Management competence

Management Competence

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Contributions to Management Science
H. DyckhofflU. Finke
Cutting and Packing in Production
and Distribution
1992. ISBN 3-7908-0630-7

A. Scholl
Balancing and Sequencing of Assembly
Lines
1999. ISBN 3-7908-1180-7

R. Flavell (Ed.)

E. Canestrelli (Ed.)
Current Topics in Quantitative Finance
1999. ISBN 3-7908-1231-5

Modelling Reality and Personal Modelling
1993. ISBN 3-7908-0682-X
M. HofmannIM. List (Eds.)
Psychoanalysis and Management
1994. ISBN 3-7908-0795-8

W. BiihlerlH. Hax/R. Schmidt (Eds.)
Empirical Research on the German
Capital Market

1999. ISBN 3-7908-1193-9

R. L. D'E cclesialS. A. Zenios (Eds.)
Operations Research Models
in Quantitative Finance
1994. ISBN 3-7908-0803-2

M. BonillafT. Casasus/R. Sala (Eds.)
Financial Modelling
2000. ISBN 3-7908-1282-X

M.S. Catalani/G. F. Cierico
Decision Making Structures
1996. ISBN 3-7908-0895-4

S. Sulzmaier
Consumer-Oriented Business Design
2001. ISBN 3-7908-1366-4

M. BertocchilE. Cavalli/SoKom16si (Eds.)
Modelling Techniques for Financial
Markets and Bank Management
1996. ISBN 3-7908-0928-4

C. Zopounidis (Ed.)

H. Herbst
Business Rule-Oriented Conceptual
Modeling
1997. ISBN 3-7908-1004-5

C. Zopounidis (Ed.)
New Operational Approaches for
Financial Modelling
1997. ISBN 3-7908-1043-6

K. Zwerina
Discrete Choice Experiments in Marketing
1997. ISBN 3-7908-1045-2

New Trends in Banking Management
2002. ISBN 3-7908-1488-1
U. Domdorf
Project Scheduling with Time Windows
2002. ISBN 3-7908-1516-0
B. RapplP. Jackson (Eds.)
Organisationand Work Beyond 2000
2003. ISBN 3-7908-1528-4
M. Grossmann
Entrepreneurship in Biotechnology
2003. ISBN 3-7908-0033-3
H.M . Arnold
Technology Shocks
2003. ISBN 3-7908-0051-1

G. Marseguerra
Corporate Financial Decisions and Market
Value
1998. ISBN 3-7908-1047-9

T.Ihde

Dynamic Alliance Auctions
2004. ISBN 3-7908-0098-8

WHU Koblenz - Otto Beisheim Graduate
School of Management (Ed.)
Structure and Dynamics of the German
Mittelstand
1999. ISBN 3-7908-1165-3

J. Windsperger/G. Cliquet
G. HendrikselM. Tuunanen (Eds.)
Economics and Management
of Franchising Networks
2004. ISBN 3-7908-0202-6


Andreas Enders

Management Competence
Resource-Based Management
and Plant Performance

With 17 Figures
and 70 Tables

Springer-Verlag Berlin Heidelberg GmbH

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Series Editors
Wemer A. Miiller
Martina Bihn
Dr. Andreas Enders
WHU - Otto Beisheim Graduate School of Management
Burgplatz 2
56179 Vallendar
Germany


ISSN 1431-1941
ISBN 978-3-7908-0262-7
ISBN 978-3-7908-2690-6 (eBook)
DOI 10.1007/978-3-7908-2690-6
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Foreword

Eight years ago, the production management department of the WHU launched the
industry competition ,Best Factory / Industrial Excellence Award' jointly with the
media partner Wirtschaftswoche in Germany. Two years earlier, the competition
had been initiated successfully by INSEAD faculty in France. Over the years, the
joint research team experienced first-hand that application of Management Quality
was a key driver of continuous improvement along the firm's core business processes. Moreover, those companies that exhibited the highest improvement rates
achieved mostly the best business results (compared to their industry benchmarks). Andreas Enders accompanied us for five rounds of the competition as
program manager for the German competition . His contributions - among others
the launch of our web site www.beste-fabrik.de - are greatly acknowledged by the
academic advisory team.
The fmdings of the industry competition greatly influenced this thesis on Management Competence. Initially, the main research question though was to provide
a theoretic foundation and an empirical test for the seven-factor Management
Quality model (as defined in our recent book on Industrial Excellence). Management Quality consists of strategy formulation and deployment combined with
delegation of tasks to workers and their participation. In addition, measurement,
integration, communication and training complement the main levers. While there
exist numerous studies on superior business performance and key success factors,
there are few sound empirical studies available to date on operational performance
and sustained business success. In this context, the most famous reference and
management book is probably Peters and Waterman's bestseller In Search of Excellence .
For the lEA competition, we developed questions to test whether Management
Quality is being applied to select business processes of the firm. In particular, our
main contribution to the field was that we operationalized the construct of Management Quality and provided a generic process model of the firm. Existing quality awards genuinely lack a model of the firm and a management concept for

achieving (industrial) excellence . We believe that management of resources (as
opposed to market positioning) is a primary driver of operational performance and
consequently of business results. A number of leading European firms, e.g., in the
automotive, automotive supplier, consumer goods, electronics and machine tool
industry, participated in the annual competition and have won the lEA award. In
this way, the conceptual model of Management Quality has been exposed to a
"market test" and is "validated" by a large number of senior executives in various
industries.

