Strategy and Performance in the Entrepreneurial Computer Software Industry

Article excerpt

ABSTRACT

This paper examines the nature of competitive strategy in the computer software industry and its relationship to performance. A cluster analysis delineated five groups classified along traditional strategy lines (e.g., prospectors, differentiators, defenders, low cost leaders, and reactors). Results suggest that prospecting was associated with high growth, differentiating with high profitability, and reacting with poor performance. Implications and suggestions for future research are also identified.

INTRODUCTION

The strategic management literature is replete with strategy typologies, research methodologies, and theories on the strategy-performance relationship (Lieberman & Montgomery, 1998; Sabourin & Pinsonneault, 1997). In general, strategies that emphasize quality, incorporate a product or service's distinctive competencies, and focus on the core business tend to result in superior firm performance across industries (Dacko & Sudharshan, 1996). However, the specific characteristics of successful business strategies, the relative influence of industry on performance, and the proper measurement of the performance construct all remain issues of considerable debate.

The present study examines the strategy-performance relationship in a high growth industry: prepackaged computer software. Competitive strategies are examined along the typologies of Porter (1980) and Miles and Snow (1978). In addition, since growth may be the major performance objective of many of the competitors in this industry, it serves as an excellent testing ground to examine performance in light of two performance indicators, profitability and revenue growth (Zahra, 2000).

The remainder of the paper is organized as follows: An historical development of business strategy research is presented. Next, the computer software industry is discussed, and propositions linking strategy and performance are developed. Research methods are then outlined, followed by a presentation of results of the data analysis and a discussion of the study's findings. Finally, conclusions and future research directions are proposed.

AN HISTORICAL DEVELOPMENT OF BUSINESS STRATEGY THEORY

Business Strategy Typologies

Two major business strategy typologies dominate the literature over the past two decades. According to Porter's (1980) framework, a business can maximize performance either by striving to be the low cost producer in an industry or by differentiating its line of products or services from those of other businesses; either of these two approaches can be accompanied by afocus of organizational efforts on a given segment of the market. Specifically, a low cost strategy is effectively implemented when the business designs, produces, and markets a comparable product more efficiently than its competitors. In contrast, a differentiation strategy is effectively implemented when the business provides unique and superior value to the buyer in terms of facets such as product quality, special features, or after-sale service. Differentiation leads to market success not based on a competitive price, but on the demands of a sophisticated consumer who wants a differentiated product and is willing to pay a higher price.

Miles and Snow's (1978) framework identified four strategic types: prospectors, defenders, analyzers, and reactors. Based on Child's (1972) conceptualization of strategic choice, Miles and Snow assume that organizations act to create their own environments through a series of choices regarding markets, products, technologies, and desired scale of operations. The enacted environment is severely constrained by existing knowledge of alternative organizational forms and managers' beliefs about how people can and should be motivated.

Prospectors perceive a dynamic, uncertain environment and maintain flexibility and employ innovation to combat environmental change, often becoming the industry designers (Miles & Snow, 1986). …