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Core Corporate Strategic Capabilities: Role of Corporate Capabilities

Abstract

Core strategies have been addressed in most of strategic literature but there has been little extension with respect to assessing the core strategic capabilities. Market measure which is done in form of looking competitive advantage has been the widely used measure for assessing the success of a strategy. Corporate reputation measure reflects into a large extent the performance measure, as well a society measure together with integrating institutional dimensions (macro, messo and micro). Capability of a strategy is not only assessed with respect to performance delivery but its ability to overcome environmental barriers, within and outside the corporate, and achieve these in integrity manner on which the outcome is sustainable corporate reputation which is measured from international as well as national eyes. In other words, reputable firms are well performing firms in the market (financial measure) but in addition they perform well in non financial measures.

This paper has sited corporate capabilities as well as corporate integrity to be main ingredients toward core corporate strategic capabilities but also institutions shape both of them.

On the other hand this paper is contributing to the standing literature with respect to assessing a capability of a strategy not only on the features and performance based but from society angle as well as in context of institutions.

1.0 Introduction

Core corporate strategic capability is the question for many corporations that operates around many places in the world. Traditional measure for assessing the successful or a key strategy is with respect to their competitive advantage. Strategies in this scale are assessed to whether they fulfil the aspects of uniqueness, inimitable, rare, and be able to create value. The outcome of these dimensions leads into competitive advantage which by itself is a measure of firm competitiveness relative to another player in the firm. This measure is too limited for several reasons. Worden (2003: 39) commented that reputation is base of an organizational identity, crystallizing the essence of what a company is, does, and stands for through images held of the organization in its environment. This paper intends to go beyond in addressing the question of a capability of a strategy which is not only assessed within the constraints of performance though that is also one on the dimension.

This paper also has a view that a core strategic capability depend highly on the corporate capabilities (innovation, leadership/managerial, financial etc), but does as well include corporate integrity. Lenz (1980) defined strategic capability as the capability of an enterprise to successfully undertake action that is intended to affect its long-term growth and development. If Integrity has not being integrated into a strategy there will be a huge failure from within and from outside the firm. Core strategic capability not only relies on corporate capabilities but also relies on corporate integrity as well as on the influence of institutions. Tan & Litschert (1994) found a different strategic focuses between planned economies and transition economies, implying a huge role of institutional factors in restructuring and assessing the strategic capabilities.

1.1 General Objective

To analyze core corporate strategic capabilities and their ultimate influence on sustainable corporate reputation as well as assessing the role of corporate capability and corporate integrity on these strategic capabilities.

1.2 Specific objectives

Defining and assess core corporate capabilities, core strategic capabilities, corporate reputation, institutions and corporate integrity.

Analyze the influence of core corporate capabilities on core corporate strategic capabilities.

Analyze the influence of Corporate Integrity on Core corporate strategic capabilities.

Examine the role of institutions on both the ingredients influencing core corporate strategic capabilities and on sustainable corporate reputation.

Analyze the influence of corporate core strategic capabilities on corporate sustainable reputation.

1.3 Reseach Questions

What are core corporate capabilities?

What are corporate core strategic capabilities?

What is corporate reputation?

What are institutions?

What is corporate integrity?

What is the influence of corporate core capabilities on corporate core strategic capabilities?

What is the influence of corporate integrity on core strategic capabilities?

What is the role of institutions on both ingredients that influence core strategic capabilities and on sustainable corporate reputation?; What is the influence of corporate core strategic capabilities on corporate sustainable reputation.

2.0 REVIEW OF LITERATURE AND CONCEPTS

2.1 Corporate capabilities

Ulrich & Wiersema (1989: 119) defined Organizational capability as a firm’s ability to establish internal structures and processes that create firm-specific competencies and enable it to adapt to changing external pressures.

Day (1994), on the other hand distinguished between business/organizational assets from business/organizational capabilities. Wong (2009) argued that skills and competence of business continuity management are integral parts of strategic management.

