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Assignment 1: Discussion—Application of Generic Strategies and Models
Often organizations enter the marketplace with one approach and model. As the economy and demands shift, and technology changes, it is important that organizations pay attention and adjust with the times. This module uses the example of Amazon and how the company proactively adjusted to changes in the market and changes in technology to acquire the position of number two behind the iPad. Amazon continues to develop reader or iPad type technology that goes beyond digital texts.
Amazon’s original aim was to be the world’s largest bookseller. The company currently offers a wide range of products and services in addition to operations in online retail storefronts for partners. The company has also developed and sold its own manufactured products such as the Kindle.
Review the main sections of Amazon’s most recent annual report available at the following link:
http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsannual
.
Respond to the following:
- What was the generic strategy originally applied?
- How has the company’s strategy changed? Which strategy applies now?
- How would you describe the central elements of Amazon’s strategy?
- What elements of low-cost provider strategy do you see?
- What are the elements of differentiation in the company’s strategy? For example, elements such as diversification or market timing.
(Apply required readings in all assignments)
Write your initial response in approximately 400 words. Apply APA standards to citation of sources.
By Monday, May 13, 2013
,
Assignment 2: Market Position Analysis
Throughout this course, you will conduct a strategy audit for a selected company. In
Module 1, you selected an organization for your course project activities.
In this assignment, you will assess the product portfolio for your selected business unit by analyzing the value proposition, market position, and competitive advantage of its products and services. You will begin your analysis by identifying the business unit and the product(s) and service(s) you will focus on in this paper.
Complete the following:
- Conduct at least three interviews with your selected mid-level or senior managers. Use the interviews to solicit each manager’s understanding of your business unit’s market position, value proposition, and competitive advantage.
- Provide either full transcripts or annotated summaries of the interviews. Include them in the appendix of your analysis.
In your analysis, be sure to cover the following:
- Describe the target customer for the product/service in terms of relevant characteristics that impact the marketing strategy, including location (how it is reached) and buying habits.
- Identify each customer segment’s specific wants and needs. Explain why they buy your company’s product or service, or a competing product or service.
- Justify how well your product/service satisfies customer wants and needs. Identify any wants and needs that are not met by your product/service.
- Analyze your product’s position in relation to the competition. Identify 3–5 main competitors. Explain how your product differs in terms features, function, quality, price, availability, brand image, etc. Explain why this differentiation is important to your customers.
- Describe the source of competitive advantage for your product. Evaluate sustainability of this source of advantage.
- Assess the long-term sustainability of the source of differentiation and competitive advantage.
- Apply the five “P’s” of marketing to your product analysis.
- Provide a concluding paragraph in your report that recapitulates the findings of your interview.
Click here
to download a template to use for comparing your product to that of the competition.
Support your responses giving reasons and examples from scholarly resources. Include the matrix in an appendix and add an extra page for your references.
Write a 3-page paper in Word format and attach the matrix as an appendix. Apply APA standards to citation of sources.
By Saturday, May 17, 2013
, deliver your assignment to the
M2: Assignment 2 Dropbox
.
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Assignment Component |
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Described the target customer for the product/service in terms of relevant characteristics that impact the marketing strategy, including location (how reached) and buying habits. |
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Identified each customer segment’s specific wants and needs. Explained why they buy your company’s product or service, or a competing product or service. |
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Justified how well your product/service satisfies customer wants and needs. Identified any wants and needs that are not met by your product/service. |
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Analyzed your product’s position in relation to the competition. Identified the main competitors. Explained how your product differs in terms of features, function, quality, price, availability, brand image, etc. Explained why this differentiation is important to your customers. Explained how the 5 “P’s” of marketing are represented in the analysis. |
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Described the source of competitive advantage for your product. Evaluated how sustainable this source of advantage is. |
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Included information from appropriate interviews. |
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Wrote using ethical scholarship and proper grammar and mechanics. |
Market Position Analysis: Product Position versus Competitor Product Position
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Needs of the Consumer |
Rating of Your Product (Use a scale of 0–2*) |
Rating of Competing Product 1 (Use a scale of 0–2*) |
Rating of Competing Product 2 (Use a scale of 0–2*) |
Rating of the Competing Product 3 (Use a scale of 0–2*) |
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Quality |
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Price |
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Availability |
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Features |
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Functions |
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Brand Image |
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Total Score |
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Narrative/Comments |
* On the scale of 0–2: 0 indicates “need not met,” 1 “indicates need partially met”, and 2 indicates “need fully met.”
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Solutions to Organizational Challenges: A Capstone Experience in Integration and Strategy
©2012 Argosy University Online Programs
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Course Name (not number)
©2012 Argosy University Online Programs
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Module2 Overview |
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This module is designed to reinforce prior learning from the MBA coursework and offer further introduction to the core concepts on strategic models and patterns. You will explore the importance of examining generic and historical models and patterns while simultaneously assessing the changing and sometimes turbulent economic environment when identifying a strategy and direction. You will also examine opportunities around formulating, designing, developing, implementing, and monitoring a diverse and flexible plan. Key concepts in this Module · Generic Strategies—A focus on cost differentiation (when the product or service offers something a little more unique or different than the competition), cost leadership (lower cost leader in the industry given a set quality), and strategy focus (this effort narrows the playing field / market segment and also offers some differentiation possibly in cost). · Vertical Integration (supply chain)—Often referred to as the degree to which a firm owns its upstream suppliers and its downstream buyers. This often influences corporate strategy because a focused vertical integration approach can significantly impact cost as well as the ability to differentiate. · Diversification (horizontal integration)—This allows for businesses to add to their existing suite of products, services, and even markets. Most often the purpose is to allow the company to enter lines of business that are related but new. However, diversification can also be completely different from current operations. · Outsourcing—Contracting with another business or person to perform specific business functions. For example, many companies outsource their payroll function to a firm to process, manage, and distribute paychecks. Some smaller firms may have an outsourced chief financial officer (CFO). They may not need someone full time but still need the skills or expertise that a CFO can provide on a part-time and contractual basis. · Timing—There are two old adages—“timing is everything” and “be in the right place at the right time.” Most likely these were coined by business people as timing is key.
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· Synthesize a wide variety of economic, financial, and qualitative data to draw actionable managerial conclusions that convince others of your position and analytical conclusions. · Identify actions that effectively integrate the primary business disciplines cross functionally to move the organization toward its mission and strategic goals, while being consistent with professional standards, social norms, and corporate ethics. · Analyze and apply practical strategic business principles, models, and theories to diverse and complex organizational situations. |
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Short- and Long-Term Strategy |
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Having a good product and being able to convey value is important. However, it is also critical to have both effective short- and long-term strategies. There are many examples of companies that rose to great heights quickly and then failed. Although there were likely numerous reasons, often the failure revolved around issues with strategy, alignment, and execution of short- and long-term business plans. Timing is a key element as well and can be as simple as the timing of an e-mail, a customer satisfaction survey, or follow-up on an issue with a defective product. Timing is an important part of the overall process to strategy development and execution. . Evaluating and Adapting Strategy Eastman Kodak is known for essentially creating the film-based imaging industry in the U.S. in the early 1900s, and dominating it into the 1980s. The company’s strategy focused on making photography available, usable, and affordable to everyone through mass production at low cost, international distribution, extensive advertising, and product innovation through continuous research. Kodak made large profits by selling cameras at low prices while profiting from high prices on film and related consumables. Kodak’s fortunes changed dramatically in the 1980s with the introduction of digital photography. Kodak largely stuck with its film-based strategy as it diversified into new markets, including medical imaging, mass memory, bioscience and lab research firms, pharmaceuticals, and batteries. However, by 1990, digital imaging technology became popular and Kodak’s expertise in film technology risked becoming obsolete. The company made an attempt to develop a digital strategy, but it was too late and its expertise in chemistry, research and development, manufacturing, and distribution was no longer valuable in digital products. Could Kodak have avoided its dramatic downfall? Despite strong signs, the company believed that the digital revolution was not going to happen, that any strategy shift would allow cannibalization of its highly profitable film offerings, and that current customers would not demand the advantages of digital photography. In retrospect, external forces such as rapid changes in imaging technology, consumer adoption of digital devices, and the entry of consumer electronics goods makers into photography all posed obvious threats to Kodak’s core business and strategy. However, the influence of internal dynamics and beliefs caused the company to refuse to acknowledge these threats and adjust its strategy to the emerging realities of digital photography. Kodak’s story illustrates a critical lesson in evaluating strategy. While strategy is anchored in occupying a beneficial market position, executing strategy is about continuously reconciling the external forces that drive changes in industry dynamics, customer preferences, and market behaviors to create new opportunities and threats with the internal forces that dictate a company’s capabilities as re ABC Case Study—Market Analysis Let’s check in with the ABC eLearning Company and learn more about its corporate strategy. ABC Case Study—Employee Alignment The goal of using cross-functional teams was to ensure that all employees stayed aligned with the strategy and could help navigate the path to success with regular communication. In lieu of building silos within each function, the cross collaboration and communication served to ensure that an optimal client growth plan could be created and achieved. Course development personnel were aware of what was going on with client services as related to a specific customer and therefore, potential issues could be addressed before they became a problem and services could be offered or adjusted to better meet the client needs. The company won an “honorable mention” award from the American Society for Training and Development (ASTD) for integrating internal training and cross-functional workgroups to improve the organization and how it was serving customers. Communicating Strategy As you review the readings and work on the assignments, consider how the ABC eLearning Company communicated its strategy versus how Amazon uses its annual report to communicate its strategy. Different companies adopt various strategies based on what is assessed and what will deliver the optimal results. Using the |
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FALL 2011
VOL.53 NO.1
)Christopher B. Bingham, Kathleen M. Eisenhardt
and Nathan R. Furr
(
REPRINT NUMBER 53110
)
Which Strategy When?
STRATEGY
Which Strategy When?
Just when you think you have settled on the right strategy, you may need to change. By understanding the particular circumstances and forces shaping your company’s competitive environment, you can choose the most appropriate strategic framework.
BY CHRISTOPHER B. BINGHAM, KATHLEEN M. EISENHARDT AND NATHAN R. FURR
MARKETS ARE CHANGING, competition is shifting and your business may be suffering or perhaps thriving, at least for now. Whatever the immediate circumstances, managers are forever asking the same questions: Where do we go from here, and which strategy will get us there? Should we fortify our strategic position, move into nearby markets or branch out into radically new territory? To help guide our decisions, most of us have a smorgasbord of strategic frameworks to draw on. But which one is the right one, and when? The strategic plans, market analyses and hefty binders that strategy consulting firms leave behind often jumble strategic lenses: Five-Forces analysis, portfolio review, assessment of core competencies; examination of profit pools, competitive land-scape and so on. But which analyses are most helpful right now?
Most managers recognize that not all strategies work equally well in every setting. So to understand how to choose the right strategy at the right time, we analyzed the logic of the leading strategic frame-works used in business and engineering schools around the world. Then we matched those frameworks with the key strategic choices faced by dozens of industry leaders at different times, during periods of stability as well as change. (See “About the Research, p. 72.) Two surprising insights emerged.
First, we discovered that the logics of the different strategic frameworks break into three archetypes: strategies of position, strategies of leverage and strategies of opportunity. What’s right for a company depends on its circumstances, its available resources and how management combines those resources together. (See “Choosing the Right Strategy,” p. 73.)
(
Pixar Animation Studios, whose worldwide megahits include the
Toy Story
movies and
Finding
Nemo
, uses rules such as “great story first, then animation” to guide its strategy.
)Second, by observing market leaders employing archetypal strategies, we found that many assumptions about competitive advantage simply don’t hold. For example, although strategy gurus talk about strategically valuable resources, sometimes
THE LEADING QUESTION
How can managers know which strategic framework is the most ap-propriate one?
FINDINGS
What’s right for a company depends on its circumstances, its available resources and how it puts the resources together.
Sometimes ordinary resources assem-bled well can be used to create competitive advantage.
To identify the most appropriate strategic framework, start by assessing whether your industry is stable, dynamic or somewhere in between.
COURTESY OF PIXAR ANIMATION STUDIOS FALL 2011 MIT SLOAN MANAGEMENT REVIEW 71
STRATEGY
very ordinary resources assembled well are all that’s required for competitive advantage. Sometimes it makes good sense to bypass the largest markets and focus instead on where resources fit best. In other circumstances, it may be preferable to ignore existing resources and attack an emergent market. In some situations, basic rules of thumb work better than detailed plans. Surprisingly, these simple strat-egies can be harder to imitate than complex ones.
(
ABOUT THE RESEARCH
To understand how
compa-nies
create competitive advantage in different
indus
-tries and settings, we conducted in-depth inter-views with more than 90 corporate leaders. The lead-
ers
included both senior executives (CEOs, chair
men, executive vice presidents
and business-unit heads) and managers who are charged with
strat-egy
implementation. We also surveyed all top man-
agement
team members at 12 U.S., Finnish and Singa
porean companies about the strategies they used for key strategic processes such as allian
ces, acquisitions, prod-
uct
development and internationalization as well as the performance results that followed from using those strategies. In addition, we reviewed relevant re
search articles in the field of strategic management pub
lished in leading a
cademic and practitioner journals from 1980 to 2010. From the data collected in our own research and through the review of the extant lit
erature, we were able to zero in on three archetypal strategic frameworks used by industry exemplars at different time
s and under different conditions of
envi-ronmental
dynamism.
)How to Choose the Right Strategy
To figure out when it makes sense to pursue strategies of position, leverage or opportunity, the key is to look first at the immediate circumstances, current resources and the relationships among the various resources. Understanding these factors will help you get started with the right strategic framework.
Understand Your Circumstances The first step for managers is a thoughtful review of their industry. Specifically, assess whether your industry is stable, dynamic or somewhere in between. How do you gauge this dynamism? Begin by asking yourself: Can I map the five industry structure forces in my industry? If you can identify buyers, suppliers, customers and substitutes by name and tick off barriers to entry, and if these five factors tend to stay largely the same, then you are probably operating within a stable industry. If the industry is too unsettled to map (think mobile Internet applications) or the basic rules are in flux (think clean or nano technology), then you most likely inhabit a dynamic industry.
Next ask: Where do my products fit in terms of product life cycle? In stable industries, standards are well-defined, product expectations are clear, product life cycles are known and often long and a limited number of competitors may slowly push the development envelope with anticipated innovations. However, in dynamic industries it’s different. Standards may not yet exist, product life cycles are short, products are diverse and no clear dominant technology or product has emerged. Some industries are in between. The auto industry is historically a stable industry. But new technologies (for example, hybrid and electric-powered engines), compressed product development times, volatile oil prices and regulatory pressure have increased dynamism. Also, don’t forget that your own company’s circumstances (for
example, whether you’re a startup with a promising business model or an established player with global reach) will also affect where you fit.
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)Take Stock of Your Resources Once you understand your industry circumstances, take a look at your company. Assessing your resources and the links among them is essential. Why? Resources lie at the heart of strategy. They enable companies to set themselves apart from competitors. Tangible resources (such as Intel’s fabrication facilities or Starbucks’ locations) are relatively straightforward to assess. But intangible resources (for instance, Amazon’s patents or Procter & Gamble’s brands) are trickier. Beyond these, organizational processes (for example, the acquisition process of India’s Tata Group or General Dynamics’ divestment process) can provide a critical basis for advantage.
Once you know your resources, determine how advantageous they really are. The most strategically important resources are valuable (i.e., useful in your industry), rare (i.e., possessed by only a few), inimitable (i.e., difficult to copy) and nonsubstitutable (i.e., lacking in functional equivalents). These resources are a potential source of competitive advantage. Yet even if they can provide advantage, they aren’t absolutely necessary for competitive advantage. Indeed, even common resources can be a source of advantage depending on how they are linked with other resources.
