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MD
50,4 How environmental uncertainty
affects the link between business
strategy and performance in SMEs
546
Evidence from China, Turkey, and the USA
John A. Parnell
School of Business Administration, University of North Carolina at Pembroke,
Pembroke, North Carolina, USA
Donald L. Lester
Jennings A. Jones College of Business, Middle Tennessee State University,
Murfreesboro, Tennessee, USA
Zhang Long
School of Humanity and Management, China University of Geosciences (Beijing),
Beijing, China, and
Mehmet Ali Köseoglu
Faculty of Economics and Administrative Sciences, Cankırı Karatekin University,
Cankırı, Turkey

Abstract
Purpose – This study aimed to examine the prospective role played by perceived environmental
uncertainty in the strategy-performance linkage among SMEs in China, Turkey, and the USA.
Design/methodology/approach – The strategic group level of analysis was employed. Generic
strategy, environmental uncertainty, and performance were measured by previously validated scales.
Findings – The combination strategy-performance linkage was supported in Turkey and the USA.
In China, the highest performing strategic group emphasized a focus orientation accompanied by
neither cost leadership nor differentiation, and the lowest performing group was comprised of low cost
businesses.
Research limitations/implications – This study supported the combination strategy thesis in the
USA and Turkey. In China, conceptualizations of strategy appear to be more complex. High
performing businesses emphasized a focus strategy, but not necessarily in concert with either cost
leadership or differentiation.
Practical implications – Firms in the USA place a great deal of emphasis on uniqueness and
individuality, translating into approaches based on differentiation and innovation. However,
attempting to control costs and differentiate without a defined niche leaves a firm vulnerable to larger,
more experienced competition.
Originality/value – This study addresses the death of strategy-performance investigations in
developing nations. Findings presented run counter to the notion that successful businesses in
emerging economies emphasize cost leadership vis-à-vis differentiation. Conventional wisdom
Management Decision suggests that high performers tend to perceive greater certainty about their environments. The present
Vol. 50 No. 4, 2012 analysis not only rejected this finding, but suggests that the opposite might be true.
pp. 546-568
q Emerald Group Publishing Limited Keywords Business strategy, Strategic groups, Uncertainty, Cross-cultural management
0025-1747
DOI 10.1108/00251741211220129 Paper type Research paper
The link between strategy and performance among small and medium sized Environmental
enterprises (SMEs) has been widely researched. In general, entrepreneurs tend to uncertainty
pursue a differentiation strategy for a niche market (Longenecker et al., 2010), with the
goal of presenting a product or service that is superior to those currently available in
the market. Conversely, large corporations operating in diverse markets base current
strategic directions on years of accumulated data and experience, involving multiple
stakeholders in the planning process (Freeman and McVae, 2001), while SMEs 547
frequently rely on one or a handful of owner/operators. New entrepreneurial firms view
formal planning as impeding a founder’s vision for the organization (Mintzberg, 1994).
Differences in strategic behavior between large organizations and SMEs are also
well documented in the literature (O’Regan and Ghobadian, 2006; Parnell, 2008).
However, there is evidence to suggest that executives in SMEs and their counterparts
in established organizations interpret environmental uncertainty in different ways
(Lester and Parnell, 2007). Moreover, most strategic group level research linking
strategy and performance has occurred in developed nations. Comparatively few
studies have examined a prospective role played by perceived environmental
uncertainty in developing economies (Ghobadian and O’Regan, 2006; Hoque, 2004;
Jusoh and Parnell, 2008; Parnell and Köseoglu, 2010; Tracey and Phillips, 2011).
This paper employs the strategic group level of analysis and investigates the
influence of environmental uncertainty on the generic strategy-performance
relationship in SMEs. Organizations in China and Turkey are the primary focus of
the study, while those in the US represent a comparison group. The paper also
identifies strategies most closely associated with superior performance in these nations
and suggests explanations for why preferred strategies vary across nations.