Irvin & Michaels III (1989), noted skills to be critical capabilities that an organization as a whole has- as distinct from the capabilities of individuals in the organization.

Other authors use the term capability to refer to certain key skills of the organization. Managerial, technological, leadership, innovation, negotiation and communication are some of capabilities that are mostly referred in most articles with respect to this subject (Lenz, 1980; Ulrich & Lake, 1991). In this study corporate capabilities in addition to (Lenz, 1980, Ulrich & Lake, 1991) should also be able to empower the organization through value creation, overcoming the corporate barriers as well as being relied for such purposes within the organization and ultimately they should be able to deliver the expectations of firm and society at large.

2.2 Corporate Integrity:

Integrity is derived from Latin word integritas meaning wholeness, coherence, rightness, or purity, has both a narrow and broad sense (Worden, 2003:33), the author continued to argue that integrity can also be defined as consistency between word and deed, in line with a consistent set of principles or commitments, especially in the context of a temptation or challenge to the contrary.

Schwartz (2005: 28) defined Integrity as to be of sound moral principle, to have the characteristics of honesty, sincerity, and condor.

Koehn (2005) noted that integrity is a business asset and he claim we should value integrity because it has a market worth. To kohen, people of integrity want to act mindfully whenever, wherever and those possessing this virtue, act with both short and long-term.

This paper views corporate integrity as not just abiding to laws or regulations of a particular country of fits into ethical views of a given culture but to constantly abiding to the global (international) principles in terms of words and actions.

2.3 Corporate Reputation

Worden (2003: 39) commented that reputation is base of an organizational identity, crystallizing the essence of what a company is, does, and stands for through images held of the organization in its environment. On the other hand Fombrun (1996), pointed out that Reputation capital is a form of intangible wealth which is closely associated with accounts call or ’’goodwill’’ and marketers term ’’brand equity’’.

Castro (2006) described corporate reputation as a result of the process of ’’social legitimization’’.

Reputation assumes an important role when there is uncertainty about the underlying quality of firm’s offerings (Robert and Dowlig, 2002: 1079). Describing the nature of uncertainty, authors argued that uncertainty makes it difficult for competing firms to quickly make quality demonstrations that would offset the signalling benefits associated with a good reputation. Schwaiger (2004) on the other hand pointed out that evaluating corporate reputation not only appraises subjective perceptions of a company’s attributes but also allows an intrinsic disposition towards these attributes.

2.4 Core strategic Capability

Mintzberg (1973) defined strategy as a patterned stream of decisions, which focus on a set of resource allocations that are employed in an attempt to reach a position consistent with a firm’s environment.

Ulrich & Wiersema (1989) noted a need for firm to develop a sense of strategic capability so as to adjust with environmental turbulences.

Lenz (1980) defined strategic capability as the capability of an enterprise to successfully undertake action that is intended to affect its long-term growth and development. Hafeez et al (2002) noted that key strategic capabilities are those that help to generate high profit margins, and are the clear market winners in securing market share however authors argued that relying purely on financial measures have implications.

This paper perceive strategic capabilities to be able to link the corporate capabilities and their intended results as well as being able to overcome business and institutional barriers from within and outside the organization.

2.5 Institutions

North (1990:34) defined institutions as ‘’humanly devised constraints that structure human interaction. Scott (1995:33) on the other hand defines institutions as ‘’regulatory, normative, and cognitive structures and activities that provide stability and meaning to social behaviour’’. Peng (2004) established what he noted as institutional framework and is made up of formal and informal institutions governing individual and firm behaviour and these institutions, in turn, are supported by three pillars, which are regulatory, normative and cognitive. Falkenberg (2007) viewed institutions as the those which provide traffic rules for carrying our transactions, or exchange.

