Moderating Effects of Task Environment on the Generic
Strategy-Performance Relationship among Dutch and
German SMEs
MSc Small Business & Entrepreneurship
Rijksuniversiteit Groningen Faculteit Economie en Bedrijfskunde
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Table of content
1. Introduction ... 4
2. Theoretical Framework ... 7
2.1 Generic strategies ... 7
2.1.1. Cost Leadership Strategy ... 8
2.1.2. Differentiation Strategy ... 9
2.1.3. Combination of Cost Leadership Strategy and Differentiation Strategy ... 9
2.2 Task Environment ... 10 2.2.1. Environmental Dynamism ... 12 2.2.2. Environmental Hostility ... 12 2.2.3. Environmental Complexity ... 13 2.3 Firm performance ... 14 2.4 Hypothesis Development ... 15
2.4.1. Moderating Influence of Environmental Dynamism ... 15
2.4.2. Moderating Influence Environmental Hostility ... 16
2.4.3 Moderating Influence of Environmental Complexity ... 17
3. Methodology ... 20
3.1. Sample and Data collection ... 20
3.2 The Measures ... 21
3.2.1 Generic strategies ... 22
3.2.2 Environmental Dynamism, Hostility and Complexity ... 23
3.2.3. Firm Performance ... 24
3.3. Control Variable ... 24
3.4 The Analytical Technique ... 25
4. Results ... 26
4.1. Results for the dependent variable Subjective Performance (SP) (Table 8) ... 32
4.2. Results for the dependent variable Employment growth (OP) (Table 9) ... 33
4.3. Overall findings for Subjective and Objective Performance ... 33
5. Discussion ... 34
6. Conclusion ... 36
6.1 Limitations and further research ... 37
7. References... 39
Appendix 1: Measurement instruments ... 48
Appendix 2: Questionnaire ... 49
Appendix 3: Interview question ... 51
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Abstract
This paper investigates the moderating impact of the task environment in the relationship between Porter’s business strategies and SME performance. The study expands existing literature and delivers new insights to the current understanding of the moderating influences of several environmental dimensions of the task environment, on the strategy-performance relationship of SMEs. The traditional generic strategies of cost leadership and differentiation developed by Porter (1980) are used. In conjunction, this research also examines a third possible strategy, which is a combination of these two generic strategies (the combination strategy). The environment is conceptualized as the task environment, and consists of the following three environmental dimensions: dynamism, hostility and complexity. Furthermore, the total sample exists of 97 SMEs that are located in either Germany or the Netherlands. To test the hypotheses, two multiple regression models are conducted. The first regression model (N=82) is measures the subjective performance (SP) and the second regression model (N=86) is conducted to measure the objective performance (OP) through employment growth. Results show that there are two moderating effects of the task environment. Firstly, environmental hostility has a negative moderating effect in the relationship between firms employing a cost leadership strategy and their SME performance in both multiple regression models (SP & OP). Secondly, complex environments have a positive moderating impact in the relationship between SME pursuing a combination strategy and their employment growth (OP). This research controls for country-specific influences and finds that German SMEs significantly underperform Dutch SMEs regarding employment growth of their businesses (OP).
Keywords: Generic strategies, Combination strategy, Subjective Performance (SP), Employment Growth (OP), Small and Medium-Sized Enterprises and Task Environment.
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1. Introduction
Literature offers a multitude of arguments why entrepreneurs and their small and medium sized enterprises (SMEs) play an important role in economics. For example, regarding to economic value creation of entrepreneurs, Van Praag and Versloot (2007) conclude that entrepreneurs “engender relatively much employment creation, productivity growth and produce and commercialize high-quality innovations” (p351). Furthermore, SMEs provide the majority of formal employment in most countries (Ayyagari, Beck and Demirgic-Kunt, 2007) and the average European contribution of SMEs to overall GDP is rated at 67% (Hancock, 2009). “In all EU countries, SMEs account for more than 99% of the total number of enterprises” (Carter
and Jones-Evans, 2012, p.11). Since the
importance of SMEs is widely recognized, an increasing number of studies have investigated strategic development in SMEs. Porter’s (1980) concept of strategy is widely used in strategic research and are known as ‘generic competitive strategies’. Strategies of Porter either follow a cost leadership strategy or a differentiation strategy. Many researchers (e.g., Julien and Ramangalahy, 2003; Shrader and Siegel, 2007; Capelleras and Rabetino, 2008) are still using Porter’s (1980) conceptualization of strategy. Porter (1980) stated that the best firm performance is achieved by following a mutually exclusive generic strategy, which means that firms should concentrate on only one generic strategy at the same time. However, during the last decades the strategic management literature proposed the possibility to employ more than one generic strategy, which can be considered as a combination strategy. Numerous studies published so far do not distinguish between large firms and SMEs and simply suppose that the combination strategy is a valid generic strategy for both types of firms (e.g., Helms et al. 1997; Spanos et al. 2001). Moreover, other researchers (D’Amboise, 1993; Leitner & Güldenberg, 2009) claimed that this combination strategy can also be adopted by SMEs.
This has led to the debate on the mutually exclusiveness of Porter’s (1980) generic strategies and their impact on firm performance. The traditional school of thought state that businesses that are combining more than one generic strategy significantly perform poorer than businesses that adopt either a cost leadership or a differentiation strategy (Porter, 1980; Dess and Davis, 1984; Thornhill and White, 2007). These researcher’s claim that the potential inconsistencies involved in employing these two strategies at the same time, is almost always doomed to failure.
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generic strategies are not necessarily mutually exclusive (Hall, 1980; Hambrick, 1983; Wright, 1987; Buzzell and Gale, 1987; Hill, 1988; Parnell and Wright, 1993; Miller and Dess, 1993; Parnell, 1997; Parnell, 2000; Fjeldstad and Haanaes, 2001 and Lubatkin et al. 2006).
Beside, Leitner and Güldenberg (2009) argue that a combination strategy is a viable choice for SMEs in the long run. Likewise, empirical evidence of Parnell (1997) supports the existence of viable combination strategies. Despite those findings, empirical evidence for the effect of pursuing a combination strategy in SMEs limited. Parnell (1997) argued that regardless of the amount of research that has been published on the strategy-performance relationship, there has been no consensus on the mutually exclusiveness of generic strategies and their relation to firm performance in the existing strategic management literature.
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Güldenberg, 2009). This paper concentrates on the moderating impact of the so called “task environment” (Castrogiovanni, 1991), while this more in-depth perspective of the environment shows more detailed information on features of several individual environmental dimensions. These dimensions address how SMEs interact with competitors, suppliers, customers and other stakeholders (Rosenbusch et al. 2013). Due to the task environment alters decisions, actions and the performance of firms it attempts to be a more applicable perspective than the concept of industry structure as antecedent of SME performance (Covin and Slevin, 1991; Miller, 1983).
