Porter (1986) corroborates the perception of strategy as plan and position. He describes strategy as a combination of the ends (goals) for which the firm is striving and the means (policies) by which it is seeking to get there. Strategy is a pattern in actions over time and as a perspective, it focuses on the vision and direction of the firm. Strategic planning set the stage for the rest of planning in the organization. It involves defining a clear company mission and purpose at the corporate level, setting detailed supporting firm objectives that guide the whole company, designing sound portfolio of business and product/service that is best for the company i.e. the marketing strategies, and coordinating functional strategies like the form of finance, investment, dividend, staffing, remuneration, incentives and welfare packages.
Strategic orientation is collectively known as positional advantage because it denotes the firm's position in its industry as a leader in either superior services (differentiation) or cost (low cost leadership). John Shank and V. Govindarahjan in 1989 argued in their research that performance evaluation needed to be tailored to the strategy being followed by a firm. They believed in a supportive argument that different strategies imply different tasks and require different behaviors for effective performance. Meaning that intellectual capital investment would depend on weather the service company chooses to follow differentiation or low-cost leadership strategy (Porter, 1980). Differentiation champions developing products that customers value.
Its goal is to offer unique attributes to clients whose perception of them as superior to alternatives supports charging a premium price, besides rivals find it hard, if not impossible, to match or copy. Approaches include brand loyalty (Coca-Cola in soft drinks), superior customer service (Ritz-Carlton), premium real estate slots for Zara shops, etc. Low cost leadership focuses on the achievement of the lowest cost relative to its competitors. Low cost may be achieved through approaches such as economies of scale in production, learning curve effects, tight cost control, etc. in areas such as R&D, service, advertising and others (Porter, 1985; Shank and Govindarahjan, 1989).
In other words, cost leadership strategy requires the sale of a “standard or no-frills”
product (Porter, 1985 p.13) combined with “aggressive pricing” (Porter, 1985). Thus, the strategy involves making a “fairly standardized product and underpricing everybody else” (Kiechel, 1981 p.181).
However, the relationship between differentiation and cost is not always so simple:
“low overall cost position may not be incompatible with differentiation” (Porter, 1996). There have been many scholars among who Mitzberg, Miller and Dess, Dickson and Ginter, Speed and others who questioned the preciseness of Porter’s model and if it represents a set of generic strategies or just dimensions of strategies.
Besides, in recent researches scholars questioned: 1) if Porter’s cost leadership strategy is not really a cost strategy but a differentiation strategy based on low-price; and 2) if differentiation strategy can lead to market share leadership which, in turn, can lead to economies of scale and eventually to low cost. So, keeping recent findings and critiques in mind, we do not insist on a mutualexcluding factor of cost leadership and differentiation strategy, but consider them as given, independent, company-chosen scenario factors for our research objective.
2.3 Hypotheses development
Different strategies require different managerial action plans, resource allocations and expenditures to achieve sustainable profitability and superior performance.
Fruitfulness often depends on capital allocation and expenditures (which are investments) in different assets. Intellectual capital investment is an investment into intangible assets, which over time create value beyond the cost. The created value is the return on an early made value-enhancing investment, which increase the profit of a company. Besides, as we mentioned above, in order to bring profit, different strategies require different resources and values, so the investment would be different.
Hence, two strategic orientations demand different intangibles investment portfolios.
Thus the following set of research questions guided this study:
Q1. Is there any significant impact of strategic orientation on firm financial performance?
Q2. Is there any significant difference in investment decisions for firms pursuing different strategic orientation?
Q3. Is there any significant impact of investment in intellectual capital on financial
performance in Taiwanese upscale hotel industry?
Q4. Is there any incremental interaction effect among various intellectual assets?
Based on literature review, issues discussed in relation to investment in intellectual capital, profitability and strategic orientation, a conceptual model of this study was formulated in the following research hypotheses.