Determine the
Relationships
Among Resources A secret to picking the right strategic framework is assessing how your resources relate to one another. Some resources are tightly linked. For example, Wal-Mart’s low-cost strategy in the United States depends heavily on its physical resources (often rural locations), so-phisticated information technology (like maximizing selling space in stores and quickly replenishing inventories), efficient logistics (like cross-docking) and cost-conscious culture, all of which reinforce each other. By contrast, Google’s resources are more loosely linked. Executives can recombine human capital and technical resources as needed to tackle different markets and products. Of course, there are trade offs: Tightly linked resources create more defensible strate-gic positions, but they resist change; loosely linked resources are easier to change, but they can be ineffi-ciently deployed and redundant.
CHOOSING THE RIGHT STRATEGY
We found that the logics of different strategic frameworks break into three archetypes: position strategies, leverage strategies and opportunity strategies. What’s right for a company depends on its circumstances, available resources and how management links those resources.
(
STRATEGY
)POSITION STRATEGY
Build mutually reinforcing resource systems with many resources in an attractive strategic position. Deepen their links.
LEVERAGE STRATEGY
Build strategically important resources for current markets. Leverage them into attractive new products and new markets.
OPPORTUNITY STRATEGY
Pick a few strategic processes with deep and swift flows of opportunities. Learn simple rules to capture opportunities.
(
Circumstances Best for
Resources
)Stable environments
Often mundane
Moderately dynamic environments
|
Strategically important (i.e., valuable, rare, inimitable and nonsubstitutable) |
Dynamic environments
|
Opportunity-rich strategic processes guided by simple rules |
Relationships
Basis of Competitive Advantage
Tightly interlocked resources
A cost leadership or differentiated strategic position that is defensible
Moderately linked resources
Ownership of specific strategically important resources that can be leveraged
Loosely linked resources
Capture of attractive opportunities before rivals
(
Sustainability of Advantage
Inimit
ability of Advantage
Challenges
)Long term
Through causal ambiguity of tightly linked resources plus time to develop the resource system and path dependence
Adjusting system of tightly linked resources quickly enough and with-out producing negative synergy
Medium term
Through property rights, path
dependence and time needed
to develop the same resources
Adjusting resource portfolio without being blocked by cognitive and political rigidities
Unpredictable
Through first-mover advantage and the challenge of inferring rules from partially improvised outcomes
Maintaining “edge of chaos” with the right number and types of rules. Timely pivoting to better strategic processes
Choosing a Strategy When does it make sense to choose one strategy over another? How do execu-tives decide whether to build their strategies around position, leverage or opportunity? We will examine each framework separately.
The Position Strategy
When industries are stable, a strong case can often be made for a position strategy. Position strategies involve selecting a valuable and unoccupied indus-try position and then building up its defenses. This is the strategy that is commonly associated with Five Forces analysis,1 where competitive advantage comes from constructing a fortress around an attractive market. Industry stability ensures that the position of the fortress provides a long-term competitive advantage, thereby justifying repeated investments to reinforce and preserve the position. The strategy remains valuable until the terrain shifts and the strategic position is eroded.
With a position strategy, competitive advantage depends first on choosing a valuable and unoccupied strategic position in a given industry, and second on creating and linking company resources
to defend that position. A valuable strategic position drives superior profitability through the ability to either boost prices (e.g., Porsche in the automotive industry) or reduce costs (e.g., Casio in the watch industry). Companies often defend their positions by assembling resource combinations that their competitors cannot easily imitate. In the U.S. mutual fund industry, for example, The Vanguard Group has built its strategy around conservative investment management and low costs. Vanguard, which claims that the average expense ratio of its mutual funds is a fraction of its main competitors, defends its position with mutually reinforcing resource choices, including low commissions, modest management perks and an absence of retail branches. Thus, the key to advantage with a position strategy is not just having a valuable strategic posi-tion, but also linking resources to defend successfully against challengers.
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)Position strategies seem straightforward, but it is often assumed their success requires strategically important resources. Although such resources can be helpful, they aren’t necessary. Competitive advantage can come from defending a strategic position
STRATEGY
through a system of tightly linked resources, not necessarily from the superiority of the resources per se. Consider JetBlue, the low-cost U.S. airline. On the surface, its strategy is based on common, even mundane, resources: Airbus A320 and Embraer 190 aircraft, comfortable passenger seats, DIRECTV access and SIRIUS XM satellite radio, e-mail and instant messaging services and fast turnaround capability at airport gates. None of these resources is particularly special. But as a package, they are mutu-ally reinforcing and produce a differentiated offering that gives JetBlue a competitive advantage that other airlines would have difficulty imitating.
When resources are tightly linked, they are hard to copy. Interdependent resources create complexity, and so copying them and their linkages is challenging and time-consuming. Thus, even if imitators understand which resources are being used, they probably don’t understand exactly how they fit together because there are often many resources with unexpected combinatorial effects. Successful imitation, therefore, requires not only knowing which resources comprise another company’s strategy (i.e., ingredients), but also deciphering the proper sequence of their assembly (i.e., recipe).
Over time, since even fortresses need maintenance, managers with position strategies can’t just rest on their laurels. To maintain competitive advantage, they may need to refresh their resources and strengthen the links among them. For example, the Spanish clothing company Zara has updated several resources to bolster its strategic position, including more and better small-batch production that seamlessly links to air shipment logistics. Zara can now send new designs to any store in the world in less than two days.
Like any strategy, position strategy has an Achil-les heel: change. When industries change, moving a fortress locked into a strategic position is tough. Changing a tightly linked system means dismantling the very synergies that management worked so hard to build and putting the organization at risk during the transition to a new strategy. For this reason, many managers either ignore change or make changes at the margin. But neither approach works. Once stable markets change, entrenched strategic positions tend to falter. Change forces managers to dismantle their existing resource systems and reas
semble them in new strategic positions. This is difficult and time-consuming — a combination that can potentially be lethal because performance may not improve until the pieces are reassembled and linked. For example, Liz Claiborne, an apparel company, relied on a positioning strategy in which production, distribution, marketing, design, pre-sentation and sales resources were all tightly linked. But when the industry changed, the company’s re-lationships with department stores were disrupted.2 In an effort to adapt, Claiborne executives changed resources such as their “no reordering” process that had antagonized department stores. But since this process was synergistically entwined with other resources like overseas logistics and distant manufacturing locations, the “no reordering” process could not be undone without damaging system coherence. Financial performance sank precipitously. Only after Claiborne executives dismantled their existing resources and started reconnecting new ones did positive performance begin to return.
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)The Leverage Strategy
In markets where change is moderate, leverage strategies often beat position strategies. Since change is incremental and predictable, it makes sense for managers to coevolve their strategically important resources with the industry. So while position strategies are based on the fortress analogy, leverage strategies are more like chess, where competitive advantage comes from both having valuable pieces and making smart moves with them. Take Pepsi. The company has several strategically important resources (including its brand, product formulas and distribution system). But what really matters is that the company has smartly leveraged them to support new products that fit with increasingly health-conscious consumers. Alongside its carbonated drinks, Pepsi now offers an array of alternative beverages, including waters (Aquafina, SoBe Lifewater), juices (Tropicana, Dole), teas (Lipton) and sports drinks (Gatorade), all of which take advantage of the company’s stra-tegically important resources.
Companies that pursue leverage strategies achieve competitive advantage by using their strategically important resources in existing and new industries at a pace that is consistent with market
change. This strategy, commonly associated with the resource-based view of the company,3 focuses on building or acquiring resources that are valuable, rare, difficult to imitate and nonsubstitutable, and leveraging them into new products and markets. But while resources in position strategies are often tightly interlocked, resources in leverage strategies are often only moderately interconnected.
Leverage strategies can focus on refreshing and consistently deploying core resources in current markets. For example, although Intel’s short-term success depends on extracting value from its current generation ofmicroprocessors, its long-term growth depends on using its well-known design capabilities, branding and manufacturing resources in future generations of microprocessors. Similarly, Pizza Hut’s continued suc-cess depends on updating its highly important service resources in its existing markets. The company expanded into India in the late 1990s and soon distinguished itself from competitors based on its ability to provide customers with pizza and friendly table service in a relaxed atmosphere. Yet, by 2005, India’s casual dining sector was crowded. Pressured by rivals, including Domino’s, Pizza Hut refreshed its service resources and leveraged them to create a more upscale dining experience. As a result, Pizza Hut is still the most trusted food brand in India.
While leveraging resources in existing markets is important, leveraging resources into new markets is important, too. Under Armour, a Baltimore, Maryland, sports apparel company founded in 1995, offers a good example. CEO Kevin Plank originally planned to make breathable garments for football players. But he and his team soon realized that they could leverage their moisture-wicking synthetic fabrications into other markets. After screening markets to see where this resource could be introduced most effectively, Under Armour executives developed their first line of moisture-wicking running shoes. Similarly, Home Depot is currently attempting to leverage its core resources by selling automotive replacement parts. By exploiting both its extensive expertise in “do-it-yourself” and its 2,200 store locations, it hopes to propel growth.
A common mistake with leverage strategies is forgetting to reassess the strategic importance of resources (especially value, rarity and nonsubsti-tutability) in potential new markets. For example,
when
Amazon.com
first tried to leverage its online ordering and inventory fulfillment capabilities beyond books and music to include other product categories such as toys, it hit a wall. As it turned out, the inventory systems that were tailored for books and music were not well suited for the extreme seasonality of toys, and the company’s warehouse logistics were not designed to handle toys, which come in all sorts of shapes and sizes.
(
Under
Armour
CEO Kevin Plank and his team realized that they could leverage their moisture-wicking synthetic fabrications into new markets.
)Leverage strategy is not only about expansion. Sometimes, it makes sense to pull back and redeploy resources. For years, California-based Advanced Micro Devices used its superior engineering design resources to develop semiconductors. Recently, however, the company has redeployed some of its resources away from the hotly competitive semiconductor industry and into design services. Although products and ser-vices may rely on particular strategically important resources, these resources need not be wedded to specific products or services. Rather, they can be used to create competitive advantage in other contexts. In other words, a deep knowledge base of resources and capabilities is often fungible across multiple products and markets.
A primary challenge of creating competitive advantage with a leverage strategy is updating the resource portfolio as industries change. This can mean choosing whether to acquire, partner or develop key resources in-house. Toyota’s Prius is an example of leveraging some existing resources, including brand and electronics technology, even as the company developed and acquired new resources for hybrid technology, engine control software and regenerative braking. But, even when managers see the need for adding, upgrading or eliminating resources, entrenched beliefs and internal power struggles can interfere. Immediate performance from existing resources takes precedence over later performance from new resources that may be several years away. To support this point, one needs to look no further than Chrysler. In 1984, Chrysler introduced the first minivan. Over the next 20 years, it sold more than 10 million minivans, revitalized its popular Jeep line and introduced successful Ram and Dakota pickups and Dodge Durango SUVs. But the auto industry changed. While General Motors and Ford adapted their engine technologies to emphasize fuel efficiency
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STRATEGY
and retooled their manufacturing plants for small cars, Chrysler failed to update its resource portfolio. As a result, the company, now controlled by Fiat, has yet to prove that it can gain the resources necessary to compete well in the new reality.
The Opportunity Strategy
In contrast to stable industries, dynamic industries are characterized by superabundant flows of fast-moving but often unpredictable opportunities. Industry struc-ture is characteristically shifting as competitors come and go, customers modify their preferences and business models are in flux. How long will competitive advantage last? It’s impossible to know, but probably not very long. As the CEO of a security software company told us half-jokingly, “You need a degree in astrology to compete in our industry.” Even though managers seek a long-term competitive advantage, they do business as if it doesn’t exist. The famous Intel axiom that “only the paranoid survive” reflects senior management’s belief that at any point in time their competitive advantage will vanish. As a result, strategy focuses on capturing opportunities that create a series of temporary competitive advantages.
In contrast to the fortress and chess views of strategy, pursuing an opportunity strategy is like surfing: Performance comes from catching a great wave at the right time, even though the duration of that wave is likely to be short and the ride a precarious “edge of chaos” experience where falling off is always a possibility.4 Timing and capturing succes-sive waves are what matters. The video game console industry provides a useful case in point. In the space of only a few years, different companies (including Sega, Nintendo, Sony and Microsoft) have “caught the wave” and for a time led the industry.
For companies pursuing opportunity strategies, competitive advantage comes from capturing at-tractive but fleeting opportunities sooner, faster and better than competitors. This strategy, which is commonly associated with “simple rules” heuris-tics,5 requires combining two elements: choosing a focal strategic process and developing simple rules to guide that process. Together, they enable companies to be flexible enough to capture unanticipated opportunities while still being broadly coherent and efficient. In choosing a focal strategic process, the key is to choose one where the flow of attractive op
portunities is steady and deep. Tata Group, whose diversified operations range from steel and autos to communications and beverages, provides a good example. Because of its high market capitalization and ready access to corporate debt, Tata has relied heavily on acquisitions as its focal strategic process. Its managers have pursued a series of acquisition opportunities quickly and effectively. For example, in 2007, the company paid $12 billion for Corus, a European steel company. Several months later, it paid $2.3 billion to buy Jaguar and Land Rover from Ford. In contrast, Apple focuses on a different stra-tegic process — product development — to churn out coveted new designs. Yet in contrast to position strategy, which depends on tightly connected processes, opportunity strategy is built on processes that are only loosely connected to one another.
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)Once managers have identified their focal strategic process, they need to learn some simple rules. The easiest to learn are rules of thumb for picking and processing opportunities; rules for pacing and priority rules are more difficult to learn. The idea is to provide enough structure for action while also allowing flexibility to capture unanticipated opportunities. At Pixar Animation Studio, whose animated films (including the Toy Story movies, A Bug’s Life, and Finding Nemo) have become worldwide megahits, the rules are clear. One rule is “no studio executives.” Pixar is run by cre-ative artists, or as Andrew Stanton (director of WALL-E and Pixar’s ninth employee) called it, “film school without the teachers.” This gives company artists maximum leeway to create without having to fight their way through middle management. A second rule is “great story first, then animation.” That not only ensures a steady stream of prestigious awards (Ratatouille holds the record for the most Oscar nominations for a feature-length animated film), but also makes it easier to attract talent. Another rule stipulates “in-house original ideas only.” And while ideas must come from within, they don’t come just from creative types: Every-one from janitors to auditors is encouraged to submit ideas, and all ideas are considered. Finally, as the surf-ing analogy would suggest, the rules affecting pacing are particularly important. A key one at Pixar is “one new movie per year.” But while there are rules, there is plenty of space at Pixar to create unique movies.
On the surface, opportunity strategies relying on simple rules seem easy to copy. But since the op-
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)portunities and outcomes are so varied, it is actually difficult to decode the rules from the outside. Of course, competitors can try to mimic processes (say, for acquisitions or product development), but rules are often the results of idiosyncratic trial and error, making them difficult for rivals to duplicate. More-over, even if competitors understand the underlying logic and copy a company’s rules, it’s often too late: The most attractive opportunities will have already been captured. For example, although Cisco Sys-tem’s networking rivals eventually copied the rules of its acquisition process, they could not replicate the opportunities that Cisco had already acquired.
