strategic profiles and performance: an empirical test of select key propositions

Strategic Profiles and Performance: An Empirical Test of Select Key Propositions

Peter Wright Memphis State University

Mark Kroll University of Texas at Tyler

Peng Chan California State University at Fullerton

Karin Hamel George Washington University

Competing theories on internal orientation versus external orientation are examined. The relevant theories are amalga- mated and condensed into a number of competing propositions that are empirically tested. The findings suggest that the internally oriented businesses as well as the externally oriented businesses underperform the efficient, marketing oriented businesses.

INTRODUCTION

In the strategic marketing and strategic management literature, two dimensions of strategy at the business unit level have received considerable attention. One dimension has been the business' willingness to be internally oriented. The other dimension has consisted of the business's willingness to be externally oriented. These two dimensions may be conceived to represent extreme opposite points on a spectrum.

In the following pages the contributions of a number of authors to these dimensions of strategy are discussed and

Journal of the Academy of Marketing Science Volume 19, Number 3, pages 245-254. Copyright �9 1991 by Academy of Marketing Science. All rights of reproduction in any form reserved. ISSN 0092-0703.

synthesized. Subsequently, select key propositions are tested empirically. After specifying the method of the study, results, limitations, and suggestions for future research are discussed.

THE SPECTRUM

Some business units may best be characterized as being primarily internally oriented. Their concern is on routiniz- ing organizational activities so that greater efficiencies can be gained. Because of their concern for efficiencies, they deliberately avoid responding to new market opportunities. Other business units may be characterized as being externally oriented. Their concern is with capitalizing on new market opportunities and on efforts that would result in improved/innovative outputs even though such efforts may be quite costly. In the following spectrum, the diametrically opposing dimensions of these strategic predispositions are portrayed.

Internal ( ~ External Orientation Orientation

A number of authors have subscribed to the above spectrum. They have identified select strategic profiles that may be positioned along various points on this spectrum. Al- though the various authors have followed different research paths, their proposals have a mutually reinforcing common

JAMS 245 SUMMER, 1991

STRATEGIC PROFILES AND PERFORMANCE: AN EMPIRICAL WRIGHT, KROLL, CHAN, AND HAMEL TEST OF SELECT KEY PROPOSITIONS

denominator which may be represented by the spectrum depicting internal and external orientations.

For instance, Utterback and Abernathy (1975) have proposed cost minimizing and performance maximizing strategic business types that may be positioned at the opposite ends of the spectrum. Cost minimizing businesses are internally oriented and produce no-frills, standardized outputs. Performance maximizing businesses are externally oriented and emphasize differentiated, "unique products and product performance, often in the anticipation that a new capability will expand customer requirements" (Utterback and Aber- nathy 1975, p. 643). Furthermore, performance maximizing businesses stress product innovations or product R&D while cost minimizing businesses "tend to focus on process innovations" or process R&D (Utterback 1975, p. 68). Utter- back and Abernathy (1975) have also identified a business type, the sales maximizing type, which represents a balance between the cost minimizing and the performance maximizing businesses. The sales maximizing type would not stress cost controls as intensely as the cost minimizing type nor would it be as innovatively oriented as the performance maximizing type. These strategic types are positioned in the following spectrum.

Internal ~ Cost Sales Performance ~ External Orientation Minimizing Maximizing Maximizing Orientation

Similarly, Miles and Snow (1978) have proposed four business types, one of which (the reactor) is destined to failure, while the other three are viable businesses. The viable business types have been identified as the defender, analyzer, and prospector organization types.

As portrayed below, the defender and the prospector represent opposite points on the spectrum, while the analyzer represents a balance between the opposite extreme organization types. The defender is internally oriented and emphasizes cost reduction efforts. The prospector is externally oriented and emphasizes innovations, leading to performance maximizing outputs. The analyzer strikes a balance between emphasis on low costs and emphasis on innovations.

Internal ~-----Defender Analyzer Prospector ~ External Orientation Orientation

A number of other authors have viewed businesses as low cost, combination, and differentiated types (Dess & Davis 1984; Hambrick 1983a,b, Miller & Friesen 1986a,b; Porter 1985; Wright 1987). As depicted in the following spectrum, the low cost businesses are internally oriented and are positioned at one extreme, the differentiated businesses are externally oriented and are positioned at the other extreme and the combination strategic adopters are positioned in between the two extreme business types.

