Strategic Management Journal, Vol. 10, 251-269 (1989)

IMPLEMENTING COMPETITIVE STRATEGIES AT THEBUSINESS UNIT LEVEL: IMPLICATIONS OFMATCHING MANAGERS TO STRATEGIESVIJAY GOVINDARAJANThe Amos Tuck School of Business Administration, Dartmouth College, Hanover,New Hampstiire, U.S.A.

This paper argues that, for superior performance, it is necessary to attune the choice of thegeneral manager to the strategy of the business unit (SBU). Data from 121 SBUs indicatethat SBU competitive strategy interacts with several managerial orientations (functionalbackground, locus of control, and problem-solving style) to influence SBU effectiveness.The theoretical and practical relevance of these findings are discussed, as are directions forfuture research.

How managerial characteristics contribute toorganizational performance, and how thisrelationship might depend upon the strategiccontext facing the organization, are extremelycritical issues for organization theory and practice.After all, if the choice of appropriate strategies(Porter, 1980) and their implementation (Gal-braith and Nathanson, 1978) is critical to organi-zational success, then the selection of specificindividuals most directly responsible for thechoice and implementation of these strategiesshould also be regarded as critical (Gupta andGovindarajan, 1984a).

Several theoretical as well as empirical studieshave addressed the issue of matching managerialcharacteristics with corporate strategy (Hambrickand Mason, 1984; Hitt, Ireland and Palia, 1982;Miller, Kets de Vries and Toulouse, 1982;Miller and Toulouse, 1986; Miller, Toulouse andBelanger, 1985). However, strategy is not just achoice of which products and markets to partici-pate in (the corporate strategy problem); it alsoinvolves choices about how to compete within thechosen industry (the business strategy problem).Given the critical importance of formulating andimplementing successful competitive strategies atthe business unit (SBU) level (Porter, 1980),the near-absence of empirical studies linking

managers to SBU competitive strategies presentsa significant research opportunity. Further, theconsistency with which past studies have foundcontingency relationships between corporatestrategy and managerial orientations would leadone to expect similar relationships at the SBUlevel as well.

Recently, both academicians (Gupta andGovindarajan, 1984a) and practitioners {BusinessWeek, 1980, 1981) have emphasized the need fordeveloping the theory and practice of matchingmanagers with strategies at the SBU level.Operationalizing SBU strategy in terms of Porter's(1980) low cost-differentiation framework, andusing a portfolio of SBU general managers'characteristics, this study addresses the followingquestion: Should companies hire general man-agers with different characteristics to 'fit' thestrategy of the individual SBUs?

Gupta and Govindarajan's study (1984a) wasthe first major study that focused on thestrategy-manager fit at the SBU level. Theyfound that greater marketing/sales experience,willingness to take risks, and tolerance forambiguity on the part of the SBU generalmanager all contributed to performance in thecase of 'build' SBUs, but hampered performancein the case of 'harvest' SBUs. While expanding

0143-2095/89/030251-19$09.50© 1989 by John Wiley & Sons, Ltd.

Received 21 July 1987Final Revision 7 July 1988

252 V. Govindarajan

on their work, this study differs from their workin two key areas:

1. Their work examined the implications ofmatching SBU general managers to the SBU'sstrategic mission (i.e. its goals). The presentstudy considers matching general managers tothe SBU's competitive strategy (i.e. how theSBU competes to achieve its goals). Thus, thefindings of the two studies should complementeach other.

2. The present study considers a more compre-hensive set of managerial background andpersonality variables than was considered byGupta and Govindarajan (1984a).

THEORY

Strategy-manager linkage

This study takes the position that congruencebetween the strategies chosen and the types ofmanagers responsible for implementing them isdesirable. The theoretical foundation for thisposition — which will be used later to developspecific hypotheses — is based on the followingset of arguments:

1. different strategies have different job require-ments — different tasks, behaviors, knowl-edge, skills, and values — for effectiveperformance (Andrews, 1971);

2. individual general managers — due to differ-ences in their biographical background (age,formal education, functional tracks, etc.) and/or their personality orientations (locus ofcontrol, risk propensity, etc.) — differ intheir behaviors, knowledge, skills, and values(Kotter, 1982);

3. managers might be able to change their stylesbut lack the flexibility to function effectivelyin all types of strategic contexts (Gupta andGovindarajan, 1984a; Hambrick and Mason,1984);

4. thus, superior performance can be achievedby selecting managers whose skills, knowledge,and behaviors are congruent with the require-ments of particular strategies (Gupta andGovindarajan, 1984a).

Competitive strategy

This study chose Porter's (1980) conceptualizationof competitive strategy, since this conceptuali-

zation is academically well accepted and internallyconsistent (Dess and Davis, 1984). Porter (1980)identified two generic ways in which an SBU cangain sustainable competitive advantage overother firms in the industry: 'low cost' and'differentiation'. A 'low-cost' strategy emphasizesthe need to be the low-cost producer in theindustry (e.g. Black and Decker in tools). A'differentiation' strategy is based on creating andoffering a product that is perceived industry-wideas unique (e.g. Mercedes in automobiles).

While discussing the skills, resources, andorganizational requirements needed for eachstrategy. Porter (1980: 40-41) alludes to thestrategy-manager match by listing several mana-gerial skills that are likely to differ across low-cost and differentiation strategies. However,Porter does not provide any theoretical argumentsas to why the specific managerial characteristicsneed to be matched with competitive strategy; norhave these relationships been tested empirically.

Managerial characteristics

This study examines a portfolio of managerialcharacteristics including a mix of both biographi-cal background and personality orientations. Thevariables examined are: (i) functional back-ground; (ii) industry familiarity; (iii) locus ofcontrol; and (iv) problem-solving style.

Turning to the biographical background vari-ables, the choice of functional experience ismotivated by previous studies which have foundthat the relative importance of organizationalfunctions varies among firms in accordance withvariations in their strategies (Hitt et al., 1982).Industry familiarity is an important characteristicsince effective strategy implementation impliesthe achievement of an appropriate coalignmentbetween the SBU and its industry setting.Strategic management literature has consideredseveral other background variables — age (Ham-brick and Mason, 1984), organizational familiarity(Gupta and Govindarajan, 1986), and formaleducation (Hambrick and Mason, 1984). Therewere no clear-cut theoretical arguments as towhy age, education, and organization familiarityshould vary systematically across different com-petitive strategies.

