Articles Unit 1

Journal of Management
1995, Vol. 21, No. 3, 357-393
Conducting and Integrating Strategy

Research at the In terna tional, Corporate,
and Business Levels: Issues and Directions
Gregory G. Dess
Universityof Texas at Arlington
Anil Gupta
Universityof Maryland
Jean-Francois Hennart
University of Illinois
Charles W.L. Hill
Universityof Washington
This paper identifies important research issues at the

international, corporate, and business levels of strategy research. In
addition, research questions that require integration across multiple
levels of strategy as well as the incorporation of both the content and
process dimensions of strategy are addressed.
The last twenty years have witnessed an impressive output of both theoretical
development and empirical research in the strategy area. This diverse and
emerging literature has addressed topics at the international, corporate, and
business levels and has spanned across both strategy content and strategy process.
The objective of this paper is twofold: (1) identify areas for future theoretical
development and empirical inquiry at the international, corporate, and business
levels, and (2) suggest possibilities for integration across levels of strategy.
The first three sections of this paper focus on promising research avenues
at the international, corporate, and business levels of strategy, respectively. The
fourth section suggests possibilities for integration across levels of strategy.
Given space constraints, we do not, of course, claim to be comprehensive in
suggesting areas of promising research opportunities. One of our objectives is
to stimulate debate regarding the viability of research directions proposed and
encourage dialogue among the community of strategic management scholars
on other important areas that were not addressed.
The first section, “Promising Directions and Dead-Ends in International
Strategy Research,” raises some basic issues about motivations behind
Direct all correspondence to: Gregory G. Dess, University of Texas at Arlington, College of Business
Administration, Department of Management, Arlington, TX 76019-0467.
Copyright @ 1995 by JAI Press Inc. 0149-2063
357
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358 DES, GUPTA, HENNART AND HILL
internationalization and the relationship between internationalization and

economic performance. The theory that firms are diversifying their risk by
setting up operations in a portfolio of countries (Geringer, Beamish & da Costa,
1989; Kim, Hwang & Burgers, 1989) is rejected. Instead, it is argued that
multinationalization can be best explained as a means to internalize inefficient
markets for intermediate inputs. Intermediate inputs are defined broadly to
include intangibles which are characterized by high fixed costs and low marginal
costs. Another suggested fruitful area for future research is the identification
of patterns and causes for failure of foreign entry. Studying failures may provide
us with a more complete understanding than the study of successful entries alone
may provide.
In the next section, “Key Research Issues-Corporate-Level Strategy,”
four major reasons which contributed to the inability of corporate-level strategy
research to fulfill its initial promise are identified. First, most of the research
in the corporate-level strategy area has attempted to examine the relationship
between strategy and performance without considering the role played by
corporate strategy in creating and sustaining competitive advantage at the
business level. Second, it is argued that the widespread adoption of Rumelt’s
(1974) categories of diversification has been inappropriate since it fails to
distinguish among differences of economic gains. Third, corporate-level strategy
research has been almost exclusively content-oriented and has paid inadequate
attention to the role of implementation. Finally, corporate-level research has
failed to establish clear cause-effect relationships because of its use of an
inappropriate methodological orientation, for example, cross-sectional studies.
Business-level strategy is addressed in the third section, “Research in
Business-Level Strategy: Substantive and Methodological Considerations.” It
is at the business level that competition among rival firms takes place. At the
heart of business-level strategy is the concept of competitive advantage which
can take multiple forms. Traditionally, cost leadership, differentiation, and
focus have been recognized as the three primary forms (Porter, 1980) but, in
recent years, quick response has been increasingly recognized as a separate and
distinct alternate means to attain a competitive advantage. Three basic questions
regarding the nature of competitive advantage are discussed: (1) What are the
important subdimensions of each form of competitive advantage? (2) How can
businesses effectively attain multiple competitive advantages? and (3) What
insights does the resource-based model provide on how competitive advantages
may be sustainable?
Although investigating research questions about the corporate, business,
and international levels of strategy is important, research in strategic
management cannot and should not be confined to any one level, given their
interdependent and interconnected nature. This final section, “Integrative
Research Across Levels In Strategy,” raises several thought provoking research
questions that require the integration of multiple levels of strategy. Some of
the important content issues identified include the decomposition of the impact
of corporate-level strategy on an individual SBU’s competitive position as well
as the interactive impact of a firm’s international expansion and its
JOURNAL OF MANAGEMENT, VOL. 21, NO. 3, 1995

INTEGRATION STRATEGY RESEARCH 359
diversification strategy on firm performance. With regard to process issues, it

is suggested that greater attention be paid to research questions such as the
relationship between the control of foreign subsidiaries and corporate strategy
as well as agency problems inherent in the control of geographically dispersed
subsidiaries.
Promising Directions and Dead-Ends in International Strategy Research

Recently, a number of articles have appeared in strategy journals
investigating the relationship between so called “geographical diversification”
and performance (Geringer, Beamish & da Costa, 1989; Kim, Hwang & Burgers,
1989, 1993). This work, which we will call the ‘geographic diversification’
approach, is patterned on the extensive domestic strategy literature and sees
the geographical extension of firms abroad as the international equivalent of
domestic product diversification. It is argued that this work suffers from some
of the shortcomings of the domestic diversification literature, namely a focus
on outcomes rather than on motives for international expansion. Critically
examining this literature in the light of existing theories of international business
underlies its lack of clear theoretical underpinnings and suggests other more
promising research opportunities.
Product and Geographic Diversification

One of the most prolific research areas in domestic strategy has been the
relationship between diversification and performance. It is tempting to extend
this concept to the international area, and to consider the expansion of
multinational firms into foreign countries as the geographical counterpart to
product diversification. Hence, the expectation is that the larger the number
of foreign countries in which the firm is present (the greater its geographical
diversification), the better its relative profit performance. A number of
researchers (Wolf, 1977; Rugman, 1979; Geringer, Beamish & da Costa 1989;
Kim et al., 1989, 1993) have pursued this approach. Some of their findings have
been mixed, and somewhat puzzling. Kim et al. (1989) for example, found that
geographical diversification increased the profit stability of related diversifiers,
but not that of unrelated diversifiers. Yet, if profit stability comes from engaging
into unrelated activities, firms which are diversified along both the product and
geographical dimensions (i.e., unrelated product diversifiers which are highly
geographically diversified) should have more stable profits than firms which
are diversified on the product dimension alone.
One major problem with the stream of strategy research on diversification
is that it has focused more on outcomes than on motives. Yet there may be
many different reasons why a firm ends up being diversified. The next section
urges a redirection of domestic product diversification research towards an
exploration of these motives. By contrast, the various theories of foreign direct
investment and of the multinational enterprise have, from very early on, focused
on the motives for the various forms of international expansion (Hennart, 1982).
Consequently, the ‘geographical diversification’ approach, which patterns itself

360 DESS, GUPTA, HENNART AND HILL
on domestic diversification studies, constitutes in many ways a step backward

in our understanding of the international expansion of firms. Yet at the same
time this literature raises a number of important issues that deserve further
study.
Geographical Diversification as Portfolio DiversiJication
Most ‘geographical diversification’ authors who have investigated the
empirical relationship between profitability, profit stability, and profit growth,
have explained it in terms of the theory of portfolio diversification (Kim et al.,
1989). Simply put, that theory says that owning assets whose returns are
uncorrelated will reduce your risk at any level of return (Markowitz, 1959). To
the extent that basic economic conditions tend to be uncorrelated across
countries, then a firm with operations in many countries is likely to have more
stable returns than a firm operating in a single country.
Markowitz (1959) had in mind an individual diversifying his/ her assets,
and at the outset one must show why it makes sense for firms to do this
diversification rather than individuals. Why should firms diversify across
countries while individuals can build a diversified portfolio of ‘pure plays’, i.e.
single business, single country firms? An assumption of the risk reduction model
for international diversification must therefore be that individuals are more
limited in their ability to diversify than firms. Then the second best solution
is for individual investors to buy shares in firms which diversify for them.
What should such firms look like? To maximize diversification, they should
have the following characteristics: (1) they should own small shares in a very
large number of foreign projects, since this maximizes diversification for a given
level of investment; (2) they should be highly diversified across industries; (3)
they should have investments in countries whose business cycle is uncorrelated
with that of their home base.
How does the actual pattern of multinational firms compare to what would
be predicted by portfolio diversification? First, most foreign investments of
multinational firms are 100 percent owned. Only 18 percent of the 8,621 foreign
subsidiaries of US firms in 1975 were minority owned, whereas 57 percent were
wholly-owned (Vernon, 1977, p. 34). Likewise, 73 percent of all Japanese
subsidiaries in the United States were wholly-owned.
Second, most foreign investments are in the same main industry as that
of the parent. In 1966, 83 percent of the sales of the foreign affiliates of US
firms were in the same BEA classification-roughly equivalent to 3 digit SIC-
as their parents (Hennart, 1982, p. 15). Similarly, 80 percent of the U.S. affiliates
of a sample of Japanese firms were producing the same 4-digit SIC product
as their parents (Hennart & Park, 1993). Hence there is very little international
product diversification.
Third, a firm that minimizes risk would invest in countries whose business
cycles are uncorrelated with that of its home country. Such an optimal country
portfolio was calculated for a U.S. investor by Levy and Sarnat (1970) for the
1951-67 period: the geographical pattern of U.S. investments abroad in 1966
bears very little resemblance to it, with a significant proportion of the U.S. stake

in Canada, a country whose business cycle is highly correlated with that of the
U.S. (Henna& 1982).
Given these characteristics of multinational firms, we would expect them
to be rather poor vehicles for diversification. And in fact this is the case.
Jacquillat and Solnik (1978) compared the reduction in risk achieved by buying
a portfolio of securities compared to that obtained by buying stock in American-
based MNEs. Compared to buying a portfolio of domestic U. S. shares, buying
shares of U.S. MNEs reduced risk 10 percent, whereas buying an internationally
diversified portfolio on the stock market reduced risk 50 to 70 percent.
The conclusion of this exercise is that it does not appear that international
diversification is the prime reason for the existence of multinational firms. At
best, international diversification might be a by-product of some more basic
reason that leads firms to expand internationally.
K4e Transaction Costs Theory of ‘Geographical Diversification’
Transaction costs theory offers an alternative theory of why firms expand
abroad (see Hennart, 1991 for a survey). Transaction costs theory argues that
multinational firms do not expand abroad to reduce risk, but instead to
internalize markets for intermediate inputs. These intermediate inputs are both
tangible (raw materials and components) and intangible (knowledge and
reputation).
A firm which generates intangibles (new products or processes, managerial
know-how, and reputation), reaps considerable gains from exploiting them in
as many countries as possible, either directly through licensing or franchising,
or indirectly by incorporating them in products or services produced in foreign
markets. MNEs manufacture abroad when there is demand for these intangibles
abroad, and when the market for these intangibles is so imperfect as to make
vertical integration into the manufacture of products and services that
incorporate them the preferred solution. Hence expanding abroad brings higher
returns on intangibles.
The implications of this theory are consistent with the empirical evidence.
First, the theory explains the disproportionate concentration of a country’s
foreign investments in countries whose business cycles are highly correlated with
those of the home country (for example, Canada for the United States, or
Norway for Sweden). International expansion is the replacement of market by
intra-firm coordination. The pattern of firm expansion abroad is therefore
affected by management costs: the more culturally close the target country, the
lower the costs of managing the affiliate. Since countries that are culturally close
are usually also economically integrated, a substantial proportion of any
country’s foreign investments is in countries which would be unlikely target
markets if what was sought was diversification.
Also, a firm’s stock of intangibles is usually industry specific, and this
explains why most multinationals will expand into the overseas manufacture
of products they manufacture at home (most exceptions being cases of vertical
integration, i.e., the internalization of international markets for raw materials
and components and parts).

Third, internalization theory tells us that the reason for a firm’s expansion
abroad is to replace markets by hierarchical coordination. Since hierarchical
coordination usually requires equity control, this explains why most foreign
subsidiaries are majority- or wholly-owned by their parents. In short,
internalization theory presents a clear theory of why firms invest abroad, and
this theory is matched by the empirical evidence.
Internalization theory predicts that a firm’s degree of ‘geographical
diversification’, or more precisely of international expansion, should be
associated with its endowment of intangibles, but that geographical
diversification should be of no (or even negative) value in the absence of
intangibles. The reason for the expectation of negative value is that operation
abroad is always more costly than operation at home, and can only be justified
if the firm can exploit the intangibles it has accumulated at home.
Merck and Yeung (1991) performed an interesting test of this proposition.
They regressed a firm’s q value (the market value of a firm divided by the
replacement cost of its tangible assets) by its degree of multinationality
(analogous to ‘geographical diversification’) and the cross-product of its
multinationality with its research and development and advertising intensities,
two main sources of intangibles exploitable abroad. The results show that while
the cross product terms are positive and significant, the multinationality term
per se is insignificant. In other words, a firm’s geographical diversification does
not provide any significant value unless the firm possesses R&D or advertising-
related intangible assets. Multinational firms do not expand abroad principally
to reduce risk, but to exploit intangible assets. There are no benefits to
‘geographical diversification’ per se. Absent the need to internalize imperfect
markets for intermediate inputs, there are no benefits of extending hierarchical
control across borders, since operating abroad is always more costly than
staying at home.
Are There Benefits to ‘Geographical Diversification' per se?
These predictions seem contradicted by a recent piece by Kim et al. (1993)
in which the authors argue that geographically diversified firms are likely to
experience higher returns at lower risks than single-market firms because they
have three basic advantages over single country firms. That is, geographical
diversification provides multiple market bases from which to retaliate against
competitors, it gives the added option of moving production in response to
changes in economic conditions, and it makes it possible to diversify risk as
per the traditional portfolio diversification model described above.
After controlling for industry effects, Kim et al. (1993) find that firms which
show the highest degree of geographical diversification enjoy higher profits at
lower risk than their less geographically diversified rivals. The authors conclude
that the distinct opportunities and options that geographically diversified firms
have over domestic firms are the cause of this higher return/risk tradeoff.
These findings suggest that there are benefits to geographical diversification
per se. But they also can be interpreted in a different way. Recall that transaction
cost theory posits that firms are geographically diversified because they have

expanded abroad to internalize imperfect markets for intermediate inputs,

including those for intangibles. We would therefore expect a firm’s extent of
geographical diversification (i.e., multinationality) to vary with its stock of
intangibles. Indeed, research and development and advertising intensity have
been shown to be the major determinants of a firm’s geographical diversification
(Swedenborg, 1979; Hennart & Park, 1994). Kim et al.‘s, measure of
performance is return on assets (ROA). Since accounting rules systematically
underreport intangible assets, we would expect firms with a large share of these
assets in total assets to show high (apparent) ROAs. Hence it is possible that
the relationship uncovered by Kim et al. between geographical diversification
and performance is spurious. It is quite possible that Kim et al.‘s findings do
not show that geographical diversification per se leads to greater profitability,
only that accounting rules tend to overestimate the profitability of firms which
are intangible-assets intensive. Those firms, as predicted by transaction cost
theory, are also the most geographically diversified.
Even if Kim et al.‘s test is flawed, the issue of whether there are benefits
of geographical diversification per se is an important one. As we have seen,
transaction cost theory argues that geographical diversification is the result
of the internalization of the market for intangibles (and other intermediate
inputs). As long as firms need to internalize markets for these inputs across
national boundaries, they will remain geographically diversified. One does not
need to assume that there are advantages that accrue to geographical
diversification per se.
In contrast, Kim et al. ascribe three major advantages to geographical
diversification: the ability to retaliate from multiple bases; greater operational
flexibility; and the reduction of risk through the portfolio diversification effect.
While the latter advantage has been discussed at length here, and its centrality
to geographical diversification has been shown to be in doubt, more theoretical
and empirical research should be devoted to the first two advantages. Kogut
(1985) for example, argues that being present in multiple markets allows
multinational firms greater options to shift production and markets between
countries. For this argument to carry, one must show that multinational firms,
with their network of international hierarchical relationships, are more flexible
than an equivalent network of arm’s length agreements.
We do not have the space to discuss this at length here, but one can think
of reasons why arm’s length relationships would be more flexible. One of them,
pointed out by Williamson (1985, pp. 150-15I), is the greater tendency in firms
to forgive errors and failings and the greater politicization of internal trades
(Williamson, 1985, pp. 152-153). The contrary argument is that the
multinational’s network of affiliates provides managers at headquarters with
a broader perspective (Root, 1973) while the greater alignment of incentives
within the firm may facilitate information transfer (Hennart, 1982) (assuming
that the firm’s subsidiaries are not run as separate profit centers). Before looking
at the macro impact of geographical diversification on performance, a more
fruitful line of inquiry would therefore be to investigate the extent to which
these hypothesized relationships hold at the firm level. It is worth noting that

the only piece of evidence on this subject is that of Rangan (1994). Rangan
investigated whether U.S. intrafirm trade responded as fully to the depreciation
of the U.S. dollar in the late 1980s as arm’s length trade. He found no substantial
difference between the speed of response of these two classes of exports,
supporting the view that multinational firms are not more flexible than markets
in adjusting to exogenous shocks.
Research Opportunities
In this section we have argued that the extension of the product
diversification-performance studies to the international arena is not likely to
be fruitful. Some of the reasons why we believe this approach not to be fruitful
are echoed in this paper’s next section. The lack of clearly articulated theories
of why geographical diversification pays, the lumping of all types of
geographical diversifications into a single variable, and the overambitious
attempt to find a macro-level relationship between this variable and
performance are unlikely to pay greater dividends internationally than they have
domestically.
Instead, resources need to be devoted to a better understanding of the
motives for geographical diversification. International business, fortunately, has
a number of well articulated theories of these motives, and some of the
arguments of the geographical diversification literature fare poorly when
confronted with these theories. Other arguments, however, raise interesting
issues, and offer great research opportunities. But they require an in-depth
attention to the underlying theories and to whether these theories are consistent
with the facts. In that sense, the redirection of research in international
geographic diversification (what should really be called international expansion)
is similar to that advocated for domestic product diversification in the next
section.
Key Research Issues in Corporate Strategy

