Competence Upgrading, Business Configuration, and Risk-Return Relationship
Date Issued
2008
Date
2008
Author(s)
Hsu, Chia-Wen
Abstract
Based on the competence-based view, the present thesis postulates that a firm’s activities that are dedicated to either upgrading or leveraging strategic competence will exert differential impacts on the firm’s risk level and economic return. Such an inquiry would lead us to establish a competence-based growth theory of the firm. To empirically implement this research inquiry, we identify two types of competence-based activities: competence upgrading and business configuration. In addition, we define two directions in which these competencies could be leveraged; they are vertical and horizontal scopes of business activities. We took a firm’s returns on invested capital as its economic profit measure, and the downside risk measure as its business risk measure. Our empirical investigation is based on the operating and financial data of 312 listed electronics and computer companies across 1998-2006. Overall speaking, our results show a high degree of consistency between theoretical predictions and empirical evidence. Product competence upgrading maintains a U-shaped relationship with firm’s economic return, while it has an inverted U-shaped relationship with the level of business risk. As far as business configuration is concerned, we found that both vertical scope expansion and horizontal scope expansion will have an inverted U-shaped relationship with firm’s economic return and U-shaped relationship with business risk. Taking both competence upgrading and business configuration into consideration, our empirical results show that upgrading product competence while leveraging those competence across a wider scope of value chain, a firm’s business risk will be substantially reduced while enhance an insignificant portion of economic return. To further examine the moderating effects of business configuration on the relationship between competence upgrading and firm performance, we conduct further comparative analyses. We found that high competence upgrading combined with high leveraging in vertical scope will reveal a high-return-low-risk outcome. The combination of competence upgrading and competence leveraging therefore could facilitate a firm’s achievement of low risk with high economic return. According to research findings, we suggest that firms should manage competence activities with external opportunities to constitute corporate growth strategies. Our results shall motivate a firm to construct a growth path based on competence upgrading and leveraging for higher return and lower risk to sustain competitive advantages.
Subjects
Competence Upgrading
Business Configuration
Downside Risk
Economic Return
Type
thesis
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