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Necessary capabilities for firm performance an NCA approach

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Policies and Sustainable Economic
Development | 289

Necessary Capabilities for Firm
Performance: An NCA Approach
NGUYEN DINH THO
International School of Business
University of Economics HCMC

Abstract
Realizing the important role of necessary conditions in business, this study
employs an NCA (necessary condition analysis) to investigate the level of
necessity of two conditions, marketing capability (comprising four components
responsiveness to customers, to competitors, to the macro-environment, and
business
relationship quality), and innovativeness capability for firm
performance. Regression results with a data set collected from 311 firms in Ho
Chi Minh City reveal that except for responsiveness to the macro-environment,
other components of marketing capability and innovativeness capability have
positive effects on firm performance. NCA results indicate that these conditions
exhibit different levels of necessity for the occurrence of firm performance.
These findings suggest that firms should pay attention not only to the net effects
(beta weights) but also the levels of necessity of firm capabilities for their target
outcome.

Keywords: firm performance; innovativeness capability; marketing capability;
necessary condition analysis


1. Introduction
Being a member of the Trans-Pacific Partnership (TPP) agreement


together with the continuing movement to a market-oriented economy
has caused Vietnamese firms to rapidly change their traditional ways of
doing business. Vietnamese firms, like firms in other transition markets, are
now required to differentiate their offerings in order to successfully
compete with international competitors in their home markets (Nguyen
& Nguyen, 2011). To survive and develop in such a competitive business
environment, Vietnamese firms have no choice but to enhance their
competitive positions in the market. To achieve sustainable competitive
positions in the market, Vietnamese firms should, therefore, have
appropriate resources and capabilities. Consequently, identifying and
nurturing resources and capabilities that can create competitive
advantage are necessary for Vietnamese firms.
Different capability levels among firms are reflected in their abilities to
create and utilize resources to reach their objectives. Several factors,
both external and internal to the firm, can contribute to such differences
(Sirmon et al., 2007). The resource-based theory (RBT) of the firm
postulate that firms have different resources and capabilities. And,
superior performance can come from firms’ resource and capability
uniqueness and their ability to appropriately respond to the surrounding
environment (Barney & Clark, 2009). Although considerable research has
been devoted to identify those firm capabilities (e.g., Orlandi, 2016;
Sirmon et al., 2007; Song et al., 2005), little research has been conducted
to explore the levels of firm capabilities that serve as necessary conditions
for firm performance.
In addition, quantitative business researchers have mainly employed
conventional statistical tools such as multiple regression analysis (MRA)
and structural equation modeling to test their theories.
These
conventional methods assist researchers in investigating the net effect
of a number of independent variables on one or more dependent

variables. Such a variable-oriented approach however does not help
researchers to discover the causal complexity of marketing phenomena
(Ragin, 2008). A fuzzy-set qualitative comparative analysis assists
researchers in examining sufficient and in-kind necessary conditions for
an outcome but it does not support researchers to explore the level of
necessary conditions. For this reason, this study, employing the
necessary condition analysis (NCA; Dull, 2016), investigates the levels of
necessity of two key firm capabilitiesmarketing capability
(responsiveness to customers, responsiveness to
competitors,
responsiveness to the macro-environment, and business relationship
quality), and innovativeness capabilityfor firm performance. The
remainder of the paper presents the theory and hypotheses, method,
data analysis and results, and discussion and conclusions.


Policies and Sustainable Economic
Development | 291

2. Theory and hypotheses
2.1.

Resources and capabilities of the firm

Competition theory, based on industrial organization economics,
focuses heavily on the environment of firms rather than on the
idiosyncratic attributes of firms (Barney & Clark, 2009). RBT considers a
firm as a bundle of resources and capabilities. The firm’s resources include
tangible and intangible assets such as financial and physical assets,
human capital and knowhow. Capabilities are the ability of the firm to

effectively use its resources to achieve its objectives (Barney & Clark,
2009). RBT posits that different firms possess different resources and
capabilities, and that a firm within an industry uses different business
strategies. The firm cannot imitate the strategies of other firms because
the firm’s business strategy is built on the firm-specific resources. These
firm-specific resources drive value creation because the firm will produce
greater utility for customers than its competitors. Thus the firm will enjoy
a competitive advantage (Sirmon et al., 2007).
RBT has been developed in the context of dynamic markets and is,
therefore, viewed as the dynamic capabilities approach to the firm. This
approach stresses the exploitation of existing internal and external firmspecific competences and the development of a strategic consistency to
address the changing environment (Lamberg et al., 2009). A firm will
enjoy competitive advantages if it has the ability to create new resources
and capabilities that are valuable, rare, not easily immutable and
substitutable (Eisenhardt & Martin, 2001). In the marketing literature, RBT
has been used intensively to explain the relationship between
marketing-related resources and capabilities and business performance
(Song et al., 2005).
2.2.

