The Impact of Strategic Fit on Innovation Performance: Focusing on Manufacturing Industry

Abstract

In a rapidly changing business management environment, continuous technological innovation is necessary in order to sustain a competitive advantage. However, technological innovation, by itself, does not necessarily guarantee success in firm management. There are many examples of firms that have failed to create values through technological innovation, despite the fact that they possess excellent innovative resources. I can easily find examples of firms that have failed to innovate because they could not seamlessly integrate their internal and external resources and because of inconsistencies in the strategies within the organization. The mutual interaction of various stakeholders, including top management teams (TMTs), suppliers, competitors and shareholders in exploring and developing innovative technologies, the convergence of a firms resources within a consistent strategy direction, and the creation of a synergistic effect are important. In other words, the way in which all the resources of technological innovation align is important in improving innovative performance. This dissertation emphasizes the importance of strategic fit in firm innovation. This study first criticizes that the concept of fit is used inconsistently and indiscriminately in many literatures, and develop a framework of strategic fit that is suitable for the study in technological innovation. Based on this framework, this dissertation examines the effect of the strategic fit of various factors, especially centered on the three major factors such as the top management team attribute, the internal context as well as the external context of the firm. As the first study, this dissertation examines the effect of TMT cognitive characteristics on fir innovation contingent upon internal context such as organizational search behavior. The central premise of upper echelons theory is that the organization is a reflection of the top management team. The top management team has the authority to formulate, execute and evaluate a firms innovation strategies. The knowledge base of the top management team is a key variable in predicting the firms innovation strategy tendencies. This study focuses on this knowledge diversity. The decision-making tendencies of a top management team with a diverse knowledge base and one with a homogeneous knowledge base are bound to differ. The majority of pre-existing study concludes that the greater the knowledge diversity, the better the innovation performance. However, just as the existing quantitative analysis shows, this tendency does not apply to all firms across the board. This is due to the fact that the top management teams strategy direction is executed by the internal organization of the firm, and the TMT effect can be distorted through the firms organizational behavior and routine. Therefore, this dissertation analyzes how the relationship between the TMTs knowledge diversity and the innovation performance changes because of the organizations internal structure. As a result of conducting quantitative analysis of 120 manufacturing companies in the U.S., a positive correlation was determined between the knowledge diversity founded on the past industrial experience of the top management team and innovation performance. However, the results vary depending on the organizational search scope. The more expansive the organizational search scope, the greater the effect of the TMTs knowledge diversity on innovation performance. Conversely, the narrower the organizational search scope, the more constrained the top management team effect. When TMT with diverse knowledge leads to a broad search organization, therefore, fit as internal complementarity increases, which improves innovation performance. The effect of the TMTs knowledge diversity must also match the managerial discretion of the firm. The managerial discretion indicates the extent of the TMTs direct and proactive intervention into corporate affairs, and there is a high degree of variance depending on the type of industry. The effect of the TMTs knowledge diversity is greater in industries with high managerial discretion like computer or semi-conductor industries. In contrast, the TMT effect is limited in industries with low managerial discretion like forestry or simple manufacturing industries. Therefore, industries with high discretion are more likely to achieve fit as external complementarity with TMT with diverse knowledge, which improve innovation performance. This dissertation also analyzes the relationship of external collaboration strategy and innovation performance. Firms can create innovative values by collaboration with many external partners. Some forms of external collaboration for innovations are mergers and acquisitions, alliances, and joint ventures. For the purpose of this study, the analysis focuses on alliances. In particular, the study analyzes the effect of alliance portfolio diversity on innovation performance. Alliance portfolio diversity refers to how many alliances firms forge with a diverse array of partners. Even if alliances are forged with great companies, alliances, by themselves, do not impact the innovation of the organization. From this perspective, I argue that the internal capability of value creation plays a critical role in leveraging alliance portfolio diversity. The alliance portfolio diversity can be represented as a pool of external resources which the focal firm can access. The extent of benefit that the focal firm gains from the portfolio will depend upon the internal capacity to create the value from the external resource pool. Based on the dynamic capabilities framework that emphasizes competitive advantage is generated from the capabilities to combine and recombine internal and external resources (Teece, 1996

Teece, Pisano, &, Shuen, 1997), this study empirically investigates how the fit between an alliance portfolio strategy and internal capabilities affects innovation performance. First, I confirm the direct relationship between innovation performance and alliance portfolio diversity in terms of industry, then examine how internal capabilities of value creation leverage this relationship. In this study, the internal capabilities of value creation are examined in two aspects: routine (organizational search routine) and ability (technological capabilities). The results of this analyses show that the alliance portfolio diversity alone cannot explain the relationship with innovation performance, and this relationship is determined by internal contexts such as organizational search routine or technological capabilities. Apart from the hypotheses tests, this study conducted additional analysis by adding interaction terms with industry volatility as dummy variable, to examine how interplay of alliance portfolio diversity and internal capabilities is applied in certain environment such as high volatile industries. The result of this analysis shows the interaction of alliance portfolio diversity and organizational search routines becomes more significant in industries with high volatility while interaction of alliance portfolio diversity, technological capabilities, and high volatility have no significance. This study analyzed the impact of alliance portfolio diversity on innovation performance in terms of fit as integrated complementarity that considers internal and external components simultaneously.