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Corporate Distinctive Competence, Strategy, Industry and PerformanceAuthor(s): Michael A. Hitt and R. Duane IrelandSource: Strategic Management Journal, Vol. 6, No. 3, (Jul. - Sep., 1985), pp. 273-293Published by: John Wiley & SonsStable URL: http://www.jstor.org/stable/2486187Accessed: 18/08/2008 12:29

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Strategic Management Journal, Vol. 6, 273-293 (1985)

Corporate Distinctive Competence, Strategy, Industry and Performance MICHAEL A. HITT College of Business Administration, Texas A&M University, College Station, Texas, U. S.A.

R. DUANE IRELAND Hankamer School of Business, Baylor University, Waco, Texas, U.S.A.

Summary Co;-porate distinctive comiipetencies mna facilitate effective management of interdependencies atmtong inuitiple uniits. Relationships between corporate distinctive comnpetenicies and filr performance were exatnined in 185 industrial firmis. Results suggested that distinctive competencies associated with pemformnance vary accotding to the grand strategy used and the firmns principal induistry. Specific distinctive competencies were identified for each strategy and industty type.

Strategy is the mechanism used to align firms with their environments. With the exception of single product firms, two strategy levels must be formulated. Concerned with domain definition (Bourgeois, 1980), the corporate level strategy specifies the firm's businesses. Separate business level strategies reflect how a firm will compete within each business or product market. Effective implementation of both strategy types is critical to performance (Lorange, 1982). The development and use of distinctive competencies is linked to successful strategy implementation (Grant and King, 1982; Yavitz and Newman, 1982).

Regardless of level, a distinctive competence represents those activities in which a firm, or one of its units, does better relative to its competition (Selznick, 1949, 1952, 1957). Snow and Hrebiniak (1980) suggested that functional areas (e.g. general management, production, marketing/selling) can become distinctive competencies. Their results showed significant relationships among business level strategies, certain distinctive competencies (functional activities) and performance. Earlier evidence suggested similar relationships (Miles and Snow, 1978). More recently, relationships of this kind were reported at the corporate level (Hitt, Ireland and Palia, 1982). In addition, others have suggested important links between corporate level strategies and performance (e.g. Bower, 1982) and called for the development of appropriate functions into corporate-wide distinctive competencies (Kiechel, 1982). This research focused on relationships among corporate level distinctive competencies, corporate level strategies, industry type and corporate performance. This present study represents a partial replication and extension of Hitt, Ireland and Stadter's (1982) research. The purpose of the current study is to confirm/disconfirm and disentangle

01 43-2095/85/030273-2 1$02 . 10 Receiv ed 31 May 1 933 ? 1985 by John Wiley & Sons, Ltd. Revised 13 Febraary 1984

274 Michael A. Hitt and R. Duane Ireland

some of their findings and to extend the conceptual and empirical development of the relationship between corporate level distinctive competencies and performance.

CORPORATE DISTINCTIVE COMPETENCIES

Many large, diversified firms segment their operations into 'strategic business units' (SBUs) to enhance market-place competitiveness. These units form strategies and operate in a semi- autonomous manner. Effective management of the whole firm requires some degree of 6relatedness' among these units. As such, complete autonomy for business units is inappropriate (Yavitz and Newman, 1982) and may be linked to poor performance.

One form of relatedness is similar products (Rumelt, 1974). Yip (1982) suggests that relatedness (the degree of interdependency effects among a firm's businesses) may assume other forms as well (e.g. entrant parent characteristics) and can be manipulated to achieve a competitive advantage. Similarly, Yavitz and Newman (1982) note that corporate executives must develop synergies among a firm's business units. They suggest that firms can no longer select portfolios and wait for results. One way to develop synergy among business units is through the transfer of corporate-wide distinctive competencies among the units (Bower, 1982).

Corporate-wide distinctive competencies, such as corporate R&D, outstanding executives and, as appropriate, centralized marketing (Yavitz and Newman, 1982), can result in relatedness across most or all of a firm's separate business units. These competencies occur through development of specific activities associated with each function. Thus, a competence in marketing, for example, can be formed through an emphasis on pricing strategies, advertising and promotion campaigns and market research strategies. Kiechel (1982) suggests that development of corporate-wide distinctive competencies may correct deficiencies in the corporate portfolio management approach. The portfolio approach may result in cautious, control-oriented behaviours in which innovation may be stifled and corporate resource allocation processes become skewed (Hayes and Abernathy, 1980).

Recent evidence denotes performance declines for some firms using the portfolio approach (e.g. Teledyne, Consolidated Foods, Castle and Cook). Kiechel (1982) and Yavitz and Newman (1982) argue that performance could be improved through development of corporate level distinctive competencies linked to success across a firm's separate businesses. A systematic corporate emphasis on application of these skills may integrate a firm's businesses more effectively than does the corporate portfolio management technique (Kiechel, 1982). Newly acquired or internally developed businesses can benefit greatly from existing corporate-level distinctive competencies (Kiechel, 1982; Yavitz and Newman, 1982). Corporate-level distinctive competencies may be related to a firm's primary markets or technologies (Ansoff, 1965). They occur through selection and development of executive personnel, assignment and delegation of power to those managing critical areas, by inclusion of executives in the dominant coalition and through differential resource allocations.

GRAND STRATEGY EFFECTS

Grand strategy denotes an overall, primary and predominant strategy for achieving a firm's major plan in terms of overall sales and earnings goals. The focus is on the entire firm's

Corporate Distinctive Competence 275

goals rather than those of a single division or unit (Glueck, 1976, 1980). This strategy indicates general options available to those managing the firm's parts and provides some indications as to the means used to influence the environment.

Grand strategy is often more difficult to examine than business and functional strategies. However, the use of generic strategic typologies facilitates examination and theory building in these instances (Hambrick, 1983a). In addition, typologies aid in achieving parsimony and constructing gestalts (Hambrick, 1983b). Thus, grand strategy may be examined more effectively using Glueck's (1976, 1980) typology as adapted by several researchers (e.g. Hitt, Ireland and Palia, 1982). The four strategy types in this typology, with examples from the current sample, are (1) stability (Curtiss Wright Corporation and Universal Leaf and Tobacco), (2) internal growth (Mattel, Inc. and Xerox Corporation), (3) external acquisitive growth (W.R. Grace and Company and Conagra, Inc.) and (4) retrenchment (Stokely Van Camp, Inc. and Revere Copper and Brass, Inc.).

