Capability-based theory

Background

During the last decade there has been a revival of interest by researchers on the role of marketing in strategic management. Some researchers observe that in many international organizations, the marketing function has lost its formal organizational position and, more significantly, the management belief in marketing as a strategic force has been weakened (Piercy, 1998). However the judgment that the strategic role of marketing is declining. ‘It remains that little is understood of (1) the relevant contribution and centrality of marketing to business strategy formation; (2) the empirical testing of this contribution in areas of particular strategic relevance; and (3) the business performance implications of marketing's contribution to business strategy formation' (Morgan et al., 2000, p. 342). Joining this debate, Kerin (1992) suggests that the functional role of marketing in the strategy dialogue has been overlooked by the marketing and related disciplines and that this oversight represents an opportunity for marketing scholars to pursue important issues in strategic management. He argues that the new agenda for research should explore organizational distinctive capabilities as they relate to innovative and entrepreneurial firm behavior.

The capability-based theory suggests that firms having unique capabilities can gain competitive advantage. Although the literature in this area of research has grown in significance, literature specifically examining the role of marketing ability in innovation based competitive approach has been limited. In addition, past research reflects several inadequacies in the conceptualization of innovation and sustained competitive advantage constructs. Innovation research has been biased towards technological innovation, whereas empirical evidence suggests that firms follow both technological and non-technological innovation and both types of innovation lead to sustained competitive advantage. Competitive advantage has been conceptualized in terms of financial indicators of performance, and sustained competitive advantage was believed to be simply a competitive advantage that lasts a long period of calendar time. The literature generally reflects the want for a well-founded measure of sustained competitive advantage.

In an attempt to address these key issues, this article presents the results of a study that explores the role of marketing capability in organizational innovation and sustained competitive advantage in the Pakistani context. The study contributes to strategic marketing theory by developing, refining and testing measures of entrepreneurship, marketing capability, organizational innovation and sustained competitive advantage. The links between these constructs are explored and it is argued that marketing capability plays a critical role in organizational innovation-based competitive strategy.

Literature Review

‘The capability based theory suggests that a firm can achieve competitive advantage through distinctive capabilities' possessed by the firm (Grant, 1991; Hayes et al., 1996) and that the firm must constantly re-invest to maintain and expand existing capabilities in order to inhibit imitability (Mahoney, 1995). The resource-based view of competitive advantage within which the capability-based theory has evolved over the last few decades suggests that firms are bundles of resources and capabilities (Barney, 1991). In exploring this model, we concur with recent contributors to the literature who distinguish capabilities from resources (Grant, 1991; Teece et al., 1997; Mahoney and Pandian, 1992). This distinction provides a better explanation of the value creation and service delivery process. Some researchers argue that a resource based strategy is often not enough to support a significant competitive advantage. Winners in the global marketplace have been firms that can demonstrate timely responsiveness and rapid and flexible product innovation (Teece et al., 1997). Resources do not completely determine what the firm can do and how efficient it can do it. A key ingredient in this relationship is strategic leadership (Grant, 1991). Our Research, therefore argues that a distinctive capability should be operationalized in relative terms and not in absolute terms.

A growing number of researchers suggest that marketing capability contributes to commercial success of the products and services marketed by the firm (O'Driscoll et al., 2000; Hooly et al., 1999). Marketing capability of a firm can able to differentiate products and services from its competitors and build successful brands and firms with strong brand names can charge premium prices globally to enhance their profitability. Vorhies (1998) found that a firm's business strategy, organizational structure and market information-processing capabilities had a positive impact on marketing capabilities development. O'Driscoll et al. (2000) suggest the need to examine marketing competence in a network perspective. Morgan et al. (2000, p. 353) found that ‘firms devoting attention to harnessing marketing contribution in all the fields of the strategy formation process are able to realize significantly greater business performance pay-offs than those firms where marketing does not make a vital contribution'. These findings do not reflect a consistent body of knowledge on the role of marketing capability in competitive strategy. It is likely that little else will regain intellectual leadership for the discipline is meeting the challenge from competing paradigms in the cooperate boardroom' (Piercy, 1998. p. 233). As observed by O'Driscoll et al. (2000, p. 184), ‘while it is generally acknowledged that the development of marketing competence is worthwhile and is associated most likely with superior firm performance, few studies have examined marketing competence in a strategic context'. The literature in general reflects the need to conceptualize the marketing capability construct in a manner that will capture its potential to contribute to the competitive strategy of the firm.