Managers often tinker with their rules by making them better or more suited to their changing industries. In doing so, managers not only alter the number and content of rules, but also their abstraction. For example, CRF Health, an international company that expedites drug discovery in the pharmaceutical industry, frequently adjusted the rules that guided its internationalization process. When the company entered the United States, it relied on a rule that had been highly effective in Sweden: “Hire strong locals using online resources.” But this rule proved ill-suited to the new market because there were few individuals with both clinical development and technical skills willing to work in a startup. Indeed, the rule led to several early hires who were not well-qualified. Based on this experience, CRF’s team decided that the existing rule needed to change to one emphasizing local hiring without regard to source. Thus, leaders raised the abstraction from “Hire strong locals using online resources” to the more general “Hire strong locals.” This new rule focused attention on the overarching aim of hiring, but did not prescribe whether to rely on online resources, headhunters or other sources. Although intuition suggests that rules begin as abstract and become detailed, opportunity strategy stresses the opposite. Rather than becoming routine to ensure efficiency, rules often become more abstract and remain few in number to ensure flexibility to address unanticipated opportunities.
When an opportunity flow becomes less attractive (e.g., greater competition for the opportunities or lower payoff from the opportunities) or when more attractive opportunity flows emerge, it’s time to pivot to the superior flow and its related strategic process.
STRATEGY
The key point is that shifts in where to compete are driven more by the attractiveness of opportunity flows than by fit with the company’s strategically important resources. For example, as product development opportunities slowed down at Google, management placed more emphasis on internationalization opportunities. The company ramped up to enter more than 55 countries with more than 35 languages by support-ing localized search, and it now generates more than half its revenue from outside the United States. Similarly, once its user network had grown to a sufficient scale, LinkedIn switched from emphasizing its strate-gic process for user acquisition to one for developing new revenue-producing services.
Just as positioning and leverage strategies have their pitfalls, so does opportunity strategy. For entrepreneurial startups, it is often critical to add more strategic processes and rules than is comfortable. Too little structure is riskier than too much. But for large companies, the greater risk is having too much structure. Most managers intuitively worry about bureaucracy and red tape. But what they don’t know is that pursuing an opportunity strategy requires holding the line on the number of rules, not just their content. In other words, the number of rules matters. Managers should also be alert to signs of consolidation, standardization, longer product life cycles and other such indications that the industry is maturing and becoming less dynamic.
SO WHICH STRATEGY SHOULD YOU USE? The reality is that no single strategy works in every industry always. Although the essence of strategy is being different, establishing that “difference” — whether it’s through different positions, different resources or different rules — depends on the circumstances. Each approach works best in particular settings and has its own implications for strategic actions, pitfalls, competitive advantage and performance. And just when you think you have it right, you may well need to change again. But by understanding the archetypal strategic frameworks and the factors underlying each choice, you’ll be better prepared to craft your next strategy.
Christopher Bingham is assistant professor and Phillip Hettleman Fellow of strategy and entrepreneurship at the University of North Carolina at Chapel Hill’s Kenan-Flagler Business School. Kathleen Eisenhardt
is the Stanford W. Ascherman M.D. Professor of Strat-egy and Organization at Stanford University. Nathan Furr is assistant professor of entrepreneurship and strategy at Brigham Young University. Comment on this article at
http://sloanreview.mit.edu/x/53110/,
or contact the authors at
smrfeedback@mit.edu
.
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)ACKNOWLEDGMENTS
The authors thank Kenan-Flagler Business School at UNC, Stanford Technology Ventures Program, Marriott School of Management at BYU and the National Science Foundation (grant #0323176) for their support.
REFERENCES
1. M.E. Porter, “Competitive Strategy” (New York: Free Press, 1980); M.E. Porter, “What Is Strategy?,” Harvard Business Review 74, no. 6 (1996); J.W. Rivkin, “Imitation of Complex Strategies,” Management Science 46, no. 6 (2000): 824-844; N. Siggelkow, “Evolution Toward Fit,” Administrative Science Quarterly 47, no. 1 (2002): 125-159 C.B. Bingham and K.M. Eisenhardt, “Position, Leverage and Opportunity: A Typology of Strategic Logics Linking Resources with Competitive Advantage,” Managerial and Decision Economics 29, no. 2-3 (2008): 241-256.
2. N. Siggelkow, “Change in the Presence of Fit: The Rise, the Fall, and the Renaissance of Liz Claiborne,” Academy of Management Journal 44, no. 4 (2001): 838-857.
3. C.K. Pralahad and G. Hamel, “The Core Competence of the Corporation,” Harvard Business Review 68, no. 3 (1990); D.J. Collis and C.A. Montgomery, “Competing on Resources,” Harvard Business Review 73, no. 4 (1995): 118-128 J. Barney, “Firm Resources and Sustained Competitive Advantage,” Journal of Management 17, no. 1 (1991): 99-120; M.A. Peteraf, “The Cornerstones of Com-petitive Advantage: A Resource-Based View,” Strategic Management Journal 14, no. 3 (1993): 179-191.
4. J.P. Davis, K.M. Eisenhardt and C. B. Bingham, “Optimal Structure, Market Dynamism and the Strategy of Simple Rules,” Administrative Science Quarterly 54 (2009): 413-452.
5. S.L. Brown and K.M. Eisenhardt, “Competing on the Edge: Strategy as Structured Chaos” (Boston: Harvard Business School Press, 1998); K.M. Eisenhardt and D.N. Sull, “Strategy as Simple Rules,” Harvard Business Review 79, no. 1 (2001): 107-116; C.B. Bingham, K.M. Eisenhardt and N.R. Furr, “What Makes a Process a Capability? Heuristics, Strategy and Effective Capture of Opportunities,” Strategic Entrepreneurship Journal 1, no. 1-2 (2007): 27-47; C.B. Bingham and K.M. Eisenhardt, “Rational Heuristics: The ‘Simple Rules’ That Strategists Learn from Their Process Experiences,” Strategic Man-agement Journal (in press); C.B. Bingham and J. Haleblian, “How Entrepreneurial Firms Learn Heuristics: Similarities and Differences Between Individual and Organizational Learning,” Strategic Entrepreneurship Journal (in press).
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Lahovnik, M. (2011). Corporate strategies in the post-transition economy: The case of Slovenian companies. Journal of Applied Business Research, 27(1), 61–68. (ProQuest Document ID: 849563355)
This paper argues that unrelated diversification strategies outperform related diversification strategies. The author identifies three phases of the internationalisation process. More detailed analyses of the internationalisation process shows that companies are trying to develop more complex forms of international business activities. The author also identifies four groups of competencies that are the cornerstones of corporate strategies. This study reveals that 40.6% of companies diversified through external means, 36.2% diversified through internal means, while 23.2% diversified through both internal and external methods. There appears to be no statistically significant performance differences among companies regarding external and internal growth strategies. Internal growth and joint ventures are the most important forms of diversification. These companies also tend to develop various forms of long-term strategic cooperation. This process can be crucial for developing competitive advantages. By comparing the performance of companies regarding ownership structure, the author found that companies with international ownership structure performed better. In other words, foreign ownership had a positive influence on company performance.
Keywords: Slovenia; corporate strategy; diversification strategy
INTRODUCTION
This PaPer deals with some factors determining performance of corpegies in the PostTransition economy in Slovenia. The article proceeds as follows. The next section deals shortly with some important theoretical issues. The third section presents the characteristics of the Slovenia’s business environment. The empirical results of this study are presented in the fourth section. In conclusion the author discusses the results and some implications for managers. Slovenia is a small open economy. It has become a member of the European Union in 2004 and a member of OECD in 2010. Among those transition economies that entered the new larger Europe, the Slovenian economy is the most developed, with a GDP of approx. 90% of average GDP in the European Union and therefore bigger than in some older EU member states like Portugal. Slovenia has become a ‘benchmark’ for other post-transitional economies in the region due to its successful transition process. Not only it is a member of EU and OECD on one hand but, as a former Yugoslav republic, it offers a starting point for strategic investors in the region of South-eastern Europe on the other.
The principal concern of corporate strategy is to identify die business areas in which a company should participate in order to maximise its long-run profitability (Hill, Jones, 1998). To create value, a corporate strategy should enable a company or its business units to perform one or more of the value creation functions at a lower cost or perform one or more of the value creation functions in a way that allows differentiation. Thus, a company’s corporate strategy should help in the process of establishing a distinctive competency and competitive advantage at the business level. It is a link that many companies appear to have lost of sight of.
The empirical research was based on a fully-structured interview that was prepared with pre-coded responses. A firm had to have specific characteristics to fall within the research sample:
* it should have had at least 250 employees;
* it should have had at least USD 5 million in annual income; and
* it should have been a j oint-stock company.
The author mailed the questionnaire to 185 companies in Slovenia. Sixty-nine companies responded which gives us 37.3 percent respond rate. The responses of the top managers were recorded on a standardised Likert scale.
The author compared the performance of the various corporate strategies by using four different criteria: ROA (return on assets), ROE (return on equity), ROS (return on sales) and value added per employee and formulated three basic research hypotheses:
* H^sub 0^: There are no performance differences between specific types of corporate strategies.
* H^sub 0^: There are no performance differences between external and internal growth strategies.
* H^sub 0^: There are no performance differences between companies regarding the ownership structure.
The author defined three basic criteria to determine whether two businesses are related or not. In order for one business to be related to another and to consider diversification as related, at least two of the following three criteria had to be fulfiUed: (1) similar type of markets served, (2) similar type of products sold and, (3) similar technology used in production.
THEORETICAL BACKGROUND
A fundamental part of any firm’s corporate strategy is its choice of what portfoho of businesses it is to compete in. There are two main types of diversification: related diversification and unrelated diversification. Related diversification is diversification in a new business activity that is linked to a company’s existing business activity. In most cases, these linkages are based on manufacturing, marketing or technological synergies. The diversified company can create value in three main ways. First, by acquiring and restructuring poorly run enterprises. Second, by transferring competencies among businesses. Third, by realising economies of scope Table 1 lists the sources of value and costs for each strategy.
Scholars have analysed the performance of related vs. unrelated diversification strategies. The empirical evidence on this issue is however mixed. The author can identify at least three different groups of authors with contradicting results. According to the lion’s share of the academic literature the diversification strategy should reflect the superiority of related diversification over unrelated diversification (Singh, Montgomery, 1987; Rumelt, 1974). This first group of scholars found that well-managed organisations had used a »sticking to the knitting« strategy (Collis, Montgomery, 1998). Another group of scholars argues that performance differences depend on the characteristics of the markets in which firms operate rather than on the strategic relationship between existing and new businesses (Lecraw, 1984; Bettis, Hall, 1982). However, the third group of scholars found that unrelated diversification performs better than related version (Chatterjee, 1986; Little, 1984).
On the other hand, some scholars suggest that the traditional ways of measuring relatedness between two businesses is incomplete because it ignores the strategic importance and similarity of the underlying assets residing in these businesses (Markides, Williamson, 1994). Researchers have traditionally regarded relatedness as being limited primarily because it has tended to equate the benefits of relatedness with the static exploitation of economies of scope, thus ignoring the main contribution of related diversification to long-run competitive advantage. This is the potential of a firm to expand its stock of strategic assets and create new ones more rapidly at a lower cost than its rivals which are not diversified across related businesses.
According to the Porter study of 33 prestigious US companies, each company entered an average of 80 new industries and 27 new fields. Just over 70% of the new entries were acquisitions, 22% were start-ups, and only 8% were joint ventures (Porter, 1987). Entry into new product-markets, which represents diversification for the existing firm, may provide an important source of future growth and profitability. In his study Porter identified four concepts of corporate strategy that have been put into practice: portfolio management, restracturing, transferring skills and sharing activities. The concepts are not always mutually exclusive, but each rests on a different mechanism by which the corporation creates shareholder value and each requires the diversified company to manage and organise itself in a different way. The first two require no connections among business units, the second two depend on them.
Research of 358 executives over a 45-year period revealed growth to be the most frequently used corporate strategy (Hill, Jones, 1998). This strategy has been used six times more often than stability and seven times more often than retrenchment. Growth strategies are extremely popular because most executives tend to equate growth with success (Wheelen, Hunger, 1999). Corporations in the dynamic environment must grow in order to survive. Growth is a very seductive strategy for at least three key reasons:
* To exploit economies of scale, as well as the effect of the experience curve.
* A growing firm can cover up mistakes and inefficiencies more easily than a stable one. Larger firms also have more clout and are more likely to receive support in the case of impending bankruptcy.
* Growth, per se, is exciting and ego-enhancing for CEOs. A growing corporation tends to be seen as a winner.
The factors that determine why and how one business outperforms another have been the subject of considerable research. In general, the debate has centred on competitive positioning, resource- or competence-based theory and knowledge-based approaches. The first of these approaches, the subject of Porter’s work, concentrates on developing a strategic framework by viewing a firm in the context of its environment (Porter, 1985). The second sees superior performance as a consequence of the special resources of an individual organisation (Grant, 1991). This approach is called the resource-based theory. The third approach is based on core competencies that can be defined as a combination of resources and capabilities that are unique to a specific organisation and which are responsible for generating its competitive advantage (Prahalad, Hamel, 1990). The knowledge-based theory is the fourth approach focused on the importance of knowledge management and organisational learning in building and mamtaining a competitive edge (Whitehill, 1997). Although each of these approaches provides a method by which superior performance can be investigated, it is the knowledge-based approach that in more recent times offers the best perspective from which the determinants of company’s competitive advantage can be analysed. Successful corporate strategies are based on certain competitive advantages of companies that can be explained by these theories.
Some management studies have suggested that managers make different decisions when owners are actively involved in the firm (owner-controlled) versus the situation where paid managers are relatively free to set the firm’s strategy (Tosi, Katz, Gomez, 1997; McEachern, 1975). Managers and internal owners have managed to forge specific coalitions in many companies that are controlled by insiders. These companies are in fact controlled by managers and they behave differently to companies controlled by strategic outside investors. An insiderdominated firm may generate neither the resources needed for restructuring activities, such as investment, nor have the incentive to sell the firm to outsiders who have those resources (Blanchard, Anghion, 1995). Prasnikar and Svejnar (1998, page 19) found some strong arguments in their research to support this thesis regarding the role of insiders in Slovenian companies. Therefore, the author decided to compare the performance of companies regarding the ownership structure also.
Rumelt argued (1984) that a firm’s competitive position is defined by a bundle of unique resources and relationships with competitive advantage arising from the sources of potential rents ranging from changes in technology and consumer tastes to innovation and legislation. The ability of a firm to develop and sustain a competitive advantage from these sources depends on its ability to develop isolating mechanisms. These can take the form of specialised assets and resources, especially those that provide specialised information, enhance brand name, image and reputation, and restrict entry. It is evident that core competencies and the isolating mechanism are heavily dependent on knowledge. Therefore, the modern business literature emphasises knowledge as the most critical success factor of companies. Sustaining a competitive edge in a dynamic and volatile environment relies on an organisation generating new knowledge more rapidly than its competitors.
BUSINESS ENVIRONMENT
Slovenia is an open, export oriented economy and is committed to open markets. It is an integrative part of common internal EU market. Potential foreign investors outside EU have been used Slovenian economy as a starting point for penetrating internal EU market. Slovenia survived relatively well the first impact of the financial crisis and Slovenia is not in the recession. This is attributable to the banks’ limited exposure and a low level of household debt. However, the most recent data show that lower demand and tightening of financing conditions, the changes in the international environment have begun to affect the Slovenian economy. Lower growth of exports, industrial production, construction activities and retail trade resulted in a considerable deceleration of economic activity and negative GDP growth in the last two months of 2008. The most pronounced slowdown was in labor intensive sectors and manufacturing such as household appUances and automotive sectors, which are also important for exports. In 2008 the GDP increased by 3.5%, which was much lower than in 2007 in which 6.8% rate of economic growth was recorded. By the end of 2008 the rate of inflation was 1.8%. The Slovenian government acted quickly to mitigate the effects of the crisis. In December 2008 it adopted the first stimulus package consisting of measures to stabilize financial markets and to improve the growth potential of the economy and its resilience. The second package upgraded the first package with concrete measures in February 2009.