According to Porter (1985), differentiation strategy and low-cost strategy are fundamentally different, so to sustain competitive advantage, different resources, strengths and organizational arrangements are needed (Aulakh, Kotabe, and Teegen, 2000), key success factors would differ and profitability origins are not the same. So, low-cost leaders are able to low the prices, because firms gain a relative advantage from their low labor and production costs, and beat their competitors getting bigger market share, hence reach above-average financial performance. In contrast, differentiators are creating unique customer value through innovation, superior service and product quality, updated technology and differentiated brand image, for what differentiators charge their customers higher prices (Frambach, Prabhu, and Verhallen, 2003). Origins of differentiation strategy represent more durable source of competitive advantage, because it is more difficult for competitors to imitate. So far, each strategy provides with some drawbacks and benefits, and requires diverse capitals, skills and procedures. Given the differences between two strategic orientations, this study aims to find which strategy works best for Taiwan lodging industry in terms of profit generation; therefore the first hypothesis was developed:
Hypothesis 1: There is difference in profitability between differentiation-oriented and cost leadership-oriented firms.
Different intellectual categories lead to different firm competitive advantages, plus the differences between two strategic orientations and requirement for diverse inputs in order to obtain financial profitability inspired this study to find out: investments in which intellectual capital categories would lead to firm’s financial success. So, the group of hypothesis 2 was established:
Hypothesis 2: Relative importance of various intellectual capital categories on
financial performance of firms pursuing cost-leadership strategic orientation.
For low-cost leaders operational efficiency is a critical component, and probably the nature of existence (Porter 1985). They offer standardized service (product) in exchange for lower price that attracts price sensitive customers. To reach these efficiencies, the company has to create a template for operational knowledge.
According to Grant (2008) hotels that pursue a low-cost leadership strategic orientation benefit from obtaining access to economies of scale through volume purchasing and economies of learning via efficient service design through process innovation, and via improved organizational routines and frameworks. Economies of scale, guests’ high turnover rate and moving along the learning curve are essential factors for a service provider to be able to offer a customer a standardized product, and simultaneously be able to minimize costs without giving up profitability. The easiest and fastest way to obtain those benefits is to get a management contract with operations templates, access to the global distribution system, reservation referrals from the management parent company, standard operating procedures (SOPs) and administration expertise. Management contract provides with immediate systems capital. Hence, the next hypothesis is as following:
Hypothesis 2a: For Taiwanese hotels that pursue a low-cost leadership strategic orientation, greater investments in structural capital will lead to higher firm performance.
Franchising is another attractive form of contract for low-cost leaders. This kind of contract provides the property owner only with customer capital. After agreement on a payment conditions and maintenance of franchisor’s actual standards, permit of brand usage is turned to franchisee. Along with the brand,- awareness, recognition, and desirable reputation are acquired, which were verified to be important for players in service industry, so Hypothesis 2a were established:
Hypothesis 2b: For Taiwanese hotels that pursue a low-cost leadership strategic orientation, greater investments in customer capital will lead to higher firm performance.
As long as customers’ expectations towards low-cost and low-price hotel are
relatively low and only anticipate basic, no-added value service/product, we believe that additional investment in human capital would have no significant impact on the hotel profitability, hence the following hypothesis was developed:
Hypothesis 2c: For Taiwanese hotels that pursue a low-cost leadership strategic orientation, greater investments in human capital will not lead to higher firm performance.
Hotels that pursue a differentiation strategic orientation compete by selecting one or more attributes that buyers in an industry perceive as important, and uniquely position themselves to meet those needs. The firm is rewarded for its uniqueness with a well-defined market segment who they charge premium price (Porter, 1985). Intellectual capital and particular categories of it have to be developed in order to be able to deliver high quality service, so the next group of hypothesis was developed in order to discover must-have and nice-to-have intangible assets for firms with differentiation strategy:
Hypothesis 3: Relative importance of various intellectual capital categories on financial performance of firms pursuing differentiation strategic orientation.
In the case of differentiation strategy, structural capital would provide with operational foundation for customer service delivery, and a basis for business process in general. Systems capital is an organizational capability of a firm necessary to meet market requirements. It provides individual members of the organization with technical support they need in order to offer added value to their customers, what is achievable through product or service innovation (Saint-Onge, H. 2000). So, hypothesis 3a was developed:
Hypothesis 3a: For Taiwanese hotels that pursue a differentiation strategic orientation, greater investments in structural capital will lead to higher firm performance.
