Strategy/Structure Fit and Firm Performance

Article excerpt

Abstract

The current study extends research in the realm of strategy/structure fit and firm performance outcomes. In doing so, the impact of industry structure, as measured by industry concentration, on the relationship between fit and performance is examined. The results suggest that industry concentration moderates the relationship between fit and performance. Specifically, this study suggests that fit between a firm's strategy and structure is more important with regard to performance for firms operating in higher concentration industries. The practical and theoretical implications of these findings are discussed.

Introduction

Strategic management research has considered the concepts of strategy and structure and their link with performance for nearly four decades. Chandler's (1962) work is credited by most to be one of the foundational works proposing linear (and causal) relationships between strategy, structure, and firm performance. Since the publication of this early research, numerous authors have conducted studies that draw heavily on Chandler's findings (e.g., Doty, Click, & Huber, 1994; Galbraith & Kazanjian, 1986; Lament, Williams, & Hoffman, 1994; Miles & Snow, 1978; Rumelt, 1974; ), illuminating for researchers and practitioners alike the merits of achieving "fit" between strategy and structure. While these studies offer logical explanations for the superior performance attained by firms that adhere to the prescriptive structures presented in the literature, drawing on Pfeffer's (1982) resource-dependency perspective, some would argue that the impact of additional environmental influences on the strategy, structure, performance relationship has been underestimated (Engdahl, Keating, & Aupperle, 2000). As Engdahl et al. suggest:

... the relationship between structure and economic outcomes may or may not be "efficiency" depending upon whether or not the match of structure and strategy is the result of a valid strategy for the environment in question (p. 22).

Concerns relating to the impact of the environment on the strategy/structure relationship are not unfounded considering that the influence of the environment on firm outcomes has been a key construct in strategy research for years (Finkelstein & Hambrick, 1996; Hambrick & Lei, 1985 ). While few researchers would disagree that the environment plays a role in constraining organizational performance, there is limited empirical research testing its influences in situations where firms adhere to the traditional strategy/structure (fit) relationships. Specifically, much of the research has centered on the direct influence of the environment on firm performance, with little attention given to the possible moderating role of environmental variables on the relationship between strategy/structure fit and performance.

For the purposes of this study, the term environment is defined as industry concentration, which represents the extent to which a smaller number of larger firms retain the dominant share of industry sales. The term fit is used extensively in this study and thus it is also important to define this term. Fit in the context of this study refers to the appropriate match between organizational strategy and organizational structure. The current study seeks to shed light on the relationship between fit, environment, and firm performance. Specifically, as can be seen in Figure 1, this study examines the moderating influence of industry concentration on the relationship between strategy/structure fit and firm performance.

Literature Review

Internal Strategy/Structure Fit and Firm Performance

The concept of fit within the organization has been one of the underlying tenets of the strategic management field. Beginning with the work of Chandler (1962), who suggested that diversification requires new administrative systems to ensure the efficient use of firm resources, researchers have been exploring the relationships between organizational strategy, structure, and firm performance. …