Strategy and performance in SMEs

Strategic management theory can be traced to the branch of microeconomics known as
industrial organization (IO). The IO perspective views profitability as a function of
industry structure. IO’s structure-conduct-performance (S-C-P) model is considered by
many scholars to be more appropriate for industries with uncomplicated group structures,
high concentrations, and relatively homogeneous firms (Seth and Thomas, 1994). However,
IO and the S-C-P model have not been able to explain large performance variances within a
single industry. As a result, strategic groups were proposed as a middle ground between
the industry and firm levels of analysis (Capps et al., 2002; Phelan et al., 2002; Porter, 1981).
The strategic group level of analysis is utilized in the present study.
The strategic group level of analysis offers several key advantages to researchers
(Dess et al., 2010). First, barriers to mobility that protect one group from attack by
another can be readily identified. Second, it identifies groups with marginal
competitive positions. Third, firms can utilize the research to assist in future planning.
Finally, strategic group research aids in analyzing industry trends.
Business strategy typologies identify several generic competitive strategies available
to businesses and were developed to provide a conceptual basis for identifying strategic
groups (DeSarbo and Grewel, 2008; Zahra and Covin, 1993). While strategic groups can
be viewed as an industry-specific phenomenon, a number of scholars have assessed
relationships between strategy and performance via cross-industry samples as well.
From this early work emerged typologies believed to reflect generic strategies
appropriate to organizations of various sizes across industries.
MD The generic strategy typologies developed by Porter (1980) and Miles and Snow
50,4 (1978, 1986) received much early scholarly attention and remain among the most
widely cited, tested, criticized, and refined (Bowman, 2008; Garrigos-Simon et al., 2005;
Kim and Mauborgne, 2005; Nwokah, 2008; Veett et al., 2009). According to Porter’s
framework, a business can pursue superior performance by either establishing a cost
leadership position or differentiating its offerings from those of its competitors. Either
548 approach may be accompanied by focusing efforts on a given market niche.
Porter also argued that a business attempting to combine emphases on low costs
and differentiation invariably finds itself “stuck in the middle” (Porter, 1980, p. 41), a
notion that received considerable early support (Dess and Davis, 1984; Hawes and
Crittendon, 1984). Whereas Porter contends that the assumptions associated with low
costs and differentiation are incompatible, those in the combination strategy school
argue that businesses successfully combining low costs and differentiation may create
competitive advantages that outweigh any tradeoffs inherent in the combination (Hill,
1988; Parnell, 1997; Wright, 1987).
Miles and Snow’s (1978) generic strategy typology identified four strategic types.
Prospectors see the environment as dynamic and uncertain; they maintain flexibility
and employ innovation to address it, and often become the industry designers (Miles
and Snow, 1986). Defenders see the environment as stable and relatively certain; they
seek stability and operational control to achieve maximum efficiency. Analyzers
attempt to blend the perspectives of both prospectors and defenders. Reactors lack
strategic consistency and tend to perform poorly (Brunk, 2003). Most published
empirical work testing Miles and Snow’s (1978) typologies has supported the
framework (Allen and Helms, 2006; Conant et al., 1990; Moore, 2005; O’Regan and
Ghobadian, 2006; Shortell and Zajac, 1990). While perspectives on classification
schemes differ, few scholars argue in favor of a single best typology, reinforcing the
notion that strategic groups are a conceptualization of researchers.
Early strategic group research supported the application of Porter’s typology to
SME’s (Chaganti et al., 1989; Dollinger and Golden, 1992). While the selected strategies
of small- to medium-sized enterprises vary, new and small organizations typically find
their greatest successes in attacking niche markets (i.e. a focus orientation). By virtue
of their limited resources, many small businesses have no choice but attack niche
markets, either geographic, product, or service-based, emphasizing cost leadership or
differentiation (Watkins, 1986). SMEs attempting to attack broad markets with cost
based or differentiation strategies encounter constant competition with large,
established brands and firms, putting them at a great disadvantage. Aside from the
focus orientation, SMEs tend to follow the same cost leadership-differentiation patterns
as their larger rivals (Wolff and Pett, 2000).
As small organizations grow, their product-market grows as well, enabling
operations to expand, facilitating a broader product-market orientation. Some
organizations that concentrate on niche markets actually become quite large in size and
scope, such as IKEA, a furniture retailer with a niche market that targets young
professionals with children (Kling and Goteman, 2003; Evans, 2003), Nonetheless, the
preponderance of niche firms tend to be smaller organizations.
The contribution of strategic group research to the field of strategic management has
been extensive and wide-ranging, considering both domestic and global contexts
(Garrigos-Simon et al., 2005; Jusoh and Parnell, 2008; Rugman and Verbeke, 2008; Spanos
et al., 2004). Strategic group research has its shortcomings, however. Their existence in Environmental
general or in specific industries has been challenged on both conceptual and empirical uncertainty
grounds (Barney and Hoskisson, 1990). Strategic groups are presumed to exist in a given
industry if group effects on performance can be separated from organization and
industry effects (Dranove et al., 1998; Short et al., 2007). Moreover, the notion of strategic
groups assumes not only the existence of groups of businesses employing similar
competitive strategies, but also the existence of clear and recognizable industries. 549
From an historical perspective, much of what we know about the business
strategy-performance relationship is based on studies of western firms in developed
nations, most notably the US (Jusoh and Parnell, 2008). The linkage in other nations –
particularly under-researched emerging economies – must be contextualized within
appropriate business and cultural assumptions. The following sections briefly outline
key considerations associated with the two other nations examined in this study, China
and Turkey.