Firms should develop distinctive competencies in activities important for implementation of their grand strategy. Distinctive competencies, in the form of critical functional activities, yield either a formal or informal structure through which the grand strategy is implemented. The relative importance of these critical activities seems to vary by grand strategy type (Fox, 1973; Heau, 1976; Hitt, Ireland and Palia, 1982; Kitching, 1967; Rockart, 1979). More directly, Hitt, Ireland and Stadter (1982) found that the relationship between functional activities and performance varied with the type of grand strategy being implemented.

INDUSTRY EFFECTS

Industry effects on firm conduct have long been suggested by industrial economists (e.g. Bain, 1959). Porter (1980) notes these strong effects on the selection of business level strategies. Hatten, Schendel and Cooper (1978) found relationships among industry structural characteristics, business level strategy and performance among firms in the brewing industry.

Industry effects may exist at the corporate level as well. For firms that are not diversified extensively, such effects will be a product of the firm's dominant industry. However, even highly diversified firms often have multiple products in similar industries or those with similar characteristics. Additionally, chief executives' actions may be guided by the core industry in which they have experience.

Examination of corporate level industry effects and the call for use of typologies in theory building (Hambrick, 1983a) required the use of an industry typology. Founded in the industrial economics literature (Economics Encyclopedia, 1973, 1974), the typology selected has been used previously (Hambrick, 1983a; Hitt, Ireland and Stadter, 1982). The four industry types, with examples of firms included in this study, are (1) consumer durable goods (Beech Aircraft Corporation and the Maytag Company), (2) consumer non-durable goods (Johnson and Johnson and Pfizer, Inc.), (3) capital goods (Hesston Corporation and Cummins Engine, Inc.) and (4) producer goods (Boise Cascade and the Standard Oil Company of Ohio). Previous research (Hitt, Ireland and Stadter, 1982) indicated that the relationship between the importance placed on various functional activities and performance may vary according to a firm's principal industry type.

Based on the existing evidence and in light of the remaining research questions, several hypotheses were formed.

276 Michael A. Hitt and R. Duane Ireland

HYPOTHESES

Hypothesis 1

The relationship between corporate level distinctive comnpetencies and pet forinance differs by grand strategy type.

This hypothesis is based on results reported by Fox (1973), Heau (1976), Hitt, Ireland and Palia (1982), Hitt, Ireland and Stadter (1982) and Kitching (1967).

Hypothesis la. Production/oper ations and mar-keting activities are r-elated positively to perfornance forfirm1s itnplementing a stability grand strategy.

As such, an emphasis on control of product costs, preventative maintenance and inventory control procedures is important. To retain market share, marketing must be emphasized. Fox (1973) suggested that both of these activities were important for firms seeking stability in a highly competitive environment. Hitt, Ireland and Stadter (1982) found marketing and production/operations to be related positively to several accounting performance measures for firms implementing a stability strategy.

Hypothesis lb. Pr-oduction/operations and finance activities are related positively to performnance forfirmns implemnenting an internal growth grand strategy.

Internal growth requires control of production processes (Fox, 1973) and effective use of financial resources (Heau, 1976). Hitt, Ireland and Stadter (1982) reported positive relationships between production/operations activities and several accounting performance measures for firms following an internal growth strategy in different industry settings. Finance activities were related positively to performance for these firms in two of four industry settings. Research and development might seem critical for implementation of this strategy. However, Hitt, Ireland and Palia's (1982) findings did not support this expectation. Similarly, Hitt, Ireland and Stadter (1982) reported a negative relationship between performance and engineering, research and development activities for internal growth strategy firms. Thus, although intuitively appealing, previous research does not support hypothesizing a positive relationship between research and development and performance for these firms.

Hypothesis ic. Public and governminental relations and financial activities are related positively and engineering, research and developmnent activities negatively to perforzmance for firns imqplementing an external acquiisitive growth grand strategy.

Anti-trust legislation and public sentiment are critical for firms seeking acquisitions. As such, development and maintenance of harmonious relationships with the public and key governmental agencies may be necessary. A positive relationship between public and governmental relations and performance was found for firms using an external acquisitive growth strategy in two industry settings (Hitt, Ireland and Stadter, 1982). The ability to complete acquisitions successfully and a firm's financial activities would seem to be highly related (Kitching, 1967). Although previous research (Hitt, Ireland and Stadter, 1982) found negative relationships between finance and performance, the logic suggests the

Corporate Distinctive Competence 277

opposite relationship. In contrast, previous research found that engineering, research and development activities were related negatively with several performance measures across industry settings (Hitt, Ireland and Stadter, 1982). Similarly, Hitt, Ireland and Palia (1982) reported that these activities were perceived to be the least important for firms using this strategy type.

Hypothesis Id. Marketing activities are related positively and gener al administration activities negatively to performnance for- firms imiplemnenting a retrenchmnent grand strategy.

Little systematic research has focused on firms using this strategy. Preliminary evidence suggests marketing activities rnay be linked to successful retrenchment (Hitt, Ireland and Palia, 1982). Others have cited the difficulty of implementing a retrenchment strategy (Harrigan, 1980; Porter, 1980). Their research suggests that general administration activities should be de-emphasized when retrenching, through reduction or elimination of efforts to analyse new business opportunities, installation of advanced information processing systems, training and development of managerial personnel, etc. Although de- emphasized, certain administrative skills remain important. For example, new buyers for plant and equipment must be located and agreements negotiated. Material flows must be redirected, employees placed on layoff status and distributors placated.

Hypothesis 2

The relationship between corporate level distinctive comnipetencies and peiformnzlance varies with thefirm 's domninant indust;-y.

