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J. of the Acad. Mark. Sci. (2007) 35:517 DOI 10.

1007/s11747-006-0002-4

ORIGINAL EMPIRICAL RESEARCH

On the importance of matching strategic behavior and target market selection to business strategy in high-tech markets
Stanley F. Slater & G. Tomas M. Hult & Eric M. Olson

Received: 15 August 2006 / Accepted: 17 August 2006 / Published online: 3 February 2007 # Academy of Marketing Science 2007

Abstract Business strategy is fundamentally concerned with the actions required to create superior customer value in the firms target markets with the ultimate goal of achieving superior performance. Marketing theory suggests that two critical marketing activities required to achieve this end are: (1) the adoption of appropriate strategic behaviors (i.e., customer-oriented, competitor-oriented, technologyoriented) and (2) targeting of the appropriate market segments (i.e., innovators, early adopters, early majority, late majority, laggards). This study builds on prior research which demonstrates that the strategic behaviorfirm performance relationship is contingent on the firms strategy by examining this relationship in high tech markets and by considering the incremental contribution of appropriate target market selection. Responses from 160 senior marketing managers in hightech firms reveal strong support for our framework. Thus, this study provides useful guidance to executives and managers in high-tech firms regarding the steps that they should take to increase their probability of success.

Keywords High-tech . Customer orientation . Competitor orientation . Technology orientation . Market segments . Business strategy . Performance

S. F. Slater (*) College of Business, Colorado State University, Fort Collins, CO 80523-1278, USA e-mail: stanley.slater@colostate.edu G. T. M. Hult Center for International Business Education and Research, Marketing & Supply Management, Eli Broad Graduate School Management, Michigan State University, East Lansing, MI 48824-1121, USA e-mail: hult@msu.edu E. M. Olson Marketing and Strategic Management, College of Business and Administration, University of ColoradoColorado Springs, Colorado Springs, CO 80918, USA e-mail: eolson@uccs.edu

Strategic market management requires understanding emergent market patterns and making decisions that lead to the creation of economic value (Dickson, Farris, &Verbeke, 2001). In this paper we present a study, conducted in hightech markets, that examines the performance implications of matching strategic behavior, target market selection, and business strategy. The theoretical foundation for this study lies in evolutionary economics. Schumpeter (1934) proposed that macroeconomic equilibrium is perpetually destroyed by entrepreneurs innovations. A successful introduction of an innovation disturbs the normal flow of economic life because it forces some of the already existing technologies and means of production to lose their positions within the economy. Nelson and Winter (1982) focused on the issue of changes in technology and routines. They proposed that if the change occurs constantly in the economy, then some kind of evolutionary process must be in play. A consensus is emerging that the evolution of productmarkets is the result of a confluence of a variety of market, technological, and competitive forces (Lambkin & Day, 1989). The strategy story here is exploration (technological innovation) followed by imitative market making followed by exploitation (cost or differentiation-based) (c.f., Dickson et al., 2001). Thus, the evolution that we envision is that Prospectors introduce new technologies into high-tech markets while Analyzers seek to understand the reasons for Prospectors successes and failures, and improve on the Prospectors offerings (Dickson, 1992; Lambkin & Day, 1989). Defenders, both Low Cost and Differentiated, are

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defending a consumer franchise and are hence more risk averse and are late followers who take advantage of respectively fixed-cost structure and employee service motivation feedback effects (Dickson et al., 2001). We first describe three strategic learning behaviors that high-tech firms engage in to generate knowledge about their market environment. We then move to the market targeting decision as it represents the foundation for the firms marketing strategy (e.g., Dickson & Ginter, 1987). We describe four generic business strategies (i.e., Prospectors, Analyzers, Low Cost Defenders, and Differentiated Defenders) that effectively summarize the strategic decisions that managers make in the pursuit of competitive advantage, and offer hypotheses for the strategic behaviors that managers of those strategies should engage in and the segments of innovation adopters they should target. We then describe the research design and discuss the results. We conclude with suggestions for future research and implications for managers.

Competitor orientation A second characteristic of high-tech markets is competitive dynamism. Competitive dynamism refers to changes in the competitive landscape: who are your competitors now and tomorrow, what are their product offerings, and how are their strategies changing? A competitor orientation is revealed through the priority placed on in-depth assessment of a set of existing and potential competitors. As such, the competitor assessment focuses on understanding targeted competitors goals, strategies, offerings, resources, and capabilities (Porter, 1980) and the organization-wide dissemination of the information generated from this assessment (Kohli & Jaworski, 1990). The goal for the business is to match, if not exceed, competitors strengths. Technological orientation Technological uncertainty is the third primary characteristic and is concerned with the lack of clear standards for new innovations in a market (Shapiro & Varian, 1999) and with the speed with which the technology is adopted in a product-market (Glazer & Weiss, 1993). It is based on not knowing whether the technologyor the company providing itcan deliver on its promise to meet specific needs (Moriarty, 1989). Gatignon and Xuereb (1997, p. 78) define technological orientation as the ability and the will to acquire a substantial technological background. Technological background refers to the firms technical knowledge. Technology orientation also means that the company is able to use its technical knowledge to create a new technical solution in order to address the needs of its customers. Technology orientation includes behaviors such as substantial investment in R&D, use of sophisticated technologies in new product development, rapid integration of new technologies, and pro-active acquisition of new technologies and generation of new product ideas.