Economic policy makers believe that protectionist tendencies should be avoided in the times of crisis. The anti-crisis measures do not discriminate between domestic and foreign commercial entities. Slovenia is committed to free capital movements, which have brought tangible benefits, including outward investments which have been growing consistently and are an important instrument of market diversification as well as growth of enterprises, especially in the services industry. Slovenia is committed to continue with the programmes of privatisation of companies in direct or indirect state ownership, although now is not the best time for these activities. There is still a process of accelerated exit of the state from company ownership in the portfoUos of the state funds, i.e. the capital fund (KAD) and the restitution fund (SOD). In those companies that will remain in state-ownership with an important share, considerable improvements are taking place in corporate governance in accordance with the Principles and Guidelines of the OECD on corporate governance, especiaUy of state-owned enterprises.
Inward investments into Slovenia have been following a weU estabUshed pattern. Having in mind the size of the economy, foreign investors have achieved good results. They are as a rule long-term oriented, rather than short-term profit oriented. Investments are not based on low-labor costs but on technical skills and relative geographic position of Slovenia. Most existing foreign investments have expanded in the course of years. A recent survey has been conducted to gauge the degree of satisfaction of foreign investors in Slovenia in which the question of motives for investing in Slovenia, as a small economy is very revealing. By structure, manufacturing foreign subsidiaries are distinctly export oriented.
Gradual liberalization of FDI, the relaxation of poUcies and legislative frameworks, is apparent through the consistent rise in FDI stock in Slovenia. Stock of inward FDI increased from EUR 1.3 billion in 1995 to EUR 9.5 biUion in 2007. As a share of GDP it grew from 9.5% in 1995 to 27.7% in 2007. Likewise, outward FDI stock has grown at a much faster pace from only EUR 382 million in 1995 to EUR 4.8 billion in 2007. As a share of the GDP, it grew from only 2.6% in 1995 to 14.2% in 2007. Slovenia has one of the highest outward FDI stock to GDP ratios among the new EU member states. In 2005 – 2007, the FDI outflows from Slovenia surpassed the inflows, making Slovenia a net direct investor abroad. Investment trends in Slovenia continue to be positive with a steady growth. It is important to note that in recent years, standards and conditions that help attract new investments have improved significantly. This is particularly true in the area of public governance, accountabüity in public decision-making, and especially public consultations and regulatory impact assessment which have become obligatory for aU government authorities. These trends have increased the degree of transparency and market openness.
In the area of corporate governance, the Government increased its activities to ensure better compliance with the law and standards of responsible and reasonable business conduct, including of Slovenian company activities abroad. An open dialogue on the standards of business conduct, also fueled by the current crisis circumstances, has been ongoing for some time. Steps are being taken to better define the role of the State in the economy and that of private business initiative as well as respective responsibilities. The awareness that basic principles of sound corporate governance, such as transparency, disclosure, the observance of the law and fairness, are strong determinants for well-based investment decisions, for the confidence of investors, for the reduced cost of capital and the development of sustained sources of financing. This is clearly understood in Slovenia.
In the area of intellectual property rights, Slovenia has achieved an appropriate level of standards in supporting policies that protect these rights, which encourage innovation and die development of a knowledge-based society. Slovenia is also an exporter of knowledge, significantly through the private sector activity abroad. At die same it is aware of the remaining challenges, particularly in the area of enforcement, such as those in relation to the length of court proceedings and backlogs and issuing decisions. Measures have been taken to reduce the delays and streamline the procedures in order to increase efficiency.
RESULTS OF THE STUDY
Most companies involved in this research have been developing one form of growth strategy: market development strategy, product-market diversification strategy or the strategy of conglomerate diversification (see Table 2). This finding is consistent with the research results in other developed economies. By comparing the performance of various types of corporate strategies, the following conclusions were drawn:
* H^sub 0^ is rejected by comparing the performance of unrelated diversification with the related diversification strategy (p<0.05). There are statistically significant performance differences regarding ROA, ROE and value added per employee between the related diversification on one hand and unrelated diversification strategy on the other. H0 is therefore rejected at very low "p" level.
* The results indicate that unrelated diversification strategy outperforms related diversification strategy regarding return on sales.
* Retrenchment strategy is outperformed by the other two types regarding all four criteria (ROA, ROE, ROS and value added). The performance differences are statistically significant at low levels (p<0.05) when comparing performance by the first three criteria. The differences are statistically significant at a higher level (p>0.05) when comparing value added per employee, but H0 cannot be rejected.
* Companies with international ownership structure performed better than companies without foreign owners regarding all four criteria (p<0.05). In other words, foreign owners had positive influence on the performance of companies. Companies controlled by insiders behaved differently to companies controlled by strategic outside investors. In many cases, the insider-dominated firms generated neither the resources needed for restructuring activities, such as investment, nor have the incentive to sell the firm to outsiders who have tiiose resources. Firms owned by strategic outsiders responded better to the global economic crisis.
This study reveals that 40.6% of companies diversified through external means, 36.2% diversified through internal means, while 23.2% diversified through both internal and external methods. Internal growth and joint ventures are the most important forms of diversification (see Table 3). Acquisitions are still one of the most popular growth strategies. On the other hand, the track record of mergers and acquisitions in the developed economies is not very encouraging (Dess, Picken, Janney, 1998). There appears to be no statistically significant performance differences between companies regarding the external or internal growth strategy. The author could not reject the H0 hypothesis at a statistically significant low “p” level (p>0.05). Some other scholars have come to the same conclusions in their studies (Lamont, Anderson, 1985). Companies also tend to develop various forms of long-term strategic co-operation. This process can be crucial for developing competitive advantages. The most important motives for the corporate strategy that has been developing in Slovenian companies are: to increase or maintain market share and to improve cost efficiency through rationaUsing operating costs. Companies are trying to maintain their competitive advantage that is obviously partly based on economies of scale.
INTERNATIONALISATION STRATEGY
The authors can identify the specific pattern of ongoing internationalisation. Direct and indirect exports prevail in the first phase of internationahsation. This is the initial entry of the market. Success in the first stage leads the parent corporation to beUeve that a stronger presence is needed in the target market. Subsidiaries of the parent were formed in the second phase. In some cases, the author also identified joint ventures between the parent and local companies. Most companies have autonomous subsidiaries owned by the parent that is developing a specific market strategy in the local market. The characteristic of the third phase was usually the formation of an independent local company that gradually also takes over some other functions. In this phase, companies often develop some forms of a strategic partnership with local companies that can lead to acquisition in the near future. This pattern of the internationahsation of business activities is characteristic of those Slovenian companies seeking to gain as large a share as possible in Southeast European markets. 94.2% of companies are internationalised. The rest of companies are oriented to the domestic market. These international business dynamics reflect the changing international business environment and the organisational response of companies whose competitive strategies increasingly involve crossing national borders. As soon as at least one competitor gains from taking an international strategic position then competitive forces begin to change, with the leading firms in the market needing to respond. The dynamic nature of such responses inevitably results in increased international exposure, requiring co-ordination and relationships with suppliers, distributors and customers across functions and geographical boundaries. More detailed analyses of the internationahsation process showed that the companies are trying to develop a more complex form of international business activities (see Table 3). The prevailing strategic orientation of Slovenian companies is to build up international strategic alUances. This should lead to global competitive advantages through long-term business co-operation. Companies are keen on green-field investment as well as on acquisitions. The most important motives that determine the internationalisation business strategy are: to increase growth and performance of the company (71%); to realise various operative synergies (43.5%) and, last but not least, a defensive strategy against competitors. Internationalisation of a company leads to cost reduction through the global configuration and coordination of its business activities.
The author found that managerial competencies (4.28) as well as competencies based on a specific business process (4.19) are the most important. Competencies based on inputs are less important (3.11). The same is true for competencies based on outputs (3.12) that are embodied in products or somehow represented in services. 68.1% of companies are developing a corporate strategy based on core competencies. The author identified four large groups of core competencies that are the cornerstones of the corporate strategies developed. The first group was based on the position of a firm within the local industry. These competencies are financial power, the company’s image, location, bargain power with regard to the suppliers and familiarity with the local environment. The second group of core competencies was based on technology management (know-how, product development, and technology development), whereas the third group of core competencies was based on the quality of business processes and products. The fourth group of core competencies was based on the employees (management, experts, training process) as well as on the organisational culture in the firm. Familiarity with the concept of knowledge management played important role in the internationalisation process (see Table 4). The author may argue that top management should in fact be involved in the knowledge management process in order to successfully internationalise business activities. However, a company needs to develop more innovative types of knowledge for a sustainable competitive advantage.
CONCLUSION
Slovenia is an open, export oriented economy and is committed to open markets. It is an integrative part of common internal EU market. Potential foreign investors outside EU have been used Slovenian economy as a starting point for penetrating internal EU market. By comparing the performance of various types of corporate strategies the author found that related diversification performed better than unrelated one. There are statistically significant performance differences regarding ROA, ROE and value added per employee between the related diversification on one hand and unrelated diversification strategy on the other. Retrenchment strategy is outperformed by the other two types regarding all four criteria (ROA, ROE, ROS and value added). The performance differences are statistically significant at low levels (p<0.05) when comparing performance by the first three criteria. The differences are statistically significant at a higher level (p>0.05) when comparing value added per employee but the H0 hypothesis cannot be rejected. By comparing the performance of companies regarding the ownership structure the author found that those companies with more international ownership structure performed better. In other words, foreign owners had positive influence on the performance of companies.
The author identified the specific pattern of internationalisation of companies’ business activities. Direct and indirect exports prevail in the first phase of internationalisation. This is the initial entry of the market. Success in the first stage leads the parent corporation to believe that a stronger presence is needed in the target market. Subsidiaries of the parent were formed in the second phase. In some cases, the author also identified joint ventures between the parent and local companies. Most companies have autonomous subsidiaries owned by the parent that is developing a specific market strategy in the local market. The characteristic of the third phase was usually the formation of an independent local company that gradually also takes over some other functions. In this phase, companies often developed some forms of a strategic partnership with local companies that could lead to acquisition in the near future.
Ting, C. (2010). Corporate competitive strategies in a transitional manufacturing industry: An empirical study. Management Decision, 48(6), 976–995. doi: 10.1108/00251741011053497 (ProQuest Document ID: 578010952)
Introduction
With the liberalization of international trade and financial markets, an increasingly interconnected global economy has been emerging ([19] Dicken, 2007). Nowadays, companies are facing more radical changes than ever before to which they must adapt to survive and prosper ([32] Gereffi, 2001). These changes have been widely felt across many sectors of industry and commerce, including the US textile industry (e.g. [4] Anson et al., 2003; [42] Kilduff, 2005).
In the past two decades, the US textile industry has been experiencing a fundamental transition similar to those unfolding in many other US manufacturing sectors ([14] Chi, 2009). As pillar of industrialization, it has been at the forefront of globalization in terms of confronting international competition, and has seen the emergence of large retail groups exercising control over the product agenda while seeking out lowest cost sources of supply ([33] Gereffi and Memedovic, 2003). Competitive pressures have steadily escalated as a result of continued international trade liberalization, including the phase-out of textile and apparel quotas under the World Trade Organization (WTO), the creation of the North American Free Trade Area (NAFTA), and the growing number of US bilateral preferential/free trade agreements (P/FTAs) ([2] Amponsah and Boadu, 2002; [59] Taplin, 2003). Against this backdrop, the industry as a whole has experienced a sharp downturn since 1997 ([42] Kilduff, 2005).
Table I [Figure omitted. See Article Image.] exhibits the US mill fiber consumption by end-use destination in 1992, 1997, 2002, and 2007 respectively. The drastic contraction in apparel and home textile productions since 1997 and the downward trend in carpet production in recent years are evident while fiber consumption in technical type products has remained much more resilient. This situation has been further reinforced by a wave of technological innovation over the last few years that has advanced process and product technologies, and diversified the numbers and applications of technical textile products ([12] Chang and Kilduff, 2002). [15] Chi et al. (2005) estimated that the value of technical textile shipments in the USA was around $20 billion in 2002, accounting for some 33 percent of total value of shipments by the US textile industry. The total workforce in this sector of the industry increased slightly between 1997 and 2007, reaching some 230 thousand in the latter year ([64] United States Department of Labor, 2009). This contrasts sharply with the apparent decline of overall textile and apparel employment over the same time period. [58] Smith (2001) indicated that the US technical textile sector has established strong position in the domestic market and the rapid growth of international markets creates even broader opportunities for this sector. The definition and scope of technical textiles are provided in the Appendix. As competition continues to escalate across traditional textile manufacturing sectors, many US apparel-related and household end-use yarn and fabric manufacturers are seeking to switch over to technical products to survive and grow ([12] Chang and Kilduff, 2002; [14] Chi, 2009).
Given the bright future and growing importance of technical textile sector within the US textile economy, there has been very little empirically based research devoted to understanding this critical sector. This is in part because much of the literature focuses on aggregate trends in textiles and apparel (e.g., [38] Hunter et al. , 2002; [42] Kilduff, 2005; [54] Rees and Hathcote, 2004). It is also because technical textile sector was a relatively small fraction of industry activity in the past and this has perhaps led to an unconscious neglect ([14] Chi, 2009).
In an effort to fill this gap in the literature, as an exploratory study, this research took a strategic approach to analyze how the US technical textile manufacturing companies managed their business operations and to determine whether there are differences on competitive priorities between high performing companies and low performing companies. By identifying the differences, the high performers will be able to maintain and further improve their competitiveness while the low performers will be able to find the problems and adjust or redesign their strategies. Competitive priority model consisting of four constructs low cost, quality, delivery performance, and flexibility, one of the most widely accepted operations strategy frameworks, was utilized to construct the analysis. Primary data was collected through a survey of senior executives in the US technical textile companies. Using 202 eligible survey returns, exploratory factor analysis (EFA) and confirmatory factor analysis (CFA) within structural equation modeling (SEM) were carried out to assess the model-to-data fit, unidimentionality, reliability, and validity of the model.
The remainder of this article is organized as follows. The next section reviews the relevant literature. Competitive priority model is then introduced with the corresponding measures and scales for each construct in the model. In the methodology section, the survey subjects, data sets, and statistical methods are described respectively. The results and discussion follow thereafter. Next, the conclusions are drawn based on the findings and the implications for both academic researchers and industrial practitioners are presented. Finally, some limitations of this study are addressed and some directions for future research are offered.
