JOURNAL OF BUSINESS LOGISTICS. Vol 2, No. 2. 200 THE EFFECTS OF LOGISTICS CAPABILITIES AND STRATEGY ON FIRM PERFORMANCE Daniel F. Lynch Montana State Untverstty-billungs Scott B. keller d John Ozment have attempted to test Porters theory of generIc strategy and link it to performance, but the results vary. Simlarly, it is easy to believe that a firm cannot be successful without certain resources and/or apabilities Efforts have been made to test the resource-based theory and to ue capabilities to firm performance, again with varying results These two theories and related research streams have emerged independently, and neither has controlled for the effects f the other when attempting to link these factors to firm performance That IS, those who support a connection between strategy and performance have not incorporated firm resources(capabilities Into ther have attempted to link capabilites and firm pertormance have not incorpo egy Rather than view each theory separately and determine which group is right or wi ntegrate the two approaches This research is based on the proposition that corporate strateg with resources/capabilities that"fit"That is, firms pursuing a given strategy with the proper capa- bilities should outperform firms pursuing the same strategy w ithout adequate capabihties. This proposition may seem obvious, but no researchers have examined both capabilities and strategy in the same study. In the absence of better evidence, It is reasonable to assume that some managers will focus on capabilites without regard to strategy and vice versa, nd without necessanly connecting the two. To test this proposition. survey data from the retail groCery industry are analyzed via LISREL
LYNCH. KELLER AND OZMENT Strategy is conceptualized as either cost leadership or differentiation as initially defined by porter and as examined by others Although Porter Identified a third choice, focus, several authors have made a convincing case that focus Is a subset of cost leadership or differentiation Capabilities are the skills and knowledge that enable firms to make use of their assets"There are many capabilities on which firms rely to pursue managerial objectives. Some are related to specific functions such as finance, operations, logistcs, OI marketing Few studies have thoroughly Identified and measured capabilities specific to functional areas, although an exception is logIstIcs, for whIch scales have been developed ' Moreover, logIstIcs Is mentioned frequently as a functional area that may provide sustainable competitive advantage and supenor firm performance" Thus, In his study, capabilities are defined as logistIcs capabilities OVERVIEW OF THE LITERATURE We begin with an overview of literature related to strategy, resources, distInctive capabilities. and logistics capabilities This is followed by an explanation of study methods, Including develop- ment of a model and hypotheses as well as discussions of the data constructs, and tests of reliabIlity and validity The hypotheses are tested, followed by the implications of the findings Finally, the limitations of the study are discussed, together with suggestions for future research Generic Business Strategies Strategy research focuses largely on factors external to the firm, such as market conditions and ompetition Porter identified three generic strategies differentiation, cost leadership, and focus These, although not mutually exclusive, are based on issues of competition and barriers to market ntry. Porter suggests that the firm s position in the market and its strategy are shaped by five market forces" These are the threat of new entrants, rivalry within the industry, buyer power, suppler power, and the threat of substitution A firm may pursue superior performance after careful consId eration of these market forces with the goal of either selecting an attractive industry or developing a strong competitive position within an ndustry It does this through a cost leadership strategy or a differentiation strategy Barney perceives thIs view of strategy as very externally( market)orented nd as dealing primanly with the opportunities and threats with which a firm must contend He contrasts thIs with an internally (resource)orented approach to strategy One shortcoming of the market forces perspective( Porter's generIc strategy ) Is Its inability to explain how firms achieve different levels of performance even when they compete within the same Industry and use the same strategy It may be necessary to include capabilities in the strategy performance relationship Porter himself stated, " CompetitIve strategy is about being difterent It means liberately choosing a different set of activities to deliver a unique mix of value The essence of strategy Is in the activities-choosing to perform activities differently or to perform difterent activities than rivals"Of particular interest to this study are the activities mentioned by Porter that seem closely tied to the capabilities associated with the resource-based theory of the firm
