Strategy and industry effects on profitability: evidence from Greece

Strategic Management JournalStrat. Mgmt. J., 25: 139–165 (2004)

Published online 4 November 2003 in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.369

STRATEGY AND INDUSTRY EFFECTS ONPROFITABILITY: EVIDENCE FROM GREECE

YIANNIS E. SPANOS,1* GEORGE ZARALIS2 and SPYROS LIOUKAS1

1 Management Science and Technology Department, Athens University of Economicsand Business, Athens, Greece2 OECD, Paris, France

The present study examines the impact of firm and industry-specific factors on profitability, usingcensus data on Greek manufacturing. At the firm level, particular attention is given to strategyeffects. Based on a modification of Porter’s typology, these effects are captured through differentforms of both ‘pure’ and ‘hybrid’ strategies. Industry effects are represented using industryconcentration, entry barriers, and growth. Hypotheses are developed taking into account bothprevious research and the particular idiosyncrasies of the national context. The results obtainedprovide important insights on specific determinants of firm profitability. With respect to strategy,results confirm the hypothesis that hybrid strategies are clearly preferable compared to pureones. In addition, it was found that the more generic strategy dimensions are included in thestrategy mix, the more profitable the strategy is, provided that one of the key ingredients islow cost. Industry-level effects, although weaker, show strong impact of industry entry barriers.Moreover, the findings suggest that while both sets of factors significantly contribute to firmprofitability, firm-specific factors explain more than twice as much profit variability as industryfactors. Copyright 2003 John Wiley & Sons, Ltd.

One of the major goals in current strategic man-agement research is to identify the sources anddeterminants of profitability differences amongfirms. Previous research, mainly within the indus-trial organization (IO) tradition, has examined therole of industry effects such as those involvingmarket concentration, entry barriers, and growth,providing results that largely support the notionthat industry is an important determinant of firmprofitability. The paradigmatic notion here is thatindustry structure determines profitability; in effectthis means that high-profit firms are found inhigh-profit industries with favorable competitive

Key words: determinants of profitability; competitiveadvantage; hybrid vs. pure strategies; industry structure∗ Correspondence to: Yiannis E. Spanos, Management Scienceand Technology Department, Athens University of Economicsand Business, 76 Patission Street, Athens 104 34, Greece.E-mail: [email protected]

structure. Whereas the question of firm behavioris largely ignored in traditional IO research, com-petitive strategy effects on firm performance havepredominately been the subject of enquiry in thestrategic management literature. Results along thisline of research provide evidence supporting theimpact of strategy on profitability.

More recent theorizing, particularly in the frame-work of the resource-based view of the firm, hasadvanced the notion that, basically, more subtlefirm qualities related to organizational and man-agerial capabilities are those that matter; thesefactors underlie the firm’s sustainable competitiveadvantage and hence profitability.

There exists a voluminous body of empiricalliterature examining the impact of the varioushypothesized determinants of firm performance(see Capon, Farley, and Hoenig, 1996, for anextensive review). For the greatest part, however,

Copyright 2003 John Wiley & Sons, Ltd. Received 10 April 2000Final revision received 26 July 2003

140 Y. E. Spanos, G. Zaralis and S. Lioukas

empirical research on the subject is based on U.S.data and to a lesser extent on data from otherlarge economies (United Kingdom, Japan, etc.). Itwill be interesting to investigate if, and to whatextent, similar results obtain in other countries,and especially smaller ones in the European Union(EU). The present study attempts to add to thisliterature by examining the impact of strategy andindustry factors on profitability, using data onGreek manufacturing industries. Greece representsan interesting example of a country in the processof catching up and, as such, the use of Greekdata may lead to an assessment of the generalapplicability of conclusions drawn from relevantresearch conducted in other countries.

As a member of the EU since 1981, Greecehas achieved considerable progress during the1990s in terms of macroeconomic convergence, afact reflected in its formal accession to the Eco-nomic Monetary Union (EMU) in 2001. The con-vergence process has been associated with sub-stantial adjustments in many industrial sectors.Several researchers have attempted to analyzethe factors that affected industrial restructuringfrom macro, industry and micro perspectives (see,for example, Pitelis and Antonakis, 1998; Lolos,1998; Louri and Minoglou, 2001, 2002; Makri-dakis et al., 1997). Also, reports on the compet-itiveness of Greek industry (e.g., Report on theCompetitiveness and Industrial Strategy in Greece,1997) note the differences in the speed of adjust-ment between sectors and the dualism in intra-industry performance, with some firms doing welland others declining during the 1990s. Moreover,these reports stress the role of firm factors suchas strategy and management as important contrib-utors to firm performance. However, no system-atic work has been done to empirically investi-gate the assumed determinants of profitability. Toour knowledge, this is the first empirical inquiryof this type in Greece, and may, hopefully, be afirst step towards assessing certain received policyassumptions.

