Branding vs contract manufacturing: capability, strategy, and performance.

Purpose – This study attempts to investigate the relationships among organizational capabilities, strategic choice, and firm performance and examine three questions: What are the relationships between organizational capabilities and the firm's strategic choice – contract manufacturing and branding? Do branding firms perform better than contract manufacturing firms after controlling for endogeneity bias? Do firms usually choose their strategy (contract manufacturing/branding) appropriately to achieve a better performance under the conditions they encounter? Design/methodology/approach – The empirical study employs a questionnaire approach to collect data from the population of the top 5,000 Taiwanese firms listed in the yearbook published by the China Credit Information Service Incorporation for testing the validity of the model and research hypotheses. This study uses a Heckman two-step estimation procedure and follows the procedure proposed by Shaver to examine the economic implications of strategic choice on firm performance. Findings – Firms are more likely to adopt the branding strategy when they have better marketing and R&D capabilities while they are more likely to choose the contract manufacturing strategy when they possess superior manufacturing and process capabilities; in general branding firms perform better than contract manufacturing firms after controlling for endogeneity bias; and firms achieve a better performance if their strategic choice (contract manufacturing/branding) fits the conditions they encounter. Research limitations/implications – This study contributes to the marketing literature by exploring an important issue of strategic choice (contract manufacturing or branding) and contributes to the strategy literature by proposing the endogenous role of strategic choice in the relationship between organizational capabilities and firm performance. Practical implications – Firms should take into account organizational capabilities when choosing a contract manufacturing strategy or branding strategy. Further, managers should not ignore matching their strategic choice (contract manufacturing/branding) with the conditions they encounter in order to optimize firm performance. Originality/value – The strategic choice of branding or contract manufacturing is a prevalent phenomenon that has received little attention in the strategy and marketing literature. Based on the competence-based perspective, this study examines the relationships among organizational capabilities, strategic choice, and firm performance. [ABSTRACT FROM AUTHOR]