The major role of institutions in a society is to reduce uncertainty by establishing a stable (but not necessarily efficient) structure to human interaction (North, 1990). Meyer & Nguyen (2005) suggested that institutions influence business strategies. Peng (2004: 110), noted that institutions affect firm strategies by constraining the range of acceptable actions.

This paper will use the model introduced by Falkenberg (2007) on levels of institutions, where he noted the micro, macro and messo (contry) level institutions. Micro level institutions play as traffic rules for the human behaviour within the local culture. Messo level institutions interact at the national level of a country which include economic, political and legal systems. Macro institutions help to govern international business to be more profitable and fair for parties in the transaction.

2.6 Corporate Performance

Mostly widely used form of performance measure for the firms is economic performance. Some studies use absolute measures while others use relative measures. When a relative measure is used, the performance of a firm is compared to others in the same industry. Dess & Robinson (1984) used in each firm’s current performance relative to other firms in the industry. Fombrun & Shanley (1990) used relative competitive measure in terms of sales growth, Return on equity, Return on investments etc. Objective performance measures has been highlited to be complex for small firms compared to large firms (Dess & Robinson, 1984). Just as price signals a firm’s inherent quality to consumers, high economic performance signals a firm’s inherent quality to investors and creditors (Fombrun and Shanley, 1990).

3.0 CONSTRUCTED MODEL AND HYPOTHESIS

3.1 Model

The model below summarizes the theory discussed from above section. The idea from the model is that the key ingredients towards corporate core strategic capabilities are corporate capabilities and corporate integrity, institutions are mediating this relation. On the other hand Core corporate strategic capabilities leads into sustainable corporate reputation.

Corporate Capabilities

Corporate Integrity

Core Corporate strategic capabilities

Sustainable Corporate Reputation Capital

Institutions

Macro

Messo

Micro

+

+

+

+

+

Corporate

Performance

+

Figure 1

Source: (Author construct from literature, 2010)

3.2 Hypothesis and Prepositions

3.2.1The Effect on Corporate Core Strategic Capabilities

Effects of Corporate Capabilities

Corporate capability have been highlighted by Ulrich & Wiersema (1989) to mean firm’s ability to establish internal structures and processes that create firm-specific competencies and enable it to adapt to changing external pressures. The rationale for arguing this is the fact that strategy by itself without organizational capabilities cannot deliver. This means the capability of strategy will heavily rely on the organizational capability. (Lenz, 1980) argued that broader a firm’s knowledge-technique base for value creation, the greater is its strategic capability.

H1: Corporate capabilities have a positive impact on core corporate strategic capabilities.

Effects of Corporate Integrity

Velasquez (2006) pointed out that business activities, like any other human activities, cannot exist unless the people involved in the business and its surrounding community adhere to some minimal standards of ethics. Integrity facilitates the bottom line, making it of value to strategic values (Worden, 2003). A strategy based on integrity hold the organization to a more robust standard (Paine, 1994:111). Petrick & Quinn (2001) suggested that integrity is an organizational strategic asset.

The capability of strategy in this respect relies on the integrity of the organization employees and management which together formulate the dimension of corporate integrity. Formal way of arguing is that a strategy as a formulated means will not only need empowerment from the organization but will require the ethical dimension which ensure that there is a match between the underlined actions and expectations to the actual implementation.

H2: Corporate Integrity has a positive impact on corporate core strategic capabilities

Effects of Institutions

Institutions to which the corporate are operating have a key role in determining their strategic capability. The strategy may be capable in one country and became incapable in another country just because of the variation of institutional factors. Formally I argue that the institutions have positive mediating effect between the corporate integrity and core strategic capability as well as in relation between corporate capability and core strategic capability.

Lewin et al (1999), noted that strategies and organizational responses are expected to be partly shaped by country-specific changes affecting business system and culture, and by history and firm-specific history-dependent exploitations and explorations

H3a: Level of integration of Institutional aspects in the corporation has a positive mediating effect between corporate capabilities and core strategic capabilities.