JOURNAL OF BUSINESS LOGISTICS. Vol 21. No. 2. 200C Resource-Based Theory In Porter's generIc strategy approach, tirms respond to competitive market forces that are extemal to the organization. In contrast. the resource-based theory involves capabilities or resources nternal to the organization These aie developed over long pe riods and provide a competitive advantage that leads to superior firm performance The exter nal (market forces versus internal (resource-based)orentation n strategy development Is paramount In distinguishing between these In 1984, Wernerfelt published the seminal article on resource-based theory. He proposed that firms are bundles of resources that can be employed to influence performance Miller and ShamsIe sought to ascertain whether there is any empirical support for the concept by examining historical data from the motion picture industry h The results indicated that certain firm resources lead to supenor performance Specifically, they identified two br oad categones of firm resources in the motion pIcture industry knowledge-based (i e, production and talent capabilities and property-based (Ie long-term contracts)tesources Distinctive Capabilities. How Is resource-based theory manif sted within the firm?As Day notes, a firm's distinctive capabilities are one source by which to lever- age greater firm performance and Increase competitive advantage Distinctive capabilities are not simply the resource of the firm but resources so deeply embedded in organizational routines and prat tices that they cannot be traded Day states that distinctive capabilities are"complex bundles of shills and accumulated knowl- edge, exercised through organicational processes, that enable 'irms to make use of their assets and. functions like a key success factor" Distinctive capability s enable the firm"to deliver value to customers In an appreciably more cost etfective way land arel the glue thut brings. assets gether and enables them to be deployed advantageously."According to Drogeet al. capabilitY (competencies)form the key sources of competitive advantage In the furniture industry Prahalad and Hamel propose that firms possess core competencies(cap. bIlitles)that enable them to out perform competitors through the use of"intangible resources". )thers suggest that firm resources and competencies may account tor competive advantage and thut sustainable competitive advan- tage Is moderated by an organizations resources and skills There is a great deal of theory about firm resources and their use through distinctive capabil ties, but there is little empincal evidence about the details of these capabilities or the relationshi If any. among distinctive capabilitIes, strategy and overall tirm perfor mance Logistics Capabilities. LogistIcs Is an area that provides a foundation upon which to build Some measurement of logistics capabilities has taken place, and Inka es have been established between logistics capabilities and firm performance We extend this work by lesting the proposed relation- up, among capabilities, strategy, and firm perfor mance within a logisties context ht⊙2001. All rights res
LYNCH KELLER AND OZMENT Many studies of capabuIties have focused on the manufacturing arena, but logistics may be the new frontier. Wal-Mart Is an excellent example of a firm with several distinctive capabilities that cannot be easily copIed, and it significantly reduces costs via high levels of efficiency Obviously. reduced costs benefit a firm financially Moreover, because wal-Marts system Is difticult if not Impos sible to imitate, the firm maintains a competitive advantage in the marketplace In addition, Wal-Mart yes to be a cost leader as part of its business strategy, and its competitive advantage is enhanced through Its distinctive logIsties capability This combination has produced supenor firm perfor- Levi-Strauss Company also focuses on distinctive logistics capabilities to obtain competi ve advantage It is now offering customers a"Personal Pair of Jeans"directly from retaIl stores. Retailers take exact measurements of customers and send the information via computer to the main plant For an additional charge of only ten dollars, custom jeans are made and sold to individuals Levi ships the orders to retailers or directly to customers via Federal Express This program is unique in the clothing tndustryOlavarrieta and Ellinger believe it allows the company to employ logistical expertise to differentiate its products trom competitors offerings and enhances Levis business performanceReportedly, Levi offers customers 4,000 selections of jeans versus 40, among most of its competit vIs program provides a compelling example of logistics capabilities linked to a differentiation strategy and superior firm performance, especially from the customer service Daugherty and Pittman examined competitive advantage in logistics by interviewing Fortune 500 firms"They believe that time-based capabilities are of cntical importance n logistics along wtth nformation technology and flexibility According to Eckert and Fawcett, the critical capabilities for logistical excellence are people, quality, and time Morash et al, Identified the logistics capabIli ties needed for competitive advantage as delivery reliability, post-sale customer servIce,responsIveness to target market, delivery speed, presale customer servIce, wIdespread distnbution coverage, selective distribution coverage, and low total cost distribution Clinton and Closs found that five factors are closely aligned with logIstics capabilities allIances, Information systems, EDI practIces, Inventory management, and reengIneering The most comprehensive examination of logistIcs capabilties was performed by the Global Logistics Research Team at Michigan State University It involved in-depth interviews and survey research that identified 32 measures of logistics performance capabilities These were employed in this study, and the underlying dimensions(factors)were examined METHODS Our pnmary focus is empircal examination of the relationships among distinctive logistics capa- Porter strategies, and overall firm perform question firms that match their logistics capabilities to an appropriate business strategy perform superior to Irms that do not match logistics capabilities and business strategies" Confirmatory factor analysis Copyright 2001. All rights reserve