Business strategy in China

Prior to the late 1970s, the Chinese economy was almost entirely centrally planned (Su,
2001). The development of strategic management concepts in China has been
facilitated by a pro-market shift over the past three decades. The emergence of market
economies and the incorporation of management approaches from the west have
played important roles in this process. The notions of competition and strategic
management are common to Chinese executives today, but strategic management in
Chinese enterprises is not as sophisticated as it is in many western firms (Yin and Choi,
2005; Zhang, 2005). Some Chinese organizations do not recognize the significance of
strategic positioning, and operational decisions are often based solely on short-term
market demands without considering long-term goals. Strategic management has been
viewed by some Chinese executives as unnecessary because of the fast rate of change
in the market and industrial environment (Chen, 2007).
With the depth of Chinese reform, some executives recognized the importance of
strategy but lacked the essential expertise to formulate and execute strategies within
the context of their own organizations. Some organizations pursued profit as a single
goal, but lacked planning on their business specific area and customers, thereby
increasing business operation risk. There is a link between the short life of some
Chinese companies and the lack of techniques on strategy planning and execution
(Zhang, 2009; Cao, 2007; Zhu, 2009).
In terms of strategic decision-making, Chinese executives tend to rely on
accumulated wisdom, holistic thinking, and experience to make decisions, whereas
their American counterparts emphasize compartmentalization, rationality, and
objectivity (Chen, 2007). Experienced managers, not necessarily those who are best
trained, make the major decisions in Chinese organizations (Chong, 1987; Leung and
Yeung, 1995). Unlike western managers, Chinese managers emphasize flexible
decision-making based more on trust and less on contracts (Tang and Ward, 2003).
Major decisions are made after the contract is signed, while long, detailed contracts are
viewed as detriments to the future business relationship. One recent survey found that
78 percent of managers reported that their companies had a business strategy, but
most lacked any detailed executive planning (Xia and Xu, 2006). Hence, for most
Chinese enterprises, the concept of strategic management continues to emerge.
MD Chinese executives also tend to demonstrate high uncertainty avoidance relative to
50,4 their American counterparts (Hofstede, 2003; Lockett, 1988). As such, security,
stability, and predictability are highly valued in contemplating the direction of an
organization. This is not to suggest that Chinese managers are unskilled strategic
thinkers, but rather that they tend to prefer predictability and consistency over
potential payoff in the evaluation of strategic opportunities. This uncertainty
550 avoidance, coupled with the cultural emphasis on thrift and productivity, tends to
translate into cost leadership strategies for many Chinese businesses, whereas the
American emphasis on uniqueness and individuality tend to translate into approaches
based on differentiation and innovation (Merrilees and Miller, 1999; Wah, 2001). This
viewpoint was supported by Xia and Xu (2006), who found that organizations with
developed strategic planning efforts tended to emphasize cost leadership (38 percent)
and focus (37 percent) strategies. In contrast, only 25 percent of businesses pursued a
differentiation approach.
The dearth of competitive strategy-performance research in China is due to several
reasons. Academic interest in strategic group studies piqued in the west before China’s
economy began to open. Bureaucratic factors render data collection in China difficult as
well. However, there is also a key methodological consideration, the proclivity for
imitation.
While many organizations in the west deliberately seek to promote resources,
capabilities and strategic approaches that represent anomalies in their industries, their
Chinese counterparts often attempt to mimic their rivals. Some executives view
imitation as a shortcut to nominal success. This phenomenon is so pervasive among
many Chinese firms that it is difficult to distinguish strategy, structure, culture, and
even leadership styles across organizations (Chen, 2007). Some companies, especially
SMEs, hesitate to recognize the significance of strategy planning and pay more
attention to available resources and market forces to procure as much profit as possible
in the short term (Liu and Xiong, 2008; Zhang, 2009).

Business strategy in Turkey

Like China, the notion of strategic management emerged in Turkey after its practice
had already gained acceptance in the US; indeed, strategic planning was not a common
practice in Turkey prior to the 1960s, and only gained widespread acceptance in the
1980s (Dinçer, 2003). Today, however, strategy concepts are widespread in Turkish
organizations, with many organizations planning for horizons of five years or greater
(Dinçer and Tatoglu, 2002; Dinçer et al., 2006; Eren et al., 2000). Moreover, instead of
preparing strategic plans at certain intervals, some Turkish organizations have
adopted a continuous approach to the process (Barca et al., 2006). Others have
departments dedicated to strategic planning. A large percentage of Turkish
organizations can be classified as family-owned, and such businesses tend to engage
in relatively less strategic planning (Başer and Arıcı, 2006).
Strategic decision making in Turkey remains largely centralized, formal, relatively
standardized, and based on business intelligence (Dinçer et al., 2006). Dinçer and
Tatoglu (2002) and Glaister et al. (2008) found a strong correlation between formal
strategic planning levels in large organizations and firm performance. Glaister and
associates’ results also suggest environmental turbulence, organizational structure,
and firm size play moderating roles on the strategic planning-performance link.
 Cost leadership strategies in Turkey remain pervasive (Köseoglu et al., 2009). Environmental
Kısacık’s (2005) study of 104 businesses found that most emphasized a low cost uncertainty
approach, convinced of a link between low costs and growth. More than half of the
respondents also employed differentiation approaches, however. Some incorporated
elements of a focus strategy as well through mimicking the strategic moves of rivals,
especially in terms of pricing. Gürpınar and Barca (2007) also found strong support for
an overarching low cost approach among Turkish firms. A number of other studies 551
also emphasize the prominence of cost leadership in Turkey. Taşgit (2008) investigated
competitive strategies among Turkish airlines and found most emphasized cost
leadership as opposed to differentiation. Moreover, airline companies generally opt for
defensive and imitative competition strategies, and they do not prioritize. Kılınç et al.
(2009) examined the same industry and found that costs, customer satisfaction and
service quality were of central importance. Berber’s (2008) analysis of the electronic
industry also emphasized the importance of cost leadership.
Karabağ’s (2008) assessment of businesses in Istanbul found a positive link between
emphasis on differentiation, cost leadership and focus strategies and organizational
performance, with organizations implementing a combination strategy outperforming
those employing a pure or inconsistent approach. Her analysis refuted the notion that
industry structure plays a greater role in determining firm performance than
competitive strategy. Fiş and Çetindamar (2009) also found a strong positive link
between innovation and strategic innovation and performance. However, Barca and
Dirlik (2009), found no significant difference between the performance of businesses
employing a combination strategy and those implementing a pure approach. Kamaşak
(2010) found that the firms that can spontaneously follow both differentiation strategy
and cost leadership strategy outperform those that cannot. Moreover, firms that cannot
successfully apply either a cost leadership strategy or a differentiation strategy were
outperformed by others in the industry. Eraslan (2008) found a positive relationship
between the cost leadership strategy and firm performance when examining firm
infrastructure, logistics, or marketing. This relationship was not verified when human
resource management, procurement, operations, or service were considered.
Unfortunately, there is a dearth of research regarding the link between strategy and
performance in Turkish SMEs. Aytekin et al.’s (2006) assessment of SMEs found a link
between emphases on total quality, specialty production, comprehensive control
procedures, and effective human resource management, and various performance
criteria, including profitability, return on investment, cash flow, and overall
effectiveness. Differentiation strategies are usually preferred by SMEs pursuing
growth (Korkmaz et al., 2009). Çelik and Karadal’s (2007) study of SMEs emphasized a
link between ineffective marketing strategies and pricing policies and firm
performance.

