New Economy Business Strategy Typology: Reconception and Synthesis

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Synthesis, Pages 8 (1934 words)

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Research on the nature of the competitive strategy-performance relationship has focused primarily on traditional, brick and mortar businesses. Although competitive strategy theory is applicable to the new economy, generic strategy typologies do not account for the opportunities and challenges that this economy has presented to strategic managers. This paper reticulates three critical debates in the field--IO/resource-based theory, strategic groups, and combination strategies and performance--into a business strategy framework specifically applied to businesses operating in the digital, knowledge-based economy.

Challenges for future research are presented.

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The strategic management literature is replete with strategy typologies, research methodologies, and theories on the strategy-performance relationship. In general, researchers have demonstrated that strategies that emphasize quality, incorporate a product or service's distinctive competencies, and focus on the core business are most likely to result in superior firm performance (Dacko & Sudharshan, 1996).

Advances in the field notwithstanding, however, a consensus concerning the precise nature of competitive strategy and its relationship to business performance has not yet emerged (Mauri & Michaels, 1998), and recent changes in social, technological, and economic factors suggest that this relationship be revisited.

This paper proposes a competitive strategy typology for the new economy. The remainder of the paper is divided into four main sections.

First, an historical development of business strategy research is presented, including discussions on the industrial organization (IO) perspective, strategy typologies, the combination strategy debate, and resource-based theory. Second, the strategic implications of recent social, technological, and economic changes are presented. Third, a framework integrating these changes into existing theory is developed.

Finally, challenges for utilizing the framework are outlined. The roots of contemporary business strategy research can be traced to--among other perspectives--industrial organization theory.

Within Bain (1956) and Mason's (1939) IO framework of industry behavior, firm profitability is viewed as a function of industry  the Journal of Behavioral and Applied Management - Winter 2002 - Vol. 3(3) Page 207 structure. Characteristics of the industry--not the firm--are viewed as the primary influences on firm performance (see also Barney, 1986c). More recently, Bain and Mason's basic structure-conduct-performance model has been posited as most appropriate for industries with uncomplicated group structures, high concentration, and relatively homogeneous firms (Seth & Thomas, 1994).

Early strategy researchers challenged the IO perspective, noting its inability to explain large performance variances within a single industry. As a result, the strategic group level of analysis was proposed as a compromise between the deterministic, industry level of analysis proposed and developed by industrial organizational economics and the firm or business level of analysis of interest to strategic management researchers (Hergert, 1983; Hunt, 1972; Porter, 1981).

Strategic groups describe apparent clusters of firms that exhibit similar or homogeneous behavior within a somewhat heterogeneous industry environment (Fiegenbaum, McGee & Thomas, 1988). Theorists have proposed at least three rationales for the existence of strategic groups (Fiegenbaum et al. , 1988). First, differing goals (i. e. , profit, revenue, or growth maximization) among industry players lead to different competitive approaches.

In addition, firms with similar goals may seek to attain them through different strategies. Second, strategic managers make different assumptions about the future potential of their industries, and are thereby affected differently by changes in the external environment. Third, skills and resources vary among competitors. Following this logic, it is reasonable to assume that there may be at least several "groups" of businesses, each with common goals, similar resources, and shared assumptions.

Strategic group research has demonstrated group-performance linkages in the home appliance (Hunt, 1972), brewing (Hatten & Schendel, 1977; Hatten, Schendel, and Cooper, 1978), chemical process (Newman, 1973), consumer goods industries (Porter, 1973), paints and allied products (Dess & Davis, 1984), industrial products (Hambrick, 1983), U. S. insurance (Fiegenbaum & Thomas, 1990), and retail mail-order (Parnell & Wright, 1993) industries, among others. However, not all studies have supported a strong association (McGee & Thomas, 1986, 1992).

Ketchen et al. 's (1997) meta-analysis found that only about eight percent of firms performance can be explained by strategic group membership. Katobe and Duhan (1993) identified three strategy clusters among Japanese businesses--"brand skeptics, mavericks, and true believers"--and found that membership in one of the groups was not a significant predictor of performance. Rather, the link between strategy and performance was moderated by organization situational variables such as the degree of emphasis on manufacturing and profitability.

Additional studies have also examined variables thought to moderate the strategic group-performance relationship (Davis & Schul, 1993; Nouthoofd & Heene, 1997; Zahra, 1993).  the Journal of Behavioral and Applied Management - Winter 2002 - Vol. 3(3) Page 208 Business Strategy Typologies As strategic group assessments identified clusters of businesses employing similar strategies, researchers were beginning to categorize similarities within the strategic groups across studies.

Business strategy typologies identifying several generic strategic approaches were developed and utilized as a theoretical basis for identifying strategic groups in industries. Although strategic groups are an industry-specific phenomenon, many strategic group researchers began to utilize approaches believed to be generalizable across industries, specifically those proposed by Porter (1980, 1985) and by Miles and Snow (1978).

According to Porter's framework, a business can maximize performance either by striving to be the low cost producer in an industry or by differentiating its line of products or services from those of other businesses; either of these two approaches can be accompanied by a focus of organizational efforts on a given segment of the market. Specifically, a low cost strategy is effectively implemented when the business designs, produces, and markets a comparable product more efficiently than its competitors.

In contrast, a differentiation strategy is effectively implemented when the business provides unique and superior value to the buyer in terms of facets such as product quality, special features, or after-sale service. Differentiation leads to market success not based on a competitive price, but on the demands of a sophisticated consumer who wants a differentiated product and is willing to pay a higher price. Miles and Snow's (1978) framework identified four strategic types: prospectors, defenders, analyzers, and reactors.