Strategic learning behavior To make sense of complex environments, managers focus their learning efforts on the market forces that are most salient to the achievement of competitive advantage (Day & Nedungadi, 1994). This is critical in high-tech markets due to the turbulence and dynamism that characterizes them. Without the ability to simplify, structure, and focus their learning efforts, managers would suffer from paralysis by analysis. Gatignon and Xuereb (1997; see also Zhou, Yim, & Tse, 2005) argued that the three most important sets of strategic learning behaviors in high-tech markets are subsumed under customer orientation, competitor orientation and technological orientation. Customer orientation Customer needs often change rapidly and unpredictably in high-tech markets. As such, no information is more important to firms competing in high-tech markets than customer information as this information shapes science into commercial product or service (Leonard-Barton, 1995). Customer-oriented businesses engage in the organizationwide development of and responsiveness to information about the expressed and latent needs of current and potential customers (Kohli & Jaworski, 1990; Slater & Narver, 1998). Due to its market-sensing and customerrelating capabilities, the customer-oriented business should be well positioned to anticipate customer need evolution and to respond through the development of new customer value-focused capabilities and the addition of valuable products and services (Day, 1994).

Market segmentation Market segmentation is a state of demand heterogeneity such that the total market demand can be disaggregated into segments with distinct demand functions. Each firms definition, framing, and characterization of this demand heterogeneity will likely be unique and form the basis for the firms marketing strategy, (Dickson & Ginter, 1987, p. 5). One approach to segmenting markets for high-tech products is based on the categories of innovation adopters. The two dominant typologies of innovation adopters are based on the work of Bass (1969) and Rogers (1995). The major difference between the two models is that Rogers assumes that the percentage of adopters in each category is constant

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across innovations while the Bass model is innovation specific (Mahajan, Muller, & Bass, 1990). This difference is not germane to our study. Both models (see also Moore, 1991) break adopters into five categories (i.e., innovators, early adopters, early majority, late majority, and laggards). The early market for innovative products is comprised of both innovators and early adopters. Innovators are buyers who appreciate innovation for its own sake and are motivated by the idea of being a change agent in their reference group. They are willing to tolerate initial glitches and problems that may accompany any innovation just coming to market and are willing to develop makeshift solutions to such problems. Early adopters look to use innovation to achieve a revolutionary improvement. These buyers are attracted by high-risk, high-reward projects, and because they envision great gains from adopting innovation, they are not very price sensitive. Customers in the early market typically demand personalized solutions and quick-response, highly qualified sales and support. Rather than looking for revolutionary changes, the early majority is motivated by evolutionary changes to gain productivity enhancements. They are averse to disruptive change and, as such, want proven applications, reliable service, and results. They are the bulwark of the mainstream market. The late majority are risk averse and technology shy; they are price sensitive and need completely preassembled, bulletproof solutions. They adopt innovation just to stay even and often rely on trusted advisers to help them make sense of technology. Finally, laggards prefer only to maintain the status quo. They tend not to believe that innovation can enhance productivity and resist new technology purchases. The only way they might buy is if they believe that all their other alternatives are worse and that the cost justification is absolutely solid. Among the virtues of this model of innovation adoption is that it enables marketers to think dynamically about configurations of strategy and behavior, and their influence on performance (Lambkin & Day, 1989) as we describe in the next section.

product-market domains and construct structures and processes to achieve competitive advantage in those domains. They identified four archetypes of how firms address these issues. Prospectors seek to locate and exploit new product and market opportunities while Defenders attempt to seal off a portion of the total market to create a stable set of products and customers. Analyzers occupy an intermediate position by following Prospectors into new product-market domains while simultaneously protecting a stable set of products and customers. A fourth type, the Reactor, does not have a consistent response to the entrepreneurial problem. Porter (1980) proposed that strategy is a product of how the firm creates customer value (differentiation or low cost) and how it defines scope of market coverage (focused or market-wide). Walker and Ruekert (1987) synthesized these frameworks in a typology consisting of Prospectors, Low Cost Defenders, and Differentiated Defenders. Slater and Olson (2000, 2001) utilized and found support for the distinction between Low Cost Defenders and Differentiated Defenders. However, they also retained the Analyzer strategy type as numerous studies have demonstrated the validity of this strategy. Thus, this study utilizes the Slater and Olson typology. Due to the low proportion of self-reported Reactors in this study and their lack of a consistent strategy, we do not consider Reactors in this study (e.g., Miles & Snow, 1978). Prospectors Prospectors are the most proactive and innovative of the strategy types. Exploration for new opportunities is a central theme in the literature on innovation (March, 1991). Exploration may take the form of outside-in processes, that is customer-oriented behaviors, or of inside-out processes, purely R&D driven innovation. Merely listening to customers or using traditional research techniques such as surveys and focus groups can inhibit innovation, constraining it to ideas that customers can envision and articulatewhich may lead to safe, but bland, offerings. Customers are not always able to articulate their needs. Customers have needs of which they are not aware. They are real, but not yet in the customers awareness (Slater & Narver, 1998). Thus, to develop new products, Prospectors may closely observe customers use of products or services in normal routines (Leonard & Rayport, 1997). They also may work closely with lead users who recognize a need in advance of the majority of the market (Herstatt & von Hippel, 1992). An assumption generally subscribed to in evolutionary economics is that innovations arise from developments in technological knowledge (Nelson & Winter, 1982). These technological innovations create new market opportunities

The performance impact of strategic behavior and market targeting in the context of business strategy Business strategy is concerned with how businesses pursue competitive advantage. The two dominant frameworks of business strategy (Walker & Ruekert, 1987) are the Miles and Snow typology and the Porter typology. Miles and Snow (1978) developed a comprehensive framework that addresses how organizations define and approach their