During the last few decades the conceptual domain of the marketing function has been widely debated (Morgan and Strong, 1998). The role of marketing in business performance has been predominantly viewed within two streams of literature, namely market orientation (Kohli and Jaworski, 1990; Slater and Narver, 1995) and marketing's role within the strategy dialogue (Kerin, 1992; Piercy, 1998). Literature suggests that marketing plays a key role in the competitive advantage process. The primary role of marketing within the competitive strategy is innovation (Kerin, 1992), which is viewed as a central concept in the search for differential advantage. The customer value-based differentiation strategies will force the firm's research efforts for market, its selection of target markets, its product growth processes, its communications programs of market, and its delivery processes. These processes require many definite capabilities that enable the firm to carry out activities necessary to move its products or services through the value chain. Strategic marketing literature assigns a prominent role to the entrepreneurial key decision-makers of the firm in the development of innovative products and services (e.g. Knight, 2000; Kerin, 1992). The capability-based theory of sustained competitive advantage in particular suggests that entrepreneurial decision-makers are the key factor driving the competitive advantage process. This is because they build and nurture distinctive capabilities that are needed to exploit superior value creating market opportunities. This suggests that entrepreneurship, innovation, marketing capabilities and competitive advantage process are strongly interrelated.

The literature suggests a positive association between ‘entrepreneurship' and growth-oriented efforts of the firm (Khandwalla, 1977). Entrepreneurship is conceptualized as a firm behavior in which the firm displays innovativeness, proactive ness and risk-taking tendency in their strategic decisions. Innovativeness refers to a company atmosphere that promotes and chains narrative ideas, creative processes and experimentation that may direct to new products, technologies or techniques. Risk taking reflects the possibility of failure, along with chances of high returns. Proactive ness implies taking proposal, violently pursuing ventures and being at the front of efforts to outline the environment in ways those beneficial to the firm. Entrepreneurship is conceptualized as a continuum using these three attributes that reflects the degree of ‘entrepreneurial intensity' of the firm. Interestingly, firm-behavior model of entrepreneurship has primarily evolved in technological innovation research. Research exploring the role of this model in the organizational capability building process and non-technological innovations has been limited.

Marketing capability is designed to apply the skills, collective knowledge, and resource of the firm as integrative processes. It enables the business to add worth to its goods and services and meet competitive demands. Marketing capabilities can be developed through learning processes when the employees of the firm repeatedly apply their knowledge for solving the marketing problems of the firm's. In explicating the overall marketing capability of the firm it is important to examine the specific marketing processes that are adopted by firm in its competitive strategy.

The first process is customer service, defined as deeds, processes and performances (Zeithaml and Bitner, 1996) which are largely intangible tasks that satisfy buyer or user needs. A growing number of researchers suggest that superior customer service leads to competitive advantage (e.g. Easingwood and Mahajan, 1989; Morris and Westbrook, 1996). The second process is concerned with the effectiveness of promotional activities in gaining market share and sales growth. Promotional activities cover advertising, sales promotions, publicity and personal selling which are widely used tools to communicate with target markets. Third is the quality of sales people, which reflects the extent of sales-generating skills possessed by firms' employees. The next area is the strength of distribution networks. “To have a capability in channel management, relationships with distributors must be formed and effectively managed” (Vorhies and Harker, 2000). The fifth process is the extent of resources committed for advertising, which is operationalized as the advertising expenditure as a percentage of sales. Next is the firm's marketing research, which defines a set of processes, desired to learn about customer needs particularly latent needs and to monitor competitor product and service offerings. The seventh is the ability to differentiate products (to boost the image of products by attributes other than prices such as superior quality, image or service) marketed by the firm. Product and service differentiation has been a key source of competitive advantage (Porter, 1990). The next area of importance is the speed of product introduction. These eight processes are adopted in varying degrees by firms in their efforts to reach respective target markets. In this study, the overall marketing capability of the firm is operationalized using these marketing processes. With the aim of capturing the distinctiveness of the overall marketing capability, each of the processes discussed above will be measured relative to those of the firm's closest competitors. As a further indicator of the distinctiveness, respondents will be asked to rate the strength of each of the processes in comparison to those of firm's closest competitors.