The data employed in the present study wereextracted from the National Statistical Service ofGreece (NSSG), Census of Manufacturing, cover-ing the 1995–96 period. This unique database con-tains both firm- and industry-level data. The resultsshow that with respect to firm-specific effects,strong relations obtain for the type of strategypursued. More specifically, ‘hybrid’ strategy com-binations seem to be more successful than ‘pure’

generic strategies. Moreover, the strength of thepositive relationship between a hybrid strategy andprofitability depends on (a) the number of genericdimensions emphasized in the mix and (b) theinclusion of low cost as a key component dimen-sion. Other firm-specific factors, including capitalintensity, market share, and size, also affect prof-itability. Industry-level effects, although weaker,show strong impact of industry entry barriers.Moreover, the findings suggest that while both setsof factors significantly contribute to profitability,firm-specific factors explain more than twice asmuch profit variability as industry factors.

The following section presents the theoreticalbackground and develops the hypotheses to betested. The third section describes the data andmethodology employed. The fourth section dis-cusses the econometric results. The final sectionpresents conclusions and directions for futureresearch.

THEORETICAL BACKGROUND

The basic model in industrial economics followsfrom the structure–conduct–performance (SCP)paradigm. According to this, firm performancedepends on its conduct in matters such as pricingpolicy, R&D, and investment policy. Firm con-duct, in turn, depends on industry structure, whichincludes concentration level, barriers to entry,and degree of product differentiation (Scherer andRoss, 1990). Within this line of reasoning the struc-tural characteristics of industries affect both theconduct, that is, the strategy of firms, and theirperformance (Bain, 1959).

Since the pioneering work of Bain (1951, 1956),a large number of empirical studies have examinedSCP relationships using the U.S. Census Bureau’sCensus of Manufactures and the PIMS database.Despite limitations regarding the specification ofrelevant measures and data quality (Scherer andRoss, 1990), this stream of empirical researchhas generally revealed the existence of impor-tant relationships between industry structure andprofitability.

While, however, the SCP paradigm maintainsthat, in principle, industry structure determinespotential performance and that proper conduct atthe firm level is also crucial for realizing thispotential, the role of firm strategy has been largelyignored in the traditional IO empirical literature.

Copyright 2003 John Wiley & Sons, Ltd. Strat. Mgmt. J., 25: 139–165 (2004)

Strategy and Industry Effects on Profitability 141

The prevailing view, which can be traced backin the works of Bain (1956) and Mason (1939),suggests that because firm conduct (i.e., strategy)is constrained by industry structural forces, it doesnot represent independent managerial action. Man-agement’s role can therefore be ignored. This tra-ditional view, however, appears counter-intuitivesince casual observation of the real-world eco-nomic phenomena reveals that, ceteris paribus,firms differ in terms of strategy pursued, manage-rial abilities, and, ultimately, profitability withinthe same structural environment. As Barney (1991)has noted, this understatement was implicitly dueto two main assumptions: first, it was assumed thatfirms are homogeneous in terms of strategicallyrelevant resources; second, any attempt to developresource heterogeneity has no long-term viabilitydue to high mobility of strategic resources amongfirms.

In light of this limitation, the ‘efficiency’ modelof IO contends that an industry’s structural imper-fection may be considered as the result of differen-tial efficiency levels exhibited by industry incum-bents. Demsetz (1973), for example, argued thatthe relationship between concentration and prof-itability is due to efficiency differences betweenfirms rather than the result of collusion and coor-dination as is postulated in the SCP model. Inother words, supranormal profits are taken as theresult of efficiency-generating competencies at thefirm level (McGee, 1988). In a similar vein, Porter(1980, 1985, 1990, 1991) assumes that industrystructure is neither wholly exogenous nor stable,as commonly viewed in traditional IO theory (e.g.,Bain, 1959). Instead, in his more recent writ-ings, Porter (1991) views market environment aspartly exogenous and partly subject to influencesby firm actions. Thus, as Porter (1991) states, firmprofitability can be decomposed into effects stem-ming from industry structural characteristics andthe firm’s strategic positioning within its industry.