Although there are many personality dimen-sions to choose from, prior research suggests thatthe associations between competitive strategy andthe following two personality variables — locus

Implementing Competitive Strategies at Business Unit Level 253

of control (Miller, Kets de Vries and Toulouse,1982) and problem-solving style (Miller, Toulouseand Belanger, 1985) — hold much promisefrom the standpoint of explaining organizationalperformance. Other personality variables havebeen examined by strategy researchers — e.g.willingness to take risk and tolerance for ambi-guity (Gupta and Govindarajan, 1984a). How-ever, there do not appear to be any theoreticalarguments which could link these personalityvariables to competitive strategy.

The next section presents the theoreticalrationale for expecting linkages between individ-ual managerial characteristics and competitivestrategy.

Functional background

The relative importance of various functions atthe SBU level can be predicted quite directlyfrom the definitions of Porter's (1980) competitivestrategies. Achieving differentiation requires aperception of exclusivity. This exclusivity can becreated through a variety of approaches: brandimage (e.g. Coca-Cola in soft drinks); superiorcustomer service (e.g. IBM in computers); dealernetwork (e.g. Caterpillar Tractor in constructionequipment); product design and product features(e.g. Hewlett-Packard in electronics); and producttechnology (e.g. Coleman in camping equipment).Differentiation can thus be broadly based on themarketing approach (brand image, customerservice, dealer network, etc.) and/or on researchand development efforts (product design, fea-tures, technology, quality, etc.). A differentiationSBU is therefore likely to require particularlystrong marketing and R&D skills (Hambrick andMason, 1984; Porter, 1980: 41).

Low-cost producers, on the other hand, attemptto reduce costs aggressively through the pursuitof economies of scale, efficiencies in buying,experience curve declines, etc. To quote Porter:'Cost leadership requires aggressive constructionof efficient-scale facilities, vigorous pursuit ofcost reduction from experience, tight cost andoverhead control, avoidance of marginal customeraccounts, and cost minimization in areas likeR&D, service, sales force, advertising, and soon' (1980: 35). For a low-cost strategy to besuccessful, managers must direct their attentionto the internal aspects of the SBU, primarily tothe production and engineering functions, as wellas place considerable emphasis on cost and

financial controls. Thus a low-cost strategy islikely to require strong manufacturing and fi-nance/accounting skills (Hambrick and Mason,1984; Porter, 1980: 40).

Finally, it is expected that skills in generalmanagement would seem to be beneficial to anySBU — regardless of its strategy — sincesuccessful implementation of every strategyrequires the coordination of decisions and actionsacross all functions (Hitt et al., 1982). The abovediscussion can be summarized in the followingset of hypotheses:

Hypothesis 1: Functional experience inresearch and development on the part of theSBU general manager will make a greatercontribution to effectiveness in the case of'differentiation' SBUs than in the case of 'low-cost' SB Us.Hypothesis 2: Functional experience in mar-keting/sales on the part of the SBU generalmanager will make a greater contribution toeffectiveness in the case of'differentiation' SBUsthan in the case of 'low-cost' SBUs.Hypothesis 3: Functional experience in manu-facturing on the part of the SBU generalmanager will make a greater contribution toeffectiveness in the case of 'low-cost' SBUs thanin the case of 'differentiation' SBUs.Hypothesis 4: Functional experience in fi-nance/accounting on the part of the SBU generalmanager will make a greater contribution toeffectiveness in the case of 'low-cost' SBUs thanin the case of 'differentiation' SBUs.Hypothesis 5: Impact of experience in generalmanagement on SBU effectiveness will not bemoderated by competitive strategy. Experiencein general management will have a direct,positive impact on SBU effectiveness.

Industry familiarity

A differentiation SBU seeks to be unique in itsindustry along some dimensions that are widelyvalued in buyers. It selects one or more attributesthat many buyers in an industry perceive asimportant, and uniquely positions itself to meetthose needs (Porter, 1980). Two implicationsfollow from this description: (1) since thedifferentiating SBU does not make standardproducts, it needs to know both what types ofproducts customers want and what customersthink about the products it makes; (2) in order

254 V. Govindarajan

to maintain uniqueness, the SBU needs to monitorthe characteristics of competitors' products almoston an ongoing basis. Both of these implicationspoint out the need for the differentiation SBUto have a strong external industry orientation.

A strategy of low cost, on the other hand,signifies an intent to become the cost leader inthe industry (Porter, 1980). In order to achievethis goal, such an SBU has to focus far more onthe internal efficiency of operations than on theexternal industry environment.

It is therefore expected that success at identify-ing products that are perceived industry-wide asbeing unique would require industry familiaritymore than would a single-minded focus on costreduction. The following example would supportthis expectation:

The subsidiary (Heublein's United Vintners,Inc.) split its wine operations in two in 1977,forming a premium wine division to stress qualityover volume and a standard wine division toemphasize aggressive pricing and efficient volumeproduction. The company chose a wine pro-fessional, Robert M. Furek,. . . to run thepremium wine business. But it tapped HaroldG. Spielberg, formerly personal products man-ager for Gillette Co., to be the general managerof United's new Standard Wines Division.'People in our premium wine company tend tohave more wine background, while those in ourstandard wine company come out of consumerproducts and food companies', an official con-cedes {Business Week, 1980: 166).

Thus:

Hypothesis 6: Industry familiarity on the partof the SBU general manager will make a greatercontribution to effectiveness in the case of'differentiation' SB Us than in the case of 'low-cost' SB Us.

Locus of control

Locus of control refers to Rotter's (1966)concept of internal versus external control ofreinforcement. Hypothesis 7 relating SBU generalmanager's locus of control to SBU competitivestrategy and effectiveness is developed based onthe following set of theoretical arguments: (1)internals and externals have different capacitiesfor effective information processing; (2) differentcompetitive strategies have different information-

processing requirements; (3) an SBU will bemore effective when there is a match betweenits information-processing requirements and itsinformation processing capacity; (4) thus, match-ing SBU general manager's locus of control withSBU competitive strategy is likely to be associatedwith superior performance.

In the framework of Rotter's (1966) sociallearning theory, internal-external locus of controlrefers to the degree to which an individualperceives success and failure as being contingentupon personal initiative. At one end of theinternal-external continuum are the highly inter-nal; that is, those who perceive effort to belargely instrumental in attaining success. At theopposite end of the spectrum are the highlyexternal; that is, those who ascribe little or novalue to initiative, since in the extreme case,success and failure are viewed as completelyunrelated to ability and effort.

