the relationships between intangible organizational elements and organizational performance

Strategic Management JournalStrat. Mgmt. J., 25: 1257–1278 (2004)

Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.428

THE RELATIONSHIPS BETWEEN INTANGIBLEORGANIZATIONAL ELEMENTS ANDORGANIZATIONAL PERFORMANCE

ABRAHAM CARMELI1 and ASHLER TISHLER2*1 Graduate School of Business Administration, Bar-Ilan University, Ramat-Gan, Israel2 Faculty of Management, Tel Aviv University, Tel Aviv, Israel

Despite the growing awareness of the importance of researching core strategic resources andactivities, the work that has been done to date has largely taken the form of anecdotal reportsand case study analysis. We have yet to see large-sample studies demonstrating how organiza-tional elements, independently, complementarily and interactively, may or may not enhance theorganization’s performance. Moreover, little attention has been given to researching this topic inpublic sector organizations. The present study aims to bridge this gap by examining the impact ofa set of independent intangible organizational elements and the interactions among them on a setof objective organizational performance measures in a sample of local government authorities inIsrael. The results of a multivariate analysis indicate that organizational performance (measuredby self-income ratio, collecting efficiency ratio, employment rate, and municipal development)can be well explained by six intangible organizational elements (managerial capabilities, humancapital, internal auditing, labor relations, organizational culture, and perceived organizationalreputation) and the interactions among them, which need to be taken into account in any costeffective development. Copyright 2004 John Wiley & Sons, Ltd.

INTRODUCTION

Recognizing that organizations, whether for-profit,governmental or non-profit, are complex entities,researchers often describe and analyze them as sys-tems of interdependent core elements (resources,activities, and policies) (see Porter, 1996; Rivkin,2000; Siggelkow, 2002) that by complementingone another contribute to enhancing and sustainingcompetitive advantages. The problem is that mea-suring core resources and their effect on organiza-tional performance is often difficult (see Hoskisson

Keywords: intangible organizational elements; comple-mentarities; organizational performance; public sectororganization∗ Correspondence to: Ashler Tishler, Faculty of Management,Tel Aviv University, Ramat Aviv, Tel Aviv 69978, Israel.E-mail: [email protected]

et al., 1999; Robins and Wiersema, 1995), partic-ularly when one needs to estimate the effect of apossibly large set of intangible resources with allmanner of possible complementarities and interac-tions among them, on a possibly large set of orga-nizational performance measures. Though anecdo-tal and case study evidence does exist (Porter,1996; Siggelkow, 2002; Stalk, Evans, and Shul-man, 1992), we have not yet seen large-samplestudies that demonstrate how several core ele-ments, independently or together, enhance orga-nizational performance.

Substantial effort has been devoted in the lastdecade to enhancing the theoretical insights ofthe resource-based view (RBV) of strategic man-agement, which serves as the paradigm of thisstudy, and examining it empirically in profit-maximizing firms (see Barney, 2001, for a partialreview). Generally, the design of most quantitative

Copyright 2004 John Wiley & Sons, Ltd. Received 19 September 2002Final revision received 7 May 2004

1258 A. Carmeli and A. Tishler

RBV studies has employed a single major factor(resource) to explain variations in firm perfor-mance, which often consist of a single measure.Moreover, studies applying the core concepts ofthe RBV in general and testing the effect of strate-gic elements on the performance of public sectororganizations are rare.

This study attempts to bridge these gaps by usinga quantitative method to empirically test the effectof intangible core elements (resources) on the per-formance of public sector organizations. We firstargue that the RBV can serve as a useful paradigmfor the analysis of variations in the performanceof public sector organizations and then empiri-cally test our approach on a sample of 99 localgovernment authorities in Israel. Specifically, weestimate the influence of a set of intangible ele-ments and their interactions on a set of perfor-mance measures while controlling for the effects ofenvironmental uncertainty, organization size, andgeographical location. The intangible elements aremanagerial capabilities, human capital, perceivedorganizational reputation, internal auditing, laborrelations, and organizational culture, and perfor-mance is evaluated by two measures of financialperformance, the employment rate, a measure ofmunicipal development, and internal migration.

The findings, which lend support to the premisethat intangible elements have a significant effect onorganizational performance, are especially impor-tant considering that we estimate the simultaneousimpact of a set of intangible elements on a set ofseveral performance measures. All six organiza-tional elements and all the interactions among themare found to be important in explaining the varia-tions in the performance of local authorities. Thepositive effect of the interactions among the orga-nizational elements on organization performanceis such that the higher the values of the otherintangible organizational elements, the larger theeffect of any given intangible organizational ele-ment. Organizational culture and perceived orga-nizational reputation are found to be the two mostimportant elements in explaining organizationalperformance. Size has little or no effect, while per-ceived environmental uncertainty and geographicallocation are important factors in explaining varia-tions in organizational performance.

The study is organized as follows. The nextsection presents the theoretical and methodolog-ical aspects of the resource-based view in gen-eral and in the public sector in particular, and

develops the research hypotheses. The researchmethod—participants, measures, and data analy-sis—is in the third section, followed by the resultsof this study. The final section includes a dis-cussion of the results, an analysis of the study’slimitations, and suggestions for directions of futureresearch.

THEORY AND HYPOTHESES

Organizations are viewed as systems of core, elab-orating, independent, and inconsistent elementsand the interconnections among all or part of theseelements (Siggelkow, 2002). The elements denot-ing resources, activities, processes, and policiesare essential for the viability of the organiza-tion. Although studies that have examined the coreconcepts of the resource-based view (RBV) havegenerally used three main constructs—resources,capabilities, and competencies (Javidan, 1998)—they have tended to refer to those that are coreto the organization in the sense of contributingto differentiating it strategically from its rivals(Leonard-Barton, 1992). In this study we usethe construct of strategic organizational element(resource) to refer to a special type1 of ele-ment which is unique, imperfectly imitable, non-transferable and aims to improve the productiv-ity of the organization (Makadok, 2001) indepen-dently or through a process of interacting withother elements.

The RBV suggests that the variability in anorganization’s performance can be attributed toheterogeneity in the distinct bundles of orga-nizational elements (resources) (Barney, 1991;Peteraf, 1993; Prahalad and Hamel, 1990; Reedand DeFillippi, 1990; Wernerfelt, 1984). Thoughthe RBV has clearly made a powerful impact inthe field of strategy, scholars question the extentto which it may be considered as a paradigm inthe field (see Barney, 2001; Priem and Butler,2001). Notably, a decade ago, Peteraf (1993: 179)asked whether the RBV ‘provides much additionalinsight over traditional understandings.’ Althoughshe and others (Barney, 2001) have advocatedthe RBV as a paradigm, the debate has not yetbeen resolved, particularly in the face of the lack

1 The term ‘special type’ is taken from the work of Makadok,who refers to a capability as a special type of resource (Makadok,2001: 389).

Copyright 2004 John Wiley & Sons, Ltd. Strat. Mgmt. J., 25: 1257–1278 (2004)

Intangible Organizational Elements 1259

of sufficient empirical studies to lend support tothe RBV’s theoretical propositions (see Farjoun,1994). Though in recent years we have beenobserving an increased effort to develop an empir-ical body of literature on the RBV (see Barney,2001, for a review), it remains an area that canbenefit from additional study. First, most quanti-tative studies have used a single element such ashuman capital (e.g., Hitt et al., 2001) or leader-ship (e.g., Waldman et al., 2001). Although suchstudies yield useful knowledge, it must be recog-nized that the organization’s competitive positionis derived from a complex combination of orga-nizational elements. Generally speaking, it is notlikely that a firm with a sustainable competitiveadvantage relies on a single element, important asit may be. For example, the competitive advan-tage of Wal-Mart (Stalk et al., 1992), Southwest(Porter, 1996), and Vanguard (Siggelkow, 2002)cannot be explained by just one element; it is basedon a successful integration of various strategic andnon-strategic elements. Whereas rivals are enthu-siastic to imitate such successful designed system,the organizations that hold it seek ways to detersuch imitation. What makes a system inimitable?Rivkin (2000) suggests that the number of ele-ments and the degree of interaction among themcreate such a complexity that is difficult to imi-tate by the rivals. By having a large number ofelements that positively interact with one anothera firm can deter imitation even if each particularelement is imitable (Rivkin, 2000).