Based on Child's (1972) conceptualization of strategic choice, Miles and Snow assume that organizations act to create their own environments through a series of choices regarding markets, products, technologies, and desired scale of operations. The enacted environment is severely constrained by existing knowledge of alternative organizational forms and managers' beliefs about how people can and should be motivated. Prospectors perceive a dynamic, uncertain environment and maintain flexibility and employ innovation to combat environmental change, often becoming the industry designers (Miles & Snow, 1986).

In contrast, defenders perceive the environment to be stable and certain, and thus seek stability and control in their operations to achieve maximum efficiency. Analyzers stress both stability and flexibility, attempting to capitalize on the best of both of the preceding strategic types. Reactors lack consistency in strategic choice and perform poorly. A number of theorists have sought to modify or integrate the typologies. For example, Miller's (1986) expansion suggested two different types of Porter's differentiation strategy.

One type--intensive image management--highlights the creation of a positive image through marketing techniques such as advertising, market segmentation, and prestige pricing. The second type--product innovation--involves the application of new or flexible technologies as well as unanticipated customer and competitor reactions (Miles & Snow, 1978; Miller, 1988; Miller & Friesen, 1984; Scherer, 1980).  the Journal of Behavioral and Applied Management - Winter 2002 - Vol. 3(3) Page 209

While many researchers were utilizing and/or extending one typology or the other in their strategy-performance studies, others were seeking common theoretical ground for combining the two approaches into a single, all-encompassing typology (Kotha & Orne, 1989). Indeed, a comparison between the two typologies suggests that strategic types within both classification schemes could be categorized along the two dimensions of consistency and proactiveness. For example, differentiation and prospecting strategies tend to emphasize proactivity, while cost leadership and defender strategies are more reactive.

Segev (1989) noted that Miles and Snow's reactor type may also be equated with Porter's "stuck in the middle" (1980, p. 41) type as strategies that lack consistency. Miller (1987) emphasized four integrated types: innovation, market differentiation, breadth, and cost control. Chrisman, Hofer, & Boulton's (1988) framework considered differentiation, scope, and competitive methods. Attempts have been made to further develop both typologies. These and other efforts notwithstanding, the original versions of the typologies appear to remain the most widely cited and tested (Eng, 1994).

Strategy Typologies: The Combination Debate Although attempts at typology integration have linked similarities between the two approaches, they have not accounted for one primary theoretical difference. Porter's approach does not allow for long-term viable combination strategies. Miles and Snow's typology allows for one via the analyzer, and Wright, Kroll, Pringle, and Johnson's (1990) expansion of the typology adds a second, the balancer. However, the debate extends well beyond the typologies themselves.

Indeed, conflicting interpretations of empirical research utilizing both typologies resulted in the emergence of two schools of thoughts on the strategy-performance relationship. One school has embraced Porter's (1980, 1985) original contention that viable business units must seek either a low cost or a differentiation strategy to be successful (Dess & Davis, 1984; Hambrick, 1982; Hawes & Crittendon, 1984). For example, Dess and Davis (1984) examined 19 industrial products businesses and suggested that superior performance was achieved through the adoption of a single strategy.

Similar results were found in Hambrick's (1983) investigation of capital goods producers and industrial products manufacturers. Indeed, most studies defending the single strategy position have identified clear strategic groups, each with its own association with performance. However, a second school considers the combination strategy to be viable over the long-run, and in many cases, to be associated with superior performance (Buzzell & Gale, 1987; Buzzell & Wiersema, 1981; Hall, 1983, Hill, 1988; Murray, 1988; Phillips, Chang, & Buzzell, 1983; White, 1986; Wright, 1987).

Although both sides appear to have moved toward common ground, a substantial gap remains. Specifically, little--if any--research published in recent years has suggested that strategies cannot be effectively combined, or that combination strategies are necessarily effective in all industries. However, no consensus has yet emerged.  the Journal of Behavioral and Applied Management - Winter 2002 - Vol. 3(3) Page 210

As a result of the inability of strategy researchers to agree on a common typology or resolve the combination strategy debate, emphasis in the field began to shift toward an alternative paradigm of the strategy-performance relationship. A dissatisfaction with the IO overtones inherent in strategic group analysis may have been the primary impetus for a renewed interest in firm resources, not strategic group membership, as the foundation for firm strategy (Barney, 1991; Collis, 1991; Grant, 1991; Lawless, Bergh, & Wilstead, 1989).

Emergence of Resource-Based Theory In the 1980s, several literature streams in the strategic management field began to synthesize into a broader perspective. The resulting paradigm, resource-based theory, drew from the earlier work of Penrose (1959) and Wernerfelt (1984) and emphasized unique firm competencies and resources in strategy formulation, implementation, and performance.

Resource-based proponents have studied such firm-level issues as transaction costs (Camerer & Vepsalainen, 1988), economies of scope, and organizational culture (Barney, 1986a, 1991; Fiol, 1991). Key business-level issues include the analysis of competitive imitation (Rumelt, 1984), informational asymmetries (Barney, 1986b), causal ambiguities (Reed & DeFillippi, 1990), and the process of resource accumulation (Dierickx & Cool, 1989). The nature of competitive advantage began to take renewed prominence within the new perspective.

From the resource-based perspective, competitive advantage occurs when a firm is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors (Peteraf, 1993). Sustained competitive advantage exists when competitors are unable to duplicate the benefits of the strategy (Barney, 1991). Resource-based theory challenges three key tenets of the industrial organization approach (see table 1).

First, IO assumes that firm profitability is primarily a function of industry profitability. Although this view recognizes the roles played by a variety of industry-level factors such as entry and exit barriers, it does not account for a firm's ability to redefine an industry or substantially influence its structure, even to the extent that it has no direct competitors. Resource-based theorists contend that the ability of a firm to develop and utilize valuable resources is the primary determinant of its performance.