The domain of corporate strategy is broad. The study of diversification strategy,
acquisitions, new ventures, and vertical integration can all be grouped under
the rubric of corporate strategy. In this section we do not intend to review and
comment upon all elements of this domain. Rather, given space constraints,
we will focus our attention upon that element of the domain that has
traditionally received the most research attention; namely, the study of the
relationship between diversification strategy and corporate performance.
Ever since Rumelt’s (1974) seminal work, the study of corporate
diversification has been a central theme in the strategy literature. In the twenty
years since Rumelt first published his work there have probably been more
empirical studies of diversification strategy and corporate performance than of
any other phenomenon of interest to strategic management researchers (for
detailed reviews see Datta, Rajagopalan & Rasheed, 1991; Ramanujam &
Varadarajan, 1989). Most of these studies have tried to answer the question
what is the relationship between diver.$cation strategy and corporate

performance? Given the great volume of work in this area, we need to ask: What
has been learned? Below we argue that the answer to this question is “very little!”
We shall explore four methodological reasons for the apparent failure of
strategy researchers to make a great deal of progress in the diversification area.
We will argue that each of these explanations for the failure of prior research
to make substantial progress also suggests substantial opportunities for future
research.
Prior Research
Table I summarizes the results of all empirical studies of the diversification
strategy-performance relationship published in either the Academy of
Management Journal or the Strategic Management Journal since 1980. Also
included in Table 1 are the results of a number of often quoted studies published
in other top tier journals (e.g., Wernerfelt & Montgomery’s 1988 American
Economic Review study). As such, Table 1 contains a summary of some of
the best diversification-performance studies undertaken to date (if we assume
that getting published in AMJ or SMJ is a signal of quality). Thus, while not
a truly representative sample, the studies contained in Table 1 may be
representative of the best studies that have looked at the diversification-
performance relationship.
There are 32 studies in all summarized in Table 1. Of these, 26 focused
explicitly upon the link between diversification strategy and corporate financial
performance. The remaining six looked at the link between the degree of
diversification and performance. Of the 26 studies that looked at the strategy-
performance linkage, I5 found that firms which pursued a related diversification
strategy outperformed those pursuing an unrelated strategy, nine found no
evidence of any performance differences between strategies, while two studies
found that unrelated firms outperformed related firms. Of the six studies that
looked at the relationship between the degree of diversification and
performance, two found a positive relationship between the degree of
diversification and performance, two found a negative relationship, while one
found an inverted U-shaped relationship, and one found no relationship. Not
exactly a clear picture! Nevertheless, one might argue that the balance of the
evidence favors the conclusion that moderately diversified firms that pursue a
strategy of related diversification can create value.
This, however, is a very tentative conclusion. It is based upon decidedly
mixed evidence. Moreover, the conclusion must be tempered by the realization
that the strength of the strategy-performance relationships reported in many
studies were weak, while the results themselves were often ambiguous, open
to conflicting interpretations, and in any case, probably an artifact of certain
methodological choices.
For an example of ambiguous and weak results, take Palepu’s (1985) study,
which introduced the entropy measure of diversification to the strategy
literature. Palepu’s (1985) study is usually counted among those that found
related diversified firms to have superior performance (we have followed this
practice in Table 1). However, Palepu found that related firms had superior

Table 1. Summary of Studies on Diversification Strategy and Performance in the Strategic Management Literature
Method
Study Measure Country Results Summary
Rumelt (1974) 1 1 Dominant-Constrained and Dominant-Related best performers. Related Most Profitable
Dominant vertical and Unrelated Passive were low performers.
Christensen & I 1 Performance differences found in Rumelt (1974) study linked to High Profitability of
Montgomery (198 1) characteristics of markets in which they operate. Related con- Related due to Industry
strained diversitiers operated in profitable concentrated
industries.
Bettis (198 1) 1 1 Related firms outperform unrelated firms. Related constrained High Profitability of
firms highest performers. Related constrained firms seem to Related due to Industry
operate in profitable industries.
Rumelt (1982) 1 1 Related constrained firms are highest performers. Related con- High Profitability of
strained firms seem to operate in profitable concentrated Related due to Industry
industries.
Bettis & Hall (1982) 1 1 Related constrained firms highest performers. Related con- High Profitability of
strained firms seem to operate in profitable industries. No evi- Related due to Industry
dence of differences in accounting risk across strategies. No Difference in Risk
Michel & Shaked (1984) 1 1 Unrelated firms outperformed related firms when compared Unrelated Best
against market based measures. Performers
Palepu (1985) 2 1 Related diversified tirms show better profir growrh than unre- Related better Profit
lated firms. Growth (Weak)
Montgomery (1985) 2 1 No significant relationship between diversification measures and No Performance
firm profitability after controlling for market share, industry Differences
concentration, and industry profitability.
Bettis & Mahajan (1985) 1 1 Looked at risk/return performance of large firms using account- On average, related firms
ing data to define risks and returns. Found that, on average, had better risk-return
related diversified firms had more favorable risk-return features performance than
than unrelated firms. A favorable risk/return performance is unrelated.
extremely hard to achieve for unrelated firms. Used analysis to
delineate risk-return groups.

Dubofsky & Varadajan 1 1 Found agreement between their “Rumelt” classifications and Convergent Validity
(1987) those done by Michel & Shaked (1984). No differences between Unrelated Best
ROA and diversification strategy, but on market based measures Performers
unrelated firms outperformed related.
Varadarajan & 1 Related diversified firms more profitable than unrelated diversi- Related Best Performers
Ramanujam (1987) fied firms.
Hoskisson (1987) 3 Related diversified firms outperformed both vertically integrated Related Best Performers
and unrelated firms. Adoption of M-form structure (the event)
depressed performance in vertically integrated forms, had no
effect in related firms, and improved performance in unrelated
hllS.
Amit & Livnat (1988) 2 2 Unrelated firms characterized by lower variability of cash flows. No Performance
No differences in profit performance among diversification Difference
types. Unrelated Lower Risk
Grant & Jammine (1988) 1 2 Diversified firms outperformed specialized firms. No evidence of Diversified Outper-
performance difference between related and unrelated. Did con- formed Specialized
trol for industry effects.
Hill & Snell(l988) 1 2 Extensive diversification negatively related to profitability. No High Diversification
difference between diversification category-both did poorly. Low Performance
Grant, Jammine & 122 2,4 Inverted U-shaped relationship between performance and degree Inverted U-Shaped
Thomas (1988) UK of diversity. Rumelt categories of little use in understanding this
relationship (they don’t adequately capture degree). Diversifica-
tion unrelated to subsequent changes in profitability, and current
profitability not related to changes in diversification.
Amit & Livnat (1988) 152 2 Related diversified firms had high returns and high risk. Unre- Related High Returns
lated firms had low returns and low risk. and High Risk
Keats & Hitt (1988) 1 1 Part of a larger study. Diversification had a positive impact on Diversified Firms had
risk-adjusted market returns and no relationship to accounting Higher Market Returns
returns. Strategic effects not broken out by diversification type. No Difference on
Accounting Returns

Table 1. (Continued)
Method
Study Measure Country Results Summary
Werner-felt & 2 2 Looked at impact of industry, focus (diversifications) and share Narrowly diversified
Montgomery (1988) effects on Tobins Q. Found that industry effects accounted for firms do better than
most of variance explained (19.48%) followed by focus effects widely diversified firms.
(2.61%). Narrowly diversified (focused) firms did better than
widely diversified firms.
Montgomery & Wemer- 2 2 Using Tobin’s Q to test the conjecture that large firms earn Rents decline as firms
felt (1988) decreasing average Ricardian rents as they diversify more widely. diversify away from their
Results suggest that the further firms must go to use their excess core business area.
factors of production, the lower the marginal rents they extract,
i.e. the more unrelated and extensive firm diversification is, the
lower rents. This does not mean that value is not being created,
however, only that rents decline.
Chang & Thomas (1989) 1 1 Diversification strategy per se does not have an impact upon No Performance
risk-return profiles. Differences in return across diversified firms Difference
explained by size (a proxy for market share) as opposed to
strategy.
Lubatkin & Rogers 1 1 Firms that adhered to related constrained diversification had the Related Constrained
(1989) highest risk-adjusted returns. Vertical strategies were associated Highest Risk Adjusted
with lowest risk adjusted returns. Unrelated firms had high risk Return
and moderate returns. Most of the variance due to difference in Due to Lower Syste-
systematic risk, not market returns. matic Risk
Hill & Snell(l989) 2 2 Related diversified firms had high productivity. Unrelated firms Related Best Performers
had low productivity.
Amit & Livnat (1988) 2 2 Develops and tests a measure of efficient corporate diversifica- Efficient diversifiers have
tion on a large sample of firms using accounting data. Found better risk return petfor-
that “efficient diversifiers” managed to reduce the variability of mance. Related iirms
their returns without sacrificing profitability (i.e., no risk-return tend to be efficient
tradeoff). Efficient diversfiers operate in related industries that diversitiers.
had differential responses to business cycle changes and thereby
enjoyed the benefits from related diversification while minimiz-
ing operating risk.

Simmonds (1990) 1 Looked at strategy and mode of diversification. Very weak evi- Related Best (Weak)
dence that related-internal diversifiers outperformed unrelated-
external.
Lubatkin 8c Chatterjee 1 Market returns. Firms which diversify by emphasizing a com- Related Lower Syste-
(1991) mon technological core (related) had lower levels of systematic matic Risk
risk-regardless of economic conditions (cycle). Related diversi- Related Higher Risk
tiers earn high risk adjusted stock returns in bear markets. No Adjusted Returns in
difference exists in bull markets. Bear Markets
Rumelt (1991) 2 Decomposed variance in returns of FTC line of business data No Performance
into industry, business unit, and corporate effects. Corporate Difference
effects (those that would arise from diversification) found to be
“astonishingly small.”
Hill & Hansen (1991) 2 Increased diversification was found to have a negative impact Diversification Resulted
upon lagged performance and lagged risk. Diversification is a in Low Profitability and
low risk-low return strategy. Low Risk
Davis, Robinson, 3 For firms in the pulp and paper industry, high degree of “maket- Related Best Performers
Pearce, & Park (1992) ing” relatedness associated with higher sales growth. High degree
of “production” relatedness associated with higher profitability.
Hill, Hitt & Hoskisson 2 No evidence of relationship between diversification strategy and No Performance
(1992) performance. However, some evidence of interaction effects Differences
between strategy and structure did have a beneficial impact upon Structural Fit Helps
performance.
Hoskisson, Hitt, l&2 Found strong evidence of convergent validity between Rumelt Convergent Validity
Johnson & Moesel and Entropy measures of diversification. Negative relationship Diversification and Low
(1993) between diversification and performance. Performance
Nayyar (1993) 3 Looked at diversification by service firms. Ability to exploit Related Diversification
information asymmetries had a positive effect on performance. Profitable Strategy-But
Attempts to exploit economies of scope had a negative effect on Caveats
performance-may be due to implementation difficulties.
Key Measure: 1 = Rumelt or quasi-Rumelt; 2 = SIC based (e.g. Entropy); 3 = Other.
Method: 1 = cross-sectional Fortune 500 or looO,2 = Cross-Sectional-Other, 3 = Event Study; 4 = Dynamic; 5 = not applicable.

profit growth, which is definitely not the same thing as superior profitability,
so his results are ambiguous and open to conflicting interpretations. Moreover,
Palepu’s results were, by his own admission, weak. The levels of statistic
significance in his study were marginal and the variance explained was small.
For an example of results that were an artifact of methodological choices,
consider Rumelt’s (1974) original study. Rumelt found that firms pursuing a
strategy of related constrained diversification were the most profitable, but
Rumelt did not control for industry effects in this study. His later work, which
did control for industry effects, found that the high profitability of related
constrained firms in his sample was due to industry factors (Rumelt, 1982). So
should Rumelt’s (1974) early study be counted as evidence in support of the
often articulated hypothesis that “related diversification creates value?”
Probably not, but it normally is. One might also note that despite the evidence
presented by a group of early researchers that the superior profitability of related
constrained firms was a function of industry membership, and not a function
of diversification strategy (Christensen & Montgomery, 1981; Bettis, 1981;
Rumelt, 1982; Bettis & Hall, 1982), many later researchers did not control for
industry effects when testing the diversification strategy-performance
relationship. One might conclude, therefore, that their results suffer from a
serious omitted variable problem, and may well be spurious.
The point here is not to pull apart prior studies, but merely to show how
suspect is the ground upon which conclusions drawn from such studies is based.
When all is said and done, we really do not have a very clear picture of the
relationship between diversification strategy and performance. This despite
twenty years of concentrated research effort on the part of scores of researchers,
and dozens of published articles. Why not? In the next section we will argue
that four methodological problems that are seemingly endemic in the field, and
can be found in most of the studies summarized in Table 1, help explain this
apparent lack of progress.
Methodological Problems
The four methodological problems that we shall focus on are the limitations
of cross-sectional studies, the general failure to explore implementation issues,
the over-reliance upon Rumelt’s (1974) original classification scheme, and the
corporate focus of most prior diversification research. We will argue that the
failure of most studies to address even one of these methodological problems
raises serious questions about the value of their results.
The Limitations of Cross-Sectional Work
With a handful of exceptions, the studies reported in Table 1 are all cross-
sectional (the exceptions include Grant, Jammine & Thomas, 1988; Hill &
Hansen, 1991; Hoskisson, 1987). Cross-sectional work suffers from two serious
problems. The first is the well known inability of cross-sectional research to
distinguish cause from effect. To illustrate the problem, let us take at face value
the popular conclusion that the strategy of related constrained diversification
is associated with superior corporate performance. This conclusion is based

upon cross-sectional work. Those who argue for this relationship tend to claim
that the causal linkage runs from strategy to performance, but it could just as
well run the opposite way. It may well be that profitable firms have a tendency
to embark upon a diversification strategy, and that their first choice is to
diversify into closely related areas that they know something about (for
empirical evidence that is consistent with this interpretation see Hill & Hansen,
1991). This would certainly give rise to a positive correlation between related
constrained diversification and corporate performance in any cross-sectional
study, but the underlying causal chain would flow from profitability to
diversification strategy, and not the other way around. In other words, a positive
correlation between the strategy of related constrained diversification and
profitability can not be taken as evidence that this strategy gives rise to superior
performance. The opposite conclusion is equally plausible.
A second problem with cross-section research, and it is one that has far
more serious consequences than the inability to distinguish between cause and
effect, is that a simple cross-sectional methodology does not allow the researcher
to control for the impact of unobservable factors on firm performance.
Unobservable factors include such factors as managerial skills and
competencies, technical know-how, and tacit organizational routines. The
resource based view of the firm argues that such factors may be a prime
determinant of firm performance (e.g., Barney, 1991). Yet such factors are
buried deep within an organization where they are difficult to observe and
measure. This presents researchers with a difficult problem. If such important
factors are not controlled for in a regression analysis a serious omitted variable
problem arises and the results of any analysis are likely to be spurious.
However, one should not think that just because a variable cannot be
observed and measured, it cannot be controlled for. In a series of influential
papers, Jacobsen (1988, 1990) has shown how unobservable factors can be
controlled for by using a pooled time series research design (i.e., panel data)
and auto-regression models. Unobservable factors show up as serial correlation
in pooled time series data. The effect of serial correlation can then be factored
out using auto-regression techniques. Taking such an approach, Jacobsen has
empirically demonstrated that many of the relationships so beloved by PIMS
researchers, such as the often reported positive relationship between profitability
and market share, are in fact spurious (Jacobsen, 1990). We suspect that if a
similar methodology were applied to the study of corporate diversification,
many of the relationships documented in prior studies would also turn out to
be spurious.
Implementation Issues
A second major problem with the vast majority of corporate diversification
research is that the issue of implementation has been ignored. This is
unfortunate, it is now thirty years since the publication of Chandler’s (1962)
Strategy and Structure. In that book, Chandler clearly suggested that the impact
of diversification strategy on firm performance is moderated by organizational
structure. In particular, in order to create value from a diversification strategy,

firms must have a multidivisional (M-form) structure in place. Moreover, it is

important to realize that M-form structures do not constitute a homogeneous
set of organizational arrangements (Hill & Pickering, 1986). There are well
designed M-form structures, and poorly designed M-form structures, and only
the former will allow a diversified firm to achieve superior performance.
Most diversification research has adopted the following model:
Performance = f (Diversification Strategy) (1)
In doing so, researchers have assumed, we think incorrectly, that there is no

variance in the efficacy of organizational structure across firms. We think that
the correct model is the following:
Performance = f (Diversification Strategy. Organizational Structure) (2)
Testing this model requires the collection of detailed data on internal

organizational arrangements, not an easy task, but one that is possible.
Moderated regression analysis can then be used to test for the impact of an
interaction between diversification strategy and organizational structure on firm
performance (for a recent example see Hill, Hitt & Hoskisson, 1992).
Alternatively, one might choose to treat organizational structure as an
“unobservable variable”and control for its impact upon firm performance using
a methodology similar to that adopted by Jacobsen (1990). Either way, it must
be recognized that the assumption that organizational structure is invariant
across firms, which is implicit in most prior research on diversification strategy,
is simply untenable.
Rumelt S Scheme
We have all become prisoners of Rumelt’s (1974) classification scheme. To
get published in a refereed journal, a study on diversification strategy is usually
required by referees and journal editors alike to utilize this scheme, or some
variation of it. Thus, the vast majority of the studies reported in Table 1 utilize
Rumelt’s scheme. The popularity of the scheme is a testament to the advantages
of being first. In no small measure, its popularity also derives from the fact
that it is easy to use.
On the one hand, the insistence that researchers use Rumelt’s scheme makes
some sense; it does allow for a minimum of comparison across studies. One
can argue that it is perhaps better to decide upon a scheme and then stick to
it, than have researchers each inventing their own unique way of measuring
diversification. On the other hand, the insistence that researchers utilize
Rumelt’s scheme can be seen as imposing a methodological and theoretical
straightjacket upon the field. While this may be acceptable if the construct is
theoretically robust, if Rumelt’s scheme is flawed in important respects, the
dominance of this construct becomes a recipe for a lack of progress. We fear
that this may be the case.