The problem is that our knowledge to dateis contained in anecdotal and case study evi-dence (see, for example, Porter, 1996; Siggelkow,2002; Stalk et al., 1992), and we have yet to seelarge-sample studies that demonstrate how strate-gic elements and complementarities among themenhance an organization’s performance. The sec-ond problem is the difficulty of measuring thesecompellingly important intangible elements (seeGodfrey and Hill, 1995; Hitt et al., 2001). Thisproblem is compounded when more than one ele-ment is involved and, particularly, when interac-tions among them may affect the organization’sperformance. Third, most studies have examinedeach performance measure separately and, thus,did not capture the simultaneity embedded in themultidimensionality of performance. Fourth, verylittle has been done to test empirically the rela-tionship between organizational elements and theperformance of public sector organizations, that is,

the applicability of the basic elements of the RBVin the public sector. This is particularly problem-atic in view of the increasing recognition amongresearchers, policy-makers and managers alike ofthe importance of strategic management, whetherin the private or public sector, for creating anddelivering value (Moore, 1995, 2000).

This study of local government authorities at-tempts to overcome some of the limitations of pre-vious studies by adopting a multivariate approachin which a bundle of intangible organizational ele-ments and the interactions among them are exam-ined for their simultaneous effect on several mea-sures of performance.

The impact of intangible organizationalelements

Both tangible elements (e.g., facilities, raw mate-rials, equipment) and intangible elements (e.g.,culture, communication, and knowledge) have animportant role in creating an organization’s value.However, ‘as the industrial society becomes a ser-vices society, where knowledge and informationare the mainstays of business growth, the impor-tance of intangible resources will come increas-ingly to the forefront’ (Canals, 2000: 118). In com-parison with tangible elements, intangible elementssuch as organizational culture are less flexible(Chatterjee and Wernerfelt, 1991), hard to accu-mulate, and not easily transferred; they can affectmultiple uses at the same time, serve simultane-ously as inputs and outputs of corporate activities(Itami with Roehl, 1987), and are not consumedwhen in use (Collis and Montgomery, 1998). Teece(2000) suggests that a firm’s superior performancedepends on its ability to defend and use the intan-gible assets it creates (e.g., knowledge). Accordingto Hitt et al. (2001: 14), ‘intangible resources aremore likely than tangible resources to produce acompetitive advantage.’

Drawing on these insights, according to whichintangible elements have strategic importance forthe viability of the organization, this study focuseson a set of six intangible elements and their effecton the performance of the organization: manage-rial capabilities, human capital, perceived organi-zational reputation, internal auditing, labor rela-tions, and organizational culture.

We chose to concentrate on these six elementson the basis of a pre-test we made. First, we inter-viewed central government officials with a view



to identifying the key factors that influence fis-cal health, education, migration, and other per-formance aspects of local government. Second,we interviewed the heads and senior officials oflocal government authorities to elicit their per-ceptions of the elements that are critical to themanagement of their local authority. Third, wereviewed the relevant literature in order to selectthe most important elements needed for manage-ment of organizations in general and local author-ities in particular. Finally, we administered a pilotquestionnaire, structured on the basis of the list ofelements obtained in steps one to three above, to13 managers who participated in an annual meetingof the general managers of the local governmentauthorities in Israel. This process identified the sixcritical elements that we use in this paper to assessorganizational performance. Other possible criticalelements are noted in the limitations subsection.

We now give a reasoned account of the criticalrole of the six particular elements that we chose asthe basis for our study.

Managerial capabilities

It has long been established that a superior topmanagement team is likely to generate higher rentfor its organization (Barney, 1991; Castanias andHelfat, 1991; Finkelstein and Hambrick, 1996;Hambrick and Mason, 1984; Katz, 1974; Norburnand Birley, 1988; Penrose, 1959). The manage-ment team’s superiority rests on the managerialcapabilities or skills that it possesses because ‘theattributes of the management team may satisfythe conditions for achieving and maintaining com-petitive advantage’ (Mahoney, 1995: 92). Attain-ing superiority in a particular competitive marketrequires that the organization’s top managementpossesses a broad set of complementary skills. Asingle person, however talented, is unlikely to pos-sess all the managerial skills that are required forthe successful operation of a complex organization.Thus, the organization needs to have a combinationof capabilities (Barney, 1991; Mahoney, 1995),such as technical, human, and conceptual skills(Katz, 1974) in order to build a superior manage-ment team.

Human capital

The idea that an organization’s members are thereal source of its competitive advantage has long

been acknowledged (Pfeffer, 1994), hence thedrive to establish the superior human capital togenerate a competitive advantage (e.g., Boxalland Steeneveld, 1999; Farjoun, 1994; Huselid,1995; Lado and Wilson, 1994; Pfeffer, 1994).Researchers seeking to establish a theoreticalframework for the contribution of the human factorto organizational efficiency and effectiveness havefocused on the educational level of employeesas a source of labor productivity and economicgrowth for the organization and the nation (Asefaand Huang, 1994; Becker, 1993; Hershberg, 1996;OECD, 2001; Schultz, 1961).

Perceived organizational reputation

A favorable organizational reputation is a coreintangible resource that creates competitive advan-tage when competitors are not able to matchthe prestige and esteem it creates, and enablesan organization to attain sustained superior out-comes (Roberts and Dowling, 2002; Shrum andWuthnow, 1988). Constituents always prefer toenter into a contract with an organization witha favorable reputation, and sometimes they areeven willing to pay a reasonable premium to doso (Fombrun, 1996; Fombrun and Shanley, 1990;Weigelt and Camerer, 1988); residents and busi-nesses are likely to select their location on thebasis of the match between their expectations andthe reputation of the local authority. A distinc-tion is made between the organization’s reputa-tion and the perceived external prestige (Smidts,Pruyn, and van Riel, 2001) or construed exter-nal image (Dutton, Dukerich, and Harquail, 1994).Whereas organizational reputation refers to out-siders’ beliefs about what distinguishes an organi-zation, perceived external prestige and construedexternal image refer to the organizational mem-bers’ view of the outsiders’ beliefs. Assuming thatthe CEO (or general manager), as the representa-tive of the management team, has the ability tocorrectly assess the organization’s reputation, weuse the term perceived organizational reputationto mean top management’s view of the outsiders’beliefs about the organization.

Internal auditing

Internal auditing is a process that examines andevaluates the functioning of the organization (Eden



and Moriah, 1996: 263). It is an ongoing pro-cess of comparing actual performance with stan-dards or expectations, based on relevant indexes,in order to improve the organization’s achieve-ments (Globerson and Globerson, 1990). An inter-nal auditing system plays an important role in man-aging the organization efficiently and effectively.It is extremely important in complex organiza-tions because of the need to pinpoint and examinea large array of activities in order to (1) teachthe organization’s members how to execute theirjob better by pointing out weaknesses, (2) enhancethe motivation of the organization’s members bydemonstrating that the audit’s goal is to improvethe efficiency and effectiveness of the organization,(3) deter members from actions that may damagethe organization, and (4) increase the probabilitythat the appropriate actions are taken in relationto goal setting and accomplishment (Eden andMoriah, 1996).

Labor relations

Labor relations are to the relationships betweenthe management team and the employees and/ortheir representatives. Organizations with positivelabor relations are likely to obtain high benefitsfrom their employees (see Dastmalchian, Blyton,and Adamson, 1991, for a review). For example,labor relations may affect the level of the employ-ees’ commitment to the organization. Committedemployees are more likely to produce high-yieldoutcomes, and have a positive effect on organiza-tional performance (Meyer and Allen, 1997).