Marketing capability

Fundamentally, marketing is a management philosophy that creates
superior value to customers in a way that benefits the organization and its
stakeholders. In view of that, marketing capability of a firm reflects the
firm’s competence in deciphering the market including customers,
competitors and the macro-environment (Homburg et al., 2007;
Jayachandran et al., 2004; Ziggers & Henseler, 2016). The firm should
continuously collect information about the market from various sources,
transform it into knowledge, and use it for making business decisions

(Nonaka & Takeuchi, 1995). Such knowledge is a source of marketing
capability and is valuable to the firm (Krasnikov & Jayachandran, 2008).
Further, marketing capability reflects the capability of the firm to obtain
quality relationships with business partners (Krasnikov & Jayachandran,
2008; Nguyen et al., 2007). Thus, the firm should build and nurture high
quality relationships with its customers, suppliers, distributors and the local
government. In sum, marketing capability comprises four key
components (Nguyen & Nguyen, 2011): (1) responsiveness to customers,
(2) responsiveness to competitors (Homburg et al., 2007; Ziggers &
Henseler, 2016), (3) responsiveness to changes in the macro-environment
(Srivastava et al., 2001), and (4) business relationship quality (Krasnikov
& Jayachandran, 2008; Nguyen et al.,


2007; Srivastava et al., 2001). Thus, marketing capability is more than
market orientation, which is a key concept in marketing (e.g., Slater &
Narver, 1995). Market orientation “focuses the organization
on
continuously collecting information about target-customers’ needs and
competitors’ capabilities,
and using this information to create
continuously superior customer value” (Slater & Narver 1995,
p. 62). Marketing capability includes market orientation but cover
another important aspect of marketing, i.e. business relationship
marketing.
2.3.

Innovativeness capability

Innovativeness capability reflects a firm’s competence in generating,

developing and implementing new ideas, products, or processes that
improve the firm’s competitive advantage and performance (Brettel et al.,
2015; Damanpour, 1991; Hult et al., 2004). Innovativeness capability is a
means for organizational change, which assists a firm in achieving
innovation. It reflects both the willingness of the firm to eliminate the
business routines that are not consistent with new environments, as well
as the adoption of new ideas which are suitable for competitive
conditions (Hult et al., 2004). These activities can result from responses to
changes in the environment, internal or external to the firm, or as a result
of a preemptive move undertaken by the firm to influence its
environment. When business environments change, it is necessary for the
firm to innovate in order to achieve both improved competitive
positioning in the market and business performance (Damanpour, 1991;
Hult et al., 2004).
2.4.

Hypotheses

Marketing and innovativeness capabilities are types of dynamic
capabilities that assist a firm in achieving its business goals (Foley & Fahy,
2009). Marketing capability helps the firm to effectively implement
marketing plans: rapidly responding to the needs of customers,
competitive actions, and macro-environments, as well as building and
maintaining high quality relationships with business
partners.
Innovativeness capability assists the firm in becoming a pioneer in the
market which allows it to obtain a competitive advantage (Hult et al.,
2004). Firms with high marketing and innovativeness capabilities spend
more resources in interacting with the market, i.e., to use capabilities to
transform resources into output that enhances business performance.

Firm performance is defined as the achievement of organizational goals,
including profitability, growth, market share, sales and other strategic
objectives (Akdenniz et al., 2006; Homburg et al., 2007; Hult et al., 2004).
Thus, this study proposes that marketing capability, comprising
responsiveness
to
customers,
responsiveness
to
competitors,
responsiveness to the macro-environment, business relationship quality,
and innovativeness capability are necessary conditions, but at different
levels, for firm performance.


