relationships among corporate level distinctive ...

5 downloads 3276 Views 913KB Size Report
Address fir reprints: Dr M. A. Hitt, Department of Management, College of Business ... distinctive competencies) across a majority of the firm's business units. ... these studies tend to support a relationship between these two variables, other .... S.T.S.); Product Divisions (centred office and a group of quasi-autonomous.
Joumal of Management Studies 23:4 July 1986 0022-2380 $3.50

RELATIONSHIPS AMONG CORPORATE LEVEL DISTINCTIVE COMPETENCIES, DIVERSIFICATION STRATEGY, CORPORATE STRUCTURE AND PERFORMANCE MICHAEL A. HITT College of Business Administration, A & M University, Texas R. DuANE IRELAND

Hankamer School of Business, Baylor University

ABSTRACT Recent evidence suggests that large multibusiness firms can enhance performance by developing and exploiting corporate level distinctive competencies. In this study of 185 industrial firms, the relationships between corporate level distinctive competencies and performance were examined across firms using different diversification strategies and having different corporate structures. The corporate level distinctive competencies/performance relationships were found to vary by type of diversification strategy but not by type of corporate structure. In addition, only a small relationship was found to exist between diversification strategy and corporate structure. The specific relationships between corporate level distinctive competencies and performance and their normative implications are explored.

INTRODUCTION

firms often segment their businesses into distinct product market groups. Once formed, these are called strategic business units (S.B.U.s). Operating in a semi-autonomous fashion, S.B.U.s strive to form distinctive competencies in order to gain a competitive advantage (Hofer and Schendel, 1978). It has been shown that application of distinctive competencies to gain a competitive advantage is linked to the successful implementation of a business unit's strategy (Miles and Snow, 1978; Snow and Hrebiniak, 1980). Recently the importance of forming and exploiting corporate level distinctive competencies has been suggested. For example, Yavitz and Newman (1982) and Kiechel (1982) argue that diversified, multibusiness firms can enhance DIVERSIFIED

Addressfirreprints: Dr M. A. Hitt, Department of Management, College of Business Administration, Texas A & M University, College Station, T X 77843-4221, U.S.A.

402

MICHAEL A. HITT AND R. DUANE IRELAND

performance through the application of a set of distinctive competencies across most, if not all, of a firm's business units. However, the set of corporate level distinctive competencies related to performance may vary by the firm's type of diversification strategy and its degree of divisionalization. These interrelationships are the focus of this research.

THEORETICAL BACKGROUND Distinctive Competencies

A distinctive competence is a firm's ability to complete an action in a manner superior to that of its competitors or to apply a skill that competitors lack (Higgins, 1983). These abilities can take many forms. Based on earlier works by Selznick (1949, 1952, 1957), Andrews (1971) suggested that distinctive competencies are formed within functional areas (e.g. marketing, production, personnel, finance, etc.). Miles and Snow's (1978) research indicated that use of distinctive competencies was critical to successful implementation of strategies at the business unit level. Elxtending this earlier work. Snow and Hrebiniak (1980) examined ten functions (e.g. personnel, finance) as business unit level distinctive competencies. They found that the set of functions related to performjince varied by conditions within firms. Thus, at the business unit level, the data suggest a relationship between application of particular distinctive competencies and performance. Marketing concerns, within a specified product/market arena, usually serve as the primary focus for selection and implementation of a business unit level strategy (Higgins, 1983). As such, the need to form distinctive competencies within vjirious functions is somewhat obvious for this type of strategy. However, a need eJso exists for distinctive competencies at the corporate level. A key corporate level strategic concern is that of selecting the businesses in which the multibusiness firm will compete. By definition then, multiple product/ markets must be examined. Portfolio planning approaches, used often by strategists in diversified firms, do not specify the need to form distinctive competencies at the corporate level. Rather, the approach is to select businesses that can meet or exceed the corporation's financial performance targets and then cdlocate resources to each business unit on the basis of the unit's relative market position and the degree of attractiveness of the industry in which it competes. Although variations do exist, this description is consistent with the range of available portfolio planning approaches (Bettis and Hall, 1983). Without extensive levels of diversification, these approaches may be successful. However, with increasing diversification, these generic approaches are less successful (Bettis and Hall, 1983). Performance declines experienced by Teledyne, Consolidated Foods and Castle and Cooke serve as testimony to the difficulty of successfully managing highly diversified firms with portfolio planning approaches. Kiechel (1982) argued that diversity can be managed