Organizational culture

Organizational culture refers to the ‘underlyingvalues, beliefs, and principles that serve as a foun-dation for the organization’s management systemas well as the set of management practices andbehaviors that both exemplify and reinforce thosebasic principles’ (Denison, 1990: 2). Klein, Masi,and Weidner (1995) place organizational culture atthe heart of an organization’s endeavors to improveits overall effectiveness and the quality of its prod-ucts and services. Many strategy researchers (e.g.,Barney, 1986) assert that organizational cultureis an important source of competitive advantage.Much of the evidence from both the private andthe public sector supports this argument. For exam-ple, Nordstrom, one of America’s most successful

fashion retailers, ascribes its success to its uniqueculture of customer service, or, as it is often called,‘the Nordstrom way’ (see Spector and McCarthy,1995).

Virtually none of the successful organizations,from either the private or the public sector, willattribute its success to just one strategic element.Superior organizational performance is due to thecombination of several strategic elements thatcomplement and strengthen one another. Given theimportance of the intangible elements, we suggestthe following hypothesis:

Hypothesis 1: Intangible organizational ele-ments (managerial capabilities, human capi-tal, perceived organizational reputation, inter-nal auditing, labor relations and organizationalculture) have a significant, positive effect on theperformance of the organization (as measuredby financial performance, municipal develop-ment, internal migration, and employment rate).

Interactions among intangible organizationalelements

The concept of fit has a long tradition in strat-egy literature (Itami with Roehl, 1987). Strategicfit, unlike specification of an individual element,indicates nets of tightly linked elements (Porter,1996) that become a major source of inimitabil-ity (Rivkin, 2000) and contribute to enhancingthe performance of an organization. Porter (1996)identifies three types of fit: (1) simple consistencybetween each activity and the overall strategy,(2) mutual reinforcement amongst activities, and(3) optimization of effort across activities. Muchof the literature refers to elements that reinforceone another. That is, the interaction amongst themis complementary in that the value of one ele-ment is increased by the presence of other elements(see Rivkin, 2000; Siggelkow, 2002). The recentstudy by Makadok (2003) demonstrated the strate-gic implication of a synergistic interaction betweengovernance and competence (similar, for instance,to the interaction between managerial competenceand internal auditing/control in this study), argu-ing that superior firms (e.g., Microsoft, Wal-Mart,Crown Cork & Seal, and Vanguard Group) are ‘fre-quently unusual in both their competence and theirgovernance.’

Hence, it can be hypothesized that a strategic,or core, element is likely to interact with one or



more other elements in affecting organizationalperformance. Given the importance we attributeto the six intangible elements that are discussed inthis study, we suggest the following hypothesis:

Hypothesis 2: The interactions among the intan-gible organizational elements enhance organi-zational performance; that is, the effect of anintangible organizational element is higher, thehigher are the values of the other intangibleorganizational elements.

THE DATA AND THE RESEARCHMETHODOLOGY

Selecting the research population

Researchers have recognized the importance ofpublic sector organizations and sought to exam-ine the generalizability of the core concepts ofbusiness strategy to the public sector (see Moore,1995; Porter, 1998). Here we choose to investi-gate the local government sector in Israel becauseof its critical impact on the business sector, thesocial structure of the country, and its citizens.Though building viable organizations is clearly afocal subject of inquiry not just for the businesssector but also for the public and not-for-profitsectors, applying the core concepts of businessstrategy to the public sector depends on the typeof competition in this sector and its magnitude.We argue here that competition does indeed existamong organizations in the local government sec-tor, and can sometimes even be very intense (seeTiebout, 1956). The consensus is that competitionin general fosters economic development by yield-ing better production efficiency. It is the relentlessdrive of the competitors to find and apply newways to improve productivity that is the sourceof the firm’s profitability, the wealth of the stateand the world (Porter, 1998). The possibility ofobtaining more and better output from the sametangible resources is the foundation of the argu-ment for some type of competition in the publicsector (Propper and Halonen, 1999).

That being said, the nature of the competition inthe public sector needs some clarification. In gen-eral, ‘the local market for public goods is reallya “quasi market” in which the benefits of com-petitive markets may be approached but not fullyachieved’ (Schneider, 1989). A local authority nor-mally provides services only to residents within its

jurisdiction, and they are the drivers of the com-petition among local authorities as they seek tomaximize the benefit/cost ratio of their location bybuying into local authorities that offer the packageof services they most prefer at the most reasonableprice in terms of the taxes they pay (Schneider,1989: 613). If a local authority does not meet itsconsumers’ needs and expectations, it is likely tolose desirable consumers to other local authorities(Peterson, 1981; Schneider, 1989), and its head(mayor) is likely not to be re-elected. The desire tobe re-elected is a major driver of the competitionas the local authority heads do whatever they canto be perceived as successful.

Though competition among local authorities canbe staged on many fronts, in the resource and prod-uct market alike, in this study we concentrate oncompetition in the resource market. Public sectororganizations compete over unique and valuableresources that can enhance their capacity—oneof the sides of the JFK School of Government’sstrategic triangle for public sector organizations(see Moore, 1995). Thus, government authoritiescompete on prestige in key areas, presuming that itwill generate rent by attracting new businesses anda strong population, leading eventually to soundfiscal health. They also invest considerable effortin building a strong organizational culture that willenhance the quality of the services they provide totheir residents. It is in this way that the fierce com-petition between the cities of Ramat Gan and TelAviv, located in the center of Israel, to attract busi-nesses to their jurisdictions has resulted in betterincentive packages being offered by both cities.These incentives are not restricted to discounts inproperty tax, but lie rather in the unique capacityto provide better services. Similarly, the cities inCoachella Valley, located approximately 120 mileseast of Los Angeles, have been competing overland for future growth and outside investment.2

Appropriate performance measures are criticalfor any organization, and even more so for pub-lic sector organizations. To quote The NationalAcademy of Public Administration of the UnitedStates (1999: 17): ‘The American people will notinvest significantly higher levels of trust or con-fidence in their government until they perceiveimprovements in the way it makes decisions and

2 We are indebted to Lynndee Kemmet for providing us withher unpublished comprehensive study on the Coachella Valleysituation.



delivers results.’ Local authorities are complexorganizations that serve multiple constituenciesand are accountable for various functional areassuch as education, employment, municipal devel-opment, recreation, and sanitation. Hence, it isof importance to develop appropriate performancecriteria upon which these multiple and complicatedtasks are evaluated. These measures are not readilyavailable in Israel since the Israeli local authoritiesdo not systematically publish assessments or mea-sures of their performance (Carmeli, 2002), mak-ing evaluation a very difficult task. In this studywe developed five performance measures, for twoconsecutive years, based on secondary data.

Data

The Israeli local authority structure includesthree types of local authorities: (a) a municipality(city)—an urban community (a city) usually with apopulation of 20,000 or more residents; (b) a localcouncil—a small city (normally fewer than 20,000residents) that developed over time from one largerural community or several small, geographicallyrelated, rural communities; and (c) a regionalcouncil—the governing body of several, possiblymany, rural communities that are located within agiven geographical region. Our targeted researchpopulation consisted of 263 local authorities inIsrael: 62 municipalities, 148 local councils, and53 regional councils.

After completing a pre-test (see descriptionabove), a questionnaire with a self-addressed replyenvelope was mailed from a university address tothe general management of each local authorityin Israel. Ninety-nine of the 106 questionnaires(38%) that were completed and returned to us wereusable, that is, they included all the necessary data.The response rate across the three different typesof local authorities was about equal: that is, of the99 usable questionnaires 24 were from municipal-ities (cities), 56 from local councils, and 19 fromregional councils. This is similar to the distributionof the population of local authorities in Israel.