Hypotheses
Four hypotheses were tested for each nation. First, Porter (1980) contends that
businesses attempting to combine cost leadership and differentiation invariably will be
outperformed by those adopting only one of the two approaches. Extant research on
organizations in the US has suggested that a combination strategy can be effective for
many businesses (Hill, 1988; Parnell, 1997; Spillan and Parnell, 2006; Wright, 1987).
The present study tests the notion of a superior performing combination strategy
MD group (H1a), while also accounting for a poor performing group (H1b) whose
50,4 businesses are unable to concentrate their efforts on either approach:
H1a. In the US, the strategic group(s) comprised of SMEs employing strategies that
combine cost leadership and differentiation will outperform other groups.
H1b. In the US, the strategic group comprised of SMEs whose strategies are unclear
552 will be outperformed by all other strategic groups.
Second, there is evidence to suggest that successful businesses in China – particularly
SMEs – emphasize a cost leadership strategy (Di Benedetto and Song, 2003; Tang et al.,
2007). As with businesses in the US, it is also expected that a strategic group
containing businesses whose strategies emphasize neither cost leadership nor
differentiation will be outperformed by other groups:
H2a. In China, the strategic group(s) comprised of SMEs employing a cost
leadership strategy will outperform other groups.
H2b. In China, the strategic group comprised of SMEs whose strategies are unclear
will be outperformed by all other strategic groups.
Third, like China, successful businesses in Turkey also tend to emphasize a cost
leadership strategy (Berber, 2008; Kılınç et al., 2009). As with businesses in the US and
China, it is also expected that strategic groups containing businesses whose strategies
are unclear will be outperformed by other groups in Turkey:
H3a. In Turkey, the strategic group(s) comprised of SMEs employing a cost
leadership strategy will outperform other groups.
H3b. In Turkey, the strategic group comprised of SMEs whose strategies are
unclear will be outperformed by all other strategic groups.
Finally, SME managers must interpret the external environment before they can select
an appropriate strategy. Environmental uncertainty is determined by three
characteristics (Lester and Parnell, 2007). The first is a simple to complex continuum,
simple meaning relatively few external influencing factors and complex meaning many.
The second characteristic is stable-unstable, or is change perceived to occur rapidly or
slowly. Third, environmental uncertainty can be a function of the quality or richness of
information available to decision makers (Starbuck, 1976). Managers discover low levels
of uncertainty in simple, stable environments where the quality of information gathered
through scanning is high. In contrast, uncertainty is high in environments that are
complex, unstable, and lacking high quality information (Duncan, 1972).
The most common process for understanding environments is through
environmental scanning (Diffenbach, 1983), gathering and analyzing information
and trends taking place outside the firm. In many instances managers rely on informal
sources in trying to characterize their external environments. Aguilar’s (1967) early
study of environmental scanning found that top managers relied on their subordinates
for most of their information. Other informal sources include suppliers, customers, and
other competitors. D’Souza and Kemelgor (2008) noted that entrepreneurs – whether
serial or novice – utilize a close network of contacts for securing market and external
environment advice.
 Emerging markets, such as China and Turkey, are inherently uncertain (Peng, 2003; Environmental
Peng et al., 2008). Droege and Marvel (2009) found that SMEs in Viet Nam, China, and uncertainty
the Philippines perceiving high levels of environmental uncertainty tended to rely on
emergent rather than deliberate strategies (Lester and Parnell, 2007; Mintzberg and
Waters, 1985).
While the literature is replete with the implications of environmental uncertainty on
performance of large organizations (e.g. Lawrence and Lorsch, 1975; Miles and Snow, 553
1978; Porter, 1980), small business owner/operators tend to be concerned with market
niches that they perceive to be less complex and more stable. With normally narrow
scopes of operation and limited resources, SMEs lack the wherewithal to compete in
complex, uncertain environments. Those who try may experience suboptimal results.
Previous research has suggested a link between uncertainty perceptions and
business strategies. Parnell et al. (2000) examined generic strategies in relationship to
how firms responded to organizational uncertainty. They found that balancers were
more certain about their external environment due to confidence borne from successful
past performance and their ability to develop the capabilities required to analyze the
environment (see also Wright et al., 1990):
H4a. In the US, the strategic group(s) comprised of SMEs employing strategies that
combine cost leadership and differentiation will perceive the environment as
less uncertain than all other groups.
Because Chinese executives tend to demonstrate high uncertainty avoidance, security,
stability, and predictability are highly valued in contemplating the direction of an
organization (Hofstede, 2003; Lockett, 1988). Chinese managers prefer predictability
and consistency over potential payoff in the evaluation of strategic opportunities. This
uncertainty avoidance translates to less uncertainty regarding the external
environment for Chinese firms pursing low cost leadership. Further support for this
notion comes from the recent work of Droege and Marvel (2009) who found that SMEs
in emerging markets favor emergent (Mintzberg and Waters, 1985) over planned
strategies. Building a cost leadership position takes time and much attention to process
innovation, lending credence to this emergent perspective:
H4b. In China, the strategic group(s) comprised of SMEs employing cost leadership
strategy will perceive the environment as less uncertain than all other groups.
Köseoglu et al. (2009) found that cost leadership strategies were pervasive in Turkey.
Because innovation is not seen as being as important (İrmiş and Akça, 2003), these low
cost leaders perceive the environment as being less certain than firms pursuing other
strategies:
H4c. In Turkey, the strategic group(s) comprised of SMEs employing cost
leadership strategy will perceive the environment as less uncertain than all
other groups.

