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Grand Strategies Re-visited—Lessons for High Technology
Small and Medium Sized Firms
Nicholas O'Regan, Bristol Business School, Bristol, UK
Gerhard Kling, Bristol Business School, Bristol, UK
Abby Ghobadian, Henley Business School, UK
THIS IS NOT THE FINAL (POST-REVIEW) VERSION
YOU FIND THE FINAL VERSION HERE:
O’Regan, N., Kling, G., Ghobadian, A. and L. Perren (2012) Strategic positioning and
grand strategies for high-technology SMEs, Strategic Change 21(5-6): 199-215.
Keywords: Grand strategies, innovation, strategy, competitive advantage
Corresponding author: Nicholas.O’Regan@uwe.ac.uk
Telephone + 44 117 328 3735
Nicholas O’Regan is Professor of Strategy/Enterprise and Innovation at
Bristol Business School, University of the West of England. His research
interests include the organisational culture, leadership and the strategic
planning processes of small and medium sized organisations.
Gerhard Kling is Senior Lecturer in Strategic Management at Bristol Business
School. His research interests include the advancement of competitive
advantage in manufacturing high technology small firms and corporate
finance. He was previously practice specialist with McKinsey & Company,
based in Munich.
Abby Ghobadian is Professor of Organisational Performance and Director of
the School of Projects Processes and Systems at Henley Business School,
University of Reading. His research is focused on identifying factors that
contribute to differential performance among organisations. His research
draws on contemporary management theories and relies on sound
methodologies with a strong bias towards relevance to practicing managers
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Grand Strategies Re-visited—Lessons for High Technology
Small and Medium Sized Firms
Abstract
Based on survey data on the engineering and electronic industry, the study uncovers the
grand strategies pursued by small high technology firms and, in particular, analyzes the
impact of formal strategic planning and industry specific effects on strategic choice. The
empirical model disentangles the interrelationship between the firm’s competitive
position, market environment (technological and regulatory change, threats from
substitutes, new entrants, and market stability) and the pursued grand strategies. The
findings indicate that firm size, in terms of turnover, affects strategic decisions
significantly. Technological change and market stability stimulate product development
and innovation. An innovation strategy seems to be the only grand strategy that
guarantees higher short and long-term performance; nevertheless, concentrated growth,
market and product development foster long-term performance.
Keywords: Grand strategies, innovation, strategy, competitive advantage
Grand Strategies Re-visited—Lessons for High Technology small and medium sized
Firms
1. Introduction
Organisational strategies are classified into three different levels; corporate, business and
functional levels –(Hax and Majluf, (984;, Bourgeois, 1980). Each level has distinct
characteristics. For example, the corporate-level strategy is concerned with domain
selection or which industry sector(s) to compete in (Bourgeois, 1980), whereas the
business-level strategy is concerned with domain navigation, which includes how to
compete in a selected market segment (Hambrick, 1980). Functional-level strategies are
derived from the business strategy and focus on the maximisation of resource
productivity. In general, corporate-level strategy is too aggregated to enable a satisfactory
understanding of strategic responses to environmental influences while functional level
strategies rarely indicate a strategic response on their own. It is at the level of business
strategy that the majority of research has focussed on, largely as business-level strategies
depict the market orientations adopted by organisations in their chosen industry sectors as
well as reflect organisational performance. Accordingly, any examination of strategic
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orientation and its impact on corporate performance should, in the first instance, focus on
business level strategies. However, small and medium sized firms [SMEs] differ
markedly from large firms. Indeed, we contend that the distinction between corporate and
business level strategies is not always clear cut and in many cases the business strategy is
also the corporate strategy. Accordingly, this paper focuses on generic strategies that
typify the behaviour of the firm. Generic strategies are generally described in terms of
typologies (e.g. Miles & Snow, 1978; Porter, 1980). Typologies are theoretically derived
dimensions which rely on identifying and measuring the key traits of the strategy and
assessing differences and similarities across a profile consisting of a set of characteristics
that collectively describe the strategy (Robinson and Pearce, 1988). This type of strategy
classification has attracted greater attention because it assists in understanding the
priority of activities. However, little research has been carried out on generic strategies in
SMEs particularly in the area of how the firm will compete in its chosen market(s). In an
effort to determine strategic thrust, Pearce and Robinson (1994) devised the concept of
grand or master strategies, which they describe as the “basic direction for strategic
actions” and consequently the “basis of coordinated and sustained efforts directed
towards achieving long-term business objectives”. Studies to-date on grand strategies
focus on larger firms (see Kumar and Subramanian, 2000; Kumar, Subramanian and
Yauger, 1998; Narver and Slater, 1990). There is a dearth of research on smaller firms
with little indication of the likely potential of grand strategies to SMEs.