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while simultaneously transforming demand in many existing product markets. From this perspective, the market primarily influences selection among competing technologies and the course of the technology after its inception. Thus, a technological orientation should be positively related to success for Prospectors (Miles & Snow, 1978) since R&D frequently drives development of these radical innovations (Olson, Walker, & Ruekert, 1995; Walker & Ruekert, 1987). Marketers in Prospector firms should be aware of the technological capabilities of the firm when communicating with the market while R&D should be customer-oriented when creating new products as well as developing core technologies. In addition, when attempting to transform cutting edge technologies into products or services, Prospectors may not even recognize who their competitors or potential competitors are. Thus, Prospectors should demonstrate more concern with customers and with technology that continuously pushes product and market boundaries than with competitors (Walker & Ruekert, 1987). As the strategic orientation of Prospectors is to pursue new product and market opportunities, it follows that they should target the innovator and early adopter segments. Buyers in these segments do not require a total solution to their problems. Prospectors are neither totally effective nor efficient at developing total customer solutions (Walker & Ruekert, 1987). Thus, we predict that in Prospector organizations: HP A positive relationship exists between (a) customer orientation and performance, (b) technological orientation and performance, (c) targeting innovators and performance, and (d) targeting early adopters and performance.

As imitators, Analyzers may observe buyer behavior in the innovator segment but will not target their offerings to this segment. However, the knowledge gained by observing buyer behavior in the innovator segment may inform product development and marketing efforts in the early adopter segment. The early adopter segment is where Prospectors and Analyzers are most likely to compete head-to-head. Analyzers are also interested in the mainstream market, as represented by the early majority segment, and have the capability to compete successfully there (Slater & Olson, 2001). Thus we predict that in Analyzer organizations: HA A positive relationship exists between (a) customer orientation and performance, (b) competitor orientation and performance, (c) targeting early adopters and performance, and (d) targeting the early majority and performance.

Low cost defenders The key to success for Low Cost Defenders is to provide quality products or services at the lowest overall cost. While Low Cost Defenders will have less technologically sophisticated product lines than firms pursuing other business strategies, technological advances that result in process innovations are critical to their overall success (Walker & Ruekert, 1987). Consistent with their objective of achieving a low cost position, the external focus of Low Cost Defenders emphasize is a competitor orientation. Competitors serve as a benchmark against which prices, costs, and performance can be compared. Low Cost Defenders do not require a sophisticated customer learning or customer linking capability because their target market is comprised of price-sensitive buyers. Two drivers of low cost are experience effects and economies of scale. Cost reductions through cumulative experience are most likely to be achieved by taking advantage of the experiences of competitors and a high growth rate. Low Cost Defenders are best able to take advantage of the experience of Prospectors and Analyzers after the product technology has matured and standards have emerged that reduce customer risk. This is most likely to occur when targeting the early majority segment. Economies of scale will be achieved through successful penetration of the mass market, with the early and late majority segments being the mass market. Thus, we predict that in Low Cost Defender organizations: HLCD A positive relationship exists between (a) competitor orientation and performance, (b) technological orientation and performance, (c) targeting the early majority and

Analyzers The key to success for Analyzers is to simultaneously bring out either improved or less expensive versions of products introduced by Prospectors while defending core markets and products. Analyzers (followers) can be as successful as Prospectors (early entrants) if they learn about customers preferences from Prospectors successful and unsuccessful efforts (e.g., Golder & Tellis, 1993) and limit their new product introductions to categories that have already shown promise in the market place. Thus, Analyzers should closely monitor customer reactions to Prospectors offerings as well as competitors activities, successes, and failures. In other words, while customers are certainly important to Analyzers, monitoring competitors actions is also important to the success of Analyzers. Furthermore, market success for Analyzers is based on imitation rather than on technological innovation (Miles & Snow, 1978).

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performance, and (d) targeting the late majority and performance.

Differentiated defenders The key to success for Differentiated Defenders is to provide premium service and/or the highest quality products to market segments that value and are willing to pay for them. The Differentiated Defenders focus is on maintaining its position in established (early and late majority) markets (Walker & Ruekert, 1987). The Differentiated Defenders value proposition is based on a nuanced understanding of its customers. Differentiated Defenders are skilled at segmenting the early and late majority markets to identify those segments that value superior quality and service (Slater & Olson, 2001). Consequently, the most successful Differentiated Defenders will emphasize customer-oriented behaviors. While this does not mean that they ignore competitors or do not engage in product or service innovation, these are not primary activities. Thus we predict that in Differentiated Defender organizations: HDD A positive relationship exists between (a) customer orientation and performance, (b) targeting the early majority and performance, and (c) targeting the late majority and performance.

Research design Data collection process and the study sample We focused this study on high-technology manufacturing and service firms operating in 20 different R&D-intensive industries as defined by the U.S. Bureau of Labor Statistics, in SIC categories 20 and 30, to provide a reasonably similar context for respondents but also to be broad enough for the results to be generalizable. We purchased a commercial mailing list of 1,450 senior marketing managers in businesses with 500 or more employees operating in these industries. In collecting the data, we followed the guidelines by Huber and Power (1985) on how to obtain high quality data from key informants. A key informant design is common in studies of marketing strategy (e.g., Slater & Olson, 2001; Vorhies & Morgan, 2005) and studies of strategic behavior (e.g., Day & Nedungadi, 1994; Gatignon & Xuereb, 1997). Senior marketing managers were selected as key informants because they should be knowledgeable about strategic behavior, target markets, business strategy, and overall firm performance.

