Business Strategy and Organizational Performance: Measures and Relationships

• Author: JAMIL ANWAR, SAID SHAH AND SAF HASNU

Abstract

The relationship of strategy-performance linkages is central in strategic management research. A large number of empirical studies have applied strategic typologies distinguishing strategic types to investigate these linkages. Of the numerous strategic typologies, Miles and Snow's framework has been one of the most scrutinized and validated strategy classifications.

Although, there is a wide array of settings that provides a host of relationships for various business domains, no systematic review in the extant literature is available that summarizes the measures and the relationships used for operationalization of the strategy-performance linkages, especially when longitudinal financial data is used. The purpose of this study is, therefore, to provide an updated review of relevant literature to know the research designs, data collection and analysis methods, strategy and performance measures, and the findings for strategy-performance relationships. An empirical example by applying refined scoring methodology is also presented for identification of strategic types and their relationship with performance using seven years' financial data from joint stock companies representing "cement and other minerals" sector of Pakistan.

Keywords: Strategy, Performance, Strategic typology, Scoring method

1. INTRODUCTION

   The strategy-performance relationship has been examined in numerous works, both empirically and theoretically. The focus of this study is on empirical studies. In empirical studies, the linkage between strategy and performance is typically operationalized by using various measures and explicit ideas of causality fuelled by Miles and Snow's (1978) idea of strategic types and Porter's (1980) generic strategies. These studies offer workable frameworks for distinguishing strategic types and for evaluating their impact on various measures of performance (Luoma, 2015).

   Development and application of strategic typologies have emerged as an important research area in strategic management. In this context, the leading contributions include: Miles and Snow's (1978) strategic types (Prospectors, Analyzers, Defenders and Reactors); Porter's (1980) set of "generic strategies" (Cost Leadership, Differentiation and Focus); Miller's (1990) high-performance "gestalts" (Craftsman, Builder, Pioneer and Salesman); and Treacy and Wiersema's (1995) three strategic types (Operational Excellence, Product Leadership and Customer Intimacy). The theoretical insights of these typologies stimulate a stream of subsequent research.

   The typology of Miles and Snow (1978) has been one of the most enduring, scrutinized and applied frameworks (Hambrick, 2003; Lin et al., 2014). This strategic typology represents four strategic types as prospectors, analyzers, defenders and reactors. It is argued that these strategic types may exist simultaneously within industries and the viable strategies (prospectors, analyzers and defenders) if properly implemented, would yield similar results and outperform Reactors - a non-viable strategy.

   The applicability of Miles and Snow's (1978) typology is widespread and it is applied in numerous settings investigating a number of measures and relationships. There is, however, an absence of updated information in summarized form about the strategy and performance measures and their relationships, especially when archived financial data is used. Also, the mainstream research is mostly in developed countries leaving room for research in developing countries.

   The purpose of the present study is, therefore, to provide an updated summary of the studies to know the research designs, data collection and analysis methods, strategy and performance measures, and the findings of the results for strategy-performance relationships. An empirical analysis of strategy-performance using seven years financial data from joint stock companies representing cement and other mineral sector of Pakistan is also presented.

2. LITERATURE REVIEW

   STRATEGY AND PERFORMANCE

   Strategy is about making choices (Porter, 1985). It is a way to ensure a sustainable competitive advantage by investing the resources needed to develop key capabilities leading to the long-term superior performance (Lin et al., 2014). According to Hambrick (1982), organizational strategy has been defined sometimes as normatively (Andrews, 1971) and sometimes descriptively (Miles and Snow, 1978; Mintzberg, 1978).

   The organizations use strategy to deal with changing environments as it brings novel combinations of circumstances to the organization. The study of strategy includes the actions taken, content of strategy, and the processes by which actions are decided and implemented. Performance is an intrinsic construct in the strategy literature. The concept of performance is three fold. For example, performance can be approached as the ultimate goal of management, an end in itself, and can be highlighted at the level of individual managers, teams, businesses and corporations. Performance can also be approached from a measurement perspective, with a focus on the selection of the appropriate indicators and levels for quantifying an organization's outcomes (Guerard et al., 2013; Luoma, 2015; Richard et al., 2009).

   STRATEGIC TYPOLOGIES

   Strategic typologies are the frameworks that identify multiple competitive strategies available to business units. Typologies provide a theoretical basis for identifying strategic groups across industries (Parnell, 2011; Zamani, et al., 2013). The typologies developed by Miles and Snow (1978) and Porter (1980) remained among the most widely cited, tested, criticized, and refined frameworks. The typology of Miles and Snow (1978) is particularly suitable as a context in which to investigate strategy-performance relationships of firms from different industries having different firm size. The typology has been subjected to numerous tests of its scrutiny and validity in a wide array of settings (Ghoshal, 2003; Hambrick, 2003; Ketchen, 2003) and is suitable for studies where archival financial data is used (Bentley et al., 2013; Blackmore and Nesbitt, 2013; Evans and Green, 2000; Hambrick, 1983; Thomas and Ramaswamy, 1996).

   Miles and Snow (1978) developed their well-known framework based on intensive literature review and continuous empirical study of four industries namely college textbook publishing, electronics, food processing and health care. Their framework can be used as a model to analyze an organization as an integrated and dynamic whole to understand the relationships among strategy, processes and structure. They developed a theoretical framework composed of adaptive cycle (a model of the adaptive process) and strategic typology (four empirically determined means of moving through adaptive process). In addition, they related this framework to available theories of management.

   The strong support for Miles and Snow typology is evidenced from its application by researchers in a variety of industries including: financial industry (e.g. banks, saving and loans, insurance, mutual funds, brokerage etc.); non-financial (e.g. manufacturing: electronics, chemical, plastic, semi- conductors etc.); service (transportation, hospitals, hotels/lodging etc.); public sector organizations (such as colleges, hospitals, local governments, nursing homes, schools, state owned enterprises etc.) and other areas (such as construction, churches, and retailing etc.) (Table 1).

   The presence of strategic types is supported by the studies for single industry (Conant et al., 1990; Datta et al., 2009; McDaniel and Kolari, 1987; Shortell and Zajac, 1990; Smith et al., 1986; Smith et al., 1989; Zahra, 1987), multi-industry (Blackmore and Nesbitt, 2013; Rajaratnam and Chonko, 1995; Jennings et al., 2003; Miles et al., 1978; Olson et al., 2005; Slater et al., 2011; Snow and Hrebiniak, 1980), and cross-country analysis (DeSarbo et al., 2005; Parnell et al., 2015). There is an uneven distribution of strategic types among industries.

   The majority of the data collection methods used in these studies is based on questionnaire using self-typing approach. The studies which applied archived data either found only two strategies (prospectors and defenders) as the extreme strategies (Hambrick, 1981, 1982, 1983; Datta et al., 2009; Thomas and Ramaswamy, 1996) or three strategies where defenders and prospectors are taken at the extreme ends and...