Grand Strategies
Pearce, Robbins, and Robinson (1987) define a grand strategy as “a comprehensive
general plan of major actions through which a firm intends to achieve its long-term
objectives” and contend that this is supported by a “coordinated and sustained strategic
management efforts”. Grand strategies tend to be associated with a top down
management style, which underpin “sustained efforts directed toward achieving longterm business objectives” (Pearce and Robinson, 2005, p.250). Pearce et al. (1987)
suggest four generic grand strategies: stability (for example. concentration), internal
growth (innovation, R&D, market development), external acquisitive growth (vertical
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and horizontal acquisition, diversification, joint ventures) and retrenchment (turn-around,
divestiture and liquidation). Table 1 depicts potential grand strategies. However,
Robinson and Pearce (2005) contend that any one of the strategies “could serve as the
basis for achieving the major long-term objectives of a single firm”, and that firms
involved in multiple industries might combine several grand strategies. Each grand
strategy has an internal or external orientation; strategies marked [i] are internal
orientated where resources are redirected within the firm, and strategies marked [e] are
external orientated.
Table 1 here.
Pearce and Robinson (2005) suggest that the growth rate of the general market and the
firm’s position within that market determine the grand strategy chosen. Having an
understanding of the rationale behind the strategy option chosen is vital if employees are
to deploy the strategy effectively. Such an understanding also provides an indication of
the longer term vision for the company. For example, Fox-Wolfgramm, Boal and Hunt
(1998) contend that, “second-order change, a shift from one strategic orientation to
another, is atypical even in times of environmental upheaval (…).” They note that
organizations typically converge around a prevailing archetype: “strategic orientation and
inertia tend to bind the organizational change to that which is consistent with the
archetype representing first-order change”. However, in contrast to Pearce and Robinson
(2005), this study accounts for additional market factors that could influence grand
strategies and, in specific, considers market stability, regulation, technology, threat from
substitutes, and market entry, which all contribute to market attractiveness. In addition,
this approach is consistent with contingency theory which posits that the environment,
managers, and organisational factors all play a role in determining strategic direction.
Contingency theory presumes that the ability of managers to influence organisational
outcome is restricted (Meindl, et al, 1985) by environmental factors (Finkelstein and
Boyd, 1998) and organisational factors (Carpenter and Golden, 1997). The options are
many and by selecting the means of adaptation, management exerts some influence on
the organisational outcome (Thomas and Ramaswamy, 1996). The effectiveness of the
adaptive response is dependent on the fit between the response and the environmental
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demands (Hambrick, 1983; Lee and Miller, 1996). This requires relevant information on
changes in the environment and an assessment of consequences of alternative responses
(Astley and Van de Ven, 1983). The use of contingency theory to underpin Fig. 1 is
particularly appropriate for SMEs as they are ore vulnerable to the effects of the
environment, are less able to control the environment, and their survival depends on how
they interact with the environment (D’Amboise and Muldowney, 1988). Hence,
contingency theory provides the dominant theoretical framework to underpin this
approach. Accordingly, the study asserts that the selection of grand strategies depends on
two criteria, the firms’ position and market attractiveness.
Fig. 1 here.
Typologies of generic strategies have received significant attention in the literature (see
for example, Miles and Snow, 1978; Porter, 1980). However, the testing of these
typologies focuses on larger firms in the United States with an emphasis on clarifying the
strategy-performance relationship. The literature uses both the Miles and Snow (1978)
and Porter (1980) typologies. While the two approaches exhibit similarities, “the two
typologies are different, each stressing somewhat different aspects of business level
strategy” (Segev, 1989). Following a number of focus group discussions, both typologies
were discounted as being too restrictive for SMEs. In Porter’s (1980) model, a focus
strategy is the only real choice open to SMEs, whereas in the case of Miles and Snow’s
(1978) model, managing directors feel that in choosing a strategic orientation, they were
being “corralled” into being classified as prospectors or defenders. Accordingly, this
study seeks a wider ranging typology that could take on board strategic orientation in a
more practical and focused way; henceforth, it follows Pearce and Robinson’s grand
strategy approach.
This paper is structured as follows: the literature review describes the changing market
environment, SMEs and strategic planning, SMEs and planning formality, market
conditions and organizational performance. The second section highlights the
methodology including the sampling method and construction of variables. The third
section shows the empirical findings and econometric methods. Finally, the study
concludes, outlines the limitations and suggests avenues for further research.