Internal *-----Low Combination Differentiated ~, External Orientation Cost Orientation

In some cases Porter has suggested that organizations cannot profitably combine low cost with differentiation, stating "a firm will ultimately reach the point where further

cost reduction requires a sacrifice in differentiation" (1985, p. 18). In other cases Porter has submitted that low cost and differentiation may be combined. Accordingly, "differentiation may not be incompatible with relatively low costs" (Porter 1980, p. 38).

The various propositions may be synthesized around a single spectrum. At one extreme, cost minimizing, defending, and low cost businesses would be positioned. At the opposite extreme, performance maximizing, prospecting, and differentiated businesses would be positioned. In between the extremes, the sales maximizing, analyzing, and combination strategic types would be positioned.

Internal Cost Sales Performance External Orientation<---Minimizing,--Maximizing,--Maximizing,---~ Orientation

Defending, Analyzing, Prospecting, Low Cost Combination Differentiated

As the extreme left points on the spectrum are approached, the businesses would be technologically stable and would emphasize efficiencies in operations. As the extreme right points on the spectrum are approached, the businesses would be technologically active, with higher costs and more innovative outputs. As the mid points are considered, the businesses would represent a compromise between the two extreme positions. They would not be as innovative as the businesses on the extreme right points and they would not be as efficient as the businesses on the extreme left points on the spectrum.

What is proposed in this paper is that the above spectrum may apply to some industries. But in other industries, particularly in select fragmented industries in which numerous small business units operate, the discussion regarding the aforementioned spectrum may not apply as well. In such industries select business units may continuously explore for opportunities to combine efficiency with efforts that lead to product improvements and innovations. These select businesses tend to be the efficient, marketing oriented business units. Their potential presence may require a different elaboration.

ELABORATING ON A DIFFERENT PERSPECTIVE

A revised perspective may be envisioned such that an efficient, marketing oriented business would be able to combine efficiency with quality improvements/innovations so that its cost position would be lower than businesses that are internally oriented. Also, its quality improvements/innovations would be greater than businesses that are externally oriented. Further elaborations on this perspective are provided in the upcoming paragraphs that deal with emphasis on quality, process innovations , product innovations, and system innovations.

Emphasis on Quality

One collection of writings has concentrated on how a transformation from substandard status to dedication to quality throughout the business can also lower costs. Crosby, a top manager at ITT, has discussed how an overall



quality concern was created at ITT which motivated their personnel to "want to do things right the first time" (Crosby 1979, p. 6). According to Crosby, substandard practices, or not doing things right, lead to costs involved in "the scrap, rework, service after service, warranty, inspection, tests, and similar activities made necessary by nonconformance problems" (Crosby 1979 p. 1 l).

Crosby has defined quality as conformance to requirements:

If a Cadillac conforms to all the requirements of a Cadillac, then it is a quality car. If a Pinto conforms to all the requirements of a Pinto, then it is a quality car. Luxury or its absence is spelled out in specific requirements, such as carpeting or rubber m a t s . . . Quality is measured by the cost of quality which �9 . . is the expense of nonconformance--the cost of doing things wrong (Crosby 1979, p. 15).

A number of authors have proposed a broader definition of quality. They have specified quality as conformance quality (how well a product conforms to a predetermined set of specifications) and as perceived quality (how customers perceive the quality of the product relative to competitors' products) (Gale and Klavans 1985; Groocock 1986; Luchs 1986; Vinson and Heany 1977). What is implied by these authors is that conformance quality may be a necessary condition for market success, but it is not a sufficient condition. Ultimately, the customers must perceive a better quality in the product. Consequently, the efficient, marketing oriented business may deliver higher perceived quality outputs while simultaneously reducing costs.

Process Innovations

Strategic accomplishments that encompass process improvements/innovations may also offer benefits that are independent of scale/scope considerations. Process innovations may be elicited from internal sources, but an efficient, marketing oriented business is also likely to scan the environment for the implementation of process improvements. Although process improvements or innovations are normally thought of in the context of lowering costs, lower costs and an enhancement in quality and differentiation may be the outcome of process improvements or innovations. Haas has noted that

U�9 manufacturers . . . have taken it for granted that higher quality means higher manufacturing cost �9 . . Sometimes it does take that kind of tradeoff �9 . . but it usually does n o t . . . Recently, a compu- ter manufacturer invested $20 million in a flexible assembly system. The investment made good opera- tional sense because it paid for itself in less than a year. Strategically, the investment was even more attractive. Production time was cut by 80%, and product quality improved tenfold (1987, p. 77).

