Necessary capabilities for firm performance: an NCA approach

Policies and Sustainable Economic Development | 289 Necessary Capabilities for Firm Performance: An NCA Approach NGUYEN DINH THO International School of Business University of Economics HCMC - ndtho@ueh.edu.vn Abstract Realizing the important role of necessary conditions in business, this study employs an NCA (necessary condition analysis) to investigate the level of necessity of two conditions, marketing capability (comprising four components responsiveness to customers, to competitors, to the macro-environment, and business relationship quality), and innovativeness capability for firm performance Regression results with a data set collected from 311 firms in Ho Chi Minh City reveal that except for responsiveness to the macro-environment, other components of marketing capability and innovativeness capability have positive effects on firm performance NCA results indicate that these conditions exhibit different levels of necessity for the occurrence of firm performance These findings suggest that firms should pay attention not only to the net effects (beta weights) but also the levels of necessity of firm capabilities for their target outcome Keywords: firm performance; innovativeness capability; marketing capability; necessary condition analysis 290 | Policies and Sustainable Economic Development Introduction Being a member of the Trans-Pacific Partnership (TPP) agreement together with the continuing movement to a market-oriented economy has caused Vietnamese firms to rapidly change their traditional ways of doing business Vietnamese firms, like firms in other transition markets, are now required to differentiate their offerings in order to successfully compete with international competitors in their home markets (Nguyen & Nguyen, 2011) To survive and develop in such a competitive business environment, Vietnamese firms have no choice but to enhance their competitive positions in the market To achieve sustainable competitive positions in the market, Vietnamese firms should, therefore, have appropriate resources and capabilities Consequently, identifying and nurturing resources and capabilities that can create competitive advantage are necessary for Vietnamese firms Different capability levels among firms are reflected in their abilities to create and utilize resources to reach their objectives Several factors, both external and internal to the firm, can contribute to such differences (Sirmon et al., 2007) The resource-based theory (RBT) of the firm postulate that firms have different resources and capabilities And, superior performance can come from firms’ resource and capability uniqueness and their ability to appropriately respond to the surrounding environment (Barney & Clark, 2009) Although considerable research has been devoted to identify those firm capabilities (e.g., Orlandi, 2016; Sirmon et al., 2007; Song et al., 2005), little research has been conducted to explore the levels of firm capabilities that serve as necessary conditions for firm performance In addition, quantitative business researchers have mainly employed conventional statistical tools such as multiple regression analysis (MRA) and structural equation modeling to test their theories These conventional methods assist researchers in investigating the net effect of a number of independent variables on one or more dependent variables Such a variable-oriented approach however does not help researchers to discover the causal complexity of marketing phenomena (Ragin, 2008) A fuzzy-set qualitative comparative analysis assists researchers in examining sufficient and in-kind necessary conditions for an outcome but it does not support researchers to explore the level of necessary conditions For this reason, this study, employing the necessary condition analysis (NCA; Dull, 2016), investigates the levels of necessity of two key firm capabilitiesmarketing capability (responsiveness to customers, responsiveness to competitors, responsiveness to the macro-environment, and business relationship quality), and innovativeness capabilityfor firm performance The remainder of the paper presents the theory and hypotheses, method, data analysis and results, and discussion and conclusions Policies and Sustainable Economic Development | 291 Theory and hypotheses 2.1 Resources and capabilities of the firm Competition theory, based on industrial organization economics, focuses heavily on the environment of firms rather than on the idiosyncratic attributes of firms (Barney & Clark, 2009) RBT considers a firm as a bundle of resources and capabilities The firm’s resources include tangible and intangible assets such as financial and physical assets, human capital and knowhow Capabilities are the ability of the firm to effectively use its resources to achieve its objectives (Barney & Clark, 2009) RBT posits that different firms possess different resources and capabilities, and that a firm within an industry uses