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VI

Foreword

The approach taken in this thesis is related but quite different. Andreas Enders
examines key strands in the management literature, i.e., Market-Oriented Theory,
the Resource-Based View and Dynamic Capabilit ies. New studies confirm a synthesis of the three literatures. In a nut shell, the main insight is that Management
Competence is the dynamic reallocation of the firm's resources towards market
needs (see chapter 2). Even though this idea may sound simple, it has neither been
thoroughly investigated nor well specified in research. For this reason, this doctoral research can be viewed as a major contribution to the (operations) management and strategy literature.
The thesis then makes the effort to classify the firm's relevant resources (see
chapter 3). The statistical details of a causal model in which internal and external
resources drive both operational performance as well as directly and indirectly the
firm's business results are discussed in chapter 4. In chapter 5, an empirical test of
the causal model - when applied to a large data set of the German electronics industry - is analyzed. A unique feature of the survey is - based on a suggestion by
our colleague Prof. Dr. Holger Ernst from the WHU - that both managers and
team leaders are being interviewed as key informants. This greatly improves the
validity of the study. A further key feature of this research is the distinction between firms competing in static as opposed to dynamic branches of one industries.

One would expect that firms operating in markets with frequent product introductions and technology changeovers are outperformed by firms operating in less turbulent environments.
The results of the empirical research are very interesting and counter-intuitive .
On the one hand, it is confirmed that resource management exhibits a significant
impact on operational and business performance. On the other hand, firms operating in turbulent - as opposed to static - industries lead in the degree of development of Management Competence skills and exhibit a higher degree of business
performance . This is a rather surprising and unexpected result and has implications for the way firms are being evaluated, e.g., for credit rating purposes.
This research study is very well written and has a clear focus. It aims at explaining the drivers of operational excellence and superior business performance.
The technical parts of the thesis can easily be skipped. The results of the empirical
study are of great interest to both academics and (operations) managers. It provides academics with the basis for further research on operational effectiveness
and sustainable business performance. Practitioners can utilize the insights from
the causal model to focus their improvement efforts on the management of specific internal and external resources .
While the study is unique in its kind and opens a new field in empirical research for operations manager, it provides (statistically confirmed) answers to the
search of excellence question. Therefore, it can also be viewed as revealing the
Secrets of(Industrial) Excellence.
Vallendarl Fontainebleau, March 2004

Prof Dr. Arnd Huchzermeier
Prof Luk N. Van Wassenhove


Acknowledgements

The research on management competence, which is summarized in the present
treatise, was conducted in view of the fulfillment of the requirements for the doctoral degree at the WHU, Otto-Beisheim Graduate School of Management, at the
Production Management department, chaired by Professor Dr. Arnd Huchzermeier. The study originates from the Industrial Excellence Award which I have
accompanied for many years. The analysis of Europe's best managed factories has
been an invaluable experience for this research. This book takes the Industrial Excellence Award one step further in the search for the characteristics of true management competence .
I am greatly indepted to my thesis advisors Professor Arnd Huchzermeier, Professor Luk van Wassenhove from INSEAD and Professor Holger Ernst from the
WHU for their highly competent as well as personal guidance throughout the research project. Without their continuous supervision, this research would not have
been such a success. I can now proudly look back on interesting results on a fascinating topic. This research has truly nurtured my fascination for the academic field
of operations strategy.

Moreover, 1 would also like to especially thank my parents Dr. Hans-Joachim and
Loni Enders who have supported me in a wonderful and unique way throughout
all stages of my life. I would also like to thank my lovely friend Juliane Bergert
who has accompanied my way for a long time as well as my colleagues from the
WHU Rolf Hellermann, Jtirgen Mihm, Stefan Spinier, Andreas Trautwein and
Claus van der Yelden, who have been of great help whenever necessary. Last but
not least, I would like to thank my dearest friends Dnal Drovs, David Steinbeck
and Andre Bernemann who has been a great help in carrying out the Industrial Excellence Award.
Fontainebleau, March 2004

Andreas Enders

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Contents

1 Introduction
1.1 Starting Point of Our Research
1.2 Objectives of Our Study
1.3 Research Agenda
2 Literature Overview
2.1 Introduction and Chapter Structure
2.2 Business Strategy
2.2.1 Market-Oriented Theory
2.2.2 The Theory ofthe Resource-Based View
2.2.3 A Synthesis of MOT and RBV
2.2.4 Industry Dynamics
2.3 Towards Resource Management..
2.3.1 Management in a Situational Context

2.3.2 Defining Capabilities
2.3.3 Towards a Theory on Dynamic Capabilities
2.3.4 Summary on RBV and Dynamic Capabilities
2.3.5 The Current State of the Art
2.3.6 Outlook
2.4 Onto Operations
2.4.1 A Strong Competitive Weapon
2.4.2 Competitive Priorities
2.4.3 Summary
2.4.4 Outlook
2.5 Towards Industrial Excellence
2.5.1 Competitive Priorities and Performance
2.5.2 The INSEAD-WHU Industrial Excellence Award

1
1
2
4
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7
8
8
12
25
30
31
31
32
35
37

38
40
42
42
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49
52
52
52
54

3 Management Competence Model.......................................•............................ 59
3.1 Base Model
59
3.2 Competence and Performance Dimensions
61
3.2.1 Competence Dimensions
61
3.2.2 Performance Dimensions
70
3.2.3 Environmental Dynamism
72
3.3 Dependencies
73
3.4 Moderated Dependence Analysis
74
3.5 Summary
75

X

Contents

4 Methodology
4.1 Qualitative Analysis
4.1.1 Conceptualiz ation
4.1 .2 Pre-testing Phase
4. 1.3 Data Generation
4.1.4 Sample
4.2 Quantitative Analysis
4.2.1 Fundamental Methodolo gical Aspects
4.2.2 Construct Quality
4.2.3 Criter ia ofthe First and Second Generation
4.2.4 Multitrait-Multimethod Analysis
4.2.5 Dependen ce Analysis
4.2.6 Moderated Dependenc e Analysis

