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competitive strategy,
and performance
Eric M. Olson
Professor of Marketing and Strategic Management,
University of Colorado at Colorado Springs T he strategic management process comprises at
least five related elements. The starting point is
developing a mission that guides all subsequent
efforts of the business. This leads to an analysis of the
firm’s situation, and on to the formation of a competitive
Stanley F. Slater strategy. That strategy is subsequently implemented and—
Professor of Business Administration, University of at least in theory—performance is monitored with an eye
Washington, Bothell; Professor of Marketing, Colorado toward fine-tuning the strategy and/or its implementa-
State University (as of July 2002) tion. Of these five elements, the one that has received the
least amount of attention is the last one: the management
control system.
According to Simons (1991), management control sys-
tems have three major elements: (a) setting performance
standards, (b) measuring performance against the stan-
dards, and (c) taking corrective action if the standards are
not being achieved. Thus, the systems provide feedback
Different product-market on the effectiveness of competitive activities, enable learn-
strategies have different ing from internal and market-oriented experiences, and
provide guidance for strategic change and renewal. Perfor-
requirements for success. Just mance measurement is central to the management con-
trol process for any business.
as organizational structures and
Venkatraman and Ramanujam (1986) proposed that strat-
processes are tailored to assist in egy-level performance measurement should include both
implementing a chosen strategy, so too financial and operating measures. Chakravarthy (1986)
should the performance emphases adopted studied firms operating in the computer industry and
concluded that financial performance measures are inade-
by a firm. The logic of this approach underlies
quate indicators of a broader construct, “excellence.” This
the reason why many managers have adopted is partly due to the fact that financial indicators largely
a balanced scorecard approach to measuring ignore the interests of stakeholders other than stockhold-
performance. But balance implies that all ers. Chakravarthy argued that future-oriented indicators,
such as investment in R&D, should also be part of the
measures are equally important in all settings.
measurement and control system.
The authors endorse the multi-measure approach
These studies suffer from one or both of two shortcom-
to understanding company performance, but
ings. First, they consider only a small number of perform-
challenge the idea that all measures are equally ance indicators rather than a comprehensive performance
important irrespective of the product-market evaluation system. A study by Ernst and Young’s Center
strategy adopted. The results from a survey of for Business Innovation (Daly 1996) found that invest-
ment analysts who considered nonfinancial as well as
more than 200 businesses support this position.
financial performance indicators were more accurate in
their earnings estimates than those who just used finan-
11
cial indicators. This suggests that a comprehensive per- archetypes, described below, we will suggest the most
formance evaluation system has greater predictive validity appropriate balance for each.
than one that is purely financially oriented. Moreover,
neither of the studies considered performance evaluation
in the context of the business’s strategy. Because different
strategies have different requirements for success, it fol- Competitive strategy and
lows that performance evaluation should be tailored to
strategic orientation.
performance emphasis
C
ompetitive strategy is concerned with the patterns
Recently, the balanced scorecard (Figure 1) has generated of choices managers make over which markets to
considerable attention. It is comprehensive in that it con- serve and how the business creates more value for
siders the customer perspective, the internal business perspec- buyers than its competitors. The Porter (1980) and Miles
tive, and the innovation and learning perspective, as well as and Snow (1978) typologies of strategy are the frame-
the financial perspective. Its benefits include its ability to works that have most often been shown to effectively rep-
1. be tailored to the business’s strategy resent managerial choices.
2. communicate strategic objectives Porter proposed that the product-market decision should
be viewed in terms of how the business creates value (dif-
3. enhance feedback and learning ferentiation or low cost) and how it defines its scope of
Slater, Olson, and Reddy (1997) argue that the scorecard market coverage (focused or market-wide). Miles and
should be “unbalanced,” based on the strategy of the Snow identified four archetypes of how firms address
business. Using Treacy and Wiersema’s (1995) “value dis- product-market strategy decisions. Prospectors continuously
ciplines,” they argue that product leaders should emphasize seek to locate and exploit new product and market oppor-
the innovation and learning perspective, customer intimates tunities. Their primary capability is innovation in product
should emphasize the customer perspective, the opera- and market development. Defenders attempt to seal off a
tionally excellent should emphasize the internal business portion of the total market to create a stable set of prod-
perspective, and all of the value disciplines should pay ucts and customers. They invest heavily in the develop-
ment of a system for the most efficient production of
goods and services. Analyzers occupy an intermediate posi-
tion between the two extremes and simultaneously seek to
minimize risk and maximize the opportunity for profit.
