Resource-based perspectives of firms attempt to define the features and characteristics of organizations that promote success. Specifically, according to this perspective, organizations will tend to prevail when their resources--their knowledge, processes, and equipment, for example--are valuable and uncommon as well as difficult to either imitate or substitute with something else (e.g., Barney, 1991).
One common variant or extension of this assumption is called the knowledge-based conceptualization of firms. This variant emphasizes that knowledge and innovation in particular, such as advanced technologies or practical insights, are the primary predictors of performance (e.g., Grant, 1996). That is, knowledge and innovation is especially likely to be valuable, uncommon, difficult to imitate, and difficult to substitute (see Hoetker & Agarwal, 2007).
Nevertheless, knowledge and innovation does not always translate into financial performance. To illustrate, when boards of directors primarily comprise members who do not work at the organization, such innovation is less likely to be related to performance (He & Wang, 2009).
Several studies have substantiated the proposition that innovative knowledge does indeed enhance workplace performance (e.g., DeCarolis & Deeds, 1999). These relationships have been confirmed in a variety of settings, such as manufacturing in the United Kingdom (Geroski, Machin, & Van Reenen, 1993), pharmaceuticals in Spain (D'Este, 2005), and banking in Australia (Roberts & Amit, 2003).
Innovative knowledge offers several key benefits. First, such knowledge can change the expectations of customers in the market and thus obstruct the success of competitors. This benefit is sometimes called creative destruction (e.g., Schumpeter, 1934).
Second, innovative knowledge is difficult to imitate. Most innovations extend previous attempts and endeavors in the organization--attempts and endeavors that rivals might not be able to access (Helfat, 1994). The knowledge that underpinned these innovations is often tacit rather than codified (Zander & Kogut, 1995).
Nevertheless, innovative knowledge can evoke some complications. Specifically, innovative knowledge might provoke improper behavior in managers. In particular, according to agency theory (Jensen & Meckling, 1976;; see also Eisenhardt, 1989;; Rees, 1985), the interests of owners and managers do not always align. In contrast to owners, who usually strive to enhance the value and growth of the organization, managers often pursue personal interests. They might introduce some initiative that benefits another company--a company that is owned by a relative, for example. They might shirk some of their corporate responsibilities.
Such disparities between owners and managers are especially pronounced in innovative organizations. Usually, managers are granted the responsibility to allocate, refine, and utilize these innovations, reaching complex decisions in ambiguous contexts. Because these contexts are complex and the optimal decision is ambiguous, owners cannot readily evaluate the motives and behavior of managers. They cannot ascertain whether the managers are acting appropriately (e.g., Eisenhardt, 1985;; see also Hambrick, 2005). As a consequence, managers often engage in behaviors that benefit themselves, often to the detriment of their organization (see Shen & Cho, 2005)
To prevent improper behavior, organizations must enhance corporate governance. Two sets of procedures are often utilized to fulfill this goal: monitoring and incentives. In general, the relationship between innovative knowledge and firm performance depends on which of these procedures are utilized.
As shown by He and Wang (2009), when the board of directors primarily comprises members who do not work at the organization, innovative knowledge become less likely to enhance firm performance. In this study, innovative knowledge was measured by both investment in research and development as well as citations of patents. Market value represented the measure of firm performance. Finally, a variety of factors, such as firm size, firm age, firm debt, CEO tenure, and advertising intensity, were controlled statistically.
Organizations often prefer boards of directors to comprise members who do not work at the organization. These individuals tend to be independent and thus, putatively, will monitor the managers more vigilantly. They are perceived as more objective (e.g., Fama, 1980).
Nevertheless, in the most innovative organizations, these boards are often ineffective. Their knowledge about the innovations are especially limited if they do not work at the organization. Their capacity to evaluate the managers is particularly constrained (cf.,Aguilera, 2005). Thus, they cannot facilitate the translation of innovation knowledge to firm performance.
Furthermore, to prevent improper behavior, many organizations ensure the CEO is not the chairperson of the board. This measure is introduced to ensure that CEOs cannot ensure the board aligns with their personal interests (Boyd, 1995). As He and Wang (2009) revealed, however, when the CEO is not the chairperson, innovative knowledge becomes less likely to enhance firm performance.
In particular, when the CEO is not the chairperson, the board will often interfere with the utilization of innovative knowledge. They will champion practices that are often effective in more conventional organizations but inapplicable when innovation is thriving. They will, therefore, often intervene unduly.
In lieu of monitoring, organizations often introduce incentives to prevent improper behavior in managers. That is, the board attempts to equate the interests of managers with the interests of their organization (Jensen & Meckling, 1976). For example, executive remuneration might depend on firm performance. Alternatively, managers might be granted some equity ownership.
Such incentives, especially equity ownership, grant managers the necessary discretion or autonomy to reach complex decisions--discretion that is necessary to translate innovative knowledge into firm performance (e.g., Hartzell & Starks, 2003). Consistent with this proposition, as He and Wang (2009) demonstrated, equity ownership and contingent pay both enhanced the association between innovative knowledge and firm performance.
