Capabilities for Strategic Direction and Performance (2)

8/8/2019 Capabilities for Strategic Direction and Performance (2)

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Management Decision

Vol. 42 No. 2, 2004

pp. 292-312

# Emerald Group Publishing Limited

0025-1747

DOI 10.1108/00251740410518525

The importance of capabilitiesfor strategic direction and

performanceNicholas O'Regan and Abby Ghobadian

Centre for Interdisciplinary Strategic Management Research,Middlesex University Business School, London, UK

Keywords Small to medium-sized enterprises, Competitive advantage, Corporate strategy,Organizational performance, Generics

Abstract This paper re-visits the perennial question ``Why do some firms perform better thanothers?'' by focusing on the resource-based view of strategy and in particular the role of generic

organisational capabilities in the achievement of overall performance and competitive advantage. Presents findings based on data collected from 194 manufacturing small to medium-sizedenterprises. The analysis confirms the authors' contention that generic organisational capabilitieshave a positive impact on strategy deployment and on the achievement of overall performance.The findings indicate that generic capabilities enable firms to manage for the future by focussingon customer's needs and requirements, while at the same time managing crises and problemsarising in their operating environment. A further analysis comparing the emphasis on genericcapabilities by both high and low performing firms found that high-performing firms emphasisedcapabilities to a far greater extent than low-performing firms. This implies that generic capabilityis one of the main drivers of performance. The analysis suggests that firms seeking high overall

performance would be well advised to ensure that they actively consider their generic capabilitiesas the basis of their strategic direction. In short, alignment of the generic capabilities and strategic

planning is a prerequisite for high performance.

IntroductionManaging directors face an increasingly dynamic, complex and unpredictableenvironment, where technology, globalisation, knowledge and changingcompetitive approaches impact on overall performance (Asch and Salaman,2002; Hitt et al., 2001; Scott, 2000). The degree and complexity of the currentchanging environment is driving firms, both large and small, to seek new waysof conducting business to create wealth (Stopford, 2001). More and more firmsare turning to a strategic approach as the way forward.

Strategy research is directed, in the main, to examining why firms differ inoverall performance and achieve sustainable competitive advantage over other

firms (Barnett and Burgelman, 1996; Schendel, 1996). In short, it seeks toestablish why some firms are more successful than others. The earlier literatureaddressed this important question by suggesting the need to achieve a ``fit'' orbalance between the firm's internal environment and its external-operatingenvironment (Volberda, 1996).

More recent studies focus on the resource-based view of strategy (RBV) andcontend that competitive advantage arises from organisational capabilities(Dierickx and Cool, 1989; Barney, 1991; Peteraf, 1993; Teece et al., 1997). Thisview suggests that competitive advantage and performance results are a

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consequence of firm-specific resources and capabilities (Barney, 1986;Wernerfelt, 1984). The core of the resource-based view is that firms differ infundamental ways as each has its own ``bundle'' of resources (Grant, 2002,p. 139; Fleisher and Bensoussan, 2003). The literature suggests that one of the

most effective means of achieving competitive advantage is by using the firm's``competencies'' or ``capabilities'' (Wernerfelt, 1984; Barney, 1986; Rumelt, 1991;Evans, 1991; Peteraf, 1993; Amit and Schoemaker, 1993). But what arecapabilities? And is there a role for capabilities that are generic rather thanunique?.

The relationship between unique capabilities and performance is wellestablished in the literature and has been researched in various perspectivessuch as the resource-based, organisational learning theories, knowledge-basedand the dynamic capabilities perspectives (De Carolis, 2003, p. 35). However, allfirms have more generic capabilities that enable them to compete. While uniquecapabilities are specific to firm(s) in particular competitive positions, wecontend that generic capabilities are present in most firms and have a positiveassociation with both strategy and overall organisational performance.

Resources, competencies and organisational capabilitiesA wide variety of terms are used in the literature to describe the drivers ofcompetitive advantage, ranging from resources, capabilities, competencies andassets (Barney, 2003, p. 424). It is not surprising that the proliferation of termshas led to a ` rather thick terminological haze over the landscape wherecapability lies'' (Winter, 2003, p. 277). In an effort to provide some clarification,we examine some of the definitions here and then select a definition for use in

this study.Resources are defined as: ``stocks of knowledge, physical assets, humancapital, and other tangible and intangible factors that a business owns orcontrols, which enable a firm to produce, efficiently and/or effectively, marketofferings that have value for some market segments'' (Capron and Hulland,1999, p. 42). A broadly similar definition is given by Barney (2001, p. 54). Theuse of resources has many potential advantages for firms such as theachievement of greater efficiency and therefore lower costs, increased qualityand the possibility of greater market share and/or profitability (Collis, 1994).