77
78
78
78
80
81
85
85
86
88
101
107

110

5 Empirical Results
~
5.1 Factor Analysis
5.1.1 Competence Dimens ions
5.1.2 Performance Dimensions
5.1.3 Environmental Factors
5.2 Multitrait-Multimethod Analysis
5.2.1 Factors
5.2.2 Comparison of Estimation Models
5.2.3 Confirmato ry Factor Analysis (CFA)
5.2.4 Conclusion
5.3 Dependence Analysis
5.3.1 Conclusion
5.4 Moderated Model
5.4.1 Cluster Analysis
5.4.2 Moderated Regression Analysis
5.4.3 Conclusion

115
115
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144
152
155
156
156
157
159

160
162
162
163
165
170

6 Conclusion
6.1 Central Results
6.2 Scientific Review
6.3 Scientific Restrictions
6.4 Managerial Implications

:

171
171
174
175
176

References

177

Appendix - Questionnaires

193

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List of Abbreviations

General Abbreviations
AMT
CA
lEA
IOE
JIT
MBNQA
MOT
MTMM
OE
PPM
PWP
QDCF

RBV
SBU
SCP
SWOT
TDC
TPM
TQM
ZVEI

Advanced Manufacturing Technology
Competitive Advantage
Industrial Excel1ence Award

Industrial Organization Economics
Just In Time
Malcolm Baldrige National Quality Award
Market-Oriented Theory
Multrait-Multimethod (analysis)
Operational Effectiveness
Parts Per Million
Plant Within a Plant (concept)
Quality Dependability Cost Flexibility (priorities)
Resource-Based View
Strategic Business Unit
Structure Conduct Performance (paradigm)
Strength Weakness Opportunity Threat (framework)
Theory on Dynamic Capabilities
Total Productive Maintenance
Total Quality Management
Zentralverband der Elektrotechnik- und Elektronikindustrie e.V.

Methodological Abbreviations
AGFI
AVE
CFA
CFI
CU
DP
FR
GFI
GLS
IR

Adju sted Goodness of Fit Index
Average Variance Explained
Confirmatory Factor Analysis
Comparative Fit Index
Correlated Uniqueness (model)
Direct Product (model)
Factor Reliability
Goodness of Fit Index
Generalized Least Squares
Indicator Reliability


XII

List of Abbreviations

LISREL
ML
PLS
RMSEA
smc
ULS
VIF

Liner Structural Relationships
Maximum Likelihood
Partial Least Squares
Root Mean Squared Error of Approximation
Square Multiple Correlation
Unweighted Least Squares

Variance Inflation Factor

Empirical Abbreviations - Dimensions
HRM
KRM
PRM
ERM
SRM
OP
BP

Human Resource Management
Knowledge Resource Management
Process/ Physical Resource Management
External Resource Management
Strategic Resource Management
Operational Performance
Business Performance

Empirical Abbreviations - Factors
HUMANMHUMANT COMPM
COMPT
RESPM
RESPT
BENCH
AVAIM
AVAIT
USE
STRUM
STRUT

FOCUSM FOCUST
SINT
SSYST
CINT
CSYST
CUST
STRAT
DC
QUAL

Degree of Goal Congruence by Manager (3)*
Degree of Goal Congruence by Team Leader (3)
Degree of Competence Delegation by Manager (5)
Degree of Competence Delegation by Team Leader (5)
Degree of Responsibility Delegation by Manager (5)
Degree of Responsibility Delegation by Team Leader (5)
Knowledge Accumulation! Benchmarking (5)
Knowledge Availability by Manager (5)
Knowledge Availability by Team Leader (5)
Knowledge Use (5)
Process Structure by Manager (2)
Process Structure by Team Leader (2)
Process Focus by Manager (3)
Process Focus by Team Leader (3)
Supplier Integration (4)
Supplier System Integration (3)
Customer Integration (3)
Customer System Integration (3)
Customer/ Market Orientation (5)
Strategic Reaction (4)

Dynamic Capabilities (2)
Quality (4)

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List of Abbreviations

DEP
Dependability (3)
Cost! Productivity (4)
COST
FLEX
Flexibility/ Time (4)
FPERF
Financial Performance (2)
MPERF
Market Performance (2)
MDYN
Market Dynamism (3)
CDYN
Competitive Dynamism (5)
TDYN
Technological Dynamism (4)
* Number of indicators in brackets

XIII


1 Introduction

We devote this research to the never ending quest for higher rents. The objective
of our study is to explain differences in firm performance. Performance differences can be easily observed, but they are difficult to explain. We have given our
study the title management competence because we strongly believe that the quality of management is an important driver of firm performance. Based on a study in
the German electronics industry with dyadic data from 168 companies, we have
tested a multi-dimensional model to control for the effects of resource deployment
and reconfiguration on plant performance. We deliver empirical evidence for the
resource-based view of the firm and the theory of dynamic capabilities.

