Business scope and competitive differentiation: a study of strategy consistency

Business scope and competitivedifferentiation: a study of strategy consistencyAnders Pehrsson*School of Management and Economics, Växjö University, Sweden

� Obstacles to strategy implementation and change are often due to limited consist-ency between the choices that a firm has to make regarding business scope and differentiation.

� The purpose of this paper is to identify relationships between business scope and com-petitive differentiation in industrial firms. It reports on managerial perceptions withina sample of business units of Swedish manufacturing firms in Germany, the UnitedKingdom and the United States.

� The study found that standardized products offered to just a few market segments areassociated with an emphasis on product differentiation but that this strategy causes negative performance effects. In contrast, penetration of many segments is associatedwith customer flexibility attributes, yielding positive results.

� The study contributes to our understanding of strategy consistency by establishing asso-ciations between business scope and competitive differentiation. Management advice ispresented.

Copyright © 2006 John Wiley & Sons, Ltd.

strategy must present mutually consistentgoals and policies (Rumelt, 1980). In fact,many strategies have not been explicitly for-mulated but have evolved over time in an adhoc fashion. Even formally planned strategiesmay consist of compromises between stake-holder groups, resulting in inconsistencies.

In order to facilitatechange, a business

strategy must presentmutually consistent goals

and policies

Strat. Change 15: 319–330 (2006)Published online in Wiley InterScience(www.interscience.wiley.com) DOI: 10.1002/jsc.773 Strategic Change

* Correspondence to: Anders Pehrsson School of Man-agement and Economics, Växjö University, SE-35195Växjö, Sweden.E-mail: [email protected]

Introduction

Strategic change in industrial firms often failsbecause there is not enough consistencybetween business scope and the competitiveadvantages the firm tries to achieve throughdifferentiation of its products. For example, anarrow range of products and customersshould be associated with differentiationefforts that appeal to the chosen target marketand give the business unit a strong position inthe market, manifested through high perfor-mance. In order to facilitate change, a business

Copyright © 2006 John Wiley & Sons, Ltd.Strategic Change, Nov–Dec 2006

320 Anders Pehrsson

Thus, a clear and explicit choice of businessscope and differentiation facilitates strategyimplementation and accompanying changes.However, the question remains: What linksbetween business scope and differentiationare appropriate?

Management research has not consistentlyaddressed this important issue. Manyresearchers have tried to find links betweenthe breadth of a product range and perfor-mance (see the review provided by Palich et al., 2000), also between the type of range andperformance (Pehrsson, 2006). This research,however, has not paid sufficient attention tothe relationship between business scope anddifferentiation in industrial firms. Further,while differentiation across markets has beena popular field of research (e.g.,Agrawal, 1995;Alden et al., 1999) and sources of competitiveadvantage have been intensively discussed(e.g., Hoopes et al., 2003), there have beenfew studies of the performance effects of dif-ferentiation in industrial firms. In sum, there isa lack of knowledge about links between theproduct/market scope of business units andcompetitive differentiation.

This paper seeks to contribute to our under-standing of strategy consistency in industrialfirms by identifying relationships betweenbusiness scope and successful differentiation.The research undertaken concerns managerialperceptions of business scope and of theimportance of differentiation measures. Thesample consists of business units of Swedishmanufacturing firms in Germany, the UnitedKingdom and the United States.

In order to understand business scope, thestrategic states model has been used (e.g.,Pehrsson, 2001a,b), which is based on thecontingency view of strategy (e.g., Ginsbergand Venkatraman, 1985; Hambrick and Lei,1985). The underlying assumption of contin-gency approaches is the idea that a successfulbusiness strategy depends on being able todetermine an appropriate relationshipbetween an environmental variable, such asmarket structure or entry barriers, which isgenerally outside the direct control of man-agement and an internal variable that strategic

management controls to a high degree.Product development and adaptation areexamples of more controllable internal vari-ables. The contingency view means that anoptimum business strategy and its accompa-nying competitive differentiation measuresmay be formulated and implemented, pro-vided a certain internal and environmentalsetting applies to the business unit.

The paper is organized as follows. First, thestrategic states model and hypotheses are pre-sented; second, the research methods aredescribed; third, the outcomes of the hypo-thesis tests are presented; finally, the paperconcludes with a discussion of the results.