Despite whatever positive or negative influenceindustry forces may exert on firm success, specificstrategic responses by firms can act to overcomestructural disadvantages or to generate attractiveconditions within a given industry environment.In fact, these responses might be intensified pre-cisely in industries where serious impediments tofirm success prevail. Within the now classical for-mulation of the competitive strategy framework,Porter (1980, 1985) explicitly recognizes the roleof firm’s conduct in influencing performance.

For Porter, strategy represents a consistent arrayor configuration of activities, aiming at creating aspecific form of competitive advantage for whichthere exist two fundamental types: low cost ordifferentiation. These in turn, together with thescope of operations, define the notion of genericstrategies. Within this framework, strategy choiceis the product of (and response to) a sophisticatedunderstanding of industry structure (Porter, 1991:102).

A generic strategy of low cost involves givingconsumers value comparable to that offered byrivals at a lower cost. According to Porter, thisstrategy entails that the firm is constantly improv-ing its ability to produce at costs lower than thecompetition by emphasizing efficient-scale facil-ities, vigorous pursuit of cost reductions alongthe value chain driven by experience, tight costand overhead control, and cost minimization inareas like R&D, and advertising, among others.This strategy can provide above-average returnsbecause it allows the firm to lower prices to matchthose of competitors and still earn profits (Millerand Friesen, 1986). Differentiation, on the otherhand, aims at creating a product that consumersperceive as unique, and hence allows the firmto command a premium price that exceeds theaccumulation of extra costs. Miller (1986, 1988)modified Porter’s conceptualization of the differ-entiation strategy, arguing that it conceals the widevariety differentiation can take (see also Dess andDavis, 1984; White, 1986; Murray, 1988). Heposited two central forms of differentiation: onebased on marketing, aiming at creating a superiorbrand image; and one founded on innovation andtechnology.

One issue that has raised considerable debatein the extant literature is the question of low costand differentiation being mutually exclusive or not.Porter (1980, 1985) has generally urged againstthe simultaneous pursuit of both strategies on theground that each of these involves a different set ofresources and organizational arrangements. Others,however, have shown that cost and differentiationmay be compatible approaches to dealing withcompetitive forces (see, for example, Miller andFriesen, 1986; Phillips, Chang, and Buzzell, 1983),and postulated the pursuit of what has been termed‘hybrid,’ ‘mixed,’ or ‘combination’ strategies.

Parallel to these theoretical developments, thefield of strategic management has also undergone



a major shift in focus in the 1990s; from indus-try and strategic positioning to firm resources andcapabilities. Rooted in evolutionary economics andthe work of Penrose (1959), the resource-basedapproach has reestablished the importance of theindividual firm, as opposed to industry, as the crit-ical unit of analysis. In particular, the resource-based perspective (Barney, 1986, 1991; Rumelt,1991; Wernerfelt, 1984) has redirected attention toidiosyncratic firm capital, postulating that perfor-mance is ultimately a return to unique firm com-petencies.

Based on this theoretical background, thepresent study attempts to throw some lighton the issues surrounding the determinants ofcompetitive advantage using census data on Greekmanufacturing. This is a unique data set, whichallows us to examine strategy and industry effectson profitability.

For reasons that will be detailed below, the pres-ence and viability of hybrid strategies is likely tobe a prominent phenomenon in the Greek context.Hence, in line with other researchers (e.g., Miller,1986, 1988; Lee and Miller, 1996; Miller and Dess,1993), the present study treats Porter’s genericstrategies as dimensions rather than ‘either/or’mutually exclusive categories. In particular, build-ing upon the work of Miller and Dess (1993), thestudy defines a model where a firm can ‘select’any of the 27 possible combinations obtained byscoring low, medium, or high on each of thethree generic strategy dimensions of: (i) low cost,(ii) marketing, and (iii) technology-based differen-tiation. In this way, we are able to explore theviability of various forms of both pure and hybridstrategies pursued by Greek firms.