3. Method
3.1.

Sample

A sample of 311 firms in Ho Chi Minh City was surveyed to collect data
for investigating the net effects as well as the level of necessity of two
conditionsmarketing
capability
and
innovativeness
capabilityfor firm performance. The data were also used for
validating the measures of the constructs in the study by means of
confirmatory factor analysis (CFA). A key informant approach (a senior
manager) and face-to-face interviews were employed. The sample, in

terms of firm size, comprised 158 (50.8%) firms with fewer than 100
employees, and 153 (49.2%) firms with more than
99 employees. In terms of ownership, there were 31 (10.0%) state-owned
firms, 127 (40.8%) joint- stock companies, 126 (40.5%) limited proprietary
firms, and 27 (8.6%) privately owned firms. In terms of industry, there
were 95 (30.5%) firms in the manufacturing industry, 118 (37.9%) firms
were in the service industry, and 98 (31.5%) firms doing business in both
manufacturing and service industries.
3.2.

Measures

Constructs examined were firm performance, marketing capability,
and innovativeness capability. Firm performance was measured by five
items, based upon Wu and Cavusgil (2006). Innovativeness capability
was measured by three items (Covin & Slevin, 1989). Finally, marketing
capability was a second-order construct comprising four components, i.e.,
customer responsiveness, competitor responsiveness, macro-environment
responsiveness, and business relationship quality. The items measuring
the components of marketing capability were based upon Jayachandran et
al. (2004), Homburg et al. (2007), Krasnikov and Jayachandran (2008),
Nguyen et al. (2007), and Wu and Cavusgil (2006). Customer
responsiveness was measured by eight items and competitor
responsiveness was measured by nine items. Macro-environment
responsiveness was measured by seven items, and business relationship
quality was measured by four items. All items were measured by a sevenpoint Likert scale, anchored by 1: strongly disagree and 7: strongly agree.
The questionnaire was initially prepared in English and then translated into
Vietnamese by an academic fluent in both languages. This procedure was
undertaken because English is not well understood by managers in this
market. Back translation was undertaken to ensure the equivalence of

meanings.


4. Data analysis and results
4.1.

Measure validation

CFA was employed to validate the measures. The screening process
shows that the data exhibited slight deviations from normality.
Nonetheless, all univariate kurtoses and skewnesses were within the
range of [-1, 1]. Therefore, maximum likelihood estimation was used
(Muthen & Kaplan, 1985).
Marketing capability: This was a second order
construct
comprising four
components:
responsiveness
to
customers,
responsiveness to competitors, responsiveness to the macroenvironment, and business relationship quality. The CFA results indicate
that the measurement model of marketing capability received an
acceptable fit to the data: 2[334] = 816.22 (p = 0.000), GFI
= 0.844, CFI = 0.926, and RMSEA = 0.068. In addition, all factor loadings
were high (0.60) and significant (p < 0.001). These findings
indicate that the scales measuring the components of marketing
capability were unidimensional and convergent validity (within-method)
was achieved (Steenkamp & van Trijp, 1991). The correlations (with
standard errors) between the components of marketing capability indicate
that they were significantly different from unity (p < 0.001), supporting

the within-construct discriminant validity (Steenkamp & van Trijp, 1991).
Saturated model: The saturated model (final measurement model)
received an acceptable fit to the data: 2[50] = 112.79 (p = 0.000),
GFI = 0.942, CFI = 0.969, and RMSEA = 0.064. Note that,
because the measures of the components of marketing capability were
unidimensional, summated items were used in the saturated model. The
use of summated items helps decrease the number of free parameters
considerably, which makes the estimation reliable without increasing the
sample size (Bagozzi & Edwards, 1998). Consequently, four summated
items were formed for marketing capability. The factor loadings of all
items were high and substantial (the lowest loading was 0.53), and all
were significant (p < 0.001). These findings indicate that the scales used
in this study were unidimensional and their convergent validity (withinmethod) was achieved. The correlations between constructs together
with their standard errors indicate that they were significantly different
from unity, thus, supporting the across-construct discriminant validity
(Steenkamp & van Trijp, 1991). Further, all the scales had high
composite reliability (0.70). Finally, except for the scales measuring
business relationship quality and innovativeness capability, the average
variance extracted of other scales was greater than 0.50. In sum, all the
scales measuring the constructs used in this study satisfied the
requirement for reliability and validity.


4.2.

