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