1.1 Starting Point of Our Research
The resource-based view dates at least back to Penrose's pioneering work "The
theory of the growth of the firm" (1959) . "A firm may achieve rents not because it
has better resources, but rather the firm's core competencies involve making better
use of its resources." (Penrose 1959, p. 54) In this sentence, Penrose explained the
primary ideas that are related to resource-based theory. A firm consists of resources and competencies. Company resources will have to be leveraged in order
to achieve rents.
The center of interest in our study shall be this resource-based view which has experienced a change in importance over the past years. While its roots can truly be
traced back to Penrose's work, the resource-based view had not been established
as a widely used concept until the early 1980s, when Rumelt, Wernerfelt, Barney
and others enriched it in different ways which shall be discussed in the literature
review. After its 'return', the resource-based view remained a dominant theory in
the strategic management literature. In the early 1990s, it has experienced a strong
development. While its concepts were widely accepted, it was widely agreed
upon, that companies consist of (sometimes superior) resources and that these will
have to be carefully managed. Criticism arose which considered the market environment of the firm as being more important. The resource-based view was accepted though as an excellent framework in stable, low-velocity markets, in which
the company resource structure could largely remain the same over a long period.
But how should companies perform in dynamic, high-velocity markets? The resource-based view was enlarged by a theory on dynamic capabilities, which ad-

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2

1 Introduction

dressed and tried to heal this criticism by emphasizing the importance of resource
re-configuration, still trying to stress the value of resource management.
A second theory which developed in parallel over many years is the marketoriented theory developed by Porter. Market-oriented theory is based in industrial
organization economics which developed in the early 1950s. Coming from an
economics or rather economic welfare background, market-oriented theory analyzed the firm within its market environment. Porter's (1985) well know five
forces model captures this external view on a company.
Recent studies call for a synthesis of the two theories. And in fact, Porter partly
gave in by accepting the importance of a resource-based perspective of the firm,
still emphasizing external factors should not be neglected (Porter 1996).
One problem of both theories, especially the resource-based view, surely is the
endless number of different frameworks which often confuse the reader. A second
problem is related to the lack of empirical evidence . This deficiency or shortage in
the study of the resource-based view makes it difficult to distinguish more and less
valuable frameworks. It is therefore hard to identify similar studies against which
our research can be directly compared. Studies that concentrate on the resourcebased view only provide us with little empirical evidence through singular case
studies. Studies that are based on a larger scale only touch the resource-based view
in passing. Concerning these studies, not the theory on the resource-based view is
of central concern, but rather a large scale test of success factors. In our study, we
would like to build the bridge by empirically testing resource-based concepts that have dominated operations strategy for decades - on a larger industry sample.
The resource-based view shall form the foundation of our research. We will develop a new framework which combines different influences of the resource-based
view presenting it as a more organizational view of the firm. We will thereby control in how far the resource-based view (modified by the theory of dynamic capabilities) is able to explain why firms earn rents and why firms perform differently.

1.2 Objectives of Our Study
The end of the last section already brought us to the research focus or research objectives of this study. In the beginning of this chapter, we have shortly touched the
fact that firms simply perform differently. A never ending task in the literature is

the search for reasons of firm performance differences. Upon the many success
factor studies in the field, it does not become very clear sometimes what exactly
distinguishes successful from non or less successful companies. The best answer
to this fundamental question probably is a combinat ion of different management
theories. We believe that firm differences are the result of managerial action. In
consequence, successful firms are the outcome of superior management. Management competence can therefore be used as a mean to explain firm differences .
In summary, we can formulate the first research question of our study as follows:


1.2 Objectives of Our Study

3

• Why do firms perform differently?
Related to this question we are furthermore interested in: Can Management
Competence be established as a primary success driver?
So far we have used the word management competence to describe superior resource management. In contribution to the theory on dynamic capabilities, we
could have called management capability also. In the next chapter, we will present
the different meanings of both terms which has led to some confusion in literature.
Similar to Hamel (1994) and Teece et al. (1997), we will use both terms synonymously in our research, even though we are aware that both terms could have a
slightly different meaning, in which management capability slightly stronger refers to dynamic capabilities and management competence rather points at the
technical or production focus of our study. Since both terms describe our research,
we decided to use management competence to emphasize the production focus of
our research and to not contribute to the confusion of the term capability which is
used in dynamic capabilities, intangible resources, organizational capabilities and
a large number of other definitions.
In the last section, we have addressed the resource-based view and the theory
on dynamic capabilities as a well accepted classification of management concepts.
Firms are said to consist of resources. Resources can be classified in different
ways which will be discussed in the next chapter. The resource-based view provides us with a very structured ' arrangement' of firm 'components'. Following

Penrose, a firm may achieve better rents not because it consists of resources but
because the core competencies of a firm better leverage these resources. The resource-based view delivers us a possible explanation of how the different components of a firm, its resources and competencies, interact. Since the resource-based
view is only theoretically discussed , it will be required to see in how far these
concepts can be utilized in empirical research effectively. In conclusion, we can
formulate the second research question as follows:
• Can the RBV be applied to practice and used as an explanation?
Furthermore : What are the effects of resource management on firm performance?
The first and the second research question are of course very similar. While the
first research questions concentrates on the explanation of firm performance differences in general, the second questions asks, in how far the resource-based view
can be used to structure firms and explain performance differences in specific.
Nevertheless, if the resource-based view turns out to be empirically confirmed, it
will surely also give insights to the first question.
We have mentioned above that the resource-based view was modified by the
theory of dynamic capabilities. The theory of dynamic capabilities emerged from
the critique of the resource-based view that it only represents an incomplete theory
in dynamic markets. The resource-based view strictly concentrates on an efficient
management of resources. Dynamic capabilities build on this idea. While they still
emphasize the importance of an efficient resource management, they concentrate
on a constant adaptation of the existing resource structure to changing market
needs. As a result, in dynamic markets, it seems more important to consequently
re-configure resources than to 'simply' manage them. It will therefore be interest-

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4

1 Introduction

ing to see in how far resource management differs in different market surroundings, for which it will of course be necessary to cluster companies according to

their environment, to see if there are in fact differences in different settings. In
conclusion, we can formulate the third research question as follows:
• Do moderating effects exist?
Furthermore : Are the effects of resource management on firm performance different in static and dynamic markets and does the classical RBV fail in dynamic
markets?
In order to answer these three research questions, we have carried out a focused
survey in the German electronics industry. We will now continue by giving a short
overview on the chapters of this study.