Thus, the goal of this study is to discover the moderating impact of task environment on the relationship between business-level strategy and SME performance. Understanding of the strategy-performance relationship and the moderating influences of task environment are needed to contribute to a more thoroughly explanation of the mutually exclusivity of the generic strategies of Porter (1980) within SMEs.
Therefore, the aim of this study is to find out whether there is a moderating impact of task environment on the strategy-performance relationship and whether this positive/negative moderating affects firm’s performance. The results of this study may be of interest of SMEs managers, because when managers understand the linkages among various strategic attributes, they can create a synergistic operation of the business, which could increase firm’s performance. Therefore the central research question in this study will be:
What are the moderating effects of task environment on the generic strategy-performance relationship among Dutch and German SMEs?
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2. Theoretical Framework
2.1 Generic strategies
“Strategy is a unified, comprehensive, and integrated plan…designed to ensure that the basic objectives of the enterprise are achieved” (Mintzberg, 1987, p.2). For organizations that strive to perform very well and to be productive, an effective strategy is necessary (Hambrick, 1982).
Although numerous strategic typologies that categorize business-level strategies have been developed, Porter’s (1980) generic strategies of differentiation, cost leadership and focus have become a leading paradigm in the strategic management literature and it is also frequently found in empirical literature on SMEs (Hill, 1988; Miller, 1988; White 1986). Next to the fact that Porter’s typologies are dominant in the strategic management literature, there are three other reasons why this study has chosen to utilize Porter’s generic strategies. Firstly, Miller (1988) argues that “other strategic typologies of for example Miles and Snow (1978) predate the more theoretically sophisticated strategic notions of Porter” (p.284). Secondly, Porter’s strategic typologies are comparable to other strategic categorizations that are used in literature, as for example Hambrick’s (1985) ‘efficient misers” and Miller and Friesen’s (1984) ‘S5 innovators’. (Marlin et al., 1994). Finally, previous research of Kim and Lim (1988) has claimed that Porter’s strategic typologies have received more empirical support than other typologies.
Porter (1980) has developed three potentially successful generic strategies for positioning an organization in a defensible position which yield higher results than their competitors (p.34). He contended that organizations that do not strictly implement a singular generic strategy are almost guaranteed for lower profitability. Porter (1985) stressed that “achieving cost leadership and differentiation are usually inconsistent, because differentiation is usually costly” (p.18). Moreover, Miller and Friesen’s (1986) findings also leave little doubt that units pursuing cost leadership or differentiation outperform those that do not, particularly in R.O.I.
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The focus strategy is excluded from this study for three reasons. First, as a focus strategy is the application of the two ‘pure’ strategies which targeting on specific industry segments in either a narrow or broad market. Thus, SMEs tend to follow the same cost leadership-differentiation patterns as their larger rivals (Wolff and Pett, 2000). Second, Porter (1980) did not postulate unique organizational requirements for implementing a focus strategy. Third, the researchers Dess and Davis (1984) found no ‘distinct strategic orientations on the part of the managers’ indicative of a focus strategy, although they did find such indications for differentiation and cost leadership strategies. For the sake of clarity and to sharpen the focus of this paper, the study is limited to the two main types of competitive advantage: cost leadership strategy and differentiation strategy (Thornhill and White, 2007). In the next section, this study will further elaborate on these strategies and the combination of those strategies as a viable strategy.
2.1.1. Cost Leadership Strategy
Organizations following a cost leadership strategy are putting efforts in controlling the costs. The main goal of this strategy is to be more efficient than the competitors within the same industry (Porter, 1980). To reach this goal, organizations need to produce high volumes and standardized products. Hereby possibilities of economies of scale and learning effects are providing above the average returns with low prices. Furthermore, to achieve an effective cost leader strategy an organization needs to build efficient-scale facilities, continuous engaging in cost reduction projects, focus on tight cost and overhead control and cost reductions in several areas like sales forces, R&D, advertising and service (Porter, 1980). Most of the time the products produced within this cost leadership strategy are no-frill products that can be produced for relatively low costs and distributed to a large customer base. Porter (1980) argues that “low cost relative to competitors becomes the theme running through the entire strategy, though quality, service, and other areas cannot be ignored” (p.35). For obtaining an overall low cost position, favorable access to raw materials is of great importance, while the availability of these raw materials depends on the characteristics of the environment in which the organization
operates. Moreover, there may
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despite the presence of strong competition. These generated returns should be reinvested in new technically advantaged equipment to sustain the low cost position (Porter, 1980).
Taken together, lower cost can be accomplished by modernizing production and/or implementing process innovations. Finally, Gibcus and Kemp (2003) contented that although SMEs are generally too small to pursue a cost leadership strategy, cost-efficient production is still a key requirement.
2.1.2. Differentiation Strategy
The second proposed strategy by Porter (1980) is the differentiation strategy. Through approaching a differentiation strategy organizations are striving to create a product or service that is perceived as unique within the industry (Porter, 1980). This strategy entails a breadth of products or services offerings, technology, special features, or customer service (Porter, 1980). Through creating unique features organizations can create superior value to customers, consequently this also means that this has to go along with additional costs, wherefore the organizations requires a premium price.
Furthermore, it should be stressed that within the differentiation strategy costs cannot be ignored, but rather they are not the primary objective (Porter, 1980). For earning above-average returns with this strategy, firms need to protect against their competitors. This could be reached due to brand loyalty by customers, which result in lower price sensitivity of this customer group. Along these lines firms can be create entry barriers by their uniqueness of products and their customer loyalty.
Finally, researchers found that a differentiation strategy appears to be the most popular competitive strategy used by SMEs (Watkin, 1986; Weinstein, 1994, Gibcus and Kemp, 2003).
2.1.3. Combination of Cost Leadership Strategy and Differentiation Strategy
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smaller firms support the successful realization of such a combination strategy” (p.183). Several researchers have tried to find evidence to prove that combinations of strategies can also lead to higher performance within SMEs (Parnell et al. 2004; Spanos et al. 2004; Wu et al. 2007). In empirical research of Hall (1980), it has been found that a minority of the most successful companies simultaneously pursued both a differentiation strategy and a cost leadership strategy. Subsequently, White (1986) researched 69 business units and found that there were 19 business units, which were employing a combination of differentiation and cost leadership strategy resulting in a competitive advantage. Likewise, White (1986) found evidence that successfully established combinations of differentiation and cost leadership were resulting in the highest returns on investment. Moreover, Hill (1988) stated that “there is often no unique low-cost position in the market, therefore a firm may have to base its sustainable competitive advantage on the simultaneous and continuous pursuit of both low cost and differentiation” (p.411). For example retailers can employ this combination of strategies by maintaining low costs through staffing and inventory control methods resulting in reduced overhead. Next to focusing on the costs the retailer has to build an exclusively image based on superior service and high quality merchandise, which should enable the retailer to charge a premium price (Cappel et all., 1994). Leitner and Güldenberg (2009) consolidate to this view by arguing that modern technologies and management practices, like quality management practices and flexible technologies, grant organizations to simultaneously reduce costs and differentiate products.
