Strategic Consistency and Performance: An Analysis of Real Estate Developers

Article excerpt

The past three years have seen the remarkable growth of publicly held real estate companies called Real Estate Investment Trusts (REIT). The industry is still dominated by small, privately held firms but REITs and other large companies are emerging as major players. Organization strategy and structure issues have become very important managerial concerns because they are of concern to W,all Street underwriters. However, evidence suggests that many real estate companies do not have long-term strategic plans. Clearly, this long-term strategic thinking is necessary.

The issue of organizational domain has received much attention in the strategic management literature (e.g., Subramanian et al., 1993; Kruger, 1989; Miles and Snow, 1978). This involves the key decision of determining the business or the portfolio of businesses the organization should be in. This domain choice requires the decision-maker's selection of the combination of the organization's specific product(s) and its target market(s). This strategic choice of product market domain is key because it creates the need for a particular organizational structure and supporting organizational processes to implement the strategy. Consistency between the chosen product market strategy and the supporting structure is a very important ingredient for success. Amburgey and Dacin (1994) report the existence of a hierarachial relationship between strategy and structure -- strategy being a more important determinant of structure than structure of strategy.

A strategy issue currently facing real estate development firms is how to structure or restructure their organizations in order to improve performance. In a major review of the management literature, in search of lessons for development firms, Bhambri et al. (1991) note that real estate development firms take on various organizational structures -- smaller firms tend to be project oriented, large firms are either project or functionally oriented, or a mix of the two. Large firms may be groups of partnerships that are highly decentralized or the firms may be integrated with staff in functional areas and therefore more centralized. The question that these authors raise is: What are the advantages and disadvantages of these alternative organizational structures? As real estate developers begin to restructure and reorganize and add functions such as property management and brokerage, the issue of the appropriate structure becomes very important. This is especially so since a Laventhol and Horwath (1989) survey of over 1,000 real estate firms found that most firms tended to operate on a short-term planning horizon, and while 81% of the firms had operating plans that were updated annually, only 59% had long-term (3-5 year) strategic plans. However, the survey indicates, real estate companies are now becoming more interested in developing business strategies.

Other studies of the real estate industry (e.g., Sriram and Anikeeff, 1991) have reported that none of the intended product market domain strategies is either more popular or leads to better performance among development companies. However, the issue of the consistent implementation of the chosen strategy was not investigated.

Thus, this paper seeks to form a bridge between the strategic management and the real estate literature by extending Sriram and Anikeeff's (1991) findings by investigating the relationship between the consistency of implementation of strategy and performance. Therefore, the primary purpose of this paper is to see if consistent implementation of strategy -- the matching of the appropriate organizational structure to the strategy -- results in superior performance. The secondary purpose of this study is to investigate whether this consistency is associated with the age of the organization and its size. While previous research has found mixed evidence for the relationship between age and strategic choice and size and strategic choice, there has been no research which has studied the association of these two variables (age and size) with the consistent implementation of the chosen strategy. …