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CHAPTER 1 INTRODUCTION
How to gain legitimacy and win competition simultaneously is critical to firms’
prosperity and survival (Baum and Oliver, 1991, Chen and Hambrick, 1995; Oliver, 1997). Institutional theorists have suggested that to be similar to peers is beneficial in terms of obtaining legitimacy and avoiding performance penalties (e.g., DiMaggio and Powell, 1983). Other researchers with strategic views, such as the resource-based view and competitive analysis, have argued that firms should be different in order to develop their unique resources and capabilities and stake out a unique competitive position (Barney, 1991; Baum and Mezias, 1992; Baum and Singh, 1994; Carroll, 1985; Helfat et al., 2007; Porter, 1996). Given this tension between legitimacy and competition, scholars have proposed a strategic balance perspective and empirically found that firms that position themselves at a medium level of distance relative to industrial norms contributes to firm performance the most, compared to positioning at either a low or high levels of distance (Oerlemans and Meeus, 2005; Robinson and McDougall, 2001; Deephouse, 1999; Porac, Thomas, and Baden-Fuller, 1989).
How firms strategically manage the competing pressures of gaining legitimacy and wining competition and obtain optimal performance through proper positioning strategy is not only a core research question of strategic perspective, but also one of the core paradoxes at the interface of strategic management and organization theory (Deephouse, 1999; Durand and Calori, 2006; Miller and Chen, 1996; Zhao, Fisher, Lounsbury, and Miller, 2016). After institutional theory enters the strategy conversation, substantive engagements between these two perspectives have occurred since the late 1990s. For example, Oliver (1997) compared the influences of organizations’ relationships to the competitive environment (also named as task environment) versus institutional environment on firm performance in Canadian
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construction industry and found that competitive environment relationship contributed to firms’ profitability and productivity. She also found that institutional relationship was associated significantly with firm performance under highly regulatory stringency
─the complexity and burden of regulatory environments (Fennel and Alexander, 1987). Her study indicated that both institutional and competitive environments affect firm performance, especially when these environments exert intense pressures on firms. Deephouse (1999) firstly introduced the idea of strategic balance approach toward competitive and institutional pressures and found that a moderate level of strategic similarity─’the extent to which a firm’s strategic position resembles the strategic position of other firms competing in its market at a particular point in time’
(p. 148) ─of resource allocation maximizes firms’ financial performance compared with low and high levels of strategic similarity in an industry with both intense competitive and institutional forces using 159 commercial banks located in the Twin Cities area.
To date, the strategic balance perspective is broadly recognized as the best method for addressing the pressures from social norms and competition and maximizing firm performance. This perspective recommends that firms should position themselves “as different as legitimately possible” (Deephouse, 1999: 147) and engage in strategies that achieve optimal distinctiveness (Zuckerman, 2016).
Current research has highlighted that strategic balance perspective has key implications for a variety of firm outcomes including resource acquisition (Lounsbury and Glynn, 2001), corporate governance (Zajac and Westphal, 1994), firm and stakeholder attention (Ocasio, 1997), reputation (Basdeo et al., 2006), and financial performance (Deephouse, 1999). This perspective is not only advocated by strategic scholars but is also widely applied in other fields, such as organizational image
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(Lamertz, Heugens, and Calmet, 2005), technology collaborations (Eapen and Krishnan, 2009), and global talent management (Sidani and Al Ariss, 2014).
Due to the importance and growing research of strategic balance perspective, Zhao et al. (2016) reviewed past research related to strategic balance perspective and optimal distinctiveness and encouraged a more integrative effort to broaden the interface between institutional theory and strategic management. They enumerated several problems inhibiting research progress on this stream of research. First, those related studies employ different conceptual terms and operationalizations such as strategic similarity (Deephouse, 1999), competitive conformity (Chen and Hambrick, 1995), strategic conformity (Finkelstein and Hambrick, 1990), legitimate distinctiveness (Navis and Glynn, 2011), and strategic categorization (Vergne and Wry, 2014), creating ambiguities in the literature. Second, institutional theory and strategic management have been somewhat polarized in their focus on either conformity or differentiation and this perceived theoretical divide between these two camps has been too vast to encourage a more integrative effort. Third, scholars embracing strategic balance perspective have assumed that there is a single, relatively static convergence point in organizational characteristics from which distinctiveness is judged in a market and firms positioned too far from convergence point risk being ignored or sanctioned (Zuckerman, 1999). However, many markets may bear more convergence points because of multipoint competition (Fuentelsaz and Gómez, 2006), multiple strategic groups (Peteraf and Shanley, 1997), or rugged landscapes (Levinthal, 1997). The aforementioned problems may result in the lack of empirical evidence and mixed findings, undermining the knowledge base of strategic balance perspective.
