Solving firm heterogeneity and generalization conundrums via case-based modeling: Explaining paradoxical firm-market performances
The study here responds to the view that the crucial problem in strategic management (research) is firm heterogeneity—why firms adopt different strategies and structures, why heterogeneity persists, and why competitors perform differently (Powell et al., 2011). The present study applies complexity theory tenets in proposing firms’ complex antecedent conditions affecting firms’ complex outcome conditions. The complex outcome conditions include firms with high market performances in declining markets and firms with low market performances in growing markets—the study focuses on seemingly paradoxical outcomes. The study here examines firm strategies and outcomes for separate samples of cross sectional data of manufacturing firms with headquarters in one of two nations: Finland (n = 820) and Hungary (n = 300).
Although theoretically well developed, empirical evidence about turnaround through strategic actions have been inconsistent (Ndofor, Vanevenhoven, and Barker, 2013). Barker and Duhaime (1997, p. 35) propose that research on firm turnaround can advance using a contingency basis “to determine what types of recovery strategies are effective and inefficient given a certain general type of cause”. Thus, turnaround research may benefit from proceeding on contingency bases by attempting to learn what types of recovery strategies are effective and ineffective given a certain general type of cause (Barker & Duhaime, 1997). Employing core tenets of complexity theory this study examines the outcomes of strategic actions taken by firms that are failing to meet market expectations (i.e., performing badly in a growing market) and strategic actions by firms that exceed market expectations (i.e., performing well in a declining market). The study here responds to the crucial problem in strategic management by investigating why firms adopt difference strategies and structures, why heterogeneity persist, and why firms perform differently (Powell et al., 2011). Furthermore, the study expands on Weick’s (1987, 2017) advocacy of nurturing requisite variety in theory construction.
Resources, strategic orientations (SOs) and capabilities
Resources are valuable, rare, inimitable and non-substitutable company-specific assets, which are difficult or even impossible to imitate (Barney, 1991; Wernerfelt, 1984). Such assets are characterized by internal coherence, organizational embeddedness, and context-specificity; transferring them from one organization to another represents a great challenge (Katkalo, Pitelis, and Teece, 2010), leading to firm heterogeneity (Barney, 1991). “Strategic orientation” is a multidimensional construct that captures the organization’s relative emphasis in understanding and managing the environmental forces acting on it (Gatignon & Xuereb, 1997). Strategy choice perspective contend that there is no universally beneficial strategic choice, and organizations need to examine their environmental conditions before they develop their strategies (Child, 1972; Ginsberg & Venkataman, 1985; Zhou, Chi, and Tse, 2005). Organizations focusing exclusively on a single strategic orientation may suffer poor performance in the long run (Kumar, Jones, and Venkatesan, 2010). “Capabilities are complex bundles of skills and accumulated knowledge, exercised through organizational processes that enable firms to coordinate activities and make use of their assets” (Day, 1994: 38). Capabilities enable the activities in a business to be carried out, and are closely interlaced with organizational resources. Because capabilities embed deeply within the organizational systems, it is hard for the management to track (identify) them (Day, 1994).
Growing versus declining markets
A firm can suffer declining performance for different reasons, and these reasons can impose the need for strategic change. The roots of a firm’s decline can either be associated with industry concentration or based in firm-specific problems (Cameron, Sutton, and Whetten, 1988; Whetten, 1987). Industry concentration-based decline occurs when a firm’s industry shrinks in size or generosity (Whetten, 1987), while firm-based decline occurs when a firm is operating in a growing industry but is maladapted, eventuating in lower than average performance (Cameron et al., 1988). The effectiveness of decline neutralizing actions varies upon the causes of decline (Arogyaswamy, Barker, and Yasai-Ardekani, 1995, Schendel, Patton, and Riggs, 1976). Strategic changes should be more effective in addressing poor strategic decisions (i.e., engineering a turnaround) (Barker & Duhaime, 1997; Schendel et al., 1976), while retrenchment actions may not help firms to recover from declines (due to weak strategic decisions) because such actions do not address the causes of decline (Hedberg, Nystrom, and Starbuck, 1976; Hofer, 1980). Ketchen and Palmer (1999) show that firms in decline are more likely to recombine their existing resource portfolio and capabilities, leading to alternative strategies. However, to reverse declining market performance, the actions must be valuable and difficult to imitate.
Rethinking causality in resources, strategic orientations, capabilities, and firm performance in declining and growing markets
We refer to the architecture of resources, strategic orientations and capabilities as the firm’s “asset configuration strategy” (Fang, Palmatier, and Grewal, 2011). Following this notion, resources, strategic orientations and capabilities are viewable from a configuration or portfolio perspective which highlights the underlying mechanisms between these factors, as well as their fit with the environment. Building on the configuration theory, a successful arrangement of assets (i.e., resources, capabilities, and strategic orientations) includes an effective internal fit between these assets, effective external fit among the arrangement of resources, capabilities, and strategic orientations and the environment (Fang et al., 2011). Each operational strategy calls for a specific configuration of organizational assets, and achieving sales growth in a declining market or a sales decline in a growing market entails a specific configuration of assets.
Discussion and implications
The study here applies the equifinality complexity tenet in strategic management that proposes two or more configurations might be equally effective in achieving the same outcome (i.e., high revenue in a declining market vs. low revenue in a growing market). Our findings support configuration theory tenet that the strategy chosen is important only to the extent that is supports consistency in operations (Doty et al., 1993). Consistency in operations occurs if structural characteristics and resource deployment is in line with operations supporting the fulfillment of strategic goals of the organization. This conclusion receives support from the perspective that implementing too many strategic orientations simultaneously can eventuate in deteriorating performance (Kumar et al., 2011), as scarce resource endowment confronts firms to face trade-offs when it comes to resource allocation (Cadogan, 2012). This research also provides evidence that the market differentiates among the types of valuable actions taken, especially for firms experiencing growth in a declining market and for firms experiencing decline in a growing market. Using existing resources and capabilities and reconfiguring them to meet internal organizational and external environmental expectations is a way to support organic growth (cf., Morrow et al., 2007).
Gábor Nagy, Carol M. Megehee, Arch G. Woodside, Tommi Laukkanen, Saku Hirvonen, Helen Reijonen
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