Methods
The SME classification used by the European Union and the Association of Turkish
Trade Chambers and Exchanges was employed in the present study (Altay and
Aksaraylı, 2007): fewer than ten employees represents a micro-scale enterprise, 10-49
MD employees represent a small-scale, and 50-249 employees represent a medium-scale. To
50,4 accommodate the manufacturing firms included in each country’s sample,
organizations with 250 or fewer employees were classified as SMEs (Hatten, 2009;
Hodgetts and Kuratko, 2008). This resulted in usable samples of 94, 383, and 192 for
China, Turkey, and the US respectively.
Managers in China completed a version of the survey translated into Chinese. A
554 total of 107 managers in both manufacturing and service industries on the mainland
completed the survey. In the US, the survey instrument was administered to attendees
at a national retail trade show. A total of 277 responses were received. All three
management levels were represented in the sample, with slightly more women
participating than men. Businesses of various sizes were represented in the sample, as
depicted in Table I.
In Turkey, the sample included managers operating throughout the country. The
survey was translated into Turkish following a double-blind approach with two
bilingual academics. Once the Turkish version was prepared, the two translators met
to finalize the Turkish version of the questionnaire to check the reliability of the
translation from English to Turkish. Respondents were randomly selected. The sample
included small and large organizations, domestic and global enterprises, and
manufacturing and service firms. Pollster teams consisting of fifty individuals
administered the questionnaire to managers of the organizations in various cities
through face-to-face interviews. A total of 500 surveys were delivered to managers, and
404 useful questionnaires were returned for an 81 percent response rate.
Zahra and Covin’s (1993) scale was utilized to categorize businesses along Porter’s
typology. Several minor amendments suggested by Luo and Zhao (2004) were adopted,
but the scale remained substantially unchanged. Market environment uncertainty,
competitive environment uncertainty, and technological environment uncertainty were
assessed via scales developed and validated by DeSarbo et al. (2005).
Findings presented in strategy-performance studies depend to a large extent on the
performance measures selected (Cavalieri et al., 2007; Dutta and Reichelstein, 2005;

China (n ¼ 94) Turkey (n ¼ 385) USA (n ¼ 192)

Variable n SD % n SD % n SD %

Mgt. experience (years) 6.6 5.5 12.4 8.0 4.0 3.5

Org. experience (years) 6.2 4.8 9.4 6.9 4.5 3.0
Number of employees 117.8 68.9 23.9 38.9 52.7 50.0
Sex
Male 50 53.2 272 70.6 80 41.7
Female 44 46.8 113 29.4 112 58.3
Level
Non-management 6 6.4 38 9.9 17 8.9
Lower 37 39.4 53 13.8 49 25.5
Middle 35 37.2 158 41.0 82 42.7
Upper 16 17.0 136 35.3 44 22.9
Table I. Note: Only respondents whose organizations employed 250 or fewer employees were included in the
Sample characteristics sample
Jusoh and Parnell, 2008; Pongatichat and Johnston, 2008; Ramanujam and Environmental
Venkatraman, 1987; Venkatraman and Ramanujam, 1986). Different measures may uncertainty
even be more appropriate for different strategies (Dye, 2004; Van der Stede et al., 2006).
Many early studies utilized financial measures, but a recent consensus suggests that
select qualitative factors should be considered as well (Hillman and Keim, 2001; Kaplan
and Norton, 1996; Laitinen, 2002). The most valid means of measuring performance
involves multiple methods, but doing so can be time consuming and difficult to execute 555
(Atkinson, 2006; Parnell et al., 2006). The present investigation relied on management
surveys, adopting scales to develop relative competitive performance and objective
attainment from Ramanujam and Venkatraman (1987).
Scholars have frequently utilized cluster analysis to classify businesses into strategic
groups, especially in early and exploratory studies (Cool and Schendel, 1988; Derajtys
et al., 1993). Businesses can be clustered along either objective (financial) or subjective
data, or on a combination of the two. By using cluster analysis, researchers can identify
groups of businesses that follow similar strategic patterns. Many early studies suggested
a link between strategic group membership and performance, but not all cluster studies
have followed suit (Dess and Davis, 1984; Katobe and Duhan, 1993). Cluster analysis
continues to be particularly useful in some exploratory and descriptive studies, but it is
not employed as commonly today as it was in previous decades.

Findings
It is necessary to confirm the integrity of the scales before testing the hypotheses.
Factor loadings and coefficient alphas for each of the cost, focus, differentiation, and
performance scales are presented for each nation in Table II. Factor loadings and
coefficient alphas for each of the uncertainty scales are presented for each nation in
Table III. Factor scores were calculated for each scale to serve as composite measures
for hypothesis testing.
Businesses in each nation were cluster analyzed (Ward’s method) along the
individual cost, focus, and differentiation items to generate strategic groups. The
optimal number of clusters employed in each nation was the one that produced the
most groups with different conceptual definitions. Conceptualizations differed across
nations, with China, Turkey, and the US generating five, three, and six groups
respectively. Results are presented in Table IV, and include mean strategy,
performance, and uncertainty factor scores for each cluster, as well as ANOVA
results testing the significance of differences among the groups.

