Relationships between Defender and Prospector Business Strategies and Organizational Performance in two Different Industries, The
Lo, Chung-Min
Most strategy managers attribute organizational effectiveness to distinguishing characteristics of organizations; neglecting the influence of industry factors of the firms. Previous studies of the relationship between business strategy and organizational effectiveness have mainly focused on single industry or cross industries. This study compares two samples from the Taiwan Sporting Goods Manufacturing industry and the Hi-Tech industry at Hsinchu Science-based Industrial Park from the perspective of Configuration Theory. The empirical results show: (1) Firms from the Sporting Goods Manufacturing Industry which implement a defender strategy have better financial and holistic performance than those which implement other strategies. (2) Hi-Tech Firms from the Hsinchu Science-based Industrial Park which implement a prospector strategy have better financial and holistic performance than those which implement other strategies. Compared to previous studies, this study suggests that top management should review and analyze the industrial environment more carefully in choosing business strategy to fit the characteristics of the environment for effective organizational performance and to achieve competitive advantages.
I. Introduction
To cope with global competition, firms in Taiwan can no longer achieve competitive advantage by simply using low cost labor, but also strategically innovate in product, procedure, and marketing. Previous studies have used single industry (Short, Palmer, Ketchen, 2002; Ketchen, Thomas& Snow, 1993) or cross industries samples (Doty, Click and Huber,1993) in examining the relationship between business strategy and organizational effectiveness. Some studies suggest industry factors can explain the difference in organizational effectiveness among industries (Powell, 1996); they fail to identify how firms choose strategy according to the industrial characteristics and how they achieve higher organizational effectiveness (Kaser and Miles, 2002). In order to figure out how firms choose business strategies in both innovative and non-innovative industries to achieve organizational effectiveness, this study chose two samples from each industry to examine the influence of business strategy on organizational effectiveness. Because Miles and Snow (1978; 2003) developed their theory from empirical studies and it can be measured only within an industry of large firms it was decided to use the configuration theory proposed by Miles and Snow (Smith, Guthrie & Chen,1989) to examine the relationship between business strategy and organizational effectiveness.
II. Literature Review
According to configuration theory, all firms have strategies, structures and management process. We can classify types of firms in terms of their unique attributes or the combination of attributes (Ketchen, Thomas & Snow, 1993; Ketch et al., 1997; Miles and Miles, 2000). The configuration of strategy identifies the types of strategy an organization can choose and structure itself on. It means the bundles of alternatives. Every bundle contains the alternatives a firm needs and helps decision makers choose strategies and to allocate resources. (MacDuffie, 1995) The widespread attention given to Porter’s (1980) theory reflects its strong intuitive appeal. But the theory used general terms and can be measured only among large firms (Smith, Guthrie & Chen, 1989). Hence it was decided to use the theory proposed by Miles and Snow (1978). Because the theory is based on an analysis of different industries, it is especially suitable for Taiwan.
Miles and Snow’s (1978) theory identifies three ideal strategy types: prospector, defender, and analyzer. Each of these ideal types is a unique configuration of contextual, structural, and strategic factors. Defender is at one end of a continuum. Firms with defender strategies define their market as narrow and stable, devoting themselves to improving production efficiency, and cost control. Their management structures are stable. Prospector is at the other end of a continuum. Firms with prospector strategies have wide and varied markets, and devote themselves to coping with change and innovation. They keep developing new products and markets. Their management structures are flexible. They are innovators and they push competitors to react to change. Prospector firms search for new opportunities and their efficiency is generally lower than defender firms. Firms with analyzer strategies fall between defender and prospector firms. They have various product lines. They act as a defender in stable product markets and as a prospector in new product markets. They are not the initiators of innovation and they react to change faster than do defenders.
To assess organizational effectiveness, this study uses three measurements from the study of Venkatraman and Ramanujam (1986); financial, operational, and holistic. Financial performance is the most common and easily used measure to assess the effectiveness of an organization. We adopt net profit (Tan & Litschert, 1994) and after-tax return on total assets (Delery & Doty, 1996) as financial measures. Operational performance is a better indicator of non-financial organizational effectiveness. We adopt quality (MacDuffie, 1995) and productivity (Doucouliagos, 1995) as the operational measures. Holistic performance reflects organizational effectiveness and takes stakeholders into consideration. We adopt overall performance and the competitive position of firms (Lukas, Tan & Huit, 2001) as the holistic measure.