1.3 Research Agenda
Our analysis is divided into six chapters. Subsequent to the first chapter, our introduction, we will turn to an extensive literature overview in chapter two. In a first
part, we will start with an overview over market-oriented theory and its latest developments. We will continue with the resource-based view and its development
toward dynamic capabilities. In the end of the first part, the resource-based view
and market-oriented theory will be shown as two sides of the same coin. Both
theories are incomplete, a synthesis of the two is therefore the best approach. In
the second part of chapter two, we enlarge on the aspect of dynamic capabilities.
We will try to shed some light onto the discussion or simply the use of the words
capability and competence. We will try to show the differences between the different understandings and deliver a better definition. In the third part, we will relate resource-based management to operations literature. We will show that competitive priorities are a very valuable classification of 0 the operational firm
performance. Similar to the Industrial Excellence framework, we show the path
from superior resource management to higher business results via improved operational performance .
In chapter three, we will present the configuration of our base model. Based on
the extensive literature review in chapter two, we will conceptualize the different
constructs of our model. In a first step, different resource management dimensions
will be discussed and presented. The center of interest is to evaluate management
competence. We will therefore define in how far management competence can be
identified in resource management dimensions. Next, we will describe the conceptualization of the performance dimensions . We will start with operational performance or more specific the competitive priorities of a plant, before we turn to
business performance, which should resemble the ultimate company target. Chapter three will show an almost identical structure as the literature review in chapter
two. In the end of the chapter, we will describe the dependencies between resource
management and performance . In addition, we will turn to the question in how far
these dependencies are moderated by differing environmental settings. In the end

1.3 Research Agenda

5

of the chapter, the hypotheses that can be derived from the model will be presented.
In chapter four, we will tum to the statistical fundamentals of the empirical
analysis. In a first part, we will present the qualitative analysis. We will shortly
discuss the process of the data generation and describe the sample of our study. In
a second part, we will concentrate on the methodological foundation of the quantitative analysis. In detail, we will describe the methods to evaluate the goodness of
our constructs, the multitrait-multimethod analysis, the dependency analysis and
the moderated regression analysis.
Chapter five consists of four sections in which the operationalization of the
constructs and the measurement of the model are discussed. In the first section, we
evaluate all determinants of resource management, operational and business performance and environmental issues. The scales necessary for the test of the constructs are developed on the basis of the conceptual work in chapter four and
tested. In the second section, we will present the results of the multitraitmultimethod (MTMM) analysis. Some factors have been addressed to two informants, the production manager and the team leader or supervisor because it was
unclear prior to the test who would deliver the more valid answers. Using the results of the MTMM analysis, we will test the dependencies of our base model in
section three. We will see in how far resource management is related to operational and business performance. In addition, we will control, in how far the hypotheses that have been developed in chapter four can be confirmed. In the last
section, we will control if moderating effects exist and how they can be characterized.
In the last chapter, we will summarize our work. We will draw the main conclusions and interpret, in how far our research questions can be answered by our
study. In the end, we will have empirical evidence in favor of or against the resource-based view. We will be able to see if the theory of dynamic capabilities is a
valuable contribution to the resource-based view.

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2 Literature Overview

Objective

It is well understood that the firm's resources inherit a competitive advantage.
Management Competence leverages it and makes it sustainable.

2.1 Introduction and Chapter Structure
The chapter reviews the state-of-the-art and the development of the literature on
the i) resource-based view (REV), ii) dynamic capabilities and iii) resource-based
related topics in manufacturing strategy. It will identify recent concepts for explaining operational excellence (business excellence respectively) and show where
their limits are, also with respect to the empirical testing of these constructs. Finally, it will show how Management Competence is one important driver of operational and business success.
Looking for higher business performance we will contribute to the never-ending
'quest for rents' (Bowman 1974), which has dominated the strategic management
literature for the past decades (McGrath et al. 1995).
In detail, we will give a broad overview on the strategic management literature
in which our model is embedded. In section 2.2, we will briefly focus on the socalled Harvard school Industrial-Organization Economics (IOE), Porter's MarketOriented Theory (MOT) and the ' in parallel' developed Resource-Based View
(RBV). We will examine how competitive advantages can be derived and what
makes them sustainable.
In sections 2.3, we will then expand on the RBV and show how it has dealt
with the criticism that it fails in dynamic markets and how the Theory on Dynamic
Capabilities (TDC) has emerged from the RBV. We will especially focus on management competence, which is a core concept of the TDC, and show the conceptual and empirical gap that our study will fill. We will conclude this section discussing the complementarities and differences ofRBV and TDC.
In section 2.4 of the literature review, we will show how the concept of our
study is related to manufacturing strategy and operations management. We will
give a brief overview on the literature on manufacturing strategy and competitive
priorities.
It will not make any sense to give a chronological overview of the literature in
any subsection, since themes have often re-appeared in the literature and have


8

2 Literature Overview

been discussed for decades now. We will however try to structure the terminology
especially used in the RBV literature, as this is requiring tremendous improvement. In what follows, we will start with a review of JOE and MOT promoted by
Porter.

2.2 Business Strategy
As mentioned above, we will first briefly describe the MOT literature, before we
tum to the RBV literature. We will discuss the differences and limits of both approaches and end this section with a synthesis as proposed by recent theory.