Previous research has concluded that internalsand externals have different information-process-ing capabilities. In particular, these studies havefound that internals are more proactive in theacquisition and utilization of information thanexternals (Phares, 1968; Spector, 1982). The logicbehind these findings is based on the constructproperties of the internal-external dimension.Internals, having a higher generalized expectancythat reinforcements follow as a function of theirown efforts, would be expected to seek task-related information more actively and use thatinformation better, since they would likely seeacquisition and utilization of relevant informationas a pathway toward reinforcement. Thus, inter-nals' more active search for, and more efficientprocessing of, task-relevant information is inkeeping with their belief in the controllingvalue of their own behavior as the significantdeterminant of task outcomes. Externals, on theother hand, possessing the generalized expectancythat their own efforts are not crucial in theattainment of reward, are not expected to activelyseek and use information. In other words,externals who expect results not to be attributableto their attempts to do a job, would be unlikelyto spend a great deal of effort in acquiring andutilizing task-relevant information.

The above discussion would lead one to predictthat internals would perform better than externalsin those job contexts where information-process-ing requirements are likely to be greater.

Implementing Competitive Strategies at Business Unit Level 255

There are two arguments in support of theexpectation that information-processing require-ments will be greater in the case of SBUsfollowing a differentiation strategy as opposedto SBUs following a low-cost strategy. First,differentiation SBUs — in contrast to low-costSBUs — typically sell non-standard products withan emphasis on unique product design, distinctivestyling, and sophisticated promotional appeal.Since the tasks associated with non-standardproducts are generally not of a repetitive nature,and since non-repetitive tasks require moreinformation to be processed than repetitive tasks(Tushman and Nadler, 1978), differentiationSBUs can be expected to need greater informationprocessing capacity than low-cost SBUs. Second,differentiation can be accomplished throughseveral approaches: superior product technology,brand image, exclusive features, special services,high quality, dealer networks, or a number ofother approaches. Each of these approaches, inturn, can be implemented through several tacticalprograms. In contrast, a low-cost strategy has asingular focus on becoming the low-cost producer(Porter, 1980). While there might be a varietyof ways to reduce costs, all of them will followa prescribed set of functional policies aimed atthis single base objective. Thus, the optionsavailable to a differentiator normally would begreater than those available in the case of a low-cost strategy. This, in turn, implies that adifferentiation SBU will require a relatively largerinformation-processing capacity than the low-costSBU to deal with the many available options.

Combining the above expectation with theearlier discussion on the relationship betweenlocus of control and information-processing capa-bilities, the following hypothesis is advanced:

Hypothesis 7: Greater internal locus of controlon the part of the SBU general manager willhave a stronger positive impact on effectivenessin the case of 'differentiation' SBUs than in thecase of 'low-cost' SBUs.

Problem-solving style

Problem-solving can be viewed in terms ofprocesses through which individuals organizeinformation from the environment and evaluateit. Jung (1970) has identified four psychologicalfunctions — sensing, intuition, thinking, and

feeling. The sensing-intuition functions areviewed as paired opposites on the information-gathering continuum. The thinking-feeling func-tions are identified as paired opposites on theinformation-evaluation continuum. The informa-tion-gathering and information-evaluation styleswill be discussed separately relative to theirinteraction with competitive strategy.

Information-gathering style

Sensing types are most comfortable whenattending to details — the specifics of the situation(Slocum, 1982). The sensing individual could bedescribed as realistic, practical, and good atremembering and working with a great deal offacts. In an organizational context the sensingperson prefers structured problems with standardsolutions, has patience for routine details, rarelyhas inspirations, seldom makes factual errors,and is good at precise work (Meyers, 1962).

Intuitive types, on the other hand, focus onmeanings and relationships between items, andconcentrate on hypothetical possibilities of thesituation rather than on facts and details (Slocum,1982). They allow their unconscious to generateand add on perspectives, possibilities, and otherassociations to the data they collect. Intuitivestherefore tend to be imaginative and inspired,and become good at developing new ideas. Inan organizational context, intuitives perceiveproblems as a whole and dislike routine andrepetitive work. New, unstructured problemsserve to inspire intuitive types who rely on theirinspirations and hunch for solutions to theseproblems (Meyers, 1962).

Low-cost and differentiation strategies will beargued to require sensing and intuitive types,respectively. A low-cost strategy capitalizes onthe benefits of the experience curve concept. Theoverall theme of this strategy is cost minimizationin all areas. This strategy requires a substantialcapital investment in state-of-the-art, efficientscale facilities, tight cost and overhead controls,and products designed for ease of manufacture.For the SBU manager this strategy requiresextensive personal attention to cost controlactivities and intense supervision of labor. TheSBU manager necessarily will deal with frequent,detailed control reports and carry out his/herdaily activities within the confines of a structuredorganization with structured responsibilities

256 V. Govindarajan

(Porter, 1980: 40). Processes which are a well-established routine (far out on the experiencecurve) are the modes of operation. Attention tothe facts (numbers) of the situation are thefoundation for problem-solving.

A differentiation strategy generally precludesa low-cost position, as those activities necessaryto establish a differentiated position are inherentlyexpensive (extensive research, distinctive productdesign, high-quality materials, intensive customersupport). Under this strategy, creating the percep-tion of being unique would require the SBUmanager to be creative and innovative in his/herefforts. The SBU manager is likely to be facedwith problems requiring new, inventive solutionsin order to maintain an unique position vis-a-viscompetitors.

Drawing on this description of strategy andthe previous explanation of the two data gatheringstyles, the following hypothesis is made:

Hypothesis 8: General managers who are'intuitive' types will make a greater contributionto effectiveness in the case of 'differentiation'SBUs than in the case of 'low-cost' SBUs.

Information evaluation style

Hypothesis linking information evaluation styleto SBU competitive strategy and effectiveness isbased on the following premises: (1) feeling typeswould be better suited in situations where theSBU manager can affect the performance ofother SBUs through his/her decisions and actions;(2) a low-cost SBU is more likely to shareresources with other SBUs than a differentiationSBU, implying thereby the need for the low-costSBU to engage in effective coordination andjoint problem-solving; (3) thus, feeling typeswould be more beneficial for low-cost SBUs thanfor differentiation SBUs.