Teece et al. (1997, p. 516) broaden the description by referring to resources,capabilities and competencies. They see resources as: ``. . . the firm specific

assets that are difficult, if not impossible to imitate'', whereas competenciesresult from the integration of firm specific assets: ` in integrated clustersspanning individuals and groups so that they enable distinctive abilities to beperformed''. Competencies are described as: ` . . . the local abilities andknowledge that are fundamental to day-to-day problem solving . . .''(Henderson and Cockburn, 1994).

Organisation capability is a broad concept with many elements andattributes. An early generic description by Nelson and Winter (1982)categorises capabilities as lower-order organizational knowledge and skills,


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and higher-order co-ordinating mechanisms. Madhok (1997) refers tocapabilities as a combination of resources that creates higher-ordercompetencies. Organisational capabilities are defined by Chandler (1990) as afirm's collective physical facilities and skills of employees, and in particular,the abilities and expertise of the top management layers.

Hoskisson et al. (2004) refer to capabilities as: ` the capacity to perform a taskor activity in an integrated manner''. This means that capabilities, existing andpotential, will influence strategic decisions. However, competitive advantageonly results from capabilities that are distinctive, costly and time-consuming toreplicate (Barney et al., 2001).

Capabilities are the building block for core competencies (Coulter, 2002,p. 129; Grant, 2002), and are usually embedded in the firm and require bothtime and significant resources to change. Organisational capabilities arecommonly defined as a firm's capacity to deploy its assets, tangible or

intangible, to perform a task or activity to improve performance (Amit andSchoemaker, 1993; Grant, 1991; Teece et al., 1997). Examples include thecapability to offer excellent customer service or to develop new products andinnovate (Lorenzoni and Lipparini, 1999).

Capabilities can also be classified as ``dynamic''. For example, Teece et al.(1997) suggest that dynamic capabilities are the ``firm's ability to integrate,build, and reconfigure internal and external competencies to address rapidlychanging environments''. The reconfiguration of competencies is alsomentioned by Helfat and Raubitschek (2000, p. 975), when they state thatdynamic capabilities are embedded in ``routine organisational processes thatguide the evolution of a firms' resource configuration and operational routines''.

Capabilities are termed ` core'' when they result in a competitive advantage overother firms.

An analysis of the definitions outlined suggests that organisationalcapabilities include the firm's capacity for undertaking, through its employees,a particular productive activity. We believe that the following definition byHelfat (2003, p. 1) encapsulate the descriptions outlined:

An organizational capability refers to an organizational ability to perform a co-ordinatedtask, utilizing organisational resources, for the purpose of achieving a particular end result.

Winter (2003) suggests that a capability comprises a large chunk of activitythat enables outputs that clearly matter to the organisation's survival and

prosperity. Recent resource-based writings stress that the uniqueness of firm'sresources and capabilities are not sufficient to sustain competitive advantage.Fiol (2001, p. 692) agrees and remarks that ``both the skills/resources and theway organizations use them must constantly change, leading to the creation ofcontinuously changing temporary advantages''. This suggests that it is theway resources are configured and not the capabilities as such that is the sourceof competitive advantage. Configuration is specific to each organization andwill relate to their corporate strategic thinking. Accordingly, firms can achievetemporary advantage, which can achieve a longer time frame by constant


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resource reconfiguration to meet the changing markets demands. Our focusgroup interviews suggested that the positioning school of strategy is prevalentin the electronics and engineering sectors. Mintzberg et al. (1998, p. 83) statethat only ` a few key strategies as positions in the economic market place are

desirable in any given industry: ones that can be defended against existing andfuture competitors''. This means that strategy has a narrow focus in thepositioning school and is seen as generic rather than having a uniqueperspective.

Accordingly, we have chosen to focus this research on generic capabilitiesrather than on capabilities that are ``core'' or ``distinctive'', on the basis thatgeneric capabilities have wider applicability and are not unique to any onefirm. While the industry context must be examined thoroughly in order tounderstand the performance of specific firms (Schoenecker and Cooper, 1998;McGahan and Porter, 1997), there is no such necessity in the consideration ofgeneric capabilities. In addition, Fleisher and Bensoussan (2003, p. 208) statethat: ``the source of competitive advantage within a firm is often multifactorialin that it usually cannot be attributed to only one type of resource''. Theysuggest that it is the interaction between the different types of resources thatdrives a firm's competitive advantage. Indeed, we contend that each level has acatalytic effect on the others and it is this cumulative catalytic impact thatmakes the resource-based view of strategy such a potentially powerful force.Accordingly, the capabilities to deploy a given mix of resources are critical forachieving competitive advantage (Teece et al., 1997; Schoenecker and Cooper,1998; Stuart and Podolny, 1996).