Miles and Snow (1978) argue that these three strategy configurations are all ideal types and are equivalent in effectiveness. Powell (1996) suggests that industry factors can explain some portion of the differences in effectiveness. Hambrick (1983) found that in a non-innovation industry, prospector firms invest a lot of expenditures (include necessary and non-necessary expenditures), and that defender firms are superior to prospector firms in cash flow and profitability. In the medical industry with its high risk, uncertainty, and emphasis on research and innovation, prospector firms perform better than defender firms. (Zajae and Shortell, 1989) To find out the relationship between industry characteristics and strategy choice, we choose two kinds of firms and examine the relationship between business strategy and organization effectiveness from the same theory and using the same scales.
The first firms were selected from Taiwan’s sporting goods manufacturing industry. There is little change in this industry, product markets are stable, most of the firms do not have their own brands, and operate with either OEM or ODM. Emphasis is on improving operation quality and cost efficiency to cope with competition. (Kao, 2002) The characteristics of this industry are close to that of a non-innovative industry. According to Hambrick’s (1983) study, sporting good manufacturers should adopt defender strategies, and emphasize process improvement, production efficiency and cost control to achieve competitive advantages. This reasoning leads to these hypotheses:
Hypothesis I : Sporting goods manufacturers that adopt a defender strategy will be more effective than those that adopt other strategies.
Hypothesis Ia: Sporting goods manufacturers that adopt a defender strategy will have better operational performance than those that adopt other strategies.
Hypothesis Ib: Sporting goods manufacturers that adopt a defender strategy will have better financial performance than those that adopt other strategies.
Hypothesis Ic: Sporting goods manufacturers that adopt a defender strategy will have better holistic performance than those that adopt other strategies.
The second firms were from Hsinchu Science industrial park, an example of high-tech industry in Taiwan. According to the census of science parks (2001), the average ratio of research and development expenditures to sales is 4.5 times higher than in other manufacturing industries. The rate of increase in automated facilities is 3.6 times higher than in other industries. The characteristics of this hi-tech industry are risk and uncertainty, a shorter product life cycle, and an emphasis on innovation. (Ma, Yang, 2001 ) To achieve higher profits and to deal with strong competition, firms in this industry adopt a prospector strategy to develop new and high value-added products and explore new markets. This should result in better operational, financial and holistic performance. This reasoning leads to these hypotheses:
Hypothesis 2: Firms in the Hsinchu Science industrial park that have a prospector strategy will be more effective than those that have other strategies.
Hypothesis 2a: Firms in the Hsinchu Science industrial park that have a prospector strategy will have a better operational performance than those that have other strategies.
Hypothesis 2b: Firms in the Hsinchu Science industrial park that have a prospector strategy will have a better financial performance than those that have other strategies.
Hypothesis 2c: Firms in the Hsinchu Science industrial park that have a prospector strategy will have a better holistic performance than those that have other strategies.
III. Methodology
There were two samples in this study. The first sample comprised sporting goods manufacturers, manufacturers of water sporting goods, golf goods, billiard goods, swimming suits, and sporting suits, etc. The list of firms came from the Taiwan Association for Sport Management (1964). The second sample, the manufacturers in Hsinchu science-based industrial park, consists of the manufacturers of integrated circuit, computer, and communication equipment etc. The firms came from the list provided by the industrial park. The total sample consisted of 256 firms. We mailed the questionnaire to each firm on the list. Since questions related to managers involved in decision-making, senior managers were asked to complete it. This pretest took place before March 2002. Questionnaires were collected by the end of August. There were 131 and 96 responses from the sporting goods industry and the science park respectively. We eliminated surveys with missing responses from the analysis. This process left 102 and 86 firms in the analysis. After the pretest, we invited three senior managers from two industries respectively for in-depth interviews. From these interviews we made some changes to the original measures.
A. Scale of business strategy
The scale of Smith, Guthrie and Chen (1989) was modified by adding an item about the R&D percentage of sales revenue. There were 14 items in the scale shown in table 1. Cronbach’s a of the scale for sporting goods manufacturers and manufacturers from Hsinchu Science industrial park were .68 and .65 respectively, which is respectable. (Smith, Guthrie&Chen,1989)
B. Scale of organization effectiveness
As mentioned above, this study used three different measures, for operational, financial, and holistic performance. Net profit and after-tax return on total assets was used for financial performance, quality and productivity for operational performance, and overall firm performance and competitive position of firms for holistic performance. Based on Dess and Robinson (1984) arguments, we asked senior managers to evaluate organizational effectiveness subjectively in comparison with competitors. We used a Likert five-point scale for each item. Since the scale is based on the opinions of senior managers in the industries, content validity and external validity are high. Cronbach’s alphas for the three performance measures in the industrial park were 0.86, 0.88,0.89 respectively and 0.91, 0.78, 0.82 in the sporting goods manufacturing industry. The alpha value of the total scale was 0.89. an acceptable level.