Thinking persons process information in ananalytical, logical fashion. Decisions are madeon the basis of cause and effect. They place ahigh emphasis on logic and systematic inquiry.In fact, anything well organized or methodicallythought out may serve as a source of satisfactionfor thinking types. They usually ignore thewishes of others when making decisions. In anorganizational setting a thinking person tends tobe impersonal in his or her evaluation, rarelyshows emotion, is uncomfortable dealing with

other people's feelings, and therefore mayunknowingly hurt their feelings (Meyers, 1962;Slocum, 1982).

At the other extreme are feeling types. Peoplewho fall at this end of the judgement continuumtend to be very aware of how their decisionsmight affect other people and their feelings.Personal factors, rather than logic, serve as thebasis for problem-solving. Feeling types focus onhuman interactions and the emotions and feelingsof the individuals involved. In contrast to thinkingtypes, they gain satisfaction through social inter-personal contacts (Meyers, 1962; Slocum, 1982).In a study involving 86 graduate students,Kilmann and Thomas (1975) found that feelingtypes were more accommodating toward others,and were more willing to cooperate with others,than were thinking types.

The above discussion would lead one to predictthat the greater a general manager's reliance onpeers and superiors for successful performance,the greater would be the need for the generalmanager to be a feeling type. This situationwould arise when an SBU shares resourceswith other SBUs (e.g. sharing in a commonmanufacturing facility, a common sales force,and/or a common R&D department). Thissharing of resources increases the degree ofinterdependence of the focal SBU with otherSBUs, implying thereby that: (1) the SBUmanager can affect the performance of otherSBUs through his/her decisions and actions; and(2) the performance of the focal SBU can beaffected by the decisions and actions of othermanagers in the SBU cluster. In either case,since the SBU manager has no formal authorityover peers and superiors who might controlfunctional resources, it is imperative that theSBU manager carefully evaluate the consequencesof his/her decision on other individuals involved.This implies that, in order to effectively managean SBU which is interlinked with other SBUs,feeling types would be preferable.

The competitive strategy of the SBU stronglyinfluences the degree of resource sharing withother SBUs. Resource sharing yields the benefitsof scale economies while incurring the costs ofincreased efforts at coordination and conflictresolution. Looking at the pros and cons ofresource sharing, Gupta and Govindarajan (1986)proposed that the utility of resource sharingwould be greater for low-cost SBUs where scale

Implementing Competitive Strategies at Business Unit Level 257

economies would yield substantial competitiveadvantage relative to differentiation SBUs wheresuch scale economies would yield little competi-tive advantage. Their study of 58 SBUs withineight diversified firms indicated a strong supportfor this relationship. It is particularly relevant tonote that this finding was based on individualSBUs as the unit of observation, and held trueafter controlling for variations in corporate-leveldiversification strategy; i.e. the degree of resourcesharing among SBUs varied even within specificrelated or unrelated diversified firms.

Combining the arguments linking competitivestrategy to resource sharing with the argumentslinking resource sharing to information evaluationstyle, the following hypothesis is advanced.

Hypothesis 9: General managers who are'feeling' types will make a greater contributionto effectiveness in the case of 'low-cost' SBUsthan in the case of 'differentiation' SBUs.

Previous studies have indicated that differencesin performance are associated with differences insubunit size (Cummins and King, 1973) as wellas differences in firm size (Weiner and Mahoney,1981). As such, all the hypotheses will be testedafter controlling for the confounding effects offirm size and SBU size on performance.

METHOD

Data were collected from general managersof 121 SBUs. For details pertaining to themeasurement procedures and the reliability andvalidity of the following variables — SBUeffectiveness, competitive strategy, locus of con-trol and size — refer to Govindarajan (1988).Details of how the other variables were measuredare given below.

Functional background

Each respondent was asked to indicate the totalyears of experience accumulated in the followingareas (counting all jobs): general management,marketing/sales, finance/accounting, production/engineering, and research and development.Summary statistics on this variable and all othervariables, as well as the matrix of zero-ordercorrelation coefficients among these variables.

are presented in Table 1. In this sample, 72 ofthe general managers had some prior experiencein marketing/sales, 61 of them had some priorexperience in production/engineering, 24 of themhad some prior experience in research anddevelopment, and 20 of them had some priorexperience in finance and accounting.

Industry familiarity

Each respondent was asked to indicate the lengthof experience in current and closely relatedindustries (counting all jobs).

Problem-solving style

Respondents were administered a shortenedversion of Form F (which appears in Hellriegeland Slocum, 1979: 222) of the Meyers-BriggsProblem-solving Styles Indicator (Meyers, 1962).This short form has been used in several previousstudies (e.g. Steckroth, Slocum and Sims, 1980).This instrument contains 17 forced-choice ques-tions divided into two parts. Part I consists ofnine questions and instructs the respondent:'Which answer comes closest to how you usuallyfeel or act?' A sample question follows: 'Do youusually get on better with: (A) imaginative peopleor (B) realistic people?' Part II consists of eightpairs of words. The respondent is instructed:'Which word in each pair appeals to you more?'Examples are: (A) compassion or (B) foresight;(A) production or (B) design; and (A) imaginativeor (B) matter-of-fact. Responses to the 17 itemswere used to construct two continuous measures:(1) whether the manager's perception wasaccomplished through sensing or intuition wherehigher values of the variable indicated intuitivetypes; and (2) whether the manager's judgingwas accomplished through feeling or thinkingwhere higher values of the variable indicatedthinking types.

RESULTS

Data analysis technique

All the hypotheses to be tested in this study areof the following form: the positive impact ofXi (managerial characteristic variable) on Y(effectiveness) will be stronger when X2 (competi-tive strategy variable) is high (or low) as compared

258 V. Govindarajan

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to when X2 is low (or high). Following thearguments of Southwood (1978), and similar tothe approach taken by Schoonhoven (1981), themost appropriate analytical method to test sucha hypothesis is to run the following regressionequation:'-

(1)

If the unstandardized regression coefficient fc, ispositive and significant, one would conclude thatthe positive impact of X^ on Y is stronger forhigher as compared to lower values of X2.Alternatively, a negative and significant Z), wouldlead to the conclusion that the positive impactof A", on Y is stronger for lower rather thanhigher values of X2. Finally, if fc, is notsignificantly different from zero, one wouldconclude that X2 does not have any contingencyeffect on the relationship between Xi and Y.

