In this project, you will complete a Company Overview, an Evaluation of the General Environment, and a conclusion.

• Vail Resorts, Inc. (NYSE:  MTN)
• You should not be using indefinite articles, GlassDoor, or Chron or similar types of articles. 
• The document has to be written in Word or RTF.  No other format is acceptable.  Pdf files will not be graded.  Use a 12-point font for a double-spaced report.  The final product cannot be longer than 8 pages in length, which includes all tables and matrices but excludes the title page and reference page.  Do no use an Appendix.
• Provide a company overview, which is an essential component to the strategic management process.  The company overview includes the purpose(s) for the founding of the company, i.e, what problems was it formed to solve and/or opportunities it was formed to exploit, who are the founders, home country or state, current management, employee headcount, last year’s revenue, etc.).
• Identify the global industry in which the company operates.  This will come from Mergent Online. Discuss the company’s general environment by developing a PESTEL analysis.  First, use the course material to identify the elements of the PESTEL and what components make up each element.  Then, complete the analysis using research on the industry and the focal company. Be sure to thoroughly present and support the reasoning for what is presented.  You may not use a PESTEL analysis that is already completed and available on the Internet.   A zero will result if used as the analysis has to be the result of your research and your own development.  NOTE:   A PESTEL analysis is not a table and it is not a bulleted assessment. Identify and discuss one key trend for each letter of the PESTEL for the industry.  Key trends are separate from the PESTEL analysis. Select one of the six trends identified in the previous requirement and discuss how the focal company could be affected by the selected trends. Discuss key areas of uncertainty related to the identified trend for the focal company that could potentially impact the company’s strategy. Perform a strategic analysis of the company’s mission, vision and objectives.

SOURCES:http://www.maxi-pedia.com/EFE+matrix+external

Porter’s Five Forces

https://csimarket.com/Industry/Industry_Financial_strength.php

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Chapter 3

Evaluating the External Environment

L E A R N I N G O B J E C T I V E S

After reading this chapter, you should be able to understand and articulate answers to the following

questions:

1. What is the general environment and why is it important to organizations?

2. What are the features of Porter’s five forces industry analysis?

3. What are strategic groups and how are they useful to evaluating the environment?

Subway Is on a Roll

As shown in the highlighted countries, Subway is well on its way to building a worldwide sandwich

empire.

Image courtesy of Nomi887,http://en.wikipedia.org/wiki/File:Subway_world_map1edit .

Many observers were stunned in March 2011 when news broke that Subway had surpassed McDonald’s as

the biggest restaurant chain in the world. At the time of the announcement, Subway had 33,749 units

under its banner while McDonald’s had 32,737. [1] Despite its meteoric growth, many opportunities

remained. In China, for example, Subway had fewer than two hundred stores. In contrast, China hosts

Chapter 3 from Mastering Strategic Management was adapted by The Saylor Foundation under
a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested

by the work’s original creator or licensee. © 2014, The Saylor Foundation.

http://www.saylor.org/site/textbooks/Mastering%20Strategic%20Management

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more than 3,200 Kentucky Fried Chicken stores. Overall, Subway was on a roll, and this success seemed

likely to continue.

How had Subway surpassed a global icon like McDonald’s? One key factor was Subway’s efforts to provide

and promote healthy eating options. This emphasis took hold in the late 1990s when the American public

became captivated by college student Jared Fogle. As a freshman at Indiana University in 1998, the 425

pound Fogle decided to try to lose weight by walking regularly and eating a diet consisting of Subway

subs. Amazingly, Fogle dropped 245 pounds by February of 1999.

Subway executives knew that a great story had fallen into their laps. They decided to feature Fogle in

Subway’s advertising and soon he was a well-known celebrity. In 2007, Fogle met with President Bush

about nutrition and testified before the US Congress about the need for healthier snack options in schools.

Today, Fogle is the face of Subway and one of the few celebrities that are instantly recognizable based on

his first name alone. Much like Beyoncé and Oprah, you can mention “Jared” to almost anyone in America

and that person will know exactly of whom you are speaking. Subway’s line of Fresh Fit sandwiches is

targeted at prospective Jareds who want to improve their diets.

Because American diets contain too much salt, which can cause high blood pressure, salt levels in

restaurant food are attracting increased scrutiny. Subway responded to this issue in April 2011 when its

outlets in the United States reduced the amount of salt in all its sandwiches by at least 15 percent without

any alteration in taste. The Fresh Fit line of sandwiches received a more dramatic 28 percent reduction in

salt. These changes were enacted after customers of Subway’s outlets in New Zealand and Australia

embraced similar adjustments. Although the new sandwich recipes cost slightly more than the old ones,

Subway plans to absorb these costs rather than raising their prices. [2] This may be a wise strategy for

retaining customers, who have become very price sensitive because of the ongoing uncertainty

surrounding the American economy and the high unemployment.

[1] Kingsley, P. 2011, March 9. How a sandwich franchise ousted McDonald’s. The Guardian. Retrieved

from http://www.guardian.co.uk/lifeandstyle/2011/mar/09/subway-biggest -fast-food-chain

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[2] Riley, C. 2011, April. Subway lowers salt in its sandwiches. CNNMoney. Retrieved from

http://money.cnn.com/2011/04/18/news/companies/subway_salt/index.htm

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3.1 The Relationship between an Organization and Its
Environment

L E A R N I N G O B J E C T I V E S

1. Define the environment in the context of business.

2. Understand how an organization and its environment affect each other.

3. Learn the difference between the general environment and the

industry.

What Is the Environment?

For any organization, the environment consists of the set of external conditions and forces that have the

potential to influence the organization. In the case of Subway, for example, the environment contains its

customers, its rivals such as McDonald’s and Kentucky Fried Chicken, social trends such as the shift in

society toward healthier eating, political entities such as the US Congress, and many additional conditions

and forces.

It is useful to break the concept of the environment down into two components.

The general environment (or macroenvironment) includes overall trends and events in society such as

social trends, technological trends, demographics, and economic conditions. The

industry (or competitive environment) consists of multiple organizations that collectively compete with

one another by providing similar goods, services, or both.

Every action that an organization takes, such as raising its prices or launching an advertising campaign,

creates some degree of changes in the world around it. Most organizations are limited to influencing their

industry. Subway’s move to cut salt in its sandwiches, for example, may lead other fast-food firms to

revisit the amount of salt contained in their products. A few organizations wield such power and influence

that they can shape some elements of the general environment. While most organizations simply react to

major technological trends, for example, the actions of firms such as Intel, Microsoft, and Apple help

create these trends. Some aspects of the general environment, such as demographics, simply must be

taken as a given by all organizations. Overall, the environment has a far greater influence on most

organizations than most organizations have on the environment.

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Why Does the Environment Matter?

Understanding the environment that surrounds an organization is important to the executives in charge

of the organizations. There are several reasons for this. First, the environment provides resources that an

organization needs in order to create goods and services. In the seventeenth century, British poet John

Donne famously noted that “no man is an island.” Similarly, it is accurate to say that no organization is

self-sufficient. As the human body must consume oxygen, food, and water, an organization needs to take

in resources such as labor, money, and raw materials from outside its boundaries. Subway, for example,

simply would cease to exist without the contributions of the franchisees that operate its stores, the

suppliers that provide food and other necessary inputs, and the customers who provide Subway with

money through purchasing its products. An organization cannot survive without the support of its

environment.

Second, the environment is a source of opportunities and threats for an organization. Opportunities are

events and trends that create chances to improve an organization’s performance level. In the late 1990s,

for example, Jared Fogle’s growing fame created an opportunity for Subway to position itself as a healthy

alternative to traditional fast-food restaurants. Threats are events and trends that may undermine an

organization’s performance. Subway faces a threat from some upstart restaurant chains. Saladworks, for

example, offers a variety of salads that contain fewer than five hundred calories. Noodles and Company

offers a variety of sandwiches, pasta dishes, and salads that contain fewer than four hundred calories.

These two firms are much smaller than Subway, but they could grow to become substantial threats to

Subway’s positioning as a healthy eatery.

Executives must also realize that virtually any environmental trend or event is likely to create

opportunities for some organizations and threats for others. This is true even in extreme cases. In

addition to horrible human death and suffering, the March 2011 earthquake and tsunami in Japan

devastated many organizations, ranging from small businesses that were simply wiped out to corporate

giants such as Toyota whose manufacturing capabilities were undermined. As odd as it may seem,

however, these tragic events also opened up significant opportunities for other organizations. The

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rebuilding of infrastructure and dwellings requires concrete, steel, and other materials. Japanese concrete

manufacturers, steelmakers, and construction companies are likely to be very busy in the years ahead.

Third, the environment shapes the various strategic decisions that executives make as they attempt to lead

their organizations to success. The environment often places important constraints on an organization’s

goals, for example. A firm that sets a goal of increasing annual sales by 50 percent might struggle to

achieve this goal during an economic recession or if several new competitors enter its business.

Environmental conditions also need to be taken into account when examining whether to start doing

business in a new country, whether to acquire another company, and whether to launch an innovative

product, to name just a few.

K E Y T A K E A W A Y

An organization’s environment is a major consideration. The environment is the source of resources that

the organizations needs. It provides opportunities and threats, and it influences the various strategic

decisions that executives must make.

E X E R C I S E S

1. What are the three reasons that the environment matters?

2. Which of these three reasons is most important? Why?

3. Can you identify an environmental trend that no organizations can influence?

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3.2 Evaluating the General Environment

L E A R N I N G O B J E C T I V E S

1. Explain how PESTEL analysis is useful to organizations.

2. Be able to offer an example of each of the elements of the general environment.

The Elements of the General Environment: PESTEL Analysis

An organization’s environment includes factors that it can readily affect as well as factors that largely lay

beyond its influence. The latter set of factors are said to exist within the general environment. Because the

general environment often has a substantial influence on an organization’s level of success, executives

must track trends and events as they evolve and try to anticipate the implications of these trends and

events.

PESTEL analysis is one important tool that executives can rely on to organize factors within the general

environment and to identify how these factors influence industries and the firms within them. PESTEL is

an anagram, meaning it is a word that created by using parts of other words. In particular, PESTEL

reflects the names of the six segments of the general environment: (1) political, (2) economic, (3) social,

(4) technological, (5) environmental, and (6) legal. Wise executives carefully examine each of these six

segments to identify major opportunities and threats and then adjust their firms’ strategies accordingly.

P Is for “Political”

The political segment centers on the role of governments in shaping business. This segment includes

elements such as tax policies, changes in trade restrictions and tariffs, and the stability of governments.

Immigration policy is an aspect of the political segment of the general environment that offers important

implications for many different organizations. What approach to take to illegal immigration into the United

States from Mexico has been a hotly debated dilemma. Some hospital executives have noted that illegal

immigrants put a strain on the health care system because immigrants seldom can pay for medical

services and hospitals cannot by law turn them away from emergency rooms.

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Meanwhile, farmers argue that a tightening of immigration policy would be harmful because farmers rely

heavily on cheap labor provided by illegal immigrants. In particular, if farmers were forced to employ only

legal workers, this would substantially increase the cost of vegetables. Restaurant chains such as Subway

would then pay higher prices for lettuce, tomatoes, and other perishables. Subway would then have to

decide whether to absorb these costs or pass them along to customers by charging more for subs. Overall,

any changes in immigration policy will have implications for hospitals, farmers, restaurants, and many

other organizations.

E Is for “Economic”

The economic segment centers on the economic conditions within which organizations operate. It

includes elements such as interest rates, inflation rates, gross domestic product, unemployment rates,

levels of disposable income, and the general growth or decline of the economy.