3. Literature review
Changing Market Environment and Strategic Thrust
The literature acknowledges and documents the changing market environment. For
example, Johnson and Greening (1999, p.564) strongly contend that “strategic decision
makers in the 1990s have seen the emergence of a hypercompetitive global market
place.” Arguably with the 2008 sub-prime crisis, the global market place has become
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more complex than ever before. However, while previous research has little doubt on the
changing market environments, straightforward solutions for business are difficult to
derive. Indeed, in juggling with the factors needed to face the new competitive
environment, some firms succeed while others fail. The question as to why this happens
has taxed the minds of strategists and researchers for some time. Arguably poor
performance results from the failure to recognize the importance of external factors or the
failure to maximize the benefits of internal resources. This means that the preparation,
development and deployment of strategic thrust is crucial to enhance the chances of
success. This is consistent with the contention by Kim and Mauborgne (1997) that the
difference in performance between high growth firms and their less successful
competitors lies in their respective approaches to strategy. In doing so, the degree of
effectiveness is enhanced with the degree of alignment of organizational strategy with the
firm’s external environment (see Hambrick, 1983; Miles and Snow, 1978).
In addition, the literature supports the long-term nature of strategic thrust. For instance,
Fox-Wolfgramm, Boal and Hunt (1998) state that organizations typically converge
around a prevailing generic strategic thrust. It is therefore reasonable to suggest that a
holistic approach that acknowledges the generic strategic direction of the firm can be
used to determine the potential activities for competitive advantage. The basis of this
thinking is the provision of generic or grand strategic choices to firms, each offering the
key to gain, attain or regain sustainable competitive advantage. Pearce and Robinson
(2005, p. 200) argue that general consensus exists on the need for generic strategies that
“provide basic direction for strategic actions” in order to achieve long-term business
objectives. They describe grand strategies as “indicating the time period over which longrange objectives are to be achieved”. Accordingly, grand strategies are the overall driver
of strategic actions; however, using the concept of grand strategies requires caution as
many firms may operate in more than one environment or indeed have different
interpretations or perceptions of an environment (see Daft and Weick, 1984). However to
date, little research has been carried out on the strategic thrust of SMEs.
SMEs and Strategic Planning
The literature suggests that SMEs are often seen as smaller versions of larger firms (see
O’Neill and Ducker, 1986; Bradburd and Ross, 1989) with resultant advantages as well
as disadvantages. Jennings and Beaver (1997) contend that the search for competitive
advantage in many SMEs is accidental rather than preplanned as SMEs are smaller in size
and scope and have fewer resources compared with larger firms. However, others argue
that smaller firms have greater flexibility and propensity to innovate effectively
compared with larger firms despite their resource constraints – Weinrauch et al (1991).
Accordingly, strategic thrust is especially important for SMEs due to their higher degree
of vulnerability (Bruderl and Schussler, 1990), where the strategy making processes help
the managers of these firms to avoid or minimize obstacles to competitive advantage
(Aram and Cowan, 1990). The relationship between strategic planning and the
performance of SMEs is borne out by the literature (e.g. Bracker and Pearson, 1986;
Olson and Bokor, 1995; Kargar and Parnell, 1996).
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Attempts so far to establish a generic definition of small and medium sized firms (SMEs)
focus on financial and employment size criteria, with each attempt drawing its own critics
(see O’Regan, 2004). However, the more commonly accepted definition is that
propounded by the European Commission (1996) based on less than 250 employees. It
should be noted that the majority of previous studies used varying definitions ranging
from 50 to 2000 employees, with most studies defining firms employing up to 500
employees as small (e.g. McKiernan and Morris, 1994).
In any event, previous research on strategic orientations did not incorporate size as an
explanatory variable (see Ghobadian et al 1998). Only Davig (1986) examines the
existence of Miles and Snow’s four strategic orientations within the context of small
manufacturing firms in apparel, foundry and fabricated metal products industries. His
results are encouraging and contribute to the understanding of the strategic management
of small firms. However, the Miles and Snow typology focuses on three main strategic
types – defender, prospector or analyzer, whereas Pearce & Robinson’s grand strategies
are more comprehensive and relate to strategies pursued rather than strategic orientation.
We were unable to locate any study that examined the use of grand strategies in SMEs.
Accordingly, this led us to derive the following research questions:
R1 What are the principal grand strategies, if any, used by manufacturing small firms?,
R2 Do firms in engineering and electronics use different strategies?,
Operating Environment
As Eisenhardt and Martin (2000, p.1105) pointed out, firms in less dynamic
environments can enact “detailed, stable processes with predictable outcomes” that are
consistent with the formalized planning approach. However, the operating environment is
far from stable for most firms. Following Miller (1988), this study focuses on narrowly
defined parts of the environment rather than on overall industry parameters because
managers select specific market segments and customers for attention. The former can
only be gauged by assessing managers’ perception of their actual target markets (see
Dess and Beard, 1984), as industry wide statistics that could serve this purpose are not
available (see Miller, 1988). Perceived measures have the strongest association with
business strategy, since strategists tend to act on their perceptions (see Miller and Friesen,
1984). Arguably, firms that perceive their operating environments to be turbulent or
dynamic might pursue a market type strategy. In this case, Lee and Miller (1996)
highlight the importance of “offerings relevant and attractive in a changing setting”. In
addition, firms adopting this approach are likely to also invest in research and
development as well as marketing (see Hambrick, 1983). This suggests that firms are
likely to adopt a combination of grand strategies rather than one grand strategic approach.
