Who pulls the strings: firm strategy or firm environment in controlling firm risk?

Modern firms operate in rapidly changing and aggressively competitive environments that are risky for their growth and survival, yet within these environmental influences, firms have to successfully achieve their goal of enhancing shareholder value. In view of that, this research proposes a comprehensive conceptual framework that explicates how developing appropriate capabilities guided by the firm’s strategy is critical for reducing the idiosyncratic risk of a firm. As the environment is an integral aspect of any organization’s existence, this study examines the moderating effects of environmental influences on the effectiveness of a firm’s strategy in developing capabilities. Upon investigating using robust regression and stochastic frontier estimation, the findings emphasize the key mechanism of marketing capabilities in accounting for the reduction in firm risk as compared to operations capabilities. With important implications for advancing the marketing literature and guiding practitioners, this study demonstrates that adept and resilient firms not only cope with external events but also develop capabilities that enable them to coordinate their offerings with the marketplace requirements.