The variables that we used in this study wereobtained from several sources. Measures of finan-cial performance, geographical location, and muni-cipal development were obtained from a Ministryof Interior (1999) report and the annual financialreports of the local authorities for 1997 and 1998.Variables representing the local authority’s organi-zational size were extracted from Publication 1046

(Local authorities in Israel 1995: Physical data1997 ) of the Israel Central Bureau of Statistics,as well as from internal reports of the Ministryof Interior. Data on the employment rate wereobtained from the Social Science Data Archive(SSDA) of the Hebrew University of Jerusalem.Finally, the data that were used to develop themeasures of the local authority’s organizationalelements, and the data representing perceived envi-ronmental uncertainty, were obtained from thequestionnaire.3

Measures

This study investigates the effect of organiza-tional elements, perceived environmental uncer-tainty, geographical location, and organization size(the independent variables) on a set of perfor-mance measures of the local authority (the depen-dent variables).

Dependent variables

Financial performance

Two measures are used to represent the fiscalstrength of the local authority (see Carmeli, 2002):self-income ratio and collecting efficiency ratio.

Self-income ratio is the proportion of self-income in the local authority’s overall income asreported in its regular budget. Self-income con-sists of all the income (taxes, grants, and fees)that the local authority collects directly from itsresidents, businesses, and other assets within itsjurisdiction. Overall income in the regular budgetconsists of property taxes, fees, surcharges, gen-eral grants, financing from ministries, and singlesources of income. The closer the self-income ratioto unity, the greater is the fiscal strength (health)of the local authority.

Collecting efficiency ratio is the proportion ofthe current year’s actual collecting (the totalamount of income that was collected by the localauthority) in the total income theoretically col-lectable during the current year. Actual collecting

3 This design raises some concerns about the probability that therespondents are biased in estimating the elements of their orga-nization. To circumvent this problem, or at least diminish it, weasked the respondents (general managers) to refer to the entireorganization, rather than themselves. A second concern withthe data collected by questionnaires is whether the respondentspossess sufficient knowledge to accurately assess organizationalelements. Previous studies indicate that top managers are a reli-able source of information (O’Reilly, Snyder, and Boothe, 1993;Miller, Burke, and Glick, 1998).



consists of property taxes, water, and sewage fees.The total income to be collected consists of accu-mulated debt from earlier years, the current year’s‘income to be collected’ minus discounts and can-cellation of self-income.

Employment rate is one of the most importantperformance measures by which a local author-ity in Israel is evaluated. It is defined as the ratioof the number of permanent residents net of thenumber of job seekers (monthly average), to thenumber of permanent residents. The total numberof permanent residents consists of all the perma-nent residents and migrants in Israel, including thepermanent residents who were away from Israelfor less than 1 year during the survey that collectedthe data for this measure (Israel Central Bureau ofStatistics, 1997: 19). It should be noted in this con-text that local authorities strive to reduce the levelof unemployment by creating business zones andattracting new enterprises (by providing them withspecial incentives).

Municipal development consists of two ratios:development expenditure ratio and local services’expenditure ratio. Development expenditure ratiois the ratio between the total amount of expensesaimed at local development, and the number ofpermanent residents. Local services’ expenditureratio is the ratio between the budget expendi-tures on services, and the number of permanentresidents. Cronbach’s alpha of this measure is0.87. It should be noted in this context that thelocal authority better serves its goals by allocat-ing its resources directly to the various munici-pal services.

Internal migration is the ratio between the num-ber of permanent residents at the end of the currentand previous year. A strong local authority is likelyto exhibit an increase in its permanent population.

Independent variables

The independent variables are divided into twogroups: (a) organizational elements and (b) all oth-er variables (denoted control variables) that mayinfluence performance. We first describe the orga-nizational elements.

Organizational elements

Six intangible organizational elements obtainedfrom the local authorities’ general managers areused in this study. Scores are on a 7-point scaleranging from 1 = strongly disagree to 7 = strongly

agree. The six measures are defined as follows andtheir items are detailed in Appendix 1.

Managerial capabilities is an adaptation of themeasure developed by Hitt and Ireland (1985).It consists of 12 items such as ‘attracting andretaining well-trained and competent top man-agers,’ and ‘ability to unify conflicting opinions,improve coordination and enhance effective col-laboration between key executives, generate enthu-siasm, and motivate sufficient managerial drive forbetter performance’. Cronbach’s alpha of this mea-sure is 0.88.

Human capital has three dimensions: educa-tion, work experience, and competence of thefirm’s members (Aryee, Chay, and Tan, 1994).The respondents were asked to evaluate four itemsrelating to education and work experience, andeight items relating to competence (Wagner andMorse, 1975). Sample items are ‘in my localauthority, employees have suitable education tofulfill their jobs,’ and ‘in my local authority,employees are well trained.’ Cronbach’s alpha forthis measure is 0.80.

Internal auditing is based on the model devel-oped by Eden and Moriah (1996). It consists ofseven items that cover four aspects of the auditingsystem: teaching, motivating, deterrence, and pro-cess improvement. Sample items are ‘the internalauditing prevents inappropriate actions which mayharm the organization,’ and ‘the internal auditingis perceived as a threat to the position and statusof the employees’ (a reverse-scored item). Cron-bach’s alpha for this measure is 0.89.

Labor relations are measured by a developmentof the model presented by Kitay and Marching-ton (1996) consisting of nine items. The measurecovers the degree of trust and satisfaction in therelations between the management and employ-ees, the degree to which the labor relations areplanned and managed, and the extent to whichthe labor relations system pursues the principlesof safety, fairness, individualism, and democracy.Sample items are ‘there is complete trust betweenthe management and employees,’ and ‘there aremutual respect and good intentions between themanagement and employees.’ Cronbach’s alphafor this scale is 0.93.

Organizational culture is based on Denison’s(1990) model with its four hypotheses. (1) Theinvolvement hypothesis: organizational effective-ness is a function of the level of involvementand participation of the organization’s members.



(2) The consistency hypothesis: organizational ef-fectiveness is a function of the degree to whichthe organization’s members understand and holda shared system of beliefs, values, and sym-bols. (3) The adaptability hypothesis: organiza-tional effectiveness is a function of the organiza-tion’s ability to perceive the external and internalenvironment and respond to it through reinstitu-tionalization of a set of behaviors and processes.(4) The mission hypothesis: organizational effec-tiveness is a function of the degree to which theorganization’s members hold a shared definition ofthe function and purpose of the organization andits members. A mission enhances employees’ con-nection with the organization and provides direc-tion and goals that serve to define the appropriatecourse of action for the organization and its mem-bers. Eight items (phrases/questions) represent thefour ingredients of the model. Sample items are‘all have a common set of values, creeds, andsymbols,’ and ‘there is high involvement of theemployees in the processes, decisions, and theirimplementation.’ Cronbach’s alpha for this mea-sure is 0.81.

Perceived organizational reputation is an inte-gration of two measures established by a cityreputation survey (see Bromley, 1993) and thereputation survey of Fortune magazine, adaptedto the unique function of the local authorities inIsrael. The first measure is derived from items in asurvey among 600 managers and experts regard-ing the reputation of U.S. cities (see Bromley,1993). It consists of items such as: flexible andhigh-quality manpower; accessibility to markets;favorable attitude toward businesses; fine publiceducation system; comfortable flying service tomajor cities; low cost of housing; jobs; facilities;taxes; and quality of life. The other measure isderived from Fortune’s annual corporate reputa-tion survey among 8000 high-ranking executives,outside directors and financial analysts, who wereasked to rate the 10 largest companies in theirown industry on eight attributes, using a scale of0 (poor) to 10 (excellent). The attributes were:quality of management; quality of products or ser-vices; innovativeness; long-term investment value;financial soundness; ability to attract, develop andkeep talented people; community and environmen-tal responsibility; and use of corporate assets (see,for example, Smith, Fortune, January 29, 1990).This measure has been used by numerous scholars,including Fombrun and Shanley (1990), Fryxell

and Wang (1994), Gatewood, Gowan, and Laut-enschlager (1993), and McGuire, Sundgren, andSchneeweiss (1988).