This hypothesis is based on findings reported by Bettis and Hall (1982), Hitt, Ireland and Palia (1982), King (1966), Miles and Snow (1978), Rockart (1979), Schoeffler, Buzzell and Heany (1974) and Thune and House (1970).

Hypothesis 2a. Production/operations, narketing andfinance activities ar-e related positively and engineering, resear-ch and development activities negatively to performance for firmiis operating in a consumn1er non-durable goods industry.

Price, promotion and distribution are often important competitive factors for firrns manufacturing goods with comparatively short life expectancies. In these instances, firms may allocate fewer resources to engineering, research and development activities. Instead, resources may be allocated to acquiring a large market share by providing reasonably priced products to consumers quickly and conveniently. To do so may necessitate tight financial control of operations. Hitt, Ireland and Stadter's (1982) findings of a positive relationship between production/operations and performance offer support for this hypothesis.

Hypothesis 2b. Production/operations activities ar-e related positively to performanceforfirms operating in a consumner durable goods industry.

Product quality is typically an important competitive factor in this industry. Recent events (e.g. in the automobile industry) suggest that product quality may be of greater competitive

278 Michael A. Hitt and R. Duane Ireland

importance than price. As such, an emphasis on both manufacturing processes and quality control may be appropriate. Hitt, Ireland and Stadter (1982) found a positive relationship between production/operations activities and performance for two sets of firms using different strategies in the consumer durable goods industry.

Hypothesis 2c. Production/operations activities ar-e related positively to performnance forfir-ms operating in a capital goods industry.

The custom-manufacturing process often associated with producing capital goods suggests an emphasis on production effectiveness and product quality. Hitt, Ireland and Stadter (1982) found production/operations activities to be related positively to performance for firms following an internal growth grand strategy in this industry.

Hypothesis 2d. Production/opercations activities ar e r-elated positively and marketing activities negatively to performanance for firmns oper-ating in a producer- goods industry.

Meeting customers' product quality specifications is critical to success in this industry. In turn, selling outputs to other producers suggests that marketing is relatively less important. Production/operations activities have been found to be related positively with performance for firms in a producer goods industry, regardless of the strategy employed (Hitt, Ireland and Stadter, 1982). In contrast, marketing was found to be related negatively with several performance measures for firms competing in this industry setting.

Logic suggests that strategy and industry characteiristics may interact to affect relationships between distinctive competencies and performance. For example, appropriate distinctive competencies may be affected by quality, price, packaging, distribution and capital requirements in internal growth strategy firms. Research and development activities may be critical for firms whose growth is based on the use of internal resources and skills to develop additional consumer durable goods. In contrast, firms attempting internal growth in a consumer non-durable goods industry, where product lives are shorter and individual sales prices are lower, may find constant and rapid development of additional markets to be critical.

METHOD

Sample The hypotheses were tested through a sample of 185 of the Fortune 1000 industrial firms. Data were collected from the Center for Research in Security Prices (CRSP data tapes), Value Line Investment Survey, Federal Reserve Bulletins and questionnaires.

Questionnaires were mailed to each firm's chief executive officer (CEO). The CEO was instructed to denote the firm's grand strategy and then have a senior executive knowledgeable about overall firm operations (most were executive vice presidents or chief planning officers) complete the remaining portions of the questionnaire to control for common method variance.

There were 240 questionnaires returned, of which 185 were usable (based on performance data availability). There were annual sales in excess of $600 million in 113 firms, 51 had between $200 million and $599 million in sales and 21 had less than $200 million in sales.

Corporate Distinctive Competence 279

Instrument Grand strategy type was measured on a nominal scale with four strategy classifications: (1) stability (similar operating levels to pursue similar objectives with only incremental performance improvements), (2) internal growth (growth through internal development), (3) external acquisitive growth (growth through acquisition, merger and/or joint ventures) and (4) retrenchment (reduction of level or scope of product/market objectives).

Distinctive competence activities (55 in total) were derived from previous works (Anthony and Dearden, 1976; Buchele, 1962; Paine and Naumes, 1974; Rockart, 1979; Sproul, 1960; Steiner, 1969; Stevenson, 1976). These same activities were aggregated and called functional importance measures in the Hitt, Ireland and Palia (1982) and Hitt, Ireland and Stadter (1982) studies. However, further conceptual development and additional analysis of the Snow and Hrebiniak (1980) research resulted in refinement of this concept. More specifically, the literature suggests that these functional activities may, when emphasized appropriately, become distinctive competencies. Similarly, in the current study, activities were categorized into their major function (either general administration, production/operations, engineering, research and development, marketing, finance, personnel or public and governmental relations). Executives were asked to rate each activity on a seven-point Likert-type response mode rainging from 'greatest strategic significance' to 'completely strategically insignificant'. The ratings were grouped by function and summed to determine the relative importance of each major group of distinctive competence activities. A list of the 55 activities is given in the Appendix.

This method of measuring the distinctive competence activities represents an improvement over the Snow and Hrebiniak (1980) measure. Snow and Hrebiniak asked executives to rate each function as a strength, a weakness or simply 'OK' (i.e. average). Researchers have found that posing a simple, straightforward question may not produce accurate responses. Decision makers' descriptions of their own policies are often inaccurate (Balke, Hammond and Meyer, 1973; Hoffman, 1960; Slovic, 1969). Argyris and Schon (1974) describe this as the difference between 'espoused theories' and 'theories in use'. However, having executives rate the strategic significance of 55 separate functional activities provides data on what specific activities are being emphasized. As such, the technique serves as a surrogate for observing and recording that person's behaviour.

Industry type was measured on a nominal scale using four normative classificationss: (1) consumer durable (goods are purchased for personal gratification and last for long periods of time-automobile), (2) consumer non-durable (goods are purchased for personal gratification but last for only a limited time period-processed foods), (3) capital (goods are used to manufacture or provide consumer or producer goods to others-machinery, buildings) and (4) producer (goods are used as raw material to produce consumer or capital goods-steel, cement). Executives noted their firm's principal industry (defined as the one in which the largest percentage of sales is earned). This classification scheme, derived from Economics Encyclopedia (1973, 1974), Khandwalla (1977), and Schoeffler, Buzzell and Heany (1974), is similar to the method used by Snow and Hrebiniak (1980).