The strategic states model and hypotheses

In the strategic states model (Figure 1), theenvironment of a business unit is reflected inthe dimension of the number of market seg-ments that are being focused on and in whicha segment is a limited and measurable part ofa larger market. The internal dimension con-cerns the adaptation of the offer to the require-ments of the customers in the marketsegments. Thus, this model enables us todescribe the strategic development of busi-ness units and their current strategic states, aswell as the alternatives for the future.

Divergence, concentration, standardizationand adaptation represent pure strategic

Copyright © 2006 John Wiley & Sons, Ltd. Strategic Change, Nov–Dec 2006DOI: 10.1002/jsc

Segment penetration

Many

segments

Few

segments

Flexibility attributes

Product attributes

Service attributes

DC

Segment adaptation

ExtensiveLimited

BA

Figure 1. Crucial differentiation attributes within thestrategic states model.

alternatives. If the business unit follows adivergence strategy along the segment pene-tration dimension and penetrates a largernumber of segments than previously, itsdependence on the single segment decreases.Concentration here means fewer segmentsand an increased dependence on each singlesegment; this is also the case when one or afew segments become dominant in the unit’sbusiness activities.

In the segment adaptation dimension, strat-egy development can show increasing stan-dardization or adaptation to the requirementsof customers in segments. Adaptation gener-ally means a significant adjustment of the basicproduct programme in order to bring it intoline with different customer needs and variedmarket environments. Further, the degree of acompany’s segment penetration and adapta-tion decides its sensitivity to price competi-tion and the actions of competitors. Hence,freedom of action varies according to the twodimensions of the model.

Strategic states and differentiation

The underlying assumption for the strategicstates model is that there is a certain freedomof action and an optimum business strategy ineach and every strategic state. In turn, theoptimum strategy is implemented throughcrucial differentiation attributes that may givethe business unit advantages in the market andcontribute to high performance. Furthermore,the dimensions of the strategic states modeldefine four extreme states (A–D in Figure 1):

� Product standardization/penetration of afew segments (State A).

� Product adaptation/penetration of a fewsegments (State B).

� Product standardization/penetration ofmany segments (State C).

� Product adaptation/penetration of manysegments (State D).

Relevant differentiation attributes may bepursued to various extents in marketing andbecome competitive advantages in the four

states. In fact, differentiation is an importantstrategy component that is frequently used todescribe a marketing programme (Kustin,2004), and much research in this field hasfocused on it (Alden et al., 1999).

As customers react to differentiationattempts, there is a need to put the attributesinto categories that are relevant from the cus-tomers’point of view and select attributes thatare relevant for the study sample. Followingthis logic, Usunier (1993) suggests two typesof attributes that are used here: physicalproduct attributes such as product design andservice attributes such as after-sales services.The services may or may not be added to thephysical core of an offering. In this study, flex-ibility attributes are used as well. The latterimplicitly indicate the combination of otherattributes applied to meet various customerneeds and include, for example, solutions tocustomer problems and features of distribu-tion. In essence, the application of flexibilityattributes enables a business unit to simulta-neously penetrate several market segments,each with different requirements.

The relative standardization of products, aswell as concentration on a limited number ofmarket segments (State A), implies that it iscrucial to emphasize product attributes. Asprice competition is the case here, it is ofcrucial importance for a business unit to try todifferentiate its products from those of itscompetitors. Furthermore, dependence on afew segments brings high risks as demand maydecline or a major competitor might decide toenter. Thus, some kind of product specializa-tion would be favourable in order to reducesuch risks. Specialization provides the oppor-tunity to highlight product attributes otherthan price, which means less need for largevolumes. Further, the business unit will enjoymany operational economies by specializingand, if the unit defends its market niche, it canearn a high return on sales (Abell, 1980).Accordingly, we are now able to articulateHypothesis 1:

Hypothesis 1: Standardized products thatare offered to just a few market segments

Business scope and competitive differentiation 321


322 Anders Pehrsson

mean that product differentiation is partic-ularly crucial.