Literature review
Over the last four decades, the acceptance and use of strategic approaches to manage manufacturing organizations have experienced a continued growth. Since [56] Skinner’s (1969) early work in the field, a common thread in operations strategy research has been the need of companies for choosing among and achieving one or multiple key capabilities ([67] Ward and Duray, 2000). Consistent with the mainstream of literature, the term competitive priorities has been broadly used to describe companies’ choice of these competitive capabilities (e.g., [16] Chopra and Meindl, 2009; [37] Hayes and Wheelwright, 1984; [68] Ward et al. , 1995; [67] Ward and Duray, 2000). There are some other terms or classifications also proposed and/or used to describe and explore these concepts. For instance, manufacturing tasks was used by [56] Skinner (1969), [55] Richardson et al. (1985), and [5] Berry et al. (1991). developed a typology from a strategic perspective to categorize companies into one of the four groups namely prospector, analyzer, defender, and reactor.[46] Miles and Snow (1978) [1] Adam and Swamidass (1989) proposed to use content and content variables. [23] Ferdows and De Meyer (1990) labeled as organizational priorities and generic capabilities. [29] Fitzsimmons et al. (1991) named dimensions of competition. In spite of the differences in terminology, there is a general agreement in the literature that competitive priorities can be expressed in terms of low cost, quality, delivery performance (speed and reliability), and flexibility (e.g., [5] Berry et al. , 1991; [13] Chen and Paulraj, 2004; [37] Hayes and Wheelwright, 1984; [56] Skinner, 1969, [57] 1985; [67] Ward and Duray, 2000). These four constructs collectively measure the content of a company’s competitive strategies ([68] Ward et al. , 1995).
Although all manufacturers are concerned to some degree with cost, most do not compete solely or even primarily on low cost . Companies that emphasize cost as a competitive priority usually focus on lowering production costs, improving productivity, maximizing capacity utilization, and reducing inventories ([37] Hayes and Wheelwright, 1984; [68] Ward et al. , 1995).
Engineering, marketing, manufacturing, and service functions have often been described as possessing different definitions of quality ([68] Ward et al. , 1995). Manufacturing’s traditional observance of quality control reflects a focus on the conformance dimension of quality such as providing high performance design, offer consistent and reliable quality, and conformance to product design specification ([30] Flynn et al. , 1990; [67] Ward and Duray, 2000).
Delivery performance comprises reliability and speed. Delivery reliability is the ability to deliver according to a promised schedule. Here the business unit may not have the least costly nor the highest quality product but is able to compete on the basis of reliably delivering products as promised ([30] Flynn et al. , 1990). For some customers, only delivery reliability is not good enough, delivery speed is also necessary to win the order. Although the two dimensions are separable, long run success requires that promises of speedy delivery be kept with a high degree of reliability ([7] Boyer and Pagell, 2000; [30] Flynn et al. , 1990; [67] Ward and Duray, 2000).
Flexibility in manufacturing companies has traditionally been achieved at a high cost by using generic purpose machinery instead of more efficient special purpose-built machinery and by deploying more highly skilled workers than would otherwise be needed ([68] Ward et al. , 1995; [69] Ward et al. , 1996). Advanced manufacturing technologies, when properly implemented, have reduced the cost of achieving flexibility ([7] Boyer and Pagell, 2000).
[57] Skinner (1985) stressed that each of these four competitive priorities must be given a weight by the company that reflects the degree of emphasis required to achieve the overall goals at a corporate level. The weights associated with each priority provide a broad measure of what a manufacturer deems important at a particular time.
The links between company competitive priorities and its business performance were affirmed by [65] Vickery et al. (1993). They found there is covariance relationship between competitive priorities and production competence with business performance. In an empirical study of Singaporean manufacturing companies, [68] Ward et al. (1995) found that a quality, delivery performance, and/or flexibility emphasis aimed at building capabilities for product or service differentiation while a cost emphasis is not. This is consistent with the viewpoint of [53] Porter (1980). proposed that a company can achieve profitability over its competitors in two fundamentally different approaches to strategy[53] Porter (1980) – differentiation or cost leadership. He views differentiation and cost leadership as mutually exclusive strategies. Differentiation strategy offers customers unique products or services that are differentiated in such a way that customers are willing to pay a price premium that exceeds the additional cost of the differentiation. In contrast, cost leadership strategy aims to provide an identical product or service at a lower cost. indicated that a company pursuing both strategies simultaneously is stuck in the middle, which almost guarantees low profitability.[53] Porter (1980) [68] Ward et al. (1995) stressed there is no one particular strategy that is applicable to all types of circumstances. [70] Wardet al. (1998) further developed a more comprehensive instrument for measuring competitive priorities. [70] Ward et al. (1998) addressed several issues related to the adequacy of measurement based on the data collected from 114 manufacturing plants in the USA They concluded that competitive priorities have long served as a foundation for strategy research, and that the choice of competitive priorities impacts company business performance.
Complete and accurate measurement of a company’s business performance is still viewed as one of the challenges in operations management research ([44] Lancioni et al. , 2000). Typically, business performance is measured using financial metrics. [39] Jahera and Lloyd (1992) proposed that return on investment (ROI) is a valid performance measure for midsize firms. [68] Ward et al. (1995) used self-reported changes in profit before tax to measure firms’ performance. [50] Morash et al. (1996) measured firm performance relative to competitors using return on asset (ROA), ROI, return on sales (ROS), ROI growth, ROS growth, and sales growth. [21] Duray et al. (2000) measured firm performance using the respondent’s perception of performance in relation to competitors. The measures used were ROI, ROS, market share, growth in ROI, growth in ROS, growth in market share, and growth in sales. [60] Stock et al. (2000) indicated that financial perspective measures such as market share, ROI, and sales growth is more likely to reflect the performance assessment of a company.
Conceptual model and survey instrument development
Competitive priority model provides the theoretical foundation for this study, as shown in Figure 1 [Figure omitted. See Article Image.]. The model consists of four latent constructs – low cost, quality, delivery performance, and flexibility. Each of these four latent constructs is captured by multiple measures in a survey instrument. The use of such multi-item constructs increases the ability to draw finer distinctions among respondents over the use of single item ([30] Flynn et al. , 1990). The five-point Likert scales employed in this study provide a relative assessment on a continuum and are commonly used for collecting primary data for empirical research in operations management, and more generally in management research ([70] Ward et al. , 1998). Respondents answered all questions with respect to a particular product line in their companies. The product line contributed the most sales value in dollar terms for their companies. The measures for each latent construct in the survey instrument are also illustrated in Figure 1 [Figure omitted. See Article Image.].
The measures for four latent constructs were developed based on previous empirical literature ([6] Boyer, 1998; [47] Miller and Vollmann, 1984; [67] Ward and Duray, 2000). The five-point Likert scales for each measure are 1=No emphasis, 2=Little emphasis, 3=Moderate emphasis, 4=Strong emphasis, and 5=Extreme emphasis.
In addition, in order to reveal the differences in competitive priority between high performing companies and low performing companies, based on prior research, in this study, business performance is measured using the respondent’s perception of performance in relation to competitors. The measures are comprised of market share, sales growth, profit margin, ROI, and ROA. The five-point Likert scales for each measure are 1=Significantly lower, 2=Lower, 3=Approximately equal, 4=Higher, and 5=Significantly higher. The developed survey instrument was first examined by academic and industrial experts. These provide the proof of content validity of the measures ([62] Swink et al. , 2005).
Methodology
Subjects
The US technical textile manufacturing companies were the research subjects. Although the US technical textile sector has proven less vulnerable than the apparel-related textile sector to global competition, it nevertheless has been confronting growing pressure from competitors in both developing and industrialized countries. In this sense, the sector is an epitome of the entire US manufacturing industry.
A sample of subjects was taken using the mailing list provided by the Industrial Fabrics Association International (IFAI). IFAI is a US based nonprofit trade association whose more than 2,000 members represent the majority of US technical textile companies. The Industrial Fabrics Foundation (IFF), a charitable organization associated with the IFAI, provided financial support and survey cooperation. The subjects targeted all occupied high-ranking management positions with an overview of the company’s business operations to ensure they had knowledge of the issues the survey addressed.
Data collection
The developed survey instrument was pre-tested through five on-site interviews with senior executives of technical textile companies. The instrument was thus refined with regard to content, arrangement, wording accuracy, and relevance. This procedure helped make the final survey instrument more valid and clearer. A postal mail survey was selected as the principal method of data collection. The survey package was sent to a sample of 995 US technical textile companies. To improve the response rate, the targeted respondents each received a follow-up email written by the IFAI president four weeks after the initial postal mailing. This email was constructed to solicit those people who did not respond to the postal mail survey and invited them to return the questionnaire or, if they preferred, to complete the survey online. The web-based questionnaire was identical to the postal mail instrument.
Among the 995 mailed surveys, six were returned owing to incorrect contact information. The adjusted survey sample size was therefore 989. After eight weeks, 207 responses were received, of which 95 were from the postal mail survey and 112 were from the follow-up web survey. Some 202 out of 207 returns were eligible and complete responses. The adjusted response rate was 20.4 percent (202/989), which was very satisfactory compared to the response rates in previous empirical studies (e.g., [63] Tracey and Tan, 2001, 9 percent; [66] Vonderembse and Tracey, 1999, 13.4 percent), particularly in light of the difficult conditions prevailing in the US textile industry. For an industry survey, [20] Dillman (2000) indicated that there is no generally accepted minimum response rate and it really depends on the survey topics and industries chosen.
Table II [Figure omitted. See Article Image.] shows the profile of survey respondents. It covers a broad diversity of businesses in technical textile sector. Among the respondents, 52 percent were owner/president/CEO, 15.5 percent were vice presidents, and the remainders were general managers or other positions. This indicates that most respondents were high-ranking executives and had the knowledge to provide relatively accurate answers to the survey questions.
Statistical methods
Non-response bias testing
Non-response bias was evaluated using the t -test on demographic variables. As a convention, the responses of early and late groups of returned surveys were compared to provide support of non-response bias ([43] Lambert and Harrington, 1990).
Factor analysis
[22] Fabrigar et al. (1999) recommended using exploratory factor analysis (EFA) to identify measurement models and confirmatory factor analysis (CFA) to test the full model. In this study, the four measurement models are the latent constructs of low cost, quality, delivery performance, and flexibility. The full model is a second-order CFA model for competitive priority. The four first-order constructs are collectively represented by a second-order construct.
EFA with varimax rotation method was utilized to reduce attribute space from a larger number of measures to a smaller number of factors. SPSS software was employed in the EFA analysis. The extraction criterion was set as eigenvalue above one. The measures with low factor loadings (<0.50), high cross-loadings (>0.40), and item-to-total correlations (<0.30) ([17] Comrey, 1973; [40] Janda et al. , 2002) were excluded from the factor matrices. The deduction of certain measures required the recomputation of factor loadings, coefficient alpha, and item-to-total correlations and a reexamination of factor structure using the reduced number of measures. This iterative procedure was repeated until all requirements were met.
CFA represents a special case of structural equation modeling (SEM) ([10] Byrne, 2005). The primary goal of testing CFA models is to determine the goodness of fit between the proposed model and the sample data. The full model was tested by CFA using LISREL involving three levels: measures, first-order latent constructs (low cost, quality, delivery performance, and flexibility), and a second-order latent construct (competitive priority).
Assessment criteria
Model-to-data fit
Goodness-of-fit indices are used to assess the model-to-data fit, which is the extent to which the data matches the proposed model. There are many goodness-of-fit indices and no single test best describes the model-to-data fit. In this study, the indices adopted for the model-to-data fit assessment included Normed Chi-square (χ2 ), the root mean squared error approximation (RMSEA), goodness-of-fit index (GFI), the Normed Fit Index (NFI), the Non-Normed Fit Index (NNFI), and the comparative Fit Index (CFI).
A Normed Chi-square (χ2 ) less than 2 indicates no significant difference between the observed and estimated covariance matrices. The RMSEA measures the discrepancy between the observed and estimated covariance matrices per degree of freedom. ([49] Maruyama, 1998) The lower the RMSEA value, the better the fit between the model (predicted data) and the actual data. Values less than 0.08 are deemed acceptable. The value of GFI should be larger than 0.9. ([9] Byrne, 1998) The NFI compares the fit between the proposed model and nested baseline or null model. An index score of 0.90 or higher are acceptable threshold for the NFI. The NNFI also compares the fit between the proposed model and the null model. It also measures parsimony by evaluating the degree of freedom from the proposed model to the degree of freedom of the null model ([48] Marsh et al. , 1988). The NNFI is highly recommended because of its resilience against variations in sample size. An index score of 0.90 or higher is acceptable for the NNFI. The CFI measures how the proposed model compares with other possible models with the same data ([49] Maruyama, 1998). An index score of 0.90 or higher is acceptable for the CFI ([34] Hair et al. , 1995).
Unidimensionality, reliability, and construct validity
The measurement properties of the constructs in the model were assessed by the following criteria: unidimensionality, reliability, and construct validity. These criteria have been widely utilized by previous empirical studies (e.g., [13] Chen and Paulraj, 2004; [68] Ward et al. , 1995). [13] Chen and Paulraj (2004) noted that these represent a three-stage continuous improvement cycle lying at the heart of the instrumentation.
Unidimensionality has been described succinctly by [36] Hattie (1985) as a set of variables forming a latent construct that all measure just one thing in common. This is a most critical and basic assumption for measurement theory. [45] Levine (2005) further indicated that unidimensionality is a prerequisite to meaningfully interpret the reliability of a measurement. In order to prove unidimensionality, [68] Ward et al.(1995) suggested that the [11] Carmines and Zeller (1979) criteria should be met:
the first indicator should explain a large proportion of the variance in the constructs (i.e. > 40 percent);
subsequent indicators should explain fairly equal proportions of the remaining variance, except for a gradual decrease;
all or most of the constructs should have sizeable loadings on the first indicator (i.e. > 0.3); and
all or most of the constructs should have higher loadings on the first indicator than on the subsequent indicators.
Also, the achievement of the model-to-data fit demonstrates sufficient internal consistency.
After all measures show unidimensionality, their reliability is then tested. Reliability is the consistency of a set of measurement variables in a latent construct. Cronbach’s coefficient alpha and the construct reliability for each latent construct are calculated respectively to compare to criterion value. A Cronbach’s coefficient alpha of 0.70 and above suggests adequate reliability ([51] Nunnally, 1978) while construct reliability values of greater than 0.50 indicate adequate reliability ([31] Fornell and Larcker, 1981).
Construct validity consists of convergent validity and discriminant validity. All of the measurement loadings are significantly high and all of the goodness of fit indices met recommended values to suggest convergent validity. An additional indication of convergent validity was the average variance extracted (AVE), which is the percentage of the total variance of a measure represented or extracted by the variance due to the construct, as opposed to being due to error ([31] Fornell and Larcker, 1981). The desired threshold AVE score is above 0.5. Discriminant validity is shown by the confidence interval of 2 standard errors around the correlation between each respective pair of constructs in the model. If the confidence interval does not include 1.0, discriminant validity is then demonstrated ([3] Anderson and Gerbing, 1988).
Results
As the measures for business performance showed unidimensionality, a single set of composite scores of these measures were used to represent the construct ([68] Ward et al. , 1995). The 202 responses were sorted in descending order in terms of their mean scores from the five business performance measures. The first half of the responses were designated as relatively high performers and the second half were designated as relatively low performers. [35] Hambrick (1984) indicated that dividing the sample into separate high and low performance sub-samples in this manner is a practical analytical technique for strategy research. This method has been successfully applied in various prior studies (e.g. [35] Hambrick, 1984; [68] Ward et al. , 1995; [67] Ward and Duray, 2000).
The iterative procedure of data analysis was repeated for both the relatively high performers sub-sample and the relatively low performers sub-sample and resulted in 14 final measures in both sub-samples. Achieve/maintain lowest inventory in low cost construct and make rapid design changes in flexibility construct were dropped due to low factor loading.
Non-response bias testing results
The non-response bias testing shows there are no significant differences between early and late groups of returned surveys.