Furthermore, Murray (1988) claimed that the two generic strategies are indeed compatible. He argued that the preconditions for a viable cost leadership strategy emerge from an industry’s structural factors, while the requirements for a successful differentiation strategy are related to customer tastes. Since these two external factors are independent and exist in various industries, Murray (1988) concluded that it should be possible to pursue a combination of both generic strategies.
2.2 Task Environment
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construct gives more comprehensive details about which environmental dimensions influence SME performance. Moreover, the task environment is a different perspective compared to other studies that were using ‘industry structure’ (McGahan and Porter, 1997; McNamara et al. 2005; Rumelt, 1991; Short et al., 2007). Castrogiovanni (1991) conceptualized task environment as: the environmental dimensions that address how firms interact with customers, competitors and other stakeholders. Therefore, firms could operate in the same industry, but are dealing with a totally different task environment. Take for example, two clothing shops in Amsterdam and Groningen who operate in the same ‘clothing industry’, they could work in a really different task environment. The clothing shop located in Amsterdam is experiencing a much more dynamic and hostile environment, due to high competition and fast changing trends in the capital compared to a store located in the main shopping street of Groningen. Nevertheless, it is still unclear how firms exact utilize the opportunities and resources provided by the environment, and their impact on SMEs performance.
Most organizational theorists acknowledge that the organizational task environment is composed of multiple dimensions (Boyd, 1995). The principal way to describe and conceptualize task environment is by the following three dimensions: munificence, dynamism and complexity, which were developed by Dess and Beard (1984). However, in the literature there is a loose consensus regarding the relevant dimensions of the organizational task environment (Bluedorn, 1993). Dess and Beard (1984) have based their three dimensions of organizational task environment on the earlier developed six environmental dimensions of Aldrich (1979).
This research has analyzed the original six dimensions of Aldrich (1979) and noticed that ‘environmental capacity’, described as the relative level of resources available, was not covered by the framework of Dess and Beard (1984). Therefore, this study has reconciled the previously established dimension ‘environmental capacity’ of Aldrich (1979) with the construct of environmental hostility developed by Colvin and Slevin (1989). Finally, the dimension of environmental munificence is excluded in this study, because this dimension is the polar opposite of hostility (Khandwalla, 1976).
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Environmental dynamism represents to both the uncertainty and unpredictability of possible market changes and developments (Khandwalla, 1972; Miller and Friesen, 1983). Environmental dynamism has been defined in terms of an individual's perceived inability to understand the direction in which an environment might be changing (Milliken, 1987). For example, highly uncertain environments could be perceived as very risky, including a context in which one inaccurate decision could result in serious trouble and put the survival of SMEs in danger. Beard and Dess (1984) stated that: “environmental dynamism should be restricted to change that is hard to predict and that heightens uncertainty for key organizational members”
(p.56). Furthermore,
turbulence within the environment can lead to externally caused changes that are vague to managers and thus difficult to plan for (Aldrich, 1979). So there can be concluded that uncertainties emerge from the lack of information about coming events and the effects, as well as the responses to them (Khandwalla, 1972). Similarly to Khandwalla (1972), Pfeffer and Salancik (1978) stated that these uncertainties are proceeding from the interconnectedness among organizations and that “changes can come from anywhere without notice and produce consequences unanticipated by those initiating the changes and those experiencing the consequences” (p.68). A dangerous posture in a dynamic environment is when firm are not capable of introducing new products or services: existing knowledge or competencies can become obsolete, which occurs rigidities within the firm that could enhance a downturn of the
firm.
2.2.2. Environmental Hostility
This research strives to explain the concept of a hostile environment by using the familiar work of Colvin and Slevin (1989). These authors compose hostile environments as: “characterized by precarious industry settings, intense competition, harsh, overwhelming business climate, and the relative lack of exploitable opportunities” (p.75). Khandwalla (1972) interpreted environmental hostility as a condition of perceived threat to the organization’s primary goals. This might be for example a threat of liquidity, market share or profitability. In other words, environmental hostility originates from a scarcity of resources and opportunities and it implies intense competition for those scares resources (Covin and Slevin, 1989; Miller and Friesen,
1983). Organizations that operate in
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endanger the survival of organizations and thus it is of great importance to follow a strict strategic discipline within hostile environments (Porter, 1980). Facing the difficulties of acquiring the scarce resources in a hostile environment, small and medium sized firms should build an organic structure, an entrepreneurial strategic posture, high product prices, a competitive profile characterized by a long-term orientation and should have a concern for predicting industry trends (Covin and Slevin, 1989).
2.2.3. Environmental Complexity
The third dimension of task environment is the complexity of an environment. This complexity is associated with the amount and diversity of information, knowledge, resources and capabilities that are required to operate successfully (Mintzberg, 1979). Child (1972) conceptualized environmental complexity as “the heterogeneity of and range of an organization’s activities” (p.3). This environmental complexity can result from the large number and variety of organizations with which a firm must interact. For example, the competition within the market for different inputs to produce as much differentiated outputs (Dess and Beard, 1984). Other researchers argued that mangers that face a more complex (i.e. heterogeneous) environment will feel more uncertainty and will have a greater necessity for information-processing than managers within a simple environment (Duncan, 1972; Pennings, 1975).
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2.3 Firm performance
One of the thorniest issues in today’s academic research is the operationalization of the business performance concept. For researchers in the strategic management field it is impossible to stay away from defining and measuring business performance accurately, mainly due to the fact that performance improvement is a vital element in strategic management. Although the importance of the firm performance construct is widely recognized, this has not resulted in any agreement on basic terminology and definitions (Venkatraman and Ramanujam, 1986).
Schendel and Hofer (1979) agrees that many strategic management theories underestimate the implications of performance either implicit or explicit in the past, since performance is the time test of any strategy. Beside, Hofer (1983, p.44) conclude that “… it seems clear that different fields of study will and should use different measures of organization performance because of the differences in their research questions”.
Researchers frequently distinguish performance into subjective and objective measures (Van der Stede et al., 2006). The approach for measuring subjective business performance has both pros and cons. With self-reported financial data less problems are caused by interpretation problems and the aggregation of data. In contrast, problems arise with the probability of biased data (Venkatraman and Ramanujam, 1986). Dess and Robinson (1984), argued that despite subjective performance measures could be prone to several reporting biases, subjective performance measures have relatively strong correlations with objective performance measures, especially when researchers are dealing with small business or new ventures.