The essential problem with Rumelt’s scheme is that it lumps together the
different economic benefits that might arise from diversification and treats them
as synonymous. The scheme is coarse grained and crude. Theory states that
there are at least four sources of economic benefit available to diversified firms.
These are the ability to realize value from economies of scope, from superior
internal governance, from the transfer of core competencies among businesses,
and from the joining together of complementary assets (Jones & Hill, 1988;
Williamson, 1985; Teece, 1982). A firm that is classified by Rumelt’s scheme
as pursuing a strategy of related diversification may in fact be creating value
by pursuing all four of these sources of benefit simultaneously (Jones & Butler,
1988). Alternatively, it may be focusing upon just one source of benefit, or two
sources, or three sources. Similarly, a firm that is classified by Rumelt’s scheme
as pursuing a strategy of unrelated diversification may be creating value through
efficient internal governance and/ or by transferring certain core competencies
(general management and organizational skills) across business units. Rumelt’s
scheme, however, glosses over such theoretically based distinctions. It assumes
that firms assigned to the same diversification category are focusing upon the
same set of economic benefits, when in fact they may not be. The scheme treats
firms that are dissimilar as essentially similar, and is therefore incorrect.
Given this, a more fruitful approach might be to place Rumelt’s scheme
to one side and instead classify firms according to the economic benefit that
they are attempting to realize. While this is a methodologically difficult
proposition, it is not impossible. For example, semi-structured interviews and
surveys might be used to identify the way(s) in which a firm is trying to create
value from diversification, in much the same way as researchers have used these
techniques to try to distinguish among different variations of the multidivisional
structure (Hill & Pickering, 1986). In any event, such an approach is preferable
to continuing to rely upon a classification scheme that has the virtue of being
easy to use, but which is also seriously flawed.
Corporate Focus
Almost all diversification research focuses upon the link between corporate
strategy and corporate performance. The problem with this approach is that
if there is value to be created by a diversification strategy, it is at the business
level where its effect will be most apparent. By focusing upon the impact of
diversification strategy on corporate performance, this effect may be masked.
For purposes of illustration, consider a firm that has four product divisions,
A, B, C, and D, each of which is active in a different business area. Product
divisions A and B are successfully sharing resources in order to realize economies
of scope. As a result, they are each more profitable than they would be if each
was a free standing single business firm in its own right. Diversification, in other
words, has created value for divisions A and B. However, divisions C and D
may be unrelated to divisions A and B, and division D may be suffering from
financial problems. As a result, when performance is consolidated at the
corporate level, the beneficial impact that diversification has upon product
divisions A and B is masked by the poor performance of division D, and one

might conclude that diversification has not created value for this firm, when
in fact it has.
The real issue here is that old methodological bug bear, unit of analysis.
Researchers have assumed that the proper unit of analysis for diversification
studies is the corporation as a whole. We maintain that if not incorrect, this
is at least a debatable point and should not be taken as a given. The proper
unit of analysis may be the individual business unit. Perhaps the research
question that should be asked is does a business unit benefit from being part
ofa diversifiedfirm? If this question can be answered in the affirmative, one
can argue that diversification does create value. Methodologically, one way to
address such a question might be to undertake a matched pairs analysis,
comparing the performance of individual business units against the performance
of comparable free standing firms. Of course, collecting the data to undertake
such an analysis would not be easy, but who said that science was easy? Another
way forward might be to build upon Rumelt’s (1991) recent work using the
FTC line of business data to partial out the impact of “corporate effects” on
business unit performance.
Research Opportunities
In sum, each of the four criticisms discussed above represents a research
opportunity. Twenty years of research on the issue of corporate diversification
has not produced much in the way of intellectual dividends. We believe that
it is time for a fresh approach, and that some of the ideas sketched out here
represent the way forward. Specifically, we urge empirical researchers to attempt
one or more of the following: (1) utilize pooled time series data and auto
regression techniques to control for unobservable effects and to disentangle
cause and effect relationships; (2) focus on issues of strategy implementation
within diversified firms; (3) focus on the source of economic benefit from
diversification, as opposed to utilizing Rumelt’s scheme; and (4) adopt the
business unit as the unit of analysis in diversification studies, as opposed to
the corporation as a whole. We believe that by adopting such a fresh approach
the field might begin to make progress in tackling this vexing issue.
Research in Business-Level Strategy:

Substantive and Methodological Considerations
Whereas corporate-level strategy deals with the question of what businesses
to compete in, business-level strategy is concerned with “how should a business
position itself among its rivals to achieve its goals?” (Schendel & Hofer, 1979,
p. 12). As such, business-level strategy is critical to the success of a firm; it is
here that businesses compete directly with others for sales and profits in the
marketplace. Competitors may take the form of either a small independent firm
or business-unit of a diversified firm.
Over the years, several typologies of business-level strategies have been
advanced. These include Buzzell, Gale and Sultan’s (1975) building, holding,
and harvesting; Utterback and Abernathy’s (1975) maximizing performance,

maximizing sales, and minimizing costs; Hofer and Schendel’s (1978) share
increasing, growth, profit, and liquidation; Vesper’s (1979) multiplication,
monopolizing, specialization, and liquidation; Miles and Snow’s (1978)
prospectors, defenders, analyzers and reactors; Wissema, Van der Pol and
Messer’s (1980) explosion, expansion, continuous growth, slip, consolidation,
and contraction; Abel’s (1980) dimensions of scope of offerings, degree of
competitive differentiation, and extent of differentiation across product-market
segments; and Miles’ (1982) domain offense and domain defense. However, the
framework which has spurred the most theoretical refinement and empirical
analysis is Porter’s (1980). Accordingly, this section will draw extensively on
theory and research based on his work. He suggests that differentiation, overall
low cost, and focus are the strategies which provide firms with the ability to
attain a competitive advantage and outperform rivals in an industry. In addition,
over the last few years, quick response (or speed) has become increasingly
recognized as an important additional source of competitive advantage (Stalk,
1988; Bower & Hout, 1988; Hughes, 1990; Thomas 1991). In today’s rapidly
changing global business environment, managers must often not only provide
superior or unique products and/or be cost leaders, but also must respond
quickly to changing technological and market demands.
This section of the paper will address substantive and methodological
considerations associated with three issues which we believe hold promise for
furthering our understanding of the concept of competitive advantage. The first
two relate directly to the forms of competitive advantage: (1) Are they
multidimensional? and (2) Can they be effectively combined to enhance firm
performance? The third issue addresses ways in which the resource-based model
(Barney, 1991) can contribute to our understanding of how a firm can attain
a sustainable competitive advantage.
Are Generic Strategies Multidimensional?
A central challenge of research in the social science is addressing tradeoffs
involving generalizability, accuracy, and simplicity (Weick, 1976). Theory
building and research associated with sources of competitive advantage is, of
course, no exception. As noted by Miller, several refinements of Porter’s (1980)
framework (Galbraith & Schendel, 1983; Hambrick, 1983; Miller & Friesen,
1986; Mintzberg, 1982) “have responded with detailed and elaborate typologies
of their own, partly in reaction to the simplicity of earlier schemes and partly
in the attempt to give them a more solid empirical base”(1992, p. 392). However,
such complexity or accuracy comes at a cost of intuitive appeal and parsimony.
Miller (1986; 1988), on the other hand, distinguishes between two types of
differentiation-marketing and innovation-and later suggested and provided
empirical support for the third-quality (Miller, 1992). It would appear that
such a perspective would achieve greater “accuracy” without a burdensome
decrease in parsimony. Other writers have suggested alternate viable means of
attaining a low cost competitive advantage-cost reductions achieved through
factors including economies of scale, economies of scope, and learning effect.
Further, Dess and Rasheed (1992) proposed that costs can also be lowered

through the use of low cost labor, reduction of labor content, or by procuring
various inputs at costs below rivals. Dimensions of focus strategies have been
suggested and empirically confirmed by Nayyar (1992). He recently found that
large service firms which focus on selected customer segments outperform firms
that focus on their internal capabilities or geographic regions. Finally,
dimensions of speed or quick response have been suggested by Vesey (1991)
including engineering, production, sales response, and customer service. His
examples of how firms became “time-to-market accelerators” include cross
functional coordination (“Team Taurus” at Ford Motor, Boeing’s Ballistic
Systems Division, and BMW 850i automobile), outsourcing (Amdahl
Corporation), and changes in internal organization design (Sun Microsystems).
Other dimensions of speed would include marketing efforts, customizing
products, and developing new products. The dimensions suggested above for
each of the forms of competitive advantage are not, of course, intended to
comprise an exhaustive list.
The value chain concept suggested by Porter (1985) may provide a useful
framework for understanding the multiple means available to firms to enhance
their low cost position, differentiation or quick response. That is, any firm could
improve its competitive position along any one or all of the three forms through
enhancements in any of the primary (e.g.,inbound logistics, marketing) or
support (e.g., technology development, procurement) activities.
The issue of dimensionality of the forms of competitive advantage suggests
several promising research opportunities. First, are the forms of competitive
advantage unidimensional or multidimensional? For example, are the types of
differentiation (marketing, innovation, quality) suggested by Miller (1992)
independent of each other or do they covary? If they are independent, from a
methodological standpoint many measures of differentiation may be subject to
aggregation errors. This, in turn, could lead to misleading normative theory.
Second, types of differentiation, overall low cost, or quick response may have
very different performance implications across industry settings. For example,
an innovation-based differentiation strategy may be more appropriate for
industries in the early stages of the market life cycle than a quality-based
innovation strategy. Or, a quick response strategy emphasizing fast delivery of
replacement parts would be more likely to enhance a firm’s position in the earth
moving equipment industry (due to expensive downtime) than a quick response
strategy focused on developing new products. In addressing the above two issues,
the generalizability, accuracy, and simplicity tradeoffs (Weick, 1976) must be
recognized. As we discussed earlier in this section, efforts at developing more
fine-grained dimensions of each of the three forms of competitive advantage can
result in a significant reduction in terms of parsimony. Researchers must strive
to match the complexity with which they conceptualize and operationalize the
forms of competitive advantage with the research question they are investigating.
Combining Forms of Competitive Advantage
Porter has not always been consistent on the viability of combining generic
strategies. Sometimes he advocates adherence to a single strategy:

. . . if a firm is to attain a competitive advantage, it must make a choice

about the type of competitive advantage it seeks to attain and the scope
within which it will attain it. Being ‘all things to all people’ is a recipe
for strategic mediocrity and below-average performance, because it
often means that a firm has no competitive advantage at all (Porter,
1985, p. 12).
At other times, he takes a contradictory position:
. . . at the broadest level we can identify three internally consistent

generic strategies (which can be used singly or in combination) for
creating such a defensible position in the long run and outperforming
competitors in the industry (Porter, 1980, emphasis added).
Although Porter qualified his position on the inappropriateness of combining

competitive advantages, he provided two specific exceptions. First, a tightly
focused business, for example, one with a narrowly defined strategic target may
be able to attain both a low cost and a highly differentiated position at the
same time. Such a combination is considered unlikely to occur in firms serving
more broadly defined markets because of the complexity of serving many
different market segments. Second, Porter suggested that a combination may
be plausible if a firm were the sole producer of a new innovation. Since successful
innovations may be copied by competitors or diffused throughout the industry,
such an enviable opportunity may be short-lived.
There is a vast body of both theory development and empirical research
to support the economic viability of combining generic strategies (e.g., Miller
& Dess, 1993). In addition, even casual observation of business practice (e.g.,
Toyota, Lincoln Electric) strongly supports effective combination strategies.
Hall’s (1980) research is among the earliest studies which supported the
viability of combining generic strategies. He found that the most successful firms
in his sample of companies competing in low-profit industries effectively
combined differentiation and overall low cost strategies. In Dess and Davis’
(1984) study of 21 firms in the paints and allied products industry, the highest
performing firms also combined multiple generic strategies. Kim and Lim (1988)
found that the highest performing firms in the Korean electronics industry
combined elements of cost leadership and differentiation. Wright, Hotard,
Kroll, Chan and Tanner (1990) and Wright, Kroll, Tu and Helms (1991) studied
67 firms in the apparel industry and 56 firms in the screw machine industry.
In the former study, the top performers identified with differentiation, focus,
and overall low cost strategies; in the latter study, the top performers effectively
combined differentiation and overall low cost strategies. And, recently Miller
and Dess (1993) studied 1,789 business units from the PIMS data base and
found that businesses which combined multiple forms of competitive advantage
outperformed businesses which only were identified with a single form. As
expected, the lowest performers, consistent with much prior research, were those
businesses classified as “stuck in the middle.”

Table 2. Combining Generic Strategies: Theoretical Perspectives

Source Excerpt
Hambrick (1983, . . . some attributes of a business may indicate a value for one of the
p. 689) dimensions without indicating anything about the other two. For exam-
ple, employee productivity says something about the efficiency of the
business without saying anything about its differentiation or scale/ scope.
Thus the three dimensions (efficiency, differentiation, scale/scope) are
taken to be conceptually distinct, even if correlated.
Miller & Friesen consumer durable producers . . can more easily create an image of qual-
(1986, p. 39) ity via advertising. If the firm is unfocused and has a high market share
it can enjoy important economies of scale in both advertising . . . and
production . . . Larger, more diversified firms spread advertising and
other marketing costs over more units. They can also create a favourable
brand image that generalizes to a number of different lines. This may
allow them to pursue a strategy of marketing-oriented differentiation as
well as one of cost leadership.
Hill (1988, p. 404) The ability of differentiation to help the firm achieve a low-cost position
depends on two factors: the extent to which expenditure on differentia-
tion significantly increases demand, shifting the demand curve to the
right, and the extent to which significant reductions in unit costs arise
from increasing volume.
Murray (1988, . . . the exogenous preconditions for a viable cost leadership strategy stem
p. 395) principally from an industry’s structural characteristics. The precondi-
tions for product differentiation stem primarily from customer tastes.
Because these two sets of exogeneous factors are independent, the possi-
bility of a firm pursuing cost leadership and product differentiation
simultaneously is not precluded.
Jones & Butler cost leadership and differentiation . . are subject to the same underlying
(1988, p. 212) cost trade-offs. Further, because transaction costs are the main compo-
nent of differentiation and production costs the main component of cost
leadership, the differences between strategies are ones of degree rather
than kind; each strategy is some combination of differentiation and low
cost . . . there may be conditions in certain industry settings in which the
two strategies are simultaneously achievable.
Wright et al. . . select strategic accomplishments may simultaneously lower costs and
(1991, p. 2) heighten differentiation independent of scale of operations. These
accomplishments may encompass quality improvement efforts (Crosby,
1979), process innovations (Haas, 1987), product innovations (Miles,
1982) and systems innovations (Gluck, 1980).
Such empirical findings support theoretical development on the viability

of combining competitive advantages. Jones and Butler (1988) and others have
suggested that generic strategies should be viewed as dimensions of strategic
positioning as opposed to mutually exclusive entities. Table 2 presents some
of the theoretical arguments that have been suggested for the presence and
viability of combination strategies. These include the nature of industry
structural characteristics and customer tastes (Murray, 1988), the impact of
strategic accomplishments such as quality improvement efforts and process