Organisational capabilities in small and medium sized organisationsThe literature is clear that firms differ based on organisational capabilities(Barney, 1991; Dierickx and Cool, 1989; Hansen and Wernerfelt, 1989), and thatsuch capabilities are used to ``create and exploit external opportunities anddevelop sustained advantages'' (Lengnick-Hall and Wolff, 1999). But wheredo they come from and are they evident in small- and medium-sizedorganisations?

Floyd and Wooldridge (1999) contend that small and medium-sizedorganisations face important challenges as they decide whether to build ontheir existing organisational capabilities or pursue entirely new businessventures. Previous studies contend that capabilities are firm-specific and

developed within the firm rather than acquired externally (Henderson andCockburn, 1994; McGrath et al., 1995). Arguably, the development of uniquecapabilities enables firms to perform processes better and in a ` differentmanner'' compared with other firms (Mische, 2001). The evidence from theliterature indicates that smaller firms use their organisational capabilities tocompete successfully with larger firms (Hayes and Upton, 1998).

As there is no accepted definition of organisational capability, we held aseries of exploratory interviews and discussions with six managing directorsand two employer representative bodies. These discussions confirmed that it


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was not possible to obtain a definitive listing of organizational capabilities.After detailed discussions, broad agreement was obtained on the use of thefollowing generic capabilities:

.

Advertise/promote the product or service.. Deliver a broad product range.

. Distribute products broadly.

. Respond to swings in volume.

. Make rapid design changes.

. Compete on price.

. Provide after sales service.

. Deliver products quickly.

. Provide high performance products.

. Deliver products on time.

. Offer consistent quality.

. Involvement of top management.

. Involvement of line managers.

. Flexibility to adapt to unanticipated changes.

Not surprisingly, the capabilities outlined centred on aspects covered inprevious research, such as the use of price, the ability to learn and change(Barney et al., 2001), the use of resources and skills (Fiol, 2001), and customer

satisfaction (Carr, 1999).The final attributes listed were perceived as the most appropriate for thesectors under examination, and are consistent with the attributes of capabilitydescribed by Lorenzoni and Lipparini (1999), and Connor (1999). Essentiallythese attributes facilitate the performance of the key tasks described by bothEisenhardt and Martin (2000), and Teece et al. (1997). These include ``acquiring,integrating and recombining resources'' to meet or even create the demands of arapidly changing market place. They are also consistent with the approach ofCollis and Montgomery (1995), and Madhok (1997) as they contribute to overallcompetitive advantage.

HypothesesThe importance of organisational capability is well documented (Ramanujamet al., 1986). Many authors refer to the use of capabilities as a source ofcompetitive advantage (D'Aveni, 1994; Teece et al., 1997). Indeed, Quelin (2000,p. 477) states that: ``more and more, the strategic management field is focusingon the role of competencies and resources that accumulate within a firm''.However, there is a lack of empirical research on the impact of organisationalcapability and its drivers in smaller organisations. The literature largelyfocuses on organisational capabilities or competencies in large organisations


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(Wernerfelt, 1984; Barney, 1986, 1991; Teece, 1988; Leonard-Barton, 1992).Specific examples of previous research include the examination of capabilitydevelopment (Henderson and Cockburn, 1994; McGrath et al., 1995; Teece et al.,1997), and the use of capabilities to achieve cost reduction, higher quality and

greater flexibility in manufacturing (Shroeder et al., 2002). De Carolis (2003)suggests that the scarcity of research on capabilities on overall performanceresults ` is due in large part to definitional and operational issues''.

The development and use of capabilities is not straightforward. Grant (1991)cautions that capabilities are complex interactions and co-ordination betweenvarious resources and that the degree of complexity should not beunderestimated. A decade afterwards, Grant (2002, p. 158) states that theapplication of organisational capability to decision making is still unclear.Accordingly, the real issue for smaller organisations is to ensure that theyunderstand the importance of organisational capabilities and acknowledge the

various influences on individual capabilities. The lack of understanding oforganisational capabilities is a large gap in the literature arising from a focusover many decades on operational efficiency measures. However, capabilitiesare just one part of the jig-saw alignment is needed with the firm's strategicgoals and the business environment in order to achieve competitive advantage(Amit and Schoemaker, 1993; Mahoney and Pandian, 1992). Recent work byZott (2003, p. 99) suggests that ` there is increasing evidence that firmperformance is affected by firms' ability to integrate, build and reconfiguretheir resources and competencies''.