The first hypothesis was supported

The highest performing group (0.79) consisted of SMEs combining cost leadership,
differentiation, and focus strategies. The second highest performing group (0.70) consisted
of businesses combining cost leadership and differentiation. The poorest performing group
(20.98) contains businesses that emphasized neither low cost nor differentiation.

The second proposition was not supported, but results were mixed
A cluster containing SMEs combining cost leadership and differentiation was
generated. Collectively, businesses in this strategic group performed above the mean
(0.18), but the highest performing group was defined by its high emphasis on only
focus (0.41). The group whose businesses lacked a coherent strategy performed below
MD
Scale China Turkey USA
50,4
Cost leadership alpha ¼ 0.728 alpha ¼ 0.790 alpha ¼ 0.733
Cost1 0.784 0.772 0.640
Cost2 0.611 0.768 0.660
Cost3 0.653 0.752 0.693
556 Cost4 0.772 0.701 0.700
Cost5 0.647 0.691 0.779
Focus alpha ¼ 0.689 alpha ¼ 0.719 alpha ¼ 0.788
Focus1 0.684 0.687 0.730
Focus2 0.644 0.738 0.695
Focus3 0.762 0.761 0.836
Focus4 0.810 0.761 0.864
Differentiation alpha ¼ 0.810 alpha ¼ 0.832 alpha ¼ 0.854
Differ1 0.501 0.683 0.721
Differ2 0.385 0.642 0.779
Differ3 0.772 0.733 0.762
Differ4 0.828 0.731 0.855
Differ5 0.650 0.752 0.675
Differ6 0.776 0.723 0.678
Differ7 0.837 0.678 0.673
Performance alpha ¼ 0.853 alpha ¼ 0.889 alpha ¼ 0.927
SalesROA 0.728 0.791 0.752
ProfitROA 0.751 0.779 0.574
MktShare 0.775 0.804 0.864
ROA 0.690 0.753 0.863
Table II. ROE 0.548 0.733 0.845
Factor analyses for ROS 0.672 0.752 0.890
strategy and performance Overall 0.874 0.745 0.879
scales CompPos 0.758 0.649 0.879

the mean (2 0.18), but the lowest performing group emphasized only cost leadership.
Performance differences across groups were not significant at the 0.05 level, however.

The third hypothesis was supported

Only three strategic groups were identified in Turkey. The group that ranked highest
along all three strategic dimensions was the highest performing cluster (0.60). The
group that scored the lowest along all three dimensions was the poorest performing
cluster (20.79).

The fourth hypothesis was rejected

In China and Turkey, a single strategic group combines cost leadership, differentiation,
and focus strategies. Businesses in these groups reported the highest levels of market
competitive and technological uncertainty. In the US, two strategic groups combined
cost leadership and differentiation, one of which also included a focus orientation. The
low cost-differentiation-focus group scored the highest among six groups along market
and technological uncertainty and second highest along competitive uncertainty. The
low cost-differentiation (no focus) group scored the highest along technological
uncertainty and third along market and competitive uncertainty.
 Environmental
Scale China Turkey USA
uncertainty
Market uncertainty alpha ¼ 0.560 alpha ¼ 0.775 alpha ¼ 0.738
MKTUNC1 0.521 0.778 0.754
MKTUNC2 0.531 0.746 0.803
MKTUNC3 0.780 0.694 0.745
MKTUNC4 0.623 0.712 0.537 557
MKTUNC5 0.349 0.631 0.514
MKTUNC6 0.537 0.551 0.598
Technological uncertainty alpha ¼ 0.828 alpha ¼ 0.750 alpha ¼ 0.940
TECHUNC1 0.851 0.758 0.874
TECHUNC2 0.788 0.758 0.888
TECHUNC3 0.748 0.729 0.878
TECHUNC4 0.770 0.679 0.889
TECHUNC5 0.369 0.375 0.855
TECHUNC6 0.850 0.703 0.883
Competitive uncertainty alpha ¼ 0.556 alpha ¼ 0.794 alpha ¼ 0.775
COMPUNC1 0.661 0.702 0.721
COMPUNC2 0.617 0.732 0.705
COMPUNC3 0.556 0.725 0.723
COMPUNC4 0.666 0.773 0.776 Table III.
COMPUNC5 0.406 0.782 0.655 Factor analyses for
COMPUNC6 0.450 0.525 0.544 uncertainty scales