2.2.1 Market-Oriented Theory

We will refer to MOT as presented by Porter in the late 70s and early 80s. Before
we tum to Porter, we will however shortly look at the roots of the MOT.
The Roots of MOT - Industrial Organization Economics

MOT clearly has its roots in industrial-organization economics', which has been
used as a powerful tool to analyze competition (Porter 1981). According to Conner (1991) at least five theories have strongly referred to IOE (namely neoclassical
theory, Bain type IOE, Schumpeterian and Chicago responses and transaction cost
theory).' The analysis of competition is the common ground on which all theories
are found. The origin of IOE is following the classical Harvard school paradigm of
(industry) structure, conduct, performance (SCP) (Bain 1956; Mason 1939). "The
essence of this paradigm is that a firm's performance in the market place depends
critically on the characteristics of the industry environment in which it competes ."
(Porter 1981, p. 610) Since the classical paradigm was facing heavy attack in the
1960s (Mancke 1974), the SCP framework had later been enriched by Learned et
al. (1969) for example, who developed a framework for effective strategy formulation which already included as part some form of a SWOT (Strength-WeaknessOpportunity-Threat) framework later developed by Andrews (1971). Nevertheless ,
at first the unit of interest clearly remained the industry and industry performance,
not the single firm or firm performance . The focus on industry performance was
partly justified by the interest of policy makers to regulate markets in a way to
maximize economic welfare. In addition, firms had the interest to influence the attributes of their industry in a way to maximize industry performance in order to

earn higher rents. The idea of the SCP framework was to analyze the relationship
between industry structure and industry performance ; for simplicity reasons, industry structure was defined as static (Porter 1981). Industry structure was fur-

1

2

For a historical development ofiOE see Conner 1991.
In fact, even the RBV is said to show important similarities to the different 10E theories.

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thermore limited to a small number of characteristics .' Due to these and other
limitations Porter (1981) viewed Bain-type lOE as "(... ) a start toward a systematic understanding of the environment" (Porter 1981, p. 612), but not more.
From an Industry to a Strategic Group Perspective

Porter used the S-C-P framework as a general basis for the analysis of industry
competition and tried to heal the obvious problems through the strategic group and
the mobility and entry barrier extensions.' Yet, Porter argued that industry performance is a far better predictor of firm performance differences, than is the degree of firm diversification (firm heterogeneity) (Montgomery and Porter 1991).
IOE only focuses on opportunities and threats of a company and thereby fails to
truly include a companies strengths and weaknesses. Even though Porter tries to
heal the problems of lOE, he did not go far enough by changing his focus from industry to strategic groups.' Nevertheless, he made at least three major contributions to lOE : (l) He focused not solely on industry but also on firm performance,
(2) he did not regard the industry structure as naturally stable and (3) he regarded
a firm's conduct to have an influence on firm performance.
Market-oriented theory gained in interest in the late 1970s. Porter integrated the

IOE ideas in his work by not focusing exclusively on industry, but considering
firms on an equal basis. "A theory must deal simultaneously with both the finn it-

3

4

S

These include mainly four types, namely the barriers of entry, the number and relative
size of firms, product differentiation and demand elasticity (Porter 1980). In Bain-type
IOE, "persistent abnormal returns are based upon long-lasting though limited types of
heterogeneity between firms: in Mann's statement (1966), the central heterogeneity is
firm size ("dominance"). In other studies, the central heterogeneity examined is, for example, which side of an entry barrier the firm is on (e.g., degree of product differentiation, as examined by Shepherd [I972]), or differing market shares (e.g. Gale 1972)"
(Conner 1991, p. 125).
Note: Mobility barriers are already related to barriers to imitation in the RBV, even
though Porter's view offers an important difference as mobility barriers only exist between strategic groups. Within the strategic groups firms are rather homogeneous and resources are mobile. "Caves and Porter (1977) define a mobility barrier as a structural attribute of a strategic group that makes it difficult (i.e. very costly) for firms not already in
the group to move in" (Barney and Hoskisson 1990, p. 191). To focus on a firm's
strengths and weaknesses however requires some degree of firm heterogeneity. As a result, strategic group theory is in agreement with IOE by emphasizing the homogeneity
within strategic groups and renewing through heterogeneity between strategic groups
(Barney and Hoskisson 1990). Mobility barriers were needed to explain inter-strategic
group heterogeneity. This is however only changing the unit of interest from industry to
strategic groups and not going far enough according to the RBV. Nevertheless, Bogner et
al. (1998) see similarities between the RBV and strategic group literature. The idea of
mobility barriers therefore goes at least back to Caves and Porter (1977), even though the
authors do not provide a configuration of these barriers.
"The strategic group perspective turned the S-C-P paradigm on its head, and argued that
the strategic behaviours influence both the structure of the industry (the formation of strategic groups) and the performance of the industr" (Thomas and Pollock 1999, p. 130).

10

2 Literature Overview

self as well as the industry and broader environment in which it operates" (Porter
1991, p. 109). Nevertheless the focus of his study remained on the industrial environment for mainly two reasons, "first, it was assumed that firms are identical on
terms of strategically relevant resources and second, any attempt to develop resource heterogeneity has no long term viability due to the high mobility of strategic resources amongst firms" (Spanos and Lioukas 2001, p. 909).
MOT by Porter

Porter's view on strategy focused on two central questions. A competitive strategy
shall value the attractiveness of industries to enter and improve the relative competitive position (Porter 1985). The entry into a market is combined with an investment decision. Entry barriers - which in theory date at least back to Bain
(1956) - have several faces. They can be a result of limited capacity, different cost
structures, or vertical integration as well as barriers to mobility (Caves and Porter
1977). Porter's well-known five forces model expresses the market-oriented view,
which stronger values external effects and action and does not include internal resources and capabilities. In fact, the relevance of capabilities and resources is reduced by stating that they are generally homogeneous (due to resource mobility)
across companies (Porter 1980). Therefore, the five forces model, or rather its
analysis, was also meant to give guidelines in answering the two fundamental
questions on industry attractiveness and relative competitive positioning.
A Synthesis of MOT and IOE

