Academic journal article Academy of Strategic Management Journal

Strategy in an Era of Economic Uncertainy: Integrating External and Internal Antecedents of Firm Performance

Academic journal article Academy of Strategic Management Journal

Strategy in an Era of Economic Uncertainy: Integrating External and Internal Antecedents of Firm Performance

Article excerpt

INTRODUCTION In the context of strategy theory, the current economic challenges faced by firms across the globe may be seen as a sign that external economic forces are more powerful determinants of firm performance than internal indicators (Albors-Garrigos, Molina & Molina, 2014; Wilson & Eilertsen, 2010). Be it the credit crisis, the reduction in global consumption, or the pervasive problems associated with the global supply chain, current economic wisdom seems to call for firms to pay greater attention to positioning themselves against environmental turbulence rather than premising strategic decision on inwardly focused approaches. This is ironic because in the arena of strategic theory, the notion of internal drivers of performance, as exemplified by the dynamic capabilities perspective (Barretto, 2010; Helfat et al, 2007), is hegemonic in the current era. In other words, theorists suggest that firm success is determined primarily by how firms configure their internal resources and core competence. Which view explains firm performance better? In this paper, we suggest that this is in reality a flawed question; i.e. the purported antagonism between external and internal antecedents of firm performance is an unhelpful fiction. We attempt to go beyond the artificial binary between these two approaches, i.e. between external and internal indicators of firm performance to offer a possible integrated model.

The impact of market structure on firm performance has been the subject of considerable discussion and debate in strategic management (Porter & Siggelkow, 2008; Galunic & Eisenhardt, 1994). Drawing from the structure-conduct- performance paradigm in I/O economics, this discussion has progressed from an analysis of the impact of industry concentration on profitability to the impact of market share on profitability. Similarly, research on contingency theory has tightened the unit of organizational analysis from the corporate level to the SBU level (Rumelt, 1991). According to these perspectives, which may be collectively termed the "structure-based view" of performance, the way a firm fits into the industry structure is seen as the primary source of competitive advantage.

On the other hand, considerable parallel research has been being conducted on the strategic determinants of firm performance (Newbert, 2007). Grounding its research in an analysis of strengths that are inherent within the firm, this stream of research, which may be termed the "strategy-based view" of performance, has isolated valuable drivers of inter-firm heterogeneity through the understanding of core competence (Prahalad & Hamel, 1990), strategic factor markets (Barney, 1986), and dynamic capabilities (Helfat et. al. 2007). The contention of the strategy-based view is that process-based aspects of firms should be accorded far more importance in the study of the determinants of performance than macro, structural indicators.

While research in both these fields has added immeasurably to our understanding of inter-firm heterogeneity, there has been little attempt at integrating the wisdom from their collective findings (cf. Conner, 1994, for a prominent exception). In this paper, we attempt to place the two fields in an integrative framework, arguing that linking the research on the strategic variables with structural research can explicate a number of unexplained facets of firm performance. The paper seeks to build links between these two apparently diverse views of firm performance, arguing that strategic variables may be seen as drivers of structural variables rather than moderators thereof. In other words, structural variables may be seen not merely as drivers of firm strategy, but occasionally, its outcomes. In an econometric sense, it suggests that modeling strategic variables into structural elements of firm performance would explain far more variance in performance than a discrete examination of either stream. …

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