Hospitality is an industry where the product is service, so differentiators have to build a customer-focused service delivery system. Hotels that pursue a differentiation strategic orientation are associated with high costs, however the return from loyal customers, who are willing to pay for a unique service, offsets firm’s expenses. We
assume that customer capital is important for differentiators, because it creates customer’s “mind-set”, such as knowledge, feelings, attitude, perceptions with respect to the brand. Brand’s important function is to differentiate a particular company’s offering from the others in the market through, firstly, delivering a message of quality certification, and secondly, helping customers to ease and organize their shopping experience. A correct mind-set is important for a firm, because it enables the organization to attract new and retain loyal customers. Customers perceive that a strong brand may reduce the risk associated with the purchase, hence have more inelastic response to price increases. In other words, clients who are loyal to a particular brand or to a particular company are less elastic to the price changes and may be willing to pay a higher price (Ambler, Bhattacharya, Edell, 2002). An opportunity to charge a higher price, means to earn higher margins and enhance firm’s profitability, so the following hypothesis 3b was developed:
Hypothesis 3b: For Taiwanese hotels that pursue a differentiation strategic orientation, greater investments in customer capital will lead to higher firm performance.
Furthermore, except structural and customer capital, development of human capital is essential for differentiation-oriented hotels. In customer service industry when we speak about differentiators, we primarily emphasize service standards, discreet, personal attention to every guest in order to satisfy and delight the customer. Many hoteliers have already recognized that the key to a successful and profitable hotel is service, and service comes from employees (both professional and service). Hudson (2001) has named human capital as key dimension of performance in service sector.
By definition, human capital is “…the capabilities of the individuals in an organization what are required to provide solutions to customers”. In the hospitality industry the human capital could be divided into service employees and professional employees. Service employees are those who help the company to communicate its vision and position, they are the ones who deliver the unique service experience to customers and create long-term relationships based on trust and guest satisfaction.
Reinartz and Kumar (2000) have shown that mismanagement of customer loyalty leads to unprofitability, highlighting the importance and high profit potential in loyal customer base development through service personalization. Hence, service
employees play an important role in capital generation through competence (represented by skills and education), attitude (behavior of employees towards their work) and intellectual ability (innovativeness, openness to changes and customers problems resolution) (Roos 1997, p. 32). Even though the operating standards and brand may communicate luxury and exclusivity, the service the guest receives is the key to firm uniqueness and differentiation. Professional employees are important for back office support, exclusive service design and training service employees.
Besides, professionals are responsible for implementing hotel’s overall positioning strategy, leading staff towards vision. Given the arguments, we would hypothesize the following:
Hypothesis 3c: For Taiwanese hotels that pursue a differentiation strategic orientation, greater investments in human capital will lead to higher firm performance.
However, according to Stewart (1999) and Sveiby (2001) the product/service value is not created directly from the intellectual capital. But can be generated by flows within intellectual capital, which shows the importance of interactions between intangibles, yet importance and magnitude of impact might differ according to the strategic orientation. So, groups of hypothesis 4 and hypothesis 5 were developed.
Hypothesis 4: Relative importance of interaction effects among various intellectual capital categories on financial performance of firms pursuing low-cost leadership strategic orientation.
For low-cost leaders intellectual capital relationships between systems capital and customer capital are important, because organizationally - managed distribution channels and other similar marketing processes are often treated as structural capital (Namasivayam K. 2006). So there might be an incremental impact of customer capital and systems capital interaction effect on the firm financial performance, thus hypothesis 4a was established as following:
Hypothesis 4a: The interaction of structural capital and customer capital would have an incremental positive effect on firm profitability for Taiwanese hotels that pursue a low-cost leadership orientation.
According to Engstrom (2003), the strongest relationships in hotel industry are between human and structural capital, because software, hardware, databases, management templates are all good, but all of the mentioned are designed to support employee’s productivity (human capital). Even though, we suppose that expenditure on human capital won’t affect profitability of low-cost leaders directly, yet we suggest that human capital productivity and impact on firm performance would be boosted through systems capital support. (Saint-Onge, 2000; Dzinkowski 2000). Hence, hypothesis 4b was settled:
Hypothesis 4b: The interaction of structural capital and human capital would have an incremental positive effect on firm profitability for Taiwanese hotels that pursue a low-cost leadership strategic orientation.
By definition, human capital and customer capital categories of intellectual capital are not the ones low-cost leaders should concentrate on, because both of them increase operation expense ratio, create customer value and provide a client with a differentiated service, which is not a core value for low-cost lodgers. Hence, the study questions if the interaction effect of human capital and customer capital would have lower impact on profitability of firms pursuing low-cost leadership strategy.
