The descriptive statistics and correlations are presented in Table 1, while Table 2 presents the results of tests for the relative performance hypotheses. Table 3 provides the results of tests for the hypotheses related to changes in strength and weakness sets.
Hypothesis 1 suggests that relative performance will grow increasingly positive as the firm’s strength set increases. Models 2 and 3 in Table 2 show that both the strength set variable and its square are positive and statistically significant. These results provide support for the hypothesized positive curvilinear relationship.
Hypothesis 2 proposes that relative performance grows increasingly negative as the firm’s weakness set degrades (i.e., grows larger). As seen in Models 2 and 3 in Table 2, the weakness set variable is negative and statistically significant. However, its square is not statistically significant. These results do not support Hypothesis 2. Instead of a negative curvilinear relationship, the results show that a firm’s set of weaknesses has a negative linear effect on relative performance.[9]
To test the hypothesized effects of the different combinations of strength and weakness sets on relative performance, we utilized dummy variables to identify the firms represented by the four cells presented in Figure 2. While median splits along the sample’s strength set score and weakness set score could be used for the identification of these groups,[10] to ensure the precision of the test and to reflect the theoretical argument, we identified highs and lows at the 25th percentile level, which allowed for a strong degree of differentiation, yet offered a reasonable number of observations per group. For example, firms represented by Cell II in Figure 2 (high strength/low weakness) were coded with a dummy variable when their strength set was among the top 25th percentile and their weakness set was among the bottom 25th percentile. We repeated this approach until all firms represented by Figure 2 were identified. The comparison group for these groups of firms are the firms that do not meet these criteria; those that are near average in their industries.
The results for the tests of Hypotheses 3a, 3b, and 3c are listed in Table 2, Model 4. Hypothesis 3a suggested that the integration of a high strength set with a low weakness set positively affects relative performance. The positive and statistically significant coefficient for this grouping supports this hypothesis. Hypothesis 3b suggested that the integration of a low strength set with a high weakness set negatively affects relative performance. The negative and statistically significant coefficient for this grouping provides support for this hypothesis. Hypothesis 3c suggested that the integration of a high strength set with a high weakness set has a positive effect on relative firm performance. The positive and statistically significant coefficient for this grouping supports this hypothesis. Also, it is useful to note that, as expected, the integration of a low strength set with a low weakness set has no effect on relative performance.
Figure 3 provides a rich visual representation of the combinative effects strength and weakness sets have on relative performance. The figure is based on the equation listed in Model 5 and reflects the results offered in Model 4 as well. The central region of the surface is located at the intersection of the middle strength and middle weakness set values. It is not surprising to see that this central area relates closely with zero on the relative performance scale. Contrasting this central location with the four corners of the graph is informative and reflects the results in Model 4. Moreover, considering the dynamic nature of the graph’s surface contours can provide additional understanding.
First, the robust advantage region (high strength/ low weakness) generally offers much higher levels of relative performance. Likewise, the precarious advantage region (high strength/high weakness) also shows higher levels of performance. Third, the low strength/low weakness region, what we term offsetting, does not show much appreciable difference in relative performance. Fourth, the low strength/high weakness region, what we term undermining in Figure 2, shows large losses in performance. Additionally, the curvilinear surface demonstrates the increasingly positive effect of capability strength sets on relative performance. Comparison of the robust and precarious advantage regions is important. Graphically, the precarious advantage region seems to offer the
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