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2.4 Hypothesis Development
2.4.1. Moderating Influence of Environmental Dynamism
Organizations that pursue a differentiation strategy are responding in a better manner to environmental dynamism, due to creating organizational segments to deal with and by reducing and structuring corresponding elements of uncertainty in the environment (Khandwalla, 1972).
In the
literature, researchers (Hofer and Schendel, 1978; Miles and Snow, 1978; Miller and Friesen, 1984) suggested that firms with a differentiation strategy have to deal with state-of-the-art technologies, unpredicted competitor and customer reactions, and the combining of various unstructured marketing problems (Hofer and Schendel, 1978; Miles and Snow, 1978; Miller and Friesen, 1984), and are therefore more able to handle dynamic environments. For example, Pelham and Lieb (2011) found that there are significant positive relations between perceived industry technical/market turbulence and reported growth/differentiation strategy. Moreover, the researchers Leitner and Güldenburg (2009) contented that product innovation is next to product quality one of the two manners in how SMEs can differentiate itself from their competitors, and that differentiation is of great importance for firms to survival in highly dynamic environments. Therefore, the first hypothesis is the following:
H1: Environmental dynamism is positively moderating the relationship between differentiation strategy and SMEs performance.
Miller (1988) suggests that “cost leadership strategies are more appropriate in stable environments, since dynamic environments that are unpredictable or subject to much change will create serious diseconomies for organizations trying to pursue a cost leadership strategy” (p.284). Besides, Khandwalla (1972) has indicated that environmental dynamism or uncertainty increases difficulty in planning. Therefore, for firms operating in a highly dynamic environment planning of production, and planning of capacity expansion are very difficult to forecast.
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When new products or trends in the market are overlooked by the firm, SMEs survival or growth can become in danger. Miller (1988) has tried to find support for a negative relationship between environmental dynamism and cost leadership, but his study did not found evidence to support this hypothesis. Pelham and Lieb (2011) tested the same hypothesis as Miller did in 1988 and they found a negative significant relationship between industry technical/market turbulence and reported growth pursuing a cost leadership strategy. To summarize, a cost leadership strategy cannot be very effective strategy in highly dynamic environments that require frequent product and technological changes. Therefore, the second hypothesis will be:
H2: Environmental dynamism is negatively moderating the relationship between cost leadership strategy and SMEs performance.
Leitner and Güldenburg (2009) found empirical evidence about SMEs that follow a combination strategy, which realized higher profitability than firms that had pursued a differentiation strategy. In addition, Parnell (1997) supposed that combination strategies may be more appropriate in volatile, dynamic industries, because these organizations attempt to combine attributes of both the generic strategies. Parnell (p.176) suggested that “such businesses provide quality and value-oriented offerings to the market in a timely fashion, remaining flexible and changing continuously”. Finally, a combination strategy allows SMEs to maintain greater agility and flexibility in offering products that focus either more on costs or on a specific product feature (Anand and Ward, 2004; Parnell and Hershey, 2005). Therefore, the third hypothesis is as follows:
H3: Environmental dynamism is positively moderating the relationship between a combination of cost leadership and differentiation strategy and SMEs performance.
2.4.2. Moderating Influence Environmental Hostility
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term orientations (Hall, 1980). These higher price levels could be best aligned with the aforementioned conditions of differentiation strategies. Therefore, the fourth hypothesis is described as follows:
H4: Environmental hostility is positively moderating the relationship between differentiation strategy and SMEs performance.
Hambrick (1983) found evidence that suggests that a cost leadership strategy is more effective in a benign environment with stable prices. Therefore, it is logical that the reverse relation for SMEs (less effective) takes place in hostile environments, and thus performance decline.
In addition, firms operating in hostile environments face difficulties in acquiring resources such as financial and human capital, which leads to higher costs in requiring alternatives (Rosenbusch et al., 2013). Thus, the fifth hypothesis is described as follow:
H5: Environmental hostility is negatively moderating the relationship between cost leadership strategy and SMEs performance.
Spanos et al. (2004) stated that hybrid strategies could be the most appropriate strategy in industries with hyper competition. Through combining the generic strategies of differentiation and cost leadership, firms will not only reduces the perils of specialization, but also grant organizations to profit from multiple abilities and exploiting potential synergies among the different strategy aspects.
Finally, Wu et al. (2007) argued that “firms with tight coupling between differentiation and efficiency outmanoeuvred those with a mutual exclusive generic strategy or no generic strategy at the time of high environmental hostility” (p.75). Therefore, the sixth hypothesis is stated below:
H6: Environmental hostility is positively moderating the relationship between a combination of cost leadership and differentiation strategy and SMEs performance.
2.4.3 Moderating Influence of Environmental Complexity
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higher needs for intensive internal differentiation. Lastly, as environmental complexity increases, firms will make more use of new dimensions of quality and service to differentiate themselves (D’aveni, 2010). Based on the aforementioned arguments the seventh hypothesis is the following:
H7: Environmental complexity is positively moderating the relationship between differentiation strategy and SMEs performance.
A cost leadership strategy requires that product-lines are more stable and that innovations deal mainly with production processes (Porter, 1980). Besides, these firms have a strong focus on efficiency, and are therefore unwilling to incur costly changes (Miller, 1986). However, in complex environments technologies can develop very quickly on an unpredictable track (Branzei, Thornhill, 2006). Thus, firms that pursue a cost leadership strategy are forced to make more cost in complex environments when anticipating on the customer needs. Therefore the eighth hypothesis is the following:
H8: Environmental complexity is negatively moderating the relationship between cost leadership strategy and SMEs performance.