In general, the target of strategy is to create a competitive advantage that will lead
to higher rents - this holds true for IOE and Porter's MOT (and also the RBV to
which we will tum later). IOE theory sees the sources of competitive advantage in
the attributes of an industry (Bamberger and Wrona 1996). Classical supporters of
JOE believed that a firm could neither influence its own performance nor its industry condition (Bam 1956; Mason 1939). Porter (1981 p. 611) later assumed that
the conduct (of the SCP-paradigm) could be neglected, since industry structure
would directly determine performance. "In this context, competitive advantage is
industry driven (i.e., determined by industry characteristics such as concentration
ratio and cost structure) rather than proactively created by firms through accumulation of unique, valuable, and imperfectly imitable resources" (Lado et al. 1992,
p. 79). Porter also regards a competitive advantage as the primary source of profitability for a company. However, unlike IOE, he regards the relevance of firm conduct as an analysis of the industry and the relationship of industry structure and

firm performance . The competitive advantage, which shall in tum create value for
a company, can be received via a cost leadership or a differentiation strategy.
"There are two basic types of competitive advantage: cost leadership and differentiation" (Porter 1985, p. 3). In addition, barriers to entry favor sustainability of
competitive advantage. Barriers should be reinforced through the reinvestment of

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earnings (Lado et al. 1992).6 In summary, the establishment of a competitive advantage is due to a firm's competit ive positioning while sustainability is dependent on industry structure effects. The implementation of strategy shall be done in a
value chain according to Porter.
"The field of strategic management has undergone, in the 90s a major shift in
focus regarding the sources of sustainable competitive advantage: from industry to
firm specific effects" (Spanos and Lioukas 200 I, p. 907). And, to say this in advance, even Porter's view partly shifted later more towards the RBV. "A company
can outperform rivals only if it can establish a difference that it can preserve"
(Porter 1996, p. 62). However, the RBV is not replacing MOT in Porter's mind,
"stress on resources must complement, not substitute for, stress on market positions" (Porter 1991, p. 108). Vice versa, we have to note that even authors who
normally contribute to the RBV have also recognized the relevance of the business
environment for the firm early, "firms can become better informed about the future values of strategies being implemented, including through the analysis of a
firm' s environment and through the analysis of its unique skills and capabilities"
(Barney 1986b, p. 1232). This builds the bridge to the RBV. We will return to the
similarities of both theories later, after having illustrated the concepts underlying
the RBV.
1950s
Harvard
School

LO.

-+

1970s
Chicago
School
Response

t

1980s

Caves and
Porter (1977 )

~

1.0. Econo mics
(The Industry)

1990s

~

Emerging Strateg ic
Management Branch
(Strategic Groups )

Strategic Management Perspective (The Firm

and The Industry) Schendel and Hofer (/979)

-

1.0. Continues
(Increased
emphasis on
Game Theo ry)

~

An Emerging Strategic
Manage ment Paradigm

Emerging Strategic
-----./
M anagement Branch
(Reso urce-Based View)

Microeconomics
(The Firm)

Penrose

1

Manageria l Cognition

(1959)

Fig. 2.1. " The evolution and integration of concepts" (Bogner et al. 1998, p. 67)

6

This enriches the picture ofIOE which failed in explaining how a sustainable competitive
advantage can be achieved.


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2 Literature Overview

2.2.2 The Theory of the Resource-Based View
Among other theories in strategy, as for example the neo-classical theory of competition, Bain-type competition (1954), Coase's (1937) transaction cost economics
and not at least market-oriented theory as expressed by Porter (1980), resourcebased theory forms a dominating branch in the literature (Mahoney and Pandian
1992). We will provide a short comparison of these theories in the end of the
RBV-section (see Table 2.4).

The Roots of RBV
The RBV dates at least back to Penrose's pioneering work "The theory of the
growth of the firm" (Penrose 1959). Yet, even earlier, Chamberlin (1939) explained that firms consist of unique resources and capabilities and the best strategy
is to exploit these unique skills . According to Learned et al. (1969}- who strongly
support Penrose - every organization has strengths and weaknesses that are related
to its resources.
Similar to MOT, the RBV also partly evolved from a critique on the S-C-P
paradigm (Rasche and Wolfrum 1994). "Resource-based theory emerged from a
dissatisfaction with neoclassical economic's handling of real-world problems of
the firm that were outside of the equilibrium context" (Bogner et aI. 1998, p. 66).
Resources of firms are heterogeneous and immobile in most industries (Barney
and Hoskisson 1990). In fact, 'business units differ far more within than across industries' (Rumelt 1991).7 As a result, business unit analysis explains by far more

of a business unit's performance than industry analysis does (Rumelt 1991). In
contrast, Schmalensee (1985) points out that industry differences do matter. In
consequence, researchers must not compare across industries, since industry differences "( ...) are clearly not all that matters" (Schmalensee 1985, p. 350). Rumelt's view of intra-industry differences is strongly supported by Roquebert et al.
(1996) who compare Rumelt 's analysis to Schmalensee.