The literature also suggests that firms perceiving their operating environment to be stable
might focus on the efficiency based grand strategy (see Hambrick, 1983; Lee and Miller,
1996). In addition, Jauch and Osborn (1981, p. 492) contend that “the probability of
organizational survival increases as the congruence of environmental, contextual, and
structural complexity increases”.
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All firms, even in the same industry grouping, do not respond to the operating
environment in the same way. For example, some firms may “anchor their reactions
primarily to the behavior of other firms that are strategically similar to them” (GarciaPont and Nohria, 2002). Others may adopt a more independent stance comprising various
approaches. The responses to the operating environment can be categorized according to
the strategic orientation of each firm. It therefore follows that the alignment of an
organization’s strategic orientation to its environment is of paramount importance for
success.
This led us to derive the following research question
R4 Does the competitive position and the degree of market attractiveness affect the
selection of grand strategies?
R5 Is the alignment of grand strategies and perceived operating environment associated
with organizational performance?
4. Methodology and research design
As it proved impossible to locate a relevant data set, and in any event, archival measures
cannot measure internal organizational processes precisely (Boyd, Dess and Rasheed,
1993), we choose a self reporting postal survey. The literature indicates strong support
for the use of self-reporting data collection (Ramanujam and Venkatraman, 1987; Pearce
and Robinson, 1987; McKiernan and Morris, 1994; Kargar and Parnell, 1996; Shrader,
Chacko, Herrmann, and Mulford, 2004). Pugh, Hickson, Hinings and Turner (1968)
argue that self-reporting measures are superior in this type of research to alternative data
collection methods because they elicit the informed opinion of organizational insiders.
Management research uses perceptual measures widely because they provide an accurate
description of the firm (Hillman and Keim, 2001). Perceptions exert a significant
influence on shaping strategic behavior (Chattopadhyay et al. 1999; Spanos and Lioukas,
2001). Perceptual measures have distinct practical utility, as they produce the most
precise assessment of conditions within a firm as well as enhancing the interpretability
and comparability of data (Lyon et al. 2000).
The initial sample for this study consists of 1,000 randomly selected manufacturing
SMEs operating in the UK’s engineering and electronics sectors; thus, the study chooses
sectors that are high technology orientated. Due to excluding firms that do not match the
selection criteria, the effective sample size is 702 firms. The reasons for focusing on the
engineering and electronics sectors are the following: first, both sectors are economically
and strategically important. Second, the already large and significant population of
15,000 SMEs in both sectors (DTI, 2000). Third, the difference between the product life
cycles of the two sectors, which is a key contingency factor (Hofer, 1975). Fourth,
changes in organizational categorizations and/or paradigms are often established using
SMEs (Klepper, 1996).
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The sample was selected randomly according to sector and size band specifications using
the European Commission’s EC/DTI’s definition of SMEs - a firm employing up to 250
people. Pearce and Robinson (2005) highlight the need to explore grand strategies by
developing a robust conceptual framework or ideally by conducting sound empirical
studies based on such a framework. Although some sound empirical studies have been
conducted in recent years on grand strategies, empirical studies on high technology SMEs
in particular are lacking. The strategies were taken from the grand strategies devised by
Pearce et al. (1987) with respondents being asked to select the strategy that best described
their overall strategic orientation.
The contacts resulted in 194 valid responses - a 27 percent response rate. This response is
relatively high as typical response rates for studies addressing strategic issues are in the
region of 10-12 per cent (Geletkanycz, 1997; Koch and McGrath, 1996). Contact prior to
the dispatch of the questionnaire and follow up calls probably account for the high
response. The potential impact of non-response bias was assessed by first contacting all
non-respondents inviting them to answer a limited number of questions concerned with
the level of emphasis placed on strategic thrust. Second, to analyze sampling differences,
T-tests compare the means for the sample of 26 CEOs who participated in the short
telephone survey with the means for the main sample, and differences are statistically
insignificant.