Questionnaires were sent to the 1,450 senior marketing managers along with a personal letter that provided a brief introduction and a general explanation of the intent of the study, a questionnaire, and a postage-paid return envelope. The questionnaire defined the meaning of business unit and asked each respondent to refer to either the largest SBU in the organization or the one they were most familiar with when answering the questions. Four weeks after the initial mailing, a follow-up mailing was sent out with a duplicate copy of the questionnaire and a return envelope. We received 160 usable responses (Prospectors: 55, Analyzers: 45, Low Cost Defenders: 23, Differentiated Defenders: 30, Reactors: 7) that, after accounting for undeliverables, constituted a 12% response rate. Approximately two-thirds of responses were received after the first mailing with the remaining responses arriving after the second mailing. Although non-response bias is always a concern in survey research, this response rate is within the range of typical response rates for strategic marketing studies (e.g., Gatignon & Xuereb, 1997; Homburg & Pflesser, 2000). Furthermore, significant differences between late responders and early responders would indicate the presence of non-response bias. We found no significant differences between early and late responders at the 0.05 level on fifteen key measures. As a group, the respondents averaged 22 years working in their respective industries and 16 years within their current organizations. In addition, the respondents indicated an average of 4.68 (on a scale from 1=low to 5=high) when asked about the extent of their involvement in the process of formulating marketing strategies; 4.56 when asked about their knowledge of marketing issues within their SBU; and 4.33 when asked about their knowledge of marketing issues within their industry. Thus, the key informants sampled appear to be knowledgeable regarding the issues studied in our research. Description of the measures All constructs with the exception of strategy type are measured with multi-item scales (contact the first author for the measures). The items were placed randomly in the final instrument to avoid order bias. We employed the Likert method of summated ratings in scale construction. The three strategic behavior scales were adapted from established scales, including: customer orientation (Narver, Slater, & MacLachlan, 2004), competitor orientation (Narver & Slater, 1990), and technological orientation (Gatignon & Xuereb, 1997). Market targeting was measured with five new scales representing emphasis placed on targeting innovators, early adopters, early majority, late majority, and laggards. Following Churchill (1979), we first specified the domain

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of the constructs from Rogers (1995) and Moore (1991). Based on a thorough review of Moore (1991, 1995), Rogers (1995), and Wiefels (2002), we generated a pool of 54 items that capture the domains of the five constructs. Each statement was reviewed to insure that its meaning was clear. We adapted Jaworski and Kohlis (1993) measures of market turbulence (customer product preference change), competitive hostility (price competition), and technological turbulence to control for the effect of industry structure on performance. Those constructs are measured with three, two, and five indicators respectively. We assessed strategy type using the self-typing paragraph approach that is commonly used in strategic marketing research (e.g., Matsuno & Mentzer, 2000; Vorhies & Morgan, 2003). Several studies (e.g., Conant, Mokwa, & Varadarajan 1990; James & Hatten, 1995) have demonstrated that this is a valid measurement approach. We use the descriptions from Slater and Olson (2000) to discriminate between the Low Cost and Differentiated Defender types. As a check on the validity of the selftyping classification scheme, we analyzed differences in revenues, customer product preference change and technological turbulence across the strategy types. We expected a Defender > Prospector ordering for revenues and a Prospector > Analyzer > Defender ordering for the environmental variables. We found that Defenders had greater revenues than Prospectors, a Prospector > Analyzer > Defender ordering for technological turbulence, and that

customer product preference change was greater for Prospectors and Analyzers than for Defenders, providing support for the self-typing approach. We followed the lead of other marketing strategy researchers (e.g., Jaworski & Kohli, 1993; Olson et a1., 1995) and utilized a global measure of firm performance because of its relevance regardless of the nature of the contextual influences. As Ittner and Larcker (1997, p.17) note, overall perceived performance should encompass not only the organizations performance on the preceding dimensions (return on assets, return on sales, and sales growth), but also any other financial and non-financial goals that may be important to the organization. In a recent study, Morgan, Kaleka, and Katsikeas (2004) found a strong correlation between objective performance data and subjective assessments of performance by key informants, which supports the validity of perceptual data. Measurement purification Tables 1 and 2 report the results of the measurement analyses. Table 1 summarizes the constructs means, standard deviations, variances extracted, composite reliabilities, factor loadings as well as the overall CFA models fit indices. Table 2 reports the correlations and shared variances among the constructs. Overall, the 12 reflective scales and their purified 55 items were found to be reliable and valid in the context of this study.

Table 1 Summary statistics of the measurement analyses (n=160) Constructs No. of items in scale 5 7 9 4 4 3 4 5 3 2 5 4 Mean Standard deviation Variance extracted Composite reliability Factor loadingsa

Innovators Early adopters Early majority Late majority Laggards Customer orientation Competitor orientation Technological orientation Customer product preference change Price competition Technological turbulence Performance

3.01 3.16 3.64 3.40 3.02 3.59 3.65 3.39 3.24 3.82 3.49 3.49

0.52 0.57 0.57 0.63 0.70 0.62 0.71 0.61 0.67 0.79 0.72 0.84

0.40 0.51 0.60 0.52 0.50 0.46 0.53 0.51 0.35 0.50 0.53 0.63

0.76 0.88 0.90 0.81 0.80 0.72 0.81 0.84 0.61 0.66 0.85 0.87

0.570.77 0.610.78 0.740.86 0.670.76 0.610.88 0.630.74 0.570.88 0.630.82 0.520.70 0.690.72 0.640.85 0.690.88

Fit Statistics: 2 =2,450.06 df=1,364 Delta2=0.91 RNI=0.91 CFI=0.91 TLI=0.91 RMSEA=0.06 a All factor loadings are significant at the p<0.01 level.