Osborn (1976) argued that “as complexity increases, firms should become more flexible, adaptive and organic and thus more effective” (p.179). Moreover, Staber and Sydow (2002) claimed that developing an adaptive capacity, which refers to the ability to cope with unknown future circumstances, is an alternative strategy that permits ambiguity and complexity. Furthermore, a number of empirical studies (Miller and Dess, 1993; Parnell 2000) demonstrated that a combination strategy can help to maximize adaptive capacity, as firm do not have to rely solely on cost-base or differentiation advantages. Thus, through employing a combination strategy, SMEs can enhance their adaptive capacity and react to deal with complex environments. Therefore, the ninth hypothesis is the following:
19 H3 H2 H1 H6 H5 H4 H9 H8 H7 - + + - + - + SMEs Performance Differentiation Strategy Cost Leader Strategy Combination Cost Leadership/ Differentiation
Dynamism Hostility Complexity
Figure 1: Conceptual Model
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3. Methodology
3.1. Sample and Data collection
This research has focused on small and medium enterprises within Germany and the Netherlands. Therefore, the European definition of SMEs is used, which lay on a fixed cut-off rate at 250 employees (Story and Greene, 2010). The data used to test the study’s hypotheses are gathered by interviewing the owner-manager of the respective SMEs, and through a questionnaire (see Appendix) that was built by Andreas Rauch of the Rijksuniversiteit Groningen. The interviews lasted between 60 and 90 minutes and the questionnaires around 25 minutes and were done separately for Germany and The Netherlands1. The first part of data gathering was specified to German SMEs, they were contacted between 2013 and 2014, by random selection from the business registrations of the Chamber of Commerce settled in Lüneburg. This allows the drawing of a representative sample. After this selection, 800 firms were informed about the research and requested to participate. In a period of three days after the request letters for participation were send, firms were contacted by telephone. Two selection criteria had to be met by firms to be included in the sample of this research. First, SMEs need to have at least one employee and secondly they may be no longer operational than twelve years. Subsequently, during the call process approximately half of the business did not meet the selection criteria. Of the 800 firms contacted, a total of 87 German firms agreed to participate in the study and met the aforementioned requirements. The second part of data gathering was specified to Dutch SMEs, contacted in 2015. Research data was gathered by using two methods. First, companies were selected at random from the personal network and were contacted by telephone or personal visits. Second, an email was sent to all alumni in the database of former Small Business & Entrepreneurship students of the Rijksuniversiteit Groningen to participate in this study. These methods of personal contacting assured a higher response rate. Of the 14 contacted firms, a total of 10 Dutch SMEs agreed to
participate. Resulting in a total sample
of 97 SMEs, a response rate of 11.9 per cent. The characteristics of the participating firms for the subjective performance (SP) and the objective performance (OP) sample can be found in Table 1 and Table 2 on the next page.
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Table 1 Characteristics of the Sample with Subjective Performance (SP) N=82
Characteristics Mean/Frequency Percentage
Age of company (average) 6.51 years Size of company (average) 6.59 employees
Nationality Germany 72 87.8% Nationality Dutch 10 12.2% Industry Trading 14x 17.1% Craft 11x 13.4% Service 49x 59.8% Production 8x 9.8%
Table 2 Characteristics of the Sample Employment Growth (OP) N=86
Characteristics Mean/Frequency Percentage
Age of company (average) 6.60 years Size of company (average) 6.57 employees
Nationality Germany 79 91.8% Nationality Dutch 7 8.1% Industry Trading 17x 19.8% Craft 9x 10.5% Service 52x 60.5% Production 8x 9.3% 3.2 The Measures
22 3.2.1 Generic strategies
The way in which generic strategies are measured can have great impact on the outcome and therefore it is crucial to measure strategy accurately. Multiple researchers have indicated strategy based on answers provided by the owner/manager, whether they classify themselves to be a differentiator or a low cost producer (Beal, 2000; Pelham, 2000; Thornhill and White, 2007).
To classify the pursued generic strategy of SMEs, an interview which approximately lasts 60 minutes has been used. While many scholars use intentions to operationalize strategies, this study focused on the realized strategy, by interpreting the examples given by the interviewee. Business owners and/or CEO’s were first asked to answer closed questions about which of the three strategies: differentiation, cost leadership or focus they had executed during the last five years. When the first question was answered, the interviewer asks the interviewee to describe more precisely the pursued strategy, asking for concrete examples of actions. After this detailed explanation of the owner-manager, the interviewer assesses the described strategy.
The assessor has to fill in five point (1-5) scales for each of the following strategies: differentiation, cost leader and focus. This is done as follows. First, SMEs that could be classified as employing a differentiation strategy were rated by the interviewer on a scale 1-5 (1= ‘low differentiator’ and 5= ‘high differentiator’). Second, SMEs that could be classified as employing a cost leadership strategy were rated by the interviewer on a scale 1-5 (1 = ‘low cost leadership’ and 5 = ‘high’ cost leadership’). Third, firms which identified themselves as pursing a focus strategy on the first question are treated differently. These firms cannot score high or low on the focus strategy, because this is excluded in this research. This is done because Porter (1980) had determined a focus strategy as the application of a cost leadership strategy or differentiation strategy in a specific industry segment or a narrow market. Thus, in the case of a focus strategy the interviewer had to assess the examples given by the owner/manager on characteristics of a cost leadership strategy or differentiation strategy. Therefore, the assessor has to rate the focus strategy on a scale 1 to 5 (1 & 2 = differentiation, 3 = ‘no clear distinction’ and 4 & 5 = cost leadership). When the assessor could not clarify specific characteristics of a differentiation strategy/cost leadership strategy to these focus strategy firms, SMEs were rated with a value of 3 ‘no clear distinction’. These SMEs can be seen as firms without generic strategy, and for that reason excluded from the sample.
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differentiation strategy (1-5) are added together (2-10). This study proposed one criteria for the classification of a combination strategy. This criteria is formulated as follow: scores have to be above 4 to be classified as a combination strategy, except for the combination 1+1. Therefore, the scale 2-10 had to be converted to1-8 scale (values of 1 and 3 cannot be obtained for the combination strategy). Thus, SMEs pursuing a combination strategy can score along a continuous scale of 1-8, (1= ‘low’ and 8= ‘high’). The process of converting the separate values into a combined scale of combination strategy is strictly conducted by following the rules, which are listed in the conversion table (see Appendix).
3.2.2 Environmental Dynamism, Hostility and Complexity
All the moderating variables were measured by the questionnaire. Using the earlier developed measurement scales for environmental dynamism, hostility and complexity ensures a higher reliability and validity of the research.
Environmental Dynamism. A five-item scale, developed by Miller and Friesen (1982),
was used to measure environmental dynamism (see Appendix). The items on dynamism were coded as SPS1 to SPS5 and are measured on a 7-point Likert scale. Information is gathered over the perceived rate of change in marketing practices, customers demand and tastes, modes of production and or service, likewise the rate of obsolesce in the market and the rate of prediction of competitors. The respondent’s ratings on these 5-items were averaged to arrive a single environmental dynamism scale for each firm. The higher the scale, the more dynamic the firm’s environment.
Environmental Hostility. A three-item scale, developed by Khandwalla (1976), was used
to measure environmental hostility (see Appendix). The items were coded as EH1 to EH3 and are measured on a 7-point Likert scale. Information about the degree to which the owner-manager perceived their task environment as safe, rich in opportunities and degree of control has been gathered. The respondent’s ratings on these 3-items were also averaged to arrive at a single environmental hostility scale. The higher the scale, the more hostile the firm’s environment.
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items were averaged to arrive at a single environmental complexity scale. The higher the scale, the more complex the firm’s environment.