Cost Focus Differ Perform MktU TechU CompU

China
Focus (n ¼ 16) 20.40 1.36 20.52 0.41 0.28 20.05 20.42
Differentiation (n ¼ 14) 20.40 0.09 0.38 0.11 0.09 20.22 0.76
Cost-diff-focus (n ¼ 20) 0.72 0.67 1.52 0.18 0.71 1.06 0.37
Cost leadership (n ¼ 10) 1.25 2 0.92 0.25 20.46 20.65 0.08 0.03
Unclear (n ¼ 34) 20.40 2 0.64 20.79 20.18 20.39 20.54 20.34
f-value 13.411 39.818 65.387 1.666 6.426 12.371 5.235
Significance 0.000 0.000 0.000 0.166 0.000 0.000 0.001
Turkey
Cost-diff-focus (n ¼ 160) 0.69 0.85 0.80 0.60 0.49 0.58 0.53
Unclear (n ¼ 121) 20.99 2 0.96 21.15 20.79 20.69 20.71 20.76
Moderate (n ¼ 102) 0.01 2 0.19 0.11 0.00 0.04 20.07 0.06
f-value 196.970 290.241 429.821 101.548 63.673 83.500 81.166
Significance 0.000 0.000 0.000 0.000 0.000 0.000 0.000
USA
Cost-diff-focus (n ¼ 44) 1.04 0.57 0.75 0.79 0.44 0.46 0.30
Differentiation (n ¼ 28) 20.83 0.17 0.77 20.32 0.14 0.43 0.77
Cost leadership (n ¼ 40) 0.14 2 0.24 20.81 20.14 20.13 20.42 20.20
Cost-focus (n ¼ 23) 0.41 0.32 20.55 20.04 20.28 20.63 20.77
Unclear (n ¼ 35) 21.15 2 1.24 21.18 20.98 20.37 20.75 20.40 Table IV.
Cost-differ (n ¼ 22) 0.13 0.72 1.43 0.70 0.04 1.14 0.22 Factor scores for
f-value 60.505 29.640 264.423 24.437 3.497 26.209 10.545 strategy, uncertainty, and
Significance 0.000 0.000 0.000 0.000 0.005 0.000 0.000 performance
MD Discussion
50,4 Support for high performing combination strategy groups and a poor performing
combination strategy group in the US was not surprising. Concentrating on a niche
market, controlling costs, and differentiating itself from competitors is a recipe for
success for most SMEs. This supports the notion that US firms place a great deal of
emphasis on uniqueness and individuality, translating into approaches based on
558 differentiation and innovation (Merrilees and Miller, 1999) Trying to control costs and
differentiate without a defined niche, or focus, however, leaves a firm vulnerable to
larger, more experienced competition.
Factor results and alpha scores from each of the three nations suggested that the
basic concepts of cost leadership, differentiation, and focus are universal. Cluster
results, however, suggest that how these strategic dimensions are conceptualized into a
coherent approach differs markedly across nations.
The findings presented herein run counter to the notion that successful businesses
in emerging economies emphasize cost leadership vis-à-vis differentiation (Jusoh and
Parnell, 2008).
Successful Chinese businesses in the sample concentrated their efforts on satisfying
a particular market niche rather than cost minimization per se. A possible explanation
for this finding is the emphasis by Chinese firms on uncertainty avoidance, thrift, and
productivity. While these are all hallmarks of cost leadership strategies (Merrilees and
Miller, 1999; Wah, 2001), the respondents did not translate their actions as reflective of
low cost.
Successful Turkish businesses in the sample emphasized all three strategic
dimensions. However, few respondents in Turkey emphasized either cost leadership or
differentiation. There are several possible explanations for this phenomenon. First, the
Turkish economy has experienced significant changes in recent years because of direct
investment from developed nations, most notably from the US and the European Union.
The resulting competitive environment has placed Turkish firms under greater pressure
to comply with Western norms as they become more involved in the global economy.
This has also led to rapid adaptation of strategic planning on a wide scale basis. Hence,
Turkish managers may pursue innovation and cost leadership strategies with greater
intensity because of their heightened achievement orientation (Arslan, 2001).
Second, the Turkish government has introduced a number of incentives for firms to
improve global competitiveness. These incentives decrease costs for investments both
inside and outside of the country, and foster research and development efforts. Indeed,
one could argue that the government is playing a key role in supporting both low cost
and innovation strategies.
Third, compared to the business environments in the US and China, the
environment in Turkey can be characterized as highly ambiguous. Political and
economic crises have been common in recent years. Because cost containment has
greater short-term payoffs, many firms have concentrated their efforts primarily on
costs (Köseoglu et al., 2010).
The limited number of firms responding as focus/differentiators or focus/cost
leaders runs counter to the notion that successful SMEs attack niche markets. In China,
only 20 of 94 businesses selected a focus emphasis, compared to 160 of 383 businesses
in Turkey and 67 of 194 in the US. Hence, many SMEs can succeed by pursuing other
strategies as well.
 Several possible explanations can be posited for these findings. First, by allowing Environmental
the sample to include firms having up to 250 employees, some medium-sized uncertainty
organizations were clearly present. Their growth efforts could have, depending on the
industry, required them to pursue broader product markets. Second, there may have
been issues with language translation since these firms were selecting their strategic
direction from a paragraph description. Or third, and possibly most plausible, small
business owner/operators, managers, and employees may not think of how they 559
approach their markets in the academic manner that researchers like to think they do.
For example, the notion of a broad product market domain might be interpreted as
encompassing a geographic area such as a city, village, or state by a respondent,
whereas a researcher might classify all of them as narrow or regional geographic
approaches. Other researchers have speculated that many small business owners
perceive themselves to be big players in a small market based on their local group of
competitors (Lester et al., 2008).
Results support the notion that problems arise when constructs and surveys are
modified or translated to fit samples in other cultures. While it is beneficial to maintain
methodological consistency in cross-national research, many constructs cannot be
applied across borders in a precise manner. Scholars must choose whether to maintain
constant construct definitions across borders or accept deviations that can make
comparisons across nations more cumbersome. Specifically, investigations where great
religious differences exist between the researcher’s home culture and the one(s) being
studied are most problematic ( Jusoh and Parnell, 2008; Punnett and Shenkar, 1994).
Although survey research is feasible when language barriers are overcome, its
reliability can be compromised when educational differences exist. Hence, some
management constructs developed in advanced Western nations may be inappropriate
in emerging economies. Modified, culture-specific constructs may more accurately
reflect organizational activities. Research approaches that enable scholars to compare
and contrast practices among widely divergent cultures without forcing one culture
into an imprecise construct definition are needed (Parnell, 2008b).
The positive link between combination strategies and uncertainty perceptions in
China and Turkey – and to a lesser extent in the US – is intriguing. Conventional
wisdom suggests that as high performers, such businesses would perceive greater
certainty about their environments. The present analysis not only rejected this finding,
but suggests that the opposite might be true. One possible explanation is that
uncertainty in market, technological, and competitive realms is high for all SMEs by
definition. Businesses recognizing this reality are more likely than their counterparts to
combine cost leadership and differentiation, and also tend to outperform their rivals.
Ceteris paribus, lower performing SMEs might tend to perceive lower levels of
uncertainty because they do not understand their environments well enough to fully
comprehend the uncertainty that exists.