H3b: Level of Institutional integration aspect in the corporation has a positive mediating effect between corporate integrity and corporate strategic capabilities.

3.2.2 Effect on Sustainable Corporate reputation

Effect of Core strategic capabilities

Worden (2003) viewed corporate reputation as a base of an organizational identity, crystallizing the essence of what a company is, does, and stands for through images held of the organization in its environment. The description of worden represent ideal of what a strategic capability can ensure for the organization, meaning it will not only impact positively on reputation but will also ensure the sustainability of it.

H4: Core strategic capabilities have a positive effect on Sustainable corporate reputation

Effect of Institutions

Institutions have also a key role in determining corporate reputation. Culture values which centres on establishing society norms for judging what is right or wrong provide a key influence on shaping a response with respect to how people views a certain conduct as a reputable or not. Also international laws, rules and principles as well as local government laws and media plays key roles in evaluating or judging the perception to what the corporations are doing. The reputation of a firm is not only an outcome of its performance but depends on whether the performance is in accordance to institutional expectations.

Formally arguing the institutions have a direct effect on sustainable corporate reputation.

H5: Level of integration of Institutional aspects in the corporation has a positive effect on sustainable corporate reputation.

Effects of Performance

Relationship between a firm’s reputation and its financial performance is complex (Hammond and Slocum, 1996). Key two reasons which were mentioned by the authors to be souce of complexity are; First, it takes profit to have the funds to have socially responsible activities. Second is the differences in stakeholders interests, whereby satisfying one group could be at the expense of the other. Thirdly is that corporate reputation often represents stakeholders’ perception of the quality of the firm’s management. The results from Hammond & Slocum (1996) study indicated that performance (measured by return on sales) has a positive impact on firm’s later reputation. Citing specific examples, they found that ROE in 1981 was positively associated with good reputation in 1993. On the other hand an empirical analysis by Sabate and Puente (2003), indicated a two way relationship between reputation and performance.

H7: There is positive interrelation between corporate performance and corporate reputation

3.2.3 Effect on Performance

Core strategic capabilities

Hill and Snell (1988), found a directly positive effect of strategy on firm performance (in terms of profitability). On the other hand Beard & Dess (1981), found that both corporate-level strategy and business level strategy are important in explaining variations in firm profitability.

H8: Core strategic capabilities has a positive impact on corporate performance

RESEARCH METHOD

SAMPLE

This study intends to use about 250 Multinational corporations. The sample is intended to be half splited between multinationals that operates in developing economies and those which operates in developed economies. In a situation which a particular multinationals is operating in both econmies (which is a likely to be a case), one on subsidiary will be choosen.

4.0 EMPIRICAL MEASUREMENTS

4.1 Reputation

Fortune 1000, have examples of items they use in assessing firm reputation from managers and analyst and they include aspects like; asset use, community and environmental friendliness, ability to develop and keep key people, financial soundness, degree of innovativeness, investment value, management quality and product quality.

Cravens et al (2003) developed a reputation index measure which reflected the following aspect;

Product/service; employee/suppliers; external relationships/alliances; innovation; value creation; financial strength and viability; strategy; culture; intangible liabilities. These items do not differ from what Schwaiger (2004) noted same features as well.

Fombrun and Shanley (1990) used 11-pont scale (0= poor, 10= excellent) and questions focused on how would respondent rate the companies on each of the following attributes: quality of management, quality of products or services; long-term investment value; innovativeness; financial soundness; ability to attract, develop, and keep talented people; community and environmental responsibility; and use of corporate assets. This paper will adopt this measure.