3.2.3. Firm Performance
This research includes financial indicators, which were gathered through interviews and questionnaires. Literature on this topic shows a strong correlation between self-reported, perceived measures of performance and objective measure of performance (Dess and Robinson, 1984; Covin and Slevin, 1988). Therefore, this research will use both ‘soft’ subjective performance measures and ‘hard’ objective performance measures in the form of employment growth. Subjective financial performance measurements such as ratings of growth or profitability compared to competitors during the last three years are used here in combination with objective measures of absolute employment growth. The
subjective performance measures the self-reported performance satisfaction and company development during the past three years by a ten-item scale (see Appendix). This scale is developed by Wiklund and Shepherd (2003). Owners-managers were asked to compare themselves, with attention to the developments the company has made, to their competitors, during the last three years, on items like sales or net profit. The items were measured on a 5-point Likert scale (where 1= much worse than the competitors and 5= much better than the competitors) and coded as SU1 till SU10. Based on this sequence we calculated the mean, providing us with an average value for performance satisfaction and company development. The ‘hard’ objective performance can be measured in absolute terms or relative terms. Absolute measures tend to ascribe higher growth to larger firms whereas smaller firms more easily reach impressive growth in percentage (i.e., relative) terms (Delmar et al., 2003). This study has a focus on SMEs and therefore has used absolute terms to measure employment growth. The employment growth is derived from the interview and is calculated in two ways. First, part-time employees were calculated as 0.5 of full time employees and added to the total number of full time employees. This absolute employment growth was calculated for the years 2012 and 2013. To calculate the absolute employment growth the total number of full time employees in 2013 was subtracted from the total number of full time employees in 2012.
3.3. Control Variable
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negatively have influence on the performance of SMEs (Zhu et al., 2006). Therefore, SMEs in this research sample are recoded into dummy variables (1= founded in Germany and 0 = founded in the Netherlands).
3.4 The Analytical Technique
First, a factor analysis is conducted to determine whether the dimensions of task environment are significantly distinct of each other. Hereafter, the Cronbach’s Alpha’s are computed to find out the reliability of the moderator variables. To discover if there are variables that show any multicollinearity a correlation analysis is conducted. Multicollinearity could exist when two or more independent variables are highly correlated (Donald and Robert, 1967).
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4. Results
Table 3 Factor analysis for the task environment construct (Varimax rotation)
Task Environment
Dynamism Hostility ComplexityEH1 The external environment is very unsecure and threatens the company’s survival functioning .853
EH2 The external environment is very stressful, demanding,
hostile and difficult. .771
EH3 The external environment cannot easily be controlled or
manipulated by the firm to gain competitive advantage .753 CPL1 The external environment is technologically a very
sophisticated and complex environment .852
CPL2 The external environment is extremely R&D oriented
industry (e.g. telecommunication, space, pharmaceuticals) .872 SPS1 Our firm must change its marketing practices extremely
frequently (e.g. semi-annually) .702
SPS2 The rate at which products/services are getting obsolete in
the industry is very high .507 .629
SPS3 Actions of competitors are unpredictable .721
SPS4 Demand and tastes are almost unpredictable (e.g. high
fashion goods) .768
SPS5 The modes of production/service change often and in a
major way .577 .659
Table 4 Explained Variance Environmental Dimensions
Variable Explained Variance
Environmental Complexity 36.28 %
Environmental Dynamism 19.61 %
Environmental Hostility 12.16 %
Total Explained Variance 68.05 %
Variable Cronbach’s Alpha
Environmental Dynamism .650
Environmental Hostility .727
Environmental Complexity .795
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Table 5 Cronbach’s Alpha’s of the task environment and subjective performance variables Table 6 Variance inflation factors of variables
Although the effects (e.g. dynamism) of some of the environmental dimensions (e.g. complexity and hostility) might have been similar, there was no theoretical rationale for the assumption of independence of the three environmental factors (Dess and Beard, 1984). Therefore a principal components analysis followed by varimax rotation was used (Table 3). This factor analysis was done on the items related to the task environment: dynamism, hostility and complexity. The exploratory factor analysis showed a 3-factor solution with eigenvalues
of above 1.0. This factor
analysis resulted in a total explained variance of 68.05% (see Table 4 above). Hair et al. (1998) stated that a factor loading of 0.6 and above can be considered as significant. Therefore, environmental dynamism consist of 3 items SPS1, SPS3, SPS4. The items SPS2 and SPS5 show high factor cross-loadings and are therefore removed. Environmental hostility consist of 3 items EH1, EH2, EH3 as can be seen in Table 3. Finally, the complexity of the environment consists of 2 items CPL1, CPL2. The Kaiser-Meyer-Olkin Measure of Sampling Adequacy (KMO) was .725 with a significance level of 0,000 and determinant level of .019.
In Table 5 the Cronbach’s Alpha values are displayed for the environmental constructs and the subjective performance (SP) measure. The Cronbach’s Alpha present the internal consistency of the items used to measure the construct. Generally, values above 0.7 are found to be reliable measure, accepting the combining of the items of a construct (Field, 2005), with the exception of environmental dynamism, which was adjusted through the factor analysis. All the other constructs exceed the threshold.
Table 6 above demonstrates the variance inflation
Variable Variance inflation factor (VIF)
Differentiation Strategy 1.675
Cost Leadership Strategy 1.297
Combination Strategy 1.607
Dynamism 1.427
Hostility 1.150
Complexity 1.155
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factor (VIF) values. This analysis is conducted to measure the multicollinearity of the variables used in both the multiple regression analysis (SP & OP). When the VIF values exceeding a certain threshold, there can be argued that there is multicollinearity. Currently the threshold is set on a value of 5, but this is subject of discussion (Kutner, Nachtsheim, Neter & Li, 2004). Keeping in mind the threshold of 5 none of the variables used in this research are showing any evidence of multicollinearity.
Table 7 on the next page presents the descriptive statistics and correlations for the variables in this study. There is a negative significant relation between the control variable country, which stands for the nationality of the SMEs (German or The Netherlands) and the absolute measured objective performance of employment growth (OP). This shows that German SMEs are underperforming compared to Dutch SMEs on employment growth. A second relation that could be found is the positive significant relationship between environmental dynamism and environmental hostility, which is below the .01 significance level. Whereas the environmental complexity is on a 5 percent level correlated to environmental dynamism. The correlation between the environmental concepts is as expected, because each construct measures features of the task environment (Dess and Beard, 1984; Covin and Slevin, 1989). Furthermore, the strongest negative correlated relationship is found between environmental hostility and the subjective performance (SP) of SMEs. This indicates that firms operating in a highly hostile environment, with little available resources and high competitiveness, the owner-managers assess their own performance lower as compared to their
competitors in the same industry. Notice, an opposite
relation for the objective performance (OP) and environmental hostility could be explained through the responded biases of the subjective performance measure (Venkatraman and Ramanujam, 1986). This because, in reality, the employment of the firm grows, even if owner-mangers evaluate that they are less performing than their main competitors in the market.