To preserve the general definition of perceivedorganizational reputation while integrating into itthe unique characteristics of a public sector orga-nization (a local authority in our case), we usehere a measure that consists of four items basedon the corporate reputation survey, and five itemsthat are based on the city reputation survey. Sam-ple items are ‘the ability of my local authority toattract, develop, and keep talented people is ratedvery favorably,’ and ‘in my local authority, themunicipal facilities are credited with a very favor-able reputation.’ Cronbach’s alpha for this measureis 0.82.

Control variables

The variability of performance across heteroge-neous organizations may be due, in addition toorganizational elements, to various other effectsthat may represent the unique nature of particularorganizations and the environment in which theyoperate. Three variables—perceived environmen-tal uncertainty, organizational (community) size,and location—are used in this study to control forthese effects across the local government authori-ties in Israel.

Perceived environmental uncertainty is definedhere as the perception of the organization’s topmanagement regarding its ability, or inability, todecide and direct the future of its task environment.Israel’s local government has faced many chal-lenges over the last two decades, one of the mostimportant being the increased interest of the con-stituencies in the way the local authority is man-aged. Whereas 20 years ago the country’s politicalparties dominated the process of electing the localauthority head, whose primary obligation was tothe party, growing public awareness, brought aboutin part by increased media coverage, has made thelocal authority elections far more open and com-petitive. The result is that residents now expecttheir local authorities to be well managed, account-able, and responsible for job creation by attractingbusinesses and investors. Clearly, the current envi-ronment in which the local authorities operate hasbecome more uncertain, which may be an impor-tant factor influencing organizational performance.

The theoretical background for our measure ofperceived environmental uncertainty derives from



Dess and Beard’s (1984: 64) suggestion that anenvironmental classification would provide usefulbuilding blocks to improve the conceptualizationand measurement of organizational task environ-ments. It also reflects the view that in an uncer-tain competitive environment the organization mayexperience difficulties in understanding what itsfuture direction will be (see Milliken, 1987).

The measure of perceived environmental uncer-tainty that we employ here was developed byMiller and Droge (1986) and has been used inmany organizational research studies (e.g., Wald-man et al., 2001). The measure consists of fiveitems, including ‘my local authority rarely hasto change its customer practices to keep up withother local authorities,’ and ‘actions of other localauthorities are quite easy to predict.’ Cronbach’salpha for this measure is 0.64.

Organizational (community) size, defined as thenumber of permanent residents in a particular juris-diction, may affect the performance of a localauthority. Though a large local authority may pre-sumably enjoy economies of scale, a recent studyby Martins (1995) shows that it is difficult todetermine an optimal size. Furthermore, large localauthorities tend to be over-bureaucratic and, hence,may find it difficult to successfully fulfill theirduties (Leach, Stewart, and Walsh, 1994). Be thatas it may, local authority size is represented by thenumber of its permanent residents.

Location may also play a significant role in thesuccess of a local authority. The local authoritiesin Israel are classified into three geographical loca-tions: south, center, and north. Each of these loca-tions is represented by a dummy variable. Localauthorities in the center of the country, where themajority of the population resides, enjoy signifi-cant resources from the central government, withTel Aviv clearly Israel’s business and financial hub.Local authorities from the north and south havelong been arguing against the ongoing discrimi-nation against their communities. Thus, we expectlocal authorities at the center to exhibit better orga-nizational performance than those in the north andsouth.

The multivariate analysis approach

Multivariate analysis is often employed whenresearchers need to represent a very large data setby several, easy-to-interpret variables or when itis necessary to relate one set of variables to other

sets of variables. This method facilitates the iden-tification of the effects of key variables in one dataset on all or several of the variables in other sets.

There are several types of multivariate analysis.In the case of two or more data sets, canonicalcorrelation analysis (CCA) has been successfullyused in different applications in the behavioral,social and economic sciences (Cliff, 1987; Dillonand Goldstein, 1984; Timm, 1975; Tishler et al.,1996). However, when the number of variables inone of the data sets is large (relative to the num-ber of observations), which is often the case instudies in the area of management, the weightsobtained by CCA (and regression analysis) are usu-ally extremely unreliable due to multicollinearityamong the variables (Judge et al., 1985; Tishlerand Lipovetsky, 2000).

To circumvent the multicollinearity problemand obtain reliable and robust weights, Tishlerand Lipovetsky (2000) developed and applied themethod of robust canonical analysis (RCA), whichhas been used successfully in management appli-cations (Ahituv, Lipovetsky, and Tishler, 1999;Azulay, Lerner, and Tishler, 2002; Tishler et al.,1996).

Applying the RCA method to two data setsamounts to estimating the weights which max-imize the covariance between linear aggregators(weighted averages) of the two data sets. RCA isapplied to standardized variables. Thus, althoughformal statistical inference of the RCA estimates isunavailable (as is the case with other multivariatecanonical correlation methods; see Cliff, 1987; Dil-lon and Goldstein, 1984), a variable with a largeestimated weight affects the connection betweenthe two data sets more than a variable with a smallweight. Variables in one data set are defined ascritical (important) relative to those in the seconddata set when their weights in the RCA betweenthe two data sets are large (see Tishler et al., 1996;Tishler and Lipovetsky, 2000) for algorithms thatselect critical variables from large data sets. Vari-ables that are not designated as critical relative tothe other data set may still affect this set. How-ever, their influence on the second data set maynot be as pronounced as the influence of criticalvariables.

Finally, the statistic q2, which measures theshare of the explained variability out of the totalvariability among the correlations of the variablesin the two data sets, is equivalent to the well-known R2 in a regression model. The squared



canonical correlation among the critical variables,r2CC , which, like forecasting with the RCA method,

uses all the correlations among the critical vari-ables and is also an important measure of goodnessof fit of the final RCA model (see Tishler andLipovetsky, 2000; Tam, 2003).4

RESULTS

The means, standard deviations, and correlationsamong the research variables are presented inTable 1. The correlations between each organiza-tional element and the control variables or vari-ables representing performance are relatively low,as are the correlations among the variables repre-senting performance and between these variablesand the control variables. Most of the correla-tions among organizational elements are, however,rather large, which is only to be expected sinceorganizations being aware of the importance ofmost of their organizational elements to their per-formance tend to balance their values. The highcorrelations, however, mean that we cannot usemultiple regression analysis or CCA, which areprone to multicollinearity, in assessing the effecton organizational performance of organizationalelements, let alone the interactions among them.The RCA procedure provides estimates that arerobust and more reliable than multiple regressionor CCA when multicollinearity among the vari-ables is severe (see Tishler and Lipovetsky, 2000;Tam, 2003). Hence, the effects of the six intan-gible organizational elements and their interac-tions on the performance of the local authoritiesin Israel were estimated by RCA. Table 2 reportsthe effect of the control variables on organiza-tional performance. Table 3 reports the effect ofthe control variables and the intangible organi-zational elements on organizational performance.Table 4 presents the effect of the control variables,the intangible organizational elements (the ‘maineffects’), and the interactions among the intangibleorganizational elements on organizational perfor-mance.

The results in Tables 2–4 lend support to Hypo-theses 1 and 2. That is, intangible organizationalelements and their interactions have a positive

4 A brief formal presentation of the RCA method and thegoodness-of-fit measures are in Appendix 2.

effect on organizational performance. The good-ness of fit is q2 = 0.71 when organizational perfor-mance is explained only by the control variables. Itincreases to q2 = 0.85 when intangible organiza-tional elements are added to the model, and furtherincreases to q2 = 0.93 when organizational per-formance is explained by the interactions of theintangible organizational elements in addition tothe control variables and the intangible organiza-tional elements. The results in Table 4, the fullmodel, are discussed below.