JOURNAL OF BUSINESS LOGISTICS, Vol 21. No 2, 2000 via lisrel& was used to develop the logistics process and value- dded servIce capability, and firm performance items "LisrEL& also was used to test the hypotheses via vanous structural models to examine the proposed relationships Figure I depIcts tie hy pothestzed model explained in the next section Hypothese Figure I shows that all possible combinations of strategy and capabilities are potentially linked to firm performance Our purpose is not to determine whether a low-cust strategy is better or worse than a differentiation strategy (although that was examined).rather we wanted to know whether firms hat match their Lapabihties to their strategy pertorm better than those that do not. Thus It was nec essary to examine all possible routes to performance It may seem obvious that firms with strategies atched to their capabilities will perform better, but no one has exi mined both capabilities and strat egy in the same study. In the absence of evidence to the contrary. w e assumed that a sample of tirm will contain a split between strategies (cost leadership and ditterentaton and that only some will have well-matched strategies and capabilities Moreover, since the strategy and capabilties research streams have emerged independently, It seems approprate to assuine that some ll fo on capabilities without regard to strategy and vice versa. and witho it necessarily connecting the two FIGURE 1 HYPOTHOSIZED MODEI LOGISTICS CAPABILITIES STRATEGY PERFORMANCE APABILT HI LEADERSHIP DF上 ERENTIATION H7:H5>H6 HIl: HI/H5 H2/H6>HH6 HAHs
LYNCH. KELLER AND OZMENT Several authors have discussed the linkage of resources, capabilIties, and performance, but th onnection among capabilities, strategy, and performance remains to be made. Work by Porter, Barney, and Day suggests that firms wl employ any and all resources(or capabihties)to achieve their H1: Process capabilities are positively linked to a cost leadership strate H2: Value-added service capabilities are positively Inked to a differentation strategy H3: Process capabilities are positively linked to a differentiatio H4: Value-added service capabilities are positively hnked to a cost leadership strateg As noted earlier, our purpose is not to resolve a competing theories debate(ie, which is more mportant, strategy or capabIlties), but in the absence of evidence to the contrary, It Is possible that pabilities are largely irrelevant, and that performance Is strongly and directly linked to strategy, or Thus, we must establish whether a direct relationship exists between performance and theory, Dess and Davis established linkages from strategy to firm performanceThey also found mewhat stronger links to firm performance from cost leadership than from differentiation. TI consistent with their findings H5: A cost leadership strategy is positively linked to firm performance H6: A differentiation strategy is positively linked to firm performance H7: A cost leadership strategy leads to higher firm performance than that of a differentiation H8: The relationship between process capabilities and cost leadership strategy is stronger than the relationship between value-added service and differentiation Previous research proposed a connection between capabilities and firm performance, and some sitive relationships were found"Therefore H9: Process capabilities wIll be positively linked to firm performance H1O: Value-added service capabilities are positively linked to firm performance The importance of resources un pursuing a strategy is not in contention here. Our focus is on the most appropriate match(or fit) of a firm's capabilities and strategy, Porter, Day, and Droge et al. discuss the need for capabilities and resources that support the firms strategy. "It is expected that many firms foster capabilitie arefully design an adequate combination of these factors It Is expected that firms in this category will have poorer performance in the marketplace compared to their competition HIl: The paths to performance from process capabilities via a cost leadership strategy, and from yalue-added service via a differentiation strategy ( e, matched capabilities and strategy) will be stronger than the paths to performance from process capabilities via a differentiation strategy, oyright@ 2001. All rights reserved
JOURNAL OF BUSINESS LOGISTICS, Vol 21. No. 2. 2000 and from value-added service capabilities via a cost leadership strategy (I e, mismatched capabilities and strategy) Data Collection A logistIcs environment was used to test the model because logistics has a great deal of promise as a future arena of strategy, and logistics capability scales exist Moreover, It is mentioned frequently as a functional area that may provide sustainable competitive advantage and supenor firm perfor Ice."UnlIke other functions, logistics activities have the potential to affect performance in terms of revenue enhancement as well as cost reduction Logistics expenses may represent as much as 20% I single industry allows for better control of extraneous vanables. Second, in general, grocery chains are either cost leaders or differentiators. Third. in the retail grocery business, logistIcs Is of paramount Importance due to the low margins, nventory turns, a nd perishable nature of products key informant survey research strategy was employed"T he sample was obtained trom The headquarters of grocery firms in the United States and Canada The intia/ S for the corporate Marketing Guidebook, "which contains CEOs and vice preside nts of logistics for the corporate whose primary business( more than 50% )Is In the retall grocery industry, as opposed to convenrence stores or warehouse stores Phone calls were made lo each grocery chain to establish contact with the appropriate informant Afollow-up call sought to generate interest and participation in the study. Ulti mately, of the 480 questionnaires were mailed, 102 were leturnetl, and 77 were usable. for an effec- The vast majority of key informants(97%)were at the senior management level Respondents had an average of 27 years in the grocery industry and on average teported 20 years with their resent company They also reported on average that they had been in their present position for 9 years Seventy-one percent possessed a college or graduate degree (learly. the key Informants repre sented upper management, and therefore should be quite involve d in strategIc planning Construct Measurement A panel of experts helped ascertain which distinctive logistics capabilities are most likely cost leadership onented and which are most likely differentiation oriented This method follows that employed by Dess and Davis"The capabilities constructs were based, In part, on the 32 logistics performance capabilty measures from the Michigan State University research. 10 Copyright 2001. All rights reserved