The economic crisis of the late 2000s has had a tremendous negative effect on a vast array of

organizations. Rising unemployment discouraged consumers from purchasing expensive, nonessential

goods such as automobiles and television sets. Bank failures during the economic crisis led to a dramatic

tightening of credit markets. This dealt a huge blow to home builders, for example, who saw demand for

new houses plummet because mortgages were extremely difficult to obtain.

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Some businesses, however, actually prospered during the crisis. Retailers that offer deep discounts, such

as Dollar General and Walmart, enjoyed an increase in their customer base as consumers sought to find

ways to economize. Similarly, restaurants such as Subway that charge relatively low prices gained

customers, while high-end restaurants such as Ruth’s Chris Steak House worked hard to retain their

clientele.

S Is for “Social”

A generation ago, ketchup was an essential element of every American pantry and salsa was a relatively

unknown product. Today, however, food manufacturers sell more salsa than ketchup in the United States.

This change reflects the social segment of the general environment. Social factors include trends in

demographics such as population size, age, and ethnic mix, as well as cultural trends such as attitudes

toward obesity and consumer activism. The exploding popularity of salsa reflects the increasing number

of Latinos in the United States over time, as well as the growing acceptance of Latino food by other

ethnic groups.

Sometimes changes in the social segment arise from unexpected sources. Before World War II, the

American workforce was overwhelmingly male. When millions of men were sent to Europe and Asia to

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fight in the war, however, organizations had no choice but to rely heavily on female employees. At the

time, the attitudes of many executives toward women were appalling. Consider, for example, some of the

advice provided to male supervisors of female workers in the July 1943 issue of Transportation

Magazine: [1]

Older women who have never contacted the public have a hard time adapting themselves and are

inclined to be cantankerous and fussy. It’s always well to impress upon older women the importance

of friendliness and courtesy.

General experience indicates that “husky” girls—those who are just a little on the heavy side—are

more even tempered and efficient than their underweight sisters.

Give every girl an adequate number of rest periods during the day. You have to make some allowances

for feminine psychology. A girl has more confidence and is more efficient if she can keep her hair

tidied, apply fresh lipstick and wash her hands several times a day.

The tremendous contributions of female workers during the war contradicted these awful stereotypes. The

main role of women who assembled airplanes, ships, and other war materials was to support the military,

of course, but their efforts also changed a lot of male executives’ minds about what females could

accomplish within organizations if provided with opportunities. Inequities in the workplace still exist

today, but modern attitudes among men toward women in the workplace are much more enlightened than

they were in 1943.

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Women’s immense contributions to the war effort during World War II helped create positive

social changes in the ensuing decades.

Image courtesy of J. Howard Miller, http://en.wikipedia.org/wiki/File:We_Can_Do_It! .

Beyond being a positive social change, the widespread acceptance of women into the workforce has

created important opportunities for certain organizations. Retailers such as Talbot’s and Dillard’s sell

business attire to women. Subway and other restaurants benefit when the scarceness of time lead dual

income families to purchase take-out meals rather than cook at home.

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T Is for “Technological”

The technological segment centers on improvements in products and services that are provided by

science. Relevant factors include, for example, changes in the rate of new product development, increases

in automation, and advancements in service industry delivery. One key feature of the modern era

is the ever-increasing pace of technological innovation. In 1965, Intel cofounder Gordon E. Moore

offered an idea that has come to be known as Moore’s law. Moore’s law suggests that the performance

of microcircuit technology roughly doubles every two years. This law has been very accurate in the

decades since it was offered.

One implication of Moore’s law is that over time electronic devices can become smaller but also more

powerful. This creates important opportunities and threats in a variety of settings. Consider, for example,

photography. Just a decade ago, digital cameras were relatively large and they produced mediocre images.

With each passing year, however, digital cameras have become smaller, lighter, and better. Today, digital

cameras are, in essence, minicomputers, and electronics firms such as Panasonic have been able to

establish strong positions in the market. Meanwhile, film photography icon Kodak has been forced to

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abandon products that had been successful for decades. In 2005, the firm announced that it would stop

producing black-and-white photographic paper. Four years later, Kodachrome color film was phased out.

Successful technologies are also being embraced at a much faster rate than in earlier generations. The

Internet reached fifty million users in only four years. In contrast, television reached the same number of

users in thirteen years while it took radio thirty-eight years. This trend creates great opportunities for

organizations that depend on emerging technologies. Writers of applications for Apple’s iPad and other

tablet devices, for example, are able to target a fast-growing population of users. At the same time,

organizations that depend on technologies that are being displaced must be aware that consumers could

abandon them at a very rapid pace. As more and more Internet users rely on Wi-Fi service, for example,

demand for cable modems may plummet.

Although the influence of the technological segment on technology-based companies such as Panasonic

and Apple is readily apparent, technological trends and events help to shape low-tech businesses too. In

2009, Subway started a service called Subway Now. This service allows customers to place their orders in

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advance using text messages and avoid standing in line at the store. By offering customers this service,

Subway is also responding to a trend in the general environment’s social segment: the need to save time in

today’s fast-paced society.

E Is for “Environmental”

The environmental segment involves the physical conditions within which organizations operate. It

includes factors such as natural disasters, pollution levels, and weather patterns. The threat of

pollution, for example, has forced municipalities to treat water supplies with chemicals. These chemicals

increase the safety of the water but detract from its taste. This has created opportunities for businesses that

provide better-tasting water. Rather than consume cheap but bad-tasting tap water, many consumers

purchase bottled water. Indeed, according to the Beverage Marketing Corporation, the amount of bottled water

consumed by the average American increased from 1.6 gallons in 1976 to 28.3 gallons in 2006.[2]

At present, roughly one-third of Americans drink bottled water regularly.

As is the case for many companies, bottled water producers not only have benefited from the general

environment but also have been threatened by it. Some estimates are that 80 percent of plastic bottles end

up in landfills. This has led some socially conscious consumers to become hostile to bottled water.

Meanwhile, water filtration systems offered by Brita and other companies are a cheaper way to obtain

clean and tasty water. Such systems also hold considerable appeal for individuals who feel the need to cut

personal expenses due to economic conditions. In sum, bottled water producers have been provided

opportunities by the environmental segment of the general environment (specifically, the spread of poor-

tasting water to combat pollution) but are faced with threats from the social segment (the social

conscience of some consumers) and the economic segment (the financial concerns of other consumers).

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L Is for “Legal”

The legal segment centers on how the courts influence business activity. Examples of important legal

factors include employment laws, health and safety regulations, discrimination laws, and antitrust laws.

Intellectual property rights are a particularly daunting aspect of the legal segment for many organizations.

When a studio such as Pixar produces a movie, a software firm such as Adobe revises a program, or a

video game company such as Activision devises a new game, these firms are creating intellectual property.

Such firms attempt to make profits by selling copies of their movies, programs, and games to individuals.

Piracy of intellectual property—a process wherein illegal copies are made and sold by others—poses a

serious threat to such profits. Law enforcement agencies and courts in many countries, including the

United States, provide organizations with the necessary legal mechanisms to protect their intellectual

property from piracy.

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In other countries, such as China, piracy of intellectual property is quite common. Three other general

environment segments play a role in making piracy a major concern. First, in terms of the social segment,

China is the most populous country in the world. Second, in terms of the economic segment, China’s

affluence is growing rapidly. Third, in terms of the technological segment, rapid advances in computers

and communication have made piracy easier over time. Taken together, these various general

environment trends lead piracy to be a major source of angst for firms that rely on intellectual property to

deliver profits.

K E Y T A K E A W A Y

To transform an avocado into guacamole, a chef may choose to use a mortar and pestle. A mortar is a

mashing device that is shaped liked a baseball bat, while a pestle is a sturdy bowl within which the

mashing takes place. Similarly, PESTEL reflects the general environment factors—political, economic,

social, technological, environmental, and legal—that can crush an organization. In many cases, executives

can prevent such outcomes by performing a PESTEL analysis to diagnose where in the general

environment important opportunities and threats arise.

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E X E R C I S E S

1. What does each letter of PESTEL mean?

2. Using a recent news article, identify a trend that has a positive and negative implication for a particular

industry.

3. Can you identify a general environment trend that has positive implications for nursing homes but

negative implications for diaper makers?

4. Are all six elements of PESTEL important to every organization? Why or why not?

5. What is a key trend for each letter of PESTEL and one industry or firm that would be affected by that

trend?

[1] 1943 guide to hiring women. 2007, September–October. Savvy & Sage, p. 16.

[2] Plastic recycling facts. earth911.com. Retrieved from http://earth911.com/recycling/plastic/plastic-bottle-

recycling-facts

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3.3 Evaluating the Industry

L E A R N I N G O B J E C T I V E S

1. Explain how five forces analysis is useful to organizations.

2. Be able to offer an example of each of the five forces.

The Purpose of Five Forces Analysis

Visit the executive suite of any company and the chances are very high that the chief executive officer and

her vice presidents are relying on five forces analysis to understand their industry. Introduced more than

thirty years ago by Professor Michael Porter of the Harvard Business School, five forces analysis has long

been and remains perhaps the most popular analytical tool in the business world.

Adapted from Porter, M. (1980). Competitive strategy. New York: Free Press.

The purpose of five forces analysis is to identify how much profit potential exists in an industry. To do so,

five forces analysis considers the interactions among the competitors in an industry, potential new

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entrants to the industry, substitutes for the industry’s offerings, suppliers to the industry, and the

industry’s buyers. [1] If none of these five forces works to undermine profits in the industry, then the profit

potential is very strong. If all the forces work to undermine profits, then the profit potential is very weak.

Most industries lie somewhere in between these extremes. This could involve, for example, all five forces

providing firms with modest help or two forces encouraging profits while the other three undermine

profits. Once executives determine how much profit potential exists in an industry, they can then decide

what strategic moves to make to be successful. If the situation looks bleak, for example, one possible move

is to exit the industry.

The Rivalry among Competitors in an Industry

The competitors in an industry are firms that produce similar products or services. Competitors use a

variety of moves such as advertising, new offerings, and price cuts to try to outmaneuver one another to

retain existing buyers and to attract new ones. Because competitors seek to serve the same general set of

buyers, rivalry can become intense. Subway faces fierce competition within the restaurant business,

for example. This is illustrated by a quote from the man who built McDonald’s into a worldwide icon.

Former CEO Ray Kroc allegedly once claimed that “if any of my competitors were

drowning, I’d stick a hose in their mouth.” While this sentiment was (hopefully) just a figure of speech,

the announcement in March 2011 that Subway had surpassed McDonald’s in terms of numbers of stores

might lead the hostility of McDonald’s toward its rival to rise.

Understanding the intensity of rivalry among an industry’s competitors is important because the degree of

intensity helps shape the industry’s profit potential. Of particular concern is whether firms in an industry

compete based on price. When competition is bitter and cutthroat, the prices competitors charge—and

their profit margins—tend to go down. If, on the other hand, competitors avoid bitter rivalry, then price

wars can be avoided and profit potential increases.

Every industry is unique to some degree, but there are some general characteristics that help to predict

the likelihood that fierce rivalry will erupt. Rivalry tends to be fierce, for example, to the extent that the

growth rate of demand for the industry’s offerings is low (because a lack of new customers forces firms to

compete more for existing customers), fixed costs in the industry are high (because firms will fight to have

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enough customers to cover these costs), competitors are not differentiated from one another (because this

forces firms to compete based on price rather than based on the uniqueness of their offerings),

and exit barriers in the industry are high (because firms do not have the option of leaving the industry

gracefully). Exit barriers can include emotional barriers, such as the bad publicity associated with massive

layoffs, or more objective reasons to stay in an industry, such as a desire to recoup considerable costs that

might have been previously spent to enter and compete.