Arguably, if firms do not know the impact of capabilities on both strategicdecision- making and performance, it is very difficult for them to align

capabilities with both strategy and performance. This lead us to formulate thefollowing hypotheses:

H1. Generic organisational capabilities are associated with the factors usedto craft strategy in SMEs.

H2. Generic organisational capabilities influence organizationalperformance.

Figure 1 depicts the relationships underlying the aims of the research.In addition, Walleck et al. (1991) suggest that firms can be divided into high

and low performing firms. They also contend that high performing firms differto a significant extent in relation to most activities from low performing firms.

Figure Organisation

capabilities, strateand performan


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Accordingly, it is important to ascertain if there are specific attributes ofgeneric organisational capabilities that are associated with high performance.This lead us to formulate the following hypothesis:

H3. High performing firms place stronger emphases on genericorganizational capabilities compared with low performing firms.

Organizational capabilities and strategyStrategy is seen by many as the main driver of competitive advantage (Larsenet al., 1998). A number of research studies indicate that small firms usingstrategic planning performed better than non-strategic planning firms (Kargarand Parnell, 1996; Naffziger and Mueller, 1999). Others found that ``strategicorientated'' smaller firms were likely to have significant capability to grow,expand, innovate and introduce new products to the market place (Joyce et al.,1996), and achieve greater profitability (Roper, 1997). Strategy is also

considered as one of the most effective ways for firms, regardless of size orsector, to cope with the changes in the business environment (Hart andBanbury, 1994).

A strategy, in essence, is the articulation of the means by which anorganisation endeavours to convert its intentions into organisational capabilityin order to take advantage of its external opportunities and to minimise thethreats that it faces. This involves configuration of resources as well as thedevelopment of an environment capable of supporting the intentionsarticulated in the strategic plan. Organisational capability is the outcome of theimplementation of the strategic plans.

Strategy consists of five separate but interdependent phases: establishment

of organisational intent, strategic analysis, strategy formulation (the strategicplanning process), strategy deployment and monitoring/evaluation. Thecontention that the development of strategy consists of several interrelatedphases is well supported in the literature (Hitt et al., 2001; Hill and Jones, 2001;Dess and Lumpkin, 2003).

The strategic planning phase, apart from the central role that it plays in thedevelopment and implementation of a robust strategic plan, lends itself morereadily to the development of constructs suitable for use in questionnaires.Content, on the other hand, is organisation dependent and more difficult toreduce to generic constructs of the type used in survey research.

Researchers have adopted a number of independent characteristics to

delineate strategic processes (Ramanujam et al ., 1986; Ramanujam andVenkatraman, 1987; Veliyath and Shortell, 1993; Kargar and Parnell, 1996).Each of the characteristics is supported by the literature. Following thoseresearchers, an extensive examination of the literature and focus groupinterviews, we adopted the following characteristics to represent the keyfactors considered in developing strategy:

. external orientation;

. internal orientation;


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. departmental co-operation;

. resources for strategy;

. staff creativity; and

. strategy a control mechanism.

Organizational capability and performanceThe literature suggests that the ability to build effective capabilities is asignificant driver of performance (Teece et al., 1997). Capabilities are nurturedand developed within a firm in order to enhance its performance. They can alsobe used to react or anticipate market movements. Accordingly, this paperexamines organisational capabilities in terms of overall organizationalperformance. An effective performance measurement system ought to cover allaspects of performance that are relevant for the existence of an organization

and the means by which it achieves success and growth (Kaplan and Norton,1996; Hillman and Keim, 2001). This means that any performance measurementsystem ought to include more than just financial measures. This point is wellestablished as many authors contend that any credible model of performancemeasurement must have more than one criterion (Veliyath and Shortell, 1993;Brown and Laverick, 1994; Kargar and Parnell, 1996).

Kargar and Parnell (1996) used two dimensions of performance: ` satisfactionwith the financial outcomes perceived to be associated with the planningprocess'' and ``satisfaction with the contribution of strategic planning efforts tooverall organizational performance''. Our exploratory interviews with themanaging directors of six firms indicated that customer satisfaction and

innovation are also important performance dimensions. However, theexploratory interviews and discussions with employer federations suggestedthat, in general, it was not possible to obtain wide-ranging hard measures ofperformance. Even if it were possible, it would have been extremely difficult toestablish a link between variation in performance and attributes deployed toindicate capability because potentially many factors contribute to changes inperformance. Therefore, we adopted the notion of measurement againstpurpose propagated by Steiner (1979). In practice, we assessed the degree ofsatisfaction with a range of performance outcomes arising from individualfactors used in the strategic process as follows:

. financial (overall financial performance);

. customer orientation (customer satisfaction, customer retention andmarket share);

. organisational effectiveness (short-term performance, long-termperformance, avoid problem areas); and

. innovation (introduction of new products).