While testing the hypotheses, equation (1) wasmodified as follows to control for the sizevariables:

(2)

' For interval scale data, as is true for all the measuredvariables in this study, Southwood (1978) has demonstratedthe following: (1) The values as well as the significance levelsof the standardized regression coefficients will change if X,and A'2 are replaced by A", + ^, and + ^,, respectively.Thus, for equation (1), standardized regression coefficientsare essentially meaningless. (2) The values as well as thesignificance levels of the unstandardized regression coefficientsa, and a^ also change when the origin points of A", and X-^are changed. (3) However, a change in the origin points ofA", and X2 has no impact on the following; the value as wellas the significance level of the unstandardized regressioncoefficient of the multiplicative interaction term (b,), thevalue of R^ caused by introducing the multiplicative interactionterm into the regression and the associated F-statistic. andthe R^ and f-values for the whole equation. The abovediscussion explains the rationale to report unstandardized(rather than standardized) regression coefficients in Tables2 and 3.^ Dewar and Werbel (1979) argued that the multiplicativeinteraction model such as the one given in equation (1)suffers from multicollinearity problems since the interactionterm is usually significantly correlated with the terms thatcompose it. However, Southwood (1978), and Gupta andGovindarajan (1987) have demonstrated that multicollinearityproblems, if they exist in equation (1), can be completelyremoved. This is so since, with suitable changes in the originpoints for A", and A'2, the R^ for the regression equationbetween A'iA'2 (= dependent variables) and A", and A'2(= independent variables) can be reduced to zero, therebyeliminating problems of multicollinearity between A',, X-, andA'iA'2 in equation (1). As was stated in footnote 1, changesin origin points for and A'2 do not in any way affect thevalue or the significance of b, in equation (1).

Where: A'3 = company size,X^ = SBU size.

While equation (2) is a sufficient test of thehypothesized contingency relationship, it providesno information on whether the latter relationshipis monotonic or non-monotonic. In order toobtain information on the presence or absenceof monotonicity in the impact of the managerialcharacteristics on SBU effectiveness, the analysiswas pushed to a second stage. As suggested bySchoonhoven (1981) and Southwood (1978), suchinformation can be obtained by examining thepartial derivative of equation (2) over A',:

dY= a ,+ (3)

If the value of dY/dXi is always positive or alwaysnegative over the entire observed range of A'2,then the relationship between Y and Xi wouldbe regarded as monotonic; otherwise, it wouldbe regarded as non-monotonic.

Table 2 contains the results of the multipleregression analyses undertaken to test all thehypotheses relating to managerial backgroundvariables (Hypotheses 1 to 6). Similar results formanagerial personality variables (Hypotheses 7to 9) are given in Table 3. Each hypothesis wastested using a set of two regression equations:one with A',, A'2, A'3, and X^ as the independentvariables and a second with A'iA'2 also broughtin.3

Functional experience in R&D

Results of regression equations (11) and (12) inTable 2 provide support for the hypothesizedimpact of competitive strategy on the utility ofexperience in R&D. The interaction term, fc,.

-'' The values of the R^ reported in Tables 2 and 3 were notvery high; however, this need not be taken as a detraction.The objective of this study was not to develop a strong modelfor predicting performance, but rather to use regression asa data analytic technique for testing selected relationships(Cohen, 1968). As argued by Southwood (1978), theappropriate test of the hypotheses is to examine whether theintroduction of the interaction term, A'iA'2, adds significantlyto the variance explained. That is to say, the hypotheseswould be supported if the f-ratio associated with /{^ causedby the introduction of the multiplicative interaction term intothe regression equation is significant.

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in equation (12) is positive and significant{bl = 0.131, p < 0.05). Also, introduction of theinteraction term brings about a significant increase(at p < 0.05) in R^; i.e. variance in SBUperformance explained. The results, therefore,support Hypothesis 1.

Further, the partial derivative of equation (12)over Xi yields the following:

dY= -0.671 + 0.131X2 (4)

As can be calculated, equation (4) will becomezero when X2 has a value of 5.12. When X2 hasvalues above 5.12, equation (4) will be positive,and when X2 has values below 5.12, equation(4) will be negative. Thus, the inflection pointof the slope (or the value of X2 when a changein the direction of the slope occurs) is 5.12 (lastcolumn. Table 2). Since this inflection point iswithin the range of values observed for competi-tive strategy {X2) in the sample — 2.50 to 6.67(Table 1) — one can conclude that experiencein R&D has a non-monotonic effect on SBUeffectiveness over the range of competitivestrategy. That is to say, for 'differentiation' SBUs,the impact of greater experience in R&D onperformance is positive; however, for 'low-cost'SBUs, the impact is negative.

Functional experience in marketing

As equation (14) in Table 2 indicates, forHypothesis 2 — the impact of competitive strategyon the utility of experience in marketing — theregression coefficient of the interaction termis not significant (bi = -0.004, n.s.). Thus,Hypothesis 2 is not supported.

Competitive strategy seems not to moderatethe impact of experience in marketing onperformance. From Table 1 it can be noted thatthe correlation between years in marketing andSBU effectiveness is not significant (r = -0.03,n.s.). Thus, there does not appear to beuniversalistic impact of experience in marketingon performance as well. One possible explanationfor this absence of a universalistic effect couldbe that the effect of marketing experience onperformance could be curvilinear, not linear.Indirect support for this position is provided byMiller and Toulouse (1986), who found that toomuch experience in a function or in the industrycould hurt performance, since it leads to tunnelvision and stagnation.

Given theoretical reasons to expect a relation-ship between marketing expertise and competitivestrategy (Porter, 1980), it seems prudent to awaitfurther empirical studies before rendering a finaljudgement on the validity of Hypothesis 2.

Functional experience in production

Results of regression equations (15) and (16)support the expected relationship between com-petitive strategy and experience in production.As hypothesized, the interaction term, fej, isnegative and significant (61 = -0.053, p < 0.05).Further, introducing the interaction term XiXibrings about a significant increase (atp < 0.05) inR^\ i.e. variance in SBU performance explained.Thus, Hypothesis 3 is consistent with the data.