innovations (Wright et al., 1991), transaction costs, production costs, and

revenues (Jones & Butler, 1988), and the independence of strategy dimensions
(Hambrick, 1983).
Empirical analysis of the viability of combining forms of competitive
advantage should include the structural implications of such efforts. For
example, an interesting research issue would be how changes in organization
design can enhance a firm’s sources of competitive advantage. How, for
example, do innovative organizational forms such as modular (Huber, 1993;
Q uinn, 1992), network (Bartless & Cerny, 1993; Ohmae, 1989), and
boundaryless (Devanna 8z Tichy, 1990; Hirschhorn & Gilmore, 1992) improve
differentiation, lower costs, and enhance speed? What types of integrating
mechanisms (Galbraith & Kazanjian, 1986) and changes in structure (e.g.,
“delayering”) help a business both to lower costs and quicken response in a
given competitive context?
Methodological attention could be directed at enhancing the validity of
forms of competitive advantage. For example, in addition to using both archival
and perceptual sources as methods of measurement, Reger and Huffs (1993)
cognitive approaches hold promise. They found that when “industry
participants share perceptions about strategic commonalities among firms, . . .
(they) cluster competitors in subtle ways not reflected in extant academic
research on strategic groups” (1993, p. 103). Too often researchers tend to rely
on existing scales without sufficient adaptation to a given research context. This
serves to inhibit one from capturing the reality, richness, and idiosyncrasies of
both the dimensionality of forms of competitive advantage as well as their
relationships to one another. Researchers should also endeavor to capture the
dynamics of changes in competitive advantages (and combinations thereof)
through the use of longitudinal analysis. Promising efforts in this area include
Zajac and Shortell’s (1989) analysis of strategy/ environment combinations over
time in the highly regulated health care industry and Mascarenhas and Aaker’s
(1989) analysis of the role of mobility barriers in affecting changes in strategic
group membership in the oil drilling industry over time.
The Resource-Based Model and Competitive Advantage
In the past decade few areas in strategy have drawn as much interest as
the resource-based model (see Barney, 1991 and Mahoney, 1992 for
comprehensive reviews). This model suggests that “a firm’s distinctive
competence is based on the specialized resources, assets and skills it possesses,
and then focuses attention on the optimum utilization of these to build
competitive advantage and thus economic wealth” (Seth & Thomas, 1994).
Resources may be in the form of tangible assets such as advanced technological
processes or attractive distribution center locations or intangible assets such as
reputation for outstanding customer service or a culture exemplified by a strong
work ethic. Underlying assumptions of the model are that resources are both
heterogeneously distributed among competitors and are not perfectly mobile.
The resource-based model’s primary research objective is to combine the
analysis of a firm’s internal strengths and weaknesses with an analysis of its

external environment. Thus, it provides an important step beyond value chain

analysis (Porter, 1985) and SWOT analysis (e.g., Learned, Christensen,
Andrews & Guth, 1969) since it provides a framework for identifying what
activities within a firm’s value chain are sources of sustainable competitive
advantage. Barney (1991) identifies four criteria which a resource must satisfy
in order for it to provide a firm with a sustainable competitive advantage:
valuable, rare, imperfectly imitable, and nonsubstitutable.
Perhaps much of the attractiveness of the resource-based model, in
business-level strategy, lies in its promise for stimulating theory and research
from multiple perspectives and methodologies (see Mahoney & Pandian, 1992).
Hollis (1994), for example, drawing on the industrial organization (IO)
perspective, tested the hypothesis that the structure-performance relationship
in the traditional IO structure-conduct-performance framework (SCP) differs
along industries depending upon which resource is most critical. By using a
value-added intensity measure of three variables-capital, advertising, R&D-
to identify competitively relevant resources, his findings suggest that industries
are heterogeneous and that “differences in the SCP relationships do result from
the competitive interaction over the acquisition of different resources” (p. 25).
Other research has relied on survey questionnaires to assess industry differences
in strategic factor markets and their relationship to financial performance
(Powell, 1992) and in-depth case analyses to assess the role of intangible
resources in business strategy (Hall, 1992). Powell found that there was not a
significant positive correlation between planning and performance in an
industry (wood upholstered furniture) in which strategic planning was widely
diffused; whereas there was a significant positive relationship in an industry
(women’s dresses) where planning was not widely diffused-what he termed
a “planning disequilibrium industry.” Among Hall’s findings was that employee
know-how and reputation were perceived by top UK executives as the resources
most important to success.
In addition to the above, a promising area for research in the resource-
based framework is in determining how organizational behavior with its
emphasis on socially complex intraorganizational behavior can provide an
important source(s) of sustainable competitive advantage (Barney, 1992). These
resources, which include culture, friendship ties, effective teamwork, values, etc.
“enable an organization to conceive, choose, and implement strategies because
of the values, beliefs, and symbols, and interpersonal relationships possessed
by individuals or groups” (Barney, 1992, p. 44). Thus, research would serve to
combine both “content” and “process” issues, for example, both formulating
and implementing strategies. Studying the presence of such resources and their
possible linkage to competitive advantage would be facilitated by fine-grained
methodologies (Harrigan, 1983) such as in-depth case studies. These
methodologies would enable researchers to capture the complex, idiosyncratic,
and unique nature of a firm’s internal organizational processes and assess the
extent to which the processes satisfy Barney’s (199 1) four criteria for achieving
sustainable competitive advantage. As noted by Peteraf (1993), for example,
a brilliant Nobel prize-winning scientist, although a unique resource, would not

be a source of sustainable competitive advantage unless she has firm-specific

ties. That is, is her productivity in part dependent on her relationship with peers
or the unique culture of the firm? If not, perfect mobility would likely keep
this individual from becoming a source of sustainable competitive advantage.
Two examples from one of the author’s recent field research may also help to
illustrate the important role of complex social resources in attaining sustainable
competitive advantage. First, a medium-sized publishing firm implemented
digital processing technology-a “content” issue. Not only did this help to
reduce costs and improve image quality, but it also reduced turnaround time
from eleven weeks to nine weeks. The improved turnaround is particularly
important given the highly seasonal nature of the business-high school and
college yearbooks. However, by studying the competitive context and the
effectiveness of the implementation (i.e., the relationship of the technology to
other systems, work group processes and relationships, production norms, etc.)
one would be able to assess whether or not the competitive advantage would
be temporary or sustainable. That is, how rare, valuable and easily imitated
by competitors is this technology? Are the competitors implementing
technologies as well (or better)? Are there viable substitutes with better cost/
benefit tradeoffs?
Second, the president of a large computer services firm asserted that
relationships across business units were facilitated by his company’s reward
system which consisted of corporate, division, and business “multipliers,” as
well as “personal goals and objectives.” At first glance, this could hardly satisfy
all four of Barney’s criteria. However, in-depth analysis could reveal how (and
whether) the firm’s culture, values, teamwork, and other organizational
processes made this reward structure effective (as contended by the president).
Some analysis of the firm’s competitors would also be necessary to determine
the value, rareness, and inimitability of this resource, and thus, whether or not
it can provide a base for sustainable competitive advantage. Although this firm’s
reward system may appear to be outstanding (as well as a source of sustainable
competitive advantage), perhaps competitors such as EDS and Arthur
Andersen Consulting may have even better reward systems.
As noted earlier in this section, the reliability and validity of research on
competitive advantage could be enhanced from the use of multiple sources of
data. Secondary data sources could be supplemented by primary data gathered
from a firm’s executives, industry informants and experts, governmental
officials such as those sector professionals from the Department of Commerce,
competitors, suppliers, and customers. It would be inappropriate to assess
Barney’s (1991) four criteria on the basis of primary and secondary data
available within the firm. Given the important role of the competitive context,
data gathering must extend beyond the focal firm and include the industry
structural dynamics and key competitors.
The use of additional data sources needs to also be complemented with
improvements in the operationalizations of key constructs. Again, the inclusion
of both industry and organizational participants would minimize the potential
for strict reliance on research interpretation of observed phenomena.

Executives’ judgments concerning resource rareness, value, imitability and

nonsubstitutability could be used as alternate operationalizations of these
constructs in resource-based strategy content or process studies. Alternately,
executive judgment may be useful in providing insight into resource-related
strategic choices (Priem & Harrison, 1994).
Finally, the resource-based research must recognize that the resources
associated with a firm’s value chain activities at one point in time-although
perhaps a source of competitive advantage-may become obsolete due to
external changes in the competitive and/ or regulatory environment.
Increasingly, flexibility and the ability to anticipate change are becoming more
important in today’s global environment. As noted by Ulrich and Wiersema
(1989), in turbulent business environments, organizations must enhance their
strategic capability (e.g., establish strategic visions, create strategic unity,
develop continual competitor scanning) as well as organizational capabilities
(e.g.,, encourage transformational leadership, increase capacity for change,
manage organizational practices). Such capabilities inherently involve both
content as well as process dimensions and necessitate assessing the competitive
context, strategy content, and complex social processes. Here again, the
resource-based model provides a useful framework and intensive case
methodologies are encouraged. Addressing such research questions hold great
promise for enhancing normative and descriptive theory in strategic
management.
Integrative Research Across Levels In Strategy
This section of the paper aims to identify some of the more important
research issues that cut across the three levels of strategy: corporate, business,
and international. To start with, we would like to suggest that there exist at
least three different approaches for multi-level research: (1) the additive
approach, (2) the comparative approach, and (3) the interdependency approach.
“Additive” research across levels refers to studies which look at the joint
(additive but not interactive) effect of strategy at multiple levels on some
outcome variable. Additive research begins with the premise that values of some
outcome variable depend on the strategic context at multiple levels; thus, it is
critical that any attempts to uncover the outcome impact of strategic context
at one level control for the potential confounding effect of strategic context(s)
at other levels. Some illustrative examples of additive multi-level research are
Christensen and Montgomery (198 l), Gupta (1987), and Geringer, Beamish and
daCosta (1989). Christensen and Montgomery (198 1) examined the joint effect
of business unit level variables (e.g., industry structure) and corporate-level
variables (e.g., product diversity) on corporate performance. Gupta (1987)
examined the joint effect of corporate strategy (e.g., product diversity) and
business unit strategy (e.g., strategic mission and competitive posture) on the
nature of corporate-SBU interaction. Finally, Geringer et al. (1989) examined
the joint effect of corporate strategy (e.g., product diversity) and international
strategy (e.g., geographic diversity) on corporate performance.

“Comparative” research across levels refers to studies which compare the

strength of relationships between certain variables across the different levels of
strategy. An illustrative example of comparative research would be a yet-to-
be-done study which compared the strength of linkages between general
manager characteristics and organizational performance across different levels.
As Hambrick and Finkelstein (1987) have argued, the extent of “managerial
discretion”is not uniform across organizations and depends on many exogenous
as well as endogenous variables. Thus, in addressing a question such as “does
leadership matter?” an argument could be made that, on average, focal
leadership would have the greatest impact on performance at the level of foreign
subsidiaries, an intermediate level of impact at the level of the whole
corporation, and the lowest impact at the level of domestic business units.
Similarly, comparative studies across levels could be done on issues such as
“the risks of agency loss” and “the choice of appropriate governance
mechanisms.”
We should also point out that, in general, additive multi-level studies also
have a comparative perspective to them. Thus, for example, Christensen and
Montgomery (1981) not only examine the effect of corporate strategy on
corporate performance after controlling for the effect of business unit level
variables, but they also compare the relative strength of the two sets of variables
in explaining corporate performance. However, it should be noted that while
any additive study can also be interpreted in comparative terms, the reverse
is not necessarily true; for example, every comparative study cannot also be
interpreted in additive terms. To illustrate, a comparative multi-level study on
“does leadership matter?” would be strictly comparative without any additive
features to it.
In contrast to the additive and comparative perspectives, the
“interdependency” approach focuses on either of two types of issues: (1) the
interactive effect of strategy at multiple levels on some outcome variable, for
example, a yet-to-be-done study on the interactive impact of corporate and
international strategy on the role of the country manager, and (2) the effect
of strategic variables at one level on those at another level, for example, a yet-
to-be-done study on the impact of corporate strategy on the creation and
sustenance of competitive advantage at the business unit level. Relative to the
additive and comparative approaches, the interdependency approach is not only
the potentially most fruitful one in terms of yielding new insights, it is also the
one that has been utilized to the least degree in extant strategy research. In order
to help redress this major deficiency, the rest of this section will focus on
identifying several largely unexplored research issues in strategy that are rooted
in an “interdependency across levels” approach.
Interdependencies Between the Corporate and Business Levels
Impact of corporate strategy on SBU-level performance. As concluded
by Summer et al. (1990) in their review of research in strategy, the impact of
corporate strategy on corporate performance has been one of the major topics
of investigation over the last two decades. As summarized in an earlier section

of this paper, the results of this stream of work at best remain inconclusive.
We would like to argue here that one major reason behind the inconclusive
nature of these results has to do with the fact that corporate performance is
an indirect (rather than direct) outcome of corporate strategy and that, by and
large, extant research has overlooked the significance of this indirectness.
Note that, in any multibusiness company, corporate performance is
computed by aggregating the performance of the various constituent businesses.
Thus, for theory development regarding the corporate strategy-corporate
performance linkage, it is important first to theorize about the direct impact
of corporate strategy on SBU-level performance. More precisely, the following
“multi-level integrative” question emerges as an important area for future
research: How can one decompose the impact of corporate strategy (i.e., extent
and type of diversification) on an individual SBU’s competitive position in terms
of the following elements: (1) impact on the SBU’s market power, (2) impact
on the SBU’s ability to understand market needs, (3) impact on the SBU’s ability
to differentiate its product-service mix from those of competitors, (4) impact
on the SBU’s cost structure, and (5) impact on the riskiness of the SBU’s earnings
and cash flow stream?
Impact of SBU-level resource characteristics on corporate strategy. Vir-
tually all existing research on corporate strategy has been rooted in a
comparison between related and unrelated diversification. Note, however, that
the direct alternative to “related diversification” is “external strategic alliances”
and not unrelated diversification. Similarly, the direct alternative to “unrelated
diversification” is “capital market governance” and not related diversification.
Thus, any explanation of why related or unrelated diversified firms exist must
be rooted in explanations of when and why (1) intra-corporate resource sharing
is superior to external strategic alliances, and (2) internalization of the capital
market is superior to external capital market governance.
Take, for example, the case of related diversification as illustrated by the
case of United Airlines under Richard Ferris, its former CEO. In order to
capture potential marketing synergies between air travel, hotels, and car rentals,
Ferris converted United Airlines into Allegis Corporation, a travel-related
diversified company, which owned United, Hilton Hotels, Westin Hotels, and
Hertz. However, unlike United, American Airlines pursued the capturing of
these synergies not through corporate diversification but through strategic
alliances with Sheraton Hotels and Avis Rent-A-Car. As it turned out, in this
context, the external alliance approach proved to be the more efficacious one
and, eventually, Ferris was forced out and Allegis disbanded. As this example
illustrates, in virtually all instances where potential synergy exists, the company
must choose between two distinctly different organizing modes: related
diversification vs. strategic alliances. How are these choices made and what
factors determine when one or the other approach will prove to be more
efficacious? In an initial attempt at addressing this question, Gupta and Singh
(1993) have suggested that the answer may lie in the characteristics of SBU-
level resources that need to be pooled in order to yield synergistic gains.