Results of model-to-data fit, unidimensionality, reliability, and construct validity
Table III [Figure omitted. See Article Image.] summarizes the final results from factor analysis. The results suggest that all four measurement constructs for both high performers sub-sample and low performers sub-sample met the unidimensionality criterion of [11] Carmines and Zeller (1979). The measures capture four distinct dimensions and the individual measures contribute to the expected construct. The eigenvalues for each factor are relatively large, from 1.453 to 4.327 for high performers sub-sample and from 1.573 to 3.293 for low performers sub-sample. The four constructs cumulatively account for 69.8 percent of the variance in competitive priority for high performers sub-sample and 67.4 percent for low performers sub-sample. They are very satisfactory. Cronbach’s coefficient alphas and construct reliability scores all are above 0.70 for both sub-samples, the evidence of reliability is then established for both sub-samples.
Table IV [Figure omitted. See Article Image.] exhibits the AVE scores of all four constructs for both sub-samples. All of the AVE scores are above the desired threshold of 0.5 ([3] Anderson and Gerbing, 1988), which indicates the criterion of convergent validity is met.
Table V [Figure omitted. See Article Image.] shows none of the confidence intervals (of 2 standard errors around the correlation between each respective pair of factors in the model) capture 1.0. Therefore, the criteria of discriminant validity are met for both sub-samples.
Table VI [Figure omitted. See Article Image.] summarizes the goodness of fit indices of all four constructs for both sub-samples. The results show all constructs meet the model-to-data fit requirements.
Results of the second-order CFA model
Figure 2 [Figure omitted. See Article Image.] illustrates the second-order CFA models for high performers and low performers respectively, including the standardized factor loadings and corresponding t -values. The final CFA model showed an excellent fit to the collected data. The four constructs designed to measure competitive priority, low cost, quality, deliver performance, and flexibility, all exhibited high and significant factor loadings.
Discussion
Competitive priority model was rigorously tested using collected survey data from the US technical textile industry. The self-perception answers from senior executives were relied on in this study. The competitive priorities embraced by senior executives are crucial and affect many other decision-making processes such as supply chain arrangement ([52] Pagell and Krause, 2004). For example, if manager perceives the company mainly competes on low cost, its supply chain arrangement might be lean oriented rather than be agile focused in order to maximize profit through minimizing cost in each operations stage ([28] Fisher, 1997). Thus, many researchers have argued that the use of perceptual measures of competitive priority permits a stronger test of the relationships between strategy orientation and other key corporate decisions ([68] Ward et al. , 1995). The establishment of unidimensionality, reliability, and validity of constructs and the model-to-data fit make perceptual measures viable and dependable in large-sample empirical studies. It is consistent with the prior research (e.g., [13] Chen and Paulraj, 2004; [41] Ketokivi and Schroeder, 2004)
The results of factor analysis show that there are distinctions on emphasis of competitive capabilities between high performers and low performers. For higher performers, quality contributes the most in the variance of competitive priority at 24.5 percent, followed by delivery performance at 17.1 percent, low cost at 14.8 percent, and flexibility at 13.4 percent. This indicates that higher performers consider quality and delivery performance as the most important competitive capabilities although low cost and flexibility are also given certain emphasis. According to [68] Ward et al. (1995), such strategic approach aims at building capabilities for product or service differentiation. In contrast, for low performers, low cost contributes the most in the variance of competitive priority at 19.2 percent, followed by quality at 18.3 percent, delivery performance at 15.5 percent, and flexibility at 14.4 percent. This reveals that low performers grant very close weights to all four types of competitive capabilities although the emphasis on low cost and quality is a little greater than delivery performance and flexibility. According to [57] Skinner (1985), each of these four competitive priorities must be given different weights by the company in order to achieve the overall corporate goals. Equal emphasis means no emphasis.
Nowadays, dynamism is the most prominent environmental characteristic facing the US technical textile sector ([14] Chi, 2009). The companies are confronting increasing uncertainty in domestic and international markets. There are rapid and discontinuous changes in supply, demand, competitors, technology, and regulations/rules ([12] Chang and Kilduff, 2002). In this environment, the large scale, mass production model that brought the industry great prosperity in the past has been no longer ensured future competitiveness ([8] Bruce et al. , 2004). Market needs have become more changeable and fragmented. These explain why differentiation strategies, including quality and delivery service were emphasized more by the high performing companies in the US technical textile sector over low cost strategy. In contrast, the lack of clear emphasis on strategies could be one of the reasons resulting in a relatively low business performance.
Conclusions and implications
The US textile industry is undergoing a radical transition from traditional labor-intensive sectors such as apparel-related textiles and home textiles to more technology- and capital-intensive sectors such as technical textiles. This study represents the first empirical investigation into corporate strategy issues in the US technical textile sector. The adequacy of the measurements and validity of the model are rigorously addressed. The confirmation process followed the typical standards of measure and scale development in management research ([9] Byrne, 1998; [13] Chen and Paulraj, 2004). The results of this study are offered as an effort in a process of continued advancement in the understanding of corporate competitive strategies.
Overall, this study contributes to the literature in four ways. First, based on previous theoretical and empirical research, it develops a survey instrument for effectively measuring corporate competitive strategies in four distinct constructs – low cost, quality, delivery performance, and flexibility. Second, using the primary data from an industry survey, it statistically assesses the unidimensionality, reliability, validity, and model-to-data fit of competitive priority model and proves the model is valid and the survey instrument can generate reliable data. Moreover, these four constructs can capture most of the variance in competitive priority. The influences of each construct on the variance of competitive priority are also determined. Third, the differences on emphasis of competitive capabilities between high performing companies and low performing companies are quantitatively identified. Finally, the statistical analysis reveals the possible cause in terms of strategic approach for low performing companies. As previous studies indicated (e.g. [53] Porter, 1980; [61] Swamidass and Newell, 1987; [68] Ward et al. , 1995), differentiation that is embraced by high performing companies is an appropriate strategy in an increasingly complex, dynamic, and hostile environment.
This study also imparts several implications. For academia, this study provides a springboard for future studies of corporate competitive strategies and its relationships with other key decisions (such as supply chain arrangement) and outcomes (such as business performance). Although the measures and scales were tested in the US technical textile sector, the methodology may, therefore, be transferred to other industries and to other market sectors. In addition, this study substantiates that an effective survey strategy can lead to higher response rates. First of all, cooperation with the industry trade association, IFAI was vital in providing privileged access to member companies through access to the association’s database and, more importantly, a personal communication from the association president. A second factor was perhaps that senior executives perceived the content of the study as an important issue. A third factor was perhaps the use of a mixed-mode survey method, which included a postal mailing with a follow-up email that provided an online version of the questionnaire. As [20] Dillman (2000) indicated that a mixed-mode survey may be the only alternative for immediately gaining access to all members in the survey sample.
For industrial practitioners, as they continue to experience intensifying international competition, shifting market needs, and constant technological innovations, the business environment is likely to become even more dynamic, complex, diverse and hostile. Under such turbulent conditions, the configuration and deployment of effective strategies and other organizational arrangements is imperative to achieve superior business performance, and perhaps, even just to survive. To be effective, it is essential for senior executives to understand the characteristics of their environment so they can choose appropriate competitive capabilities accordingly. Companies also need to constantly monitor their environment for shifts so they can make timely adjustment.
Limitations and future studies
This study overcame some limitations of previous research by using a well-developed survey instrument, an effective industrial survey strategy, and the rigorous application of EFA and CFA techniques for data analysis. However, there are still several limitations that need to be addressed and also can be considered as possible directions for future studies.
First of all, one of most obvious limitations is about time constraint. This research provides a measure of what a manufacturer deems important at a particular time. With the changes of business environmental characteristics, it is worth conducting follow-up studies in the future. Second, as an exploratory study, this research is dedicated to understanding strategic emphasis in a transitional industrial sector. In future studies, the relationships between corporate competitive strategies and other key arrangements such as supply chain management can be examined. A decision making model can be developed accordingly. Finally, although four constructs – low cost, quality, delivery performance and flexibility can capture most of the variance in corporate competitive strategies, some underlying factors that contribute to the unexplained variance in the model can be identified in the future.
Voola, R., & O’Cass, A. (2010). Implementing competitive strategies: The role of responsive and proactive market orientations. European Journal of Marketing, 44(1/2), 245–266. doi: 10.1108/03090561011008691 (ProQuest Document ID: 237032252)
Introduction
Organising marketing activities in ways that successfully enable business strategy implementation is recognised as one of the most difficult challenges facing managers […] and researchers know little about how marketing activities should be organised to enable business strategy implementation or how this affects performance ([85] Vorhies and Morgan, 2003, p. 100).
A fundamental objective of marketing strategy research is to examine and better understand how firms develop and sustain competitive advantage, and how this leads to better firm performance outcomes ([45] McNaughton et al. , 2002). However, as the above extract from [85] Vorhies and Morgan (2003) indicates, implementation is a critical issue requiring much more attention. With regard to competitive advantage and firm performance, market orientation has been identified as a key issue. As such, market orientation as a firm capability has been studied extensively in the context of how firms develop and sustain competitive advantages. However, there still exists a research gap in understanding how market orientation fits in the implementation of competitive strategies (e.g. [34] Homburg et al. , 2004). In particular, because the relationship between marketing and strategic management is axiomatic ([53] Morgan and Strong, 1998) and the contribution of marketing to corporate strategy is under-researched ([65] Olson et al. , 2005), understanding the relationships between market orientation and competitive strategies is crucial to understanding how market orientation contributes to firm performance ([83] Vijande et al. , 2005). Furthermore, [34] Homburg et al. (2004) argue that although examining the role of market orientation in the relationship between competitive strategies and firm performance is important, understanding the role of market orientation when a firm simultaneously attempts to achieve differentiation and cost-leadership is vital.
Although previous studies have examined the relationships among differentiation strategy, cost-leadership strategy, market orientation and new product activity ([27] Frambach et al. , 2003) and differentiation, market orientation and firm performance ([34] Homburg et al. , 2004), existing research has not simultaneously examined the relationships between differentiation, cost-leadership competitive strategies, responsive market orientation (RMO), proactive market orientation (PMO) and firm performance. The issue of simultaneity is particularly important because in most circumstances, the constructs derive their essence from the conceptual (nomological) network in which they are rooted. Furthermore, in reality, a firm may choose one or adopt both differentiation and cost-leadership competitive strategies ([32] Hall, 1980). Although adopting both these strategies may seem contradictory, because it may lead to conflicts in an organisation’s requirements, some research indicates that a mixed strategy is not only feasible ([89] White, 1986) but essential for organisational success ([12] Chan and Mauborgne, 2005). This argument is analogous to [30] Gibson and Birkinshaw’s (2004) notion of organisational ambidexterity, or simultaneously achieving alignment and adaptability, and [4] Atuahene-Gima’s (2005) assertion that firms must simultaneously implement exploitation and exploration strategies.
For the most part, the existing literature examining market orientation and competitive strategies has not conceptualised market orientation within the notion of RMO and PMO. This is important, as [57] Narver et al.(2004) argue that dominant conceptualisations of market orientation ([40] Kohli and Jaworski, 1990; [55] Narver and Slater, 1990) emphasise responding to the expressed needs of the customers and consequently do not include the proactive nature of market orientation or understanding the latent needs of the customers. This results in market-oriented firms ignoring or paying insufficient attention to new markets and/or potential competitors ([3] Argyris, 1994; [73] Slater and Narver, 1995).
Furthermore, [31] Grinstein (2008) highlights that few studies have made the distinction between RMO and PMO, and that research in the future should study these constructs, their antecedents and consequences. Moreover, adding to [31] Grinstein’s (2008) view, [16] Coltman et al. (2008) indicate a disparity between the focus on RMO versus PMO and contend that given the growing evidence, industry and customer foresight (PMO) are potentially the most important components of market orientation. Importantly, as suggested earlier, the primary criticism of the conventional treatment of market orientation is that it has been conceptualised as responsive. Critics of RMO argue that it hinders a firm’s innovativeness ([9] Berthon et al. , 1999), confuses a firm’s processes ([46] MacDonald, 1995), and results in narrow-minded research and development activities ([28] Frosch, 1996). We respond to these issues and the call for research by proposing that competitive strategies are antecedents to RMO and PMO and firm performance is a key consequence of RMO and PMO; we test this contention using an empirical study. As such, we seek to contribute to both the strategy implementation literature and the market orientation literature by focusing on the strategy-capability-performance connections.
This study is structured as follows. First, we present a background discussion in relation to the strategy formulation and strategy implementation perspectives. Within this discourse, we adopt the RB theory to shed light on the strategy formulation-strategy implementation perspectives. Second, in line with the strategy implementation approach and the RB theory, specifically focusing on market orientation as a key variable in RB theory, we develop six hypotheses. Third, we discuss the quantitative method and the findings. Last, we highlight implications for research and practice and discuss limitations and opportunities for extending this research.
Strategy formulation and strategy implementation
There has been a debate on whether organisational dimensions affect competitive strategies (i.e. strategy formulation) or whether competitive strategies affect organisational dimensions (i.e. strategy implementation) (e.g. [59] Noble and Mokwa, 1999; [68] Prahalad and Bettis, 1986). Historically, the emphasis of both marketing strategy scholars and practitioners has been on strategy formulation, with strategy implementation being viewed as a strategic afterthought ([59] Noble and Mokwa, 1999). Furthermore, strategy formulation has been at the core of strategic management for several decades (e.g. [51] Mintzberg, 1973), and is an attempt to explain how effective strategies are developed within a firm ([76] Slater et al. , 2006). The strategy formulation approach views organisational variables as antecedents to strategy on the basis of the argument that managerial action is founded on underlying beliefs, behaviours and cognitive maps such as dominant logics and worldviews (e.g. [23] Foil and Huff, 1992; [34] Homburg et al. , 2004).
The strategy implementation approach involves viewing strategy as affecting organisational dimensions, or organisational dimensions are adapted to strategy, which then results in higher firm performance ([34] Homburg et al. , 2004). Although traditionally organisational dimensions such as structure and systems have been emphasised, with the advent of the RB theory ([6] Barney, 1991; [18] Day, 1994), firm capabilities are increasingly being viewed as organisational dimensions that must be developed and deployed to implement a particular competitive strategy effectively. Essentially, the RB theory adopts an inside-out approach to strategy, taking the position that internal firm factors explain more variance in firm performance than do external industry-related factors, a view that emphasises an outside-in approach to strategy ([6] Barney, 1991; [63] O’Cass and Ngo, 2007b; [87] Wernerfelt, 1984).
The importance of strategy and the significance of the strategy debate can be seen in the argument over formulation versus implementation, with various scholars such as [10] Bonoma (1984), [13] Chebat (1999), [15] Chimhanzi (2004), [44] McGuinness and Morgan (2005), [65] Olson et al. (2005) and [72] Slater and Mohr (2006) raising the contention that marketing scholars must align themselves with the strategy implementation approach. Furthermore, the role of strategy and its implementation can be seen in the work of [63] O’Cass and Ngo (2007b), who show empirically that strategy drives market orientation. Moreover, [7] Barney (2001) highlights the importance of implementation and its connection with RB theory. According to the original conception of RB theory, competitive advantage results from a firm’s unique capabilities that are valuable, rare and inimitable ([6] Barney, 1991). Therefore, market orientation positioned as a capability is valuable because it enables firms to better serve their target markets. However, a limitation of early RB theory is the lack of attention to implementation issues, and as [7] Barney (2001) notes, for simplicity’s sake even he early on adopted the view that “once a firm understands how to use its resources […] implementation follows, almost automatically” ([7] Barney, 2001, p. 53). This view perpetuated the notion that the actions the firm should take to exploit these capabilities will be self-evident and automatic.