Arguments for the use of a broad industry classification to examine potential corporate level effects were advanced earlier.; However, this approach also has limitations. For example, diversified firms operate in multiple industries. The uniqueness of these industries' environments complicates the attempt to isolate industry type effects on corporate level distinctive competencies. Also, precise distinctions between capital and producer goods are sometimes difficult to discern. None the less, this scheme is a useful corporate level measure and is used extensively by practitioners.

280 Michael A. Hitt and R. Duane Ireland

In some strategy research (e.g. Grinyer and Norburn, 1975; Karger and Malik, 1975; Rumelt, 1974; Thune and House, 1970), performance has been measured by various accounting determined indices (e.g. ROI, ROE, ROA, EPS). Market returns, as reflected by the Treynor Index (Treynor, 1965, 1968), reflects better a firm's fitness to engage in future activity (Thompson, 1967). Weston and Brigham (1978) and Reilly (1979), for example, suggest that the securities market adjusts or compensates for deficiencies associated with some accounting data. Thus, the market evaluates, among other factors, a firm's present and prospective earnings flow, the timing risks of this flow and the firm's dividend policies. As such, the market price of a firm's stock reflects the organization's long-run performance potential on behalf of stockholders.

In the light of the evidence, market returns were used to measure performance. The variable was defined as follows: MR= (GMRi - RFRk)/3 where MR = market returns, X = beta measure of systematic risk, GMRi = geometric mean annual stock return for firm i and RFRk = geometric mean annual riskless rate.

Data on daily market returns for firms' securities were obtained from CRSP tapes. A maximum of 5 years (1975-1979) data were used to calculate the geometric mean annual return. The geometric annual risk-free rate was computed from the average selling prices at the weekly 3-month treasury bill auction. These data were obtained from the Federal Reserve Bulletin.

The beta measures of systematic risk were taken from the Value-Line Investment Survey. The mean betas presented in Value-Line are calculated for a period of 5 years, matching the 5 years of market returns data.

The use of market returns has potential limitations. As with any financial performance measure, it can be affected by extraneous factors. Economic factors affect most stock prices in a systematic manner, however. Branch and Gale (1983) noted four important determinants of stock price: firm profitability, firm growth (past and future expectations), risk and stock market outlook. Two of these are affected primarily by firm actions. In an earlier work, King (1966) found only 10 per cent of variance in stock prices to be explained independently by industry. Thus, a large percentage of the variance in market returns can be attributed to a firm's actions over time. Its potential limitations notwithstanding, the market returns measure has advantages over others. It is based on the capital asset pricing model, which represents the best theoretically-derived firm performance index now available (Langetieg, 1978) and is accepted in the finance literature in the study of corporate strategies (Harrington, 1983; Lubatkin, 1983).

Reliability and validity In a pilot study (Hitt, Ireland and Palia, 1982; Hitt, Ireland and Stadter, 1982), all variables reflected strong interjudge reliability, and additional support for the validity of the grand strategy measure was shown. The use of multiple measures meets requirements recommended by Ginsberg and Venkatraman (1983), for measuring strategy in policy research. In addition, Cronbach (1970) alphas for the seven functional distinctive competence scores in this data set were: general administration (0.82), production/operations (0.88), engineering, research and development (0.85), marketing (0.85), finance (0.86) and public and governmental relations (0.82). Thus, all measures showed acceptable reliability levels.

Corporate Distinctive Coinpetence 281

RESULTS

Hypotheses 1 and 2 were tested using moderated regression analysis (Zedeck, 1971). This technique yields a conservative estimate of the moderating effects one variable has on the relationship between two others (Darrow and Kahl, 1982). In this procedure, the dependent variable is regressed on a set of predictor variables, an hypothesized moderator variable and a cross-product of the preceding terms (y = a + bx + cz + dxz) where y is the dependent variable, x is an independent variable, z is an hypothesized moderator variable and xz is the interaction term (Bedeian, Mossholder and Armenakis, 1983). The purpose of the analysis is to determine whether the addition of the interaction term significantly increases the explanation of variance (R2). The procedure recommended by Saunders (1956) was used to test the differences in R2s.

Results of the moderated regression analyses for the grand strategy types appear in Table 1. As shown, changes in R2 (ranging from 0.015 to 0.044) from the restricted (independent plus dummy moderator variables) to the full model (independent plus dummy moderator plus interaction variables) are all significant at least p < 0. 1. 1,2 The results strongly support hypothesis 1 in that the stability, internal growth and external acquisitive growth grand strategies were shown to be reasonably strong moderators of the corporate level distinctive competence/performance relationship. The retrenchment strategy was found to be a mild moderator of this relationship.

Table 2 includes results of the moderated regression analyses for each industry type. Changes in R2 from the restricted to the full model are all significant at p < 0.1. These changes ranged from a low of 0.019 to a high of 0.107. The results suggest that consumer non-durable and producer industries are reasonably strong moderators of the distinctive competence/performance relationship. Consumer durable and capital goods industries have mild moderating effects on this relationship. In total, support is provided for hypothesis 2.

Given the moderated regression results, further subgroup analyses were necessary to specify the type and directionality of the relationships. The interaction terms in moderated regression are not directly interpretable. Thus, Pearson product-moment correlations were calculated to test hypotheses la-ld and 2a-2d. Relationships between the seven distinctive

Table 1. Moderated regression analysis with grand strategies as moderators

Restricted model Full model Grand strategy R R2 AR t

Stability 0.077 0.121 0.044 2.85*** Internal growth 0.084 0.105 0.021 1.97** External acquisitive growth 0.121 0.158 0.037 2.68** Retrenchment 0.076 0.091 0.015 1.66*

*p<0.1; **p<0.05; ***p<0.01.