J. of the Acad. Mark. Sci. (2007) 35:517 Table 2 Correlations and shared variances (n=160) I I EA EM LM L CO COM TO MKT CH TECH PERF 0.42 0.11 0.19 0.32 0.10 0.06 0.33 0.29 0.03 0.10 0.13 EA 0.18 0.20 0.15 0.41 0.27 0.07 0.49 0.26 0.08 0.37 0.46 EM 0.01 0.04 0.21 0.01 0.40 0.41 0.11 0.17 0.03 0.31 0.46 LM 0.04 0.02 0.04 0.45 0.13 0.12 0.06 0.15 0.05 0.04 0.19 L 0.10 0.17 0.00 0.20 0.10 0.03 0.16 0.21 0.09 0.20 0.01 CO 0.01 0.07 0.16 0.02 0.01 0.47 0.32 0.28 0.02 0.46 0.35 COM 0.00 0.00 0.17 0.01 0.00 0.22 0.20 0.13 0.11 0.31 0.25 TO 0.11 0.24 0.01 0.00 0.03 0.10 0.04 0.35 0.01 0.51 0.29 MKT 0.08 0.07 0.03 0.02 0.04 0.08 0.02 0.12 0.34 0.58 0.06 CH 0.00 0.01 0.00 0.00 0.01 0.00 0.01 0.00 0.12 0.28 0.12 TECH 0.01 0.14 0.10 0.00 0.04 0.21 0.10 0.26 0.34 0.08 0.11

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PERF 0.02 0.21 0.21 0.04 0.00 0.12 0.06 0.08 0.00 0.01 0.01

Correlations are included below the diagonal and shared variances are included above the diagonal. All correlations above 0.16 are significant at p<0.05.

Following the data collection, we tested the dimensionality, reliability, and validity of the scales. Given the relatively small sample size (n=160) and the battery of items used to measure the various constructs, we factor analyzed each construct separately to remove problematic items and followed with an assessment of the remaining items in one confirmatory factor analysis using LISREL 8.72 (Jreskog, S. Du Toit, & M. Du Toit, 2000). In removing items from a scale, we followed suggestions by Anderson and Gerbing (1988) regarding maintaining conceptual integrity and explanatory power while also incorporating statistical considerations associated with reliability and validity. For the overall CFA we used the DELTA2 (Bollen, 1989), RNI (McDonald & Marsh, 1990), CFI (Bentler, 1990), TLI (Tucker & Lewis, 1973), and RMSEA (Steiger & Lind, 1980) fit indices to evaluate the measurement model. This measurement process resulted in us keeping 55 of the 100 original items included in the survey. The refined set of 55 items resulted in acceptable fit statistics (2 = 2,450.06, df=1,364, DELTA2=0.91, RNI=0.91, CFI=0.91, TLI=0.91, and RMSEA=0.06; See Table 1 for complete results). In addition, the 55 items were found to be reliable and valid when evaluated based on each items error variance, modification index, and residual covariation (e.g., Fornell & Larcker, 1981; Jreskog et al., 2000). Next, we calculated composite reliability for each scale using the procedures outlined by Fornell and Larcker (1981). The composite reliabilities for the 12 scales ranged from 0.61 to 0.90, with factor loadings ranging from 0.52 to 0.88 (p< 0.01) (See Table 1 for complete results). The technological orientation and customer product preference change scales fell below the commonly used threshold of 0.70, the innovator and customer orientation scales fell between 0.70 and 0.80, and the remaining eight scales were equal to or exceeded 0.80. We assessed discriminant validity using two different methods. First, we assessed the average variance extracted

(AVE) for each construct, and verified that the AVE was higher than the corresponding shared variance for all possible pairs of constructs (Anderson & Gerbing, 1988). The average variances extracted ranged from 0.35 to 0.63, and the shared variances ranged from 0.00 to 0.34 (Tables 1 and 2). Second, we tested discriminant validity via the test advocated by Anderson (1987) and Bagozzi and Phillips (1982). In this test, all pairs of constructs were analyzed in a series of twofactor CFA models. Each model was run twice once constraining the coefficient to 1.0 and once allowing to vary freely. Using a 2-difference test on the paired nested models (Anderson & Gerbing, 1988), we found that the critical value (2df 1 >3:84) was exceeded in all cases (the lowest 2df 1 9:38 was found between customer product preference change and price competition). We employed a confirmatory factor-analytic approach to Harmons one-factor test (e.g., Sanchez & Brock, 1996) to assess whether common method bias (CMB) would constitute a problem in the testing and interpretation of the results. The rationale for this test is that if CMB poses a serious threat, a single latent factor would account for all manifest variables (Podsakoff & Organ, 1986) as opposed to the a priori specified measurement model. As such, a worse fit for the one-factor model means that CMB is not significant enough to warrant concern (Sanchez, Korbin, & Viscarra, 1995). In our case, the one-factor model yielded a 2 =4,841.58 with 1,430 degrees of freedom (compared with the 2 =2,450.06 and df=1,364 for the measurement model). Thus, CMB is not a serious threat in the context of this studys use of the measures.