Product Innovations

Although product improvements or innovations are usually thought of in the context of heightening differentiation,

it should be noted that higher levels of differentiation as well as lower costs may be the outcomes of product innovations. For instance, according to Miles, innovative product- markets developed by the tobacco division of Philip Morris have allowed this business to use greater portions of reconstituted tobacco sheet, shorter tobacco columns, and a freeze-drying process in order to reduce the quantity of tobacco usage per cigarette (Miles t982). Furthermore, the use of reconstituted tobacco sheet has made it possible to utilize not only a smaller amount of tobacco, but also to use lower quality tobacco in cigarette production. The above measures have combined to dramatically reduce the per unit cost of cigarette manufacture. However, these measures be- came possible only after Philip Morris developed innovative products--first by developing the filter cigarette and then by developing cigarettes with significantly lower tar and nicotine levels (Miles 1982). Put in other words, with the older non-filter cigarettes, it was neither feasible to reduce the amount of tobacco per cigarette nor was it feasible to use lower quality tobacco without detrimentally affecting the taste and the aroma of the cigarette.

System Innovations

Increases in differentiation and decreases in costs may be achieved through the undertaking of systems improvements or innovations. In fact, some of the most rewarding strategic advantages may hinge not on new products developed by the efficient, marketing oriented business unit, but rather on changing conventional systems for getting existing products to the market. Such systems innovations may heighten product quality while lowering costs of operations. Gluck has illustrated the possibility of this accomplishment with an example of an enterprise that at virtually every link of the business system did something different from the competition. The name of the firm is Savin Business Machines. According to Gluck:

Savin accomplished this feat by taking a radically different approach in every element of the copier business system [vs. Xerox] . . . while most Xerox machines were made up of costly customized com- ponents Savin designed its product around standardized c o m p o n e n t s . . . Savin lowered the cost of the machine so d ramat i ca l ly . . , and at the same time the Savin copier was more r e l i a b l e . . . Rather than building a direct sales force to parallel that of the competition, Savin aggressively recruited office- products dealers (1980, pp. 27-28).

The various perspectives may be summarized in a number of propositions�9 The empirical testing of these propositions is also elaborated.

PROPOSITIONS

What has been presented in this paper revolves around a number of key competing contentions. They are detailed below�9



Internal Orientation

Businesses that are internally oriented emphasize low costs. They deliberately avoid responding to market changes and, if possible, they attempt to further lower their cost of operations through process R&D. They also con- tinue to emphasize high capacity utilization, low advertising, low manufacturing and low relative direct costs (Jones and Butler 1988; Miles and Snow 1978; Porter 1980, 1985). Their emphasis on overall low costs enables them to offer lower prices, if necessary, to bid away business from their rivals. These businesses perform well through their low cost strategic profiles, particularly in industry environments that are conducive to business units that are below average in their responsiveness to market changes. That is, according to the contingency perspective, the performance of businesses that adopt different strategic profiles would be contingent on their environmental compatibilities. Conse- quently, environments that offer less volatile market opportunities may well suit business units that primarily emphasize internal orientation/low cost positions (Hre- biniak and Joyce 1985). Thus, there is theoretical support for the following proposition:

PI: Internally oriented businesses tend to have higher business performance than the externally oriented and the efficient, marketing oriented businesses, particularly in environments that are conducive to business units that are below average in their responsiveness to market changes.

A competing view to the above has also been proposed theoretically. According to select authors, those businesses that choose to compete primarily on the basis of internal orientation and low costs tend to face severe price competition, even in environments that are conducive to business units that are below average in their responsiveness to market changes (Abernathy and Wayne 1983). Severe price competition tends to put profit margins under pressure. Consequently, management's abilities to implement measures to improve operations, improve outputs, augment products with superior services, or expend more on marketing activities are limited. Thus, these businesses remain vulnerable to competitor moves that may draw customers away from them (Luchs 1986). A strategic tendency, in this event, might be to further lower prices, which would put even more pressure on profit margins. Also, from a marketing perspective, internally oriented businesses are likely to be operations oriented rather than market oriented which is a prescription to inferior performance (Gronroos 1983; McDaniel and Kolari 1987). Therefore, there is theoretical support for the following proposition which contradicts the above proposition (P1):

P2: Internally oriented businesses tend to have lower business performance than the externally oriented and the efficient, marketing oriented businesses, even in industries that are conducive to business units that are below average in their responsiveness to market changes.