Similarly, it is conceivable that the relative efficacy of unrelated

diversification vs. external capital market governance may depend at least partly
on the nature of the SBU-level resources that need to be “governed.” Thus,
more broadly stated, the following integrative multi-level question also emerges
as a potential avenue for future research: How do SBU-level resource
characteristics affect the relative efficacy of related diversification vis-a-vis
external strategic alliances and unrelated diversification vis-a-vis external capital
market governance?
Impact of SBU strategy on corporate control. As Chandler (1962), Vancil
(1980), Hill, Hitt and Hoskisson (1992) and others have argued, corporate
strategy has a significant impact on corporate structure and the nature of
corporate control over SBUs. However, as Gupta and Govindarajan (1986) and
Gupta (1987) have argued, in most diversified firms, there exists considerable
intra-corporate strategic diversity across SBUs and that this diversity is mirrored
in intra-corporate variations in corporate control over individual SBUs.
Notwithstanding some extant work on the impact of SBU strategy on corporate
control, other interesting questions remain unexplored and should serve as the
bases for future investigations; for example, (1) Do intra-corporate variations
in SBU strategies and corporate control create cognitive overload for the
corporate center? If so, under what circumstances? (2) Does inter-SBU strategic
diversity along some dimensions create less cognitive overload compared with
that along some other dimensions? and (3) How does the risk of cognitive
overload shape corporate strategy, for example, decisions regarding the extent
and type of diversification?
Interdependencies Between the Business and International Levels
Impact of business strategy on international strategy. Business strategy
is generally defined in terms of the intended basis for competitive advantage
within a specified industry (Porter, 1980). Taking the product-market scope as
a given, any SBU has basically three choices regarding competitive advantage:
superior products and services, lower prices, or a combination of the two. On
the other hand, international strategy is generally defined in terms of the global
configuration and coordination of the various elements of the value chain
(Porter, 1986). At one extreme, a “multidomestic” strategy implies a situation
where the multinational company creates a complete value chain in every
country and inter-country coordination is low. At the other extreme, a
“transnational” strategy implies that different elements of the value chain are
concentrated in different countries, no country has a complete value chain, and
the level of inter-country coordination is very high (Porter, 1986; Bartlett &
Ghoshal, 1989).
An interesting and yet-unexplored question would be whether there is a
systematic linkage between business strategy and international strategy. We
would argue that, ceteris paribus, the more customized a company’s products
and services are to a particular customer’s needs, the greater will be the
differentiation advantage perceived by the customer; also, the greater the
differentiation advantage created by the SBU, the less critical it may be to

capture the scale efficiencies resulting from global centralization. Similarly, for
an SBU whose intended competitive advantage is lower prices, cost
minimization is likely to be far more critical than product or service
customization. In other words, it seems likely that, on average, (I) strategies
of differentiation may be associated more strongly with multidomestic than with
transnational strategies, and (2) strategies of cost leadership may be associated
more strongly with export, global, or transnational than with multidomestic
strategies. Such integrative issues across business and international levels of
research have yet to be examined empirically.
Role of the SBU general manager. Every SBU that competes across
countries can be conceptualized as a network where (1) the various subsidiaries
constitute the nodes of the network, and (2) these nodes are connected to each
other through potentially three types of flows: capital flows, product flows, and
knowledge flows (Gupta & Govindarajan, 1991). In the case of an export-
oriented SBU, the global network is likely to be characterized primarily by
product flows. In contrast, in the case of a multidomestic SBU, the global
network is likely to be characterized by capital and knowledge flows. Finally,
in the case of a transnational SBU, the global network is likely to be
characterized by all three types of flows (i.e., capital, product, as well as
knowledge flows). Since one of the principal tasks of any SBU general manager
would be to create and manage the appropriate type of network, it can be
expected that the role of the SBU general manager would depend heavily on
not just the SBU strategy but also the international strategy. Thus, an interesting
avenue for future research would be: how does the peculiar nature of the SBU’s
global network affect the role of the SBU general manager?
Interdependencies Between Corporate and International Levels
Antecedents and consequences of alternative evolutionary paths. Focus-
ing on the twin dimensions of product and geographic diversification, at one
extreme, we find single business domestic companies such as Giant Food (a
food retailer headquartered in the Metropolitan Washington area) and, at the
other extreme, we find diversified multinational companies such as General
Electric. There are three evolutionary paths through which a single business
domestic firm can become a diversified multinational company: (1) product
diversification as the first step followed by globalization as the second step, e.g.,,
the case of General Electric; (2) globalization within the single business as the
first step followed by product diversification as the second step, for example,
the case of Saatchi and Saatchi; and (3) simultaneous push towards product
diversification and globalization, for example, the case of Amer Group, a
Finnish paper and tobacco products company which diversified into the
sporting goods industry through the acquisition of the U.S.-based Wilson
Sporting Goods Company. An as-yet-unexamined research question is: What
are the antecedents and consequences of these alternative evolutionary paths
towards product and geographic diversification? From the work of Nelson and
Winter (1982), we know that organizational routines are both history dependent
as well as resistant to quick mutations. Thus, a company which undertakes

product diversification as the first step is likely to build quite different

“parenting” routines (Goold, Campbell & Alexander, 1994) as compared to a
company that undertakes globalization as the first step. It should be expected
that these differences in parenting routines would be important explanators of
why different diversified multinational corporations are managed differently.
Role of the country manager. In the case of any diversified multinational
corporation such as General Electric or Procter & Gamble, it is virtually a
certainty that, in any single country, the company would have (1) several
subsidiaries or profit centers each belonging to a different global SBU (e.g.,
P&G Detergents/ France, P&G Foods/ France), and (2) a country manager who
is the “legal” head of all of the multinational corporation’s activities in the
particular country. Thus, any single subsidiary in a foreign country is likely
to find itself involved in at least two relationships-one with the global SBU
manager for that business and the other with the local country manager.
Field studies by one of the authors of this paper indicate that, at a
minimum, every country manager would have a local “infrastructure
management role” encompassing activities such as political relations with the
host government, relationships with local unions, relationships with campuses
where the local subsidiaries go for recruitment, and treasury and tax
management. However, going beyond this infrastructure role, some country
managers may also have a major “strategic” role (i.e., guiding, approving, and
controlling the strategies of the local subsidiaries) whereas other country
managers may have only a very minor strategic role. How might we
systematically explain the differences in the “strategic” responsibilities of
country managers? So far, this remains a largely unexplored question. Our
preliminary conjecture would be that, for any local subsidiary, there are two
potential avenues for strategic coordination with other subsidiaries: (1) strategic
coordination with subsidiaries in other countries belonging to the same SBU,
for example, P&G Detergents/ France vis-a-vis P&G Detergents/ Germany; and
(2) strategic coordination with subsidiaries located within the same country but
belonging to different SBUs. In the case of a corporate strategy of unrelated
diversification, the need for the second type of coordination is likely to be low
or absent; in contrast, in the case of a related diversified firm, the need for intra-
country coordination across subsidiaries may well be high. Thus, we would
hypothesize that the role of the country manager may be “both infrastructural
and strategic”in the case of global related diversified firms (e.g.,, P&G) whereas
it may be “primarily infrastructural” in the case of global unrelated diversified
firms (e.g., GE).
Interdependencies Across the Corporate, Business, and International Levels
One area where the simultaneous integration of corporate, business, and
international strategies (i.e., strategies at all three levels) is starkly evident is
in the case of the recent trend towards the dispersion of worldwide SBU
headquarters responsibilities to different countries rather than concentration
in the same country as the corporate parent (Porter, 1994). This trend is
illustrated by examples such as the British company ICI which manages its

worldwide explosives business from an SBU headquartered in Toronto, the

Korean company Hyundai which has located the global home base of its
personal computers business in California, or the American company du Pont
which has located the global home base of its Lycra business in Germany. In
examples such as these, it may often be virtually impossible or meaningless to
draw any clear boundaries between corporate, business, and international
strategies.
There are at least four important yet-to-be-addressed research questions
pertaining to this emerging trend towards the geographic dispersion of SBU-
specific global home bases: (1) How do corporate-level characteristics affect a
company’s disposition to locate the global home bases of product lines in foreign
countries? (2) How do product line characteristics affect the decision to locate
the global home base of the product line in a foreign country? (3) What factors
affect the choice of location for the global home base of a product line? (4)
How do the “coordination and control” mechanisms linking a global home base
subsidiary to the rest of the company differ from those utilized in the case of
domestic-based global SBUs as well as other foreign subsidiaries that are not
global home bases?
Summary
The central underlying premise of this section has been that integrative
research studies across two or more levels of strategy represent some of the
most fruitful avenues for future investigations in strategic management. We have
also suggested that, of the three possible approaches to integrative research
(additive, comparative, and interdependency), the interdependency approach
may have the highest potential to add value. Building on these assumptions,
we have attempted to identify and outline potential research topics and
questions that fall under either of four types of integrative research: (I)
integration across corporate and business strategy; (2) integration across
business and international strategy; (3) integration across corporate and
international strategy; and (4) integration across corporate, business, and
international strategies. As the last section dealing with geographic dispersion
of SBU global home bases suggested, trends in the actual behavior of large
corporations may be such that, for strategy scholars, the issue of whether or
not to do integrative research may increasingly become non-discretionary.
Conclusion
In the previous four sections, we have articulated what we believe to be
among the most fruitful areas for future research inquiry in strategic
management. We have endeavored to minimize errors of commission. At the
same time, and given the practical constraint of page limitations, we hope to
stimulate a dialogue concerning “perceived” errors of omission. To paraphrase
the old saw: “One researcher’s passion is another researcher’s poison!”
Accordingly, we’ll gauge our success as the extent to which our efforts result
in meaningful discussion, debate, and critique.

Acknowledgment: The ideas in this paper were initially developed for a joint
symposium proposal presented to the Business Policy and Strategy and the
International Management Professional Divisions at the 1993 Academy of
Management Meetings in Atlanta, Georgia. We would like to thank Richard
Priem, Abdul Rasheed, Tom Roehl, and Bruce Walters for their helpful and
constructive comments.
Note
1. This is not strictly true since MNEs have also arisen to internalize the markets for tangibles, for example
raw materials.
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Human Resource Development International
ISSN: 1367-8868 (Print) 1469-8374 (Online) Journal homepage: http://www.tandfonline.com/loi/rhrd20
Strategic human resource development: towards

a conceptual framework to understand its
contribution to dynamic capabilities
Thomas Garavan, Valerie Shanahan, Ronan Carbery & Sandra Watson
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Download by: [Orta Dogu Teknik Universitesi] Date: 21 May 2016, At: 11:02
Human Resource Development International, 2016
http://dx.doi.org/10.1080/13678868.2016.1169765
Strategic human resource development: towards a conceptual

framework to understand its contribution to dynamic capabilities
Thomas Garavana*, Valerie Shanahanb, Ronan Carberyc and Sandra Watson d
a
Edinburgh Napier Business School, Edinburgh, UK; bDublin City University, Dublin, Ireland;
c
University College Cork, Cork, Ireland; dEdinburgh Napier University, Edinburgh, UK
(Received 31 July 2015; accepted 21 March 2016)
Downloaded by [Orta Dogu Teknik Universitesi] at 11:02 21 May 2016
Dynamic capabilities have assumed major importance in the strategy and human
resource management literatures. However, discussion of their contribution to strategic
human resource development (SHRD) is nascent. We introduce the concept of
‘dynamic’ strategic human resource development capabilities (DSHRDCs) and propose
a framework consisting of (a) enabling factors, (b) specific components, (c) underlying
processes, and (d) unique SHRD dynamic capabilities. We view a dynamic capabilities
approach as a useful lens to understand how SHRD contributes to organizational
performance through the development of capabilities. We discuss each component of
the framework and propose possible directions for future research and implications for
practice.
Keywords: SHRD; dynamic capabilities; multilevel framework; research and practice
implications
Introduction
Without doubt, the dynamic capabilities perspective is making a significant impact on the
strategy and human resource management (HRM) disciplines (Wang, Senaratne, and
Rafiq 2015; Helfat and Peteraf 2015; Teece 2014). However, interest in dynamic cap-
abilities within strategic human resource development (SHRD) is nascent. A relatively
recent article by Helfat et al. (2009) emphasized the growth of interest in the dynamic
capabilities construct and its potential to inform a multiplicity of disciplines. The gap in
theory and research in SHRD on dynamic capabilities stems from a number of interrelated
issues. First, there is significant uncertainty as to the precise definition of dynamic
capabilities even though there are many theoretical and empirical articles that incorporate
dynamic capability concepts. Second, existing theorizing on SHRD is strongly aligned
with the resource-based view (RBV). This view argues that the role of SHRD is to
develop human capital, that is: (1) valuable [V] in terms of the external environment,
(2) rare [R] among a firm’s current and potential competitors, (3) are not easily imitable
[I], and (4) non-substitutable [N] where other types of resources cannot be considered
functional substitutes. Scholars have begun to re-evaluate the robustness of the RBV as a
theoretical foundation for SHRD. Specifically, theorizing on the RBV and SHRD is
premised on the assumption that organizations operate in relatively stable external envir-
onments (Spicer and Sadler-Smith 2006; Garavan 2007) whereas many organizations
operate in highly dynamic external environments. The RBV is also weak in explaining
*Corresponding author. Email: thomas.garavan@ul.ie
© 2016 Informa UK Limited, trading as Taylor & Francis Group

2 T. Garavan et al.
the contribution of SHRD to organizational performance and competitive advantage

(Kaufman 2015). SHRD models typically in resources rather than capabilities.
Investments emphasise SHRD practices enhance the quality of human resources
(Ridder, Baluch, and Piening 2012); however, the mechanism through which performance
and competitive advantage are enhanced is unclear.
We can better understand the contribution of SHRD to performance and competitive
advantage by focusing on dynamic capabilities. We build our proposed framework on the
original definition proposed by Teece, Pisano, and Shuen (1997) ‘the . . . ability to
integrate, build, and reconfigure internal and external competencies to address rapidly
changing environments’ (p. 516). This definition emphasizes the challenge for SHRD to
contribute to the creation of new capabilities and the renewal and alteration of existing
capabilities to respond to dynamic environments and change in the environment (Bowman
and Ambrosini 2003; Zollo and Winter 2002). There are significant parallels between the
concept of dynamic capabilities and SHRD. Both concepts are underpinned by organiza-
tional learning and change, and the development of capabilities. A dynamic capabilities
perspective posits that SHRD will therefore contribute to competitive advantage because it
contributes distinctive capabilities that allow organizations to make better use of its human
resources (Vogel and Güttel 2013; Schilke 2014; Festing and Eidems 2011).
Therefore, this article represents a starting point for the development of a conceptual
framework for ‘dynamic’ strategic human resource development capabilities (DSHRDCs).
We take the established parameters of the DCs perspective established in the strategy and
HRM literature as a starting point (Barrales-Molina, Martínez-López, and Gázquez-Abad
2014; Maatman, Bondarouk, and Looise 2010). We propose distinct dynamic capabilities
that can be linked to SHRD as an organizational function. We also propose the underlying
processes, components, and enablers of DSHRDCs. DSHRDCs as unique capabilities
developed by SHRD contribute to the renewal, reconfiguration and recombination of
human resources in conditions of environmental dynamism (Drnevich and Kriauciunas
2011; Felin et al. 2012).
Development of an integrated framework to understand DSHRDCs

From the onset, the aim of this article is to develop a framework to understand dynamic
capabilities in SHRD. This aim made it challenging to identify the body of literature and the
relevant set of keywords for the search process to conduct a literature research. We, therefore,
relied on a non-keyword-based reviewing process. Our goal was to identify articles that made
a key contribution either conceptually or empirically to addressing dynamic capabilities in
SHRD. The starting point was to identify some formative papers that have shaped the
discussion and debates on dynamic capabilities. For this, we consulted the list of citations
to guide our research. The ISI Web of Science Citation Index was used to identify articles that
cited those seminal papers. However, the process of identifying components of dynamic
capabilities proved problematic. As a concept, dynamic capabilities are considered elusive
and difficult to define (Kraatz and Zajac 2001). We found multiple conceptualizations of
dynamic capabilities in the strategy literature including strategic change and learning
(Ployhart and Moliterno 2011), learning and innovation (Teece 2007), innovation and adapta-
tion (Anand, Oriani, and Vassolo 2010), ambidexterity (Eisenhardt, Furr, and Bingham 2010),
and microfoundations (Lewin, Massini, and Peeters 2011). We speculate on what these
various perspectives suggest for SHRD in Table 1. There is also a disagreement as to what
dynamic capabilities add to the organization in terms of value and outcomes. Ambrosini and
Table 1. Conceptualizations of dynamic capabilities: implications for dynamic strategic human resource development (SHRD) capabilities.
Dynamic SHRD capabilities
Underlying
Perspective Key authors Key propositions SHRD enablers Specific components processes DSHRDCs
Learning and Kaplan (2008), ● Tensions between building new ● Characteristics ● Absorptive capacity ● SHRD seizing ● Organizational
innovation Teece dynamic capabilities and the use of of SHRD and knowledge processes learning
perspective (2007), existing capabilities practitioners integration capability
Eisenhardt ● Building dynamic capabilities by ● SHRD ● Organizational
and Martin building on existing knowledge processes and capacity for
(2000) ● Cognitive skills of individuals as structures change and
microfoundations of DCs innovation
Strategic learning Lee, Hsieh, ● Development of learning capabilities ● Alignment and ● Absorptive capacity ● SHRD ● Human
and change and Ma ● Knowledge assets leveraged into Strength of and knowledge reconfiguration resource
(2011), human capital and organizational SHRD integration processes scalability
Clougherty capabilities through learning Practices ● Recalibrations and capability
and mechanisms reconceptualization ● Organizational
Moliterno ● Measuring dynamic capabilities of SHRD capacity for
(2010), stakeholder change and
Ployhart relationships innovation
and
Moliterno
(2011)
Ambidexterity Eisenhardt, ● Balancing flexibility and efficiency, ● SHRD ● Absorptive capacity ● SHRD ● Organizational
Furr, and stability, change, and incremental and processes and and knowledge reconfiguration capability for
Bingham radical innovation structures integration processes change and
(2010), ● Exploration of new knowledge innovation
Tushman domains and exploitation of current ● Human
et al. ones Resource
(2010), ● Use of HR and learning strategies to scalability
Kang and facilitate ambidexterity capability
Human Resource Development International
Snell
(2009)
3
(continued )
Table 1. (Continued).
Underlying
T. Garavan et al.
Perspective Key authors Key propositions SHRD enablers Specific components processes DSHRDCs
Innovation and Anand, ● Influence of organizational routines ● Characteristics ● Absorptive capacity ● SHRD ● Organizational
adaptation Oriani, and in inhibiting innovation of SHRD and knowledge reconfiguration capacity for
Vassolo ● Role of pre-existing capabilities in practitioners integration processes change and
(2010), impacting acquisition of new ● Alignment and ● Recalibration and innovation
Eggers and capabilities strength of reconceptualization
● Organizational
Kaplan ● Role of managerial cognition in SHRD of SHRD stake- learning
(2009), shaping innovation practices holder relationships capability
Capron and
Mitchell
(2009)
Microfoundations Lewin, ● Dynamic capabilities are founded in ● Characteristics ● Absorptive capacity ● SHRD sensing ● Organizational
Massini, routines, processes and collective of SHRD and knowledge capabilities learning
and Peeters activities rooted in the intentional practitioners integration ● SHRD capability
(2011), behaviour of individuals ● Alignment of reconfiguration
Salvato and ● Management processes influence on strength of processes
Rerup strategic decisions and integration SHRD
(2010), activities practices
Felin and
Foss (2005)
Human Resource Development International 5
Bowman (2009) suggested that they contribute to sustainable competitive advantage to

temporary advantage and competitive parity.
We found that the majority of contribution within the HRM field emphasize micro-
foundations (Vogel and Güttel 2013). Microfoundations are conceptualized as underlying
individual and group-level actions that shape strategy (Eisenhardt, Furr, and Bingham
2010). However, there is little agreement in the HRM context as what these are. Examples
specified in the literature include learning practices (Eisenhardt and Martin 2000), social
interaction and relationship processes (Argote, McEvily, and Reagans 2003), and knowl-
edge processes (Lichtenthaler and Lichtenthaler 2009). Our review of the literature
revealed that dynamic capabilities are an important and valuable framework to better
understand and explore SHRD in organizations. Figure 1 illustrates our proposed frame-
work. Following the presentational approach used by Barrales-Molina, Martínez-López,
and Gázquez-Abad (2014), Figure 1 consists of four concentric rings. We conceptualize
the outer ring as SHRD enablers. We define this construct as characteristics of SHRD in
organizations that trigger the generation of DSHRDCs. We particularly focus on three
characteristics: SHRD practices, processes, and structures, and alignment and strength of
SHRD. The next ring focuses on specific components of DSHRDCs. We define these as
the underlying processes considered essential to the emergence of DSHRDCs (Teece,
Pisano, and Shuen 1997). The next ring illustrates three micro-foundations: sensing,
seizing, and reconfiguration. The central ring presents three DSHRDCs that SHRD
Figure 1. Dynamic strategic human resource development (SHRD) capabilities: an integrative

framework.
6 T. Garavan et al.
helps to develop. SHRD knowledge, expertise, and know-how contributes to the devel-
opment of these DSHRDCs: human resource scalability capability, organizational learning
capability, and organizational capability for change and innovation.
In the sections that follow, we first provide an overview of the key constructs in the
proposed framework. We then discuss the research (including methodological implica-
tions) of our framework. Finally, we discuss the practical implications of our framework.
Key dimensions of our theoretical framework