We used T-tests to examine the difference between early and late informants’ response to
key questions. This provides an effective test for assessing non-response bias because late
respondents are likely to respond in a manner similar to non-respondents (Armstrong and
Overton, 1977; Lambert and Harrington, 1990). The analysis suggests that non-response
is not a serious problem and should not affect conclusions. Finally, we took measures to
minimize Common method variance (CMV). CMV refers to the amount of spurious
covariance shared among variables because of the common method used in collecting
data (Buckley et al. 1990). The literature suggests that self-reporting surveys involving a
single respondent may be susceptible to CMV (Kemery and Dunlap 1986; Lindell and
Whitney 2001). The constructs used in this study required the respondents to report on
discrete events reducing the likelihood of distorted self-reports and / or socially desirable
responses. Hence, the CMV problem is minimised to a large extend. We also used the
one factor test proposed by Harman (1967) that offers a statistical procedure for testing
the magnitude of potential CMV problems.
5. Empirical analysis
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Table 3 highlights the grand strategies favored by SMEs and indicates that product
development, market development and innovation are prominent generic strategies used.
Need a bit more here Arguably the majority of SMEs aim to deliver innovative and highquality products, with many tending to concentrate on a single product, single market and
a single dominant technology. Corporate level strategies related to portfolio management
are not at the heart of SMEs’ strategic thinking, which is, arguably, due to their product,
geographical and organizational concentration.
Table 3 here.
Due to ordered data, namely values from 1 to 5 indicating the degree of importance to the
individual, linear regression models fail in analyzing rankings, as they treat the difference
between 4 and 5 the same as between 1 and 2. In fact, differences between categories
cannot be interpreted in a linear way, as they represent differences in rankings and not
continuous variables. Henceforth, to account for self-anchoring scales, ordered logit and
probit models represent the best econometric method (Zavoina and McElvey, 1975).
Besides using ordered logit models instead of linear regressions, ordinal level data
require rank correlation coefficients when analyzing the interrelation between two grand
strategies. The Spearman’s rank correlation and Kendall’s (1938) measure are both nonparametric estimators and do not require a linear relationship between the two tested
variables; hence, they provide correct estimates for the correlation between responses.
Kendall’s (1938) measure is superior in medium and small sized samples. Stars indicate
statistical significance on the 99 percent level of confidence and are based on Bonferroni
adjustments, which account for the number of statistical tests carried out. Table 4 focuses
on the four dominant grand strategies (see Table 3) and displays rank correlations. The
grand strategy product development fosters innovation and vice versa, whereas market
development exhibits only a weak positive correlation with product development and
innovation. Interestingly, the strategy concentrated growth is not strongly linked to any of
the other three favorite strategic choices.
Table 4 here.
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After uncovering SMEs’ strategic thrust preferences, the study analyzes the impact of
formal and informal planning on the choice of grand strategies. 45 percent of the
respondents do not have any written strategic plan; hence, one could consider that these
firms pursue informal strategic planning. Table 5 summarizes the descriptive statistics,
namely the average rank in both groups, and the results of ordered probit models, which
explain the rank of the respective grand strategies driven by formal or informal planning.
Table 5 indicates the difference between formal and informal planning and test for its
significance.
Table 5 here.
Informal planning firms tend to rank nearly all grand strategies lower, except vertical
integration and concentric diversification. However, significance levels derived from
ordered probit models indicate that the observed differences between formal and informal
planning are not statistically significant – horizontal integration and product development
being an exception.
Industry specific effects seem to matter with regard to preferred grand strategies. Fig. 2
plots the strategic profile of engineering and electronics firms and indicates whether the
observed discrepancies are of statistical significance. This refers to ordered logit model
with indicator variables for industries as explanatory variables. High technology SMEs in
electronics tend to favor product development more compared to engineering companies,
whereas the latter focus more on conglomerate diversification and turnaround strategies.
After confirming industry specific effects, the study considers the interrelation between
competitive position, market environment and applied grand strategies. In particular, the
empirical model measures the competitive position based on turnover and gross profit
margins; hence, size and profitability determine the firm’s position. Market environment
as perceived by the respective respondent consists of an overall assessment of market
dynamics (stable, dynamic, turbulent) and more specific features that impose an
imminent threat to the organization (technological change, substitutes, new domestic and
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foreign entrants, regulatory changes). The technological component is further refined into
an overall change in technology affecting the whole market, product related technological
advances, and decreasing product life cycles. Based on ordered probit models, Table 6
reports the estimated partial impact of competitive position (turnover and gross profit
margin), market dynamics and threats due to technology, substitutes, entrants and
regulatory changes.
Table 6 here.
The analysis indicates that the competitive position and environmental factors determine
strategic decisions. In particular, high technology SMEs favor a concentrated growth
strategy if the single market in which they operate is stable and regulatory changes are
unlikely. Market development, in contrast, is highly driven by the threat from substitutes;
thus, companies facing competition from substitutes try to establish stronger customer
relationships by adding more distribution channels and refining their advertising.