Nicholson (1986) argues that one of the critical factors for success of an emerging business is marketing, sales and service effectiveness. Similarly, the emerging marketing and entrepreneurship interface paradigm suggests that entrepreneurs possess marketing capabilities (Hills and La Forge, 1992; Carson and Grant, 1993) accordingly; the relationship between entrepreneurial intensity and marketing capability is hypothesized as follows:

Hypothesis1: There is a positive relationship between entrepreneurial intensity and marketing capability.

Organizational innovation

Firm innovation and the competitive advantage process are closely inter-related. Porter (1990) argues that firms create competitive advantage by conceiving new ways to conduct activities in the value-chain for delivering superior customer value, which is an act of innovation. This suggests that innovation leads to competitive advantage and innovation can occur in any value-creating activity of the organization. Similarly, all types of innovations can lead to sustained competitive advantage. Although the literature suggests that innovations can occur in any value-creating activity, suggesting that it should be conceptualized to cover a broad range of activities (Schumpeter, 1934; Porter, 1990; Rothwell, 1992), past innovation research is biased toward technological innovation. However, firms must have both technological and non technological innovation. Accordingly, the relationship between marketing capability and organizational innovation intensity is hypothesized as follows:

Hypothesis2: There is a positive relationship between marketing capability and organizational innovation intensity.

Sustained competitive advantage

Competitive advantage can be conceptualized as a superior ‘marketplace position' that captures the provision of superior customer value and/or the achievement of lower relative costs, which results in market share dominance and superior financial performance (Hunt and Morgan, 1995). Similarly, sustained competitive advantage is believed to be simply a competitive advantage that lasts a long period of calendar time (Jacobson, 1988; Porter, 1990). These views, particularly those advocating the use of financial indicators, have attracted criticism (Barney, 1991; Day and Wensley, 1988) and there is a need to conceptualize this construct incorporating well-founded indicators of sustainability of competitive advantage. Premised on the capability-based model, this construct is operationalized as: whether the firm has gained superior financial and market advantages (Day and Wensley, 1988) and whether it is possible for competitors to duplicate the firm's competitive strategy (Barney, 1991; Grant, 1991) and distinctive capabilities on which advantages have been founded (Grant, 1991; Hall, 1993). As observed earlier, the literature suggests that innovation leads to competitive advantage (Porter, 1990). Based on the preceding discussion the following hypothesis is advanced.

Hypothesis3: There is a positive relationship between organizational innovation and sustained competitive advantage.

Extensive marketing efforts lead to product success (Rothwell, 1992). Achievement of competitive advantage typically also requires that the product be brought to the attention of and be made available to the appropriate target customers. This requires communication, sales force and distribution resources'. Research examining the antecedents of product success and failure broadly suggests that inadequate marketing support is a key factor leading to product failure (Crawford, 1991; Davis, 1988). Adequate performance of all marketing activities is a key determinant of product market success (Cooper and Kleinschmidt, 1987), and thus it is argued that marketing capability leads to sustained competitive advantage. Therefore it is hypothesized as:

Hypothesis4: There is a positive relationship between marketing capability and sustained competitive advantage.

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