Enablers of DSHRD capabilities
Consistent with theorizing on DCs, generally DSHRDCs are embedded, historically
determined, and path dependent (Felin and Foss 2005; Ployhart and Hale 2014). We
propose three SHRD-related enablers central to triggering the generation of DSHRDCs.
SHRD practitioners
The abilities, cognitions, networks, and agency of SHRD practitioners facilitate the
development of DSHRDCs; however, they are subject to significant heterogeneity
(Mäkelä et al. 2012). SHRD practitioner’s experience is both context specific and path
dependent. Firm-specific business experience will help SHRD practitioners to make more
effective and swift decisions. In turbulent and fast changing environments, practitioners
are required to make decisions decisively and rapidly (Carlsson and El Sawy 2008). Firm-
specific experience is beneficial in helping practitioners to make connections between
performance of the role and the organizational context. Firm-specific experience also
enhances the agency of the practitioner (Evans, Björkman, and Pucik 2011). The social
capital and networks of practitioners help them to understand stakeholder requirements
and make more strategically aligned decisions (Gubbins and Garavan 2009). Social
networks help practitioners to acquire tacit knowledge and learn from others (Mäkelä
et al. 2012). This helps them to make more strategically focused decisions that contribute
to the development of DSHRDCs (Levin and Cross 2004). Bjorkman et al. (2009)
highlighted the value of cognitive social capital in providing practitioners with insights
and perspectives on what enhances organizational effectiveness.
SHRD processes and structures

We make the following theoretical distinction between processes and structures. Processes
include a multiplicity of attributes, such as ongoing communications, tacit and team
processes, decision-making, problem solving, and trial and error learning processes
(Srikanth and Puranam 2010). In contrast, structures focus on the constraints within
which practitioners make decisions. Both processes and structures help the development
of long-term relationships and ensure robust delivery processes and monitoring mechan-
isms. They affect the capacity of SHRD to adapt to changing environmental conditions.
Schleimer and Pedersen (2013), for example, found that in MNCs that structures influ-
enced the relationships between a headquarter and subsidiary, and the extent of centraliza-
tion or decentralization. These in turn influenced knowledge flows, knowledge absorption,
the locus of decision-making, the extent of discretion for action, the diversity of knowl-
edge structures, and the modes of engagement with stakeholders. Where SHRD practi-
tioners have more decision rights, they can tap into different knowledge sources to inform
decision about SHRD practices. They have more scope to interact with and collaborate
with business partners, and as a consequence they learn more and make better decisions.
Hoopes and Postrel (1999), for example, found that matrix type structures enabled SHRD
practitioners to share knowledge, to process information and to develop capabilities.
Processes and structures facilitate the delivery of new capabilities and make the SHRD
function more nimble, flexible, and tuned into business needs. Lengnick-Hall, Lengnick-
Hall, and Rigsbee (2012) used the term ‘proximity’ to describe structural closeness of a
function within an organization. Close proximity with internal customers facilitates better
interaction, a greater understanding of needs, more effective service delivery, and more
effective exchange and sharing of knowledge. Structures are particularly valuable to the
development of SHRD practitioners’ social capital including networks with executives,
customers, strategic partners, and line managers (Wang 2003; Uen et al. 2012; Cialdini
et al. 2006).
Alignment and strength of SHRD practices

Alignment and strength of SHRD practices are important enabling conditions for the
development of DSHRDCs. Wognum (2001) suggested that alignment emphasizes infor-
mation (data needed to inform a decision on which SHRD practices are appropriate)
formulation (information gathering processes), participation (involvement of SHRD sta-
keholders in decision-making), and the strategic choices made. SHRD should align
strategies and practices with HRM strategies and align with each other. Therefore, for
example, extensive job training will be most valuable when combined with opportunities
to utilize new skills and career advancement opportunities. Where organizations invest in
the skills of high potential employees and implement practices, such as job rotation and
international job assignments, these will contribute to greater human capital value. Jiang
et al. (2012) highlighted the need for SHRD practices to be consistent within the HR
policy domains of ability, motivation and effort, and opportunity to contribute. Strength is
conceptualized as the ‘presence, frequency of use, coverage, and extensiveness of devel-
opment of HRD practices’ (Delmotte, DeWinne, and Sels 2012). A particular area of
complexity concerns the gap between intended and implemented SHRD practices.
Garavan (2012), for example, found a significant gap between the rhetoric and the reality
of global talent management practices in MNCs. Employees may lack awareness of the
existence of specific SHRD practices. The degree of consistency between intended and
implemented SHRD practices will affect dynamic capability development (Khilji and
Wang 2006).
Specific components of DSHRDCs

Dynamic capabilities theory highlights important components that stimulate the under-
lying processes considered fundamental to the emergence of dynamic capabilities
(Ployhart and Hale 2014). We propose three specific components in the context of
DSHRDCs (Way and Johnson 2005; Ambrosini and Bowman 2009).
Recalibration and reconceptualization of SHRD stakeholder relationships

The capacity of SHRD to coevolve, recalibrate, and reconceptualize relationships is an
important specific component. In dynamic environments, new actors or stakeholders may
become more important or of higher priority. In the context of SHRD, they may include
8 T. Garavan et al.
both external and internal relationships. External relationships include, for example,
strategic alliance partners, regulatory agencies, and funding agencies, such as training
bodies and other national funders of SHRD practices. Internally, these stakeholders may
include new business units, new management teams, and new relationships. In highly
dynamic environments, the development of stakeholder relationships represents a contin-
uous routine, and it requires the capability to be dynamic and responsive. The SHRD
function may encounter difficulties due to rigid and outdated relationship structures
(James and Jones 1976). Eisenhardt and Martin (2000) proposed that coevolving includes
routines through which managers reconnect webs of collaborations among various parts of
an organization to generate new and synergistic resource combinations. Therefore, SHRD
will focus on developing new capabilities with strategic business partners rather than
developing an existing partner into a better partner. Practitioners will undertake progres-
sive transformations in strategic partner relationships resulting in new dynamic capabil-
ities emerging (Ketkar and Sett 2010) and the enhanced capacity of SHRD to recalibrate
and reorient practices to meet different organizational human capital requirements
(Ployhart and Moliterno 2011). The reconfiguring process will involve the development
of new bundles of SHRD practices, the re-bundling of existing practices, and moving
SHRD resources towards new priorities.
SHRD practices can contribute to individual, team, and organizational outcomes.
Individual outcome-focused SHRD practices enable employees to work effectively in
different environmental contexts and produce a multiplicity of skill, behavioural, and
attitudinal outcomes that provide employees with the flexibility to respond to different
environmental conditions. SHRD practices can be used to develop skills, flexibility, and
willingness to change (Costen and Salazar 2011). They can enhance innovation and
responsiveness where there is an emphasis on group learning, the use of developmental
feedback tools and emphasis on what employees are capable of, rather than what training
can do for a specific role (Muñoz Castellanos and Salinero Martín 2011). Second, it is
important that SHRD practices lead to team-level outcomes. Team-level human capital is
more difficult to replicate than any one individual’s human capital because of team-level
human resource capability emergence processes (Ployhart and Moliterno 2011). They
enable new knowledge structures to become embedded at the level of the team. The DCs
perspective argues that team-level human capital stock will facilitate organizations to
adapt to environmental turbulence. Team-focused SHRD practices help develop capabil-
ities, such as knowledge sharing, peer training, and enhanced adaptive capacity.
Third, SHRD practices should contribute to organizational-level outcomes. The devel-
opment of an organizations capacity to learn from the past, adapt to the present, envision,
and create the future is important to the development of DSHRDCs. SHRD practices, such
as knowledge communities, collaborative project activities, and action learning can create
organization learning capability (Buller and McEvoy 2012; Levin, Walter, and Murnighan
2011). These practices help create common knowledge among employees and stimulate
higher organizational performance. Organizations with more effective learning routines
are better able to absorb and apply knowledge (Hartmann, Feisel, and Schober 2010).
Greater organizational learning capabilities help SHRD to engage in new forms of
collaboration and engagement with strategic partners. Recalibration and reorientation
may be inhibited by over commitment or over-reliance on particular practices (Garavan
2012). SHRD practitioners and internal customers may not possess the skills to develop
new SHRD practices and to implement new configurations of existing practices. Senior
level management may also lack the administrative capabilities to monitor progress and
manage implementation problems effectively.
Absorptive capacity and knowledge integration

A third specific component involves the absorptive capacity and knowledge integration
capability of SHRD. Ambrosini and Bowman (2009) and Easterby-Smith and Prieto
(2008) suggest that both absorptive capacity and knowledge integration help SHRD to
access external knowledge and integrate/disseminate that knowledge throughout an orga-
nization. Omidvar Tehrani (2013) highlights three dimensions of absorptive capacity. The
first dimension concerns the recognition of the value of external knowledge. SHRD may
be less effective in recognizing the value of external knowledge due to attachment to
existing competencies and capabilities. Therefore, where practitioners act as boundary
spanners and recognize new knowledge, transfer it, and present it in a form that is
understandable, this influences the extent of recognition. The second dimension focuses
on the ability of SHRD to analyse, process, make interpretations, and achieve under-
standing. Knowledge requires transformation to ensure its assimilated (Todorova and

Durisin 2007). Gherardi and Nicolini (2000) suggested that assimilation requires SHRD
to have the capabilities to transform prevailing practices. This process of transformation
may lead to conflicts in identity and where there is a lack of alignment, it halts the
transformation processes (O’Mahony and Bechky 2008). The third dimension focuses on
application or use of knowledge to make it part of the daily life of SHRD. Making it part
of daily life requires SHRD to be effectively networked and to possess skills to integrate
knowledge into day-to-day practice and routines. These specific components of
DSHRDCS are linked to three underpinning processes that we consider in the next
section.
Underlying processes of DSHRDCs

Underlying processes are central to conceptualizations of dynamic capabilities (Teece,
Pisano, and Shuen 1997; Pavlou and El Sawy 2011). They are conceptualized as micro-
foundations that enable dynamic capabilities to emerge. In the interest of parsimony, we
focus on the three microfoundations proposed by Teece (2007): sensing, seizing and
reconfiguration.
SHRD sensing capabilities

The capacity of SHRD to sense opportunities before they fully materialize is a critical
component necessary for the development of the three dynamic capabilities specified in
our framework. Sensing is defined as ‘the ability to spot, interpret and pursue opportu-
nities in the environment’ (Pavlou and El Sawy 2011, 26). Environmental scanning is an
important component of the sensing process. Eisenhardt and Martin (2000) proposed that
dynamic capabilities involve both creating change as well as reacting to it. Therefore,
SHRD needs to be alert to changes, be focused on particular changes and possess the
capacity to make sense of them. Effective sensing processes help SHRD to make sense of
events and changing environmental conditions, initiate plans, capitalize on opportunities,
and configure existing operational capabilities on them.
SHRD seizing processes

Seizing processes help SHRD to respond to opportunities detected in the external envir-
onment. In the context of SHRD, seizing processes may involve the design of new models
10 T. Garavan et al.
of SHRD delivery, the development of problem-solving capabilities, and tapping into

organizational knowledge or resources to address the needs of customers. The effective
design of new models to deliver SHRD introduces significant challenges in areas, such as
strategic fit, ensuring complementarities across various components of SHRD delivery,
and the commitment of resources to realize new ways of doing things.
SHRD reconfiguration processes

The third leg of the dynamic capability underlying processes triad focuses on combining
and reconfiguring SHRD. For SHRD, this will involve making particular changes, taking
specific actions, and coping with resilience to change. These processes if successful will
enable the effective reconfiguration of resources, roles, tasks, and actions to redeploy
operational capabilities. Examples of reconfiguring processes include the assignment of
resources to tasks (Ridder, Baluch, and Piening 2012), the assignment of the most
appropriate SHRD practitioners to undertake particular tasks, the identification of com-
plementarities and synergies among tasks and resources, and the use of processes neces-
sary to orchestrate collective actions (Eisenhardt and Brown 1999). SHRD will utilize
reconfiguring processes to develop conceptual schema about what SHRD is about and
help it to develop DSHRDCs that enhance organization level dynamic capabilities.

To this point, we have specified the underpinnings necessary for DSHRDCs to emerge.
We specify three DSHRDCs that SHRD knowledge and expertise contributes to devel-
oping: human resource scalability capability, organizational capability for change innova-
tion, and organizational learning capability.
Human resource scalability capability

SHRD makes a direct contribution to enhancing human resource scalability capability
making it an important DSHRDC. Dwyer and Edwards (2009) define human resource
scalability as ‘the capacity of an organization to keep its human resources aligned on an
ongoing basis by constantly transitioning from one human resource configuration to
another and another, ad infinitum on a timely basis and in a seamless way’ (p. 11).
Nijssen and Paauwe (2012) emphasized that scalability concerns workforce fluidity and
workforce alignment. It also includes employee flexibility (Camps et al. 2015). Fluidity
emphasizes the speed to which an organization’s human resources can move from one
aligned configuration to another one. Alignment emphasizes competency elements that
are in the right place and can perform the desired task to the required standard. Employee
flexibility is defined as the extent to which employees possess skills and behavioural
repertoires that can provide a firm with options to pursue strategic alternatives (Beltrán-
Martín and Roca-Puig 2013, 648). Camps et al. (2015) proposed that flexible employees
have the capability to implement different strategies appropriate to diverse competitive
and turbulent environmental conditions. Therefore, SHRD through its knowledge and
expertise helps develop human resource scalability capability. Dyer and Ericksen (2005)
emphasizes the capability of an organizational function to perform both reactive and
proactive adaptations of how it is configured to cope with internal and external uncertain-
ties. Examples of SHRD practices that contribute to human resource scalability capability
include development practices aimed at creating a shared mind-set, competence-based
training and development, training and development activities aimed at developing a

broad and flexible skillset, career development, and horizontal career paths (Hopp and
Oyen 2004; Sumukadas and Sawhney 2004).
Organizational capacity for change and innovation

SHRD makes a direct contribution to the organizational capacity for change and innova-
tion. Therefore, it is appropriate to consider this as a DSHRDC. Shipton, Budhwar, and
Crawshaw (2012) define organizational change capability, as ‘the dynamic resource
bundle comprised of effective human capital at varying levels of a business with cultural
predispositions towards innovation and accountability and organizational systems that
facilitate organizational change and transformation’ (p. 781). SHRD activities are central
to developing organizational capacity for change and innovation. Shipton, Budhwar, and
Crawshaw (2012) criticize traditional SHRD approaches that reinforce the status quo,
place too much emphasis on one best way, and SHRD practices with an exploitative
learning focus. They highlight the value of job rotations, project work, exposure to new
experiences, and explorative learning processes. SHRD practices that enable the devel-
opment of an innovative culture and climate enhance the capacity of an organization to
innovate. Firms with a strong adaptive innovation culture are in a better position to
capitalize on the ability of employees to solve problems more effectively and acquire a
broader range of skills (Wei and Lau 2010). The enhanced responsiveness of employees to
cope with change and be innovative enhances firm performance. Beltran-Martin et al.
(2008) suggested that SHRD practices, such as training, development, and knowledge
sharing contribute to innovation within the firm. Enhanced skills contribute to the capacity
of employees to respond more effectively to new and novel situations. SHRD practices
help employees to engage in improvisation, to generate new ideas, question issues, reflect
on actions and achieve a greater understanding from their actions. SHRD practices that
promote personal growth, and create conditions where employees are better prepared to
cope with changes also contribute to this capability (Van Dam and Thierry 2000; Ball
et al. 2002).
Organizational learning capability