Technology in terms of overall technological change, product technology, and shortening
of product life cycles forces companies to follow a product development strategy. Yet
market stability is a crucial factor for high technology SMEs that apply a product
development strategy. Frequent changes and improvement of product offerings
(innovation) depends on technological factors – but in contrast to a product development
strategy, size in terms of turnover plays an essential role. Henceforth, smaller companies
seem to be reluctant to pursue an innovation strategy and favor instead product
development due to their weaker market position and financial constraints. Growth
through acquisitions (horizontal integration) is heavily influenced by size in that larger
companies with regard to turnover seek external growth opportunities, for their organic
growth potential seems to be limited. In addition, technology might play a role in the
decision to acquire horizontally, as patents or process innovations could be an attractive
component of acquisitions. Companies experiencing low gross profit margins tend to
consider conglomerate diversification to change their fortune. A turnaround strategy
seems to be a viable path for high technology SMEs with low gross profit margins but
sufficient turnover in an unstable market environment. Threats imposed by substitutes
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drive divestitures to some extent. The model reveals an interesting difference between
joint ventures and strategic alliances in that both strategies are driven by size, technology
and more likely to be formed in less stable markets (in terms of market growth) – but
joint ventures and hence equity stakes matter if companies face a potential threat of
market entry. Again technology matters in the formation of consortia; yet, other factors
do not possess a significant effect.
Finally, the question arises whether the grand strategies favored by high technology
SMEs and driven by the competitive position and market environment really enhance
operational performance in the long-term. Accordingly, the empirical model uses
subjective performance, relative firm costs, the change in turnover and profits over the
last three years as indicators for operational performance to evaluate the impact of grand
strategies on these performance measurers. Besides these general performance measurers,
respondents assess whether their strategic choices affect their short and long-term
performance. Accordingly, Table 7 reports the partial impact of the respective grand
strategy chosen and its statistic significance on the six operational performance measures.
To circumvent the inherent endogeneity and causality problem when analyzing the
strategy/performance relationship, Table 7 shows the impact of past performance
(measured by the change in turnover and profits during the past three years) on grand
strategies. Consequently, high technology SMEs that suffered from a decline in turnover
and profits tend to adopt a turnaround strategy. Interestingly, a turnaround strategy does
not seem to foster current and future performance. An innovation strategy due to its
related investment is more likely when past performance is strong and it seems to
enhance current and future performance. In spite of lacking current and short-term
success, concentrated growth, market development and product development are believed
to increase future performance. Following an innovation strategy seems to be the best
choice for guaranteeing higher short and long-term performance.
Table 7 here.
6. Discussion
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6.1. Main findings and concluding remarks
Generic strategies are relevant to high technology SMEs as well as larger firms.
However, high technology SMEs favor focusing and developing on a single market,
whereas portfolio strategies are only relevant for larger SMEs and large firms that seek to
grow through acquisitions. Accordingly, the impact of firm size on strategic decisions
even in the field of high technology SMEs, is significant. Industry specific effects exist –
but are not dominant, as the study examines rather similar industries, namely engineering
and electronics. Nevertheless, high technology SMEs in the electronics sector tend to
favor product development more compared to engineering companies, whereas the latter
focus more on conglomerate diversification and turnaround strategies. The competitive
position and market factors shape strategic decisions considerably. Turbulent markets
make joint ventures and strategic alliances attractive, for they allow better diversification
of risks. Technological changes force high technology SMEs to adopt product
development and innovation strategies. By incorporating past, current, and future
operational performance, the empirical model can mitigate the inherent causality and
endogeneity issue when analyzing the strategy-performance relationship. Firms suffering
from declining turnover and profits try to implement a turnaround strategy, whereas
strong past performance enables high technology SMEs to invest in innovation.
Innovation in turn is the only grand strategy that significantly boosts current and future
performance. Yet, concentrated growth, market development, and product development
promise higher long-term performance.
Strategic management is a continuous, cyclical process; the planning part is not a one-off
effort. Pearce and Robinson (2005) point out that viewing strategic management as a
process means that a change in any component has an effect on all or on at least several
other components; that planning, formulation, and implementation are sequential; that
feedback is the means by which post implementation results can enhance future decision
making; that viewing strategic management as a process underlines the need to regard it
as a dynamic yet interdependent system. The study cannot detect a pronounced impact of
formal strategic planning on pursued grand strategies, which indicates that in the case of
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high technology SMEs formal strategic planning is less relevant. This might suggest that
the traditional top-down management approach in high technology SMEs does not
require formal strategic planning for implementation of strategies.
The most important lesson for high technology SME managing directors is that strategic
direction can affect short and long-term performance; hence, selecting the right grand
strategy given the firm’s own competitive position and market attractiveness is the key to
enhancing performance and guaranteeing longer term survival. Concentrated growth,
market and product development promise higher long-term performance; thus, high
technology SME managing directors are strongly advised to follow these strategies.