The partial derivative of equation (16) over Xiyields the following:

ay= -0.249 - 0.053X2 (5)

The inflection point for equation (5) is 4.69 (lastcolumn. Table 2). That is to say, over theobserved range of the competitive strategyvariable (A'2), the slope effect of experiencein production on performance is positive for4.69 > X2> 2.50 and negative for 6.67 > X2> 4.69. To conclude, greater experience inproduction contributes to performance for 'low-cost' SBUs but hampers performance for 'differ-entiation' SBUs.

Functional experience in finance and accounting

As equations (17) and (18) in Table 2 indicate,for Hypothesis 4 — impact of competitive strategyon utility of experience in finance and accounting— the results are not supportive. The interactionterm, bi, is not significant (bi = 0.029, n.s.).

Competitive strategy seems not to moderatethe impact of experience in finance and accountingon performance. However, the correlationbetween years in finance/accounting and SBUeffectiveness is negative and significant(r = -0.47, p < 0.05; Table 1). This suggeststhat: (1) there is an universalistic relationshipbetween finance/accounting experience and per-formance, and this relationship does not varyaccording to variations in competitive strategy;and (2) greater finance/accounting experiencehurts performance. These conclusions are also

Implementing Competitive Strategies at Business Unit Level 263

supported when one examines equations (17) and(18). From equation (17) it can be noted thatthe regression coefficient corresponding to theXi term is negative and significant (oi = -0.079,p < 0.05). Further, the partial derivative ofequation (18) over Xi yields the following:

(2) the partial derivative of this equation overXi yields the following:

BY= -0.221 + 0.029^, (6)

As can be calculated, equation (6) will becomepositive only when X2 has values above 7.62.That is to say, for all the observed values of X2— 2.50 to 6.67 (Table 1) — equation (6) will benegative. Thus, finance/accounting experiencehas a direct, negative impact on performance.

At the overall firm level, it has been arguedthat top management experience in finance/accounting is likely to be beneficial for unrelateddiversified firms (Rumelt, 1974). While not takingissue with the theoretical arguments at theoverall company level, this study draws differentconclusions at the SBU level withiti the firm. FromTable 1 it can be noted that years in finance/accounting does not correlate with years ofexperience in marketing, R&D, and production.Thus, in this sample, managers with finance/accounting backgrounds who moved on to becomegeneral managers had minimal exposure to otherfunctional areas. In such a context, the resultsfor Hypothesis 4 imply that any SBU — regardlessof its strategy — cannot be successfully managedjust 'by the numbers'; rather, effective implemen-tation of SBU-level strategies requires in-depthunderstanding of the particular business and priorexperience in 'line' positions, not just finance/accounting skills.

Experience in general management

Hypothesis 5 predicted a direct impact ofexperience in general management on perform-ance. The data support this hypothesis. First,correlation between years in general managementand SBU effectiveness is positive and significant(r = 0.12, p < 0.10; Table 1). Second, fromequation (19) in Table 2, it can be noted thatthe regression coefficient corresponding to the A',,term is positive and significant (fli = 0.017,p < 0.10). Finally, the results for regressionequation (20) indicate that: (1) the interactionterm, b^, is not significant (6, = 0.010, n.s.); and

dYax

= -0.030 + O.OIOZ2 (7)

The above equation will be positive for allvalues of X2 above 3.00. Thus, experience ingeneral management contributes to performancefor practically the entire observed range ofcompetitive strategy variables.

To conclude, general management experiencehas a direct, positive impact on performance, andthis relationship is not moderated by competitivestrategy.

Industry familiarity

As equation (21) in Table 2 indicates, forHypothesis 6 — impact of competitive strategyon the utility of industry familiarity — theregression coefficient of the interaction termis not significant (bi = -0.002, n.s.). ThusHypothesis 6 is not supported. Competitivestrategy seems not to moderate the impact ofindustry familiarity on performance.

However, three pieces of evidence point outthat an in-depth knowledge of the industrycontributes to performance in an universalisticsense. First, it can be noted from Table 1 thatthe correlation between industry familiarity andSBU effectiveness is positive and significant(r = 0.21, p < 0.01). Second, results of regressingy on Xi, X2, X3 and X4 show a positive andsignificant beta for X\ (flj = 0.011, p < 0.10;Table 2, equation 21). Finally, the partialderivative of equation (22) over X^ yields thefollowing:

ay= 0.022 - 0.002^, (8)

As can be calculated, the above equation willbecome negative only when X2 has values above11. Thus, for the entire observed range of X2 inthe sample — 2.50 to 6.67 (Table 1) — the slopeeffect of industry familiarity on performance ispositive.

To sum up, the results indicate that industryfamiliarity is important for implementing anycompetitive strategy — be it low-cost or differen-tiation.

264 V. Govindarajan

Locus of control

Results of equations (23) and (24) in Table 3support the hypothesized impact of competitivestrategy on the utility of locus of control. Theinteraction term in equation (24) is positiveand significant {bi = 0.056, p < 0.01). Also,introduction of the interaction term brings abouta significant increase (at p < 0.01) in R^\ i.e.variance in SBU performance explained. Theresults therefore support Hypothesis 7.

Further, the partial derivative of equation (24)over Xi yields the following:

ay= -0.184+ -0.038Z, (10)

BY= -0.246 + 0.056Z, (9)

Over the observed range of competitive strategyvariables it can be calculated that the slope effectof locus of control on performance is positive for6.67 > X2> 4.40 and negative for 4.40 > X2> 2.50. To conclude, for 'differentiation' SBUsthe impact of greater internal locus of control onperformance is positive; however, for 'low-cost'SBUs the impact is negative.

Problem-solving style

For Hypothesis 8 — impact of competitivestrategy on utility of information-gathering style— the results are not supportive. As can benoted from equation (26) in Table 3, theinteraction term is not significant {bi = -0.001,n.s.). Thus Hypothesis 8 is not supported.

Competitive strategy seems not to moderatethe impact of information-gathering style onperformance. Correlation between information-gathering style and SBU effectiveness is notsignificant, (r = 0.08, n.s.; Table 1). Thus theredoes not appear to be a direct impact ofinformation-gathering style on performance aswell.

Results of equations (27) and (28) in Table 3support the hypothesized impact of competitivestrategy on the utility of information-evaluationstyle. The interaction term in equation (28) ispositive and significant (61 = 0.038, p < 0.01).As expected, introduction of the interaction termbrings about a significant increase (at/? < 0.05) inR^; i.e. variance in SBU performance explained.These results support Hypothesis 9.