Adaptation to market segments and cus-tomization of offerings (State B) is another wayof avoiding price competition. However, thisstate involves high risks due to segmentdependence and the latent limited freedom ofaction and low bargaining power (Porter,1980). If, for example, customers demonstratean unwillingness to pay as quickly asexpected, the business unit may find itself ina difficult liquidity situation. A wise solutionwould be to try to apply differentiation basedon services adaptable to the requirements ofcustomers. To keep costs as low as possible, acertain amount of product standardizationmay be beneficial. In that case, products willalso be more easily available to other seg-ments. However, too much standardizationwill result in a loss of the service differentia-tion advantage and instead imply price com-petition. Consequently, Hypothesis 2 assumesthis form:

Hypothesis 2: Adapted products that areoffered to just a few market segments meanthat service differentiation is particularlycrucial.

The ability to be flexible is crucial in StatesC and D, where the company has a more diver-gent strategy. In fact, the ability to handle distribution, achieve problem solutions andpursue customer relations in a variety of indi-vidual market segments will prove to becrucial in competition. Without enough flexi-bility, however, there may be difficulties in thetreatment of varying types of target customersin areas such as promotion (Walters, 1986).

Although it is difficult to separate States Cand D, flexibility differentiation requiresdecentralization of activities to a high degree.At the same time, penetration of many marketsegments makes it crucial to be able to receiveorders that are sufficiently similar to eachother, otherwise costs will probably be toohigh due to the difficulty of exploiting learn-ing effects and reducing variable costs. Thus,

it is essential to define carefully the key corecompetencies (Prahalad and Hamel, 1990)that may be used throughout the organization.For instance, analysing customer needs inde-pendently of market segment may be regardedas a core competence. This argument leads usto Hypothesis 3:

Hypothesis 3: Products that are offered tomany market segments mean that flexibilitydifferentiation is particularly crucial.

Performance effects of differentiation

There is an ongoing debate on the role ofmarket orientation in shaping firm perfor-mance (e.g., Hult et al., 2005). However, thegeneral view is that understanding needs oftarget customers is central to performance(Sin et al., 2000). The latter study summarizedempirical studies on performance effects ofmarket orientation, including understandingcustomer needs, and found strong support fora positive association. Accordingly, too muchemphasis on product features in marketing isan obstacle to market orientation and, mostprobably, yields negative results. Although aphysical product may be the core of an offer,product features generally need to be balancedagainst other parts of the offer in order toreceive orders. Accordingly, Hypothesis 4 canbe formulated as follows:

Hypothesis 4: Emphasis on product attrib-utes has negative effects on performance ofa business unit.

Customer understanding may be acquiredthrough differentiation of services that areproduced close to customers. Service differ-entiation is a way to achieve high performancewhen the business environment is character-ized by intensive competition and similarity ofproducts in the market. In fact, this observa-tion theoretically relies on a contingency rela-tion where there is a fit between appropriatedifferentiation measures and character of theenvironment (e.g., Chandler, 1962; Thomp-son, 1967). This leads to Hypothesis 5:


Hypothesis 5: Emphasis on service attrib-utes has positive effects on performance ofa business unit.

A business unit that faces competitive pres-sures combined with varying customer pref-erences has to possess the capacity to beflexible, and this relies on a thorough under-standing of customers (Javorski and Kohli,1993; Narver and Slater, 1990). Through flexi-bility differentiation, the business unit mayachieve a strong market position owing to itsgreater knowledge of the needs of the usersand the reputation it builds (Abell, 1980).These theoretical reflections lead to the finalhypothesis:

Hypothesis 6: Emphasis on flexibilityattributes has positive effects on perfor-mance of a business unit.

Methods

A questionnaire was used to collect the quan-titative data necessary to test the hypothesesusing multivariate statistical techniques.Appendix 1 presents the questions that wereanswered by managers of foreign businessunits, i.e., subsidiaries or other units ofSwedish manufacturing firms in Germany, theUK and the USA.