Since configuration emphasizes the classification of organizations, cluster analysis is an appropriate method. To avoid the influence of scaling artifacts (Ketchen & Shook (1996), we adopted the suggestion of Ketchen and Shook (1996) standardizing all scores and examining cluster analysis with the K-means method. Then we used the LSD test to measure the difference in summated scores of every cluster. Finally, we used an ANOVA test to examine the relationship between business strategy and organization effectiveness.
IV. Results and discussion
A. Cluster analysis of business strategy
We standardized business strategy scores and examined the cluster analysis with kmeans. This produced the three clusters, shown in table 1. We named the clusters the, prospector, analyzer, and defender in the summated scores sequence. The F-values of the cluster analysis of the two industries were significant. (P-value
Among the manufacturers of sporting goods, the cluster with the highest summated score was named prospector. From table 2 the characteristics of the prospector strategy are their broad market definition, unstable customer base, changing product mix, a wide monitoring of the environment, and achieving competitive edge by innovation. These characteristics are similar to the definition of prospector in Miles and Snow’s (1978) theory. The second cluster we named analyzer. Except for its marketing approach, growth patterns, and attitude towards production, the analyzer strategy has characteristics of both prospector and defender. The last cluster we named defender. Its characteristics are also similar to the definition of prospector in Miles and Snow’s theory.
Among the manufacturing firms in the science industrial park, the characteristics of the prospector strategy are their broad market definition, changing its customer base, its spurting growth pattern, its aggressive attitude toward growth, and its high R&D budget. These characteristics are similar to the definition of defender in Mile and Snow’s (1978) theory. Except for its product mix stability, specificity of its production employee’s skill, attitude towards production, and its number of products, the analyzer strategy has characteristics of both prospector and defender. The characteristics of the defender strategy are its stable customer base, achieving competitive edge through low cost, and its low R&D budget. These characteristics are also similar to the definition of defender in Mile and Snow’s theory.
B. Examining relationship with ANOVA analysis
From table 2, we find that among the manufacturers of sporting goods, the financial performance of defender strategy is superior to firms with the other two strategies. Although the difference in the productivity of defenders is significant, the difference between defender and analyzer firms is not significant under the LSD test. The holistic performance of defender firms is superior to firms with the other two strategies. We conclude that sporting goods manufacturers with a defender strategy will have better financial and holistic performance than firms with the other strategies. Hypotheses Ia, Ic are verified. Hypotheses Ib and Hypotheses 1 are partially verified.
Among the manufacturers in the science-base industrial park, financial performance of prospector firms is superior to firms with the other two strategies. Although the difference in the productivity of prospector firms is significant, the difference between prospector and analyzer firms is not significant according to the LSD test. The holistic performance of prospector firms is superior to that of firms with the other two strategies. We conclude that manufacturers in the science industrial park with a prospector strategy have a better financial and holistic performance than firms with the other strategies. Hypotheses 2a, 2c are verified. Hypotheses 2b and Hypotheses 2 are partially verified.
As most of the manufacturers in Taiwan have ISO 9000 series certification (Industrial Development Bureau, 2000), the difference in the product quality in the two samples is not significant. To sum up, we conclude that manufacturers of sporting goods with a defender strategy and manufacturers in the science industrial park with a prospector strategy are more organizationally effective. It is therefore important that firms review the environment of their industry, analyze the competition and the variety of products in their market before selecting strategies.
V. Conclusion
Although previous studies suggest that industry factors explain the difference in organizational effectiveness among industries (Powell, 1996); they do not explain why firms that choose strategy according to their environment characteristics are more effective. In the empirical study we find that the same strategy configuration does not guarantee equal success. Firms should thus select business strategies that fit the characteristics of their environment to achieve competitive advantage.
Sporting goods manufacturers in their non-innovative industry with a defender strategy perform better financially and holistically than firms with the other strategies; Manufacturers in the science industrial park, in an innovative industry, with a prospector strategy have better financial and holistic performance than those with other strategies. This conclusion is the same as Hambrick’s (1983) and Zajae and Shortell’s (I989) findings that use samples from single industries.
The managerial implications are that high-level managers of firms should recognize the characteristics of the environment in which they compete, analyze the competition and the variety of products in their markets, then select strategies that fit all the characteristics to achieve greater organization effectiveness. If the firms compete in a non-innovative industry, they should adopt a defender strategy and emphasize improving internal operation efficiency. If the firms compete in an innovative industry, they should adopt a prospector strategy and emphasize research and innovation of product.
According to these findings, we suggest further research that; (1) includes environmental factors in the research to examine the relationship more precisely. (2) examines how the fitness of environmental factors and business strategies influence organizational effectiveness.
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Chung-M in Lo
Yu Da College of Business, Taiwan
Jun-Ren Wang
National College of Physical Education and Sports, Taiwan
Copyright International Journal of Management Mar 2007
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