' This iesearch is exploratory in nature. In this instance, Hartwig and Dearing (1979) recomlnmenid that a liberal analytical approach be used. As such, the 0.10 level of significance was u.sed. Precedence has been established for this procedul-e in studies of this kind (e.g. Bettis, 1981; Hambrick, 1981; Snow and Hrebiniak, 1980). The probability of a Type 11 error- is increased and the probability of a Type I error is decreased. Since this r esearch is exploratory, it is muchL more likely that futur-e research examining these results will discover a Type II error rather than a Type I error. 2 Although the changes in R2 are statistically significant, the amount of varianice explainied by any one strategy or any one industry type is not high. As might be expected, other factors also affect the performnance of the firm (e.g. implementation of its strategy, ability to control costs, etc.).

282 Michael A. Hitt and R. Duane Ireland

Table 2. Moderated regression analysis with industry types as moderators

Restricted model Full model Industry type R2 R2 AR2 t

Consumer non-durable 0.074 0.181 0.107 4.43** Consumer durable 0.076 0.096 0.020 1.92* Capital 0.077 0.096 0.019 1.87I Producer 0.088 0.124 0.036 2.59***

*p<0.1; **p<0.05; ***p<0.01.

competence measures and performance for each strategy and industry type are shown in Table 3.

For firms using a stability strategy, marketing activities showed a positive relationship with performance, providing partial support for hypothesis la. Financial activities had a positive relationship and engineering, research and development activities a negative one with performance in internal growth strategy firms, providing partial support for hypothesis lb. For firms using an external acquisitive growth strategy, production/operations and public and governmental relations activities had positive

Table 3. Correlations between distinctive competence measures and performanace for eaclh grand strategy and industry typet

GENAD PROD MKT FIN ERD PER PGR

Stability024 035* (nS=b25) 0.065 0.246 0.359** 0.237 -0.105 0.071 -0.083 Performance (+) (+)

Internal growth (n- 119) 0.026 0.038 -0.098 0.146* -0.150* 0.026 0.094 Performance (+) ( + )

External acquisitive growth (n= 33) 0.045 0.289** 0.051 0.071 0.124 0.181 0.230* Performance (+) (-)

Retrenchment (n -7) -0.808** -0.797 -0.717"* _0.549 -0.435 -0.871*" i -0.359 Performance () -()

Consumer non-durable (n = 53) - 0.092 - 0.099 0.010 0.257** 0.386** -0.039 0.069 Performance (+) (?) () (-)

Consumer durable (n= 16) 0.188 0.212 0.238 0.206 0.279 0.240 0.240 Performance (+)

Capital (n=47) -0.046 0.210** -0.016 0.156 0.078 0.066 0.151 Performance (?)

Producer (nP=d69) 0.076 0. 153* -0.156* 0.085 -0.075 0.098 0.078 Performance (+) ()

*p<O.l; **p<0.05; ***p<0.01.

t Hypothesized relationships are underlined with the hypothesized directions of the relationships inicicated with appropriate signs in parentheses.

Table 4. Rank order correlations between distinctive competence measuies and perfor-mance in strategy by industry type cellst

Strategy/industry cell GENAD PROD MKT FIN ERD PER PGR

Stability/ Consuiner non-durable -0.162 0.714* ? 0.643* 0.582-1 0.109 0.036 0.036 (n= 7)

Stability/ Consumer durable na na na na na na na (n = 4)

Stability/ Capital na na na na ina na na (n= 3)

Stability/ Producer -0.119 -0.014 -0.164 -0.320 -0.757*** -0.340 -0.156 (11= 11)

Internal growth/ Consumer non-durable 0.036 - 0.125 - 0.080 0.270* -0.5O1**8 0.051 0.072 (n = 36)

Intei-nal growth/ Consumer durable 0.234 - 0.185 - 0.326 0.084 -0.008 -0.218 0.185 (n1 = 9)

Internal growth/ Capital - 0.014 0.224* --0.087 0.193 -0.018 0.231* 0.167 (n = 34)

Internal growtlh/ Producer - 0.007 0.111 -0.076 0.102 0.081 0.1 24 0.024 (1 = 40)

External acquisitive growth/ Consumner non-duirable - 0.234 - 0.179 -0.036 - 0.036 -0.179 -0.198 0.436 (n =7)

External acquisitive growth/ Consumner durable na na na na nia na na (n = 2)

External acquisitive growth/ Capital 0.371 0.365 0.6774-i 0.166 0.355 0.110 0.299 (n1 = 10)

External acquisitive growtlh/ Producer 0.532k* 0.358*- - 0.256 -0.066 0.(044 0.335 0.157 (n= 15)

Retrenchment/ Consumer non-durable na na na na na na na (n =2)

Retrenchment/ Consumer durable na na na na na na na (n= 1)

Retrenchment/ Capital na na na na na na na (a1 = 0)

Retr-enchment/ Producer na na na na na na na (n = 4)

*p< 0. 1; ** p< 0.05; i*p< 0.01; na, inot applicable.

t Rtelationshlips denlotinlg interactionl effects as dlefinled inl the p aere are unlderlinled.

284 Michael A. Hitt and R. Duane Ireland

relationships with performance. Thus, hypothesis Ic received partial support. Performance had a strong, negative correlation with general administration, production/operations, marketing and personnel activities in retrenchment strategy firms, providing only marginal support for hypothesis Id. However, the small cell size (n =7) suggests cautious interpretation.

Hypothesis 2a received partial support. For firms in a consumer non-durable goods industry, financial activities were related positively and engineering, research and development activities negatively to performance. No significant statistical relationships were found in the consumer durable industry cell, indicating a lack of support for hypothesis 2b. Production/operatioins activities were related positively to performance for firms in a capital goods industry. Tlhus, partial support was provided for hypothesis 2c. Finally, for firms in a producer industry, marketing activities were related negatively to performance whereas production/operations activities showed a positive relationship. Tlherefore, hypothesis 2d received strong support. All cell sizes were reasonable except for the retrenchment and consumer durable cells.

Further analyses were conducted to examine potential interaction effects between grand strategy and industry type. Owing to small cell sizes, a non-pararnetric statistic, Spearman's rank order correlation (Siegel, 1956) was used. A conservative estimate of interaction effects was applied. Interaction effects were assumed when a correlation between a distinctive competence area and performance was statistically significant in the strategy/industry interaction cells (Table 4) but not in the main effects cells of strategy or industry (Table 3). Using this method, interaction effects are specifically denoted in Table 4.

