The dynamic interplay of capability strengths and weaknesses: investigating, страница 9

Because rivals, even indirect rivals, work to continuously improve their capabilities in order to attain high relative performance, changes in the strengths and weakness sets are likely to occur. However, continuous development of new competitive advantages requires basic resources, such as investment dollars, to maintain or improve the relative strength of the firm’s capabilities (Kor and Mahoney, 2005). Two sources of such resources are the external environment and the firm’s current operations. Therefore, we investigate how environmental munificence (exogenous) and prior firm performance (endogenous) influence changes in the firm’s strength and weakness sets over time.

Environmental munificence refers to ‘the scarcity or abundance of critical resources needed by (one or more) firms operating within an environment’ (Castrogiovanni, 1991: 542). When operating in munificent environments, the accessibility of requisite resources is not a major concern. Investment dollars, employees, and other resources are generally available to most or all competitors. Thus, while competing in munificent environments reduces the threat of failure, differentiating the firm’s capabilities from rivals is more difficult because of the access to plentiful resources. For example, in munificent environments, all firms could strive to enhance their capability strengths. Furthermore, because capability strengths are critical to firm success (and thereby highly salient), managers are likely aware of rivals’ actions to overtake their capability strengths and are motivated to prevent it from happening by taking similar actions, thereby triggering a Red Queen effect among rivals (Barnett and McKendrick, 2004). In this case, the availability of critical resources serves as a catalyst for firms’ actions and reactions that, in fact, will not change their relative positions. Moreover, investment alone may not be adequate to build or increase capability strengths. Instead, managers’ efforts to invest in and bundle resources to develop capabilities are needed to create relative strengths (Sirmon et al., 2008; Sirmon and Hitt, 2003; 2009). These special managerial skills are not equally distributed among rivals (Castanias and Helfat, 2001). Therefore, a munificent environment alone is insufficient to enhance strength sets.

The same logic can be applied to reducing capability weaknesses in munificent environments. Although munificence may allow firms to ignore weaknesses, there are theoretical reasons why munificence may allow competitive firms to reduce their set of weaknesses. First, theory suggests that approaching parity is far easier than building a competitive advantage (Barney, 1991). In other words, increasing a capability’s relative value to the average (i.e., parity) is more likely than overtaking competitors with superior capabilities. Second, working to improve a capability to parity may not be as threatening to rivals in munificent environments. In fact, achieving such parity may not be adequate to trigger rivals’ awareness nor motivate them to react. Such actions are unlikely to unleash a Red Queen effect among rivals. Therefore, while environmental munificence is unlikely to affect change in a strength set, it allows the firm to reduce its weakness set over time.

Hypothesis 4a (H4a). Higher munificence leads to a decrease in firms’ weakness sets over time.

Additionally, firms can utilize their own resources to change their strength and weakness sets. For instance, they can allocate flows of firmspecific resources (Dierickx and Cool, 1989) to enrich their stock of capabilities. Moreover, firmspecific resources are largely inaccessible to rivals. For example, financial resources generated by the firm’s prior performance are available for its private use. The asymmetric nature of these resources allows the firm to potentially differentiate its capabilities from those of rivals because managers can direct these private financial resources into firmspecific R&D projects (Ndofor, Sirmon, and He, 2011), in-house training sessions, etc. Thus, higher prior performance provides an asymmetric source of firm-specific resources with which to enhance the firm’s set of strengths and/or reduce its set of weaknesses.