Industry concentration is an important aspect of competition in many industries. Industry concentration

is the extent to which a small number of firms dominate an industry. Among circuses, for example,

the four largest companies collectively own 89 percent of the market. Meanwhile, these companies tend

to keep their competition rather polite. Their advertising does not lampoon one another, and they do not

put on shows in the same city at the same time. This does not guarantee that the circus industry will be

profitable; there are four other forces to consider as well as the quality of each firm’s strategy.

But low levels of rivalry certainly help build the profit potential of the industry.

In contrast, the restaurant industry is fragmented, meaning that the largest rivals control just a small

fraction of the business and that a large number of firms are important participants. Rivalry in

fragmented industries tends to become bitter and fierce. Quiznos, a chain of sub shops that is roughly 15

percent the size of Subway, has directed some of its advertising campaigns directly at Subway, including

one depicting a fictional sub shop called “Wrong Way” that bore a strong resemblance to Subway.

Within fragmented industries, it is almost inevitable that over time some firms will try to steal customers

from other firms, such as by lowering prices, and that any competitive move by one firm will be matched

by others. In the wake of Subway’s success in offering foot-long subs for $5, for example, Quiznos has

matched Subway’s price. Such price jockeying is delightful to customers, of course, but it tends to reduce

prices (and profit margins) within an industry. Indeed, Quiznos later escalated its attempt to attract

budget-minded consumers by introducing a flatbread sandwich that cost only $2. Overall, when choosing

strategic moves, Subway’s presence in a fragmented industry forces the firm to try to anticipate not only

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how fellow restaurant giants such as McDonald’s and Burger King will react but also how smaller sub

shop chains like Quiznos and various regional and local players will respond.

The Threat of Potential New Entrants to an Industry

Competing within a highly profitable industry is desirable, but it can also attract unwanted attention from

outside the industry. Potential new entrants to an industry are firms that do not currently compete in the

industry but may in the future. New entrants tend to reduce the profit potential of an industry by increasing

its competitiveness. If, for example, an industry consisting of five firms is entered by two new firms, this means

that seven rather than five firms are now trying to attract the same general pool of customers. Thus executives

need to analyze how likely it is that one or more new entrants will enter their industry as part of their effort

to understand the profit potential that their industry offers.

New entrants can join the fray within an industry in several different ways. New entrants can be start-up

companies created by entrepreneurs, foreign firms that decide to enter a new geographic area, supplier

firms that choose to enter their customers’ business, or buyer firms that choose to enter their suppliers’

business. The likelihood of these four paths being taken varies across industries. Restaurant firms such as

Subway, for example, do not need to worry about their buyers entering the industry because they sell

directly to individuals, not to firms. It is also unlikely that Subway’s suppliers, such as farmers, will make

a big splash in the restaurant industry.

On the other hand, entrepreneurs launch new restaurant concepts every year, and one or more of these

concepts may evolve into a fearsome competitor. Also, competitors based overseas sometimes enter

Subway’s core US market. In February 2011, Australia-based Oporto opened its first US store in

California. [2] Oporto operates more than 130 chicken burger restaurants in its home country. Time will

tell whether this new entrant has a significant effect on Subway and other restaurant firms. Because a

chicken burger closely resembles a hamburger, McDonald’s and Burger King may have more to fear from

Oporto than does Subway.

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Every industry is unique to some degree, but some general characteristics help to predict the likelihood

that new entrants will join an industry. New entry is less likely, for example, to the extent that existing

competitors enjoy economies of scale (because new entrants struggle to match incumbents’ prices),

capital requirements to enter the industry are high (because new entrants struggle to gather enough cash

to get started), access to distribution channels is limited (because new entrants struggle to get their

offerings to customers), governmental policy discourages new entry, differentiation among existing

competitors is high (because each incumbent has a group of loyal customers that enjoy its unique

features), switching costs are high (because this discourages customers from buying a new entrant’s

offerings), expected retaliation from existing competitors is high, and cost advantages independent of size

exist.

The Threat of Substitutes for an Industry’s Offerings

Executives need to take stock not only of their direct competition but also of players in other industries

that can steal their customers. Substitutes are offerings that differ from the goods and services provided

by the competitors in an industry but that fill similar needs to what the industry offers.How strong of a

threat substitutes are depends on how effective substitutes are in serving an industry’s customers.

At first glance, it could appear that the satellite television business is a tranquil one because there are only

two significant competitors—DIRECTV and DISH Network. These two industry giants, however, face a

daunting challenge from substitutes. The closest substitute for satellite television is provided by cable

television firms, such as Comcast and Charter Communications. DIRECTV and DISH Network also need

to be wary of streaming video services, such as Netflix, and video rental services, such as Redbox. The

availability of viable substitutes places stringent limits on what DIRECTV and DISH Network can charge

for their services. If the satellite television firms raise their prices, customers will be tempted to obtain

video programs from alternative sources. This limits the profit potential of the satellite television

business.

In other settings, viable substitutes are not available, and this helps an industry’s competitors enjoy

profits. Like lightbulbs, candles can provide lighting within a home. Few consumers, however, would be

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willing to use candles instead of lightbulbs. Candles simply do not provide as much light as lightbulbs.

Also, the risk of starting a fire when using candles is far greater than the fire risk of using lightbulbs.

Because candles are a poor substitute, lightbulb makers such as General Electric and Siemens do not need

to fear candle makers stealing their customers and undermining their profits.

The dividing line between which firms are competitors and which firms offer substitutes is a challenging

issue for executives. Most observers would agree that, from Subway’s perspective, sandwich maker

Quiznos should be considered a competitor and that grocery stores such as Kroger offer a substitute for

Subway’s offerings. But what about full-service restaurants, such as Ruth’s Chris Steak House, and “fast

causal” outlets, such as Panera Bread? Whether firms such as these are considered competitors or

substitutes depends on how the industry is defined. Under a broad definition—Subway competes in the

restaurant business—Ruth’s Chris and Panera should be considered competitors. Under a narrower

definition—Subway competes in the sandwich business—Panera is a competitor and Ruth’s Chris is a

substitute. Under a very narrow definition—Subway competes in the sub sandwich business—both Ruth’s

Chris and Panera provide substitute offerings. Thus clearly defining a firm’s industry is an important step

for executives who are performing a five forces analysis.

The Power of Suppliers to an Industry

Suppliers provide inputs that the firms in an industry need to create the goods and services that they in

turn sell to their buyers. A variety of supplies are important to companies, including raw materials,

financial resources, and labor. For restaurant firms such as Subway, key suppliers include such firms as Sysco

that bring various foods to their doors, restaurant supply stores that sell kitchen equipment, and

employees that provide labor.

The relative bargaining power between an industry’s competitors and its suppliers helps shape the profit

potential of the industry. If suppliers have greater leverage over the competitors than the competitors

have over the suppliers, then suppliers can increase their prices over time. This cuts into competitors’

profit margins and makes them less likely to be prosperous. On the other hand, if suppliers have less

leverage over the competitors than the competitors have over the suppliers, then suppliers may be forced

to lower their prices over time. This strengthens competitors’ profit margins and makes them more likely

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to be prosperous. Thus when analyzing the profit potential of their industry, executives must carefully

consider whether suppliers have the ability to demand higher prices.

Every industry is unique to some degree, but some general characteristics help to predict the likelihood

that suppliers will be powerful relative to the firms to which they sell their goods and services. Suppliers

tend to be powerful, for example, to the extent that the suppliers’ industry is dominated by a few

companies, if it is more concentrated than the industry that it supplies and/or if there is no effective

substitute for what the supplier group provides. These circumstances restrict industry competitors’ ability

to shop around for better prices and put suppliers in a position of strength.

Supplier power is also stronger to the extent that industry members rely heavily on suppliers to be

profitable, industry members face high costs when changing suppliers, and suppliers’ products are

differentiated. Finally, suppliers possess power to the extent that they have the ability to become a new

entrant to the industry if they wish. This is a strategy calledforward vertical integration. Ford, for

example, used a forward vertical integration strategy when it purchased rental car company (and Ford

customer) Hertz. A difficult financial situation forced Ford to sell Hertz for $5.6 billion in 2005. But

before rental car companies such as Avis and Thrifty drive too hard of a bargain when buying cars from an

automaker, their executives should remember that automakers are much bigger firms than are rental car

companies. The executives running the automaker might simply decide that they want to enjoy the rental

car company’s profits themselves and acquire the firm.

Strategy at the Movies

Flash of Genius

When dealing with a large company, a small supplier can get squashed like a bug on a windshield. That is

what college professor and inventor Dr. Robert Kearns found out when he invented intermittent

windshield wipers in the 1960s and attempted to supply them to Ford Motor Company. As depicted in the

2008 movie Flash of Genius, Kearns dreamed of manufacturing the wipers and selling them to Detroit

automakers. Rather than buy the wipers from Kearns, Ford replicated the design. An angry Kearns then

spent many years trying to hold the firm accountable for infringing on his patent. Kearns eventually won

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in court, but he paid a terrible personal price along the way, including a nervous breakdown and

estrangement from his family. Kearns’s lengthy battle with Ford illustrates the concept of bargaining

power that is central to Porter’s five forces model. Even though Kearns created an exceptional new

product, he had little leverage when dealing with a massive, well-financed automobile manufacturer.

The Power of an Industry’s Buyers

Buyers purchase the goods and services that the firms in an industry produce. For Subway and other

restaurants, buyers are individual people. In contrast, the buyers for some firms are other firms rather than

end users. For Procter & Gamble, for example, buyers are retailers such as Walmart and Target who

stock Procter & Gamble’s pharmaceuticals, hair care products, pet supplies, cleaning products, and other

household goods on their shelves.

The relative bargaining power between an industry’s competitors and its buyers helps shape the profit

potential of the industry. If buyers have greater leverage over the competitors than the competitors have

over the buyers, then the competitors may be forced to lower their prices over time. This weakens

competitors’ profit margins and makes them less likely to be prosperous. Walmart furnishes a good

example. The mammoth retailer is notorious among manufacturers of goods for demanding lower and

lower prices over time. [3] In 2008, for example, the firm threatened to stop selling compact discs if record

companies did not lower their prices. Walmart has the power to insist on price concessions because its

sales volume is huge. Compact discs make up a small portion of Walmart’s overall sales, so exiting the

market would not hurt Walmart. From the perspective of record companies, however, Walmart is their

biggest buyer. If the record companies were to refuse to do business with Walmart, they would miss out

on access to a large portion of consumers.

On the other hand, if buyers have less leverage over the competitors than the competitors have over the

buyers, then competitors can raise their prices and enjoy greater profits. This description fits the textbook

industry quite well. College students are often dismayed to learn that an assigned textbook costs $150 or

more. Historically, textbook publishers have been able to charge high prices because buyers had no

leverage. A student enrolled in a class must purchase the specific book that the professor has selected.

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Used copies are sometimes a lower-cost option, but textbook publishers have cleverly worked to

undermine the used textbook market by releasing new editions after very short periods of time.

Of course, the presence of a very high profit industry is attractive to potential new entrants. Firms such as

the publisher of this book, have entered the textbook market with lower-priced offerings. Time will tell

whether such offerings bring down textbook prices. Like any new entrant, upstarts in the textbook

business must prove that they can execute their strategies before they can gain widespread acceptance.