Hypothesis 4c: The interaction of customer capital and human capital would have the lowest incremental positive effect on firm profitability for Taiwanese hotels that pursue a low-cost leadership strategic orientation.
Hypothesis 5: Relative importance of interaction effects among various intellectual capital categories on financial performance of firms pursuing differentiation strategic orientation.
Both administration and marketing are important and connected, for example:
organization’s management philosophy impacts not only its employees, but also consumers’ satisfaction level and as a result- customer loyalty. Customer capital among others includes distribution channels, which are often impacted by hotel’s organizational culture and business process (Carmeli and Tisher, 2004). Besides, according to Bontis (2000) a customer-focused and market-driven organization will ultimately create efficient organizational routines and processes that service their clients well, meaning that there are relationships between customer capital and
systems capital that lead to higher business performance (Engstrom, Westnes, and Westnes, 2003 ). Based on the previous arguments, the following hypothesis was developed:
Hypothesis 5a: The interaction of customer capital and systems capital would have an incremental positive effect on firm profitability for Taiwanese hotels that pursue differentiation strategic orientation.
Human capital aligns and integrates the complex knowledge system derived from investments in systems capital. Structural capital only provides support: employees learns from the codified knowledge, that has been transformed before into databases and business processes, however, human capital is still the key that turns on the machine power, besides human capital plays an important role for differentiators, because it ensures high-quality service delivery and firm overall positioning strategy implementation (Weigelt and Camerer 1988; Walsh K., C.A. Enz and L. Canina 2008). However, without structure human being is notably less effective and efficient at wealth-creation (Bradley,1997, p.58-59). For that reason the following hypothesis was developed:
Hypothesis 5b: The interaction of human capital and systems capital would have an incremental positive effect on firm profitability for Taiwanese hotels that pursue a differentiation strategic orientation.
Branding and marketing are both important; loyalty programs and customers databases are profitability bringers in lodging industry, however, the data has to be analyzed and correct conclusions have to be made from consumers behavior, customers’ suggestions and complains. Customer capital needs smart capable employees with engaging personality to be developed, communicated, spread and executed. Moreover, clients use proxies to assess the potential quality of firm services, because the actual quality cannot be known until the services are rendered, but those proxies are based on firm’s reputation and past service performance, which was implemented by employees, so human capital is useful in implementing service diversification (Brush and Artz, 1999; Hitt, Bierman, Shimitzu and Kochhar, 2001).
So, this study argues for an additional interaction effect condition, because of the necessity to prove the congruence of brand associations. The cohesiveness of brand
image is characterized by brand associations’ consistency with the real experience of consumers, otherwise brand’s image would be diffused and expenditure on it would not bring any return (Keller, 1993; Heckler, Keller and Houston, 1992). To reach holistic brand, the managers have to invest in to the employees who are the bridge between customers’ associations and real experience. Hence, hypothesis 5c was developed:
Hypothesis 5c: The interaction of human capital and customer capital would have an incremental positive effect on firm profitability for Taiwanese hotels that pursue differentiation strategic orientation.
Chapter Three Methodology
Chapter Three presents the research participants, method and procedure to explore and investigate upscale hotels’ investments in different categories of intellectual capital and how those investments impact on hotel performance for both the upscale lodging industry as a whole and under different strategic orientations in particular.
3.1 Research Model
Figure 3.1 is a conceptual model for firms with low-cost leadership strategic orientation and for firms with differentiation strategic orientation. It provides a clear picture of the carcass of the current research in terms of relative importance of various intellectual capital categories on firm performance in Taiwanese lodging industry.
The figure 3.1 was created for this study and includes research hypotheses.
Figure 3.1
Conceptual Model of Impact of Intellectual Capital on Firm Performance for Firms with Different Strategic Orientation
Source: developed for the research
3.2 Samples Definition
Financial information on publicly traded hospitality firms was downloaded from the Taiwan Stock Exchange Inc. & Gre Tai Securities Market, Hong Kong Stock Exchange (SEHK) and COMPUSTAT database. Financial annual reports’ data is
Financial information on publicly traded hospitality firms was downloaded from the Taiwan Stock Exchange Inc. & Gre Tai Securities Market, Hong Kong Stock Exchange (SEHK) and COMPUSTAT database. Financial annual reports’ data is