different business strategies The firm cannot imitate the strategies of other firms because the firm’s business strategy is built on the firm-specific resources These firm-specific resources drive value creation because the firm will produce greater utility for customers than its competitors Thus the firm will enjoy a competitive advantage (Sirmon et al., 2007) RBT has been developed in the context of dynamic markets and is, therefore, viewed as the dynamic capabilities approach to the firm This approach stresses the exploitation of existing internal and external firm-specific competences and the development of a strategic consistency to address the changing environment (Lamberg et al., 2009) A firm will enjoy competitive advantages if it has the ability to create new resources and capabilities that are valuable, rare, not easily immutable and substitutable (Eisenhardt & Martin, 2001) In the marketing literature, RBT has been used intensively to explain the relationship between marketing-related resources and capabilities and business performance (Song et al., 2005) 2.2 Marketing capability Fundamentally, marketing is a management philosophy that creates superior value to customers in a way that benefits the organization and its stakeholders In view of that, marketing capability of a firm reflects the firm’s competence in deciphering the market including customers, competitors and the macro-environment (Homburg et al., 2007; Jayachandran et al., 2004; Ziggers & Henseler, 2016) The firm should continuously collect information about the market from various sources, transform it into knowledge, and use it for making business decisions (Nonaka & Takeuchi, 1995) Such knowledge is a source of marketing capability and is valuable to the firm (Krasnikov & Jayachandran, 2008) Further, marketing capability reflects the capability of the firm to obtain quality relationships with business partners (Krasnikov & Jayachandran, 2008; Nguyen et al., 2007) Thus, the firm should build and nurture high quality relationships with its customers, suppliers, distributors and the local government In sum, marketing capability comprises four key components (Nguyen & Nguyen, 2011): (1) responsiveness to customers, (2) responsiveness to competitors (Homburg et al., 2007; Ziggers & Henseler, 2016), (3) responsiveness to changes in the macro-environment (Srivastava et al., 2001), and (4) business relationship quality (Krasnikov & Jayachandran, 2008; Nguyen et al., 292 | Policies and Sustainable Economic Development 2007; Srivastava et al., 2001) Thus, marketing capability is more than market orientation, which is a key concept in marketing (e.g., Slater & Narver, 1995) Market orientation “focuses the organization on continuously collecting information about target-customers’ needs and competitors’ capabilities, and using this information to create continuously superior customer value” (Slater & Narver 1995, p 62) Marketing capability includes market orientation but cover another important aspect of marketing, i.e business relationship marketing 2.3 Innovativeness capability Innovativeness capability reflects a firm’s competence in generating, developing and implementing new ideas, products, or processes that improve the firm’s competitive advantage and performance (Brettel et al., 2015; Damanpour, 1991; Hult et al., 2004) Innovativeness capability is a means for organizational change, which assists a firm in achieving innovation It reflects both the willingness of the firm to eliminate the business routines that are not consistent with new environments, as well as the adoption of new ideas which are suitable for competitive conditions (Hult et al., 2004) These activities can result from responses to changes in the environment, internal or external to the firm, or as a result of a preemptive move undertaken by the firm to influence its environment When business environments change, it is necessary for the firm to innovate in order to achieve both improved competitive positioning in the market and business performance (Damanpour, 1991; Hult et al., 2004) 2.4 Hypotheses Marketing and innovativeness capabilities are types of dynamic capabilities that assist a firm in achieving its business goals (Foley & Fahy, 2009) Marketing capability helps the firm to effectively implement marketing plans: rapidly responding to the needs of customers, competitive actions, and macro-environments, as well as building and maintaining high quality relationships with business partners Innovativeness capability assists the firm in becoming a pioneer in the market which allows it to obtain a competitive advantage (Hult et al., 2004) Firms with high marketing and innovativeness capabilities spend more resources in interacting with the market, i.e., to use capabilities to transform resources into output that enhances business performance Firm performance is defined as the achievement of organizational goals, including profitability, growth, market share, sales and