Overall, when analyzing the profit potential of their industry, executives must carefully consider whether

buyers have the ability to demand lower prices. In the textbook market, buyers do not.

Every industry is unique to some degree, but some general characteristics help to predict the likelihood

that buyers will be powerful relative to the firms from which they purchases goods and services. Buyers

tend to be powerful, for example, to the extent that there are relatively few buyers compared with the

number of firms that supply the industry, the industry’s goods or services are standardized or

undifferentiated, buyers face little or no switching costs in changing vendors, the good or service

purchased by the buyers represents a high percentage of the buyer’s costs, and the good or service is of

limited importance to the quality or price of the buyer’s offerings.

Finally, buyers possess power to the extent that they have the ability to become a new entrant to the

industry if they wish. This strategy is called backward vertical integration. DIRECTV used to be an

important customer of TiVo, the pioneer of digital video recorders. This situation changed, however, when

executives at DIRECTV grew weary of their relationship with TiVo. DIRECTV then used a backward

vertical integration strategy and started offering DIRECTV-branded digital video recorders. Profits that

used to be enjoyed by TiVo were transferred at that point to DIRECTV.

The Limitations of Five Forces Analysis

Five forces analysis is useful, but it has some limitations too. The description of five forces analysis

provided by its creator, Michael Porter, seems to assume that competition is a zero-sum game, meaning

that the amount of profit potential in an industry is fixed. One implication is that, if a firm is to make

more profit, it must take that profit from a rival, a supplier, or a buyer. In some settings, however,

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collaboration can create a larger pool of profit that benefits everyone involved in the collaboration. In

general, collaboration is a possibility that five forces analysis tends to downplay. The relationships among

the rivals in an industry, for example, are depicted as adversarial. In reality, these relationships are

sometimes adversarial and sometimes collaborative. General Motors and Toyota compete fiercely all

around the world, for example, but they also have worked together in joint ventures. Similarly, five forces

analysis tends to portray a firm’s relationships with its suppliers and buyers as adversarial, but many

firms find ways to collaborate with these parties for mutual benefit. Indeed, concepts such as just-in-time

inventory systems depend heavily on a firm working as a partner with its suppliers and buyers.

K E Y T A K E A W A Y

“How much profit potential exists in our industry?” is a key question for executives. Five forces analysis

provides an answer to this question. It does this by considering the interactions among the competitors in

an industry, potential new entrants to the industry, substitutes for the industry’s offerings, suppliers to

the industry, and the industry’s buyers.

E X E R C I S E S

1. What are the five forces?

2. Is there an aspect of industry activity that the five forces seems to leave out?

3. Imagine you are the president of your college or university. Which of the five forces would be most

important to you? Why?

[1] Porter, M. E. 1979, March–April. How competitive forces shape strategy. Harvard Business Review, 137–156.

[2] Odell, K. 2011, February 22. Portuguese-influenced Australian chicken burger chain, Oporto, comes to

SoCal. Eater LA. Retrieved from

http://la.eater.com/archives/2011/02/22/portugueseinfluenced_australian_chicken_burger_chain_oporto_comes

_to_socal.php

[3] Bianco, B., & Zellner, W. 2003, October 6. Is Wal-Mart too powerful? Bloomberg Businessweek. Retrieved

fromhttp://www.businessweek.com/magazine/content/03_40/b3852001_mz001.htm

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3.4 Mapping Strategic Groups

L E A R N I N G O B J E C T I V E S

1. Understand what strategic groups are.

2. Learn three ways that analyzing strategic groups is useful to organizations.

The analysis of the strategic groups in an industry can offer important insights to executives. Strategic

groups are sets of firms that follow similar strategies to one another. [1] More specifically, a strategic

group consists of a set of industry competitors that have similar characteristics to one another but

differ in important ways from the members of other groups.

Understanding the nature of strategic groups within an industry is important for at least three

reasons. First, emphasizing the members of a firm’s group is helpful because these firms are usually

its closest rivals. When assessing their firm’s performance and considering strategic moves, the other

members of a group are often the best referents for executives to consider. In some cases, one or

more strategic groups in the industry are irrelevant. Subway, for example, does not need to worry

about competing for customers with the likes of Ruth’s Chris Steak House and P. F. Chang’s. This is

partly because firms confront mobility barriers that make it difficult or illogical for a particular firm to

change groups over time. Because Subway is unlikely to offer a gourmet steak as well as the

experience offered by fine-dining outlets, they can largely ignore the actions taken by firms in that

restaurant industry strategic group.

Second, the strategies pursued by firms within other strategic groups highlight alternative paths to

success. A firm may be able to borrow an idea from another strategic group and use this idea to

improve its situation. During the recession of the late 2000s, midquality restaurant chains such as

Applebee’s and Chili’s used a variety of promotions such as coupons and meal combinations to try to

attract budget-conscious consumers. Firms such as Subway and Quiznos that already offered low-

priced meals still had an inherent price advantage over Applebee’s and Chili’s, however: There is no

tipping expected at the former restaurants, but there is at the latter. It must have been tempting to

executives at Applebee’s and Chili’s to try to expand their appeal to budget-conscious consumers by

experimenting with operating formats that do not involve tipping.

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Third, the analysis of strategic groups can reveal gaps in the industry that represent untapped

opportunities. Within the restaurant business, for example, it appears that no national chain offers

both very high-quality meals and a very diverse menu. Perhaps the firm that comes the closest to

filling this niche is the Cheesecake Factory, a chain of approximately 150 outlets whose menu

includes more than 200 lunch, dinner, and dessert items. Ruth’s Chris Steak House already offers

very high quality food; its executives could consider moving the firm toward offering a very diverse

menu as well. This would involve considerable risk, however. Perhaps no national chain offers both

very high quality meals and a very diverse menu because doing so is extremely difficult.

Nevertheless, examining the strategic groups in an industry with an eye toward untapped

opportunities offers executives a chance to consider novel ideas.

K E Y T A K E A W A Y

Examination of the strategic groups in an industry provides a firm’s executives with a better

understanding of their closest rivals, reveals alternative paths to success, and highlights untapped

opportunities.

E X E R C I S E S

1. What other colleges and universities are probably in your school’s strategic group?

2. From what other groups of colleges and universities could your school learn? What specific ideas could be

borrowed from these groups?

[1] Hunt, M. S. 1972. Competition in the major home appliance industry 1960–1970. (Unpublished doctoral
dissertation). Harvard University, Cambridge, MA; Short, J. C., Ketchen, D. J., Palmer, T., & Hult, G. T. 2007. Firm,
strategic group, and industry influences on performance. Strategic Management Journal, 28, 147–167.

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3.5 Conclusion

This chapter explains several considerations for examining the external environment that executives

must monitor to lead their organizations strategically. Executives must be aware of trends and

changes in the general environment, as well as the condition of their specific industry, as elements of

both have the potential to change considerably over time. While PESTEL analysis provides a useful

framework to understand the general environment, Porter’s five forces is helpful to make sense of an

industry’s profit potential. Strategic groups are valuable for understanding close competitors that

affect a firm more than other industry members. When executives carefully monitor their

organization’s environment using these tools, they greatly increase the chances of their organization

being successful.

E X E R C I S E S

1. In groups of four or five, use the PESTEL framework to identify elements from each factor of the general

environment that could have a large effect on your future career.

2. Use Porter’s five forces analysis to analyze an industry in which you might like to work in the future.

Discuss the implications your results may have on the salary potential of jobs in that industry and how

that could impact your career plans.

Porter’s (1980) Generic Strategies as Determinants of Strategic Group Membership and
Organizational Performance
Author(s): Gregory G. Dess and Peter S. Davis
Source: The Academy of Management Journal, Vol. 27, No. 3 (Sep., 1984), pp. 467-488
Published by: Academy of Management
Stable URL: https://www.jstor.org/stable/256040
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?Academy of Management Journal
1984, Vol. 27, No. 3, 467-488.

Porter’s (1980) Generic Strategies
as Determinants of

Strategic Group Membership
and Organizational Performance1

GREGORY G. DESS

Florida State University
PETER S. DAVIS

University of Oregon

A multimethod, multivariate analysis of “intended”
strategies provides empirical support for the presence of
strategic groups based upon Porter’s (1980) generic strat-
egies. Variations in intraindustry profitability and growth
are found to be related to strategic group membership.
Firms identified with at least one generic strategy outper-
formed firms identified as “stuck in the middle.”

The primary purpose of this paper is to demonstrate the viability and
usefulness of categorizing firms within an industry into strategic groups
on the basis of their intended strategies. These intended strategies may be
identified on the basis of Porter’s (1980) generic strategies-differentia-
tion, overall low cost, and focus. This study consists of three distinct but
interrelated phases. Phase 1, the field study, examines the relationship be-
tween a firm’s “intended or espoused” (Mintzberg, 1978) strategy-rep-
resented by the competitive methods (e.g., competitive pricing) considered
most important by the firm’s top management team-and the presence of
strategic orientations within an industry. These strategic orientations are
classified on the basis of which of the three alternative generic strategies
they appear to represent most closely. Phase 2 consists of a panel of ex-
perts who assess the importance of each of the identified competitive
methods for each generic strategy. The use of this panel serves to corroborate
the researchers’ inferences drawn from the field study. Phase 3 uses the
perceptions of the chief executive officers to cluster firms that exhibit a

‘The authors wish to express their appreciation for the thoughtful comments made by Alan Bauer-
schmidt, Danny Miller, and Carolyn Woo on an earlier draft of this paper, as well as the helpful sug-
gestions of three anonymous reviewers. An earlier version of this paper was presented at the 1982 Acad-
emy of Management Meetings in New York. This research was supported, in part, by grants from
the Division of Research, College of Business Administration, University of South Carolina, and the
Edna Benson Foundation at the University of Washington.

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Academy of Management Journal

similar strategic orientation into distinct groups. Measures of performance
for firms comprising each strategic group are assessed to detect whether
significant differences exist between strategic groups within an industry.
Differences in performance have important implications for both practic-
ing managers and academicians interested in the strategic group concept.

Theoretical Background and Empirical Research

The field of strategic management has shown a noticeable shift away from
the atomistic view of strategy-in which each firm is considered unique
in all aspects-toward a new view that supports the recognition of com-
monalities that exist among firms. These configurations have been referred
to as “gestalts” (Hambrick, 1983b; Miller, 1981), said to represent “tight-
ly integrated and mutually supportive parts, the significance of which can
best be understood by making reference to the whole” (Miller, 1981, p.
3). Similarly, Hatten (1979), in his discussion of strategic groups within
an industry, recognized that subgroups of firms employ different mixes
of what are substantially the same strategic variables. Thus, strategic groups
provide a useful intermediate frame of reference between viewing the in-
dustry as a whole and considering each firm separately (Porter, 1980). The
emerging concept of a strategic group of firms provides a framework for
answering recent calls for empirical “evidence that strategies differ among
firms and that better strategies make a difference in performance results”
(Schendel & Hofer, 1979, p. 517).

The presence of groups of firms within an industry following similar strat-
egies has been identified in the home appliance (Hunt, 1972), the chemical
process (Newman, 1973), the consumer goods (Porter, 1973), and the brew-
ing industry (Patton, 1976). Quantitative models of the brewing industry
(Hatten & Schendel, 1977; Patton, 1976) recognized that firms within an
industry differ along dimensions other than size and market share.