Measures

The measures were designed to fit manufac-turing firms. Thus, two variables were used tocollect data on strategic states of the businessunits. Each respondent was asked to ratesegment penetration in terms of target cus-tomer size similarity, where turnover in 2004indicated size. As demographic information ontarget customers would be the primary basisfor any industrial market segmentation(Bonoma and Shapiro, 1983), the study highlighted target customers. For segmentadaptation, respondents rated the producttechnology similarity of the products deliv-ered in the local market. These two measureswere chosen because the measurement of

such similarities can be conveniently com-pared across industrial firms. The similaritiesalso adhere to applications in previous studies(Douglas and Wind, 1987; Jain, 1989; Wolf andEgelhoff, 2002).The ratings were made on five-point Likert scales, on which scale point 1 represented ‘Very different’ and point 5 repre-sented ‘Very similar’.

As self-reported measures are generallyacceptable provided that item reliability isexamined (Boyd et al., 1993), reliability wastested using Cronbach’s alpha. The value forthe two variables was 0.83, which is above the lowest acceptable value of 0.60 forexploratory studies (DeVillis, 1991). A largepart of the measures is thus free of randomerrors.

For differentiation, managers were asked torate to what degree they considered certainvariables decisive in terms of receiving orders,where scale point 1 represented ‘Not at alldecisive’ and point 5 represented ‘Very deci-sive’. The variables representing productattributes were broad product range, productdevelopment, pricing, technical product fea-tures and product design. Service attributeswere represented by after-sales services,while flexibility attributes were representedby product customization, problem solution,customer relations and distribution. As Cronbach’s alpha here was 0.73, item reliabil-ity is acceptable.

To initially ensure their validity, the variableswere chosen on the basis of a focus groupmeeting. A draft questionnaire was tested on agroup of eight managers representing firms inthe sample. The ensuing discussion in partic-ular revealed that the initial ‘customer’attribute had to be changed to ‘target cus-tomers’ as this was easier for the respondentsto understand. It indicated a customersegment that was penetrated by marketingefforts and excluded intermediaries.

Further, as it is impossible in most cases toaccess or calculate market-based performanceattributes for individual business units offirms, accounting-based performance datawere used. All business units in the study wereresponsible for at least local sales; therefore,



324 Anders Pehrsson

performance in terms of return on sales (ROS)was chosen as the performance measure.Moreover, this profitability measure has beenused in previous studies incorporating inter-national business units (Makino et al., 2004;Christmann et al., 1999). Respondents in thisresearch were asked to report information onprofitability in this way. While the alternativeof collecting performance data from annualreports was evaluated, it was found generallynot possible to access business unit data fromthe secondary sources.

Controls

The size of a firm or a business unit is oftenused to explain strategy (Buysse and Verbeke,2003), the reason being that size frequentlyenables the establishment of market positions.In this study, size was controlled for and dataon local sales of the business units werereported by respondents to the questionnaireand converted into logarithmic values.

Industry effects of business strategy consti-tute a popular field of research (Hawawini et al., 2003; Ruefli and Wiggins, 2003; Rumelt,1991; Spanos et al., 2004). For example,empirical analysis has shown that perfor-mance may vary along the value chain whenfirms in upstream industries offering individ-ual products are compared with firms indownstream industries offering systems ofproducts that incorporate extensive value(Pehrsson, 1995a). In order to control for suchlocal industry effects, a dummy variable, localindustry, was included in the analysis. Scalepoint 1 represented firms in industries definedby systems of products and point 0 repre-sented firms in industries defined by individ-ual products. Survey respondents were askedto describe the main products that were mar-keted locally and the information was codedto fit the dummy variable.

Sample and data collection

The sample comprised all 303 business unitsin Germany, the UK and the USA directly controlled by Swedish manufacturing firms in

2004 according to the Swedish Export Direc-tory. The firms were thus represented by subsidiaries or other organizational units. Aninvestigation of firms of a single country oforigin implies that management values couldbe expected to be relatively homogeneous.Moreover, the three countries are the domi-nant export markets of Swedish industry.

Given the relatively large number of busi-ness units in the sample, it seemed suitable tocollect the data by mail or telephone. As theintention was to approach general managersresponsible for the local operations whowould be able to answer the questions prop-erly, and as these managers were generallyvery busy, telephone interviews were pre-ferred. Two research assistants (with Germanand English as their first language, respec-tively) were trained to conduct the interviews.The research assistants and the author metduring the data collection in order to ensurethat managers interpreted the interview ques-tions correctly.

