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Grand Strategies Re-visited—Lessons for High Technology Small and Medium Sized Firms

Nicholas O'Regan, Bristol Business School, Bristol, UKGerhard Kling, Bristol Business School, Bristol, UKAbby 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

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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

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

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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

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

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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 long-

term 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

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

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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

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

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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 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 long-range 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

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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).

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

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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”.

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” (Garcia-Pont 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 questionR4 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.

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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).

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

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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

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 high-

quality 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 non-

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parametric 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.

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

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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

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

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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

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

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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

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

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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

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.

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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.

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 Main Emphasis Characteristics

Concentrated the pursuit of profitable growth of a single product ability to assess market needs, knowledge of buyerGrowth [i] in a single market with a single dominant technology behavior, customer price sensitivity, effective

Promotion, builds on competenciesOverall result: increased use of technology, increased productivity and better coverage of

product-market segment

Market marketing existing products to customers in related areas additional geographic outletsDevelopment [i] by adding channels of distribution and/or changing attracting other market segments

the content of advertising and promotionOverall result: increased sales

Product substantial modification of existing products, or the prolong product life cycleDevelopment [i] 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] growth through acquisition of similar firms operating access to new markets Integration at the same stage of the production-marketing chain Overall result: eliminate some competitors

Vertical acquisition of firms supplying inputs or firms that are expansion of operations, greater market shareIntegration [e] 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 compatibilityDiversification [e] higher profits. with existing business

Overall result: increases synergy

Conglomerate acquisition of potentially profitable business based on profit considerations onlyDiversification [e] Overall result: increased profit

Turnaround [i] fortify the firm’s distinctive competencies by cost or changes in management Asset reduction during declining profitability

Overall result: entrenchment and recovery

Divestiture [i] sale of major components of the firm improve cash flow, Divest units unable to provideSynergy

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 profitsStrategic similar to joint ventures with the exception that licensing agreements, time limited outsourcingAlliances [e] partners do not take an equity position in one another

Overall result: increased market share/productivityConsortia [e] seeking interlocking relationships between businesses of industry coordination an industry

Overall result: cost sharing and increased economies of scale

Other liquidation/bankruptcy

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Table 3: Descriptive statistics

Mean Standard deviationConcentrated growth 3.1 1.32

Market development 3.4 1.11

Product development 3.6 1.22

Innovation 3.3 1.14

Horizontal integration 2.2 1.20

Vertical integration 1.8 0.98

Concentric diversification 1.8 1.03

Conglomerate diversification 1.6 0.90

Turnaround 3.0 1.27

Divestiture 1.5 1.88

Joint ventures 2.4 1.25

Strategic alliances 2.6 1.24

Consortia 2.3 1.19

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Table4: Correlation matrix

Concentrated growth

Market development Product development

Innovation

Concentrated growth

1.00

Market development

0.18* 1.00

Product development

0.18** 0.28*** 1.00

Innovation 0.12 0.22*** 0.54*** 1.00

Stars indicate level of significance*** p<0.01, ** p<0.05, * p<0.1

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Table 5: Difference between firms with formal and informal planning

Mean formal planning

Mean informal planning

Difference in means

Concentrated growth

3.13 3.07 0.06

Market development

3.44 3.27 0.17

Product development

3.72 3.39 0.33*

Innovation 3.39 3.20 0.19

Horizontal integration

2.37 1.90 0.47***

Vertical integration

1.75 1.82 -0.07

Concentric diversification

1.66 1.91 -0.25

Conglomerate diversification

1.55 1.72 -0.17

Turnaround 3.13 2.85 0.28

Divestiture 1.57 1.51 0.06

Joint ventures 2.48 2.41 0.07

Strategic alliances

2.75 2.51 0.24

Consortia 2.36 2.11 0.25

Stars indicate level of significance*** p<0.01, ** p<0.05, * p<0.1

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Table 6: Interrelation between competitive position, market environment and the choice of grand strategies

Competitive position Market forces

Gross profit margin

Turnover Sub-stitutes

Entrant Re-gulation

Tech-nology

Sta-bility

Concentrated growth

0.00 0.06 0.11 0.11 -0.17** 0.13 0.17*

Market development

0.01 0.09 0.29*** 0.05 -0.04 -0.06 0.05

Product development

0.00 0.04 0.13 -0.17 -0.03 0.33*** 0.15*

Innovation -0.01 0.11* -0.06 -0.15 -0.01 0.55*** 0.16

Horizontal integration

0.00 0.15*** 0.12 -0.13 -0.04 0.20* 0.07

Vertical integration

0.00 0.04 0.10 -0.10 0.01 -0.11 -0.12

Concentric diversification

0.00 -0.04 0.13 -0.02 0.03 -0.06 0.05

Conglomerate diversification

-0.01* 0.02 0.11 -0.01 -0.05 -0.14 0.07

Turnaround -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 ventures 0.00 0.11* 0.06 -0.24** 0.10 0.20* -0.20**

Strategic alliances

0.00 0.12* -0.03 -0.10 0.02 0.26** -0.18**

Consortia 0.00 0.08 0.07 -0.11 0.10 0.22* -0.14

Stars indicate level of significance*** p<0.01, ** p<0.05, * p<0.1

26

Table 7: Interrelation between grand strategies and operational performance

Past performance Current performance Future performanceTurn-over last 3 years

Profit last 3 years

Subjective per-formance

Relative firm costs

Short-term Long-term

Concentrated growth

0.03 0.04 0.10 0.01 0.04 0.12**

Market development

0.00 -0.05 0.13 -0.01 0.11 0.16**

Product development

0.06 0.08 0.09 0.06 0.09 0.22***

Innovation 0.22*** 0.22*** 0.19** -0.11 0.20*** 0.30***

Horizontal integration

-0.06 -0.15** 0.04 -0.08 0.07 0.02

Vertical integration

-0.09 -0.08 -0.08 -0.03 0.03 0.06

Concentric diversification

-0.01 0.05 -0.02 -0.11 -0.02 0.01

Conglomerate diversification

-0.03 0.02 -0.02 -0.15 0.02 -0.03

Turnaround -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 ventures -0.01 -0.04 0.00 -0.02 -0.09 -0.05

Strategic alliances

0.03 0.01 0.05 -0.03 -0.02 0.09

Consortia 0.08 0.05 0.06 -0.09 0.01 -0.02

Stars indicate level of significance*** p<0.01, ** p<0.05, * p<0.1

27

Fig. 1: Selecting a grand strategy

Rapid Market growth / High market attractiveness

Concentrated growth Horizontal integrationVertical integration DivestitureConcentric diversification

Strong competitive Weak competitivePosition position

Conglomerate diversification TurnaroundJoint ventures

Slow market growth / Low market attractiveness

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Fig. 2: Strategic profiles in engineering and electronic

1 2 3 4 5

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

29