other strategic objectives (Akdenniz et al., 2006; Homburg et al., 2007; Hult et al., 2004) Thus, this study proposes that marketing capability, comprising responsiveness to customers, responsiveness to competitors, responsiveness to the macro-environment, business relationship quality, and innovativeness capability are necessary conditions, but at different levels, for firm performance Policies and Sustainable Economic Development | 293 Method 3.1 Sample A sample of 311 firms in Ho Chi Minh City was surveyed to collect data for investigating the net effects as well as the level of necessity of two conditionsmarketing capability and innovativeness capabilityfor firm performance The data were also used for validating the measures of the constructs in the study by means of confirmatory factor analysis (CFA) A key informant approach (a senior manager) and face-to-face interviews were employed The sample, in terms of firm size, comprised 158 (50.8%) firms with fewer than 100 employees, and 153 (49.2%) firms with more than 99 employees In terms of ownership, there were 31 (10.0%) state-owned firms, 127 (40.8%) jointstock companies, 126 (40.5%) limited proprietary firms, and 27 (8.6%) privately owned firms In terms of industry, there were 95 (30.5%) firms in the manufacturing industry, 118 (37.9%) firms were in the service industry, and 98 (31.5%) firms doing business in both manufacturing and service industries 3.2 Measures Constructs examined were firm performance, marketing capability, and innovativeness capability Firm performance was measured by five items, based upon Wu and Cavusgil (2006) Innovativeness capability was measured by three items (Covin & Slevin, 1989) Finally, marketing capability was a second-order construct comprising four components, i.e., customer responsiveness, competitor responsiveness, macro-environment responsiveness, and business relationship quality The items measuring the components of marketing capability were based upon Jayachandran et al (2004), Homburg et al (2007), Krasnikov and Jayachandran (2008), Nguyen et al (2007), and Wu and Cavusgil (2006) Customer responsiveness was measured by eight items and competitor responsiveness was measured by nine items Macro-environment responsiveness was measured by seven items, and business relationship quality was measured by four items All items were measured by a seven-point Likert scale, anchored by 1: strongly disagree and 7: strongly agree The questionnaire was initially prepared in English and then translated into Vietnamese by an academic fluent in both languages This procedure was undertaken because English is not well understood by managers in this market Back translation was undertaken to ensure the equivalence of meanings 294 | Policies and Sustainable Economic Development Data analysis and results 4.1 Measure validation CFA was employed to validate the measures The screening process shows that the data exhibited slight deviations from normality Nonetheless, all univariate kurtoses and skewnesses were within the range of [-1, 1] Therefore, maximum likelihood estimation was used (Muthen & Kaplan, 1985) Marketing capability: This was a second order construct comprising four components: responsiveness to customers, responsiveness to competitors, responsiveness to the macroenvironment, and business relationship quality The CFA results indicate that the measurement model of marketing capability received an acceptable fit to the data: 2[334] = 816.22 (p = 0.000), GFI = 0.844, CFI = 0.926, and RMSEA = 0.068 In addition, all factor loadings were high ( 0.60) and significant (p < 0.001) These findings indicate that the scales measuring the components of marketing capability were unidimensional and convergent validity (within-method) was achieved (Steenkamp & van Trijp, 1991) The correlations (with standard errors) between the components of marketing capability indicate that they were significantly different from unity (p < 0.001), supporting the within-construct discriminant validity (Steenkamp & van Trijp, 1991) Saturated model: The saturated model (final measurement model) received an acceptable fit to the data: 2[50] = 112.79 (p = 0.000), GFI = 0.942, CFI = 0.969, and RMSEA = 0.064 Note that, because the measures of the components of marketing capability were unidimensional, summated items were used in the saturated model The use of summated items helps decrease the number of free parameters considerably, which makes the estimation reliable without increasing the sample size (Bagozzi & Edwards, 1998) Consequently, four summated items were formed for marketing capability The factor loadings of all items were high and substantial (the lowest loading was 0.53), and all were significant (p < 0.001) These findings indicate that the scales used in this study were unidimensional and their convergent validity (within-method) was achieved The correlations between constructs together with their standard errors indicate that they were significantly