Results We tested the hypotheses using OLS regression within each of the four strategy subgroups. This is the preferred

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Table 3 Standardized regression results with performance as the criterion variable for the four viable strategy types Predictor variables Prospectors (n=55) 0.06 0.06 0.17 0.05 0.09 0.09 0.25** 0.33** 0.28** 0.21** 0.05 0.03 0.80 0.73 11.76** >0.99** Analyzers (n=45) 0.01 0.11 0.08 0.22 0.01 0.12*,a 0.15 0.16 0.46** 0.40** 0.13 0.19 0.75 0.64 6.40** >0.99** Low cost defenders (n=23) 0.29 0.47* 1.03** 0.30* 0.03 0.52** 1.17** 0.18* 0.23* 0.48** 0.39*,b 0.91** 0.96 0.89 13.16** >0.99** Differentiated defenders (n=30) 0.20 0.03 0.20* 0.02 0.55** 0.00 0.10 0.00 0.28* 0.43** 0.20*,a 0.27* 0.90 0.82 10.70** >0.99**

Revenues (log) Customer product preference change Price competition Technological turbulence Customer orientation Competitor orientation Technological orientation Innovators Early adopters Early majority Late majority Laggards R2 Adjusted R2 F-value Effect size
**

p<0.01, * p<0.05. Reactors (n=7) were excluded from the overall analysis. One-tailed tests were used for directional relationships and twotailed tests were used for all others relationships. The effect size (i.e., power of each subgroup model) was determined using the procedures by Cohen et al. (2003, p. 92); for each subgroup, we find adequate statistical power in the samples to conduct the analysis of the included variables. a redundancy effect b net suppressor effect

technique when the moderator variable is categorical (Sharma, Durand, & Gur-Arie, 1981). One-tailed tests were used for the directional hypotheses and two-tailed tests were used for all other relationships. Given that each subgroup has a relatively small sample size, we conducted a power analysis, as suggested by J. Cohen, P. Cohen, West, and Aiken (2003), to determine the probability of finding the sample R2 to be greater than zero with =0.01 for each strategy type. We achieved excellent statistical power (>0.99, p<0.01) in each subgroup as well as in the overall sample (R2-range: 0.750.96; Adjusted R2-range: 0.640.89; see Table 3). However, the power to detect a significant relationship at the variable level is considerably lower due to the small subgroup samples. Thus, we use p0.10 as our Type I error rate instead of the more conservative p0.05 Type I error rate. We believe this strikes a reasonable balance between committing a Type I error and a Type II error (Sawyer & Ball, 1981). Additionally, for all models, the Variance Inflation Factors (VIF) were lower than 10.0 except for the price competition variable (VIF=10.70) and the technological orientation variable (VIF=12.49) in the low-cost defender model. Thus, multicollinearity does not appear to systematically affect variables in the models. Prospectors In the analysis of the Prospector model, we found positive effects of technological orientation (=0.25,

t=2.22, p<0.05), targeting innovators (=0.33, t=2.63, p< 0.05), and targeting early adopters (=0.28, t=2.27, p< 0.05) on performance. We also found a negative effect of targeting the early majority (=0.21, t=3.49, p<0.05) on performance, a relationship that was not hypothesized. Overall, the model had an adjusted R2 =0.73. Thus, HPb, HPc, and HPd could not be rejected in the analysis. Analyzers In the analysis of the Analyzer model, we found positive effects of targeting early adopters (=0.46, t=3.08, p<0.01) and targeting the early majority (=0.40, t=2.51, p<0.01). Although the regression results for Analyzers indicate that competitor orientation is not a significant predictor of performance, this is actually a classic case of redundancy. Each semi-partial correlation, and the corresponding is less than the simple correlation between competitor orientation and performance. This is because competitor orientation and targeting the early majority share variance and influence. Cohen et al.s (2003) recommended solution to the problem of describing an IVs participation in determining R is given by the partial correlation coefficient and its square. In this case, the squared partial correlation between competitor orientation and performance after controlling for the influence of all IVs with the exception of targeting the early majority is 0.15 which is statistically significant (p<0.05). Overall, the model had an adjusted R2 =0.64. Based on the analysis, we cannot reject HAb, HAc, or HAd.

J. of the Acad. Mark. Sci. (2007) 35:517

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Low Cost Defenders In the analysis of the Low CostDefender model, we found negative relationships between customer product preference change (=0.47, t=2.36, p< 0.05) and performance, and between price competition (= 1.03, t=4.06, p<0.01) and performance, and a positive relationship between technological turbulence (=0.30, t= 2.24, p<0.05) and performance. The signs of the coefficients for competitor orientation (=0.52, t=3.74, p< 0.01) and technological orientation (=1.17, t=4.05, p< 0.01) were positive and significant. We found positive and significant relationships between targeting the early majority ( = 0.48, t = 4.02, p < 0.01) and performance, and between targeting laggards (=0.91, t=4.62, p<0.01) and performance. The coefficient for targeting the late majority was negative and significant (=0.39, t=1.60, p<0.10). However, this seems to be a classic example of net suppression where targeting the late majority is positively correlated with performance (r=0.81, p<0.01), but has a negative regression coefficient. In this case, the squared partial correlation between targeting the late majority and performance after controlling for the influence of all IVs with the exception of targeting the early majority and targeting laggards is 0.33 which is statistically significant (p<0.05). Overall, the model had an adjusted R2 =0.89. Given these results, HLCDa, HLCDb, and HLCDc could not be rejected in the analysis, and we do not reject HLCDd given the results of the partial correlation analysis.

be a threat to the internal validity of the study. Third, while the response rate is within the typical range for studies such as this and non-response bias does not seem to be a problem, we clearly would have preferred a higher response rate. Despite these limitations, this study provides useful guidance to scholars and managers regarding appropriate strategic behavior and target market selection in the high tech sector.