4.2 Integrity

Kaptein and Avelino (2005) will be used (7-points likert scale) where key items are; the existence of codes, the quality of compliance programs; the ways these codes and programs are embedded in and supported by the corporate structure and culture; the frequency of unethical conduct. Authors broadened up these dimensions into specific set of items which were ranked in percentages from (0= poor to 100%= excellent). These items are False/misleading promises to customers; violation of workplace health/safety rules, employment discrimination; sexual harassment or hostile work environment; carelessness with confidential/proprietary information; Activities posing a conflict of interest;

4.3 Organizational Capababilities:

This paper will use part of items developed by Lenz (1980), Ulrich & Lake (1991) which included managerial, technological, leadership, innovation, negotiation and communication capabilities. These all items will be used in 7-points likert scale and the focus will be finding out the extent to which particular organization posess them. Sharma & Vredenburg (1998) provided detailed items, and they will also be used in addition to above.

4.4 Core strategic Capabilites

Most strategic literature argue that a core strategy must be rare, inimitable, valuable as well as organizable. These character are not necessarily the capabilities themselves rather they are centred at creating a competitive advantage i.e. an advantage of a firm relative to their competitors in a given industry. Sharma & Vredenburg (1998). Example of some statements could be;

We have capable means to address conflicts within and outside the organization; Our strategies (means) are unique and well embedded in our organization (not easy to copy by other organizations) and are capable at creating benefits; Our strategies are capable of addressing local challenges as well as meeting universal standards; Our strategies do not conflict with local culture and society values; Our strategies are capable of ensuring sustainable growth

4.5 Institutions

In measuring the institutions there will be a need to deal with the three dimensions of institutions Falkenberg (2007 i.e. macro, messo and micro. 7-points likert scale will be used for a set of measuring items which organization will agree or disagree on the extent to which they integrate these institutional items in their strategies and as well on the level they feel they influence their organization. The Lewin et al (1999), five institutional components; Role of government (extensiveness of involvement, regulatory environment in terms of detailness, guidance or laissez-faire), Rule of law (level of developed rules, government role in terms of centralization or decentralization , and transparency), Structure of capital markets (level of restrictiveness versus competitiveness, banks long term equity owners versus sophisticated, large scale liquid markets), Education system (centralized versus decentralized, uniform versus heterogenous, vocational versus non vocationa, meritocracy versus path for socioeconomic system)

4.6 Corporate performance

Dess & Robinson (1984) used both subjective and self-reported objective measures of return on assets and growth in sales as well as two measures of what may be considered overall or ‘global organizational performance. Objective measures included firm total sales growth, firm after tax return on total assets, and overall firm performance. These measures were then ranked into a five point scale. The subjective performance involved asking CEO’s to comment on ideal or optimal performance of their firms in their industries with comparison to competitors. Buck et al (1998) used mainly economic criterias for performance, and key iterms they used were market share, growth (sales), profitability, Retur non investment (ROIC), and ration of market to book value. The decision to include subjective measures in performance relies moslty on the study objectives, whether it is a comparison of measures or it is something involving analysis of relations among variables. This study will adopt mainly economic performance measures used by Buck et al (1998), but in addition the measures will be ranked into a 7-points likert scale.

5.0 Data Analysis Technique

Based on the nature of this study qualitative and quantitative data analysis methods will be appropriate. With regard to quantitative data analysis method the following linear regressive (additive) model will be used to test hypothesis H1 to H8.

STRCAP = β o + β 1CORPCAP + β2CORPINT + β3INST + ε ( i)

Where,

STRCAP= Strategic Capabilities

CORPCAP= Corporate Capabilities

CORPINT= Corporate Integrity

INST= Institutions

STRCAP= β o + β 1CORPCAP + β2CORPINT + β3INST + β4CORPCAPXINST + (ii)

Β5CORPINTXINST + ε

Where,

CORPXINST= Interaction of corporate capabilities and institutions

COPRINTXINST = Interaction of corporate integrity and institutions.

CORPREP= β o + β 1STRATCAP + β2INST + β3CORPPERF + ε (iii)

Where,

CORPREP= Corporate Reputation

CORPPERF= Corporate Performance

CORPERF = β o + β 1STRATCAP + β2CORPREP + ε


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