External Orientation

Businesses that are externally oriented emphasize cultivating the ability to be responsive to market changes. They value product R&D efforts that are meant to improve their outputs. They are also prone to advertising their products and services. Such businesses are deliberately ineffi- cient, so they do not greatly value process R&D in order to reduce costs. Nor are they likely to be significantly con- cerned with capacity utilization, manufacturing expenses or relative direct costs (Day and Wensley, 1983). Brand loyalty may support the high performance of these business units. Their high quality products, to some extent, may enable them to avoid "profit damaging competition on the basis of price" (Phillips et al. 1983, p. 29). These elaborations tend to support the following proposition:

t'3: Externally oriented businesses tend to have higher business performance than the internally oriented and the efficient, marketing oriented businesses, particularly in industries that are conducive to business units that are above average in their responsiveness to market changes.

A counter position to consider with respect to the one just offered is that externally oriented businesses have vulnerabilities even in industries that are conducive to business units that are above average in their responsiveness to market changes (Phillips et al. 1983). That is, since they are not predisposed to reduce costs, their competitors may offer alternative outputs, occasionally at predatory prices (Gale and Klavans 1985; Henderson 1979). Such businesses are also vulnerable because they are not likely to be able to take advantage of differentiation possibilities that select cost cut- ting measures offer. These possibilities were discussed pre- viously under such topics as process innovations and systems innovations (Gluck 1980; Haas 1987). Consequently, a competing proposition (to P3) is submitted:

P4: Externally oriented businesses tend to have lower business performance than the internally oriented and the efficient, marketing oriented businesses, even in industries that are conducive to business units that are above average in their responsiveness to market changes.

Compromising Orientation and Efficient, Marketing Orientation

Assuming a compromising orientation (sales maximizing, analyzing, combination strategic types) lessens the vul- nerability of a business unit in two ways, particularly in industries that are conducive to business units that are moderate in their responsiveness to market changes (McKee et al. 1989). First, it tends to buffer the business unit against the internally oriented, low cost businesses (Hill 1988; Jones and Butler 1988; McKee et al. 1989; Phillips et al. 1983). Second, it tends to buffer the business against the externally oriented businesses (Jones and Butler 1988; McKee et al. 1989; Porter 1980). Within the spectrum of



external orientation versus internal orientation, "it would follow that, in general, the optimal performance would oc- cur in the organizations that balance adaptive and efficiency needs" (McKee et al. 1989, p. 24). Alternatively put, a compromising business unit gains advantage through maintaining a balance between low cost needs and differentiation needs (Jones and Butler 1988; Porter 1985). Thus,

P5: Compromising business units tend to have higher performance than the internally oriented and the externally oriented businesses. Their cost position would be higher than that of businesses that are primarily internally oriented. Their level of differentiation would be lower than that of businesses that are primarily externally oriented. The compromise or balance between innovative and efficiency needs provides the business with competitive advantage, particularly in industries that are conducive to business units that are moderate in their responsiveness to market changes.

An alternative proposition to the above may be considered which would envision that an efficient, marketing oriented business unit may surpass the competitors that are primarily internally oriented in cost containment efforts. Also, the efficient, marketing oriented business unit may surpass (in differentiation) the rivals that are primarily externally oriented. The strategic advantage would hinge on an emphasis on quality, process innovations, product innovations, or systems innovations (Gale and Klavans 1985; Gluck t980; Groocock 1986; Haas 1987; Miles 1982). Hence,

P6: Business units that are efficient and marketing oriented tend to have higher performance than the internally oriented and the externally oriented businesses, particularly in industries that are conducive to business units that are moderate in their responsiveness to market changes. Their cost position would be lower than that of businesses that are primarily internally oriented. Their level of differentiation would be higher than that of businesses that are primarily externally oriented.

The above propositions are empirically tested in this study. The specifics of the empirical testing are provided in the following section.

METHOD

Four topics are discussed in this section. The first is the sample, the second is the strategy variables, the third is business performance, and the fourth is the analytical procedure.

Sample

The adhesives and sealants industry (SIC 2891) com- prised the crux of this investigation for two reasons. First,

this industry is characterized by modest growth and tech- nological change. Since it is relatively stable, it was possible to study competing businesses that have existed for at least several years. Thus, they have developed identifiable strategic profiles as opposed to businesses in very dynamic industries in which the rate of failure is quite high (Miller 1986). The adhesives and sealants industry is mainly com- prised of smaller businesses and most of them are privately held. Thus, it is a fragmented industry in which even the largest competitors do not have dominance in the industry.