Unfortunately, most of the multivariate measurement of strategy used
to develop the strategic groups concept has relied almost exclusively on mea-
sures of implemented strategy. One problem with existing typologies has
been that few of the propositions regarding the types of strategies a firm
may follow to become a leader in its market have been tested with data
different from that used to develop them (Schendel & Hofer, 1979). This
methodological limitation may lead to findings that lack generalizability
and that are incapable of confirmation in other research settings. Another
problem is that existing typologies tend to put business unit strategies into
generic categories based on the size or market share of the firm and its rate
of return on investment (Hatten, 1974; Porter, 1979). Such a narrow ap-
proach limits the applicability of many typologies to a rather select group
of firms within an industry and presents little in the way of prescriptions
useful across size categories within an industry. It is believed that Porter’s
framework of generic strategies and competitive dimensions provides a

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potentially valuable research tool for classifying the strategies of all com-
petitors within an industry.

Many previous models of strategic groups (Hambrick, 1983a; Porter,
1974) have implied that organizational strategies could best be inferred by
analyzing patterns in organizational resource allocations. However, the re-
liance upon measures of resource allocations may inhibit recognition of
the central thread or underlying logic of a firm’s strategy by failing to con-
sider the role of strategic choice as exercised by key organizational members.
The notion of strategic choice recognizes that similar organizations operating
within the same environment may choose to address that environment dif-
ferently based on the strategic orientation of their management (Ackoff,
1970). Indeed, the element of strategic choice is inherent within the con-
cept of strategy, which is viewed as implying that “the organization pur-
sues a purposive, directive course, whether it is described in terms of a pat-
tern of decisions, or in terms of the goals, plans, or intentions of the
organization” (White & Hamermesh, 1981, p. 216, emphasis added). Pre-
vious evidence for the importance of strategic choice for market behavior,
although compelling, has relied on indirect measures to show that firms
follow different strategies within an industry (Caves, 1980).

Hambrick (1980) recognized that it should be possible to develop multi-
variate measures of intended strategies as well as implemented strategies.
Demonstration of the ability of a multivariate measure of strategic choice
to classify firms into homogeneous groups based on Porter’s model of
generic strategies would provide much needed empirical evidence, not only
for the construct validity of Porter’s (1980) typology but also for the no-
tion of strategic groups in general.

Porter develops three potentially successful generic strategies for creating
a defensible position and outperforming competitors in a given industry.
The first, overall cost leadership, although not neglecting quality, service,
and other areas, emphasizes low cost relative to competitors. The second
strategy, differentiation, requires that the firm create something, either a
product or a service, that is recognized industrywide as being unique, thus
permitting the firm to command higher than average prices. The third is
a focus strategy, in which the firm concentrates on a particular group of
customers, geographic markets, or product line segments. These three
generic strategies represent three broad types of strategic groups, and thus
the choice of strategy “can be viewed as the choice of which strategic group
to compete in” (Porter, 1980, p. 149). Firms oriented toward specific strat-
egies should outperform firms characterized by Porter as “stuck in the mid-
dle.” Porter maintains that this latter class of firms, by failing to develop
its strategy along at least one of these three categories, is “almost guaran-
teed low profitability” (1980, p. 41).

The underlying proposition of this paper is that variations in intraindustry
profitability and growth may be explained on the basis of strategic group
membership. The strategic groups model also serves to explain differences
in performance among firms of equivalent sizes: even when firms are divided

1984 Dess and Davis 469

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Academy of Management Journal

by size class within an industry, each division may contain members of more
than one strategic group.

Method

Overview

The field study was comprised of responses from executives of a sample
of firms that were used to develop the dimensions associated with the three
generic strategies offered by Porter. For the second phase, a panel of ex-
perts from the academic community provided recommendations regarding
the appropriate content of each of Porter’s generic strategies. The use of
a panel of experts in strategy research follows the recommendations of Har-
rigan (1983) for the refinement and corroboration of investigator inferences
developed from field research. Thus, the first two phases of the study en-
abled the researchers to combine the descriptive capability of field research
with the normative recommendations obtained from a panel of experts.

Phase 3 of the study classified firms with similar strategic orientations
into distinct groups. These groups were developed from the responses of
the subsample of firms in which the chief executive officer was the primary
respondent. Measures of performance for firms comprising each strategic
group were assessed to detect the presence of significant differences among
the strategic groups.

Phase 1: Field Study

Strategic orientations within an industry were seen by the researchers as
represented by the views of top management teams about the competitive
methods firms use in their industry. When the research instrument was con-
structed it was assumed that all members of the top management team had
knowledge of the strategy of their firm, and that the strategy could be in-
ferred on the basis of the emphasis or importance given various competitive
methods available to the firm.

Porter recognizes that the strategies that companies use to compete in
an industry can differ in a wide variety of ways, and he proposes a number
of “strategic dimensions” that should capture the possible differences among
the strategic options of companies in a given industry. These dimensions
are comprised of competitive methods that include brand identification,
channel selection, technological leadership, cost position, service, and
leverage, among others (Porter, 1980). These competitive methods provide
a means for characterizing the strategies of competitors within an industry.
A group of firms within an industry that follows the same or a similar strat-
egy (i.e., emphasizes similar competitive methods) will comprise a strategic
group (Porter, 1980).

Research Instrument. Following a review of Porter (1980), an instrument
was inductively derived to evaluate the various competitive methods that

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might be used to characterize a particular generic strategy. The content
validity of the questionnaire was enhanced through a review of question-
naire items used by previous strategy researchers (Bourgeois, 1980; Child,
1975; Khandwalla, 1976). In order to pretest the research instrument in a
field setting, the CEOs of four manufacturing firms, not included in the
final sample, were interviewed to ascertain the comprehensiveness and phras-
ing of the questionnaire items.

Next, the relevance of particular competitive methods for firms within
the industry was ascertained through the use of a semi-structured interview
with the chief executive officer (or designated executive) in each of the sample
firms within the industry chosen for the study-the paints and allied prod-
ucts industry. During the interview the executive was asked to identify those
members of the top management team who are most influential in the mak-
ing of strategic decisions for the firm. By incorporating the richness of anec-
dotal information about the firm, the industry within which it competes,
and methods of competition in that industry, the researchers were able to
modify the instrument in order to enhance its ability to capture competi-
tive methods that identify the strategic orientation of a firm’s decision
makers. In order to generalize across the sample, the same instrument was
administered to all respondents.

The interviews with the executives of the pretest and sample firms led
to several improvements in both the wording and the composition of the
list of competitive methods. A modification that helped refine the final in-
strument illustrates the benefit of on-site interviews. The presence of in-
tense price competition was mentioned by several respondents and suggested
the inclusion of the item “competitive pricing.” The sentiments of the ex-
ecutives in this regard are largely consistent with a U.S. Department of Com-
merce industry report that stated that the profit-after-taxes as a percent
of sales for the paint industry (the site of this study) was 2.25 percent, com-
pared to an average for all manufacturing industries of 5.25 percent. The
report further suggested that the depressed profits were largely attributed
to a price-cost squeeze, reflected by the 1978 Producers Price Index for
paint of 192.3 (1967 = 100) compared to the average for paint raw materials
of 212.7 (U.S. Industrial Outlook, 1980).

Sample and Data Analysis. Several criteria were used in the selection of
firms within the paints and allied products industry. First, the 4-digit Stan-
dard Industrial Classification (SIC) code was chosen as an appropriate mea-
sure of the industrial environment. This unit of analysis is supported by
Porter (1980). Second, the output of firms had to be concentrated in one
line of business to avoid confusion between methods used in competing
in multiple businesses. The criterion followed Rumelt’s (1974) “single busi-
ness” or “dominant business” categorization: that is, at least 70 percent
of the firm’s total sales had to be within a given 4-digit SIC industry. Third,
the organization had to be an autonomous, self-contained entity. Thus,
the researchers were able to consider corporate-level and business-level strat-
egies as synonymous (Hofer, 1975). Fourth, the organizations had to be

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relatively homogeneous in size. This criterion permitted the researchers to
control for any potentially confounding effects imposed by wide variations
in organizational resources and scope of operations. Fifth, the organiza-
tions had to be similar in the technology they employed. Woodward’s (1965)
classification of manufacturing processes was used to classify the sample
organizations as using a batch technology. Finally, the organizations had
to be located within a limited geographic area in order to facilitate the per-
formance of the on-site interviews.

Based on an analysis of forces that drive competition, Porter (1980) clas-
sifies industries as representative of one of five generic industrial environ-
ments: (1) fragmented, (2) emerging, (3) mature, (4) declining, or (5) global.
The paints and allied products industry has a 4-firm concentration ratio
of less than 40 percent (i.e., 22 percent). There is no true market leader,
and there are a large number of small and medium-sized companies, many
of them privately-held. These characteristics identify the paints and allied
products as highly fragmented, an identification that is confirmed by Porter
(1980).

In the field study, 28 nondiversified manufacturing firms in the paints
and allied products industry (SIC 2851) were initially contacted. Of these,
22 fully participated. The final industry-specific questionnaire was mailed
to each CEO for distribution to the previously identified top management
team members. These individuals were asked to indicate the importance
of the 21 competitive methods (e.g., customer service, brand identifica-
tion) to their firm’s overall strategy. A 5-point scale was used with values
ranging from “1 = Not at all important” to “5 = Extremely important.”
A total of 78 of 99 possible respondents (79 percent) from the 22 sample
firms completed the questionnaire.

Factor analysis of the questionnaire data on competitive methods was
used to develop the competitive dimensions associated with each of Porter’s
generic strategies. Factor analysis has the ability to produce descriptive sum-
maries of data matrices, which aid in detecting the presence of meaningful
patterns among a set of variables.

Results of Phase 1. The principal factor solution obtained after the vari-
max rotation for the 21 competitive methods is shown in Table 1. Although
five significant factors (i.e., eigenvalues > 1) emerged from the factor anal-
ysis, only the three factors explaining the greatest amount of total variance
are shown in Table 1. The other two factors were dropped in the interest
of parsimony; additionally, a scree test (Cattell, 1976) indicated that they
should be excluded.

The factors displayed in Table 1 are rank ordered from left to right ac-
cording to the proportion of total variance they explained. The factors are
named to reflect the three generic strategies they were interpreted by the
writers as representing.