A similar approach to assessing the level of satisfaction arising from specificfactors and actions was adopted by Kargar and Parnell (1996), and Luo and


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Park (2001). Andersen et al. (2001) suggest that linking strategic objectives withperformance helps with the articulation of causality. They state that thisapproach has clear advantages such as helping small- and medium-sizedorganizations to gain a thorough understanding of strategy by raising the

awareness of strategy throughout the entire organization and by providing afocus to enhance the achievement of the strategic objectives.

Walker et al. (2002) state that to achieve desired performance levels, a firm'scapabilities and the resources available to it must interact positively with therequirements of the firm's markets. Both capabilities and market requirementsneed to be clearly defined and explicit. Arguably, both need activeconsideration during the strategy formulation stage.

MethodologyThis study began by conducting a series of semi-focused interviews with thechief executives of small- and medium-sized organisations in order tounderstand the relationship between strategy, capability and performance. Inaddition, a number of employer representative bodies were also interviewed.All interviews were taped and transcribed.

We used managerial perceptions as they shape to a significant degree thestrategic behaviour of the firm. This is consistent with Chattopadhyay et al.(1999) and Spanos and Lioukas (2001). Gioia and Chittipeddi (1991, p. 434) state:` the CEO is portrayed as someone who has primary responsibility for settingstrategic directions and plans for the organisation, as well as responsibility forguiding actions that will realise those plans''. In a review of the literature,Westphal and Frederickson (2001) found that top management has a

significant impact on strategic direction and change. We chose to use chiefexecutives as focus group members and respondents in this study as they areseen as having a wide breadth of knowledge of all the organisation's functions,activities and operating environment (Frost et al., 2002; Hillman and Keim,2001).

The sample consisted of 1,000 small- and medium-sized manufacturingfirms throughout the UK. Practical considerations largely guided the choice ofthe two industrial sectors examined. The aim was to identify industries thatwere economically important and where it was possible to find many small-and medium-sized firms. Furthermore, it was important that the two sectorsprovided a significant contrast in terms of product maturity. Following careful

consideration, the electronics and engineering sectors were chosen. Bothsectors are economically important and both have a large number of small- andmedium-sized firms. Firms were chosen at the four-digit level from SIC 37 and38.

Small- and medium-sized organisations were chosen as they tend to be morevulnerable to environmental forces compared with larger firms in aspects suchas access to financial capital, a strong reliance on a narrow product range, anda more limited market presence. The manufacturing sector was chosen asstrategy adaptation is usually more pronounced compared with the services


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sector, arising from its higher levels of fixed commitment (Swartz andIacobucci, 2000).

Small- and medium-sized organisations were defined as having fewer than250 employees. As there are nearly 15,000 electronics and engineering SMEs in

the UK (DTI, 1996), it was decided to use a random sampling methodologybased on a directory available from a reputable commercial firm.

Data were gathered by means of a self-reporting survey questionnaire,consisting of questions to infer the existence of a strategic planning processand to establish the degree of perception of satisfaction with the results of thestrategic planning process. Selecting a self-reporting respondent is awell-established approach in management research (Avolio et al., 1991).

Data were gathered by means of a survey questionnaire, consisting ofquestions to ascertain the degree of importance of each attribute of capability,strategy and performance. All questions used a five-point Likert type scale.

The questions in relation to strategy were largely based on a surveyinstrument devised and tested by Kargar and Parnell (1996). All questions useda five-point Likert type scale, with a response of one indicating that an itemreceived ` no emphasis'' and five indicating that an item received ` strongemphasis''. Respondents were also asked to indicate, on a five-point scaleranging from ``highly dissatisfied'' to ``highly satisfied'', the extent to whichthey were satisfied with their firm's performance on four separate criteria:financial results, organisational effectiveness, customer satisfaction andinnovation.

Correlation analysis was carried out to ascertain the correlation betweenorganisational capabilities with strategy characteristics and performance

indicators. The procedures used to analyse the responses included thedetermination of the reliability of the instrument. The questionnaire constructswere tested for their ability to yield a significant factor structure. Theinstrument could be said to have a high degree of reliability when there is asignificant association between responses to each of the attributes. In effect, itis ` an indicator of how well the different items measure the same issue'' (Litwin,1995, p. 21). Internal consistency was established using Cronbach's alpha andfactor analysis. The alpha co-efficient ``represents the most widely used andmost general form of internal consistency estimate'' (Murphy and Davidshofer,1994, p. 83).