However, the link between capabilities and actions may not be obvious, and proper strategy implementation remains a major challenge. For example, [7] Barney (2001) and [75] Slater and Olson (2001) argue that there is a need for more research on how marketing can facilitate the implementation of competitive strategies. However, a key question relates to whether strategy formulation or strategy implementation is more realistic to apply, and it refers to the causality between strategy and organisational dimensions. This study adopts a strategy implementation approach based on the work of [34] Homburg et al. (2004), who argue that it is more likely that strategy has a stronger positive effect on structure than structure on strategy ([2] Amburgey and Dacin, 1994), whilst acknowledging that strategy and structure affect each other. Furthermore, the notion that competitive strategies influence market orientation is consistent with the work of [66] Pelham and Wilson (1996) and [27] Frambach et al. (2003). For example, [27] Frambach et al. (2003) argue that behaviours inherent in market orientation, such as responsiveness to information, are likely to be influenced by strategic choices at the broader corporate level.
The theory development here extends [34] Homburg et al. ‘s (2004) and [27] Frambach et al. ‘s (2003) work on the role of market orientation in the competitive strategy-firm performance relationship. Furthermore, by conceptualising and operationalising market orientation as having two theoretical components – specifically RMO as responsive and PMO as proactive – it responds to the call for this distinction by many researchers, including [57] Narver et al. (2004) and [31] Grinstein (2008). The argument put forward here is that differentiation and cost-leadership strategies drive RMO and PMO, which then drive firm performance. The conceptual model outlining the key constructs and hypothesised paths is presented in Figure 1 [Figure omitted. See Article Image.]. This model essentially shows:
– a direct positive effect for differentiation (H1 ) and cost-leadership strategies (H2 ) on RMO;
– a direct positive effect for differentiation (H3 ) and cost-leadership (H4 ) on PMO; and
– a positive effect for RMO (H5 ), and PMO (H6 ) on firm performance.
Hypotheses development
Competitive strategies, responsive and proactive market orientation
Responsive and proactive market orientation
To overcome the limitations of the responsive nature of the market orientation conceptualisations, [56] Narveret al. (2000, p. 7) highlight the concept of PMO and define it as “the attempt to understand and satisfy customers’ latent needs”. The development of this capability is based on [37] Jaworski and Kohli’s (1996) and [73] Slater and Narver’s (1995) assertion that there are two types of customers’ needs:
expressed; and
latent.
They define expressed needs as those needs that the customers are aware of and consequently can express; whereas latent needs are needs that the customers are unaware of and reside in the subconscious of the customers. The treatment of RMO and PMO here as distinct constructs is consistent with empirical research (i.e. [5] Atuahene-Gima et al. , 2005; [16] Coltman et al. , 2008; [57] Narver et al. , 2004; [70] Saini and Johnson, 2005; [80] Tsai et al. , 2007) and [57] Narver et al. ‘s (2004) argument that RMO and PMO are statistically related but distinct constructs.
The effects of competitive strategies on RMO and PMO
The extent of market orientation in a firm must be congruent with the competitive strategy adopted (e.g. [17] Conant et al. , 1990; [86] Walker and Ruekert, 1987). In fact, the importance of the match between business strategy and marketing strategy has been empirically illustrated ([65] Olson et al. , 2005). The argument that competitive strategies drive market orientation is founded on the assertion that marketing activities are likely to be influenced by strategic choices at the macro competitive strategy level ([75] Slater and Olson, 2001). Furthermore, literature suggests that top management leadership is critical in developing market orientation ([18] Day, 1994; [55] Narver and Slater, 1990). This point is alluded to by [79] Stoelhorst and van Raaij (2004), who in the context of the RB theory, argue that the role of the manager is to acquire, combine and deploy appropriate capabilities. In this sense, such capabilities should logically be deployed to implement the strategy of the firm through its managers. We concur with [47] Makadok’s (2001) definition of a capability as an asset that cannot be observed (therefore, intangible), cannot be valued and is traded only as part of its entire unit. Typically, these capabilities are idiosyncratic to the firm, have been built over time with heavy reliance on tacit knowledge and skills, involve complex interrelationships with other resources, and are by their nature important factors in affecting firm performance outcomes ([35] Hooley et al. , 2005). Therefore, we contend that if market orientation is a firm capability ([5] Atuahene-Gima et al. , 2005), then the strategy the firm develops and seeks to pursue requires implementation. Thus, market orientation provides the mechanism through which strategy is enacted through its possession and appropriate deployment. This, we argue, is fundamental, in that top management is critical for developing strategies (i.e. differentiation and cost-leadership) and therefore they will drive market orientation development and deployment to implement the strategy. The connection between strategy and market orientation is further identified by [74] Slater and Narver (1996), who contend that successful execution of a strategy is facilitated by market orientation. Importantly, [27] Frambach et al. (2003) provide support for the notion that a firm’s differentiation strategy and/or cost-leadership strategy will influence the extent of market orientation.
When a differentiation strategy leads to increased customer benefits, it is consistent with market orientation’s external focus on customer needs as implied by RMO ([74] Slater and Narver, 1996). Furthermore, differentiation strategy is based on the ability of a firm to balance product benefits and costs to the customer ([75] Slater and Olson, 2001). Therefore, a differentiation strategy affects market orientation, as it requires an intimate examination of customer-related information. Essentially, we argue that a firm adopting a differentiation strategy will need to develop unique insights into customers (RMO) for the differentiation strategy to result in higher performance. On this issue, [34] Homburg et al. (2004) argue that product differentiation strategy affects market orientation, which they operationalise as RMO. Furthermore, various empirical studies provide evidence that market orientation is influenced by a firm pursuing a differentiation strategy ([27] Frambach et al. , 2003; [34] Homburg et al. , 2004; [55] Narver and Slater, 1990; [66] Pelham and Wilson, 1996; [74] Slater and Narver, 1996). Thus we hypothesise the following:
H1. Differentiation strategy is positively related to responsive market orientation.
Using internal efficiencies, market-oriented firms create customer value by reducing customers’ acquisition and usage costs ([74] Slater and Narver, 1996). Firms adopting a cost-leadership strategy must be market-oriented because they need to understand the perceived customer value to decide whether cost advantages should be transferred to their target market(s) and to determine which aspects of the firm’s marketing activities can be reduced without affecting customers’ perceived value ([27] Frambach et al. , 2003). Furthermore, firms emphasising activities that seek to understand customer needs and satisfy those needs are more likely to manufacture products that have lower defects, which then should result in lower costs ([66] Pelham and Wilson, 1996). Moreover, [27] Frambach et al. (2003) found that cost-leadership strategy was positively related to customer orientation (i.e. RMO). They contend that understanding the customer is critical in deciding how to decrease the marketing budget in the most cost-effective manner. Therefore, market orientation plays an important role in transmitting the benefits of a cost-leadership strategy to firm performance. Several empirical studies provide evidence that cost-leadership strategy influences market orientation (e.g. [27] Frambach et al. , 2003; [74] Slater and Narver, 1996). Thus, we hypothesise the following:
H2. Cost-leadership strategy is positively related to responsive market orientation.
The existing literature relating to the competitive strategy-firm performance relationship has conceptualised market orientation primarily as a responsive construct. Some authors have alluded to the proactive nature of market orientation in examining its relationship to competitive strategies ([74] Slater and Narver, 1996; [81] Vazquez et al. , 2001). For example, [74] Slater and Narver (1996, p. 163) conceptualise market orientation as including both responsive and proactive elements, but operationalise it primarily as a responsive construct. Here, we argue that PMO is a critical mechanism by which the benefits of differentiation strategy are transmitted to firm performance. The contention raised here is that a differentiation competitive strategy also affects PMO, on the basis of the notion that marketing activities are likely to be influenced by strategic choices ([75] Slater and Olson, 2001). Specifically, a differentiation strategy affects PMO, because this strategy drives a firm to develop not only an intimate understanding of customers (i.e. RMO or unique insights) but also an understanding of their customers’ latent needs (i.e. PMO or unique foresights). Furthermore, PMO is becoming more important in the context of firm performance as more and more firms develop the RMO capability. PMO inherently involves exploratory learning that includes searching for a broader range of information and knowledge that allows the firm to move beyond the limitations of experience and engage in experimentation ([5] Atuahene-Gima et al. , 2005). Consequently, firms using PMO engage in scanning the markets more widely ([18] Day, 1994) and working integrally with lead customers ([42] Leonard-Barton, 1995), both of which provide unique foresight into a firm’s customers. Thus, we hypothesise the following:
H3. Differentiation strategy is positively related to proactive market orientation.
The essence of PMO is that it leads the firm beyond its existing experience and encourages experimentation, through new knowledge of markets that may be different from the firm’s existing market ([80] Tsai et al. , 2007). Proactively market-oriented firms work closely with lead users and engage in experiments, both of which are linked to innovative developments ([43] Lilien et al. , 2002). Therefore, a cost-leadership strategy will lead to higher levels of PMO because proactively market-oriented firms experiment with new technological developments that allow for increased internal efficiencies. Furthermore, focusing on future customer needs may also alert the firm to new market and technology developments and increase its abilities to integrate new developments into lowering costs. In addition, because it is important that firms adopt both competitive strategies concurrently, these new technologies enable the firm to simultaneously engage in such activities as new product development whilst emphasising cost-leadership. Thus, we hypothesise the following:
H4. Cost-leadership strategy is positively related to proactive market orientation.
RMO, PMO and firm performance
The key premise of the RB theory is that competitive advantage lies in the heterogeneous firm-specific capabilities held by firms ([52] Montgomery and Wernerfelt, 1988). Moreover, RB theory contends that capabilities are the most important source of an organisation’s success ([18] Day, 1994). Firm capabilities have gained widespread attention in recent years because they are difficult to duplicate ([20] Dierickx and Cool, 1989). Similarly to [5] Atuahene-Gima et al. (2005), we conceptualise RMO and PMO as capabilities. Market orientation has been linked to the organisational response to consumers’ needs and wants (e.g. [69] Ruekert, 1992), and has been argued to be a source of competitive advantage that influences firm performance (e.g. [36] Jaworski and Kohli, 1993; [55] Narver and Slater, 1990). Although there is a debate regarding the direct effects of market orientation on firm performance (e.g. [48] Matear et al. , 2002), we adhere to the assertion that there has been a broad consensus regarding the positive relationship between market orientation and firm performance (e.g. [38] Kirca et al. , 2005). For example, a meta-analysis conducted in 23 countries in five continents suggests that the relationship between market orientation and firm performance is positive and consistent ([11] Cano et al. , 2004). However, previous conceptualisations have viewed market orientation primarily as a responsive capability (RMO), attempting only to understand customers’ expressed needs and satisfying them (e.g. [40] Kohli and Jaworski, 1990; [55] Narver and Slater, 1990). Nevertheless, there is strong support for a positive relationship between RMO and firm performance. Thus, we hypothesise the following:
H5. Responsive market orientation is positively related to firm performance.
Market orientation can be a source of competitive advantage when it is rare in a firm’s industry ([6] Barney, 1991). With the widespread research on RMO and its relationship to firm performance, firms are increasingly investing in being market-oriented in the traditional notion of RMO. Consequently, as RMO becomes common, in the long run, competitors can imitate it ([56] Narver et al. , 2000). Therefore, [57] Narver et al. (2004) argue that to develop and maintain a competitive advantage, firms increasingly must complement RMO with PMO. Furthermore, to understand and discover latent needs and to respond with new solutions, proactively market-oriented firms are more likely to scan the markets more widely than are firms that focus on RMO ([18] Day, 1994) and work integrally with lead customers ([42] Leonard-Barton, 1995). Owing to the more sophisticated market-sensing and linking processes involved in PMO, as opposed to RMO, we argue that firms adopting PMO are more likely to understand not only the expressed needs but the latent needs of the customers, allowing firms, for example, to uncover new market opportunities and to undertake market experiments to improve marketing strategies ([5] Atuahene-Gima et al. , 2005), all of which affect customer value and firm performance. Thus, we hypothesise the following:
H6. Proactive market orientation is positively related to firm performance.
Method
Research design
The mail survey was comprised of pre-existing scales found in the literature. RMO was measured using [19] Deshpandé et al. ‘s (1993) measure; PMO by [57] Narver et al. ‘s (2004) measure and differentiation and cost-leadership competitive strategies by [27] Frambach et al. ‘s (2003) measures. Measures were anchored with scale poles from 1=strongly disagree to 7=strongly agree. Firm performance was measured with [35] Hooley et al. ‘s (2005) measure using sales volume, market share, overall profit, profit margins and return on investment compared with competitors. Anchors were 1=much worse than competitors to 7=much better than competitors. Following [82] Venkatraman and Ramanujam’s (1986) two-step method of pretesting, the survey was pretested with five marketing academics and doctoral students in marketing and with 17 senior managers from the sample frame. The sample frame was obtained from databases of Australian firms that are publicly available on the internet. These websites provided public access to the mailing addresses of more than 8,000 firms across Australia. A systematic sampling process was used because of its representativeness and ease of implementation. For example, every fourth firm on the databases was chosen as the sample unit for the mail survey to be sent.
For the final survey, 1,400 key informants in organisations across various industries listed on a publicly available website were mailed the surveys. Of the 1,400 surveys mailed, 189 useable surveys were returned, resulting in a response rate of 13.5 percent. This response rate is within the 10-20 per cent range for top management survey response rates ([49] Mennon et al. , 1996). The RB theory does not place any significant emphasis on firm size because that measure is primarily focused on resource-based rather than monopoly-based advantages ([21] Fahy, 2002). Therefore, the population of interest included all firms (SMEs)[1] , focusing on firms having fewer than 200 employees. Furthermore, the industries represented included software, construction, automotive, engineering and mining. The majority of the firms were in the services industry (63.6 per cent) and the remainder were in the manufacturing industry (36.4 per cent). Moreover, 70 per cent of the firms were in the business-to-business sector, whilst 24 per cent had both businesses and individual customers. The firm-level variables in this study are strategic (i.e. firm capabilities, competitive strategies) and as such senior executives are appropriate informants, because they have the greatest insight into the firm’s strategic practices ([14] Child, 1997). A descriptive analysis suggested that 47 per cent were managing directors, 24 per cent chief executive officers, 13 per cent were owners and the remaining 16 per cent of the respondents included general managers and marketing managers. To verify the respondents’ knowledge of the key constructs, each survey instrument contained a self-report item on the informant’s knowledge and confidence of the area being studied ([41] Kumar et al. , 1993). The final sample showed a high mean score of 5.36 on a scale of 1-7, where 1=not confident and 7=very confident.
Analysis procedures
The hypotheses were tested using partial least squares (PLS), a multivariate, variance-based technique used for estimating path models involving latent constructs indirectly observed by multiple indicators. Moreover, because PLS focuses on the explanation of variance using ordinary least squares, this technique is better suited for investigating relationships in a predictive rather than confirmatory fashion ([24] Fornell and Bookstein, 1982). In this study, our primary concern is with maximizing the prediction of dependent endogenous constructs using exogenous constructs, including strategy to PMO-RMO and PMO-RMO to firm performance. Because we used PLS, we also avoided the necessity of a large sample size, as research similar to this study has done as well. For example, [63] O’Cass and Ngo (2007b) used a sample size of 180, which is comparable to this study (189 respondents). Furthermore, PLS is not sensitive to the assumptions of normality, thus circumventing the necessity for the multivariate normal data. Moreover, the preliminary analysis indicated that some items had moderate to high levels of skew and kurtosis, indicating that PLS was suitable procedure ([63] O’Cass and Ngo, 2007b). Finally, PLS is increasingly being used in marketing literature (e.g. [39] Klemz et al. , 2006; [62], [63] O’Cass and Ngo, 2007a, b; [77] Slotegraaf and Dickson, 2004)[2] to analyse data to test theory in marketing strategy.