Further, the partial derivative of equation (28)over X^ yields the following:

Over the observed range of competitive strategyvariables it can be calculated that the slope effectof information-evaluation style on performanceis positive for 6.67 > X2 > 4.81 and negativefor 4.81 > ^2 > 2.50. Thus, for 'differentiation'SBUs, 'thinking' types are effective and for 'low-cost' SBUs, 'feeling' types are effective.

Prior selection vs. socialization

The analyses for the managerial personalityvariables have indicated that matching generalmanager's locus of control and problem-solvingstyle with SBU competitive strategy is associatedwith superior SBU performance. It would beuseful to know whether the selection of the rightmanager is really the issue, or is it a matter ofmanagement training and experience? That is,are the managerial personality variables examinedin this study innate, or are they a function ofsocialization? If socialization is the answer,selection becomes less important since the requi-site skills can be learned. An organization'semphasis on personnel selection vs. managementtraining and development will shift based on theanswer to this question. Data analysis was doneto examine this issue.

Each SBU manager was asked to indicate thenumber of years spent on his current job. Iflocus of control and problem-solving style werelargely a function of socialization; i.e. the resultof on-the-job personality development, then itwould be expected that tenure on the job wouldmake a greater contribution to the developmentof these two personality characteristics in thecase of differentiation SBUs as opposed to low-cost SBUs. Results of regressions (obtainablefrom the author) indicate that interaction betweentenure on the job and competitive strategy hasno significant impact on either locus of controlor problem-solving style. This suggests that theobserved characteristics are intrinsic to themanager's personality and are independent ofon-the-job socialization of that SBU.

DISCUSSION AND IMPLICATIONS

A growing number of firms, both in the U.S.and abroad, currently use the SBU concept in a

Implementing Competitive Strategies at Business Unit Level 265

'formal' sense {Business Week, 1982). Oneimplication of such a practice is a realization onthe part of corporate-level executives that thediversified firm should be viewed not as a mixtureof similar business units, but rather as a portfolioof businesses with different strategic contexts. Inorder to effectively implement multiple businessstrategies within the same firm, there is anincreasing interest on the part of academiciansas well as practitioners to link SBU-level strategyconcepts with those associated with humanresource management — specifically, matchingmanagers to strategies. However, a limitedamount of systematic empirical research hasaddressed this need to date. Except for the studyby Gupta and Govindarajan (1984a), no empiricalresearch has analyzed the implications of matchinggeneral managers with strategies at the SBUlevel. This study fpcused on this critical issue.

The findings of this study can be summarizedas follows: (1) greater R&D experience andgreater internal locus of control on the partof the SBU general manager contribute toeffectiveness in the case of differentiation SBUsbut hamper it for low-cost SBUs; (2) generalmanagers who have manufacturing experienceand who are feeling types contribute to perform-ance in the case of low-cost SBUs, but hamperperformance for differentiation SBUs; (3) experi-ence in general management and industry famili-arity are beneficial in a universalistic sense;and (4) experience in finance/accounting has anegative effect on performance.

This study represents the first attempt atproviding a systematic validation of the linkagesbetween manager's personal orientations andSBU competitive strategy suggested by Porter(1980: 40-41). This study also corroborates thefindings of Hitt et al. (1982), who have concludedthat experience in general management is bene-ficial in a universalistic sense. Further, thefindings of this study with regard to locus ofcontrol are consistent with those of Miller et al.(1982), who concluded that the more internal thechief executive, the more the firm engaged inproduct/market innovation and the more the firmundertook risky projects.

The findings of this study have useful impli-cations not only for those responsible for man-power planning in diversified firms, but also forthe general managers themselves, when applyingfor new work assignments. Specifically for theemployer, there are two practical applications:

(1) during the strategy implementation phasecompanies should attune the choice of the generalmanager to the strategy being implemented; (2)during the strategy formulation phase the findingsof this study can be used to project futuremanagement need. This may, under certaincircumstances, lead to a reconsideration of thestrategies chosen, especially if the intendedstrategic direction is overambitious in view ofpresent management capabilities and recruitmentlimitations. For the individual general managersthe results of this study imply that, whilereviewing potential future work assignments, theyshould attempt to select SBUs with the strategieswhich fit with their particular background andpersonality orientations.

These findings, in addition to providing mana-gerial assistance to today's business world, alsohave significant theoretical implications. At aminimum they have demonstrated that futureinvestigations of the strategy-manager-per-formance 'fit' have potential. In order to provideimpetus to such investigations, and to get thisstream of inquiry going, the next section willoutline a research program in the area of matchingmanagers to strategies. The ultimate objective ofsuch a program would be to develop thetheory and practice of strategic human resourcemanagement at the intrafirm level (i.e. at theSBU level), with a view to aid in bettermanagement selection, training, and develop-ment.

Toward a research program onstrategy-manager 'fit'

Future research in the broad area of matchingmanagers with strategies should address thefollowing theoretical and methodological issues.

Theoretical issues

First, it is inevitable that the SBU's externalenvironment will change over time, which mightimply the need for a shift in strategy. Two issuesneed examination in this context:

1. Success at any task requires commitment. Thestrategy-manager 'fit' is expected to fostersuch a commitment to the current strategy.However, a 'perfect' match between mana-gerial characteristics and current strategy couldresult in over-commitment and self-fulfilling

266 V. Govindarajan

prophecies, thereby preventing the SBU fromshifting to a new strategy (when it should).Future research needs to address the followingdilemma: how could SBU managers andcorporate executives simultaneously maintaina high degree of commitment as well as ahealthy skepticism regarding SBU strategies?

2. Even if the self-fulfilling prophecies couldbe overcome, what happens to the generalmanager when the strategy is changed inresponse to environmental (or other) changes?Is the manager moved to another SBU whichfollows a strategy that 'fits' the manager?What if another position is not available? Is themanager simply let go? Future investigationsmight consider these interrelated issues andserve to clarify and resolve them.

Second, this study has focused on only afew variables pertaining to both strategy andmanagers. There are five potential avenues forresearch in this context:

1. SBU strategy refers both to the mission(Govindarajan and Shank, 1986) and thecompetitive strategy (Shank and Govindara-jan, 1988). Gupta and Govindarajan's (1984a)study focused on strategic mission, whereasthis study examined competitive strategy.There is a need to consider the implicationsthat interactions between mission and competi-tive strategy might have for general managercharacteristics.