Organizational learning capability is another DSHRDC that SHRD can help develop. In
conditions of high environmental turbulence, organizational learning capability help
organizations to tackle new challenges and respond to rapidly evolving environmental
conditions (Chiva, Alegre, and Lapiedra 2007). Organizational learning capability goes
beyond organizational learning in that rather than simply focusing on developing and
applying new knowledge, it emphasizes the capacity to develop the capability to learn and
convert that learning into new knowledge. Organizational learning capabilities are an
important source of organizational dynamic capabilities (Easterby-Smith and Prieto 2008).
Discussion, research and practice implications

Scholars and practitioners have highlighted the unprecedented pace of change, which
SHRD is facing in organizations. An important outcome of this change is a major increase
in the level of competition facing businesses (D’Aveni, Dagnino, and Smith 2010). These
changes provide significant challenges for SHRD. We propose a dynamic capabilities
framework for SHRD as a way of responding to these changes. Our analyses of dynamic
capabilities unique to SHRD focuses on individual, functional practices, and organiza-

tional underpinnings that lead to their development. We identified three specific sets of
enablers/components and processes that underpin three DSHRDCs. These DSHRDCs
focus on human resource scalability, organizational learning capability, and capability
for change and innovation. We deemed these DSHRDCS appropriate to SHRD due to the
important role that SHRD knowledge and expertise play in their development. Our
proposed framework is speculative and incomplete. However, we believe it provides a
useful starting point for future research. To date, SHRD theory has highlighted the
primacy of human capital to organizational performance (Ostroff and Bowen 2000;
Garavan 2007) and used RBV thinking to argue that firm-specific human capital will
result in sustainable competitive advantage (Wright and McMahan 1992). The DCs
perspective helps in explaining how in conditions of environmental dynamism, SHRD
will need to engage in a continual renewal of its capabilities if it is to contribute to
organizational performance.
Research implications and future research

Remarkably, despite the proliferation of research on dynamic capabilities in the strategy
field and to a lesser extent in HRM, there is a total absence of contributions on the types
of dynamic capabilities that SHRD can contribute to developing. The fundamental argu-
ment that we make here is that SHRD can, through its practices structures and processes
develop unique dynamic capabilities that enhance the capacity of organizations to be
competitive in turbulent business environment. Human resources create value where an
organization and in particular, SHRD has the capabilities to deploy them in ways matched
with the needs of the environment. We present our framework in the form of a series of
concentric circles. We do not propose causal directions among the various components of
the model, nor do we propose testable propositions. We specify the various layers of
influence moving from the broad in the outer circle to the specific DSHRDCs in the
central circle. We are conscious of the absence of empirical research and, therefore,
suggest a number of avenues for future research.
First, we suggest a number of content research areas. These include a greater under-
standing of the SHRD enablers of DSHRDCs including the cognitions of SHRD practi-
tioners and actors, the role of strategic alignment and the strength of SHRD in
contributing to the development of DSHRDCs, and how processes and structures help
their development. There is scope to understand how different enablers are linked to
specific DSHRD capabilities and which enablers most benefit particular DSHRDCs.
Specific questions that can be investigated include; how do SHRD practitioner’s inter-
pretations of their environment shape the responses of the SHRD function? What cogni-
tive, motivational, and behavioural characteristics of SHRD practitioners shape
DSHRDCs development? What are the specific micro-origins of DSHRDCs? Where do
DSHRDCs originate? How do absorptive capacity, knowledge sharing, and integration
mechanisms influence DSRDCs? There is scope to investigate the relationships between
the specific components highlighted in our framework and to extend our framework. The
content of the framework is influenced by DCs and SHRD literatures. Other dimensions
of SHRD, such as HRD orientation could enhance our understanding of DSHRDCs.
Second, we suggest there should be a focus on researching the context of DSHRDCs.
Differences in business strategy, product/service portfolio, manufacturing and service
industry differences, customer expectations, regulatory influences, and the number and
location of HRD practitioners and actors can affect how DSHRDCs emerge. In general,
insufficient attention has been given to context issues in HRD, and it is important to focus
on context to achieve a deeper understanding of DSHRDCs. Contexts where SHRD actors
and units have significant scope and focus on customization will serve as strong contexts
supporting DSHRDCs. Similarly, contexts where employees’ behaviours are prescribed
and where there is less discretion in respect of SHRD practices and a heavy use of highly
structured job-focused SHRD practices will provide a more challenging context for the
development of DSHRDCs. Specific questions that can be addressed in this context
include: how does industry context affect the criticality of SHRD for firm-level DCs?
What are the characteristics of high and low performing SHRD functions and DSHRDCs?
Are there unique organizational, situational, and contextual factors that shape the actions
of SHRD actors? Are DSHRDCs more likely to emerge in particular industry and service
contexts?
Third, we suggest that research on DSHRDCs requires novel and multilevel research
designs. Aguinis and Molina-Azorin (2015) highlight the complexity of researching DCs
and in particular microfoundations due to their inherent multilevel nature. They require
research designs that capture this complexity. We recommend the use of truly longitudinal
designs with repeated measures over time. Given the dynamic nature of DSHRD cap-
abilities, there is a need for repeated measures of phenomena from the same units over
time. Longitudinal studies can establish the directionality of the concepts proposed in our
framework and understand both the short and long-term effects of DSHRDCs in organi-
zations. We also recommend the use of triangulation with different methodologies to
capture the complex, holistic and contextual nature of DSHRDCs. There is scope to
combine qualitative and quantitative designs to obtain in-depth understandings of
DSHRDCs while also contributing to greater generalizability. Aguinis and Molina-
Azorin (2015) proposed the careful use of mixed methods and the selection and imple-
mentation of these methods to address specific research questions.
Implications for SHRD practice

A dynamic capabilities perspective on SHRD challenges the traditional roles that it plays
in organizations. Our framework suggests practical lessons for SHRD practitioners that
wish to ensure that SHRD contributes to organizational performance and competitiveness
in dynamic environments. First, involving a large number of stakeholders during the
management of SHRD creates valuable knowledge that will stimulate SHRD to think
differently about its role and help it sense, seize, and reconfigure what it does to contribute
important DSHRDCS to organizations.
SHRD practitioners need to be aware that the dynamic capabilities that they develop
need to be deployed at multiple points in time. The capacity to deploy these capabilities
requires that SHRD practitioners have a clear view of the role of SHRD in organizations
and understand the skills required to sense, seize and reconfigure. Neglecting to develop
these skills may lead SHRD to spend too much time and resources on the wrong activities
that may not be relevant to the development of DSHRDCs. Our framework particularly
emphasizes the role of SHRD practitioner cognitions, beliefs, values and skills and their
specific skills to interpret the external environment, to make decisions in situations of
uncertainty and turbulence, to network both inside and outside the organization and to be
skilled to engage in sensing, seizing and reconfiguration activities.
Finally, our framework demonstrates the pivotal role of SHRD practices in contribut-
ing to DSHRDCs. Where previously SHRD practitioners tended to focus on practices
directed at individuals, the depth of practices under consideration becomes deeper when
the development of DSHRDCs is the focus of what SHRD does. Indeed, given the
salience of SHRD practices, SHRD practitioners need to focus on the strength of these
practices in terms of coverage and extent of implementation.
Conclusion
In a pioneering theoretical contribution, Teece (2007) challenged scholars and practi-
tioners to move away from the analysis of an organization’s external environment and
focus instead on internal capabilities and resources. This contribution has triggered much
research in the strategy and HRM fields; however, to date there is very little in the HRD
field. Consistent with fundamental DC concepts we propose a framework that defines
DSHRDCs based on the accepted generic DCs view. We conceptualized the role of
DSHRDCs through human resource scalability capability, organizational capability for
change and innovation, and organizational learning capability. Our article’s overall con-
tribution is its focus on specifying DSHRDCs, which we believe, offers potential for
future SHRD research and practice.
Disclosure statement
No potential conflict of interest was reported by the authors.
ORCID
Sandra Watson http://orcid.org/0000-0002-5800-5731
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Creighton Journal of Interdisciplinary Leadership
Vol. 1, No. 2, November 2015, pp. 120 – 129
COMPREHENSIVE REVIEW
Human resource management and human resource development:

Evolution and contributions
Nicole Richman, MBA

George Fox University, doctoral student, nrichman12@georgefox.edu
Abstract. Research agrees that a high performance organization (HPO) cannot exist without an elevated value
placed on human resource management (HRM) and human resource development (HRD). However, a
complementary pairing of HRM and HRD has not always existed. The evolution of HRD from its roots in human
knowledge transference to HRM and present day HRD activities reveals that environmental, social, and political
influences have escalated the need for organizations to focus employee development in the areas of flexibility,
innovation, and capability. The following review illustrates the importance of HRM and HRD to organizational
leadership. Furthermore, the research examined builds a close association between the attributes of a HPO and the
skills transferred through an effective collaboration of HRM and HRD activities.
Keywords: high performance organization (HPO), human resource management (HRM), human resource
development (HRD)
Introduction
F rom financial transactions to operational decisions and beyond, the core of every
business function relies on an organization’s greatest asset: its human resources. As
such, human resources boast significant responsibility for the success or failure of an
organization (de Waal, 2007; Haslinda, 2009). The value of human resources is not always
widely apparent. In fact, present day perception frequently limits human resource
management (HRM) and human resource development (HRD) to recruitment, compensation,
and legalities of managing a workforce (Haslinda, 2009). This review identifies the emergent
value of human resources, the transformation from education and training to HRD, and the
relative importance of HRD to organizational leaders. Specifically, it outlines the reliance of
high performance organizations (HPOs) on HRM and HRD, concluding with the present day
critical issues facing HRM and HRD.
The acronyms HRM, HRD and HPO can be, and often are, confused (Haslinda, 2009).
However, to examine their historical and future implications, the differentiation of the
acronyms must first be understood. Researchers have adopted a multitude of definitions for
the same acronyms. The definitions vary based on country of origin, global perspective, or
individual theorist (Haslinda, 2009). The definitions listed below are selected as the
foundational meanings for this paper because each one encompasses the overarching themes
across literature.
Human Resource Management (HRM)

Haslinda (2009) cites HRM as the “process of managing human talents to achieve
organization’s objective” (Haslinda, 2009, p. 180). Recruitment of talent, benefit
management, labor relations, and other legalities such as employee safety and health are all
© 2015 N. Richman
DOI: http://dx.doi.org/10.17062:CJIL.v1i2.19
HRM and HRD: Evolution and contribution 121
encompassed in the process of HRM (Haslinda, 2009). As discussed further, HRM as a

process is a critical distinction from HRD.
Human Resource Development (HRD)

Converse to the process-based HRM, HRD is a series of activities that support behavioral
change and learning opportunities for employees (Haslinda, 2009). HRD activities aim to
develop employee skills and resilience to the current and future demands of the organization.
The overall objective of HRD activities is to achieve high performance (Haslinda, 2009).
Haslinda (2009) provides for specific examples of development activities to include training
and development, feedback and appraisal, career planning and development, and change
management.
High Performance Organization (HPO)

Literature varies widely in the definition of a HPO. Definitions tend to revolve around
specific achievements, financial outcomes, customer satisfaction, or productivity (de Waal,
2007).
A High Performance Organization is an organization that achieves financial results that
are better than those of its peer group over a longer period of time, by being able to adapt
well to changes and react to these quickly, by managing for the longer term, by setting up
an integrated and aligned management structure, by continuously improving its core
capabilities, and by truly treating the employees as its main asset. (de Waal, 2007, p. 3)
Because capability, adaptation, and management are core human resource functions, this
paper restates de Waal’s (2007) definition of an HPO as the sought result from effective HRM
processes and HRD activities.
History and Evolution

Theorists such as Haslinda (2009) and Torraco, (2009), place the beginning of HRM in
England during the 1800s. Research suggests, that formal HRD activities began to appear in
the United States during the Industrial Revolution (Sleight, 1993). Overall literature dates
human development to the earliest days of mankind when training and learning were
processes of survival and subsistence (Haslinda, 2009; Sleight, 1993; Torraco, 2009).
Throughout such literature, a path of labor necessity, revolutions, and evolution of thought
can be drawn from the earliest transference of knowledge and skills to modern day HRD
activities.
Human Development
This paper consolidates literature to define learning, or development, as a cyclical process
which starts with a trigger or a problem. Russ-Eft, Watkins, Marsick, Jacobs, & McLean
(2014) suggest that various perspectives aid in understanding and analyzing the problem or
situation to develop alternative solutions. During and after implementation of one or more
alternatives, the outcomes create new knowledge which is pooled for future decisions (Russ-
Eft et al., 2014). Torraco (n.d) suggests the pattern of learning and development can be traced
back to the earliest days of man. For example, in more primitive periods, the skills and
knowledge transferred from one human to another consisted of those needed to provide tools,
food, and shelter for survival (Torraco, 2009). However, the literature disagrees with the
foundational forces which exposed labor division. Marx proposes the economic desire for
private property and social class exposed natural skill differences and proficiencies (as cited
in North, 1969). In contrast, Torraco (2009) argues as tools developed to more easily provide
survival needs, the natural skills and abilities of human labor became exposed resulting in a
natural division of skill crafts, such as carpentry and weaving. Regardless of the foundational
© 2015 N. Richman
122 N. Richman
force that drove the division of labor, the separation of skills and crafts led to the cooperation
of people for goods and services as well as transference of skills and craft (North, 1969;
Torraco, 2009).
Communication, language, and professional skills became evident in some of the earliest
Egyptian written records dating back to 3000 and 500 B.C.E. (Tokuhama-Espinosa, 2011).
While historical evidence suggests the learning curve during mankind’s beginning was steep,
it remained modest and primitive until the Greek and Roman eras (Tokuhama-Espinosa,
2011; Torraco, 2009). Specifically, the comprehensive history provided by Torraco (2009)
concludes the more sophisticated development was the result of Greek and Roman political
and social agendas to create learning institutions. The Greeks first recognized education as a
necessity to human development, which resulted in the permanent imprint of Greek
philosophy on education (Tokuhama-Espinosa, 2011; Torraco, 2009). According to the
Greeks, the type of work training and education one received reflected social status. Torraco
illustrates the Greek culture through Socrates’ stance on educational philosophy. In short,
Socrates believed that manual labor destroyed the body and left no time for development of
the mind and soul. Therefore, only the lower class Greek population received apprenticeship
and trade training. Upper-class youths received the more distinguished arts and humanities
scholarship (Tokuhama-Espinosa, 2011; Torraco, 2009).
Between late mid-400 B.C. to early 300 B.C., human development philosophy expanded
significantly from trade and arts education. Greek philosophers Plato and Aristotle joined
Socrates in contributing significant insight and educational thought to human development.
Socrates based his Socratic Method on inquisition and the need to find the underlying truth to
reason (Torraco, 2009). In The Republic, Plato introduced a society with an elaborate system
of knowledge, politics, and educational theory (Dillon, 2004). Aristotle systemized
knowledge through the development of scientific inquiry methodology. Organon, the series of
treatises authored by Aristotle, outline the principle guides to analyze reason and logic
scientifically (“Aristotle,” n.d.; Torraco, 2009). The Politics extended exemplification of
Aristotle’s belief on the ways that education would enrich human development (Torraco,
2009).
By the middle ages, beginning early 300s to early 1300s, Christianity held the greatest
influence in education and training. Specifically, the responsibility for institutional control
rested with the Church. “In the wake of the decadent Romans and barbarous Goths and
Vandals, there was a great need for the structure and moral discipline that Christianity
offered” (Torraco, 2009, p. 6). Torraco (2009) argues that Christianity became instrumental in
cultivating the curriculum for secondary and higher education, much of which extended
beyond the medieval period. Christianity incorporated the spiritual value of labor, thus
paradigmatically shifting the Greek value for mental growth to the Roman value for trades
and labors (Torraco, 2009). In fact, the academic learning fell almost entirely to the Christian
monasteries while manual labor and mechanical arts saw significant advancement. The shift
from mental growth to laborious trades was not necessarily a solid split of values (Swanson &
Holton, 2009). Rather, the Renaissance era, 1400 – 1800, introduced inventions, ideas, and
art, which continue to underlie technological advancements today. Much of modern
technology can be traced back to the culmination of trade practices and a deepening thirst for
knowledge (Swanson & Holton, 2009).
Possibly the most interesting findings in human development came from the social
movements of the past two centuries. The social movements, such as labor organization, civil
rights, and religious freedom, proved relentlessly that training and development is not about
the organization of an idea rather the cyclical process by which an idea is founded, analyzed,
rationalized, implemented, and learned from (Callahan, 2013). In the more recent era, human
development and education has centered on the individual goals and desire for achievement.
The transition from external pressures to internal reflection altered the higher education
program. Adult education programs aim at providing education directed at specific career
paths. Human development has thus transformed to a chosen path versus one directed by
environmental need or spiritual leadership (Jacobs, 2014).
Research in human development appears to have gone full circle to the primitive era of
learning through experiences and Greek style growth muffled by dictated values. Modern
literature agrees that learning through work programs and engagement in growth activities,
offers deep experiences and grounded cognition (Gold & Bratton, 2014). Specifically, Gold
and Bratton (2014) contend the context of knowledge gain is derivative of a focused
professional environment which ultimately best serves the organization. As a result, the
transference of knowledge to new behaviors or ideas is stifled by the purpose or direction of
the organization (Gold & Bratton, 2014). Thus, HRM and HRD practice emerged in an effort
to open the learning process through a convergence of practical needs and a thirst for
knowledge.
Human Resource Management