To respond to Zhao et al.’s (2016) call, this dissertation includes two essays to
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consolidate, accumulate, and broaden the knowledge base of strategic balance perspective by (at least partially) addressing aforementioned problems. I began by replicating Deephouse’s (1999) seminal work using almost the same operationalization, model specification, and analysis1. Reproducibility of results lies at the core of modern science (Bettis, Helfat, and Shaver, 2014). Replication not only helps building a cumulative body of thought that is reliable, but also facilitates exploring phenomenon-based empirical regularity (e.g., learning curve, diversification pattern/performance, conditions favoring joint ventures). In addition, conducting replication in a different or independent context from the original study enhances the benefits of external validity (Rosenthal, 1991). By replication in 155 manufacturing industries in China, the first study examines the replicability, accumulates empirical evidence to seek for regular patterns, contributes to the external validity, identifies the boundary conditions, and provides additional knowledge for theory development of strategic balance perspective.
In the second essay, co-authored with Prof. Yu-Chieh Jade Lo, we focused on foreign firms operating in China. In such contexts, MNCs are new entrants that can be seen as the emerging group within the local industry of the host country, competing against local firms－the established group. Even though different MNCs may come from different countries, their foreign status and the fact that they often need to fight the liability of foreignness together constitute the common identity basis for such firms. We attempted to explore how foreign firms as members of an emerging group manage legitimacy and competition across and within groups and obtain optimal
1
Because some variables in Deephouse’s (1999) study are specific to commercial bank industry (e.g., strategic similarity and market growth), I have to adjust them to reflect the nature of manufacturing industries. Other variables are constructed in the same manner as those in Deephouse’s (1999) study.
The model specification and analysis are strictly followed; see details in the methods section of study 1.
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performance through proper positioning strategy. Drawing on recent development of collective identity and organizational legitimacy theories, we have tried to exhibit an integrative progress of organizational theory and strategic management and push the research boundary of strategic balance perspective from a single convergence point to multiple convergence points.
Strategic balance perspective is developed in the U.S. and has been examined in various industries in the U.S. and some European countries such as the Netherlands (Oerlemans and Meeus, 2005), while it remains unexplored in the Chinese context.
Although using China as a research context contributes to the external validity of strategic balance perspective, it is necessary to ensure that the Chinese context is compatible with its theoretical foundations. According to the seminal work of Deephouse (1999), these theoretical foundations include (1) firms facing strong competition and institutional forces, (2) and firms’ performance subjecting to resource control and legitimacy.
China as a transitional economy has some characteristics of institutional and competitive environments different from those developed countries such the U.S. and European countries. Market competition is intensified because state-owned enterprises (SOEs), private-owned enterprises (POEs), foreign firms, and numerous start-ups jointly compete in product market (Peng, 2003). The intensified competition continuously exerts strong pressures and threads on firms’ prosperity and survival.
Second, financial infrastructure in China is underdeveloped and weak financial market constrains POEs’ access to capital and resources. The imperfect financial market and difficulty of resource acquisition trigger severe resource competition among POEs. Third, the role of government in business is influential and active (Tjosvold, Peng, Chen, and Su, 2008). Industries polices announced by government
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are popular among all industries. Most firms are facing highly uncertain and dynamic environment, whereas certain firms are protected from such uncertainty and dynamism by these polices. These polices diversify the degrees of competitive and institutional forces not only among industries but among different types of ownership of firms. Fourth, SOEs which often confront lower degrees of competitive and institutional forces are larger and more dominant than POEs in major industries. Fifth, for POEs, political ties (i.e. the connections with government agencies) are important, which can help firms to secure favorable regulatory conditions (Agrawal and Knoeber, 2001) and access to resources such as bank loans (Khwaja and Mian, 2005; Faccio, 2006), and ultimately increase the value of firms (Roberts, 1990; Fisman, 2001;
Ramalho, 2007) and improve firm performance (Johnson and Mitton, 2003). The condition of regulatory stringency and the importance of political ties are reflection of highly coercive pressures compelling isomorphic processes.
Based on the aforementioned characteristics, the Chinese context indeed imposes strong competitive and institutional pressures on firms and firms’ performance depends on resource control and legitimacy, fitting the theoretical foundations of strategic balance perspective. However, some firms which are greatly interdependent with governments such as SOEs face relatively weak competition and regulatory requirements due to the protection of policies and access to resources. These firms are often lack of operating efficiency and pursue political agenda (e.g., maintaining social welfare and employment) rather than financial returns. Strategic balance is not an issue for these firms but remains critical for other firms such as POEs. China is an ideal context to examine strategic balance perspective, if the potential bias caused by SOEs is eliminated. Fortunately, other firms including POEs and foreign firms generally do not consider SOEs as competitors because the goals and strategies of
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SOEs are highly distinguished from them. In addition, the numbers of SOEs has been declined to less than 15 percent of all firms in 2007. It means that the potential bias can be removed by deleting SOEs from the sample firms examined.