ResponseA total of 194 valid responses were received a response rate of 27 per cent. Itis important to measure the degree of non-response to eliminate any source ofbias within the sample. All firms were contacted by telephone to ascertain thereasons for non-response. The most frequent reasons were:

. lack of time and resources to complete the survey (299 firms);

. company policy not to participate in surveys (108 firms);

. a reluctance to divulge information (51 firms);


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. unable to contact the managing director or his/her deputy (29 firms); and

. refusal to participate with no particular reason given (21 firms).

Taken together with the number of valid responses this suggests that response

bias is not a serious problem and does not invalidate the results. We also testedfor the effects of extraneous variables (i.e. perception of the operatingenvironment, ownership and sector) and were able to establish that thosefactors did not influence organisational capability.

Sample demographicsTable I outlines the sample demographics.

Emphasis on organisational capabilitiesOrganisational capabilities were examined based on 11 attributes. Table IIoutlines the importance of each attribute based on the mean score, and alsoindicates the proportion of firms ranking each attribute as either important orof major importance.

Table II indicates that the most important capabilities are deliveringproducts quickly, providing high performance products, delivering products ontime and offering consistent quality. Interestingly, nearly all firms stressed thecapability to provide high performance products and the capability to offerconsistent quality.

Table I.Sample demographics

Percentage

Annual turnoverLess than 500,000 9.3500,000-1m 12.41m-2m 17.02m-4m 22.24m-6m 14.4Over 6m 24.7

Employees1-9 11.310-19 12.420-49 28.950-99 24.2

100-199 16.0200-249 7.2

Years in operation5-10 20.811-20 24.121-30 25.331-40 5.241-50 5.851 years and over 18.8


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Research findings

The association between organizational capability and the factors used to craft

strategy was examined using correlation analysis. The results are presented in

Table III.

Table III indicates that there is a strong degree of correlation between

generic organizational capabilities and the factors used to craft strategy. This

finding is consistent with the resource-based view of strategy which sees the

firm as a collection of resources (capabilities) used for competitive advantage(strategic direction) (Grant, 2002, p. 139; Fleisher and Bensoussan, 2003).

Accordingly, the following hypothesis is accepted:

Table Importanceorganisation

capability typ(n = 194), in rank

ord

Attribute Mean

Percentage of firms rankingimportant or of major

importance

Advertise/promote the products 3.15 39.2Deliver a broad product line 3.34 49.5Distribute products broadly 3.35 47.9Respond to swings in volume 3.52 58.2Make rapid design changes 3.95 71.1Deliver products quickly 3.97 72.5Deliver products on time 3.95 74.7Compete on price 4.06 76.3Involvement of top management 4.10 77.3Involvement of line managers 4.11 77.7Flexibility to adapt to unanticipated changes 4.15 78.8Provide after sales service 4.21 80.9Provide high performance products 4.65 96.4

Offer consistent quality 4.65 96.9

Table ICorrelation analysis

generic capability typand strate

characteristi

Capabilities Strategy characteristics

Advertise/promote the product or service All* with the exception of controlDeliver a broad product range All*Distribute products broadly All*Respond to swings in volume All*Make rapid design changes All* with the exception of controlCompete on price All*

Provide after sales service All* with the exception of controlDeliver products quickly All*Involvement of top management All*Involvement of line managers All*Flexibility to adapt to unanticipated changes All*Provide high performance products All* with the exception of controlDeliver products on time All* with the exception of controlOffer consistent quality All* with the exception of control

Note: * Correlation significant at the 0.01 level (two-tailed)


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H1. Generic organisational capabilities are associated with the factors usedto craft strategy in SMEs.

The association between generic organisational capabilities and the factors

used to measure performance was examined using correlation analysis. Theresults are presented in Table IV.