MRA results

To investigate the net effects of the components of marketing
capability and innovativeness capability, MRA was employed. The MRA
results are shown in Table 1. A closer examination of the results, one can

see that, except for one component of marketing capability
(responsiveness to the macro-environment) which was not supported,
other components of marketing capability (responsiveness to customers,
responsiveness to competitors and business relationship quality) and
innovativeness capability have positive effects on firm performance. Note
that although the effect of responsiveness to the macro-environment was
not significant, the zero-order correlation between this type of marketing
capability and firm performance was significant (p < 0.001), indicating
that responsiveness to the macro-environment still interacts with other
capabilities to drive firm performance.
Table 1
MRA results
Predictors

B

SE

β

t

p

r

VIF

Constant


1.13

0.366

3.09

0.002

Innovativeness capability

0.24

0.055

0.25

4.33

0.000

0.454

1.431

Business relationship quality

0.15

0.064


0.13

2.34

0.020

0.353

1.322

Responsiveness to customers

0.20

0.088

0.17

2.24

0.026

0.466

2.443

Responsiveness to competitors

0.14


0.068

0.14

2.00

0.047

0.445

2.207

Responsiveness to the macro0.03 0.056 0.03 0.497 0.619 0.341
environment
Dependent variable: Firm performance; Adjusted R2 = 0.30 (sig F < 0.001)

1.633

Notes: B: unstandardized regression weight; SE: standard error; t: t-statistic; p: p-value;
r: Pearson correlation; VIF: variance inflation factor
4.3.

NCA results

MRA was used to investigate the net effects of the components of
marketing capability and innovativeness capability on firm performance.
To discover the levels of necessity of these conditions (the components of
marketing capability and innovativeness capability), this study utilized
NCA. This is an analysis method that assists researchers in identifying
the degree of a necessary (but not sufficient) condition for an outcome.

In order to examine the level of necessary conditions, NCA determines
the ceiling line, the line that separates the area with observations from the
area without observations (Dul, 2016). Two common techniques used for
determining ceiling lines are the ceiling envelopment technique (a
piecewise linear line) with free disposal hull (CE-FDH) and the ceiling
regression (a straight line) with free disposal hull (CR-FDH) because they
are more flexible techniques.
The NCA results produced by the NCA package (Dul, 2015) included the
bottleneck table (Table 2), and the CE-FDH and CR-FDH ceiling lines for
each conditions (Figures 1 to 5). In Table 2, the levels of all necessary
conditions (the components of marketing capability and innovativeness


capability) are determined through their bottlenecks. For example, to
reach 70% of firm performance, it is necessary that innovativeness
capability should be at least 6.7% if using the CE- FDH ceiling line, and at
least 2.4% if using CR-FDH ceiling line. The highest effect size of these
necessary conditions was responsiveness to customers: d(CE-FDH) = 0.158
and d(RE-FDH) = 0.136. The second highest effect size was responsiveness
to competitors: d(CE-FDH) = 0.130 and d(RE-FDH) = 0.115 (Table 2). Note that,
in terms of net effects on firm performance, innovativeness capability
received a highest size. Thus, NCA is a complementary, not competing,
method to traditional quantitative methods. Figures 1, 2, 3, 4, and 5
present the CR-FDH and CE-FDH ceiling lines together with the OLS
regression lines for innovativeness capability, business relationship
quality, responsiveness to customers, responsiveness to competitors,
and responsiveness to the macro-environment, respectively.
Table 2
Bottleneck table: Required minimum levels of the necessary condition for
different desired levels of the outcome

PERF
(%)
0

INCAP

1
0
2

N
N
N
N

0
3
0
4

a. CE-FDH
BR (%)RCUS RCOM
Q
NN
NN
NN
NN

NN


NN

NN

NN

NN

N
N
N
N

NN

NN

NN

NN

NN

0
5
0
6

N
N

N
N

NN
NN

23.
8
26.

0
7
0
8

N
6.7

15.
0
25.
0
35.
0
55.

0
9
0
100


20.0
46.7
53.3

RENV

INCAP

N
N
N
N

N
N
N
N

b. CR-FDH
BR (%) RCUS RCOM
Q
NN
N
NN
NN
NN

RENV
N

N
N
N

N
N
N

NN
2.5
6.4

N
N
N
2.

NN

N
N
N
N

NN

11.3

N
N

N
12.5

NN

N
N
N
N

15.1

12.5

NN

N
7.4

10.4

5
6.4

22.6

17.5

N
N

N
N

NN

14.3

10.2

2
26.
2
33.

22.6

17.5

2.6

18.2

14.1

22.6

17.5

N
2.

4
19.6

15.
1
22.