2. Future research could focus on other back-ground variables (age, formal education, etc.)and other personality variables (flexibility,need for achievement, etc.), especially asthey relate to strategic mission and/or othercompetitive strategy typologies (e.g. Miles andSnow, 1978).

3. Although several managerial characteristicsmight indicate a desired match with strategy,it is possible that one or two of these variablesmay be so salient to overshadow or dominatethe other variables. There is both theoreticalas well as practical merit in examining thepresence of such 'dominance' among mana-gerial orientations.

4. The equifinality approach argues that multipledesign alternatives may exist to effectivelyimplement a given strategy. Further researchis needed to examine how different experience

backgrounds and personality orientationscould be used as substitutes for one anotherto effectively implement any given strategy;

5. In addition to focusing on managerial charac-teristics there is a clear need to studymanagerial behaviors ('what do general man-agers do?') and their interaction with SBUstrategies (Kotter, 1982).

Third, while the arguments in favor of matchingmanagers to strategies are compelling, theremight be circumstances in which a deliberatemismatch between managers and strategies couldlead to more favorable outcomes. One suchinstance is pointed out by Gupta and Govindara-jan: 'exposure to and experience at managingdifferent kinds of strategies and businesses isviewed as an essential component of managerialdevelopment; this necessitates rotating managersthrough various businesses' (1984b: 41). Such ajob rotation policy implies that the focal mana-ger's characteristics will have a 'misfit' with atleast some of the SBUs he/she has to manage.This policy is justified on the grounds that SBUgeneral managers need to manage differentstrategic contexts so as to be able to move up inthe hierarchy to assume positions at the group,sector, and corporate levels. Examining this andother conditions under which benefits of 'misfit'might outweigh its costs would certainly enhancethe contingency theory linking managers tostrategies.

Fourth, this research focused exclusively onthe selection of the SBU general manager.However, there are strong reasons to suggest thatresearchers interested in the strategy-managermatch, instead of limiting their attention only tothe selection of the SBU general manager, couldfocus on the dominant coalition at the SBU level(Hambrick and Mason, 1984). Practical reasonsfor this argument include: (1) an individualmatching of all the requirements of a particularstrategy may not be available; and (2) the generalmanager of an SBU typically shares tasks andpower with other team members (say, thefunctional managers). The fact that encouragingresults were obtained in the present study (whichexamined the selection of a single manager)suggests that future studies relating the character-istics of the management coalition at the SBUlevel to SBU strategy are likely to find evenmore significant results.

Implementing Competitive Strategies at Business Unit Level 267

Fifth, no doubt strategy is one variable, albeitan important one, in influencing the choiceof managers. Other factors which influencemanagement selection decisions include power(Pfeffer and Salancik, 1978), organizational cul-ture (e.g. IBM's policy of promotion-from-within)and environmental context (Pfeffer and Salancik,1978). These factors might moderate the SBUstrategy-manager-performance relationships,and need to be explicitly considered in futurestudies.

Finally, the effectiveness of strategy implemen-tation at the SBU level depends on: (1) thecharacteristics of the SBU general manager(Galbraith and Nathanson, 1978; Govindarajan,1988); (2) the SBU's internal organization (Govin-darajan, 1986a); and (3) the administrativesystems designed by the corporation to plan andcontrol the SBU (Govindarajan, 1986b, 1988).This study focused exclusively on the firstof these three factors. Future studies couldincorporate all the three factors and, in addition,could consider 'dominance' and 'substitutability'among these three factors.

Methodological issues

Several alternative methodologies could be usedin future studies on the strategy-manager 'fit'.First, in-depth clinical studies would be particu-larly appropriate for examining managerialbehaviors. Second, further progress on thestrategy-manager match also crucially dependson securing clarity on precisely how contingencyhypotheses should be specified and tested. Atpresent there is a considerable amount ofdisagreement on this subject matter (Dewar andWerbel, 1979; Drazin and Van de Ven, 1985;Schoonhoven, 1981). In particular there is acritical need to identify appropriate analyticalmethods to test 'multivariate systemic' contin-gency relationships; i.e. the case of multipledesign variables and multiple contextual variables.Suitable models need to be developed to test for'dominance' as well as 'equifinality' amongmanagerial orientations. In this context a fewmethodological possibilities would be: patternanalysis (Drazin and Van de Ven, 1985), simul-taneous multiple regression approach, LISRELand second-generation multivariate non-para-metric analysis such as PLS.

ACKNOWLEDGMENTS

The research leading to this paper was supportedby the Amos Tuck School of Business Adminis-tration, Dartmouth College. Research assistanceprovided by Steve Socolof and Rick VonGnechten is gratefully acknowledged. Valuablecomments were provided by Danny Miller, VasuRamanujam, and N. Venkatraman on an earlierdraft of this paper.

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APPENDIX: CONTENT ANALYSIS

The following rules were established prior to thecontent analysis:

Read the descriptive parts of the annual reportand 10-K relating to the focal SBU and lookfor information on:(a) Industry competition (type of industry in

terms of fragmented, evolving, mature,declining, etc.; price sensitivity of buyers;commodity versus non-commodity typeof product)

(b) SBU's focus on cost reduction activities(c) Focus on operating efficiency(d) R&D emphasis(e) Importance of product features(f) Importance of product quality(g) Importance of brand image

Code as follows:1 = 'Pure' low-cost (focus on cost

leadership)

Implementing Competitive Strategies at Business Unit Level 269

2 = Mixed (mix of low-cost and differ-entiation)

3 = 'Pure' differentiation (focus onproduct uniqueness)

The content analysis was performed by theresearcher and independently by a second-yearMBA student who had successfully completed twoquarters of strategic management coursework.There was substantial agreement between thetwo analyses.

Given below are some samples of SBUs andtheir classification into different competitivestrategies:

DifferentiationNorton. 1983 Annual Report, p. 12.Industrial Ceramics.

'Our business strategy in IndustrialCeramics is to engineer into our productsreal value and customer benefits whichwill bring premium prices.'

Low-costJoy Manufacturing Company. 1983 AnnualReport, p. 15. Wheeling Machine FittingDivision.

'Wheeling's thrust will be to improvemarket share by maintaining excellentregional distribution and by remaining thelow cost producer.'