Correlation analyses between each of the 55 distinctive competence activities and performance were performend in each cell to interpret the results accuirately. Because of the large number (1320) of correlations, they are not reported in this paper. However, they were used to interpret and discuss the results.

DISCUSSION

These results indicate that grand strategy type and industry type moderate the relationship between corporate level distinctive competencies and firm performance. Thus, to enhance performance, corporate level decisions to develop distinctive competencies should be made in the context of the firm's grand strategy, its principal industry type and their interaction.

Grand strategy The item (55 distinctive coinpetence activities) correlations with performance suggest that firms implementing a stability strategy emphasize marketing by improving distribution networks and by developing effective policies for product additions and deletions. These activities help to achieve sales levels that facilitate use of plant capacity. Firms using this strategy often face strong competition and must streamline while maintaining effective marketing activities to survive and grow incrementally in current product/market domains.

The relationship hypothesized between production/operations activities and performance was not supported. A couple of production activities (improving plant layout, workflow and work environment and more effective maintenance processes) were correlated with performance, however. Both emphasize the efficiency critical to stable operations. However, production/operations activities are not as important as marketing activities in these instances.

Implementation of an internal growth strategy requires financial control of operations. The positive relationship between financial activities and performance (as hypothesized)

Coiporate Distinctive Comiipetence 285

supports this emphasis. However, the negative relationship between engineering, research and development activities and performance was not expected. The item correlations provide information on both of these outcomes. The two most important financial activities were improving bond ratings and performance of common stock and developing a sound capital structure. These activities facilitate raising additional capital for growth. All correlations between engineering, research and developmnent activities and performance were negative. The strongest negative relationships occurred with use of value analysis to improve present products, with developing better raw material substitutes and with attempts -to improve process engineering for energy efficiency. Therefore, these results suggest that the least emphasis should be placed on improving current products and manufacturinlg efficiency. The same negative relationship was r eported previously (Hitt, Ireland and Stadter, 1982) for internal growth firms in three different settings; Foster (1982) and Hayes and Abernathy (1980) suggest that firms sometimes invest heavily in research and development, but miss factors critical to R&D success. For example, firms which were once technology leaders sometimes strive to gain manufacturing efficiencies with mature technologies, rather than to focus on the discovery of new technologies. Additionally, Hambrick, MacMillan and Barbosa (1983) found that research and development intensity related negatively to sales in both growth and mature businesses, suggesting that corporate- level managers may favour SBUs that show early positive cash generation rather than those with future potential. The relatioinship hypothesized between production/operations and performance was not found. Item correlations showed only one marginal relationship with performance (improving plant layout, workflow and work environment). These firms focus more on financing growth and the cost of financing (bond ratings) than on production efficiency. In addition, an emphasis on manufacturing activities in internal growth firms may vary by industry type, as production/operations activities were related positively to performance in internal growth strategy/capital goods industry firms.

Manufacturing firms following an external acquisitive growth strategy may focus on several criteria when seeking acquisitions. A common criterion is the melding of similar core technologies to achieve synergy (supported by item/performance correlations). The most important production/operations activities include (1) increased comptuterization and decentralization of production control systems to improve quality, time and cost control and (2) improved industrial engineering capabilities. Because of increased size, improved computerization and decentralized production control are necessary to realize the synergy. Better industrial engineering capabilities should improve the efficiency of the worker/machine interface.

The item correlations suggested the importance of maintaining a good overall corporate image in these firms. No engineering, research and development activities were related to performance, probably because growth is sought not through internal development of new products, but rather through acquisition of others' existing capabilities. Hambrick, MacMillan and Barbosa (1983) suggest that firms with major businesses in mature industries often seek to grow through diversification by external acquisition. Thus, cash generated by mature businesses is used to acquire and fund growth businesses (Hambrick, MacMillan and Barbosa, 1983).

Retrenchment requires reductions in objectives and/or scales of operations. The results suggest that retrenchment may require de-emphasizing general administration, production and personnel activities to reduce costs (particularly overhead costs). General administration activities/performance correlations showed that the most negative relationships were with (1) developing and communicating corporate mission objectives and

286 Michael A. Hitt atid R. Duane Ireland

strategy, (2) developing a corporate strategic planning system, (3) use of quiantitative techniques in decision making and (4) more extensive use of computer systems to provide information for decision making. Executives in these firms muist focus on sur-vival iather than long range effectiveness. In addition, mnarketing activities/performance correlations showed that these firms cannot support more extensive marketing research, intensive market penetration, flexible pricing strategies or a dynamic sales force. However, these activities will probably be reqtuired for growth after retrenchment is completed. The personnel activities/performance correlations suggest that union relations, effective personnel policies, enmployee motivation, employee creativity and grievanice procedures are less important when firms retrench. These results suggest that survival must override other obj ectives.

Industry type Engineering, research and development activities were related negatively to performiance for consumer non-dujrable goods firms. Markets for constumner non-durable goods are often highly competitive. The price variable, as compared to product quality, is frequently a more critical competitive weapon. 'he item correlations suggest that as a result of the highly competitive markets, these firms focus strongly on stock market performlance, relations with stocklholders and attempts to maintain a strong capital structure.

Thle expected relationships between performance anid prodluction/operations and marketing activities were not realized. However, this industry's competitive nature would seem to requiire an emnphasis on advertising, promotion and related marketing activities (Khandwalla, 1977). The iteim correlations showed that imiarketing activities aimed at securing large conitracts were related positively to performance. None the less, Hitt, Ireland and Stadter (1982) found marketing activities for consumer non-durable goods firms to be related to performance in only one of thiree strategy types, and that relationship was negative. Thlus, in this industry settiing, marketing activities nmay wairant emuphasis only for selected businesses in specific product mrarkets.