Second, while the industry is stable, it nevertheless allows for below average, average, and above average market responsiveness. That is, the businesses in the adhesives and sealants industry are end-user driven. A business unit may concentrate on simple end-user needs that do not change significantly from one year to the next. Another business unit may address complex end-user needs that change frequently.

Still another business unit may attempt to satisfy the diverse needs of various end-users. In fact, it is possible for the same end-user to have various needs. For instance, the bonding needs of an electronics producer are simple and entail few changes from one year to the next for its en- closures, but the needs of the same end-user for its circuit boards tend to entail frequent changes and are quite complex. The opportunities for below average, average, and above average changing needs of the end-users allow for the adhesives and sealants businesses to assume different strategic profiles. The internally oriented businesses would primarily attempt to address routine bonding needs that do not change frequently. The externally oriented businesses would cater to more complex end-user needs that require frequent changes. The compromising and the efficient, marketing oriented business units may cater to diverse end user needs and these businesses would combine innovations with low cost operations.

Given this context, a total of 120 adhesives and sealants businesses were randomly selected from Dun and Bradstreet's (1988) Million Dollar Directory. These business units were contacted in order to elicit their participation in the study. The person contacted in each business was the Chief Executive Officer. Assurances were made that the purpose of the study was to analyze the adhesives and sealants industry for academic purposes and that all information provided would remain strictly confidential.

In spite of the assurances made, only 72 businesses (60 percent) agreed to participate in the investigation. Subse- quently, two of the businesses in the sample were eliminated because the information needed for the study ultimately was not provided by them. The 70 enterprises in the final sample (58 percent of businesses randomly selected) were non- diversified, self-contained and autonomous organizations, enabling the authors to measure their performance as distinct business units.

In Table 1 the sales and number of employees of the participating businesses are presented. The preponderance of smaller businesses in the sample is reflective of the industry as a whole.

Copies of the financial statements of these business units were obtained. Additionally, further information was gath- ered via a brief questionnaire which appears at the end of the paper. The objective information (financial statements)



TABLE 1 Characteristics of Firms

Firm Number of Sales Firm Number of Sales (Number) Employees ~ ( $ MM ) ~' (Number) Employees ~ ( $ MM ) h

1 18-27 2 36 220-230 16 2 20-24 2 37 230-240 18 3 22-26 2 38 245-260 17 4 24-28 3 39 270-285 18 5 26-30 3 40 290-310 20 6 28-32 4 41 310-330 24 7 30-34 3 42 330-350 25 8 32-36 4 43 350-370 26 9 34-38 4 44 370-390 25

10 36-40 5 45 400-420 27 11 38-42 4 46 410-430 26 12 40-44 5 47 420-440 29 13 42-46 4 48 430-450 30 14 44-48 5 49 440-460 32 15 46-50 6 50 450-470 36 16 48-52 5 51 480-500 40 17 50-54 4 52 490-510 43 18 52-56 6 53 500-520 50 19 54-58 6 54 510-530 53 20 56-60 7 55 520-540 56 21 70-74 8 56 530-550 62 22 72-76 10 57 540-560 59 23 74-78 9 58 550-570 64 24 82-86 12 59 560-580 71 25 84-88 11 60 570-590 68 26 90-94 13 61 580-600 76 27 92-96 13 62 590-610 74 28 98-104 14 63 600-620 75 29 110 115 12 64 640 680 79 30 118-124 13 65 670-690 82 31 132 138 13 66 740-800 93 32 148-154 14 67 760-820 91 33 156-162 15 68 780-840 94 34 170-180 16 69 800-860 94 35 185-195 15 70 820-880 95

"Range provided to preserve anonymity. bApproximate sales provided to preserve anonymity.

and the subjective information (questionnaire) were com- piled in order to determine the strategy variables detailed below.

Strategy Variables

Some of the previous studies have explored strategic profiles of businesses based on a few strategy variables. For example, White (1986) only used per unit cost of production and pricing, while Gupta and Govindarajan (1986) only used product performance and pricing. Other studies have examined strategic profiles based on more numerous variables (Buzzell and Gale 1987; Hambrick 1983a,b; McKee et al. 1989; Miller and Friesen 1986a,b).