Some theorists contend modern business management stems from five periods, which can be
characterized by external forces, that ultimately altered the way management responded over
the long term (Darmody, 2007; Liebhold, 1995; Nadworny, 1957). The five periods include
the industrial growth, scientific management, human relations, systems, and organizational
culture (Rodríguez-Ruiz, 2014). However, other theorists such as Sleight (2009), extend
HRM earlier, directly connecting it to the trade period and human development. While an
official HRM milestone may not be defined, the precluding events are clear. The craftsman
and trade apprenticeship era extended into the early 1800s and fostered the introduction of the
Industrial Revolution in the late 1800s. According to Darmody (2007) and Liebhold (1995)
theorists such as Fredrick Taylor and Frank and Lillian Gilbreth emerged with a goal to
increase productivity through process management of the organization’s human resources.
Taylor and the Gilbreths introduced concepts of efficient workflow and optimal conditions
(Darmody, 2007; Liebhold, 1995; Nadworny, 1957).
The new obsession with worker performance combined with the rise of large
organizations and government intervention forced companies to develop formal personnel
management departments. By 1945, during the World War, the official term personnel
management (PM) had been coined (Haslinda, 2009). While Haslinda (2009) supports PM
aligns with the development of HRM, there are differences between the functions of PM and
HRM. PM originally functioned to hire and terminate employees and maintain the
organization standards in accordance to the trade unions (Haslinda, 2009). Thus, PM was
largely a reactive set of processes. To the contrary, Haslinda (2009) argues HRM proactively
addresses organizational needs by obtaining, organizing, and managing human resources.
The transformation from PM to HRM stemmed from the evolvement of management
practice and philosophies introduced by behavior theorists. For example, Maslow introduced
the first concepts of human resource motivation in his A Theory of Human Motivation
(Haslinda, 2009; Jelavic & Ogilvie, 2009; Maslow, 1943). By the 1980s, another
transformation from a hard HRM approach to a softer HRM approach began to appear
(Rodríguez-Ruiz, 2014). The hard approach focused on strategic fit and firm performance.
Conversely, the soft approach primarily addressed the impact of human resources on internal
and external stakeholders of the organization. The contrasting approaches shifted the
perspective of HRM from calculated practices aimed at effective and efficient resource
utilization to management decisions which valued both the employer and employee
(Rodríguez-Ruiz, 2014).
Human Resource Development

The origins of HRD are widely contested among researchers and across geographic and
cultural boundaries. However, in the United States, the Industrial Revolution is recognized
once again as a driving force in the evolution of HRD (Haslinda, 2009; Sambrook, 2001).
© 2015 N. Richman
124 N. Richman
Like Taylor, Henry Ford sought to improve the efficiency of his operations by mitigating the
negative impact of human resources. Ford designed a production process that utilized the
most efficient movements and maximized employee capabilities. The Ford assembly line is a
notable contribution to flow design and lean management in today’s operations (Goldratt &
Cox, 2012; Haslinda, 2009).
By the mid-1930s, the formal concept of organizational development (OD) emerged. The
theories supporting OD drove ongoing employee training and development opportunities
(Haslinda, 2009; Stewart & Sambrook, 2012). Similarly, World War II led to the increased
need for employee training to produce warships and military equipment, which employees
were not previously apt at doing. In the late 1950s, psychology introduced the human element
to OD. Theories on effective employee development activities rose to the forefront of
management concern. Psychologists, Argyris, McGregor, Likert, and Herzberg popularized
the notion that employee development activities directly influence employee performance
(Haslinda, 2009). As such, HRD added the psychological component to HRM, separating
HRD from the processes supporting HRM (Haslinda, 2009).
Purpose and Value

HRM and HRD are not only broadly contested in purpose across academics, but also
commonly confused or misinterpreted amongst managers and organizational leaders
(Nickson, 2007). The deliberate development activities of HRD can be easily misaligned with
learning and training programs seeking only to provide information or specific skills to
employees. However, as this review illustrates, HRD constitutes purposeful actions that
intervene with the natural learning process, driving employees to adopt behaviors and develop
mental and physical attributes (Stewart & Sambrook, 2012). Through the lens of HPO,
employee adaptability and flexibility are key drivers to organizational performance.
Therefore, the purpose of HRD is fundamentally connected to training and development of
personnel proactively to address change (de Waal, 2007; Stewart & Sambrook, 2012).
Relevance of HRM and HRD to Organizational Leaders

Critics argue that the purpose of HRD is to improve productivity and financial outcome with
little to no regard for the psychological issues within an organization (Bunch, 2007). The
contradictory needs of employers and employees separate HRD activities from the overall
organizational values and goals. Such separation leads to power imbalance within an
organization and shifts HRD from operational and humanistic to a strategic maneuver in a
competitive struggle amongst organizations. Some theorists have even placed a portion of the
2008 financial crisis blame on HRD (MacKenzie, Garavan, & Carbery, 2012). Regardless,
blame misplaced or not, HRD has gained notoriety in current organizational management and
leadership. As such, ignoring HRD and its implications on organizational success would
negate arguably the largest impact in history on organizational performance (de Waal, 2007;
Haslinda, 2009; MacKenzie et al., 2012).
The implication of HRD for organizational leaders extends far beyond the walls of the
company or the limitations of an individual. Specifically, there is a growing interest in the
social effects of HRD. Researchers seek to understand the social meaning of HRD through its
impact on the workplace, community, and environment (Baek & Kim, 2014; Bunch, 2007;
Sambrook, 2001). By posing questions outside of the immediate organizational impact,
research has broadened the applicable scope of HRD to a societal perspective. Such
contextualization contradicts both critics and proponents of HRD while adding significant
demand on organizational leaders for HRD. By examining organizational impact through the
aforementioned wider scope, leaders can more clearly evaluate the organization’s impact on
society. HRD thus focuses on a more comprehensive person development rather than the
narrow employee development context (Baek & Kim, 2014; Sambrook, 2001).
Baek and Kim (2014) support four types of HRD: mainstream HRD, critical HRD,
socially responsible HRD, and national HRD. Mainstream HRD activities seek to develop
those skills and behaviors characteristic of a high performing organization, such as flexibility
and innovation. Baek and Kim further define critical HRD activities as those that push the
boundaries of the status quo. Specifically, critical HRD calls for the workplace to act as a
center for social change. Under this HRD belief, HRD is not just for employees, but also
employers, stakeholders, and the supporting community. Therefore, HRD should be
incorporated in all organizations, nonprofit, government, and professional groups or
associations. The socially responsible HRD belief extends the boundaries even further, to
incorporate a holistic and systematic approach to change behavior and increase social
awareness. Last, the broadest perspective, national HRD, extends performance contexts to
include the families, organizations, and nations that are impacted by human behavior. Each of
the perspectives identified contend with the social meaning of HRD beyond the boundaries of
organizational performance (Baek & Kim, 2014). Such conceptualization furthers the relative
importance of HRD to organizational leaders as a social impact as well.
Creating HPOs
To summarize, an HPO must be versatile, flexible, and adaptable to the multitude of
constraints pressuring organizational existence. Adaptability and flexibility require an
innovative and creative cultural environment. Specifically, Sheehan, Gravan, and Carbery
(2014) state: “Innovation is widely recognized to be critical for sustaining the competitive
advantage of firms and industries and at the regional and national levels” (p. 2). As mentioned
previously, studies have identified the critical importance of human resources on
organizational performance. Innovation, an essential ingredient of a HPO, relies on the
dynamic capability of the human resources within a firm (de Waal, 2007; Haslinda, 2009;
Sheehan et al., 2014). Sheehan et al., (2014) state that such capability encompasses the ability
to sense, seize, and transform capacity. Knowledge exchanges and leadership are critical
components of dynamic capability.
Research supports a culture of organizational learning as a positive influence on
innovative employee behaviors (Gilley & Maycunich, 2000). However, Sheehan et al. (2014)
conclude that work engagement also plays a vital role in innovative employee behaviors.
Such findings support collaboration between the HRM processes and the HRD activities to
support human resource behaviors and skills necessary in an HPO. The collaboration of HRM
and HRD includes a range of development and change interventions. Innovation,
subsequently, is not the sole byproduct of such collaboration. Attributes of resilience,
adaptability, and persistence also emerge and contribute to HPO development (de Waal,
2007; Longenecker, Zink, & Florence, 2012; Sheehan et al., 2014).
HRD activities support the constrained resources and capacities facing organizations in
financially turbulent and limited environments. Activities such as mentoring, coaching, and
network learning simultaneously develop employees while accomplishing the work necessary
to sustain the business. Additionally, the mentors, coaches, and instructors in such instances
demonstrate a greater commitment to learning to the recipient employees (Sheehan et al.,
2014). Such programs recognize employee learning and development as an investment in high
performance rather than an employee-related expense.
According to de Waal (2007), the HPO framework, consisting of organization culture,
structure, external environment, and leadership, influences the behavior of its employees. The
structure includes the systems, processes, policies, technology, organization design, and
strategy, which employees and leaders must reference and utilize to achieve favorable
outcomes (de Waal, 2007).
Two factors have influenced the evolution of HRD toward the more active role in the
formulation of business strategy: (a) the centrality of information technology to business
success, and (b) the sustainable competitive advantage offered by workforce expertise.
© 2015 N. Richman
126 N. Richman
These two factors work together in such a way that the competitive advantages they offer
are nearly impossible to achieve without development and maintaining a highly
competent workforce (Torraco & Swanson, 1995, p. 11)
Torraco and Swanson (1995) and de Waal place elevated value on HRD but from
different perspectives. The determinant issues integral to business success, such as marketing,
innovation, and technology, rely significantly on the capabilities of the organization’s
workforce. Research agrees that the skills transferred through HRD are aligned with the
characteristics of a HPO (de Waal, 2007). As such, HRD and HPO must be considered
reciprocal; without one, the other could not exist.
Issues Facing Human Resources

Stewart and Sambrook (2012) argue that the present day nature of HRD is threatened.
Leaning on singular activities, such as coaching or mentoring, organizations are overriding
other necessary, but more complex HRD activities. Additionally, HRD has evolved from its
modest United States roots in the mid-20th century to an international phenomenon. The
varied cultural, psychological, and organizational influences on HRD activities force the
paradigmatic shift in understanding human development, and thus HRD (Stewart &
Sambrook, 2012).
The globalization of organizations and thus wider range of stakeholders contributes to the
complexity and shifting priorities of HRM processes and HRD activities. Stewart and
Sambrook (2012) argue that an emergence of contradictory priorities between employees and
stakeholder perspective portends that the fundamental purpose of HRD will be lost. As a
result, scholarly activity around HRD theories and practices has significantly increased
worldwide. The additional research broadly criticizes the humanist assumptions and
instrumental view of personhood established by HRD (Stewart & Sambrook, 2012). Current
researchers argue HRD does not dedicate enough attention to emotional connectivity with
humans and power (Stewart & Sambrook, 2012).
Academia is not a singular influence to the principle understanding of HRD. In fact,
political and environmental interventions have produced change in the realm of HRM and
HRD (Stewart & Sambrook, 2012). In August 2007, George W. Bush wrote, “We recognize,
and must prepare for, the possibility of unforeseen events, natural disasters, and acts of terror.
We must be prepared as a Nation, as a Federal Government, and as individual citizens to
preserve, protect, and defend our way of life” (Homeland Security Council, 2007). Following
the attacks on September 11, President Bush approved the National Continuity Policy
Implementation Plan to provide guidance on identifying and carrying out the country’s most
fundamental functions during a catastrophe, natural or human (“Federal Continuity Directive
- 1,” 2012). Terrorism, natural disaster, and other environmental impediments have forced
government action and destroyed the very existence of many organizations that were, by the
definition above, previously considered HPOs. Under the pretense of human protection,
government intervention poses new requirements, regulations, and financial burdens to
organizations. Such actions force new processes into HRM and alter the underlying purpose
of HRD activities (de Waal, 2007; Longenecker et al., 2012; Stewart & Sambrook, 2012).
There is well-established theory and supporting research on the positive effects of
resilience in the field of psychology (Youssef & Luthans, 2007). Unfortunately, there remains
a gap in connecting research between psychology and workforce application. Initial research
indicates a positive impact of resilient behaviors on work-related outcomes (Youssef &
Luthans, 2007). Overall, it is evident that HRD can no longer preclude resilience as a skill set
necessary to achieve organizational high performance and individual development.
What remains contentious is the ability to implement improved resilient behaviors.
Supposing that a connection, supported by empirical research, can be made between
resilience and performance, it is not yet understood if such behaviors are instilled or merely
realized. “Reviewing the literature raises legitimate questions as to whether resilience is
something that is even possible to teach and learn” (Longenecker et al., 2012, p. 123).
Defining resilience as the ability to overcome hardship, Logenecker et al. (2012) support that
resilience is a skill learned from life journeys and experienced hardships. Resilience is
achieved from personal experience and through the observation of others’ personal
experiences. Therefore, HRM and HRD must consider the reliance on interpersonal
relationships to develop resilience as a critical skill necessary to all employees and to the
development of an HPO (de Waal, 2007; Longenecker et al., 2012).
Conclusion
Researchers agree that HRD emerged in the United States largely as a result of the demands
presented during the Industrial Revolution. However, human development is traced to the
pressures and demands of a subsistence lifestyle. HRM likewise formed from recognition of
human resources as an organizational asset and the regulatory pressures of government and
union interactions during the Industrial Revolution. The evolutionary trend supports two
fundamental principles: (1) that human resources are the biggest asset to an organization; and
(2) social and human development is necessary to persist in a changing environment.
Research agrees there is a prevalence of external and internal pressures on organizational
performance globally. Based on the above definitions, resilience to change and innovation are
vital characteristics of a HPO. The influence of such pressures and the need for responsive
and proactive skill sets altered the practice of HRM. Further, constraints and pressures
contributed significantly to HRD activities.
Broader societal implications further complicate HRM and HRD. Social responsibility
commands organizational leaders to incorporate sensitivity to societal concerns in
organizations’ objectives and decision making processes. Such awareness has expanded the
context of HRD to include employee behavior impact on the broader community and social
environments outside of the organization’s constraints.
Despite efforts to formulate HRD as controllable, predictable, and systematic, the
research included in this paper supports HRD as an evolutionary and variable set of activities
to drive necessary behaviors internal and external to the workplace environment. Training
and formatted programs which seek to solve a particular problem may, or may not, be a
component of the broader group of HRD activities within the organization. However, HRD
extends far beyond prescriptive solutions to organizational problems. Conversely, HRM is far
more prescriptive, but no less proactive, to the demands of HPOs. HRM seeks to manage and
maintain the organization’s human resources within the productivity needs of the organization
and the legal, political, and social external constraints. Some researchers argue that HRD is a
vital component to HRM. Conversely, other research contends the process versus activity
level variance separates HRM and HRD entirely.
Regardless of the contextual placement of HRM and HRD definitions, the increased
research in the field culminated with the increased pressures facing organizations places
critical importance on human resources. The prominence of human resources extends to
organizations, societies, and cultures. As such, in the pursuit of high performance, the
development and management of the most vital resource cannot be ignore
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Journal of Management

1995, Vol. 21, No. 3, 357-393

Conducting and Integrating Strategy

This paper identifies important research issues at the

Copyright @ 1995 by JAI Press Inc. 0149-2063

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internationalization and the relationship between internationalization and

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diversification strategy on firm performance. With regard to process issues, it

Promising Directions and Dead-Ends in International Strategy Research

Product and Geographic Diversification

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on domestic diversification studies, constitutes in many ways a step backward

JOURNAL OF MANAGEMENT, VOL. 21, NO. 3, 1995

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expanded abroad to internalize imperfect markets for intermediate inputs,

JOURNAL OF MANAGEMENT, VOL. 21, NO. 3, 1995

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Key Research Issues in Corporate Strategy

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firms must have a multidivisional (M-form) structure in place. Moreover, it is

Performance = f (Diversification Strategy) (1)

In doing so, researchers have assumed, we think incorrectly, that there is no

Performance = f (Diversification Strategy. Organizational Structure) (2)

Testing this model requires the collection of detailed data on internal

JOURNAL OF MANAGEMENT, VOL. 21, NO. 3, 1995

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JOURNAL OF MANAGEMENT, VOL. 21, NO. 3, 1995

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Research in Business-Level Strategy:

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. . . if a firm is to attain a competitive advantage, it must make a choice

At other times, he takes a contradictory position:

. . . at the broadest level we can identify three internally consistent

Although Porter qualified his position on the inappropriateness of combining

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