Discussion and implications The results of this study are quite intriguing for several reasons. First, we find support for 13 out of our 15 hypotheses. Second, the explanatory power of the models is quite high with the adjusted R2 for each subgroup at or above 0.60. Third, market targeting which, to the best of our knowledge, has not been studied empirically, adds significantly to the explanatory of the models. Finally, the pattern of results for each strategy type holds some surprises which we discuss now. The most interesting results from the Prospector analysis were the findings of no relationship between customer orientation and performance and a negative relationship between targeting the early majority and performance. Previous research has found a significant and positive relationship between customer orientation and performance for Prospectors (Olson, Slater, & Hult, 2005). Why is it that we find no such relationship in this study of firms competing in high-tech markets? One possibility is that a customer orientation improves performance only in markets where demand uncertainty is high but detracts from performance when demand uncertainty is low as found by Gatignon and Xuereb (1997). To determine whether uncertainty moderates the customer orientationperformance relationship for Prospectors, we conducted a post hoc analysis. After mean centering the variables, we computed a multiplicative interaction term for customer orientation and customer product preference change. We then regressed performance on the original set of independent variables plus the interaction term. We found a positive relationship between the interaction term (=0.21, t=2.18, p<0.05) and performance. R2 increased by 2.4%, significant at p<0.05 (F change=4.74). Thus, a customer orientation appears to be positively related to performance for Prospectors when uncertainty is high. The finding of a negative relationship between targeting the early majority and performance is consistent with Moores (1991) proposition that innovative firms (i.e., Prospectors) have difficulty crossing the chasm between the early adopter and early majority market segments. The chasm exists because critical differences between the early

Differentiated defenders In the analysis of the DifferentiatedDefender model, we found a negative relationship between price competition (=0.20, t=1.82, p<0.10), and positive relationships between customer orientation (=0.55, t= 3.84, p<0.01) and performance, and between targeting the early majority (=0.43, t=2.46, p<0.05) and performance. We found no relationship between targeting the late majority and performance. However, as was the situation with Analyzers, this too seems to be a case of redundancy. When we computed the squared partial correlation between targeting the late majority and performance after controlling for the influence of all IVs with the exception of targeting the early majority, we found a value of 0.36 which is significant (p<0.05). We also found a negative effect of targeting laggards (=0.27, t=2.11, p<0.05). Overall, the model had an adjusted R2 =0.82. Thus, HDDa, HDDb, and HDDc could not be rejected in the analysis. Before discussing the findings, we address some caveats regarding this study. First, the study utilizes a crosssectional design; thus, inferences about causality should not be drawn. Second, we utilize a single respondentkey informantdesign. Ideally, we would obtain responses from multiple informants in each SBU. However, based on our analysis, common method variance does not seem to

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adopter and early majority segments cause them to adopt at different rates, make cross-market segment communication extremely difficult regarding technological innovations, and, more critically, the marketing strategies firms use to effectively reach the early market for technology innovations do not address the very different needs of the mainstream market. Thus, Prospectors who excel at exploiting new product and market opportunities, have a difficult time reaching out to more mainstream customers to successfully commercialize their technological innovations. What then are the implications for managers of Prospector businesses? First, they should place a high priority on developing customer sensing and relating capabilities, staying ahead or abreast of technological developments and using these to supply new technology based solutions for their customers expressed and latent needs. While our results indicate that customer orientation is related to performance only in markets characterized by a high degree of market preference change, this makes perfect sense from a positive feedback perspective. When there is high rate of change in customer preferences, customer orientation involving willingness to experiment, market sensing capabilities and fast implementation skills increase and as they increase they drive even more changes in customer preferences (Dickson, 1992). But even in times of relative market calm it is in the Prospectors best interests to prepare for market change by developing and maintaining customer sensing and relating capabilities (e.g., DAveni, 1994). Dickson et al., (2001) precisely describe such a major prospecting dynamic, how a within firm market surveillance feedback effect can lead to increasing returns on investment in market sensing rather than decreasing returns. Good Prospectors get ever better at prospecting. But the momentum of the customer sensing capability needs to be maintained because if it starts to slip the feedback effect will drive it down (see Dickson et al., 2001, Figure 3). Second, managers of Prospector companies might draw on the lessons of the evolutionary economics simulation literature (Nelson & Winter, 1982). Nelson and Winter found that most of the time, imitators with major collateral distribution assets and brand reputation come to dominate their more innovative rivals. The imitator analyzes the innovators success and the more quickly the innovators advantage can be imitated (and appropriated) by the larger firm that can rapidly diffuse their imitation across the market at low cost, the faster the larger analyzer with marketing collateral assets in place wins out (see Nelson & Winter, 1982). The Analyzer and Prospector in our study are equivalent to Nelson and Winters Imitator and Innovator companies in their simulations. If the Analyzer almost always beat the Prospector because of competitive dynamic advantages then it makes sense for a Prospector to combat the Analyzers collateral asset advantages through a