Overall, 15 of the 21 competitive methods exhibited factor loadings greater
than or equal to ? .50 on at least one factor. These loadings may be con-
sidered to be a conservative criterion; Kim and Mueller (1978) suggest

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Table 1
Competitive Methods: Factor Structure and Communalities

Factor One Factor Two Factor Three
Differentiation Low Cost Focus Communalities

Squared Squared Squared
Factor Factor Factor Factor Factor Factor

Loadings Loadings Loadings Loadings Loadings Loadings
Competitive Methods a ( a1) (a2) (a2 (a22) (a (a32) (h2)

V1. New product development .19858 .03943 .15352 .02357 .62736 .39358 .45658
V2. Customer service -.26645 .07100 .48492 .23515 .41641 .17340 .47955
V3. Operating efficiency .29412 .08650 .51166 .26180 -.14168 .02007 .36837
V4. Product quality control .16526 .02731 .80309 .64495 .02370 .00056 .67281
V5. Experienced/trained personnel .05293 .00280 .58847 .34630 -.02899 .00084 .34994
V6. Maintain high inventory levels .24855 .06118 .07925 .00628 -.05166 .00270 .07016
V7. Competitive pricing .04730 .00223 -.01997 .00040 -.26566 .07058 .07321
V8. Broad range of products .02949 .00087 -.11203 .01255 .26821 .07194 .08536
V9. Developing/refining existing products .19764 .03906 .61536 .37867 .34666 .12017 .53790
V10. Brand identification .82943 .68795 .12707 .01615 .03331 .00111 .70521
V11. Innovation in marketing techniques and methods .85953 .73879 .20290 .04117 .15055 .02267 .80263
V12. Control of channels of distribution .70853 .50201 .29166 .08507 .07323 .00536 .59244
V13. Procurement of raw materials .50326 .25327 .61069 .37294 -.15426 .02380 .65001
V14. Minimizing use of outside financing .23042 .05309 .30128 .09077 -.11744 .01379 .15765
V15. Serving special geographic markets .17321 .03000 .10626 .01129 .25196 .06348 .10477
V16. Capability to manufacture specialty products -.08241 .00679 .16097 .02591 .76621 .58708 .61978
V17. Products in high price market segments .22651 .05131 .00842 .00070 .69132 .47792 .52993
V18. Advertising .83112 .69076 .01627 .00026 .06969 .00486 .69588
V19. Reputation within industry .04930 .00243 .78639 .61841 .25484 .06464 .73265
V20. Forecasting market growth .55085 .34034 .51302 .26319 .17149 .02940 .63293
V21. Innovation in manufacturing processes .44429 .19739 .61579 .37920 .11464 .01314 .58973
Eigenvalue 6.7871 2.2416 1.8101 10.8388
Percent of common variance 62.60 20.74 16.66 100.00
Percent of total variance 32.3 10.7 8.6 51.6

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factor loadings of .30 as a cutoff for significance. Similarly, Nunnally sug-
gests that “it is doubtful that loadings of a smaller size be taken seriously,
because they represent less than ten percent of the variance of the factor”
(1978, p. 423). Two of the competitive methods (i.e., V13, and V20) loaded
highly on more than one factor, indicating that they may be germane to
more than one generic strategy.

A common methodological weakness that might threaten the reliability
and validity of the factor analytic results is the possible instability of the
factor loadings. Instability of the factor loadings because of sampling er-
ror may result from the use of a relatively small ratio of subjects (n = 78)
to measures (n = 21). This ratio of 3.7 approaches but does not exceed the
desirable but conservative ratio of four or five to one advocated by some
authors (Hair, Anderson, Tatham, & Grablowsky, 1979). The sample size
does exceed that suggested by Lawley and Maxwell (1971) for the maxi-
mum likelihood solution method of confirmatory factor analysis. They sug-
gest that this test is appropriate if the sample contains at least 51 more cases
than the number of variables under consideration. Furthermore, given the
exploratory nature of the research question as well as constraints-time,
resources, availability of firms-inherent in field research, the sample size
of this study is not considered a significant limitation in interpreting the
results.

Phase 2: Panel Study

A panel of experts was used to develop normative recommendations re-
garding the appropriate content of each of Porter’s (1980) three generic
strategies. The panel consisted of seven academicians selected on the basis
of their experience and expertise in the field of strategic management. The
panel was used to evaluate Porter’s (1980) concepts regarding generic strat-
egies because of the common core of knowledge they possessed relevant
to the area of inquiry. Each panel member was asked to review Porter’s
chapter on “Generic Competitive Strategies” and then complete three ques-
tionnaires, one for each of Porter’s three generic strategies. Each question-
naire consisted of the same 21 competitive methods and associated 5-point
scales used in the field research. The panel members were asked to indicate
the importance of each competitive method for each generic strategy. The
data were analyzed to determine whether experts would uniquely organize
the competitive methods for each strategy. Furthermore, because “expert
judges will not show well-known biases as leniency, halo, etc.” (Einhorn,
1974, p. 562), it is reasonable to expect that the variables being measured
actually represent explanatory concepts when combined into global
constructs.

Results ofPhase2. The descriptive statistics (means, standard deviations)
developed for the panel’s responses are shown in Table 2. The statistics
were used to evaluate which competitive methods the experts considered
most important for each of Porter’s generic strategies. Table 2 indicates

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Table 2
Panel Technique: Descriptive Statistics

Differentiation Overall Low
Strategy Cost Strategy Focus Strategy

Competitive Methods Mean S.D. Mean S.D. Mean S.D.

V1. New product development 4.71 .49 2.29 1.25 3.71 .49
V2. Customer service 4.29 .49 1.71 .49 4.29 .76
V3. Operating efficiency 2.57 .53 5.00 .00 3.00 1.00
V4. Product quality control 4.29 .49 3.00 1.00 3.57 .79
V5. Experienced/trained personnel 4.57 .53 3.57 .98 3.57 .53
V6. Maintain high inventory levels 2.57 .53 3.14 1.21 2.57 1.27
V7. Competitive pricing 1.71 .49 4.86 .38 3.57 .79
V8. Broad range of products 1.14 .69 2.14 1.07 2.43 .53
V9. Developing/refining existing products 4.00 1.00 3.86 .69 3.29 1.11
V10. Brand identification 5.00 .00 1.86 .69 4.57 .53
V11. Innovation in marketing techniques

and methods 4.86 .38 1.71 .76 4.14 .90
V12. Control of channels of distribution 4.14 .69 3.00 1.41 3.29 .49
V13. Procurement of raw materials 2.43 .53 4.86 .38 2.71 .76
V14. Minimizing use of outside financing 2.29 .49 3.29 .95 2.43 .79
V15. Serving special geographic markets 2.71 1.25 1.57 .79 4.86 .38
V16. Capability to manufacture specialty

products 3.86 1.07 1.14 .38 5.00 .00
V17. Products in high price market seg-

ments 4.57 .53 1.29 .49 3.71 .76
V18. Advertising 4.71 .49 2.43 1.72 3.86 1.07
V19. Reputation within industry 4.29 .49 2.57 .98 3.50 1.04
V20. Forecasting market growth 3.29 .49 4.00 .82 2.86 .69
V21. Innovation in manufacturing processes 2.57 1.13 4.14 1.07 3.71 1.38

Mean item value 3.60 2.93 3.55
Mean standard deviation 1.07 1.21 .74

that the panel of experts identified some competitive methods as either most
or least important for each of the generic strategies. The analysis clarified
the relationships between the competitive methods and the generic strategies
and aided in the interpretation of the factor analysis developed from the
field study.

Comparison of the Results of Phase 1 and Phase 2

An important step in the data analysis for Phase 1 involved a comparison
between: (1) the principal factor solution with varimax rotation for the 21
competitive methods used in the field study and (2) the opinions of the panel
as to the appropriate content of each of the generic strategies. These find-
ings are summarized in Table 3.
Table 3 is presented on the basis of Porter’s three generic strategies. Under

each generic strategy, the competitive methods identified by the managers
and the panel of experts are arrayed as most and least important. For the
field study, the most important competitive methods were those items whose
factor loadings were greater than .50. The least important competitive
methods were those items whose factor loadings were between +.30 and
-.30 (Kim & Mueller, 1978; Nunnally, 1978). For interpretive purposes,
competitive methods that exhibited either their highest or lowest loadings

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on the two factors that were excluded from analysis were not incorporated
into Table 3. For the panel, the most important and least important com-
petitive methods consisted of those items whose mean value was greater
than or less than, respectively, one standard deviation from the aggregate
mean.

Table 3
Content of Generic Strategies: Summary of Findings

Differentiation

Experts Managers

(most important)
V1. New product development V10. Brand identification

V10. Brand identification V 1. Innovation in marketing techniques and
V11. Innovation in marketing techniques and methods

methods V12. Control of channels of distribution
V18. Advertising V13. Procurement of raw materials

V18. Advertising
V20. Forecasting market growth

(least important)
V7. Competitive pricing V2. Customer service
V8. Broad range of products

V13. Procurement of raw materials
V14. Minimizing use of outside financing

Overall Low Cost
Experts Managers

V3. Operating efficiency
V7. Competitive pricing

V13. Procurement of raw materials
V21. Innovation in manufacturing processes

(least
V2. Customer service

VI1. Innovation in marketing techniques and
methods

V15. Serving special geographic markets
V16. Capability to manufacture specialty

products
V17. Products in high price market segments

important)
V3. Operating efficiency
V4. Product quality control
VS. Experienced/trained personnel
V9. Developing/refining existing products

V13. Procurement of raw materials
V19. Reputation within industry
V20. Forecasting market growth
V21. Innovation in manufacturing processes

important)
V8. Broad range of products

V15. Serving special geographic markets
V18. Advertising

Focus

Experts Managers

(most important)
V2. Customer service VI. New product development

V10. Brand identification V16. Capability to manufacture specialty
V15. Serving special geographic markets products
V16. Capability to manufacture specialty V17. Products in high price market segments

products
(least important)

V6. Maintain high inventory levels V3. Operating efficiency
V8. Broad range of products V6. Maintain high inventory levels

V13. Procurement of raw materials V7. Competitive pricing
V14. Minimizing use of outside financing V12. Control of channels of distribution

V13. Procurement of raw materials
V14. Minimizing use of outside financing
V21. Innovation in manufacturing processes

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The results suggest that factor one consists of competitive methods iden-
tified by the experts as most important to a differentiation strategy. Three
of the four competitive methods identified by the panel for this generic
strategy are contained in factor one. This close association led the researchers
to interpret factor one as representative of a differentiation strategy. This
interpretation is supported further: only one (i.e., V13) of the competitive
methods identified by the panel as least important appeared with a high
loading on factor one. Many of the competitive methods loading highly
on factor one appear to be indicative of a marketing orientation (e.g., brand
identification). Porter (1980) notes that one of the principal economic causes
for the existence of highly fragmented industries is high product differen-
tiation, particularly if it is based on image.

Similarly, factor two contains three of the four competitive methods iden-
tified by the panel as most important to an overall low cost strategy. Fac-
tor two suggests a predominantly production orientation (e.g., operating
efficiency). Such an orientation lends support to the identification of fac-
tor two as representative of Porter’s overall low cost strategy. Porter con-
tends that “achieving a low overall cost position often requires a high relative
market share or other advantages, such as favorable access to raw materials”
(1980, p. 36). Although there has been some empirical research to refute
the requirement for a high relative market share in order to obtain a low
cost position (Hall, 1980), it should be noted that one of the competitive
methods with a high loading on this factor was V13 (i.e., procurement of
raw materials). As with factor one, interpretive support is indicated; none
of the competitive methods regarded by the panel as least important to this
strategy appeared with high loadings on factor two.

More similarity appeared between the panel and managers on what does
not rather than what does constitute a focus strategy. Three of the four
competitive methods seen by the panel as least important in a focus strategy
appeared in factor three with their lowest factor loadings. However, those
competitive methods (e.g., V16-specialty products-and V17-high priced
market segments) exhibiting high loadings on factor three do suggest an
emphasis on specific market segments and imply concentration on a par-
ticular niche.

Phase 3: Strategic Group Membership and Organizational Performance

Phase 3 uses the responses from the 19 firms whose CEO, rather than
a “designated executive,” was the primary respondent. The chief executive
is most important in strategy formulation (Chandler, 1962). Chief execu-
tives’ perceptions of their organizations’ strategies are more closely aligned
to external measures of strategy than are the perceptions of other execu-
tives (Hambrick, 1981b). Therefore, the CEOs’ responses were used to cate-
gorize firms into clusters reflecting similar intended strategies. Performance
data were provided for 15 of these firms and were used to analyze differ-
ences in performance among the clusters. This reduction in the sample size

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is regrettable but not uncommon in the study of privately-held firms (Porter,
1979).