17.9

22.6

25.0

36.8

18.
5
34.

22.2

3
33.
3
33.

7
30.
4
38.


26.1

21.8

5
50.
5
0.0

1
45.
7
0.136

22.6
25.0
54.0
30.0
25.6
0
3
d
0.104 0.1
0.158 0.130 0.113 0.085
0.115 0.085
00
80
Notes: INCAP: Innovativeness capability; BRQ: Business relationship quality; RCUS:
Responsiveness to customers;

RCOM: Responsiveness to competitors; RENV:
Responsiveness to the macro-environment; PERF: Firm performance; CE-FDH: Ceiling
Envelopment-Free Disposal Hull; CR-FDH: Ceiling Regression-Free Disposal Hull; d: effect
size; NN: Not necessary


Figure 1. Ceiling line for
innovativeness capability
Notes: PERF: Firm performance; INCAP: Innovativeness capability; Lower solid line:
OLS regression line; Upper solid line: CR-FDH ceiling line; Dashed line: CE-FDH
ceiling line

Figure 2. Ceiling line for business
relationship quality
Notes: PERF: Firm performance; BRQ: Business relationship quality; Lower solid
line: OLS regression line; Upper solid line: CR-FDH ceiling line; Dashed line: CEFDH ceiling line


Figure 3. Ceiling line for responsiveness to customers
Notes: PERF: Firm performance; RCUS: Responsiveness to customers; Lower solid
line: OLS regression line; Upper solid line: CR-FDH ceiling line; Dashed line: CE-FDH
ceiling line

Figure 4. Ceiling line for responsiveness to competitors
Notes: PERF: Firm performance; RCOM: Responsiveness to competitors; Lower solid
line: OLS regression line; Upper solid line: CR-FDH ceiling line; Dashed line: CE-FDH
ceiling line


Figure 5. Ceiling line for responsiveness to the macro-environment

Notes: PERF: Firm performance; RENV: Responsiveness to the macro-environment; Lower
solid line: OLS regression line; Upper solid line: CR-FDH ceiling line; Dashed line: CE-FDH
ceiling line

5. Summary, implications, and conclusions
The main objective of this study is to investigate the levels of necessity
of marketing capability
and innovativeness capability for firm
performance. The results from MRA reveal that innovativeness capability
and three out of four component of marketing capability and have positive
relationships with firm performance, confirming the net effects of these
capabilities on firm performance. The results from NCA show that
innovativeness
capability and all four components of marketing
capability are necessary conditions, but at different levels, for the
occurrence of firm performance. The findings have several implications for
theory, research and practice.
In terms of theory and research, first, this study reconfirms the roles of
marketing capability and innovativeness capability in firm performance.
Several studies have investigated the impacts of marketing capability
and innovation capability on performance. However, such research studies
have mainly discovered the net effects of these firm capabilities on firm
performance. An examination of the levels of necessity of these
capabilities for firm performance, therefore, may assist researchers in
better understanding the complexity of firm capabilities. Thus, this study
shed light on a new way of research on firm capabilities, especially in
transition markets.
In terms of practice, the study findings confirm the roles of marketing
capability and innovativeness capability in the success of firms in
general and the levels of necessity of these capabilities for firm

performance in particular. Vietnamese firms, therefore, should optimally


deploy marketing and innovativeness resources to obtain capabilities in
order to survive and develop in this


Policies and Sustainable Economic
Development | 301

increasingly competitive market in the TPP era. Specifically, firms should
enhance their capabilities of understanding, and rapidly responding to,
their customers, competitors, and macro- environments. Establishing and
nurturing quality relationships with business and business-related partners
are also of importance for Vietnamese firms to improve their marketing
capability. In addition, Vietnamese managers are advised to enhance
their innovativeness capability in order to obtain superior business
performance.
This study has several limitations. First, the study focuses only on two
key firm capabilitiesmarketing and innovativeness. Several other
capabilities, such as entrepreneurial orientation, learning orientation,
knowledge internalization (Nguyen & Barrett, 2007; Nonaka & Takeuchi,
1995), research and development (Krasnikov & Jayachandran, 2008), and
other market- based assets (Srivastava et al., 2001), should be
investigated in future research to discover their levels of necessity.
Further, a configuration of firm capabilities using a set-theoretic approach
such as fsQCA may help researchers to understand the complexity of
causal relationships between firm capabilities and firm performance. This
should be examined in future research.
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