LYNCH KELLERAND OZMENT TABLE I ITEMS AND CONSTRUCTS alue-Added Service Capabilities(87) PC II Pt es that add value for the customer during the actual sales process PC 12 C ely a PC 14 mer service requests PC 15 new product/service introductions (roll-outs to market PC 23 Continuously add new products or varations Process Capabilities( 90) PC Attain the lowest total cost logistIcs by efficient operations, technology, or scale economes PC 7 Pr tively seek solutions to logistics problems before they occur PC 21 Perform reverse logistics operations in a timely manner PC 22 Difterentiate logistical servIce offerings trom those of compe PC 30 Develop creative logistical solutions for specific situations encles, or customers PC 31 Simplify the overall logistical process PC 32 Provide a consistent approach to performing key logistics work Strategy(83 CS 12 Emphasize efficiency CS 13 Redesign products and/or services to reduce costs CS 19 Keep all costs as low as possible so we can offer lower prices Differentiation Strategy ( 92) CS I Develop new products and/or services CS 3 Offer products and/or es for specialized needs CS4 Offer higher quality products han competitors S6 Offer highly differentiated products and/or CS7 Offer a high degree of value in products and/or services CS 8 Ofler products/scrvices with distinctly different teatures from those of competitors Performance( 95 CP3 Net profit margIn CP 7 I competitive position CP5 Return on assets(ROA) CP8 CP6 Return on investment(ROl Note The Cronbach's alpha for the scale appears in parenthese The measures were split by the panel of experts to form the nital dimensions of distinctive logIs tics capabilities previously mentioned (I e, process capabilities and value-added service capabilities A factor analysis was performed on the managers responses to formalize the final factors The Item related to each construct is shown in Table I Five items survived the factor analysis to form the value added service capabilities construct, and 7 items were used to form the process capabilities construct Copyright G 2001. All rights reserved
JOURNAL OF BUSINESS LOGISTICS, VoL 21, No 2, 2000 Cost leadership and differentiation strategies were measured through scales developed by Dess and Davis"They empirically supported Porter's three generic strategies cost leadership. dIfferen tIation, and focus Since that study, a number of researchers have made a convincing case for only two truly generc business strategies, cost leadership and differentiation. Thus, these two were used In this study The items that loaded on the relevant strategy fac tors are shown in Table For our purposes, overall firm performance measures were return on investments(ROI), return n assets(ROA). net profit margin, general profitability, and o erall competitive shown in Table I Self-reports by respondents used seven-point Likert scales Respondents were asked to report their firms performance in relationship to competitor Reliability analysis Items for each construct were assesed through principal component analysis Table 2 provides the principal component scores. Item-to-total correlations resulting Items, and the coelficient alpha for each item and construct"As can be seen, the tinal w ales illustrate relability and internal consistency resulting indicants contain high pi Incipal compont nt coefficients and tclabilite TABLE 2 RELIABILITIES AND PRINCIPAL COMPONENTSCORES Item-to-Item Items Correlation Alpha for Scale Value-Added Service 7 PC 14 72 PC 15 PC Process PC 4 PC 7 PC 21 PC PC 30 PC 3I CS II
LYNCH. KELLER AND OZMENT TABLE 2(continued) Item-to-Item Alpha If Items PC Scores Correlation Item Deleted 山 Ipha for Scale DIfferentiation CS I 9 Performance 的6277阵688 CP8 Validity Analysis Items were assessed for the validity with which they measure their respective constructs, and construct unidimensionalty was evaluated through confirmatory factor analysis(CFA) To establish construct content validity, a thorough review of the literature on capabilites, strategy, and performance was undertaken during the item developmental stage The initial items also were reviewed by a panel of academIc and professional experts in the areas of logistics and strategy In addition, a pretest of the questionnaire was mailed to several CEOs and vice presidents in the retail grocery industry These procedures clanfied the wording of the questionnaire items and assured the accuracy of terminology. CFA was performed on all the scales via LiSreL& The procedures outlined by Alwin and Jackson were employed" Table 3 contains the fit indices and indicates that all constructs have unIdimensional charactenstIcs, as each single-construct model fits the data Convergent valdity was established, as shown in Table 4, because all tems loaded signIficantly(t> 1 96)on their respective constructs. Discriminant validity for each construct was established by following the recommendations of Fornell and Larcker"As seen in Table 5, average variance extracted exceeded the shared varlance for all construct pairs Based on the psychometric properties of the constructs, It was determined that the measures were sufficient and could be employed in hypothesis testing