The researchers calculated individual factor scores for each CEO on each
of the three factors corresponding to Porter’s (1980) three generic strategies
in accordance with the following formula:

A= alizl + a2;i2 + ? ?. + ajizj,

where: aj; is the factor score coefficient for competitive method j (= 1,
…, 21) on factor i (i= 1, 2, 3), and zj is the CEO’s standardized value
on competitive method j.

The factor scores generated for each of the CEOs were used as input
to a K means clustering algorithm (Dixon, 1975). The CEOs were switched
from one cluster to another until the optimal cluster configuration, which
maximizes between and minimizes within cluster variances, was obtained.
The clusters consisted of subsets of CEOs that were more similar or closer
to each other in orientation than they were to CEOs outside the cluster.

Initially a three cluster solution was chosen in order to facilitate com-
parison with Porter’s typology of three generic strategies. However, the
three cluster solution did not adequately distinguish among the clusters.
Consistent with the exploratory nature of this research, a four cluster solu-
tion also was examined. The clusters that resulted consisted of CEOs who
were most similar in respect to the factors (generic strategies) that had
emerged from Phase 1 of this study.

The overall significance of the cluster solutions obtained was tested by
means of a one-way analysis of variance-based on the assumption that
the scores in each of the various groups have approximately the same vari-
ance. However, because the various groups do not contain the same num-
ber of subjects, a Bartlett’s Box F-test on the within-cell variances was used
to test for homogeneity among variances.

Using Parsons’ (1956) classification of organizations by type of goal or
function, the organizations in this study would be classified as oriented
toward economic production. Therefore, consistent with the “economic
primacy” of the subject organizations, the derived goals of the financial
community (e.g., profitability, growth) should be considered of primary
importance in the assessment of organizational performance. Consequently,
the researchers obtained “total firm sales” figures for the period 1976 to
1980 to determine “sales growth” and “average after tax return on total
assets” from 1976 to 1980 to determine profitability. Annual sales growth
rates for the five-year period ranged from .8 percent to 37.7 percent, and
average after tax return on total assets ranged from 1 percent to 42 percent
for the sample.

An F-value was calculated using a one-way analysis of variance to decide
whether there were significant differences among the strategic groups (clus-
ters) on the basis of their mean values for the two performance measures.
To determine where the significant differences lie, Scheffe’s posteriori

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contrast test was used to compare all possible pairs of performance means.
Among the various multiple comparison tests, Scheffe’s is considered to
be the most conservative test (Huck, Cormier, & Bounds, 1974). This test
also offers the advantages of applicability to groups of unequal sizes and
is relatively insensitive to departures from normality and homogeneity of
variances (Hays, 1963).

Results of Phase 3: The Three Cluster Solution. The profiles of the three
strategic groups that emerged from the cluster analysis and the performance
results are presented in Table 4.

Table 4
Summary of Cluster Analysis Results and Performance Relationships:

The Three Cluster Solution

A. Mean Scores
Coordinate Centroids Performance

Overall Annual Return on
Cluster Differentiation Low Cost Focus Sales Growtha Total Assetsb

1 (n= 12) .5057 .2437 .4000 .197 .118
(.4332)c (.8034) (.5247)

2 (n=4) -.5063 -.3723 -1.2356 .084 .055
(.5977) (.3266) (.3484)

3 (n=3) -1.0351 -.1808 .5225 .308 .044
(.6462) (.7499) (.4516)

Grand Means .1441 .0470 .0750

B. Mean Squares
Overall

Differentiation Low Cost Focus

Between groups 2.9503 .6616 4.3692
Within groups .3083 .6162 .2751
d.f. 2,16 2,16 2,16
F-ratio 9.568 1.074 15.883
P-value .001 .388 .001
Bartlett’s Box F-test = .086, p = .917

aAnalysis of variance results for the three clusters: F= 5.531, p .022
bAnalysis of variance results for the three clusters: F=.724, p=.507
CStandard deviations are in parentheses.

The one-way analysis of variance procedure indicated that the three clus-
ters of firms were significantly different from each other on the basis of
their emphasis on the differentiation strategy (p < .001) and the focus strat- egy (p < .001) but not on the basis of the overall low cost strategy (p = .388). The researchers had anticipated that each of Porter's three generic strategies would be required to distinguish clearly the different strategic emphases that existed among the clusters of firms. Thus, the inability of the low cost dimension to account for significant differences among the three clusters was unanticipated and provided the rationale for developing the four cluster solution.

The first cluster had its highest centroid score on the differentiation strat-
egy, and it was the only cluster that displayed a positive score for the dif-
ferentiation strategy. Cluster number two displayed negative scores for all

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three of the generic strategies. This lack of a positive score on any of the
three generic strategies indicates that firms comprising this group have failed
to develop their strategy in at least one of Porter’s (1980) three directions.
Cluster number three exhibited the highest positive score of any cluster for
the focus dimension and negative scores for the other two generic strategies.

Taken in combination, the pattern of centroid scores that emerged from
the cluster analysis led the researchers to identify cluster one as represen-
tative of a strategic group of firms oriented primarily toward a differen-
tiation strategy. However, the pattern of scores was not conclusive (i.e.,
the relatively high scores on the alternative generic strategies indicated the
possibility of emphasis on more than one generic strategy within this cluster
of firms). Cluster number three appears to consist of a group of firms em-
phasizing a focus strategy. Cluster number two evidences an apparent lack
of commitment to any of Porter’s generic strategies. Therefore, this cluster
may be comprised of firms that are “stuck in the middle” (Porter, 1980,
p. 41). This does not imply that firms that are stuck in the middle do not
emphasize certain competitive methods that are key components of one
or more generic strategies; however, the composite strategy that emerges
may lack internal consistency.

The next step in the analysis was to compare performance among the
three clusters of strategic groups. Table 4 indicates that the three strategic
groups were not significantly different from one another with regard to
profitability as measured by return of assets (p = .507). However, for the
other performance measure, annual sales growth, Table 4 indicates that
strategic group membership was significant (p = .002). This finding is con-
sistent with Porter’s (1980) contention that firms that adopt a generic strategy
should outperform those stuck in the middle. Cluster one, the differentia-
tion strategy group, averaged 19.7 percent annual sales growth; cluster three,
the focus group, averaged 31 percent annual sales growth; and cluster two,
stuck in the middle, averaged only 8 percent annual sales growth. The
Scheffe test for significant differences among the groups on the perfor-
mance measure “sales growth” shows that the mean value for the focus
strategy group is significantly greater than the mean value for the stuck
in the middle group. None of the other differences is significant.

Results of Phase 3: Four Cluster Solution. The profiles of the four stra-
tegic groups that emerged from the cluster analysis and their links with or-
ganization performance are presented in Table 5. The four cluster solu-
tion resulted in the splitting of cluster number one in Table 4 into two sep-
arate and unique clusters labeled one and four in Table 5. The composi-
tion of clusters numbered two (i.e., stuck in the middle) and three (i.e.,
focus) remained intact from the three cluster solution to the four cluster
solution.

The one-way analysis of variance procedure indicated that the four clusters
of firms were significantly different from each other on the basis of their
emphasis on the differentiation dimension (p < .003), the focus dimension (p<.001), and the overall low cost dimension (p<.001). Table 5 shows

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Table 5
Summary of Cluster Analysis Results and Performance Relationships:

The Four Cluster Solution

A. Mean Scores
Coordinate Centroids Performance
Overall Annual Return on
Cluster Differentiation Low Cost Focus Sales Growtha Total Assetsb

1 (n = 4) .3268 1.2685 .6226 .201 .255
(.5254)C (.1444) (.8757)

2 (n=4) -.5063 -.3723 -1.2356 .084 .055
(.6902) (.3771) (.4023)

3 (n= 3) -1.0351 -.1808 .5225 .308 .044
(.7914) (.9185) (.5531)

4 (n=8) .5951 -.2687 .2887 .170 .089
(.4195) (.4445) (.3176)

Grand Means .1441 .0470 .0750
B. Mean Squares
Overall
Differentiation Low Cost Focus

Between groups 2.0309 2.5417 3.0119
Within groups .3161 .2372 .2736
d.f. 3,15 3,15 3,15
F-ratio 6.425 10.715 11.009
P-value .003 .001 .001
Bartlett’s Box F-test= .567, p= .638

aAnalysis of variance results for the four clusters: F= 3.89, p= .041
bAnalysis of variance results for the four clusters: F= 3.24, p= .069
cStandard deviations are in parentheses.

that although cluster one displays positive centroid scores for each of the
three generic strategies, the emphasis on overall low cost strategy is clearly
dominant. Also, the primary orientation for the fourth cluster is a differen-
tiation strategy. Thus, though the three cluster solution was anticipated
to parallel Porter’s three generic strategies, the four cluster solution affords
an interpretation that is more consistent with Porter’s framework.
It is important to note that cluster analysis, unlike most parametric sta-

tistical techniques, does not explicitly provide a clearly acceptable or unac-
ceptable solution. It merely provides a structure so that relationships may
emerge; thus, it is important to make explicit the criteria that guided the
selection of an appropriate solution. In the present case, both subjective
and objective criteria led to the selection of the four cluster solution as the
more appropriate. The subjective criterion involved an identification of how
many clusters theory would lead one to expect. Initially, three clusters were
anticipated, one for each of Porter’s three generic strategies. The appearance
of the stuck in the middle group as a cluster in the initial three cluster solu-
tion suggested that the third generic strategy-overall low cost-which had
not appeared as a significant determinant of group structure may have been
pooled into one or more of the other groups. The most important objec-
tive criterion was the appearance of a significant F-value for the overall
low cost factor when the number of clusters was increased from three to
four.

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Academy of Management Journal

The validity of these findings and interpretations is enhanced by the strong
relationship between the composition of the clusters and anecdotal infor-
mation obtained from the CEOs during the on-site interviews. A brief discus-
sion of a typical firm from each of the four clusters in Table 5 will convey
this convergence. The CEO of a firm in the overall low cost cluster stressed
the primacy of high productivity in manufacturing operations. Production
incentives and extensive reinvestment in modern facilities and equipment
were mentioned as very important. Uncertainties regarding product-market
scope seemed to characterize the responses of one of the CEOs whose firm
was in the stuck in the middle cluster. Perhaps the relatively low perfor-
mance of his firm may be attributed to the lack of a well articulated and
consistent strategy because of a lack of continuity (mentioned by the CEO)
in the composition of the top management team. The CEO of one of the
firms in the focus cluster emphasized the importance of successfully com-
peting within a particular product-market niche. Favorable relations with
key distribution channels (i.e., painting contractors) were considered to be
highly important. Lastly, the CEO of one of the firms in the differentia-
tion cluster asserted that his firm’s success lay more in differentiating the
firm than the product. He contended that his firm’s reputation for “superior
service and quick reaction to customer needs” enabled it to enjoy a high
profit margin by charging a premium for his product. These remarks are
clearly consistent with Porter’s generic strategies.

The next step in the analysis was to compare performance among the
four clusters or strategic groups. Table 5 indicates that differences among
the four strategic groups regarding return on total assets approached sta-
tistical significance (p = .069). This represents a noticeable improvement
over the results of the three cluster solution. The highest average annual
return on total assets (25.5 percent) was achieved by cluster one with its
emphasis on overall low cost; followed by cluster four-differentiation-
with 8.9 percent; cluster two-stuck in the middle-with 5.4 percent; and
cluster three-focus-with 4.4 percent. The Scheffe procedure indicated
that the differences between cluster one and cluster four were significant
(p <.05).

