Similar to Caves and Porter’s theory of strategic groups, the Purdue approach to strategic groups also draws on the SCP paradigm. The SCP paradigm views performance as a result of the industry structure, with firms’ decisions resulting from the industry structure:
Figure 3.1 The Original SCP Model
Industry Structure ---► Firms’ Conduct --- ► Performance
Caves and Porter (1977), in their theory of strategic groups, transform the SCP paradigm without, however, significantly changing the content of the SCP paradigm. In their theory, a homogeneous industry structure is replaced by a more complex structure of
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strategic groups, which is internally homogeneous and externally heterogeneous. Firms within the same group recognise that they are part of the same group, and their conduct and performance follow the strategic groups structure:
Figure 3.2 The Strategic Groups Model of Firms’ Performance
Strategic Groups Structures ---► Firms’ Conduct --- ► Performance
The Purdue approach differs in a number of ways. Although the variables that are considered are the same, the relations among them are different. Firms’ strategic and operational decisions have a much higher degree of independence from the industry structure:
Figure 3.3 The Purdue Model of Firms’ Performance
Firms’ Conduct (Firms’ Strategic and Operational Decisions)
▼
Performance
Industry Variables
The use of the same variables is virtually about the only similarity between the two approaches. While Caves and Porter’s theory of strategic groups has an underlying theory of the firm and firms’ behaviour, the model developed at Purdue does not contain any theoretical framework about the nature of the firms and firms’ strategic behaviour
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within an industry. In the Harvard approach, similarities among firms are substantial and they have consequences for firms’ behaviour. In the Purdue approach, strategic groups are the result of a statistical technique rather than entities existing within industries. Strategic groups are viewed as an aggregation of companies with similarities along a number of strategic characteristics, but firms within the same groups “are comparable but different” (Hatten and Hatten 1987: 333). Further differences lie in the complexity of the variables. In Caves and Porter’s theory, strategy and performance are seen in simplistic terms and a straightforward relation is assumed to exist between decision, implementation and performance. At Purdue, the issue of strategy and performance receives much more attention. Schendel and Patton (1978: 1612) argue “a conceptual distinction can be made between effective strategy and efficient operation, but their respective effects on performance are difficult to isolate.” They initially assume that variables related to strategic and operational decisions are independent, although “in reality the components form a dynamic system and are interactive over time.” (ibid. 1978: 1613). Findings support this view by indicating that:
1. strategic and operational decisions are complex, with a multiplicity of interactive effect among themselves and on performance;
2. firms have a structure of multiple goals that are not always positively correlated. For example, the authors have found that for a long period of time there was a significant negative relation between market share and profitability;
3. some explanatory variables have multiple effects on different performance measures, with the same controllable or non-controllable variable displaying different directions and magnitudes of effect on the various dimensions of performance. For example, concentration had a strong positive effect on market share of firms in
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group 2/C, while it had a strong negative effect on profitability for the same firms; and,
4. the relationships between performance measures, controllable and non-controllable variables vary among the different subgroups of firms. A research finding shared by the various research, with Hatten et al. (1978: 604) concluding that “different firms
can (and must) use different resource deployments to compete successfully.”
The complexities of firms’ strategies, linked with the fact that strategic groups are seen as statistical artefacts rather than real entities, means that when examining the effectiveness of strategic decisions, the analysis centres on the relations between the variables of a group and performance rather than between the group and performance. Because strategy is complex and because there is not a ‘single strategy’ but a series of decisions that have a varied impact on performance, researchers try to isolate the effects of single variables. The complexities of firms’ strategies also means that in explaining research findings, the authors have to make a strong use of qualitative information.
“The present research is empirical and quantitative in nature. Yet, it becomes feasible only when the empirical nature is combined with conceptual and qualitative study ... Qualitative investigation of the sample under consideration is necessary to identify the relevant sets of performance measures, managerially controllable, and noncontrollable factors used to specify the model. With a proper background study and model specification, the benefits of explicit mathematical modelling can be more fully realised." (Schendel and Patton 1978: 1620).
The use and integration of qualitative information is a specificity that has not since occurred in strategic groups research.
The differences between IO and SM with regard to the specification of the model and the complexities of the variables have to be examined by considering the differences in
the research focus. At the time the concept of strategic groups was developed, IO researchers were mainly interested in the way markets operated for the purpose of understanding their implications for welfare efficiency issues from a public policy viewpoint. Because of the large numbers of firms, researchers generated assumptions that tended to highlight similarities, and to simplify what happened within firms. However, SM was oriented to management decision-making in an individual firm context, with more attention given to single specificities as potentially the source of competitive advantage. It is not surprising, therefore, that apart from differences in the characteristics of the models and in the complexities of the single variables, significant differences also exist in the way strategic groups originate. In IO, the concept of strategic groups emerges for the purpose of demonstrating that differences exist among firms in an industry. Caves and Porter (1977) argue that the existence of differences among firms have relevant implications for market structure and competitive behaviour. Firms were previously assumed similar in all relevant aspects except size. The assumption of homogeneity within an industry is eliminated but it is still possible to identify a cluster of relatively homogeneous firms within an industry.
The main objective of research carried out at Purdue (SM) on the brewing industry is “to show that the strategy construct can be mathematically modelled and that quantitative approaches can provide top management with help in the major resource allocation decisions that it must make to achieve its goals in a complex, changing environment” (Schendel and Patton 1978: 1611). On the other hand, in a context that has traditionally stressed the specificities of companies (Rumelt et al. 1991), researchers at Purdue indicate the existence of important similarities among firms operating within the same
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competitive environment.
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Having analysed in detail the different papers published by researchers at Purdue and the similarities and differences between the Harvard and the Purdue approaches, in the next section we assess the methodological and theoretical weaknesses of the Purdue approach.