The Impact of Internal and External Resources, and Strategic Actions in Business Networks on Firm Performance in the Software Industry

Understanding the variance in firm performance has been an important topic in the strategic management literature. In the last two decades it has become particularly interesting as business networks increasingly have become an integrated part of a firm's environment. Besides the internal resources, the less-controlled external resources in the firm’s business networks to affect its performance too. The uncertainty associated with the lower levels of control over external resources implies that there is room for strategic actions as a moderator to obtain better firm performance. This study investigates the following research question: What are the roles of internal and external resources, and strategic actions in business networks, and what is their relationship with firm performance? We propose a conceptual framework that adopts an integrated view to study firm performance in an environment where firms become increasingly interconnected. It combines the Resource-based View (RBV), which predominantly looks at a firm's internal resources as a source of competitive advantage as well as the network perspective, which emphasizes the resources inherent in a firm’s business network as a source of competitive advantage. This thesis starts with the notion that a firm is an autonomous entity operating in an environment and aiming for improving its performance. Following the RBV, a firm owns inherently unique resources that differentiate it from other firms. When these resources are valuable, rare, inimitable, and non-substitutable (VRIN), they become sources of sustained competitive advantage and firm performance. In addition, firms are also economic agents that depend on other members in a business network and require complementary resources from their partners. They consciously act and react to threats and opportunities in their business network. These opportunities or threats, either from collaborators or competitors, affect a firm's competitive advantage. Therefore, we propose a conceptual framework of strategic actions that acts as a mechanism to enhance and protect a firm’s VRIN conditions and sustain firm performance. The research starts with a literature review and develops a conceptual model. The conceptual model takes into account a firm’s internal resources, external resources and strategic actions as three important factors influencing firm performance. This is followed by an empirical study in Chapter 3 to examine the direct relationships and the interactions between internal or external resources and the influence on firm performance. We conducted a regression analysis on 96 cases of firms that are publicly listed with SIC 7372 and are part of a network of software industry in 2007. The findings are not as straightforward as expected, and confirm other research, i.e. internal resources, measured by technological and marketing assets, are not consistent and positive explanatory variables of firm performance. External resources, as represented by structural autonomy, directly influence firm performance and the relationship is positive, as expected. The findings also show that the inclusion of a firm’s external resources increases the explained variance in firm performance. This raises the question to what extent firm performance is not only dependent on the resources it possesses, as articulated by the RBV and network perspective, but also on their strategic actions in their business networks. In Chapter 4, we investigate the strategic actions among four (4) firms in the pre-packaged software industry. The case studies indicate that strategic actions do play an important role in the relationship between a firm’s resources and its performance. We identified a number of strategic actions and found that firms that perform well, put more emphasis on different strategic actions, compared to firms that perform less. The findings based on the four cases, indicate that strategic actions in the relationship between a firm’s resources and performance are important. These strategic actions underline the need to augment the RBV and network perspective with strategic actions that reflect actions that enhance or protect the resources of a firm in order to improve its performance. To better understand the general influence of strategic actions, it is important to develop an instrument to measure a firm’s strategic actions in a business network. In an earlier study, Venkatraman developed a model of six dimensions that reflect strategic actions and we extend this model with a network perspective on strategy. We tested the questionnaire using 54 responses we received from a survey conducted in the Dutch IT-software industry. The results indicate that there are distinct dimensions reflecting the firm’s strategic orientation toward its partners, in terms of managing efficiency, dependence and tensions when collaborating and competing in a business network. Because a firm’s business network consists of complex and multifaceted phenomena, it requires a variety of concepts to understand the role of strategic actions in it. The first contribution of this study is that we extend the RBV with the network perspective to explicitly take into account a firm’s external resources as factors influencing firm performance. The second contribution refers to the inclusion of firm strategic actions as an instrument to enhance and protect the VRIN conditions of a firm’s resources. Strategic actions seem to be an important set of variables that so far has been overlooked, while it is important when it comes to realizing the full potential of a firm’s resources. Internal resources, external resources and strategic actions are all important in explaining firm performance. These findings allow us to complement the main causal mechanism of RBV, i.e. that firm resources are a source of sustained competitive advantage, with the influence of strategic actions to enhance and safeguard sustained competitive advantage. Our third contribution is the creation and initial testing of a tool to measure strategic orientation that explicitly includes network-related strategy and captures a firm’s emphases on various strategic dimensions. We underline the importance of the match between a firm’s resources and strategic actions in improving its performance. Being connected in a business network, a firm’s strategy may not be categorized in one strategy dimension, but it is a multi-dimensional set of actions that reinforce each other to capture the benefits, reduce the costs, and manage the risks. Firms like SAP or Autodesk capitalize their internal and partners’ resources and showed proactive and visionary strategic actions that enabled them to move ahead of their competitors and to enjoy the benefits of early commitment to technology development. They were also able to engage in defensive and analytical strategic actions that enabled them to maintain or improve their efficiency. They also took some aggressive strategic actions that enabled them to maintain their independency with regard to both their competitors and collaborators. Firms may put different emphases on the various strategic dimensions which allow them to orchestrate strategic actions and balance the forces that it faces in its external business network. From managerial point of view, this research provides some thoughts about a firm’s strategy in a business network. Having an integrated and coherent strategy shows the manager’s ability to balance the benefits and the threats embedded in a firms’ business network. There are three main building blocks which provide questions to guide managers in diagnosing and evaluating the breadth and coherence of their strategy, which ultimately influences firm performance. These three building blocks are (1) identifying a firm’s resource positions, (2) aligning resources and strategic actions, and (3) evaluating the strategic actions firms can employ in a business network