From Firm Resources to Higher Rents
The primary objective of a firm remains the 'search for rents' (Bowman 1974)
"( ... ) and sustainability of rent, where rent is defined as return in excess of a resource owner's alternative use of costs" (Mahoney 1995, p. 91). The main idea of
the RBV theory is that internal resources are the source of a company's strengths
(and weaknesses) and in order to be a strength over a competitor, resources have
to be heterogeneous among firms. A company's strength inherits the competitive
advantage which will be used to receive higher rents. That reflects the trait of
thought of the RBV . The task of an organization therefore is to first identify these
resources (Penrose 1959) and then to create a competence that is truly distinctive.
7

The reasoning behind immobility is that it strengthens heterogeneity and sustainability of
a superior resource position. Resources have to be heterogeneous in order to be of strategic interest to the firm (Barney 1991).

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The identification of critical resources is also important for choosing the best
business area or industry to enter. "A firm is constrained in the amount of entry it
can pursue in a given time period due to limitations on managerial time (Penrose
1959). In the face of such constraint, it will select among its potential viable entries according to the degree to which its resources provide advantage in each industry (Montgomery and Wemerfelt 1988)." (Silverman 1999, p. 1111). The relationship between resources and rents can be described and will next be analyzed

as follows:
Resources

Heterogeneity

Competitive
Advantage

Sustainability

Rents

Fig. 2.2. From resources to rents

We will use the above framework of five steps in order to analyze the RBV
theory. We will start with resources and show how these resources - via heterogeneity and the creation of a sustainable competitive advantage - will finally generate higher returns (Riihli 1995). The second half of the above framework is similar
to Porter's MOT which regards competitive advantage as the primary source of
higher rents as well (even though he derives it from a different source).
Resources. "In our view, a resource is a fixed input which enables a firm to perform a particular task. The input is made up of people and the real assets that they
use" (Rubin 1973, p. 937). Starting the discussion with resources brings us to the
first problem of our analysis. Resource classification is highly non-standardized.
While traditional classifications primarily relied on human and physical assets, a
more modem classification rather divides resources into tangible and intangible
resources (Silverman 1999). Related to that, recent literature also supports a separation of resources from capabilities. In this context, the term ' capabilities' is
highly misleading (we will later use the term for dynamic and organizational capabilities only). Therefore, we will refer to them as 'skills' from this point onwards." Dierickx and Cool (1989) classify resources into asset flows (resources
which can be immediately changed) and asset stocks which are built up by flows
(and are therefore difficult to copy). A last and for our purposes important classification is among critical and non-critical resources. Critical resources render the
strengths of a company - their identification and their limits will be discussed
later.
There exists an endless number of resource classifications, of which we can just

provide a small sample. According to Wemerfelt (1989), critical resources that
render competitive advantages can be classified as: (1) fixed assets (physical and

8

We will later try to give a clear definition of capabilities. So far we refer to them as skills.
The confusion can be shown by a definition of Birchall and Tovstiga (1999) , for example,
who classify capabilitie s into: integrity related, market-access, and functionality related
capabilit ies. In our analysis, we will only concentrate on the last, functionality-related capabilities that come closest to our discussion.


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2 Literature Overview

human), (2), blueprints (non-physical such as brands), and (3) culture? (tearn! network effects). According to Hofer and Schendel (1978) resources include six
groups: financial resources, physical resources, human resources, technological
resources, reputation, and organizational resources. According to Barney (1991),
there are three main groups: physical resources, human capital resources, and organizational capital resources.'? Coming back to our first classification into tangible and intangible assets, Hall (1992,1993, p. 607,1994) provides us with a quite
complete list of intangible assets including: intellectual property, trade secrets,
contracts and licenses, data bases, information, networks, know-how of stakeholders, reputation, and culture. According to De Gregiori (1987, p.1243) "Resources are not things or stuff or materials; they are a set of capabilities. (.. .) The
capabilities define the functional relationship that we call resources."
Resource Heterogeneity. Having looked at different resource classifications (of
which the classification into tangible and intangible assets probably is one of the
most convenient) it is the firm's crucial task to separate critical from non-critical
resources. We can conclude that critical resources have to be company specific
and as a result companies have to differ accord ing to their resources. Management
identifies and selects resources which resemble the core competences of the firm,
which are characterized by the fact that they are different from the competences of
a competitor and able to lead to a competitive advantage . This management identification and selection process or ability is often called a meta-competence, which

is related to social competences of managers seen in the ability to communicate,
learn, etc. (RUhli 1994).
Economic progress is supported by firm differences (which is in fact a serious
problem in monopolies). Since the concept of firm heterogeneity is core to the resource-based idea of competitive advantage, it is necessary to understand the dynamic mechanisms that lead to firm idiosyncratic resources (Noda and Collis
2001). This raises the often-touched question of 'why firms are different'. The differences in resources may have several reasons. According to Amit and Schoemaker (1993) firms differ because of factor market imperfections and discretionary managerial decisions about resources. The absence of perfect factor markets is
important because otherwise competitive advantage could be easily competed
away (Rasche 1994).11 According to Noda and Collis (2001), firm diversity results
Barney (1986a) emphasized that organizational culture can be a very strong source of
competitive advantage. (Barney 1986a; Barney 1986c; Fiol 1991). "Recent attempts (00 ')
have focused on managerial values and believes embodied in these firms' organizational
culture. (... ) Firms with strong cultures are pointed out as examples of excellent management (Peters and Waterman 1982)" (Barney 1986a, p. 656). This moves the "good
management" aspect to the center of interest. The cause of success clearly lays in efficient management. As Porter himself pointed out (1991: 98-99), product-market analysis
can explain a firm's successful performance by way of its cost leadership, but the firm's
low-cost position is an outcome, not a cause, of that success" (Noda and Collis 2001, p.
898). Organizational culture in that already inherits management aspects.
10 There are other classifications (as for example Greene et al. 1999) which mostly use
similar sets, but shall not be discussed here.
11 Rumelt (1984, p. 559) provides us with a list of reasons for factor market imperfections.

9

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