In this study, the variables chosen include product R&D expenses, process R&D expenses, manufacturing expenses, relative direct costs, capacity utilization, advertising expenditures and pricing. The operationalization of the variables is stated in the Appendix. These variables were selected because (1) they broadly reflect attributes that tend to be associated with strategic profiles (Buzzell and Gale 1987; Hambrick 1983a,b; McKee et al. 1989; Miller and Friesen 1986a,b; Porter 1980, 1985; White 1986; Wright 1987); (2)

they are subject to managerial control; (3) they reflect strategic profiles more than industry specifications; and (4) they collectively allow for group categorization of the businesses studied in accordance with whether they are internally oriented, externally oriented, or whether they have combination strategic profiles.

Similar to the studies referred to in the above paragraph, in this paper it was anticipated that subscription to the various strategies would have certain levels of conduct variables associated with them. Specifically, it would be expected that subscribing to an internal orientation would involve high process R&D expenses. Since process R&D includes all expenses incurred to improve the efficiency of manufacturing and distribution, this datum is representative of how much a business stresses efficiency of operations. In addition, a business which stresses low costs would normally be expected to have low product R&D expenses, since its emphasis would not be on responding to market changes and the development of improved or new products. Also, low manufacturing expenses, low relative direct costs, low advertising expenditures, high capacity utilization and the charging of average to low prices would be consistent with this strategic profile.



On the other hand, subscribing to external orientation would be consistent with high product R&D expenses, high advertising expenditures, high manufacturing expenses, as well as high relative direct costs for a business. Such a business would be expected to have low process R&D expenses and low capacity utilization, while charging average to high prices. Finally, competing with a compromising or an efficient, marketing oriented strategic profile would likely entail high product R&D expenses, high advertising expenditures and high process R&D expenses. Also, such a business would tend to have high capacity utilization, low manufacturing expenditures, and low relative direct costs, while charging average to high prices (Phillips et al. 1983).

Business Performance

Two measures of business performance were employed. Return on investment (ROI) (five-year average, 1984- 1988) was calculated as net income before taxes divided by total investment. This measure is widely used, although it may be considered to have certain vulnerabilities (various depreciation methods, differing inventory and fixed asset valuations). Also, RO1 may be regarded to be more reflective within shorter-term time horizons. Hence, growth in relative market share was also used to measure performance. This measure may be considered to be more reflective within longer-term time horizons. Growth in relative market share was measured by dividing the growth in sales of each business by the combined growth in sales of the three largest competitors over a five-year period (1984- 1988).

Analytical Procedure

Cluster analysis was adopted for the analytical procedure. Specifically, the minimum squared-error clustering of Eu- clidean distances technique was utilized (Hair, Anderson, and Tatham 1987). Researchers face the choice as to the number of clusters to discuss in cluster analysis. The number of groups which result from cluster analysis should be internally homogeneous (in terms of within-group variance) and heterogeneous in terms of between-group variance.

In this study, the number of clusters included in the analysis was based on a priori theoretical expectation that there would be three different groups of businesses in the sample - - those that compete with an internal orientation, those that compete with an external orientation and those that compete with a compromising or an efficient, marketing orientation. Categorization by three groups was supported by statistical differences between groups which were indicated by multiple group ANOVA tests and cubic clustering criteria values for various numbers of clusters. It should be empha- sized that categorization by two and four clusters was also attempted. But, the results of cluster analyses were not meaningful.

RESULTS AND DISCUSSION

The results of a three cluster model, which were found to best meet the criteria mentioned in the previous section, are contained in Table 2. Included are cluster means and stan-

TABLE 2 Profiles of Three Clusters

Means and Standard Deviations

Strategic Attributes

Cluster 1 (N = 40) Internal

Orientation

Cluster 11 (N = 15) Efficient Marketer

Cluster II1 (N = 15) External

Orientation

1. Product R&D

2. Process R&D

3. Advertising expenditures

4. Manufacturing expenses

5. Capacity utilization

6. Relative direct costs

7. Price

Performance Variables 1. ROt

2. Growth in relative market share

.44b., �9 (.152) 1.300' (.378) .452J,.,

(.202) 61.975' (6.203) 82.3(Y'.' (9.291) 99.475~,., (7.500) 2.47/,.,

(I.585)

2.620/,., (2.082)

.047 (.099)

1.86(/" (.235) 1.420" (. 23(I) 1.50(1" (.321)

57.067" (8.851) 89.60".' (6.021) 59.60"." (3.906) 9.067". '

(3.327)

8.013"" (1.626)

.07 I (.070)

1.747" (.239) .473-.b

(.128) 1.293" (.592)

78.933,,.b (6.077) 56.60,,J' (5.853)

132.933"J' (1.791) 5.733"J'

(2.549)

4.413".# (I.150)

.081 (.147)

a = value is different from Cluster 1 value at the .05 levcl b = value is different from Cluster 11 value at the .05 level c = value is different from Cluster I11 value at the .05 level

Note." Standard deviations are in parentheses.



dard deviations for each of the strategy and performance variables used to cluster the businesses.