No relationships were found between corporate distinctive competencies and performance for consumer durable goods firms. However, thie item correlations suggested that relationships do exist. Improved plant layout, workflow and worIk environimeilt, along with better industrial engineering capabilities, seem important. In. addition, a strong marketing research programme and an effective sales organization were found to be related strongly to performance. Emphasis on production efficiency and qluality, better knowledge of the markets, coupled with close m-onitoring of returns in product markets, is required in markets that are higily comnpetitive and where each product produced represents a sizeable investment (e.g. automobile).

In the capital goods industry, many products are custom manufactured. With fixed contract prices, profits ar-e realized only if the firm is efficient, controls production costs and produces products that satisfy customer requir-ements. Itemt- correilations support thiis notion. Increased automation, efficient and reliable multiple-source material procurement and improved production control of quality, cost and tiIne were related to performanice.

Firms in the producer goods industry do not sell to the ultimate consumer, but to other firms who use these goods to mianufacture a final product. Diflerential pricing strategies and advertising are less critical to these firms than to consumer goods firms. These firilis mav have to emphasize manufacturing efficiency and quality control, rather than marketing activities, to meet customers' price and qualitly standards. Item corr elations showed increased automation, improved plant layout, workflow and maintenance policies to be related to performance.

Corporate Distinctive Competence 287

Interaction effects: strategy x industry The literature supports a link between environment and strategy. In particular, there is support for thie relationship between industry and strategy (e.g. Bettis and Hall, 1982; Porter, 1980). Not only might strategy be affected by industry characteristics (Porter, 1980), but, more importantly, the means of effective implementation may vary by industry. Therefore, the interaction of the strategy and industiy characteristics probably affects the development and use of firm-specific distiinctive conmpetencies. hIowever, there is little theoretical or empirical data to suggest the specific configuration of these effects.

Interaction effects on distinctive competencies were found. For example, no main effects on the relationship between production/operations and performance for stability strategy firms, nor those firms in a consumer non-durable goods industry, were found. However, a strong relationship exists between- production/operations and performance for firms using a stability strategy and in a consumer non-durable goods industry. Item correlations suggest ithat the most important production activities were effective production control and reduction of pollution along with compliance with OSEA standards. Thus, these firms may find it necessary to stabilize operations in their product/markets but also seek to remain competitive in an industry where competition is usually strong. The control of costs, maintenance of quality and minimization of government concerns may be critical. Other item correlations suggest that seeking new business oppoitunities is unimportant, but that securing large business contracts (stabilizing output) and an effective internal auditing programme (increasing efficiency) are important.

The strong negative relationship between research and development and performance for firms implementing a stability strategy in a producer goods industry also reveals interaction effects. Firms that must meet customers' product specificatioins and remain within contract cost constraints, while seeking to stabilize operations, probably cannot afford to emphasize research and development programmes. Item correlations suggest that overall management of the R&D programme and the use of interdisciplinary teams to co-ordirnate R&D efforts are unimportant for these firms.

The main effects found for an internal growth grand strategy on the relationship between engineering, research and development and perfoimance mnay be strongest in the consumer non-durable goods industry. Item correlations showed all engineering, research and development activities to be related negatively to performance for internal growth/consumer non-durable goods firms. However, no relationships existed between any of these activities and performance for internal growth firms in the other industry groupings. Thus, industry characteristics, in which competition is based more on price than innovativeness, may detemine the means of internal growth. For example, growth may be attained by seeking new markets for current products and expansion of the firm's product/market domain.

Although no overall relationships were found for internal growth/consumer durable goods firms, item correlations suggest that some mnay exist. In addition to the production activities related to performance (as found in the main effects of this industry), two general administration activities were related to performance. These findings suggest that more effective management development programmes and use of management by objectives and participative decision making at upper management levels lead to better performance. Management personnel are critical if growth goals are to be attained, particularly in an industry where quality is important and the product involves considerable investment.

Firms seeking internal growth in a capital goods industry find the human element to be important. Customized production processes require decentralization. As such, the need for

288 Michael A. Hitt and R. Duane Ireland

expertise and innovativeness increases (Perrow, 1970). The item correlations suggest that the most important personnel activity is stimulating employee creativity. Multiple, unique problems are encountered in customized production processes requiring innovative solutions to achieve growth.

Examination of the item correlations in the internal growth/producer cell and external acquisitive growth/consumer non-durable goods cell supports the notion that no interaction may occur between these strategies and industry types.

The strong relationship between marketing activities and performance for firms implementing an external acquisitive growth strategy in a capital goods industry is difficult to interpret. These firms may seek mergers resulting in synergistic marketing opportunities. Acquisition of other capital goods firms with different distribution channels, a different set of customers, and/or with different marketing expertise than currently possessed may enhance performance. Additionally, the item correlations suggest that several general administration activities are important. Attracting effective top executives, developing an effective management information system and the use of objectives and participative decision making in upper management levels were related positively to performance. The improvement of present products and process engineering were also related positively to performance. Owing to high investment intensities, external acquisitive growth/capital goods must avoid strategic errors. Although firms seeking growth by acquisition often do not emphasize research and development, they must seek to improve current products and processes to remain competitive in this industry setting.

Finally, the positive relationship between general administration activities and performance for external acquisitive growth strategy firms in producer goods' manufacturers are often acquired to achieve vertical integration. Recent evidence (Baker, Miller and Ramsperger, 1981) reflects a low probability of success in these mergers. Emphasizing general administration activities may facilitate effective integration of the separate operations.

CONCLUSIONS

The results suggest that corporate distinctive competencies do exist and that executives should be concerned with the development of distinctive competencies appropriate for the implementation of the firm's grand strategy within the context of its principal industry.

The current study extended the research presented by Hitt, Ireland and Stadter (1982). Different performance measures were used in the two studies. As such, executives should determine the performance measures (i.e. accounting measures or market returns) that are most important to the internal dominant coalition and to the firm's key constituents. Where results between the two studies differ (e.g. the relationship of production/operations activities to performance for internal growth/consumer non-durable goods firms), executives may wish to examine results with the performance measure appropriate for their firm. Where the results from the two studies are similar (e.g. the relationship of production/operations and personnel to performance for internal growth/capital goods firms), executives may more confidently develop distinctive competencies appropriate for their strategy/industry classification.