Innovation is the most promising grand strategy for boosting short and long-term
performance – but a strong past performance seems to be essential for choosing this path.
6.2. Limitations
A number of limitations occur in this study. The variety and number of generic strategies
are such that any single investigation of generic strategies is unlikely to be exhaustive.
The study focuses on the generic strategies propounded by Pearce and Robinson.
The study suggests that increased innovation improves performance, but without
longitudinal objective measures the size of the benefit is difficult to quantify. However,
from a practical stand, practitioners need to know not only that it is beneficial, but also
the potential magnitude of the benefit. Augmenting the subjective measures with
temporal objectives measures would have strengthened the study by answering this
question as well as offering additional support for the use of subjective measures.
This study relies on data collected using a self-reporting postal questionnaire. Ideally, this
should be augmented with real-time longitudinal studies to obtain a better understanding
of causal relationships (both degree and direction) between the various generic strategies
and overall corporate performance. Longitudinal studies will illuminate how the generic
strategy being pursued evolves in the context of environmental and other influences.
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The study only includes manufacturing high technology SMEs operating in the
engineering and electronics sectors. Accordingly, the generalisability of the results to
other industries, or firms of larger size, must await future research. Moreover, the study
only establishes whether the level of emphasis on a generic strategy is related to
performance. Obviously, as other organizational and environmental factors affect overall
performance, any causal relationships are extremely difficult to quantify.
Notwithstanding the limitations the article makes a positive contribution to the strategic
literature by focusing on generic strategies in manufacturing high technology SMEs.
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Table 1: Pearce and Robinson grand strategies
Strategy
Concentrated
Growth [i]
Main Emphasis
Characteristics
the pursuit of profitable growth of a single product
ability
to assess market needs, knowledge of buyer
in a single market with a single dominant technology behavior, customer price sensitivity, effective
Promotion, builds on competencies
Overall result: increased use of technology, increased productivity and better coverage of
product-market segment
Market
Development [i]
marketing existing products to customers in related areas
additional geographic outlets
by adding channels of distribution and/or changing attracting other market segments
the content of advertising and promotion
Overall result: increased sales
Product
Development [i]
substantial modification of existing products, or the
prolong product life cycle
creation of more but related products that can be
build on existing brand
marketed to current customers via existing channels
Overall result: retain satisfied customers
Innovation [i]
frequent changes and improvements to products
create a new product life cycle
Overall result: high profits (if product is Successful)
Horizontal [e]
Integration
growth through acquisition of similar firms operating access to new markets
at the same stage of the production-marketing chain
Overall result: eliminate some competitors
Vertical
Integration [e]
acquisition of firms supplying inputs or firms that are
expansion of operations, greater market share
customers for its output
economies of scale
Overall result: increase stability of production and/or demand
Concentric
seeking unrelated investments with potential for
increased growth/earnings, high compatibility
Diversification [e] higher profits.
with existing business
Overall result: increases synergy
Conglomerate
acquisition of potentially profitable business
based on profit considerations only
Diversification [e]
Overall result: increased profit
Turnaround [i]
Divestiture [i]
fortify the firm’s distinctive competencies by cost or
changes in management
Asset reduction during declining profitability
Overall result: entrenchment and recovery
sale of major components of the firm
improve cash flow, Divest units unable to provide
Synergy
Overall result: address corporate financial needs
Joint ventures [e] joining forces with another firm to succeed in a
shared costs
particular competitive market
entry to new markets
Overall result: Shared risks and shared profits
Strategic