As shown in Table 2, the first cluster consists of 40 businesses that are primarily internally oriented. They tend to demonstrate their emphases on low costs by stressing expenditures on process R&D. Also, they have low manufacturing expenses, low relative direct costs, low advertising expenditures, while they have high capacity utilization. Additionally, they charge low prices and they eschew product changes, as shown by their low score on product R&D.

The second cluster consists of fifteen businesses that are efficient and marketing oriented. On the one hand, they demonstrate their emphases on differentiation by stressing product R&D, advertising expenditures and charging high prices. On the other hand, they show their emphases on low costs by stressing process R&D. In addition, they have been successful in maintaining low costs, since they have high capacity utilization, low manufacturing expenses, and low relative direct costs.

The third cluster consists of fifteen businesses that are primarily externally oriented. They stress product R&D in order to capitalize on market opportunities, as shown by their high score on this category. They emphasize advertising expenditures and charge high prices, and they tend to demonstrate their reduced concern for achieving a low cost position through their low score on process R&D. Their subdued concern (or ability) for cost containment is also shown by their high manufacturing expenses, high relative direct costs and low capacity utilization.

As portrayed in Table 2, growth in relative market share is not significant as a performance variable among the three clusters. However, return on investment is significant as a performance variable.

With reference to the results of Table 2, propositions P1 and P3 should be rejected. P1 should be rejected because the internally oriented businesses have the lowest return on investment. P3 should also be rejected--although the ROI of the externally oriented group of businesses is higher than the internally oriented group, their ROI significantly trails the efficient, marketing oriented group. P5 can neither be accepted nor rejected. The businesses with combined strategic profiles are the efficient, marketing oriented type, not the compromising type. The reason is that their cost position is not higher than that of the internally oriented businesses. Also, their level of differentiation is not lower than that of the externally oriented businesses.

Propositions P2 and P6 are supported by the results of the investigation. P2 is supported since the internally oriented businesses have the lowest performance. P6 is supported because the efficient, marketing oriented business units have the highest performance. Note should be made that their cost positions tend to be the lowest while their differentiation tends to be the highest among the three clusters. P4 is partially supported by the results. The externally oriented businesses have lower performance than the efficient, marketing oriented businesses, but they have higher performance than the internally oriented businesses.

A number of observations may be made with regard to the results of this study. First, being primarily internally oriented may be beneficial in consolidated industries. In such industries, larger businesses may benefit through a

stable technology and the achievement of scale economies. But in fragmented industries, small businesses would find it difficult to become substantially larger than their rivals. In such industries scale economies are reached at low vol- umes. Therefore, being internally oriented does not offer much promise in fragmented industries, since the business forgoes its flexibility.

Second, being primarily externally oriented has its advantage over being primarily internally oriented. External orientation allows a continuous realignment of the business with its industry environment. However, being primarily externally oriented makes the business vulnerable to competitors with lower cost positions.

Third, the strategic profile with the best prospects appears to be an efficient marketer. This strategic profile can surpass both the primarily internally and the primarily externally oriented business types. Furthermore, apparently in some fragmented industries, competitive advantage is not based on the achievement of a compromise between an internal orientation and an external orientation. Rather, the advantage may be based on the mutually reinforcing benefits that might possibly be elicited from a business unit's emphasis on being responsive to market changes through product/service innovations as well as its emphasis on process innovations, systems innovations and cost controls. These mutually reinforcing benefits accrue to the efficient, marketing oriented businesses.

As shown by the results, these businesses surpass in cost containment efforts the businesses that are primarily internally oriented, since they have lower manufacturing expenses, significantly lower relative direct costs and significantly higher capacity utilization. Also, these businesses seem to surpass (in differentiation) the competitors that are primarily externally oriented since they have been able to charge significantly higher prices.

LIMITATIONS AND SUGGESTIONS FOR FUTURE RESEARCH

There are a number of limitations in this study. First, choosing a sample from any one publication may be considered to entail some bias. Also, the fact that the results of the study would be based on responses made by less than 60% of randomly selected businesses would potentially involve some bias. Thus, the choice of the industry and the limited number of companies studied tend to limit the generalizability of the findings. There may be factors unique to the businesses studied that would have little in common with businesses in other industries. Emphasis should be made, however, that single-industry investigations are common in strategy literature because they offer enhanced internal validity, although they limit the generalizability of the results.