Because different strategies have Thus, they follow prospectors into new product market
domains after their viability has been demonstrated, while
different requirements for success, protecting a stable set of products and customers. A key
it follows that performance capability of analyzers is flexibility, the capability to re-
spond rapidly as new opportunities become apparent. A
evaluation should be tailored to fourth type, the reactor, does not have a consistent re-
sponse to the product-market problem.
strategic orientation. Walker and Ruekert (1987) synthesized these typologies
of product-market behavior by discriminating between
low-cost defenders and differentiated defenders. Our study
makes use of that distinction. In other studies, we vali-
attention to the financial perspective. Their rationale was dated the distinctiveness of the prospector, analyzer, low-
that each value discipline has a performance perspective cost defender, and differentiated defender strategy types.
that is a leading indicator of its financial performance.
Prospectors evaluate performance in terms of effectiveness.
Although the balanced scorecard appears to be a widely They emphasize measures such as new product success,
adopted and powerful management tool, little research percentage of revenues derived from new products or new
has been conducted to assess its usefulness. This paucity customers, market development, and sales or market share
in the literature is consistent with the surprise that Zahra growth—characteristics of the innovation and learning per-
(1999) expressed when, as the guest editor of a special spective (which we prefer to characterize as the innovation
issue of the Academy of Management Executive, he discov- and growth perspective) in the balanced scorecard. Prospec-
ered that no papers had been submitted that dealt with tors have also been found to be oriented toward market-
how the balanced scorecard can be used effectively. The ing, which implies an emphasis on customer satisfac-
purpose of our study is to determine whether benefits can tion/retention and product quality/image. These are all
be derived from matching an emphasis in the scorecard to characteristics of the customer perspective, which com-
strategy type. From among four competitive strategy
T
enues and profits from a fairly stable set of products and o test these propositions, we sent questionnaires
customer groups. This suggests that high-performing ana- with preaddressed return envelopes to 1,000 senior
lyzers would also be apt to emphasize performance meas- managers in service and manufacturing firms
ures similar to defenders. However, given the distinction in across the country. Over the course of two mailings we
types of defenders, this becomes somewhat problematic, received back more than 200 responses. After accounting
for undeliverables, this constituted a 23 percent response formance distributions by competitive strategy category.
rate, which is considered well above minimal thresholds We can only speculate as to why this group yielded a
for management studies. We asked each participant to lower percentage of high-performing firms than did the
consider either the largest business unit or the one they others. However, as the results will show, even with re-
were most familiar with when responding to the survey’s duced numbers significant differences were demonstrated
questions. By choosing to rely on the responses of a single between high- and low-performing low-cost defenders
informant, we followed the advice of Huber and Power with regard to the emphasis each applied to alternative
(1985), who found that the response of a single knowl- components of the management control system.
edgeable informant was more accurate than the average of
The results of this study are presented in Table 1, which
responses from informants with a range of knowledge.
shows the degree of emphasis low and high performers
The survey measured the competitive strategy type place on each dimension in the scorecard. As a group,
adopted by the firm, the emphasis placed on each dimen- prospectors emphasize the innovation and growth per-
sion in the balanced scorecard, and the overall perceived spective more than do any of the other strategy types.
performance of the firm. Strategy type was assessed using However, there is no significant difference between high
the self-typing paragraph approach that is commonly and low performers regarding emphasis on the innovation
used in research on both strategic management and mar- and growth perspective. This finding suggests that the
keting strategy research. Overall perceived performance of need for innovation is well understood among prospector
the firm was assessed on a five-point scale ranging from firms. However, as predicted, high-performing prospectors
1 = “much worse than competitors” to 5 = “much better place greater emphasis on the customer perspective than
than competitors.” Firms were subsequently categorized do low performers. Thus, what truly separates high- from
as either high performers (overall performance of 4 or low-achieving prospectors is the attention they pay to
higher) or low performers (overall performance of 3 or their customers.
lower). We adopted this conservative demarcation point
As predicted, high-performing analyzers place greater
to clearly identify the top firms. Out of the 208 responses,
emphasis on both the innovation and growth perspective
81 were subsequently categorized as high performers—39
and the financial perspective than do low-performing ana-
percent of the total sample.
lyzers. No difference between high and low performers
Prospectors, analyzers, and differentiated defenders all with respect to the customer perspective was observed.
demonstrated a rate of 40 percent or higher for high-per- However, high-performing analyzers also place greater
forming firms. Only low-cost defenders, with just 23 per- emphasis on the internal business perspective than do
cent, demonstrated significantly lower than expected per- low performers. Thus, an emphasis on three out of the