The intangible organizational elements that weuse here are positively related to all the organi-zational performance measures, except for inter-nal migration. Thus, the results in Table 4 pro-vide strong support for the postulate of Hypoth-esis 1 that intangible organizational elements arepositively associated with organizational perfor-mance. We find that organizational culture andperceived organizational reputation are the mea-sures most important to organizational perfor-mance (with coefficients of 0.24 and 0.23, respec-tively), while the other four intangible organiza-tional elements exhibit a similar degree of impor-tance, as do perceived environmental uncertaintyand geographical location (with absolute values ofthe estimated coefficients at or somewhat below0.20). This clearly indicates that organizations withstrong organizational culture and favorable per-ceived organizational reputation achieve above-normal performance, and that high measures oflabor relations, human capital, internal auditing,and managerial capabilities are also critical toorganizational performance.

The estimates in Table 4 also lend strong supportto Hypothesis 2. All the coefficient estimates of the15 interactions among the six organizational ele-ments are positive and substantial in size, showingthat the effect of any given organizational ele-ment on the organization’s performance is larger,the larger are the effects of the other organiza-tional elements. That is, organizational elementsenhance each other in their effect on the perfor-mance of the sample local authorities. As is thecase with the direct effects of organizational ele-ments on organizational performance, the effectsof the interactions of organizational culture andperceived organizational reputation with the otherorganizational elements are somewhat larger (i.e.,more important in their effect on organizationalperformance) than the effects of the interactionswith the remaining four organizational elements.



Tabl

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0.46

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990.

520.

170.

111

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0.92

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661.

130.

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601.

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530.

761

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841.

190.

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50.

570.

780.

751

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721.

200.

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550.

800.

790.

751

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lture

5.04

1.05

0.20

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0.64

0.72

0.69

0.75

0.76

110

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961.

210.

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770.

720.

740.

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831

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0.44

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360.

370.

340.

350.

340.

370.

420.

401

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0.57

0.25

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0.24

0.25

0.29

0.25

0.31

0.43

0.45

0.68

113

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mpl

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te26

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13.5

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0.17

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2678

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170.

150.

180.

140.

300.

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115

Inte

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Table 2. The effects of location, size and environmental uncertainty on organizationalperformancea

Performance Measures Weight Control and Independent Variables Weight

Self-income ratio 0.83 Location: center 0.47Collecting efficiency ratio 0.47 Location: north −0.64Employment rate 0.29 Organizational size (LOG) −0.29Municipal development −0.03 Perceived environmental uncertainty −0.54Internal migration 0.02

a q2 = 0.71; r2CC = 0.55

Table 3. The effects of the control variables and the organizational elements on organizationalperformancea

Performance measures Weight Control and independent variables Weight

Self-income ratio 0.73 Location: center 0.35Collecting efficiency ratio 0.59 Location: north −0.27Employment rate 0.27 Organizational size (LOG) 0.09Municipal development 0.16 Perceived environmental uncertainty −0.31

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -Internal migration 0.04 Managerial capabilities (MC) 0.28

Human capital 0.31Internal auditing 0.29Labor relations 0.31Organizational culture 0.41Perceived organizational reputation 0.40

a q2 = 0.85; r2CC = 0.60

Table 4 also indicates that four performancemeasures (self-income ratio, collecting efficiencyratio, employment rate, and municipal develop-ment) can be well explained by the six intan-gible elements and the interactions among them,together with variables representing the perceivedenvironmental uncertainty and location of thelocal authority. The squared canonical correlationbetween the weighted average of the indepen-dent variables—intangible organizational elementsand the interactions among them, as well as theother control variables, and the weighted averageof the variables representing organizational per-formance—is 0.71. The estimates in Table 4 alsoindicate that the ‘financial performance’ measures,represented by self-income ratio and collectingefficiency ratio, are by far the most important tothe local authority’s overall organizational perfor-mance. The local authority’s employment rate andits municipal development, while of importancein forming the measure of overall organizationalperformance, are less critical than the financial per-formance measures.

Finally, the estimates in Table 4 indicate thatgeographical location and perceived environmental

uncertainty are important factors in explaining thevariability in the performance of local authoritiesin Israel, but organizational size (whether mea-sured in absolute value or in logarithms) is not.Perceived environmental uncertainty was relatednegatively to all four measures of performance. Itseems that organizations that perceive their envi-ronment as highly uncertain are more likely toshow below-normal performance than those thatperceive the task environment as more certain.Location is also critically associated with organiza-tional performance. That is, local authorities in thecentral part of Israel outperform local authoritiesin the north and in the south.

DISCUSSION AND CONCLUSIONS

Today, perhaps more than in the past, managers,whether in the business or public sector, are findingit difficult to cope with the increasingly uncertainenvironment and are therefore coming to the real-ization that the rules have changed and they nowneed to compete on strategic elements in orderto outperform their rivals (Prahalad and Hamel,



Table 4. The effects of the organizational elements and their interactions on organizationalperformancea

Performance measures Weight Control and independent variables Weight

Self-income ratio 0.73 Location: center 0.20Collecting efficiency ratio 0.60 Location: north −0.16Employment rate 0.24 Organizational size (LOG) 0.05Municipal development 0.20 Perceived environmental uncertainty −0.18

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -Internal migration 0.02 Managerial capabilities (MC) 0.16

Human capital 0.18Internal auditing 0.17Labor relations 0.18Organizational culture 0.24Perceived organizational reputation 0.23- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -Managerial capabilities × Human capital 0.18Managerial capabilities × Internal auditing 0.18Managerial capabilities × Labor relations 0.18Managerial capabilities × Org. culture 0.21Managerial capabilities × Reputationb 0.21Human capital × Internal auditing 0.19Human capital × Labor relations 0.19Human capital × Org. culture 0.23Human capital × Reputation 0.23Internal auditing × Labor relations 0.19Internal auditing × Org. culture 0.21Internal auditing × Reputation 0.22Labor relations × Org. culture 0.22Labor relations × Reputation 0.22Org. culture × Reputation 0.25

a This model consists of all the control and independent variables and interactions that are discussed inthe research.b ‘Reputation’ stands for ‘Perceived organizational reputation’.q2 = 0.93; r2

CC = 0.71

1990). In this public sector study of local author-ities in Israel, we focus on a set of six intangibleelements and their direct and interactive effectson a set of five organizational performance mea-sures, while controlling for the effects of location,perceived environmental uncertainty, and orga-nizational (community) size. Using multivariateanalysis, we demonstrate that intangible elements,together with environmental uncertainty and geo-graphical location, strongly affect the performanceof local authorities.

We adopt the argument that the resource-basedview (RBV) can serve as a useful paradigm for theanalysis of variations in the performance of publicsector organizations, designing the study to over-come some of the difficulties that RBV researchershave been facing. In so doing, we contribute tofilling the gap in the literature on the applicabil-ity of the RBV to the public and not-for-profitsector. Second, following Robins and Wiersema

(1995), we adopt a behavioral approach to opera-tionalize and measure the strategic characteristicsof organizations as identified by the RBV. Third,this study does not limit itself to the analysis ofone resource (or capability) on the performanceof the organization. Rather, it analyzes the simul-taneous effect of a set of organizational elementson organization performance (as do, for example,Hitt and Ireland, 1985). Thus, we emphasize thatno organization is likely to outperform its rivalsbased on a single strategic resource. Fourth, thisstudy uses measures that capture the multidimen-sionality of organizational performance. Clearly,neither business firms nor local authorities can beevaluated solely on the basis of their financial per-formance. Public organizations in particular arealso judged on their social performance (such ascontribution to the community and environmentalresponsibility). Also, as noted above, local author-ities are now responsible for activities that they



had not been concerned with in the past, such asjob creation.

The estimation results demonstrate several im-portant effects of intangible elements on the per-formance of local authorities. First, it is clearlyshown that intangible elements are critical for anorganization to attain its goals and accomplishabove-normal performance, organizational cultureand perceived organizational reputation appearingto be far more important than the other intangibleresources. The finding that strong organizationalculture is critical to a local authority in achiev-ing an advantageous position is especially notable,since it generalizes previous theoretical proposi-tions on its importance for business organizations(see Barney, 1986). A local authority with a strongorganizational culture that emphasizes elementssuch as high involvement of the organization’smembers, shared beliefs, ability to adapt to theenvironment, and a sense of mission (Denison,1990) is likely to perform better than its counter-parts lacking such an organizational culture. Thefinding that perceived organizational reputation isalso a highly critical resource is consistent withthe theory as well as empirical findings of pre-vious research (see Fombrun, 1996; Roberts andDowling, 2002; Shrum and Wuthnow, 1988). Asin the business sector, local authorities exploit afavorable reputation that cannot be easily imitatedby competitors to achieve superior performance.Highly reputable local authorities can, for exam-ple, attract new residents from the higher socio-economic levels, as well as new investors, and thusstrengthen their fiscal state, create new jobs, andoffer a higher standard of living.