business alliance of some form, but most particularly one that reaches and penetrates the early majority and late majority market. The most surprising result for Analyzers is that customer orientation is not significantly related to performance. Again, previous research has found a significant and positive relationship between customer orientation and performance for Analyzers (Olson et al., 2005). Why is it that we find no such relationship in this study of firms competing in high-tech markets? It may be that Analyzers do not benefit from a customer orientation because they derive sufficient benefit from copying the successful efforts of Prospectors. Aside from developing strong competitor analysis capabilities, what should managers in Analyzer firms do to enhance their chances for success? First, they should recognize that the early majority is comprised of many segments and identify the best beachhead (Moore, 1995), the target market from which to pursue the mainstream market. A good beachhead requires that customers have a single, compelling, must have reason to buy that can be addressed by the capabilities of the firm. Marketing capabilities of successful Analyzers relative to Prospectors include (Slater & Olson, 2001) ability to offer lower prices, intensive distribution, and a lesser emphasis on product innovation. Low Cost Defenders are successful in the early majority, late majority, and laggard markets that are characterized by increasing emphasis on price competition. They are able to offer lower prices than businesses employing other strategies (Slater & Olson, 2001) because of their internal/cost orientation (Olson et al., 2005), their competitor orientation that allows them to benchmark their value chains, and their technology orientation that leads to process improvement. Moreover, the most successful Low Cost Defenders have the lowest marketing expenses due to placing the lowest emphasis on marketing research, product innovation, promotion, and distribution management of all of the strategy types (Slater & Olson, 2001). As we hypothesized, success for Differentiated Defenders is associated with a customer orientation, and with targeting the early and late majority markets. The most successful Differentiated Defenders conduct extensive marketing research to identify the market segments that value innovative products and services and that are willing to pay premium prices for them. They promote their products/services extensively and use an internal sales force to control their message (Slater & Olson, 2001). Not surprising is the finding of a negative relationship between targeting laggards and performance. Laggards are technology skeptics who prefer to maintain the status quo and purchase only when they believe that the cost justification is absolutely solid. Thus, they would be unlikely to pay the premium prices that Differentiated Defenders require.

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Suggestions for future research It is difficult to study market dynamics in a cross-sectional study. Our research design, data, and analytical approach could be interpreted as our suggesting that all of the categories of innovation adopters and strategy types will exist simultaneously in a market. However, the evolutionary perspective to which we subscribe argues that by the time Defenders enter a market, Prospectors will either have morphed into a different strategy type or will have moved into adjacent markets or developed new products that make new markets. In that case, there exist two technology standards that compete against each other. In this case, Prospectors who represent the new technology will be competing against Defenders who represent the old technology. However, our objective is not to predict the path of market evolution but to provide insight into the predictors of success for the different strategy types. The next phase in this research stream would utilize archival data to study these phenomena as a market develops and matures (e.g., Christensen, 1997). Another issue is whether the Miles and Snow typology is a valid vehicle for studying these types of phenomena. On the one hand, several studies (e.g., James & Hatten, 1995; Slater & Olson, 2001) have provided evidence of the validity of this classification scheme. A refinement that might increase the validity of the typology would be to view the response to the entrepreneurial problem in two dimensional space instead the Prospector, Analyzer, Defender continuum of adjustment strategies (Miles & Snow, 1978, p. 68). The second dimension would closely parallel learning strategies. The first learning strategy emphasizes learning through exploration and experimentation. The second strategy emphasizes vicarious learning, learning by observing and analyzing rivals and their successes and failures. The third strategy emphasizes learning through exploitation manifested as continuous improvement based a succession of incremental improvements (e.g., March, 1991). While all three of these learning strategies are essential for organizations, they compete for scarce resources. Consequently, managers make explicit and implicit choices among them based on their perceived value to the organization. Thus, a revised typology would be based on the interaction between adjustment strategy and learning strategy. Testing the validity of this approach to organizational classification would represent the first substantial refinement to the typology since Walker and Ruekert (1987).1 Conclusion The results of this study suggest that, based on their strategy type, successful firms develop skill sets for specific
0

situations (e.g., success with early market customers). For example, Prospectors are the most likely to possess the resources and capabilities to develop the radical innovations that address needs in the innovator and early adopter segments. Conversely, Analyzers and Defenders are more likely to develop incremental and process innovations that enable them to address mainstream market needs. However, to be successful across a range of innovations (both radical and incremental, and product and process), firms must diversify their skill sets. In essence, the capability to develop contradictory skill sets is what will allow Prospectors to successfully cross the chasm and allow Analyzers and Defenders to overcome the innovators dilemma (Christensen, 1997). Specifically, for Prospectors to cross the chasm and move into mainstream markets, they must develop Analyzer-like marketing capabilities and strive for cost reductions, or partner with firms that already possess those capabilities. And for Analyzers and Defenders to successfully develop and commercialize radical innovations, they must develop some of the marketing and technological resources and capabilities of Prospectors, and be willing to cannibalize sales from existing product lines. At first glance this recommendation might be construed as simply a call for the elimination of a unique strategy. After all, if all groups share the same skill sets what is there to differentiate their approach to achieving sustainable competitive advantage? But this interpretation would be incorrect. Rather, this recommendation focuses on the evolution of strategy. Just as todays high technology offerings spawn tomorrows mass-marketed generics, todays skills in bringing innovative ideas to the market must give way to tomorrows need to generate cost efficiencies and expand distribution and customer appeal. While, it is beyond the scope of this study to determine how that process is best pursued, the strength of the findings in this study serve to suggest that future research into the relationship between innovation adoption and strategy evolution is warranted.
Acknowledgement The authors gratefully acknowledge the support of the Center for International Business Education and Research at Michigan State University (MSU-CIBER) and the College of Business Administration at University of ColoradoColorado Springs for financial assistance. We also acknowledge the many helpful comments and suggestions of two anonymous reviewers.

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We are grateful to a reviewer for suggesting this refinement.

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