Also, because PLS is not based on distributional assumptions, providing definite statistics tests are contrary to the soft modelling philosophy, the evaluation of the model is as such not based on any single statistical index, but uses several indices ([22] Falk and Miller, 1992). These indices are used and assessed on the basis of their ability to explain the data congruence with hypotheses and their precision. As a result, we used several indices to assess the hypotheses (see [25] Fornell and Cha, 1994): r2 , average variance explained (AVE), average variance accounted (AVA), regression weights and loadings. Furthermore, we also assessed important indices such as the variance explained by the paths and critical ratios for the inner model. Because the hypotheses are one-tailed, to reject a null hypothesis at the 0.05 level the observed t -value should be greater than 1.645 and 0.01 at 1.96 ([58] Ngo and O’Cass, 2008). Moreover, two sets of linear relations specify the model: the outer model relationships between the latent and the manifest variables and the inner model where the hypothesised relationships ( H1 -H6) between the latent variables are specified ([58] Ngo and O’Cass, 2008).
Measurement issues
Convergent and discriminant validity
Given that a single source of information can introduce spurious relationships among the variables, and as this study collected data via single source methods (self-report scales), the need to test for common method variance was evident. This test was conducted by adopting Harmon’s one-factor test ([64] O’Cass and Pecotich, 2005), in which all items, presumably measuring a variety of different constructs, were subjected to a single factor analysis. The results indicated that one factor was not present (or a common factor underlying the data) and because the majority of the variance was not accounted for by one general factor, we determined that a substantial amount of common method variance was not evident.
Assessing measurement validity is important. [26] Fornell and Larcker (1981) argue that convergent validity is achieved if the AVE in items by their respective constructs is greater than the variance unexplained (i.e. AVE>0.50). Therefore, to assess the constructs, convergent validity, the squared multiple correlations from the factor analysis were used to calculate the average variance explained. All factors had an AVE greater than or equal to 0.50, therefore meeting the recommended criteria for convergent validity. Table I [Figure omitted. See Article Image.] presents the AVEs, composite reliabilities and component loadings for each construct.
Having computed the composite measures, we next assessed discriminant validity as recommended by [29] Gaski and Nevin (1985) and [61] O’Cass (2002). First, the discriminant validity is exhibited if the square root of the AVE is greater than all corresponding correlations ([26] Fornell and Larcker, 1981). As shown in Table II [Figure omitted. See Article Image.], these values are consistently greater than the off-diagonal correlations, suggesting discriminant validity. Second, [29] Gaski and Nevin (1985) and [61] O’Cass (2002) suggest that satisfactory discriminant validity among constructs is obtained when the correlation between two constructs is not higher than their respective reliability estimates. Table II [Figure omitted. See Article Image.] demonstrates that no individual correlations (which ranged from 0.72 to 0.18) are higher than their respective reliabilities (which ranged from 0.94 to 0.85), indicating satisfactory discriminant validity.
Hypotheses testing
Because the measurement models were satisfactory, we applied PLS to test the hypothesised relationships depicted in H1 -H6 . We used the bootstrapping procedure in PLS Graph to test the significance of the regression coefficients. Table III [Figure omitted. See Article Image.] presents the path coefficients, variance due to path (recommended to be greater than 0.015), r2 values (recommended to be greater than 0.10) and critical ratios (CR) (recommended to be greater than 1.645 for a one-tailed test). Differentiation strategy positively affects RMO (path=0.36, CR=3.55) and cost-leadership positively affects RMO (path=0.22, CR=2.28). Hence, H1 and H2 are supported. The findings also suggest that differentiation affects PMO (path=0.41, CR=4.44) and cost-leadership positively affects PMO (path=0.20, CR=2.77). Hence, H3 and H4 are supported. Lastly, both RMO (path=0.20, CR=1.86) and PMO (path=0.40, CR=4.01) positively affect performance[3] . Hence, H5 and H6 are supported. Furthermore, all the r2 are greater than 0.10 (RMO=0.22, PMO =25, and performance=0.33) and the AVA is 0.26. In summary, the findings suggest that all hypotheses are supported.
Indirect and direct effects
Additional or supplementary findings can be an important component of research, as seen in [34] Homburg et al. (2004). In their work, they undertook further analysis to investigate the indirect effects of differentiation strategy on performance through market orientation. We build on this philosophy by exploring the effect of strategy on performance through market orientation. Therefore, in the same vein as [34] Homburg et al.(2004), we analysed the indirect effects of the competitive strategies through RMO and PMO, which highlights the intervening role of market orientation. This allows us to understand the role of market orientation in the implementation of competitive strategies – specifically, whether the indirect effects of competitive strategies on the performance through RMO and PMO are important when compared with the direct effects of strategy on performance.
PLS is a well-established method for examining the direct and indirect effects of several variables simultaneously. The indirect effect is determined by understanding the product of a particular variable on a second variable through its effect on a third intervening or mediating variable ([1] Alwin and Hauser, 1975). Furthermore, “the sum of the direct and indirect effect reflects the total effects of the variable on the endogenous variable” ([60] O’Cass, 2001, p. 56). Table IV [Figure omitted. See Article Image.] illustrates that the indirect effects are stronger than the direct affects. The results show that, first, in the context of RMO as an intervening variable, the effect of differentiation on performance is 0.04, the indirect effect on performance is .08 and the total effects are 0.12. Second, in the context of RMO as an intervening variable, the effect of cost-leadership on performance is 0.00, the indirect effect on performance is 0.06 and the total effects are 0.06. In the context of PMO as an intervening variable, the effect of differentiation on performance is 0.04, the indirect effect on performance is 0.13 and the total effects are 0.17. Last, in the context of PMO as an intervening variable, the effect of cost-leadership on performance is 0.00, the indirect effect on performance is 0.06 and the total effect is 0.06. Collectively, these results highlight the importance of indirect effects and the intervening role of RMO and PMO between competitive strategies and performance.
Furthermore, we applied [8] Baron and Kenny’s (1986, p. 1177) four-step method for identifying mediation to examine the indirect effects and to corroborate the results of PLS. The results support those obtained through PLS, showing that when the independent variable differentiation and the mediator RMO were regressed on firm performance, differentiation became non-significant ( p >0.1), whilst RMO positively affected performance (p<0.001). When the independent variable cost-leadership and the mediator RMO were regressed on performance, cost-leadership became non-significant (p >0.5) whilst RMO positively affected performance (p<0.001). When the independent variable differentiation and the mediator PMO were regressed on performance, differentiation became non-significant (p >0.5), whilst PMO positively affected performance (p<0.001). Last, when the independent variable differentiation and the mediator PMO were regressed on firm performance, differentiation became non-significant (p >0.5) whilst PMO positively affected performance (p<0.001).
Discussion and implications
This study is couched in the research addressing strategy implementation, and it adds to this research domain by conceptualising and testing the antecedents and consequences of RMO and PMO. Particularly, by integrating the strategy implementation approach and the RB theory, this study examined the role of two key marketing capabilities, i.e. RMO and PMO, in the competitive strategies-firm performance relationship. Therefore, the current study extends the works of [27] Frambach et al. (2003) and [34] Homburg et al. (2004), and contributes to the strategy implementation literature by examining the effects of competitive strategies on both PMO and RMO. This model essentially shows:
– a direct link between differentiation (H1 ) and cost-leadership strategies (H2 ) on RMO;
– a direct link between differentiation (H3 ) and cost-leadership (H4 ) on PMO; and
– a direct link between RMO (H5 ) and PMO (H6 ) on performance.
This study applied PLS to analyse complex relationships by simultaneously examining both the direct and indirect effects. The findings support the conceptual model. Differentiation and low-cost strategies drive RMO and PMO, and RMO and PMO in turn affect firm performance. Furthermore, the findings suggest that the treatment of market orientation as RMO and PMO is important, as they can fully capture the benefits of the competitive strategies and, more importantly, act as critical mechanisms for transmitting the benefits of competitive strategies to performance.
The findings contribute in several ways to the market orientation literature, specifically the emerging literature related to RMO and PMO (i.e. [5] Atuahene-Gima et al. , 2005; [16] Coltman et al. , 2008; [57] Narver et al. , 2004; [70] Saini and Johnson, 2005). The study confirms the argument that RMO and PMO are statistically related but theoretically distinct constructs. Furthermore, it provides evidence that RMO and PMO are capabilities that are important sources of competitive advantage and uniquely contribute to performance ([5] Atuahene-Gima et al. , 2005). Therefore, it is possible to pursue RMO or PMO individually, with some success. Last, it validates the claim that PMO should have higher impact on performance than RMO, as [57] Narver et al.(2004) and [16] Coltman et al. (2008) argue. For example, the relative importance of PMO is evidenced by the higher coefficient between PMO and performance (0.40) than the coefficient between RMO and performance (0.20). This further validates the argument that industry and customer foresight (PMO) may be the most important component of market orientation ([16] Coltman et al. , 2008) with empirical evidence. It is important, however, that as the findings suggest that these capabilities together fully intervene between competitive strategies and performance, for optimal performance outcomes, firms must simultaneously invest in and nurture both RMO and PMO when implementing competitive strategies.
Extant literature that has related PMO to performance (i.e. [5] Atuahene-Gima et al. , 2005; [57] Narver et al. , 2004) has only related this capability to one specific performance outcome: new product success. However, this study conceptualises performance as comprising five items relating to market share and financial performance and empirically finds a positive relationship between PMO and performance. Although this finding has been extensively confirmed in the context of RMO, this study is amongst the first to empirically illustrate the essential nature of PMO as it affects various important broader performance outcomes.
The findings also show that differentiation strategy had a stronger effect on RMO and PMO (as evidenced by the coefficient on both RMO, 0.36, and PMO, 0.41), than did cost-leadership strategy (on RMO, 0.22, and PMO, 0.20). This is consistent with the argument that market-oriented firms are inherently externally focused, emphasising understanding customer needs (both expressed and latent) and attempting to satisfy them better than their competitors ([55] Narver and Slater, 1990; [74] Slater and Narver, 1996; [81] Vazquez et al. , 2001). This does not discount the pursuit of cost-leadership strategy, but it does show that differentiation is more likely to be more successfully implemented with RMO and/or PMO.
Marketing scholars have called for adopting the strategy implementation approach ([10] Bonoma, 1984; [13] Chebat, 1999). In the context of competitive strategies and RMO and PMO, we contribute to the discussion by showing that the extent of market orientation in a firm must be congruent with the competitive strategy pursued (see also [17] Conant et al. , 1990) to ensure successful implementation. This study contributes to the strategy implementation literature by finding empirical support for this approach. In fact, the findings strongly support the strategy implementation approach, as the competitive strategies only affect performance through RMO or PMO. Essentially, the findings suggest that competitive strategies create and shape RMO and PMO, which then result in increased performance outcomes. Furthermore, the strategy implementation literature is increasingly emphasising organisational capabilities, as opposed to traditional organisational dimensions such as organisational structure, as key intervening dimensions between strategy and performance. This study conceptualises RMO and PMO as capabilities, and because the findings illustrate the fully intervening nature of these capabilities, they give credence to the RB theory’s claim that capabilities are critical for strategy implementation.
Practical implications
There are several implications for practice. First, the empirical findings present managers with an insight into the role of firm capabilities in the competitive strategies-performance relationships. It provides a viable path for building competitive advantage. For example, little research exists on the interrelations among competitive strategies, capabilities (specifically RMO and PMO) and performance. The findings suggest that these interrelationships collectively serve to provide performance outcomes and therefore are important to understand.
Second, strategy implementation is a valid route to organisational performance. Specifically, the development of RMO and PMO is essential for the effectiveness of competitive strategies, suggesting that in their quest for competitive advantage, managers must not only develop competitive strategies but simultaneously develop capabilities that act as key mediators. Therefore, an important message from the evidence to managers is that having competitive strategies in the absence of RMO and PMO is likely to be substantially less effective in facilitating the firm’s achievement of relevant performance outcomes. Third, the findings suggest that managers should emphasise strategy implementation over strategy formulation; strategy implementation is more likely to be effective because it is more operational than the intellectual process underlying the strategy formulation approach ([34] Homburg et al. , 2004).
Last, the manner in which market orientation is conceptualised has implications for practice. Whereas market orientation has traditionally been viewed as being responsive, PMO highlights the importance of understanding latent needs. This approach encourages organisations to adopt a holistic view of market orientation that includes proactively understanding customers’ latent needs in examining the influence of competitive strategies on performance.
Limitations and future research directions
Applying the strategy implementation approach, this study examines two important capabilities as intervening variables. However, other capabilities may play an important intervening role. A firm’s ability to create, disseminate and utilise knowledge, or organisational learning , has been argued to be important. For example, [71] Sinkula et al. (1997, p. 316) suggest that “cultivating a learning culture may indeed become one of the primary means to attain and maintain a competitive advantage”. Furthermore, because the business environment is characterised by technological uncertainty, competitive advantage depends on the firm’s capability to adopt new technologies in a strategic manner (e.g. [67] Porter, 2001). Therefore, a firm’s ability to understand and respond to new technologies, or technological opportunism, is critical ([78] Srinivasan et al. , 2002). Lastly, leadership is important in implementing strategy. Future research could examine the role of strategic leadership capability ([84] Voola et al. , 2004) in the competitive strategies-performance relationships.
This study emphasised two competitive strategies: differentiation and cost-leadership. There is scope for future research to include focused competitive strategy and simultaneously examine the concurrent effects of all three competitive strategies on firm capabilities and performance. Furthermore, another dominant conceptualisation of competitive strategies is that of [50] Miles and Snow (1978) typology, which has been extensively applied in marketing (e.g. [54] Morgan et al. , 2003). Therefore, understanding the relationships among [50] Miles and Snow’s (1978) typology, RMO, PMO and performance would provide an alternative perspective and would be a fruitful extension to the strategy implementation approach.
Conclusion
We argue that businesses strategies influence two key marketing capabilities: RMO and PMO, which in turn influence performance. The findings support this contention. These arguments and findings contribute to the strategy implementation and the RB theories, especially the market orientation literature, by empirically showing that RMO and PMO fully capture the benefits of the competitive strategies and act as fundamental mechanisms for transmitting the benefits of competitive strategies to performance. Therefore, this research contributes to the identified need for work in the area by [85] Vorhies and Morgan (2003) who contend that organising marketing activities in ways that successfully enable business strategy implementation is a difficult challenge facing managers, and yet researchers know little about how marketing activities should be organised to enable business strategy implementation.
Footnote
1. Our focus on SMEs and the industries represented is consistent with a number of studies found within the literature that reported comparable sample size, and/or firm size focus (SMEs), and/or industries represented within samples. Such studies, like this study, did not specifically test for differences across firm size or industry (see, for example, [63] O’Cass and Ngo, 2007b; [27] Frambach et al. , 2003).
2. We followed similar procedures outlined in the literature by a number of scholars who also studied various aspects of either strategy or capability and performance issues, with similar sampling procedures and sample sizes and all adopted PLS for data analysis (see, for example, [63] O’Cass and Ngo, 2007b; [77] Slotegraaf and Dickson, 2004; [88] White et al. , 2003).
3. Moreover, [33] He and Wong (2004) highlight the issue of ambidexterity in the context of fit as matching and fit as moderating. Utilising their procedures, our regression results show that there is evidence for fit as moderating, but no evidence for fit as matching. As such, there is evidence of ambidexterity in firms pursing both RMO and PMO. We thank one of the reviewers for highlighting these procedures.