Conclusions and future research directions

This study supported the combination strategy thesis in the US and Turkey. In China,
however, conceptualizations of strategy appear to be more complex. High performing
businesses emphasized a focus strategy, but not necessarily in concert with either cost
leadership or differentiation.
MD China, Turkey and the US are large nations with unique cultures. Moreover, the
50,4 political economies of each country are substantially different, yet they have
significant and growing allegiance to market economy approaches. Several
opportunities for additional research have been identified. First, replications of the
present study in other emerging nations are needed and may identify insight into the
strategy-performance relationship that is unique to developing nations. Without
560 applications to other nations, the generalizability of these findings is difficult to assess.
Second, differences in strategic behavior between large organizations and SMEs are
well documented in the literature (Ghobadian and O’Regan, 2006). The present study
addressed relationships within SMEs but did not consider differences on the basis of
size or age.
Third, most competitive strategy studies have assessed the link between strategy
and performance over the fixed, relatively short time frame. High performing
businesses generate profits and other positive outcomes over an extended period of
time. Market sustainability reflects the extent to which a strategy’s success can achieve
a desired level of financial performance while enduring current and potential change
across competitors and markets. The extent to which sustainable competitive
advantage is developed cannot be accurately assessed in a single iteration (see Barney,
1991).
Finally, the present study does not consider the role of strategic capabilities in the
strategy-performance relationship. Indeed, a general frustration with IO’s deterministic
underpinnings of the strategic group approach led to a continued push away from the
industry level of analysis, particularly in the late 1980s and early 1990s (Barney, 1991;
Wernerfelt, 1984). An alternative perspective, the resource based view (RBV), embraces
a firm level of analysis while incorporating some of the same traditions as the broader
perspective of organizational economics (Barney and Ouchi, 1986; Kim and Mahoney,
2005). Examining the contribution of organization-specific capabilities and resources
on performance can elucidate the findings presented in this study.
Integrating IO and the RBV can be a delicate task conceptually. The two
perspectives are somewhat compatible, but they differ on the relative importance of
industry and firm factors in determining firm performance (Claver-Cortes et al., 2004;
McGahan and Porter, 1997). Recent scholarship has already shifted in this direction,
however. For example, a renewed interest in organizational economics, encompassing
issues such as incentives, agency theory, transactions cost theory, authority and
delegation, decentralization, and property rights theory, has built upon both IO and the
RBV (Fulghieri and Hodrick, 2006; Kim and Mahoney, 2005; Sheehan and Foss, 2007).
DeSarbo et al. (2005) extended the Miles and Snow framework with a deeper
examination of inherent strategic capabilities. An organization’s resources – including
its assets and skills – represent the source of its foundation for sustainable competitive
advantage (Bowman and Ambrosini, 2003). The concept of strategic capabilities is
conceptually linked to the RBV, as both perspectives emphasize the development of
idiosyncratic aptitudes that cannot be readily mimicked by competitors. The more
recent dynamic capabilities approach (DCA) extends strategic capabilities by
emphasizing the transitory nature of both organizational resources and external
influences (Augier and Teece, 2009; McGuinness and Morgan, 2000). Strategists can
shape and transform these resources into strategic capabilities that correspond with
the business strategy (Lopez, 2005; Pandza and Thorpe, 2009).
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Further reading
568 Acar, A.Z. and Zehir, C. (2009), “Rekabet Avantajı Yaratmada Lojistik Yeteneklerin Rolü ve
İşletme Performansına etkileri”, 17. Ulusal Yönetim ve Organizasyon Kongresi, Eskişehir
Osmangazi Üniversitesi İşletme Bölümü, Eskişehir, Turkey, pp. 411-8.
Alpay, G., Bodur, M. and Yılmaz, C. (2008), “Performance implications of institutionalization
process in family-owned businesses: evidence from an emerging economy”, Journal of
World Business, Vol. 43, pp. 435-48.
Erdil, O. and Kitapçı, H. (2004), “İşletmede Bilgi Yönetimi, Stratejik Yetenek Ve Rekabet
Yoğunluğunun Işletme Etkinliği Ile Ilişkisi”, 12. Ulusal Yönetim ve Organizasyon
Kongresi Kongre Kitabı, Uludağ Üniversitesi, İktisadi ve İdari Bilimler Fakültesi İşletme
Bölümü, 27-29 Mayıs, Bursa, Turkey, pp. 76-80.
James, W.L. and Hatten, K.J. (1995), “Further evidence on the validity of the self typing
paragraph approach: Miles and Snow strategic archetypes in banking”, Strategic
Management Journal, Vol. 16, pp. 161-8.

Corresponding author
John A. Parnell can be contacted at: [email protected]

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