different from unity, thus, supporting the across-construct discriminant validity (Steenkamp & van Trijp, 1991) Further, all the scales had high composite reliability ( 0.70) Finally, except for the scales measuring business relationship quality and innovativeness capability, the average variance extracted of other scales was greater than 0.50 In sum, all the scales measuring the constructs used in this study satisfied the requirement for reliability and validity Policies and Sustainable Economic Development | 295 4.2 MRA results To investigate the net effects of the components of marketing capability and innovativeness capability, MRA was employed The MRA results are shown in Table A closer examination of the results, one can see that, except for one component of marketing capability (responsiveness to the macro-environment) which was not supported, other components of marketing capability (responsiveness to customers, responsiveness to competitors and business relationship quality) and innovativeness capability have positive effects on firm performance Note that although the effect of responsiveness to the macro-environment was not significant, the zero-order correlation between this type of marketing capability and firm performance was significant (p < 0.001), indicating that responsiveness to the macro-environment still interacts with other capabilities to drive firm performance Table MRA results Predictors B SE Constant 1.13 0.366 Innovativeness capability 0.24 0.055 Business relationship quality 0.15 Responsiveness to customers β t p r VIF 3.09 0.002 0.25 4.33 0.000 0.454 1.431 0.064 0.13 2.34 0.020 0.353 1.322 0.20 0.088 0.17 2.24 0.026 0.466 2.443 Responsiveness to competitors 0.14 0.068 0.14 2.00 0.047 0.445 2.207 Responsiveness to the macro-environment 0.03 0.056 0.03 0.497 0.619 0.341 1.633 Dependent variable: Firm performance; Adjusted R = 0.30 (sig F < 0.001) Notes: B: unstandardized regression weight; SE: standard error; t: t-statistic; p: p-value; r: Pearson correlation; VIF: variance inflation factor 4.3 NCA results MRA was used to investigate the net effects of the components of marketing capability and innovativeness capability on firm performance To discover the levels of necessity of these conditions (the components of marketing capability and innovativeness capability), this study utilized NCA This is an analysis method that assists researchers in identifying the degree of a necessary (but not sufficient) condition for an outcome In order to examine the level of necessary conditions, NCA determines the ceiling line, the line that separates the area with observations from the area without observations (Dul, 2016) Two common techniques used for determining ceiling lines are the ceiling envelopment technique (a piecewise linear line) with free disposal hull (CE-FDH) and the ceiling regression (a straight line) with free disposal hull (CR-FDH) because they are more flexible techniques The NCA results produced by the NCA package (Dul, 2015) included the bottleneck table (Table 2), and the CE-FDH and CR-FDH ceiling lines for each conditions (Figures to 5) In Table 2, the levels of all necessary conditions (the components of marketing capability and innovativeness 296 | Policies and Sustainable Economic Development capability) are determined through their bottlenecks For example, to reach 70% of firm performance, it is necessary that innovativeness capability should be at least 6.7% if using the CEFDH ceiling line, and at least 2.4% if using CR-FDH ceiling line The highest effect size of these necessary conditions was responsiveness to customers: d(CE-FDH) = 0.158 and d(RE-FDH) = 0.136 The second highest effect size was responsiveness to competitors: d(CE-FDH) = 0.130 and d(RE-FDH) = 0.115 (Table 2) Note that, in terms of net effects on firm performance, innovativeness capability received a highest size Thus, NCA is a complementary, not competing, method to traditional quantitative methods Figures 1, 2, 3, 4, and present the CR-FDH and CE-FDH ceiling lines together with the OLS regression lines for innovativeness capability, business relationship quality, responsiveness to customers, responsiveness to competitors, and responsiveness to the macro-environment, respectively Table Bottleneck table: Required minimum levels of the necessary condition for different desired levels of the outcome PERF (%) a CE-FDH (%) b CR-FDH (%) INCAP BRQ RCUS RCOM RENV INCAP BRQ RCUS RCOM RENV NN NN NN NN NN NN NN NN NN NN 10 NN NN NN NN NN NN NN NN NN NN 20 NN NN NN NN NN NN NN NN NN NN 30 NN NN NN NN NN NN NN NN 2.5 NN 40 NN NN NN 11.3 12.5 NN NN NN 6.4 2.5 50 NN NN 23.8 15.1 12.5 NN NN 7.4 10.4 6.4 60 NN NN 26.2 22.6 17.5 NN NN 15.1 14.3 10.2 70 6.7 15.0 26.2 22.6 17.5 2.4 2.6 22.7 18.2 14.1 80 20.0 25.0 33.3 22.6 17.5 19.6 18.5 30.4 22.2 17.9 90 46.7 35.0 33.3 22.6 25.0 36.8 34.5 38.1 26.1 21.8 100 53.3 55.0 33.3 22.6 25.0 54.0 50.5 45.7 30.0 25.6 d 0.104 0.100 0.158 0.130 0.113 0.085 0.080 0.136 0.115 0.085 Notes: INCAP: Innovativeness capability; BRQ: Business relationship quality; RCUS: Responsiveness to customers; RCOM: Responsiveness to competitors; RENV: Responsiveness to the macro-environment; PERF: Firm performance; CE-FDH: Ceiling Envelopment-Free Disposal Hull; CR-FDH: Ceiling Regression-Free Disposal Hull; d: effect size; NN: Not necessary Policies and Sustainable Economic Development | 297 Figure Ceiling line for innovativeness capability Notes: PERF: Firm performance; INCAP: Innovativeness capability; Lower solid line: OLS regression line; Upper solid line: CR-FDH ceiling line; Dashed line: CE-FDH ceiling line Figure Ceiling line for business relationship quality Notes: PERF: Firm performance; BRQ: Business relationship quality; Lower solid line: OLS regression line; Upper solid line: CR-FDH ceiling line; Dashed line: CE-FDH ceiling line 298 | Policies and Sustainable Economic Development Figure Ceiling line for responsiveness to customers Notes: PERF: Firm performance; RCUS: Responsiveness to customers; Lower solid line: OLS regression line; Upper solid line: CR-FDH ceiling line; Dashed line: CE-FDH ceiling line Figure Ceiling line for responsiveness to competitors Notes: PERF: Firm performance; RCOM: Responsiveness to competitors; Lower solid line: OLS regression line; Upper solid line: CR-FDH ceiling line; Dashed line: CE-FDH ceiling line Policies and Sustainable Economic Development | 299 Figure Ceiling line for responsiveness to the macro-environment Notes: PERF: Firm performance; RENV: Responsiveness to the macro-environment; Lower solid line: OLS regression line; Upper solid line: CR-FDH ceiling line; Dashed line: CE-FDH ceiling line Summary, implications, and conclusions The main objective of this study is to investigate the levels of necessity of marketing capability and innovativeness capability for firm performance The results from MRA reveal that innovativeness capability and three out of four component of marketing capability and have positive relationships with firm performance, confirming the net effects of these capabilities on firm performance The results from NCA show that innovativeness capability and all four components of marketing capability are necessary conditions, but at different levels, for the occurrence of firm performance The findings have several implications for theory, research and practice In terms of theory and research, first, this study reconfirms the roles of marketing capability and innovativeness capability in firm performance Several studies have investigated the impacts of marketing capability and innovation capability on performance However, such research studies have mainly discovered the net effects of these firm capabilities on firm performance An examination of the levels of necessity of these capabilities for firm performance, therefore, may assist researchers in better understanding the complexity of firm capabilities Thus, this study shed light on a new way of research on firm capabilities, especially in transition markets In terms of practice, the study findings confirm the roles of marketing capability and innovativeness capability in the success of firms in general and the levels of necessity of these capabilities for firm performance in particular Vietnamese firms, therefore, should optimally deploy marketing and innovativeness resources to obtain capabilities in order to survive and develop in this 300 | Policies and Sustainable Economic Development increasingly competitive market in the TPP era Specifically, firms should enhance their capabilities of understanding, and rapidly responding to, their customers, competitors, and macroenvironments Establishing and nurturing quality relationships with business and business-related partners are also of importance for Vietnamese firms to improve their marketing capability In addition, Vietnamese managers are advised to enhance their innovativeness capability in order to obtain superior business performance This study has several limitations First, the study focuses only on two key firm capabilitiesmarketing and innovativeness Several other capabilities, such as entrepreneurial orientation, learning orientation, knowledge internalization (Nguyen & Barrett, 2007; Nonaka & Takeuchi, 1995), research and development (Krasnikov & Jayachandran, 2008), and other marketbased assets (Srivastava et al., 2001), should be investigated in future research to discover their levels of necessity Further, a configuration of firm capabilities using a set-theoretic approach such as fsQCA may help researchers to understand the complexity of causal relationships between firm capabilities and firm performance This should be examined in future research References Bagozzi, R P., & Edwards, J R (1998) A general approach for representing constructs in organizational research Organizational Research Methods, 1(1), 45-87 Barney, J B., & Clark, D N (2009) Resource-based theory – Creating and 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