Labor relations, human capital, internal audit-ing, and managerial capabilities are also importantin achieving above-normal organizational perfor-mance. Good labor relations between the man-agement and the employees are likely to improvethe performance of a local authority. The resultsindicate that upholding principles such as fair-ness, safety, and trust is likely to motivate mem-bers to higher production and overall standards,thereby countervailing the effects of inefficiency,ineffectiveness, and concealed unemployment thattoo often burden local authorities in Israel. Theimplication is that organizations with good laborrelations will manage to retain the rent generatedrather than enabling the employees to appropri-ate large portions of it. Clearly, managers should

take care to ensure that the rent generated by posi-tive labor relations is not offset by costs associatedwith the establishment and maintenance of theselabor relations (see Coff, 1999). Human capital isalso found to be a source of higher performanceby local authorities. It seems that local authoritiesimplementing strategic human resource manage-ment practices that result in organization-specificeducated and trained employees outperform thosethat do not implement such practices (Huselid,1995; Huselid, Jackson, and Schuler, 1997), whichstrengthens the premise that people are a valuableorganizational resource (Collis and Montgomery,1998; O’Reilly and Pfeffer, 2000; Pfeffer, 1994).Internal auditing is also a critical resource for thelocal authority, apparently helping the employeesto focus on doing the right things and doing themright, through teaching, motivating, deterrence, andprocess improvement (Eden and Moriah, 1996). Itmay also be an important aid to local authoritiesin the proper management of their complex orga-nizations, leaving them less open to accusations ofmismanagement. The estimation results show thatmanagerial capabilities are also important for thesuccess (high performance) of a local authority.These findings are consistent with the importancethat business organizations attribute to their topmanagement and the capabilities they possess ingenerating rent for the firm (Castanias and Helfat,1991; Hambrick and Mason, 1984; Finkelstein andHambrick, 1996; Mahoney, 1995; Yukl, 1981).

One of the most important findings of this studyis that organizational elements enhance each otherin their effect on organizational performance. Thatis, the ‘marginal productivity’ of each organiza-tional element is higher the higher are the valuesof all other organizational elements. This resultsuggests that local authorities seeking to maxi-mize their performance subject to a given budgetshould balance the development of their organiza-tional elements. Though optimal values of variousorganizational elements may differ due to the dif-ferent cost entailed in developing each of them,our results indicate that local authorities shouldattempt to estimate not only the direct effect ofeach organizational element on performance, butalso assess the effects on performance of the inter-actions among them.

Perceived environmental uncertainty is nega-tively related to organizational performance. Thatis, the more uncertain the environment is per-ceived to be, the lower the performance of the local



authority. It seems that organizations that outper-form their competitors better analyze and under-stand their task environment and are thus moreadaptable. Their superior understanding of the cur-rent and future environmental trends makes thembetter able to fit into the ever-changing environ-ment.

As to geographical location, local authoritieslocated in central Israel perform better in a varietyof functions than those located in the north andsouth of the country. This outcome is due mainlyto the concentration of business and governmentactivities in the center of Israel.

In conclusion, the observation made by Collisand Montgomery (1998: 27) that resources are‘the substance of strategy, the very essence ofsustainable competitive advantage’ finds supportin our study, as does the argument that gainingand preserving superiority in competitive environ-ments rests on a set of strategic elements (Amitand Schoemaker, 1993; Barney, 1991; Wernerfelt,1984). The design of this study may also con-tribute to overcoming some difficulties in quan-titative analyses in the field and extend the use ofthe RBV to the public sector.

Limitations and suggestions for future research

Two limitations of the study need elaboration:causality and generalizability. It seems importantto inquire whether the performance of local gov-ernment authorities is driven mainly by intangibleelements and not by other, possibly unobserved,variables. Clearly, this is possible. Though we havemade a substantial effort to explain the importanceof intangible elements in a service and knowledgesociety, more research is needed to extend the setof intangible resources, and simultaneously esti-mate the effect of tangible and intangible resourceson organizational performance. Another issue con-cerning causality is the large number of functionsthat the local authority is expected to carry out.A study of the performance of these organizationsmay have to explore all the activities for whichthey are accountable. This study employs objectivedata on several performance measures of the localauthorities in order to capture the multidimen-sionality of their performance. Further research isneeded to extend the measures that relevant stake-holders use to evaluate the performance of publicorganizations such as local authorities.

The second concern is the generalizability of thestudy, which may be limited due to the unique-ness of the local government task environment(Dess, Ireland, and Hitt, 1990: 13). It was pre-cisely the fact that local government in Israel canbe viewed as a definable task environment (i.e., asingle industry) that allowed us to apply the RBV,with its primary interest on competitive advantage,which, by definition, is task-environment specific.Moreover, the elements of local government thatare the focus of this study are task-environmentspecific and cannot be easily transferred acrossenvironment boundaries. Also, by studying a sin-gle task environment, the researcher eliminates theneed to measure and control for a broad range ofenvironment-specific factors. Nevertheless, despitethe obvious need to exercise cautious in generaliz-ing the results of applying the RBV in a single-taskenvironment to other environments, we are confi-dent that the findings of this study can, with somemodifications, be applied to other settings. Forexample, a strong organizational culture has beenfound to play a significant role in business andpublic organizations alike. Thus, the issue is how,not whether, to match the competitive strategy andthe culture of the organization (Itami with Roehl,1987). We believe that an interesting avenue ofresearch would be to compare the effect of intangi-ble elements on organizational performance acrossthe private and the public sectors.

Conclusion

In this article we have made an attempt to advancethe research on complementarities from anecdo-tal and case study evidence to a relatively large-sample study. We estimated the influence of a setof intangible elements and their interactions on aset of performance measures in a public sectorsetting. Our results, in general, indicate the valueof intangible elements (resources) and their mutu-ally enhancing interactions for organizational per-formance. However, the task of coordinating andbalancing the development of organizational ele-ments, within investment constraints, in the effortto maximize performance is quite complex (cf.Rivkin, 2000; Siggelkow, 2002). To practicallyresolve this complexity, it may be beneficial to dis-aggregate the organization into discrete elements,as in Porter’s (1985) value chain, and examine thevalue of each element independently and interac-tively with one or more elements. Though this may



seem at first sight to be a mission beyond the orga-nization’s capability, we believe that senior man-agers have the knowledge and circumspection toprovide relatively accurate observations regardingthe core and non-core elements and the interactionsamong them that ultimately constitute the over-all value of the organization. Finally, the notionof complementarities is especially important giventhe findings of previous studies (e.g., Barnett andFreeman, 2001) that too much emphasis on a par-ticular good element may produce a negative effectby creating an imbalance among the individual ele-ments and within the system as a whole. We extendthis insight by discouraging managers from placingtoo much emphasis on a particular set of interac-tions, encouraging them rather to create a balancein such a way that the whole is greater than thesum of its parts (see Makadok, 2003).

ACKNOWLEDGEMENTS

We wish to thank Aaron Cohen, Associate EditorWill Mitchell, and two anonymous reviewers fortheir insightful comments and suggestions. We alsothank the participants of the research seminar in theDepartment of Management at Drexel Universityfor their comments on an earlier draft of this paper.