29 Table 7 Summary statistics and correlation matrix
Variable Mean SD 1 2 3 4 5 6 7 8 9 10 1 Country 0.95 0.23 1 2 Dynamism 3.54 1.32 -.079 1 3 Hostility 3.22 1.18 .008 .287** 1 4 Complexity 3.71 1.85 .029 .231* .030 1 5 Differentiation strategy 2.08 1.35 -.125 .132 -.007 .131 1 6 Low-cost strategy 1.28 0.80 .122 -.234* -.164 .071 -.294** 1 7 Combination strategy 2.21 2.35 .023 .206* .004 .017 -.410** -.207* 1 8 Subjective Performance 3.64 0.52 .043 -.205* -.555** -.047 .142 -.067 -.053 1
9 Objective Performance absolute 0.97 3.89 -.339** .034 .273** .016 -.051 -.118 -.059 -.013 1
10 Objective Performance relative 0.16 0.62 -.138 .136 -.053 .255* .205 -.080 -.136 .103 .439** 1 **p < 0.01
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Table 8 Moderator Regression Analysis Dependent Variable: Subjective Performance (SP)
St. Beta = Standardized Coefficients Beta + p < 0.10; * p < 0.05; ** p < 0.01
N=82
Model 1
Model 2
Model 3
St. Beta Sig. St. Beta Sig. St. Beta Sig.
Model 1
Control Variable
Country .067 .559 .074 .449 .066 .509
Independent Variables
Differentiation Strategy .106 .434 .025 .842 -.504 .787
Cost Leadership Strategy -.059 .640 -.154 .158 -.621 .695
Combination Strategy -.075 .566 -.075 .528 -.416 .764 Model 2 Moderators Environmental Dynamism .002 .988 .034 .775 Environmental Hostility -.562 .000** -.606 .000** Environmental Complexity -.015 .882 .063 .559 Model 3 Interaction Variables
Dynamism x Differentiation Strategy -.045 .675
Dynamism x Cost Leadership Strategy .270 .135
Dynamism x Combination Strategy -.076 .506
Hostility x Differentiation Strategy -.181 .091+
Hostility x Cost Leadership Strategy -.239 .097+
Hostility x Combination Strategy .004 .972
Complexity x Differentiation Strategy -.084 .452
Complexity x Cost Leadership Strategy -.148 .188
Complexity x Combination Strategy .186 .076+
Total Variance (R2) .029 .334 .481
R2 change .029 .305 .147
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Table 9 Moderator Regression Analysis Dependent Variable: Objective Performance (OP) Employment Growth
St. Beta = Standardized Coefficients Beta + p < 0.10; * p < 0.05; ** p < 0.01
N=86
Model 1
Model 2
Model 3
St. Beta Sig. St. Beta Sig. St. Beta Sig.
Model 1
Control Variable
Country -.329 .002** -.336 .001** -.175 .070+
Independent Variables
Differentiation Strategy -.182 .148 -.136 .289 -.027 .863
Cost Leadership Strategy -.168 .157 -.098 .420 .026 .863
Combination Strategy -.159 .198 -.089 .474 -.013 .912 Model 2 Moderators Environmental Dynamism -.081 .470 -.026 .794 Environmental Hostility .299 .007** .155 .142 Environmental Complexity .011 .913 .090 .349 Model 3 Interaction Variables
Dynamism x Differentiation Strategy .035 .713
Dynamism x Cost Leadership Strategy .319 .036*
Dynamism x Combination Strategy .030 .763
Hostility x Differentiation Strategy -.071 .483
Hostility x Cost Leadership Strategy -.691 .000**
Hostility x Combination Strategy .068 .488
Complexity x Differentiation Strategy -.034 .744
Complexity x Cost leadership Strategy .236 .021*
Complexity x Combination Strategy .001 .991
Total Variance (R2) .150 .226 .541
R2 change .150 .076 .315
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4.1. Results for the dependent variable Subjective Performance (SP) (Table 8)
Table 8 predicts the results of the moderating regression analysis with the dependent variable subjective performance (SP). This analysis was conducted by 3 Models. The first Model (1) includes the control variable country and the three independent variables for business-level strategies. In second Model (2) the moderating variables are included, whereas in the third and last Model (3) the interaction between business-level strategy and the task environment moderators are generated.
Model 1 predicts no significant relationships for the control and independent variables. Analysing Model 2, which includes the three task environment constructs, one significant negative relationship for environmental hostility appears (β = -.562, p = .000). This result proves that when the environment is more hostile, the subjective performance of the SME worsened in general.
To test hypotheses H1 up to H9, the interactions between the business-level strategies and moderators have been conducted in Model 3. The moderating influences of the task environment on the strategic-performance relationship showed two supported hypotheses, H5 and H9, for the multiple regression analysis on the dependent variable subjective performance (SP).
Hypothesis H5 is supported, because the regression analysis shows a negative moderating effect of a hostile environment on the relationship between firms pursuing a cost leadership and their subjective performance (β = -.239, p = .097).
The second supported hypothesis is H9, which can be related to the positive moderating influence of environmental complexity on the combination strategy-performance relationship (β = .186, p = .076) is supported, while this positive effect was proposed in the hypothesis
development section. Only one
significant relationship in the moderator regression analysis for the dependent variable subjective performance is predicting the opposite relationship as proposed by hypothesis 4 (β = -.181, p = .091), thus hypothesis 4 is rejected. Summarizing, this research has found evidence to support two hypotheses, namely hypothesis H5 and hypothesis H9. Besides these findings all the other hypothesis had to be rejected.
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4.2. Results for the dependent variable Employment Growth (OP) (Table 9)
The second moderator regression analysis is conducted for the dependent variable employment growth (OP), and is displayed in Table 9. Results have indicated that the nationality of SMEs are influencing the employment growth of firms, as predicted for all the models (Model 1, Model 2 and Model 3). For Model 3, this relationship (β = -.175, p = .070) assumed that German SMEs are significantly underperforming compared to the Dutch SMEs when taken in account the employment growth. Notable, this relation is weakened when the interaction variables are also included. For hypothesis H2, a negative moderating impact of environmental dynamism on the relationship between cost leadership and firm performance was proposed. However, contrary to our expectations, hypothesis H2 (β = .319, p = .036) showed the opposite significant coefficient and therefore have to be rejected.
Support is found for hypothesis H5 (β = -.691, p = .000), because Model 3 shows a negative moderating effect of a hostile environment on the relationship between firms employing a cost leadership and their subjective performance.
Similar to hypothesis H2, there is contrary evidence for hypothesis H8, which also shows the opposite significant coefficient (β = .236, p = .021). For hypothesis 8 the study expected a negative moderating influence of a complex environment for firms pursuing a cost leadership strategy, but the contrary is found in the regression analysis.
The total explained variance (R2) is 54.1% with a F change significant level of .000 which can be seen as highly reliable model with a high predictive power of the dependent variable employment growth.
4.3. Overall findings for Subjective and Objective Performance
Firstly, the control variable ‘country’ was only significant in the regression model for employment growth (OP).