similar to joint ventures with the exception that
licensing agreements, time limited outsourcing
Alliances [e]
partners do not take an equity position in one another
Consortia [e]
Overall result: increased market share/productivity
seeking interlocking relationships between businesses of industry coordination
an industry
Overall result: cost sharing and increased economies of scale
Other
liquidation/bankruptcy
23
Table 3: Descriptive statistics
Mean
Concentrated
growth
Market
development
Product
development
Innovation
Horizontal
integration
Vertical
integration
Concentric
diversification
Conglomerate
diversification
Turnaround
Divestiture
Joint
ventures
Strategic
alliances
Consortia
Standard deviation
3.1
1.32
3.4
1.11
3.6
1.22
3.3
1.14
2.2
1.20
1.8
0.98
1.8
1.03
1.6
0.90
3.0
1.27
1.5
1.88
2.4
1.25
2.6
1.24
2.3
1.19
24
Table4: Correlation matrix
Concentrated
growth
Market
development
Product
development
Innovation
Concentrated
growth
1.00
Market development
Product
development
0.18*
1.00
0.18**
0.28***
1.00
0.12
0.22***
0.54***
Stars indicate level of significance
*** p<0.01, ** p<0.05, * p<0.1
Innovation
1.00
25
Table 5: Difference between firms with formal and informal planning
Concentrated
growth
Market
development
Product
development
Innovation
Mean formal
planning
3.13
Mean informal
planning
3.07
Difference in means
0.06
3.44
3.27
0.17
3.72
3.39
0.33*
3.39
3.20
0.19
Horizontal
integration
Vertical
integration
Concentric
diversification
Conglomerate
diversification
Turnaround
2.37
1.90
0.47***
1.75
1.82
-0.07
1.66
1.91
-0.25
1.55
1.72
-0.17
3.13
2.85
0.28
Divestiture
1.57
1.51
0.06
Joint
2.48
2.41
0.07
2.75
2.51
0.24
2.36
2.11
0.25
ventures
Strategic
alliances
Consortia
Stars indicate level of significance
*** p<0.01, ** p<0.05, * p<0.1
26
Table 6: Interrelation between competitive position, market environment and the choice of grand
strategies
Competitive position
Market forces
Gross
profit
margin
0.00
Turnover
Substitutes
Entrant
Regulation
Technology
Sta-bility
0.06
0.11
0.11
-0.17**
0.13
0.17*
0.01
0.09
0.29***
0.05
-0.04
-0.06
0.05
0.00
0.04
0.13
-0.17
-0.03
0.33***
0.15*
-0.01
0.11*
-0.06
-0.15
-0.01
0.55***
0.16
Horizontal
integration
Vertical
integration
Concentric
diversification
Conglomerate
diversification
Turnaround
0.00
0.15***
0.12
-0.13
-0.04
0.20*
0.07
0.00
0.04
0.10
-0.10
0.01
-0.11
-0.12
0.00
-0.04
0.13
-0.02
0.03
-0.06
0.05
-0.01*
0.02
0.11
-0.01
-0.05
-0.14
0.07
-0.01**
0.10*
-0.07
0.08
-0.01
-0.11
-0.21**
Divestiture
0.00
0.04
0.16*
-0.12
0.08
-0.07
-0.05
Joint
0.00
0.11*
0.06
-0.24**
0.10
0.20*
-0.20**
0.00
0.12*
-0.03
-0.10
0.02
0.26**
-0.18**
0.00
0.08
0.07
-0.11
0.10
0.22*
-0.14
Concentrated
growth
Market
development
Product
development
Innovation
ventures
Strategic
alliances
Consortia
Stars indicate level of significance
*** p<0.01, ** p<0.05, * p<0.1
27
Table 7: Interrelation between grand strategies and operational performance
Past performance
Turn-over
Profit last 3
last 3 years
years
Concentrated
growth
Market
development
Product
development
Innovation
0.03
0.04
Current performance
Subjective
Relative
perfirm costs
formance
0.10
0.01
0.00
-0.05
0.13
-0.01
0.11
0.16**
0.06
0.08
0.09
0.06
0.09
0.22***
0.22***
0.22***
0.19**
-0.11
0.20***
0.30***
Horizontal
integration
Vertical
integration
Concentric
diversification
Conglomerate
diversification
Turnaround
-0.06
-0.15**
0.04
-0.08
0.07
0.02
-0.09
-0.08
-0.08
-0.03
0.03
0.06
-0.01
0.05
-0.02
-0.11
-0.02
0.01
-0.03
0.02
-0.02
-0.15
0.02
-0.03
-0.15**
-0.24***
-0.06
0.03
0.00
-0.05
Divestiture
-0.05
0.07
-0.07
-0.05
0.05
0.02
Joint
-0.01
-0.04
0.00
-0.02
-0.09
-0.05
0.03
0.01
0.05
-0.03
-0.02
0.09
0.08
0.05
0.06
-0.09
0.01
-0.02
ventures
Strategic
alliances
Consortia
Stars indicate level of significance
*** p<0.01, ** p<0.05, * p<0.1
Future performance
Short-term
Long-term
0.04
0.12**
28
Fig. 1: Selecting a grand strategy
Rapid Market growth / High market attractiveness
Concentrated growth
Vertical integration
Concentric diversification
Strong competitive
Position
Horizontal integration
Divestiture
Weak competitive
position
Conglomerate diversification
Joint ventures
Turnaround
Slow market growth / Low market attractiveness
29
Fig. 2: Strategic profiles in engineering and electronic
1
2
3
4
Concentrated growth
Market development
Product development
Innovation
Horizontal integration
Vertical integration
Concentric diversification
Conglomerate diversification
Turnaround
Divestiture
Joint venture
Strategic alliances
Consortia
Engineering
Electronic
Arrows indicate a significant difference in the respective strategic component on the 95percent level of
confidence; significance is based on ordered probit models for survey data
5