Third, while the study could have encompassed more strategic variables, two factors influenced the authors to limit the number of these variables. The first factor is based on previous experience in gathering subjective responses directly from CEOs. If the questionnaire is elaborate, many CEOs either refuse to participate in the study or have a subordinate complete the questionnaire. A second factor is



that the use of more numerous subjective and objective variables is better suited to larger samples within comprehensive data bases. But, the comprehensive data bases do not contain very small privately held businesses and so are not conducive to the study of such businesses in fragmented industries. Therefore, to gain above 50% participation and study very large samples (outside of comprehensive data bases) is indeed challenging. However, in defense of the limited number of strategy variables used in this study, it should be again stated that a number of investigations have only used two variables in order to categorize strategic profiles (Gupta and Govindarajan 1986; White 1986).

Future research might explore other possibilities. One possibility would be to explore strategic profiles in different fragmented industries with diverse environmental volatili- ties. Another possibility is to explore whether the combination strategic profile is conducive to high performance in other fragmented industries. Yet another possibility is to investigate whether low or high relative market shares are associated with distinct strategic profiles in industries where smaller businesses predominate. Finally, future research might explore whether clusters of business units in other fragmented industries experience significant growths in their relative sizes, while other clusters of businesses experience significant reductions in their relative sizes.

QUESTIONNAIRE

The purpose of this questionnaire is to study strategic profiles of business units that only produce adhesives and sealants. Your responses will be used for academic purposes. Your information will be held in strict confidence and all the information will be disguised or will appear in summary form, in order to assure anonymity. Your cooperation is sincerely appreciated.

1. Please state the total number of all the people employed by your business.

. Please estimate your business' direct costs (average costs of materials, production, and distribution) relative to the three largest competitors. If your direct costs are about the same as the three largest competitors, please indicate a score of 100 on the line, if your costs are about 30% more, please indicate a score of 130, if your costs are about 30% less, please indicate a score of 70, etc.

. Please estimate your business' percentage of capacity utilization during the year, including production for inventory. If your capacity is fully utilized, please indicate 100% on the line, if your capacity is 75% utilized, please indicate 75%, if your capacity is 53% utilized, please indicate 53%, etc.

. Please estimate your business' pricing policies relative to the competitors. If your prices are about equal to competition, please indicate zero on the

line, if your prices are about 5% more, please indicate +5, if your prices are about 5% less, please indicate - 5 , etc.

APPENDIX

The information for relative direct costs, capacity utilization, and pricing were derived from the questionnaire.

The information for the other variables were derived from financial data.

Product R & D All expenses incurred to improve the existing products and services or to develop new products and services, divided by revenues (revenues realized from goods shipped or services rendered net of (1) bad debt, (2) re- turns, and (3) allowances).

Process R & D All expenses for improving the efficiency of operations and distribution processes, divided by revenues.

Manufacturing Expenses Direct labor and other costs of converting the purchases into the final product plus ware- housing, freight, excluding depreciation expenses divided by revenues.

Advertising & Promotion Expenditures for media advertising, catalogs, exhibits and displays, samples, tem- porary price reductions for promotional purposes divided by revenues.

Relative Direct Costs Estimation of the average level of the business unit's costs of materials, production, and distribution relative to the three largest competitors.

Capacity Utilization The percentage of standard capacity utilized on average during the year, including production for inventory.

Pricing Estimates of pricing relative to competitors', expressed in index form. If prices are equal to competition, the index is set at zero; a 5% pre- mium is expressed as +5, a 5% discount as - 5 , etc.



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ABOUTTHE AUTHORS

Peter Wright (Ph.D., Louisiana State University) is Pro- fessor and the MSU Holder of the Chair of Excellence in Strategic/Free Enterprise Management at Memphis State University.

Mark Kroll (DBA, Mississippi State University) is an As- sistant Professor and Chairman of the Department of Man- agement at the University of Texas at Tyler.

Peng Chan (Ph.D., University of Texas at Austin) is an Assistant Professor of Management at California State Uni- versity (Fullerton) and President of the Chan Group.

Karin Hamel (Ph.D., Old Dominion University) is an As- sociate Professor of Administrative Sciences at George Washington University and the Editor of the Journal of Management Systems.


strategic profiles and performance: an empirical test of select key propositions

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