CORPORATE LEVEL DISTINCTIVE COMPETENCIES

403

in a superior manner through the application of functional skills (that is, distinctive competencies) across a majority of the firm's business units. Examples of functions that can be formed into corporate level distinctive competencies include centralized marketing, corporate research and development, and production technologies (Yavitz and Newman, 1982). A similar perspective has been presented by Lauenstein (1984), who proposed that diversified firms that have several business units utilizing an identical technology can gain a competitive advantage by concentrating R and D efforts into a single technical centre. For example. Allied Corporation apparently has decided to develop a corporate R and D capability that is superior to competitors. A new-venture group has been established to assure that the firm's skills in this area are applied across and within all business units (Business Week, December 12, 1983a). As a second example, the Zenith Radio Corporation concluded, following an analysis of its internal strengths, that it possesses three distinctive competencies throughout the corporation-technology, manufacturing and distribution. To exploit these competencies fully, any new product offering will not be accepted unless it taps two of these three competencies (Business Week, December 12, 1983c). This approach is consistent with Kiechel's (1982) view that a newlyacquired or internally-developed business should exploit the firm's existing set of corporate distinctive competencies. Successful formation and use of corporate level distinctive competencies should increase relatedness,'*' among units within the diversified, multibusiness firm. Evidence suggesting that performance may decline as firms become more unrelated through diversification efforts (Grinyer et al., 1980; Rumelt, 1974), indicates the importance of maintaining relatedness through product similarities (Wrigley, 1970; Rumelt, 1974) or through corporate level distinctive competencies (Yip, 1982). In summary, the literature suggests that corporate distinctive competencies may be related to performance in multibusiness firms. In light of Chandler's (1962) work and subsequent research by others, the set of distinctive competencies related to performance may vary by the type of diversification strategy being implemented and the degree of divisionalization adopted by the firm. Diversification Strategies

Chandler (1962) suggested that the successful firm is one that expands its operations geographically, then integrates vertically and finally diversifies its product offerings. Wrigley (1970) extended Chandler's (1962) classification scheme to specify four types of the corporate level product diversification strategy. Ranging from the least amounts of diversification to the greatest, these strategies are single business, dominant business, related business and unrelated business. With each strategic change. Chandler (1962) indicated that novel administrative problems surface resulting in inefficiencies and eventual performance declines. In response, a new administrative structure, consistent with the challenges posed by the new strategy, is created.

404

MICHAEL A. HITT AND R. DUANE IRELAND

Several studies have examined relationships between specific types of diversification strategy and the degree of divisionalization in the firm's structure (Channon, 1973; Dyas and Thanheiser, 1976; Pavan, 1972, 1976; Pooley-Dyas, 1972; Suzuki, 1980; Thanheiser, 1972; V^rigley, 1970). WhUe findings from these studies tend to support a relationship between these two variables, other results do not suggest a strong link between these two and a third variableperformance. Rumelt (1974), for example, was unable to confirm that high performance is related to a match between type of diversification strategfy and degree of divisionalization. In addition, the research by Pethia, (1981, 1982) and Grinyer (1982) questions this relationship. Thus, the data suggest that development of the requisite divisionalized structure is not a sufficient condition to achieve effective management of a particular diversification strategry. Development and application of corporate level distinctive competencies may be required to implement a particular diversification strategy successfully within the parameters of a particular divisionalized structure. For example, in the initial stages of increasing diversification, an emphasis on financial and marketing activities may be necessary to assure tight control of operations and successful introductions of new product offerings. With still additional diversification (that is, selection of the dominant business strategy) effective financial management may be required to assure rational resource allocations. When pursuing related diversification, synergies among product offerings are sought. These synergies may be acquired in several areas. However, Kitching (1967) suggested that technological synergies may be the most desirable. To achieve this type of synergy requires an emphasis on production/operations activities. Being able to exploit such synergies to the corporation's competitive advantage may require a distinctive competence in personnel and, if diversification is completed through mergers and/or acquisitions, a public and governmental distinctive competency may be necessary as well. Finally, the greatest amounts of diversification, as achieved through the unrelated business strategy, call for decentralization of decision making responsibilities to those in the business units. As such, the corporate level general administration function should be de-emphasized. Based on the literature and this reasoning, several hypotheses were formed: Hypothesis 1: The relationship between the degree of diversification and divisionalization will be small (r 0.01), it is not large as the two variables have only 7.8 per cent common variance (falls below the heuristic r