For the other performance measure-sales growth-the overall F-ratio
indicated that the groups were significantly different from one another
(p = .041). Cluster three-focus-was the leader with 31 percent annual sales
growth; followed by cluster one-overall low cost-with 20 percent; cluster
four-differentiation-with 17 percent; and cluster two-stuck in the
middle-with 8 percent. The Scheffe procedure indicated that the difference
between cluster two and cluster three with regard to sales growth was sig-
nificant (p <.05).

Discussion

Phase 1 of this study analyzed the competitive methods considered to
be most important by the top management of firms competing within a

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single highly fragmented industry. Three sets of internally consistent com-
petitive methods were identified that conformed to Porter’s (1980) three
generic strategies. The ability of questionnaire data to identify different
“intended” strategies in industrial settings has been supported by others
(Bourgeois, 1980; Hambrick, 1980). However, such an approach, with its
emphasis on “intended” strategies, has rarely been used to examine the
presence of strategic groups and their relationships to organizational per-
formance.

The pattern of competitive methods that emerged from the field study
closely resembled that obtained in Phase 2 from the panel of experts and
provides additional support for the authors’ interpretations. In addition
to identifying competitive methods of high importance, the managers and
the panel also identified items of lesser importance for each generic strategy.
This convergence implies that these managerial orientations are indicative
of the two generic strategies that Porter (1980) identified as differentiation
and overall low cost. However, the normative recommendations of the panel
for the third of Porter’s generic strategies-focus-did not clearly coin-
cide with the third orientation of the managers.

The inability to identify clearly the third managerial orientation as reflec-
tive of a focus strategy may be due, at least in part, to what some regard
as a limitation of the focus strategy as currently outlined by Porter. Hofer
(1982), for example, proposed that when a firm deals in a market com-
posed of different segments, it may, for any given product, choose to utilize
either a common appeal across all the various segments within which the
product competes or the firm may tailor different appeals for specific cus-
tomer groups. Under such a broader view of a focus strategy it may not
be possible to prescribe a single set of competitive methods applicable for
all the potential strategy combinations within this single generic strategy.
An important implication is that equifinality (von Bertalanffy, 1955) may
characterize focus strategies, that is, there is a broad range of different but
internally consistent sets of competitive methods available to firms employ-
ing a focus strategy.

The cluster analysis used in Phase 3 was based on the assumption that
clusters of firms could be identified that would correspond to a model of
strategic groups based on Porter’s three generic strategies. Two of the clus-
ters that emerged in the three cluster solution did appear to represent Porter’s
differentation and focus strategies. However, the overall low cost dimen-
sion did not appear as significant in determining the composition of orga-
nizational strategies. Further, the apparent emphasis on more than one
generic strategy, reflected in the cluster centroid scores of cluster one, led
the researchers to investigate the possibility that aggregation of dissimilar
firms may have occurred within the three cluster solution. The four cluster
solution served to disaggregate the larger cluster (n = 12) previously identi-
fied as differentiation into two separate clusters. Each cluster reflected a
unique strategic orientation-differentiation (n = 8) and overall low cost
(n = 4)-as well as different levels of organizational performance.

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An important finding of the study is the apparent lack of singularity in
strategic orientation that characterizes the highest performance group-clus-
ter number one. This group had the highest performance on the return on
assets criterion and the second highest performance on sales growth. On
the basis of its centroid scores, this cluster was identified as primarily
oriented toward an overall low cost strategy. However, this group also
emerged with the highest centroid score on the focus strategy. Given Porter’s
(1980) caution against the commitment to multiple generic strategies, the
high performance exhibited by the members of this cluster may appear in-
consistent. However, as Cyert and March (1963) suggest, high performance
may generate slack resources that can be used to enable firms to expand
their present scope of operations. Also, constraints posed by budget limita-
tions may require that a firm limit its emphasis to only one market segment.

The present cross-sectional research design inhibits the ability to do more
than infer causal relationships. To a large extent the viability of inferences
drawn from a cross-sectional measurement of organizational strategies relies
on the concept of strategic momentum (Miller & Friesen, 1980). The per-
sistence of strategies over time may result from decision making processes
as well as industry characteristics. The view of organizations as conservative
and resistant to change is promulgated by the Carnegie group (Carter, 1971;
Cyert & March, 1963; March & Simon, 1958). Also, the presence of intra-
industry barriers to mobility (Caves & Porter, 1977; Harrigan, 1982; Oster,
1982) may require such an investment of scarce resources as to make stra-
tegic change or exit costly if not prohibitive. Oster asserts:

To have significance for the allocation of resources, a strategy must necessarily involve
some commitment that it is irreversable, at least for a time. It is difficulty of movement
that makes group structures potentially important (1981, p. 377).

In the case of small organizations, the scarcity of resources and the high
risk attendant with strategic change may help to explain why organizations
continue to pursue marginally profitable strategies. The problems may be
compounded in the presence of privately-held firms because of the lack
of publicly available information by which to judge the strategies and per-
formance of other firms.

In summary, the research findings are generally consistent with Porter’s
contention that commitment to at least one of the three generic strategies
will result in higher performance than if the firm fails to develop a generic
strategy (i.e., becomes stuck in the middle). Additionally, the findings that
the overall low cost cluster had the highest average return on total assets
support prior research by Woo and Cooper (1981) and Hamermesh, Ander-
son, and Harris (1978) that rejects the notion that high market share is a
requirement for the successful implementation of a low cost strategy. Porter
also comments that “low cost may be achievable without high share” (1980,
p. 44). However, it may be important for competitors to identify with a
generic strategy that does not place them in direct competition with a large
number of firms evidencing a similar strategic orientation. For example,
a large number of firms in the sample were identified as pursuing a differ-
entiation strategy, and this may have inhibited the ability of firms in this

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strategic group to realize as high a level of performance as those in other
less populated groups. Lastly, the group of firms identified with a focus
strategy may illustrate a potential for trade-offs between growth and prof-
itability. The focus group was the highest performing group on sales growth
but had the lowest level of return on assets. The findings in this respect
are consistent with the recent empirical findings of Trostel and Nichols
(1982), which indicated that privately-held firms may choose to emphasize
sales growth as a decision criterion at the possible expense of profitability.

Limitations of the Study

Limitations of this study should be noted. First, the generalizability of
the study is limited because the firms used in the study represent only one
of Porter’s (1980) five generic industrial environments. The relative im-
portance of the competitive methods may vary across as well as within in-
dustry environments. For example, Porter posits that the emphasis on cost
control and service orientation may be of greater strategic importance for
firms competing within a fragmented industry than an emergent industry.

Second, the relatively small sample of firms and executives included in
the field study may lead to some instability in the factor loadings obtained
from the factor analysis (Kim & Mueller, 1978; Nunnally, 1978). However,
given the exploratory nature of the study and resource constraints inherent
in field research, this limitation is not considered a major barrier in inter-
preting the results.

Third, the instrument administered to the executives was used to deter-
mine “intended” firm strategies and may have served to enact the environ-
ment (Weick, 1979) to which the subject responded. Thus, executives may
have overintellectualized on what they actually did or attempted to do (Dun-
can, 1979) in the formulation of their firm’s strategy. Alternatively, the
parsimony of the instrument may have excluded important competitive
methods used by a firm. Thus, the instrument may not fully capture the
richness or complexity of a firm’s intended strategy.

Fourth, the strategy realized by an organization may be different from
that intended by the decision makers (Hambrick, 1981a; Mintzberg, 1978).
An observed discrepancy between intentions and realized strategy may arise
from the inability of the firm to translate its intended strategies into ac-
tions because of unpredictable environmental change, a lack of appropriate
implementational capabilities, or unrealistic expectations (Mintzberg, 1978).
Singly, or in combination, these factors may result in an emergent strategy
that is observed to be different from the intended strategy.

Fifth, because all of the sample firms were privately-held, secondary
sources for confirmation of reported data were unavailable. However, the
authors believe that the time, effort, and cooperation extended by the man-
agers of the sample firms as well as the researchers’ assurances regarding
confidentiality and sharing of the results of the study enhanced the reli-
ability of the information provided.

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Academy of Management Journal

Implications for Future Research

Future research could establish the similarities that exist among the various
typologies that have been proposed for classifying firms. For example, to
what extent is Porter’s classification of firms stuck in the middle compatible
with Miles and Snow’s (1978) reactors or Miller and Friesen’s (1978) stag-
nating firms? The goal would be to develop a parsimonious typology capable
of classifying the array of strategic configurations available within an in-
dustry. Such synthesis would serve to answer a recent call for “developing
or isolating composites which take the form of. . . ‘gestalts,’ ‘archetypes,’
and ‘configurations”‘ (Miller & Mintzberg, 1983, p. 57).

The study of publicly-held firms would provide access to secondary
sources of data, which then could be used to determine if firms classified
on the basis of strategic choice would be similarly classified on the basis
of structural configurations exhibited by the firm. The use of maximally
different methods could provide strong evidence for the validity of a par-
ticular typology.

Some evidence has emerged that strategies appear to be enduring over
time (Miller, 1981). Systematic research on a longitudinal basis would reveal
whether performance within and among strategic groups classified on the
basis of strategic orientation varies over time. One may posit, for exam-
ple, that as the industry life cycle progresses, the firms stuck in the middle
may actually be able to adapt to changes in the industry environment more
readily than firms committed to a specific strategy.

Finally, the role of strategic choice as a method of classifying strategic
groups may vary across as well as within industries, as suggested by Ham-
brick (1983a), Snow and Hrebiniak (1980), and others.

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• Contents

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• Issue Table of Contents

Academy of Management Journal, Vol. 27, No. 3, Sep., 1984
Front Matter [pp. 441 – 444]
The Comprehensiveness of Strategic Decision Processes: Extension, Observations, Future Directions [pp. 445 – 466]
Porter’s (1980) Generic Strategies as Determinants of Strategic Group Membership and Organizational Performance [pp. 467 – 488]
The Choice of Strategic Alternatives under Increasing Regulation in High Technology Companies [pp. 489 – 510]
Merger Strategies as a Response to Bilateral Market Power [pp. 511 – 524]
Environment, Strategy, and the Implementation of Administrative Change: The Case of Civil Service Reform [pp. 525 – 543]
The Effects of Training, Goal Setting, and Knowledge of Results on Safe Behavior: A Component Analysis [pp. 544 – 560]
The Effects of the Application on Recall of Information from the Interview [pp. 561 – 575]
The Impact of Work Environment, Instrumentality Beliefs, Perceived Labor Union Image, and Subjective Norms on Union Voting Intentions [pp. 576 – 590]
Faculty Satisfaction with Pay and Other Job Dimensions under Union and Nonunion Conditions [pp. 591 – 602]
Evaluating In-Role and Out-of-Role Performers [pp. 603 – 618]
A Role Set Analysis of Gender Differences in Performance, Affective Relationships, and Career Success of Industrial Middle Managers [pp. 619 – 635]
Research Notes
Follower Attitudes toward Women and Judgments concerning Performance by Female and Male Leaders [pp. 636 – 643]
Administration Size and Organization Size: An Examination of the Lag Structure [pp. 644 – 653]
Correlates of Voting Behavior in a Union Decertification Election [pp. 654 – 659]
Evaluating the Management Journals: A Second Look [pp. 660 – 666]
Perceptions of Socially Responsible Activities and Attitudes: A Comparison of Business School Deans and Corporate Chief Executives [pp. 666 – 674]
Back Matter [pp. 675 – 680]