Equifinality and the strategic groups--performance relationship.

Strategic groups are clusters or sets of firms that pursue similar competitive approaches within an industry (Porter, 1979). For example, in the pharmaceutical industry, one strategic group consists of firms such as Merck and Bristol-Myers Squibb that compete mainly through developing and marketing new drugs. The members of a second strategic group compete through providing low-cost copies of therapies whose patents have expired. Since Hunt (1972) first coined the term "strategic groups," a considerable amount of inquiry has focused on the concept.

In particular, the possibility that performance differences exist between groups has been a frequent subject of research. Strategic groups are assumed to be highly stable due to mobility barriers that limit movement between groups (McGee and Thomas, 1986). For example, most generic drug makers lack the research and development capabilities to create original therapies. Because firms are unable to easily change strategies to pursue opportunities as they emerge, performance differences between groups are expected (Porter, 1979). In essence, groups occupying lucrative niches should outperform those in other niches. Despite the logical appeal of these arguments, the evidence regarding performance differences between groups remains largely equivocal and has generated considerable debate (cf., Barney and Hoskisson, 1990; McGee and Thomas, 1986; Mehra and Floyd, 1998). Indeed, a recent review of the strategic groups literature in the Journal of Management concluded that "ambiguity still surrounds the strategic groups-performance relationship" (Ketchen et al., 2004: 796).

We believe that this ambiguity might be reduced if researchers test an alternative view--that the strategic groups-performance relationship is often characterized by equifinality. According to Katz and Kahn, equifinality is present when "a system can reach the same final state, from different initial conditions and by a variety of different paths" (1978: 30). For example, Jennings et al.'s (2003) examination of six different service industries using the Miles and Snow (1978) strategy typology revealed that firms with a defender, prospector, or analyzer strategy have equal performance. Additionally, Eisenhardt's (1988) examination of compensation systems in specialized retail stores found that different forms of compensation are equally effective. Thus, in the context of the strategic groups-performance relationship, the concept of equifinality suggests that multiple strategic groups can be equally effective under a given set of conditions. Although largely ignored within empirical strategy research (see Doty et al. (1993) and Jennings et al. (2003) for exceptions), equifinality is implicit in the theorizing of Porter (1980) and Miles and Snow (1978). Specifically, each of these authors identifies more than one alternative strategic approach that can be used to achieve high performance in a variety of contexts.

Given the equivocality of past results and the acknowledgement of equifinality in prominent conceptual research, empirical testing centered on the concept of equifinality within strategic groups research seems timely and warranted. The purpose of this study is to extend previous research by examining equifinality and its possible effects on the strategic groups-performance relationship. As such, we take a first step toward answering Ketchen et al.'s call for "research on the major contingencies that shape the nature and strength of between-group performance differences" (2004: 796). In the next section relevant literature is reviewed, the research setting is described, and hypotheses are developed. We then present the methodology used in the study and report and discuss its findings.

THEORETICAL BACKGROUND

Strategic Equifinality

For many years, organizational research offered little guidance about the issues and assumptions surrounding equifinality, resulting in calls for development of the concept (e.g., Doty and Glick, 1994; Fry and Smith, 1987). Answering these calls, Gresov and Drazin (1997) developed a classification of different forms of equifinality based on differences in the set of functional demands imposed upon the organization by its environment and the structural latitude available to managers to deal with those demands. The degree of conflict in the functional demands is posited to range from low to high depending on the compatibility and consistency of the different functions an organization must perform. Similarly, structural latitude is posited to range from low to high depending on how limited the set of structural features are to match the functional demands and/or how constrained managers are in matching the functional demands.

While Gresov and Drazin (1997) focused on the equifinality of structures, their ideas clarify and complement general notions of equifinality implicit in conceptual strategy research (e.g., Miles and Snow, 1978; Porter, 1980) because, as with structure, matching strategy to the demands of the environment should result in higher performance. Thus, if different strategic approaches satisfy the same functional demands and lead to the same level of performance, then these strategic approaches can be viewed as being functionally equivalent. It is by substituting strategic latitude for structural latitude in Gresov and Drazin's (1997) theorizing that we can determine the applicability of equifinality to the strategic groups-performance relationship. Thus, consistent with Gresov and Drazin (1997), we posit that when considered in tandem, functional demands and strategic latitude result in four different equifinal situations, each associated with a different form of equifinality (see Figure 1).

[FIGURE 1 OMITTED]

Ideal profile situations exist when there is a low degree of conflict in function demands and little latitude in strategic options. This is the simplest equifinal situation where performance depends on the organization's ability to identify and adopt the ideal strategy to meet a single, dominant functional demand. Suboptimal situations are characterized by multiple and conflicting functional demands from the environment and little latitude in strategic options. In this situation, suboptimal equifinality is the result of a trade-off between functions, wherein a lack of strategic choice results in one or more function (s) always going unsatisfied, which then results in suboptimal organizational performance (Gresov and Drazin, 1997). Trade-off equifinality is expected in situations with low conflict in functional demands and high strategic latitude. Here managers can select from among alternative strategies that each can be used to satisfy a single, dominant functional demand and thus achieve the same outcome or level of performance. Finally, configurational equifinality is found in situations characterized by high conflict in functional demands and high strategic latitude. That is, there are trade-offs between both strategies and functions that result in a number of strategic configurations arising that each perform reasonably well.

Generic Strategies

Our examination of the strategic groups-performance relationship requires the adoption of a conceptual scheme that articulates types of strategies available to firms. Porter (1980) offers one of the most heavily researched strategy typologies (e.g., Kim et al., 2004). Porter (1980) argues that organizations compete within an industry mainly based either on costs (wherein a firm seeks to become the industry's low-cost producer) or on differentiation (wherein a firm tries to create a product or service that consumers perceive as unique and desirable). Some firms choose to focus on one segment of the market through either offering this segment relative low costs or unique features. Extending Porter's argument, Wright (1987) argues that beyond these basic approaches, firms may also pursue a hybrid or "best-cost" strategy, which satisfies the functional demands of both low cost and differentiation, an option not ruled out by Porter (1985) and others (e.g., Hill, 1988; Murray, 1988). Thus, some differentiation approaches may allow for the simultaneous lowering of costs while achieving a low-cost advantage may allow for selected attempts at differentiation. Porter (1980) considers organizations with no coherent strategy (i.e., those not satisfying the functional demands of low cost or differentiation) as being "stuck in the middle" or "muddlers." Alternatively, muddlers can be firms that try but fail in the pursuit of a competitive advantage.

Implicit in Porter's (1980) theorizing is that each strategy pursues a different basis for achieving a competitive advantage and that different strategies can yield the same level of performance. More recent evidence suggests that the efficacy of low-cost and differentiation strategies varies depending on environmental conditions (e.g., Hambrick, 1983; Miller, 1988; Kim and Lim, 1988) because the different strategies enable the firm to address different types of environmentally-determined functional demands. For example, if functional demands such as achieving economies of scale and minimizing costs are important for the survival of the organization, then achieving a low-cost advantage is more appropriate. Conversely, if functional demands require the development of a unique product or service through heavy investments in research and development, product/service design, and marketing, then firms should try to achieve a differentiation advantage.