Table IV indicates that the three types of generic organisational capability

given the highest ranking by degree of emphasis (see Table II) achieve the

highest degree of correlation with all the measures of performance. Forexample, offering consistent quality and providing high performance goods

correlate with all the measures of performance, while the third ranked attribute,providing after-sales service, is correlated with all the measures, but only with

the attributes customer satisfaction and customer retention at a 0.01

significance level. This finding is not surprising and implies that firms in the

sectors examined are customer conscious. The remainder of the attributes oforganisational capability are correlated with individual measures ofperformance to varying degrees. Overall, it is possible to conclude that the

following hypothesis is accepted:

Table IV.Correlation analysis generic capability typesand performancemeasures

Capability attributes Performance measures

Advertise/promote the product or service Market share**Improve short-term performance**Financial performance**

Deliver a broad product range Financial performance**Customer satisfaction**

Customer retention**Innovation**

Distribute products broadly Market share*Financial performance*

Respond to swings in volume Innovation**Market share*

Make rapid design changes Innovation*Market share*Customer retention**

Compete on price Improve short-term performance**Deliver products quickly Financial performance*Deliver products on time Short-term performance*Involvement of top management Avoid problem areas*

Involvement of line managers Avoid problem areas*Flexibility to adapt to unanticipated changes Avoid problem areas*Provide after sales service All (customer satisfaction and

customer retention*)Rest of measures**

Provide high performance products All*Offer consistent quality All*

Notes: * Correlation significant at the 0.05 level (two-tailed); ** Correlation significant at the0.01 level (two-tailed)


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H2. Generic organisational capabilities influence organizationalperformance

High performing firms and organisational capabilityTo ascertain the impact of organisational capability in practice, a comparisonwas carried out on the extent of emphasis given to each type of genericcapability by high performing and low performing firms. Firms were classifiedas high and low performing based on a combination of measures that includefinancial performance, the extent to which their organizational goals wereachieved, the overall success in the deployment of strategic actions andincreased or decreased market share. Market share was used as the literaturesuggests that it is an effective indicator of performance (Gale and Buzzell, 1993,pp. 137-45).

Firms with a perceived increase in market share were classified as

high-performing firms, while firms with a perceived decreased market sharewere classified as low-performing firms. Firms indicating that their marketshare remained static were omitted from the analysis.

The criteria for classifying firms into high and low performing firms aredepicted in Table V.

A total of 108 firms were classified as ``high performing'' whereas only 35firms were classified as ``low performing''. Table V shows that high performingfirms have higher perceived initial goals and objectives and financial resultsthan low performing firms.

The choice of perceived change in market share for classifying firms as highor low performing was tested by examining the ability of the firms classified ashigh and low performing to meet their initial goals, expected financial results,and ability to deploy strategy within the allocated resources. A 2 testestablished that the differences are statistically significant (2 = 3.83, df = 1,

p < 0.05). This suggests that change in market share is a good predictor of thelevel of performance. The analysis showed that high performing firms had aperceived achievement rate of 75 per cent of their initial goals and objectives,over 58 per cent of the financial results expected and 64 per cent for deploymentwithin the resources allocated, whereas low performing firms had a perceivedachievement of less than 50 per cent of their initial goals, slightly over 34 per

Table Degrees of success

the implementationinnovation by hi

performing and loperforming firms

defined by thmarket sha

Achieveda

Firm type NumberInitial goals/

objectives (%)Financial results

expected (%)Deployment of firm's

resources allocated (%)

High performing 108 75.0 50.1 63.9Low performing 35 48.5 34.3 45.7All firmsb 194 67.0 53.0 56.0

Notes: a Firms indicating that their goals were either fulfilled or entirely fulfilled; b Includesfirms whose share of the market remained static


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cent of the financial results expected and 45.7 per cent perceived achievementwithin the resources allocated.

The descriptive statistics detailing the comparisons between attributes inboth types of firms are depicted in Table VI.

Table VI indicates that the emphasis by high performing firms on the typesof generic organisational capability is greater than the emphasis given by lowperforming firms to the same types.

Significant differences are evident in the three most highly ranked types ofcapability (see Table II) as follows: offering consistent quality, providing highperformance products and the provision of an after-sales service. This findingis consistent with the work of Connor (1999) and suggests that high performingfirms are both customer conscious and aware of the need to maximise the use oftheir capabilities. Accordingly, the following hypothesis is accepted:

H3. High performing firms place stronger emphases on generic

organizational capabilities compared with low performing firms.

Practical implications of the findingsIn line with the contention of Kelemen and Bansal (2002) and Hodgkinson(2001), this section will relate the findings to contemporary managementpractice. This paper has a number of implications for managers and academics.First, it highlights the importance of generic capabilities and implies the needto understand the role of capabilities and their impact on strategy. For example,Connor (1999) contends that the most important aspects of any organisationseeking to meet the needs of customers include the provision of goods/servicesthat customers need, continuous innovation and the ability to meet current,future and potential needs. Table II indicates that the firms in this sample placea significant emphasis on customer needs by providing quality highperformance goods. In addition, over 70 per cent of the firms surveyed

Table VI.The emphasis ongeneric organisationalcapability types inhigh and lowperforming firms percentage of firmsindicating attributesare important or veryimportant