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APPENDIX 1: MEASUREMENT ITEMSFOR THE INTANGIBLE ELEMENTS

Managerial capabilities

1. Attracting and retaining well-trained and com-petent top managers.

2. Achieving a better overall control of generalorganization performance.



3. Perceiving new organizational opportunitiesand potential threats.

4. Developing and communicating a unifiedsense of direction and a sense of commonpurpose to which all members of theorganization can relate.

5. Unifying conflicting opinions, improve coor-dination and enhance effective collaborationbetween key executives, generate enthusiasmand motivate sufficient managerial drive forbetter performance.

6. Developing a more effective organization-wide strategic planning system for plannedoverall organizational development.

7. Generating advanced developmental and train-ing programs for our organizational members.

8. Increased use of management by objective.9. Increased use of ‘financial accountability.’

10. Increased participative decision making at se-nior and middle management levels.

11. An extensive and effective use of quantitativetechniques in decision making.

12. An extensive use of cost-effective analyses.

Human capital

1. Employees have suitable education to fulfilltheir jobs.

2. Employees are well trained.3. Employees hold suitable work experience for

accomplishing their job successfully.4. Employees are well-skilled professionally to

accomplish their job successfully.5. No one knows this job better than our employ-

ees.6. Problems here are easy to solve once the

employees understand the various consequen-ces of their actions, a skill they have acquired.

7. Employees do not know why, but sometimeswhen they are supposed to be in controlthey feel they are being manipulated (reverse-scored item).

8. If anyone here can find the answer, it is ouremployees.

9. Employees go home the same way they arrivedin the morning, feeling they have not accom-plished much (reverse-scored item).

10. Considering the time spent on the job, employ-ees feel thoroughly familiar with their tasks.

11. Doing this job well is a reward in itself.12. Mastering their jobs meant a lot to our employ-

ees.

Internal auditing

1. The internal auditing helps to a better function-ing of the organizational members.

2. The internal auditing clarifies aspects of work-ing processes.

3. The internal auditing is perceived as a threatto the position and status of the employees’(reverse-scored item).

4. Organizational members are not afraid of theresults revealed by the internal auditing.

5. The internal auditing prevents inappropriateactions which may harm the organization.

6. The internal auditing helps achieve the organi-zational goals.

Labor relations

1. There is complete trust between managementand employees.

2. There is complete satisfaction of the relation-ships between management and employees.

3. There is a clear and accepted managerial pol-icy on all parts (management and employees)regarding labor relations system.

4. There is a constant consultation between man-agement and employees.

5. There are mutual respect and good intentionsbetween management and employees.

6. The principle of security, namely caring for theemployee’s health, safety, livelihood, and herfuture employment, is a common one amongboth management and employees.

7. The principle of fairness, namely caring that theemployee is getting fair compensation for hereffort and contribution, is a common one amongboth management and employees.

8. The principle of individualism, namely caringthat the employee is making meaningful workindependently, on the basis of her planningand reasonable performance, is a common oneamong both management and employees.

9. The principle of democracy, namely caring thatthe employee participates actively in the deci-sion making, is a common one among bothmanagement and employees.

Organizational culture

1. There is a high involvement of the employeesin the processes, decisions, and their implemen-tation.

2. The employees are committed and hold a highsense of responsibility to the organization.



3. All have a common set of values, creeds, andsymbols.

4. There is a high coordination and agreementamong the employees.

5. The organization knows the external environ-ment and provides appropriate responses.

6. The organization adapts its structure and theway it functions to changes in the externalenvironment.

7. The organizational goals are clear and agreeableto all members.

8. The organization strives hard to achieve itsgoals.

Perceived organizational reputation

1. The quality of management of my local author-ity is credited with a very favorable reputation.

2. The ability of my local authority to attract,develop, and keep talented people is creditedwith a very favorable reputation.

3. The quality of services my local authority sup-plies is credited with a very favorable reputa-tion.

4. The financial soundness of my local authorityis credited with a very favorable reputation.

5. In my local authority, the education system iscredited with a very favorable reputation.

6. In my local authority, the municipal facilitiesare credited with a very favorable reputation.

7. In my local authority, the tax system is creditedwith a very favorable reputation.

8. In my local authority, the transportation systemis credited with a very favorable reputation.

9. The quality of life in my local authority’s juris-diction is credited with a very favorable repu-tation.’

APPENDIX 2: A BRIEF DESCRIPTIONOF THE RCA METHOD

Suppose that we are given two sets of data, eachorganized in a matrix, as follows: Xij , i = 1, . . . , l;j = 1, . . . , n, and Yij , i = 1, . . . , l; j = 1, . . . , m.In the field of management, each data set mayinclude a group of specific variables describingvarious attributes of l projects or assessments ofl individuals. For example, X may represent dataon n variables describing the managerial structureof projects, and Y may contain m different mea-sures of success (see Tishler et al., 1996). For ease

of presentation, suppose that all variables are stan-dardized (variables are standardized by subtractingtheir mean and dividing them by their standarddeviations). Define the scores of the two data setsas follows:

η = Xa, ξ = Yb (A1)

where a and b are (n × 1) and (m × 1) vectorsof constant weights (parameters). The (l × 1) vec-tors of scores η and ξ can be interpreted as theweighted averages of their respective matrices (setsof variables). For example, ξ includes the averageof project success across all projects; that is, a rela-tively high value of ξ1 means that project 1 is verysuccessful, relative to other projects in the sample.In this paper we try to find the relations, or con-nections, between data sets X and Y by means ofthe weighted averages (‘aggregators’) η and ξ ; thatis, we say that X and Y are closely related to eachother if η and ξ are ‘close’ to each other. Clearly,the weights a and b may have managerial or othermeanings that should be taken into account in theanalysis.

RCA uses covariance as the measure of con-nection between two data sets; that is, rather thanmaximizing the correlation (as is the case withcanonical correlations analysis) RCA seeks to esti-mate a and b that maximize the following sam-ple covariance:

cov (ξ, η) = ξ ′η = a′X′Yb (A2)

with the usual normalizing conditions a′a = 1 andb′b = 1. Thus, applying the RCA method to twodata sets amounts to estimating the weights whichmaximize the covariance between linear aggre-gators (weighted averages) of the two data sets.RCA is applied to standardized variables. Thus, avariable with a large estimated weight affects theconnection between the two data sets more thana variable with a small weight. Variables in onedata set are defined as critical (important) relativeto those in the second data set when their weightsin the RCA between the two data sets are large(see Tishler et al., 1996; Tishler and Lipovetsky,2000) for algorithms that select critical variablesfrom large data sets. Variables that are not desig-nated as critical relative to the other data set maystill affect this set. However, their influence on thesecond data set may not be as pronounced as theinfluence of critical variables.



Tishler and Lipovetsky (2000) show that theRCA estimates (the estimated vectors a and b)can also be obtained as a least squares (LS)approximation of Rxy ≡ X′Y , the matrix of cor-relations among the variables in the two data sets.That is:

Rxy = λba′ + ε (A3)

where λ is a scalar and ε is a matrix of residuals.The LS function of the residuals is

LS = ‖ε‖2 = ‖Rxy − λba′‖2 (A4)

The RCA estimates a and b are obtained for λmax,the maximal eigenvalue of Rxy . At the optimum:

LS = ‖Rxy‖2 − λ2max = ‖Rxy‖2

(1 − λ2

max

‖Rxy‖2

)(A5)

Thus, the goodness of fit of the RCA estimates,where rij is the simple correlation between xi andyj , is as follows:

q2 ≡ λ2max

‖Rxy‖2 = λ2max

n∑i=1

m∑j=1

r2ij

, 0 ≤ q2 ≤ 1

(A6)

The measure q2, which measures the share of theexplained variability in the total variability amongthe correlations of the variables in the two datasets, is equivalent to the well-known R2 in a regres-sion model. Finally, the squared canonical correla-tion among the critical variables, r2

CC , which, likeforecasting with the RCA method, uses all the cor-relations among the critical variables is also animportant measure of goodness of fit of the finalRCA model (see Tishler and Lipovetsky, 2000;Tam, 2003).


the relationships between intangible organizational elements and organizational performance

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