validity

We assess discriminant validity by comparing the fit between separate unidimensional and two-dimensional CFA models for each pair of constructs (Dabholkar & Bagozzi, 2002). In the unidimensional model, all measures for the pair of constructs are forced to load on a single factor. In a second model, we release this constraint and allow each measure to load only on its respective factor. As indicated in Table 8 of Appendix B, the values for these chi-square difference tests (with one degree of freedom) range from 420.28 to 897.87 and are statistically significant for each pairwise comparison, indicating discriminant validity in the latent constructs.

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