Incentives, despite these benefits, can elicit a host of complications. Managers are more likely to embrace risky actions. These actions or initiatives, if effective, could greatly enhance their pay. These actions, if ineffective however, will not decimate their remuneration, because their salary is usually reasonable (see Sanders, 2001). Furthermore, managers often attempt to optimize the indices that correspond to their bonuses, which typically relate to more immediate performance indicators, sometimes to the detriment of future success (Zahra, Priem, & Rasheed, 2005)
Managers often utilize a variety of tools and techniques to formulate strategies, such as Strengths, Weaknesses, Opportunities, and Threats or SWOT analysis. One example is profit from the core (Zook, 2001). This principle was derived from a study, conducted over ten years, in a diversity of companies. These examinations uncovered a key principle: The main determinant of growth is to maintain concentration on the core business rather than diversify unnecessarily. Expansion should be extended only to businesses that surround the core. Finally, the core business needs to be redefined proactively and preemptively in turbulent markets.
Another approach to strategic development is co-creation (see Prahalad & Ramaswamy, 2004). In this approach, markets are conceptualized as forums in which organizations and customers can share, combine, and refine the resources of one another. This collaboration facilitates learning and improves services in comparison to models in which customers are conceptualized as submissive rather than active. Specifically, this approach ensures that customers receive personalized solutions and that firms are bestowed the loyalty, reputation, and insights they need. Not only are products jointly created, but this approach ensures that purchases are part of a collaborative experience.
To illustrate this approach, customer can access source code, and thus improve products. Customers are sometimes granted tools to design their own sneakers, for example, or to develop advertisements for the company. Furthermore, customers who used products in extreme conditions often stimulated ideas on how these items could be enhanced.
Another approach to develop strategies is judo strategy (Yoffie & Kwak, 2001). Like judo, the organization should attempt to prevent their opponents from utilizing their gamut of strengths, rather than engage in direct conflict. One of the recommendations to organizations, for example, is to curb their profile initially, ensuring they do not attract undue attention from rivals. To fulfill this goal, they could initially conceptualize their product as relevant to one market, before then entering the target market.
Many other approaches are also recommended. Organizations should attempt to outperform rivals on their weaknesses and not their strengths: If rivals offer many features, organizations should instead offer few features, highlighting the simplicity of their products. In addition, before organizations launch into a market, they should ensure they can change and augment their products rapidly, to guarantee their offers are difficult to imitate. Furthermore, organizations should develop relationships with potential rivals: They might consider joint ventures or selling their products inexpensively to competitors. Organizations should also attempt to exploit the attacks or initiatives of competitors. If a rival is appealing to many customers, companies should attempt to advertise in the spaces to which these customers are attracted.
Finally, the rivals of organizations often compete with other firms. Organizations should attempt to assist these firms, ultimately compromising the success of their rivals. Organizations should also determine the concerns of partners or associates of their rivals& to attract these partners and associates, organizations should offer alternatives that circumvent these problems.
Blue Ocean Strategy is another approach in which organizations do not attempt to outperform rivals. Instead, organizations attempts to cultivate a unique market space, ultimately a combination of differentiation and low cost (e.g., Kim & Mauborgne, 2005). Systematic tools, usually visual in form are applied to uncover these spaces, called blue oceans.
The five forces analysis, developed and promulgated by Porter (1979, 1980, 2008), is one of the most prevalent approaches to strategies development. According to Porter (1979, 1980, 2008), five factors determine the extent to which a market is profitable and thus attractive. These five forces comprise the bargaining power of suppliers, the bargaining power of customers, threat of substitute products, threat of established rivals, and threat of new entrants.
The bargaining power of suppliers--such as suppliers of raw materials or services--depends on many factors, including the competition amongst suppliers, the availability of substitutes, and the variation across suppliers. The bargaining power of customers depends on the number of customers, the reliance of these customers on this market, the availability of information to customers, the diversity of industry products, and the sensitivity of customers to prices. If suppliers or customers demonstrate a strong bargaining power, profitability of the market is likely to diminish.
The threat of substitute products or services depends on the extent to which these items are perceived to vary from one another as well as many other factors. The threat of established rivals depends on the level of advertising in the market, the competitive strategy of rivals, and other characteristics. Finally, barriers to entry depend on the capital requirements to establish a business in this market, government policies, the time that is needed to acquire relevant knowledge, the loyalty of customers to established brands, and government policies. If threat from substitutes and rivals is elevated, but barriers to entry are minimal, the market might not be profitable.
Another approach, PESTLE, is an acronym for political, economic, social, technological, legal, and environmental factors (see Gillespie, 2007). The PESTLE analysis, often conducted as part of a SWOT analysis, is undertaken to characterize the factors in the business environment that organizations cannot influence but may affect growth. Organizations undertake a PESTLE analysis to ensure their strategies align with the prevailing trends in the environment, to prevent unanticipated obstacles. Usually, a PESTLE analysis is undertaken to identify the factors that could affect a specific initiative, such as an acquisition, product, strategy, investment, or partnership. Practitioners identify all the relevant factors, the consequences of these factors, and the risk of these factors.
Political factors include issues such as taxation policy and impediments to trade. Economic factors include unemployment, inflation, exchange rates, and interest rates. Social factors concern issues like the distribution of income and attitudes of employees to work. Technological factors include rate of technological obsolescence. Environmental factors refer to global climate and resource conservation, for example. Finally, legal issues include health and safety as well as competition and employment law.
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Last Update: 7/5/2016