Organisational capabilityHigh performing

mean (n = 108)Low performing

mean (n =35)

Advertise/promote the product or service 40.7 12.0Deliver a broad product range 49.1 16.7Distribute products broadly 48.1 17.6Respond to swings in volume 59.3 28.5

Make rapid design changes 76.8 19.4Compete on price 49.1 25.0Provide after-sales service 79.7 22.2Deliver products quickly 75.9 25.9Involvement of top management 84.9 49.7Involvement of line managers 88.4 47.6Flexibility to adapt to unanticipated changes 86.2 49.8Provide high performance products 84.2 24.6Deliver products on time 94.5 41.5Offer consistent quality 98.2 32.4


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emphasised rapid design changes as being important or of major importance.Arguably, these firms are well on the road to meeting Connor's criteria forsuccess.

Second, all the generic capabilities examined have a close relationship withall the characteristics of strategy (with the exception of strategy as a controlmechanism). This indicates that the firms surveyed view genericorganisational capabilities as an integral part of the strategic process. Based onthe analysis of Table III, it could be argued that small- and medium-sizedorganisations use their generic organisational capabilities as the basis of theirstrategic direction. This indicates a high degree of alignment.

Third, the analysis of Table IV shows that every one of the organisationalcapabilities are correlated with one or more performance measures. The uses oftop management time and line manager involvement are seen as importantaspects of avoiding problem areas a vital task for SMEs. Interestingly, the

capabilities to provide high performance goods and consistent quality arecorrelated with all the measures of performance. This indicates that these twocapabilities are very important drivers of overall performance.

Based on the above findings, there can be little doubt on the impact ofgeneric organisational capabilities on both strategy and organisationalperformance. The findings enable managers to identify and focus on thecapabilities needed for enhanced or desired performance.

However, while a large percentage of high performing firms see each of thecapabilities as either important or of major importance, the percentage of lowperforming firms viewing capabilities as either important or of majorimportance is very low often less than half that of high performing firms.

This finding has some profound implications for low performing firms arguably one of the reasons, if not the main reason, that they are lowperforming. Arguably, a greater emphasis on capabilities by training andsupport agencies would give small- and medium-sized organisations greaterconfidence as well as enhance their competitiveness as they face increasingcompetition from domestic and overseas firms.

ConclusionsThis paper has sought to clarify the concepts of organisational capability inrelation to small- and medium-sized firms. Organisational capability lies within

the resource-based view of corporate strategy and relates to the use of theresources in the attainment of the firm's strategic goals and objectives.The findings indicate that generic organisational capabilities are very

important factors in the operating environment of SMEs and are associatedwith both strategy and performance.

All small- and medium-sized organisations perceive the various types oforganisational capability to be important. However, the analysis provides someinteresting results. For example, the variance on the degree of importance givento each type of capability between high and low performing firms is significant


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and confirms the impact of capabilities as critical drivers of both strategy andperformance.

The findings provide an ideal foundation for firms to review the criticalaspects of their operations and to identify the actions necessary for the effectivedeployment of corporate strategy and ultimately achieving greater competitiveadvantage. Accordingly, it is the author's opinion that the findings have someimportant implications for managers.

Our research extends previous research by linking generic capabilities toboth strategy and organisational performance. Accordingly, the findings are ofbenefit to practitioners and academics as they explain and predict an empiricalphenomenon (the impact of generic organisational capabilities on strategy andperformance in small and medium sized organisations) that is not fullyexplained or predicted by conceptual frameworks already in existence.

Future researchThe sample in this study was restricted to only two SIC types electronics andengineering. Clearly, the analysis applies primarily to these sectors. In addition,the study did not attempt to examine the differences at the more detailedsub-sectoral level. In other words, it assumed that the engineering andelectronics sectors were internally homogeneous. This assumption should betested in future studies. In addition, any future research should consider a morein-depth approach. It would have been beneficial to augment the quantitativedata with qualitative in-depth case studies or an ethnographic approach.Further testing should be carried out to confirm the finding's relevance topractice and in particular its effective operationalisation. This might entail the

development of a diagnostic framework to assist SMEs to identify the aspectsnecessary for the effective deployment of strategy using a checklist principle.Such a checklist would be of immense value to the managers of small- andmedium-sized firms as a self-monitoring instrument.

In addition, future research might focus on the development of capabilities inSMEs and the feasibility of acquiring such resources compared with growingthem organically. More importantly, further research should examine themechanisms that enable the effective reconfigurations of resources.

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Further reading

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Capabilities for Strategic Direction and Performance (2)

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