Of the original 303 units (105 in Germany,108 in the UK and 90 in the USA), represen-tatives of 57 firms (40, 9 and 8, respectively)were too busy or did not want to participatein the study. Furthermore, it was not possibleto reach representatives of 55 other units (5,25 and 25, respectively) after four phone calls.The outcome was 191 completed question-naires, a response rate of 63%. The responserates in Germany, the UK and the USA were57%, 69% and 63%, respectively.

Descriptive statistics and analysis

The mean sales of the responding firms in2004 were US$202 million. Further, the meannumber of countries penetrated by sole oper-ations of the firms was 16.A comparison of themean values regarding responding and non-responding firms, respectively showed no sig-nificant differences between the two groups(ANOVA F-values for corporate statistics were0.1 and 1.8). This means that the respondingfirms were considered representative of thesample and appeared to provide reliable information. However, the missing units,


together with the impossibility of afterwardscollecting information from those unit man-agers, limited the generalizability of the find-ings in the study.

The mean value of local sales in foreignmarkets in 2004 was just over US$10 millionand 65% of the business units offered individ-ual products. Further, mean values of thestrategic states variables and differentiationvariables varied between 3.55 (customer sizesimilarity) and 4.70 (distribution).

As 51% of the correlations among differen-tiation variables were over 0.20 (significant atp < 0.01), there most probably were multi-collinearity problems. A factor analysis wastherefore conducted resulting in three factors(Appendix 2). The first factor, customer flex-ibility, is manifested by three flexibility attrib-utes; the second factor, product attributes,consists of product attributes only; while thethird factor is more heterogeneous. As thisfactor, however, is dominated by the serviceattribute, it is called after-sales services. Thefactors and accompanying factor scores wereused in the subsequent analyses.

In order to analyse relationships among dif-ferentiation and strategic states (Hypotheses 1to 3), a factor score mean value below 0 indi-cated that the particular factor was not deci-sive in generating orders, while a mean valueover 0 indicated that the factor was decisiveto orders generation. Mean values of the strate-gic states variables were calculated for mean

values of factor scores and ANOVA F-statisticsshowed degrees of difference.

Performance effects of differentiation(Hypotheses 4 to 6) were analysed using hier-archical linear regression (Cohen et al., 2003).In the first step, the control variables wereentered. In the second step, the hypothesizeddifferentiation factors were included. In orderto detect any multicollinearity problems, vari-ance inflation factors (VIF) were calculated foreach of the regression equations.

Tests of the hypotheses

Table 1 presents mean values of strategicstates variables for low and high values of thethree differentiation factors. Hypothesis 1 pre-dicted that standardized products that areoffered to just a few market segments meansthat product differentiation is particularlycrucial. The value as regards customer sizesimilarity was significantly ( p < 0.001) highfor those business units that consideredproduct attributes decisive to receive ordersfrom customers. As product technology simi-larity was high ( p < 0.001) for these units aswell, then Hypothesis 1 is supported. This is,however, not the case for Hypothesis 2, whichpredicted that adapted products that areoffered to just a few market segments are par-ticularly associated with service differentia-tion. Here no significant differences werefound.



Table 1. Differentiation factors across strategic states variables

Differentiation factors Customer size ANOVA Product technology ANOVA(H1–H3 indicate hypotheses) similarity F similarity F

H1: Product attributesNot decisive to receive ordersa 3.01 (1.54) 23.02** 3.53 (1.37) 16.62**Decisive to receive ordersb 3.99 (1.28) 4.27 (1.11)H2: After-sales servicesNot decisive to receive ordersa 3.48 (1.54) 0.24 3.78 (1.39) 1.63Decisive to receive ordersb 3.59 (1.45) 4.02 (1.22)H3: Customer flexibilityNot decisive to receive ordersa 3.88 (1.28) 5.41* 4.10 (1.15) 1.77Decisive to receive ordersb 3.37 (1.56) 3.85 (1.35)

* p < 0.05. ** p < 0.001. Mean values of similarities. Standard errors in parentheses.a Factor score mean values are below 0.b Factor score mean values are over 0.

