Academic journal article Academy of Marketing Studies Journal

Exploring the Role of External Environment on Determining Strategic Focus, Market Orientation, and Firm Performance of Service Firms

Academic journal article Academy of Marketing Studies Journal

Exploring the Role of External Environment on Determining Strategic Focus, Market Orientation, and Firm Performance of Service Firms

Article excerpt

INTRODUCTION

Due to increased globalization and rapid technological advancements today's markets are becoming increasingly competitive and turbulent. In order to achieve superior performance and remain competitive companies are required to align their strategic focus and internal resources (i.e., market-oriented culture) with their external environments (Venkatraman & Prescott, 1990). According to the environment-strategy-performance theoretical framework and the contingency theory environmental factors are important determinants of a strategy choice (Child, 1972; Luo & Park, 2001; Cui, Griffith, & Cavusgil, 2005), and organizational structure and processes of the firm (Farjoun, 2002; Miles & Snow, 1978; Miller & Friesen, 1978). In other words, these frameworks suggest that the successful alignment of a firm's strategic focus (i.e., defender versus prospector) and internal structures and processes (i.e., market-oriented culture) with its turbulent and competitive external environment results in enhanced firm performance (Farjoun, 2002).

The traditional environment-strategy-performance framework suggests that for the purpose of defending their market position and business performance companies deliberately select strategies in response to their external environments (Child, 1972; Matsuno & Mentzer, 2000). According to the strategic co-alignment literature, the fit between the strategic choice and environmental conditions maximize the effectiveness of operations (Child 1972; Venkatraman & Prescott, 1990), which in turn enhances business performance of the firms.

Empirical evidence indicates that companies modify their strategies to fit their external environments (e.g., Hofer, 1975; Miller & Friesen, 1983). In their more recent empirical study with multinational corporations (MNC) Luo and Park (2001) found that MNC subsidiaries' choice of strategies is based on subsidiaries' response to local market environmental conditions and that the adoption of specific generic strategies in alignment with the market environment enhances subsidiary performance. Although, there is a strong theoretical and empirical support for the environment-strategy relationship the review of the literature indicates that there is a need for more recent studies that examine this relationship for today's service companies that operate under highly turbulent and competitive market conditions. Considering the fact that the service sector is an increasingly important source of job creation and economic wealth, and accounts for more than two thirds of the activity in many developed economies, including the U.S. (Gray & Hooley, 2002; Johnson, 2011), the need for such a study becomes more evident.

Recently, the traditional environment-strategy-performance framework is expanded to include the internal capabilities and characteristics in explaining the relationship between strategic focus and firm performance (O'Cass & Ngo, 2007). This inclusion is supported by the configuration theory that posits that an appropriate fit between a firm's strategic focus and internal organizational characteristics leads to superior performance. Largely based on Walker and Ruekert's seminal work (1987), previous research argued about the importance of achieving a match between business strategy and marketing organization characteristics for improved firm performance (Slater, Olson, & Finnegan, 2010) and established that different business strategic types were more effective when supported by suitable marketing organization characteristics and activities (see Slater et al., 2010 for detailed references) such as sales force management practices (Slater & Olsen, 2000).

In this literature, an area that requires further exploration is the role of market orientation in explaining the relationship between a firm's strategic focus and its business performance. Because of its prominent role in the creation of customer value and sustainable competitive advantage (Narver & Slater, 1990) it is critically important to understand how a firm's strategic focus influences its market orientation and then its business performance. …

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