The challenge of combining several strategies
To ensure competitive advantage, firms focus their actions on specific strategies, and commit themselves to their pursuit in the long run. Business philosophies of companies can be described with the help of strategic orientation governing their actions. Two orientations have received the most recognition among management scholars – entrepreneurial orientation and market orientation. Entrepreneurial orientation has to do with proactive pursuit of risky innovations. Market orientation deals with being receptive and responsive to new market trends and careful coordination of firm activities to harness the emerging possibilities. Recently, arbitrage orientation, a novel form of strategic orientation, has been suggested by the researchers to explain firm actions aimed at the pursuit of the more “trivial” opportunities. Arbitrage orientation captures firm’s commitment to identifying and exploiting market inefficiencies, and it may manifest in the classic “buying low and selling high” operations or in the imitation of novel ideas first offered by someone else. Most firms actually pursue opportunities of this relatively trivial kind and cannot be called innovators in the grand sense with a straight face.
All of these orientations have a positive effect on firm performance. At the same time, for firms that want to build a truly defensible strategy, submitting to a single orientation logic may not be sufficient, suggests Sergey Anokhin, an Entrepreneurship Professor at Kent State University. Competitive advantage often requires building unique resource and capability combinations, so it may be desirable to manage firm’s strategic orientations as a portfolio. Yet, combining orientations is challenging, and researchers have documented that trying to pursue entrepreneurial and market orientations simultaneously may actually be detrimental for firm performance. With the novel arbitrage orientation being added to the strategic toolkit of decision makers, the problem of combining different strategic orientations in a single portfolio becomes all the more important.
The intuition behind the study
The difficulty of combining entrepreneurial orientation and market orientation, explains Dr. Sergey Anokhin, has to do with their conflicting natures. While entrepreneurial orientation deals with the proactive development of innovative and risky offerings for the untested market, market orientation is reactive, and seeks to provide the firm with a straightforward, market-tested space that can be profitably served by the firm. Because most firms are resource-constrained, they find it difficult to go after both goals simultaneously, and spread themselves too thin if they choose to do both. Arbitrage orientation, while clearly different from entrepreneurial orientation, represents less of a departure from the guiding principles that govern entrepreneurially oriented firms. After all, much like entrepreneurial orientation, it has to do with the pursuit of entrepreneurial opportunities, albeit of a different kind than those usually targeted by the entrepreneurially oriented firms. At the same time, it is as distinct from market orientation as entrepreneurial orientation. Because of that, suggests Professor Sergey Anokhin, one may expect that arbitrage orientation and entrepreneurial orientation will work hand-in-hand, whereas the interaction of arbitrage orientation and market orientation is likely to be marred with the same difficulties that make it hard to combine entrepreneurial orientation and market orientation. Juggling three orientations is hard, but if done right, it can be successful.
To test these ideas empirically, a group of scholars from Kent State University and Western Michigan University has conducted a statistical analysis of the effects that these three orientations and their combinations exert on firm performance. A representative sample of firms from the Midwest was subjected to a careful investigation, and the results were fully in line with the logic outlined above. While the effect of arbitrage orientation gets stronger in the presence of entrepreneurial orientation, it weakens significantly when the firm also scores high on market orientation. That is, if the firm chooses to develop a complex strategy that implies combining several strategic orientations, going after arbitrage and entrepreneurial orientations at once looks like a winning choice, whereas trying to combine arbitrage orientation with market orientation will only make the matters worse. This dovetails neatly with the prior research that reported the same negative outcome for the combination of entrepreneurial orientation and market orientation.
The study offers novel insights for decision makers at the level of individual firms. To ensure a windfall, it is a good idea to think of various strategic orientations as a portfolio that the firm builds over time. Not all portfolios are created equal. Certain orientation combinations are clearly beneficial to the firm, while others are detrimental. It is possible that with sufficient cushion of unused slack resources the firm may be able to effectively combine all three orientations, but for a typical firm the best strategy by far is investing in combining entrepreneurial orientation and arbitrage orientation.