326 Anders Pehrsson

Further, Hypothesis 3 predicted that prod-ucts offered to many market segments areassociated with emphasis on flexibility differ-entiation. As the mean value of customer sizesimilarity was significantly low ( p < 0.05) forthe business units that considered flexibilityattributes decisive to receive orders, Hypo-thesis 3 is supported.

Table 2 presents the results of the regres-sion analyses. Tests for violations in the modelassumptions were conducted on all regres-sions. No violations were found in the normalprobability plots of standardized residuals ascompared with predicted values. Further, asthe Durbin–Watson statistics ranged from 1.52to 1.84, which is acceptable (Van der Vegt andBunderson, 2005), error terms were indepen-dent, corresponding to the assumptions. Asregards multicollinearity among the predictorvariables, VIF tests showed that factors rangedfrom 1.00 to 1.02.This is far away from the VIFvalue of 10, which is an indication of poten-tial multicollinearity problems (Neter et al.,1996).

As a first test, ROS was regressed on thecontrol variables (Model 1 in Table 2). The

local industry variable affected performancein the first model ( p < 0.05) and also in thesecond model ( p < 0.10) and thus, marketingof systems of products affected performancein a negative way. The other control variable,local size, had no impact on local perfor-mance.

The change in the level of explanation wassignificant ( p < 0.001) when the hypothesizedvariables were added (Model 2) to the con-trols. Hypothesis 4 predicted that emphasis onproduct attributes would have negative effectson performance. As the product attributefactor had a negative performance effect ( p <0.001) in Model 2, this hypothesis is sup-ported. No positive performance effect was,however, found as regards after-sales servicesand Hypothesis 5 is rejected. Hypothesis 6, onthe contrary, is supported as an emphasis onflexibility attributes had positive performanceeffects ( p < 0.05).

Discussion

This section first discusses the findings ingeneral terms. This is followed by conclusionsand implications.

Product attributes vs. customer flexibility

It was found that standardized productsoffered to just a few market segments (State Ain Figure 1) were associated with an emphasison product differentiation. However, the risksconnected to this state may explain the nega-tive performance effect of stressing productattributes as a way of differentiating the offer-ing. The dependence on just a few segmentsgenerally brings high risk as the demand in animportant market segment might decline, or amajor competitor might enter the segment. Anew entrant will become a serious threat ifbarriers to entry are low and give only limitedadvantages to a firm established previously. Analternative interpretation of the finding couldbe that the units are not capable of exploitingthe theoretical potential of product differenti-ation (Caves and Porter, 1977; Marsh, 1998;


Table 2. Performance effects of differentiation factors.Dependent variable: ROS

Independent variables and factors Model 1 Model 2(H4–H6 indicate hypotheses)

Constant 6.21*** 5.74***(0.99) (0.91)

Control variablesLocal size (lg sales, MSEK) −0.25 −0.04

(0.61) (0.56)Local industry (dummya) −1.82** −1.34*

(0.82) (0.76)Differentiation factors

H4: Product attributes −1.93***(0.36)

H5: After-sales services −0.81**(0.36)

H6: Customer flexibility 0.77**(0.36)

R2 0.03 0.19Adjusted R2 0.02 0.17Change in R2 0.16***

* p < 0.10. ** p < 0.05. *** p < 0.001. N = 191.a 1 = systems of products, 0 = individual products.Values are unstandardized coefficients with standarderrors in parentheses under coefficients.

McFarlan, 1984; Porter, 1980) and turning itinto an efficient entry barrier.

It is also reasonable to assume that the busi-ness units studied in State A had not enoughfocus on understanding the needs of targetcustomers, a factor that has been found to becentral to performance (Sin et al., 2000). Theunits probably put too much emphasis onproduct features in marketing, and this is anobstacle to market orientation and positivefinancial results.

Customer flexibility, on the other hand(States C and D), yields positive results andbusiness units in the study were obviously ableto handle many market segments simultane-ously. This includes the treatment of distribu-tion features, solution of customer problems,and the building and maintenance of customerrelations. Through flexibility differentiation abusiness unit may achieve a strong marketposition, but this strategy relies on a thoroughunderstanding of customers ( Javorski andKohli, 1993; Narver and Slater, 1990).However, too much flexibility and accompa-nying decentralization of activities makesbusiness integration difficult. In fact, thebalance between decentralized response todifferent customer needs and integration inorder to exploit common competencies is a central issue in international strategyresearch (e.g., Douglas and Wind, 1987;Pehrsson, 1995b; Porter, 1986; Prahalad andDoz, 1987).