More precise hypotheses and the item correlations (activities with performance) yielded much more specific data to guide executive actions. For example, the two distinctive competence areas related to performance for internal growth grand strategy firms were finance (?+) and engineering, research and development ( -). The item correlations,

Cor porate Distinctive Comiipetence 289

however, suggested which activities were most important or least important in each area. Executives in these firms should be concerned with improving bond ratings and common stock performance along with developing a sound capital structure in order to raise additional capital to finance growth. The item correlations also suggested that attempts to improve current products and manufacturiing efficiency were unlikely to lead to higher performance for these firms. Thus, firms investing heavily in research and development must be careful not to miss factors critical to R&D success and allocate resources wisely.

The results suggesting a negative relationship between engineering, research and development activities and performance for i nternal growth firms (and internal growth/consumer non-durable firms) have been found in two separate studies. Executives in these firms should re-examine their R&D expenditures and policies. The data strongly suggest that changes are in order. Stronger and more precise definition of R&D goals and policies may be necessary to achieve the return on the resources invested.

The importance of production/operations activities was supported for three groups of firms (stability/consumer non-durable goods; internal growth/capital; external acquisitive growth/producer) in both studies. Thus, for these firms, the data suggest strongly that allocating resources to production control activities and increased computerization should result in greater production efficiency.

Executives must integrate the use of corporate level distinctive competencies with approaches to strategy (grand and business level) development and implementation. In addition, corporate distinctive competencies must be integrated with the distinctive competencies required by the SBU strategies.

The differences in the results of the two studies suggest that more research is needed to determine appropriate performance measures. Less emphasis should be placed on academic ideologies with greater emphasis placed on the important constituencies' requirements in each industry. Also, future research should seek to refine corporate distinctive competencies with particular emphasis on important ones not examined previously. Future studies should critically examine how to achieve effective implementation of grand strategies.

APPENDIX: DISTINCTIVE COMPETENCE ACTIVITIES

General administration 1. Attracting and retaining well-trained and competent top managers. 2. Achieving a better overall control of general corporate performance. 3. Ability to perceive new business opportunities and potential threats. 4. Developing and communicating a corporate identity, corporate mission and objectives,

a corporate creed and a grand strategy ... a unified sense of direction and a sense of common purpose to which all members of the organization can relate.

5. Ability to unify conflicting opinions, improve co-ordination and enhance effective collaboration between key executives, generate enthusiasm and motivate sufficient managerial drive for growth and profits.

6. Developing a more effective company-wide strategic planning system for planned overall corporate development.

7. Maintaining and enhancing the management depth by ongoing training and development programmes for both domestic and overseas operations.

8. Increased use of MBO and 'responsibility accounting' and increased participative decision making at senior and middle management levels.

290 Michael A. Hitt and R. Duane Ireland

9. A more extensive and e-ffective use of quantitative techniques in decision making. 10. More extensive and cost-effective computer systems emphasizing richness, timeliness,

flexibility and accessibility of information for managerial decision making.

Production/operations 11. An ongoing plant modernization programme to keep the efficiency of equipment

comparable to that of the major competitors. 12. A good trade-off between expanding capacity and increased subcontracting. 13. Increased automation of production processes. 14. Improved plant layout, workflow and work environment. 15. More efficient and reliable mul-tiple-source material procurement. 16. More effective equipment maintenance and replacement policies. 17. Increased computerization and decentralization of production control systems for

better control of quality, cost and time. 18. Improved materials and inventory control. 19. Improved industrial engineering capabilities. 20. Reduced air, noise and other pollution and greater compliance with industrial health

and safety regulations.

Engineering and R&D 21. Improvement in research and new product development capabilities. 22. Value analysis for improving present products and developing and using more

economical and easily available raw material substitutes. 23. Improved process engineering with an added emphasis on energy efficiency. 24. Better overall management of and increased productivity from R&D expenditure by

matching explicit R&D objectives and strategies with present and proposed product/market domains.

25. Using multi-disciplinary task forces or project teams for effective co-ordination between R&D, operation and marketing (research).

Marketing 26. Improved marketing research and information systems. 27. Widening the customer base by intensive market penetration and development. 28. Ability to secure large business contracts from governments and other large customers,

especially from overseas. 29. More effective use of different pricing strategies. 30. More novel and effective sales promotion and advertising campaigns. 31. Widening and improving the product distribution networks and improving distributor

relations. 32. Developing more efficient and effective product-line policy for product additions and

deletions. 33. Maintaining a highly trained, motivated, vigorous and dynamic sales organization.

Finance 34. Improving bond ratings and common stock market performance. 35. Providing a competitive return to shareholders through effective dividend policies even

under price regulations. 36. Improving financial public relations in general and stockholder relations in particular.

Corporate Distinctive Competence 291

37. Lower cost of equity capital and long-term borrowings. 38. Sound capital structure allowing flexibility to raise additional capital for internal

growth and acquisitions. 39. Strong working capital position allowing flexibility to raise short-term capital at low

cost. 40. Effective tax management. 41. Ability to manage foreign investment risks of inflation and exchange losses. 42. Effective capital expenditure evaluation procedures that would encourage taking risks

with commensurate returns for new business opportunities in order to attain growth objectives.

43. Extensive application of ROI techniques and periodic monitoring of product-cum- market profitability.

44. Efficient, effective and independent internal auditing system.

Personnel 45. Effective relations with trade unions. 46. Effective and efficient personnel policies for hiring, training, promotion, compensation

and employee services. 47. Optimizing employee turnover (neither too high nor too low), through the corporate

image of a model employer. 48. Improved employee motivation, job satisfaction and morale. 49. Stimulating and rewarding creativity in employees and installing incentive performance

reward systems. 50. Effective grievance procedures. 51. Stimulating more employees at all levels to continue to educate themselves to remain

abreast of developments in their fields.

Public and governmental relations 52. Ability to influence national policy in the industry and to maintain effective

relationships with relevant regulatory bodies. 53. Better relations withi special interest groups such as environmentalists, consumerists and

others. 54. Ability to maintain satisfactory relations with local, state, federal and foreign

governments. 55. Improving overall corporate image.

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