Secondly, in both the regression models (SP & OP) found evidence for supporting hypothesis H5, which predicted that when the environmental hostility is SMEs that were pursuing a cost leadership performance significant lower.
Thirdly, the second hypothesis that could be supported was hypothesis H9, which is only supported in the regression model for employment growth (OP), which indicated that as there is a highly complex environment a combination strategy will perform better under this conditions.
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5. Discussion
This empirical research tries to investigate and broaden the knowledge on the moderating impact of the task environment of SMEs, on the strategy-performance relationship, and thereby adding value to the missing link in literature. By providing evidence for the moderating effects of environmental hostility (H5) and environmental complexity (H9) on the strategy-performance relationship, this study tries to contribute to a better understanding of the mutually
exclusivity paradox. In line with
the expectations, both the regression analysis for subjective (SP) and objective performance (OP) have found evidence to support hypothesis H5, which has shown the significantly negatively moderating effect of hostile environments on the relationship between firms that pursue a cost leadership strategy and their subjective/objective performance.
First, an explanation for hypothesis H5 based on the subjective performance (SP) regression model (Table 8), could be that large firms benefit at the expense of SMEs due to greater market shares and higher volume. In such case it is easier for the bigger firms to compete for resources and opportunities in a hostile environment (Rosenbusch et al., 2013). Second, an explanation for the relationship of hypothesis H5 for the objective performance (OP) regression model (Table 9), can be directly related to the characteristics of a cost leadership strategy, which may reflect the impact of continuous cost-reduction efforts on employment growth (OP). Thus, for SMEs to compete in hostile environments the first responding actions to reduce the costs, is to fire a number of employees (Leitner and Güldenberg, 2009). At the end, the support for hypothesis H5 confirms the earlier results of Hambrick (1983), who has contended that a cost leadership strategy is more effective in a benign environment than in a hostile environment.
Furthermore, the subjective performance (SP) regression model (Table 9) of this study delivers evidence to support hypothesis H9. A positive moderating effect was found on the relationship between SMEs employing a combination strategy and their subjective performance. This relationship indicates that combination strategies have probably a more generic character, and therefore can be applied under complex conditions of the environment (Leitner and Güldenburg, 2009). This is in line with the earlier arguments presented in the hypotheses development section.
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German firms. This has to interpret with caution, since the objective performance (OP) analysis consist of only 7 Dutch SMEs and a total of 79 German SMEs.
Noteworthy, this study has found the opposite relationship as predicted for the following moderator hypotheses: H2, H4 and H8. Thus, these had to be rejected. Starting with explaining hypotheses H2 and H8 that have shown the opposite significant positive relation for the dynamic and complex environments, as this research had proposed to find a negative relationship for firms pursuing a cost leadership strategy operating in these task environments. A clarification for the founded opposite relations could be that in a complex or dynamic task environment, the higher need for information, a more extensive network and a strong capability of information processing increases costs. However, in the end this could have led to a higher efficiency within the SME, what outweigh the total incurred costs (He et al., 2009).
Likewise, hypothesis H4 is also presenting an opposite moderating impact. The negative moderating effects was found for the differentiation strategy-performance relation, for the subjective performance (SP) analysis. Instead of the proposed positive moderating influence of a hostile environment for firms with a differentiation strategy, a slightly significant negative impact was found. This finding can be explained through the negative overall features of a hostile environment. For example, “environmental hostility indicates unfavourable external forces for a firm’s business, such as radical industry changes, regulations, fierce rivalry” (Zahra and Garvis, 2000, p.475) and legal, political and economic constraints (Miller, 1987).
The differences found between the subjective (SP) and objective (OP) regression analysis can be assigned to changes in SMEs within these sub-sample (Table 1 and Table 2). Therefore it’s not possible to make a comparison between both the regression analyses. However, either of the two regression analysis showed a high explained variance (R2), which concludes that a large proportion of the SMEs performance dependent variables can be predicted by the independent strategy variables and the environmental moderating variables. As earlier mentioned, environmental hostility appears to have a strong negative effect on the strategy-performance relationship, whereas dynamism and complexity show more non-significant or weaker impacts. Therefore, it can be concluded that instead of looking broadly at a single aspect of the environment, for example if the environment is favorable or unfavorable, studies need to assess the multidimensional nature of the environment (Rosenbusch et al., 2013).
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moderating impacts between several environmental dimensions and SMEs performance formulate the mechanisms by which the individual environmental dimensions enhance or decrease firm performance. Contrary to arguments in literature over the validity and soundness of integrating different features of the environment, this study shows the distinctiveness of the three used environmental dimensions; dynamism, hostility and complexity (Khandwalla, 1976; Dess and Beard, 1984). Through the application of various distinct environmental dimensions within this research, a number of new insights could hereby contribute to the discussion on the mutually exclusivity of the generic strategies of SMEs.
6. Conclusion
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6.1 Limitations and further research
When interpreting the results of this study, considerations must be given to its limitations. Firstly, the allocation of generic strategies for each SME has been done on a systematic manner by using the interpretations of the interviewers on the examples given by the managers/owners of the SMEs. Due to the interviewee is free in selecting examples to describe his or her pursued strategy, a mismatch when allocating a strategy could have occurred. This can happen when the entrepreneurs or owner/manager pitches outdated examples that were relate to previous executed strategies. When this has occurred, the interviewer may have allocated the wrong strategy to SME and therefore research results could be set less accurately.
Secondly, the allocation of a combination strategy is based on conjoining the two scales of cost leadership strategy (1-5) and differentiation strategy (1-5) to one scale. SMEs that scored for both the scales a value of 1 and thus a total of 2 have been allocated to the combination strategy, which might have led to an over allocation to the combination strategies within this research.
Thirdly, the answers given on the subjective performance questions in the questionnaire and the numbers of employees could be biased by the responded, due to the overwhelming estimates of the owner/manager of the firm. These biased answers may impact the accuracy of SMEs performances.
Fourthly, the sample size was fairly small. N=82
for the subjective performance (SP) regression model and N=86 for the objective performance (OP) regression model. This together with the unequally distributed industries in both the samples (around 60% of the firms were active in the service industry), leads to caution when interpreting the results, because findings are limited generalizable. A further aspect that merits more detailed study is the role of industry interaction, which might reveal specific technological or market opportunities relevant for the success of a combination strategy.
Fifthly, there might be a few SMEs that have served more than one market at the same time. Therefore, this paper has used for the sake of simplicity the assumption that these firms were pursuing the same strategy for all the market.
Sixthly, for the objective performance (OP) regression model, only data over the years 2012-2013 were used to calculate the employment growth. This snapshot in time may be created a distorted picture of the employment growth of SMEs compared to other years of economic prosperity or turbulence. In order to tackle these issues, studies based on longitudinal
data need to be conducted in the future. Finally, this
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