A possible way of treating the decentraliza-tion/integration problem is to strive for ordersthat are sufficiently similar to each otherwithout losing the advantage of customer flexibility. Some common product elementsenable the exploitation of learning effects andreduction of variable costs. Thus, there is aneed to define carefully the key core compe-tencies and core products (Prahalad andHamel, 1990) that may be used throughout theorganization.

Conclusions and implications

Although the missing units in the survey studylimit the generalizability of the findings, it is

possible to draw some conclusions. First, dif-ferentiation of product attributes in industrialfirms is associated with a narrow product/market scope and too much emphasis on suchdifferentiation yields negative performanceeffects. Second, differentiation based on flexi-bility in serving customers is associated witha penetration of a broad market consisting ofmany segments. The performance effects ofcustomer flexibility are positive.

In order to facilitate strategy change, indus-trial management is advised to strive for consistency between business scope and differentiation. In order to avoid the draw-backs of differentiation based on productattributes, particular attention should be paidto the risks involved in narrowing the scope,and the opportunities to build and exploit bar-riers to competition should be scrutinized. Asregards broad market scope and differentia-tion based on customer flexibility, difficultiesin treating widespread customer needs mayrepresent an obstacle. This may be overcomeif management strives for orders that to somedegree are similar to each other without losingthe advantage of flexibility. Learning effectsmay thereby be exploited throughout theorganization and costs may be reduced.

Management is advised tostrive for consistency

between business scopeand differentiation

It would be fruitful to repeat the researchpresented here using another sample in orderto evaluate the stability of the findings. Thereis also less than perfect understanding of relevant dynamic processes and develop-ment of strategy consistency over time.Further, the field needs studies on firms’exploitation of barriers to competition, theirtreatment of risks in different business settingsand their ability to benefit from commoncompetencies.



328 Anders Pehrsson

Appendix 1: Survey items

Respondents to the questionnaire used Likertscales to indicate their perceptions in relationto the following questions:

Strategic state of the business unit (Cronbach’s alpha = 0.83)

How similar are the products that youdeliver regarding technology?How similar are your target customersregarding size (turnover in 2004)?[Scale point 1 = ‘Very different’; scalepoint 5 = ‘Very similar’]

Differentiation of the business unit (Cronbach’s alpha = 0.73)

To what extent are the following attrib-utes decisive to receive orders on yourlocal market? (A broad product range,product development, pricing, technicalproduct features, product design, after-sales services, product customization,problem solution, customer relations anddistribution.)[Scale point 1 = ‘Not at all decisive’; scalepoint 5 = ‘Very decisive’]

Appendix 2: Factors underlyingvariables of differentiation

Variables of Customer Product After-salesdifferentiationa flexibility attributes services

Distribution 0.84Problem solution 0.80Customer relations 0.70Product design 0.79Broad product range 0.74Technical product 0.64

featuresPricing 0.62After-sales services 0.81Product 0.68

developmentProduct 0.68

customizationEigenvalue 3.08 1.73 1.12Variance explained 31 17 11

(%)Cronbach’s alpha 0.74 0.67 0.63

a Only loadings greater than 0.50.

Acknowledgements

The author is grateful for valuable commentsreceived from Editor Graham Beaver and twoanonymous reviewers of Strategic Change.Samuel Glen, Johan Jyrwall and TobiasSchauerte carried out the telephone inter-views. The author finally wishes to acknowl-edge Växjö University for its financial support.

Biographical note

Anders Pehrsson is Professor of BusinessAdministration at the School of Managementand Economics, Växjö University, Sweden andfocuses on international strategy of firms. Hehas contributed articles to European BusinessReview, Management Decision, Scandina-vian Journal of Management, StrategicChange and Strategic Management Journal.Recent monographs are Strategy in Emerg-ing Markets and International Strategies in Telecommunications, published by Routledge. Pehrsson also works as a business consultant.

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Business scope and competitive differentiation: a study of strategy consistency