Lastly, a weakness set can limit a firm’s ability to pursue new opportunities. For example, if a firm’s assets, which are often used to facilitate and, indeed, implement strategic actions, are of lower value, it may have to forego certain strategic options such as acquisitions, entry into international markets, or major investments in R&D. Excluding these actions from the firm’s repertoire of strategic alternatives increases the firm’s reliance on a more narrow set of actions; such a constraint has been shown to harm firm performance (Miller and Chen, 1996). Moreover, existing revenue streams are likely to be under increasing pressure from the attacks of stronger rivals. Therefore, increases in a firm’s weakness set are expected to differentiate the firm from its rivals in a negative manner (i.e., rivals’ gain in advantage over the focal firm), thereby producing a negative curvilinear effect on relative performance.
Hypothesis 2 (H2). There is a negative curvilinear relationship between the firm’s weakness set and relative performance. The relationship grows increasingly negative as the firm’s weakness set degrades (i.e., grows larger).
Powell stated that ‘it seems unreasonable to expect competitive advantage to imply superior performance no matter what else the firms may be doing wrong’ (2001: 877). Therefore, understanding the effect of strength/weakness integration on relative performance is important.
In order to effectively compete against rivals, firms must complete many tasks that, in combination, contribute to the satisfaction of end-users as well as owners’ wealth (Morrow et al., 2007; Sirmon et al., 2011). To accomplish these outcomes, firms must integrate their capabilities in ways that allow them to cope with external uncertainty (Thompson, 1967). Thus, a firm’s strength and weakness sets are interdependent (Powell, 2001). We summarize the potential combinations of strength and weakness sets and their effect on relative performance in Figure 2.
While limited, the few works that have addressed potential outcomes from the integration of capability strengths and weaknesses suggest that a net-effect logic will prevail. Specifically, Powell (2001) argues that strengths and weaknesses will offset one another and when an imbalance occurs, performance will tip in favor of the dominant force (positive for strength and negative for weakness). Similar logic was proposed by Ray, Barney and Muhanna (2004). Specifically, they argued that a firm’s performance depends on the net effect of several capabilities. Likewise, Arend (2004) argued that performance is a function of the aggregate of firm capabilities. For example, if a hospital’s set of weaknesses is relatively low (e.g., based perhaps on nursing constraints, configuration and availability of facilities, etc.), while its strengths are high (e.g., perhaps based on location, and quality medical doctors) the net-effect logic suggests that the set of strengths will overwhelm the set of weaknesses, thereby producing positive outcomes. This particular combination is represented in Cell II of Figure 2. Where a firm’s strength set is vastly superior to its weakness set, a robust advantage results and, with it, higher relative performance.
The inverse combination, a low strength set paired with a high weakness set, represented in Cell III of Figure 2, should have a negative effect on relative performance. In this case, the firm’s strength set exists, but at low levels. The weakness set, however, is able to undermine the strength set’s positive contribution to firm outcomes, resulting in negative relative performance.
The next combination, a low strength set paired with a low weakness set, represented in Cell I of Figure 2, is likely to yield neutral results. In this case, the opposing sets of strengths and weaknesses offset each other. There is very little to differentiate firms with this combination from competitors. These firms are close to average. As such, no consistent relative performance differences are expected for these undifferentiated firms. The last combination, a high strength set paired with a high weakness set, represented in Cell IV of Figure 2, is more complex. On the one hand, the net-effect logic suggests that these firms are not likely to enjoy a relative performance differential because the strength and weakness sets neutralize each other. On the other hand, an opposing and compelling logic suggests that this combination is a reasonable approach for managers trying to improve performance in the presence of highly competitive rivals.
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