In addition to strategy type, some other firm-specific variables are included, notably capital andexport intensity, market share, and flexibility. Thecritical elements of industry environment are rep-resented using concentration, entry barriers, andgrowth. Finally, the role of firm competencies can-not be directly examined using this dataset. Theseare largely ‘unobservable’ firm characteristics thatdefy objective measurement (Godfrey and Hill,1995). For the sake of completeness in our analy-ses, however, we approximate these idiosyncraticfirm qualities using lagged profitability, a practicethat has precedence in the empirical literature (see,for example, Jacobson and Aaker, 1985; Jacobson,1988, 1990; Szymanski, Bharadwaj, and Varadara-jan, 1993).

HYPOTHESES

Strategy effects on profitability

As noted earlier, Porter (1980, 1985) suggestedthat above-average performance can only beachieved by adopting pure generic strategiesbased on either differentiation or cost advantage;in contrast, firms pursuing ‘stuck-in-the-middle’strategies possess no competitive advantage.Others, however, have objected to this line ofreasoning, arguing that under certain conditions acombination of low cost and differentiation maylead to success. Murray (1988), for example, hasargued that whereas the exogenous preconditionsfor a viable low cost strategy stem mainlyfrom industry structure, the preconditions fora differentiation strategy stem principally fromcustomer tastes. Because the two sets of exogenousfactors are independent, and because internalorganization to support both targets may bedifficult but not impossible to achieve, givenmodern management techniques and technology,the possibility of a firm pursuing both genericstrategies simultaneously cannot be precluded. Hill(1988) criticized Porter’s position based on thepremise that (a) differentiation can be a means forfirms to achieve an overall low cost position, and(b) there are situations in which no unique lowcost position can be achieved in a given industry,and hence, establishing a sustained advantagerequires the firm to achieve both low cost anddifferentiation. In the same vein, Miller (1992)argued that hybrid strategies are perhaps the onesmost appropriate in an era of hypercompetitionprevailing in most industries.

Empirical evidence on the subject is inconclu-sive. For instance, Hambrick (1983) did not findany firms following hybrid strategies within themature industries he examined. Dess and Davis’s(1984) findings were generally consistent withPorter’s contention that commitment to at leastone generic strategy results in higher performancecompared with a stuck-in-the-middle strategy. Oth-ers, however, found that firms combining low costwith differentiation were among the highest, if notthe highest performers (e.g., Hall, 1980; White,1986; Wright et al., 1990, 1991). As Dess andRasheed (1992) have observed, however, much ofthe lack of consistency in these results may derivefrom the fact that research has failed to distin-guish between a hybrid strategy and one that is



stuck-in-the-middle. The former, denoting compet-itive behavior emphasizing more than one genericstrategy, is clearly different from the latter, whichis characterized by the lack of distinctive emphasison any particular strategy. Making this distinctionexplicit, Miller and Dess (1993) found no supportfor the idea that hybrid strategies are less success-ful than pure ones. In contrast, businesses pursuinga stuck-in-the-middle strategy, defined as one withonly average emphasis on all generic strategies,did exhibit low profitability, albeit not the lowestamong those strategies examined.

The question of hybrid vis-a-vis pure strate-gies is particularly relevant in the specific contextof this study since, as will be explicated below,hybrid strategies are perhaps most appropriate forGreek firms. During the early stages of the coun-try’s industrialization (i.e., the 1960s and 1970s),the strategy adopted by Greek firms has generallytaken two forms: (a) an opportunistic, ‘day-to-day’model of doing business; and (b) an emphasistowards low costs. The first essentially representsa ‘no strategy’ alternative (see Inkpen and Choud-hury, 1995), and has been a prevalent characteris-tic of many family-owned SMEs. The second hasbeen adopted in those cases where strategy rep-resented a serious question of purposeful overalldirection, usually by larger enterprises, and wasfounded on the comparative advantage of low laborcosts that countries such as Greece traditionallyenjoyed over more advanced economies.

The basic conditions underlying such responseswere the small size of a fairly protected marketlocated in the periphery, the comparatively lowdisposable income and, perhaps more fundamen-tally, the fact that Greece was coming out of thedisasters of the 1940s (i.e., World War II and thecivil war 1945–49) without ever having developeda real industrial tradition, as other, relatively smallEuropean economies had (e.g., Holland or Bel-gium). These conditions gave birth to a processof ‘hesitant industrialization’ (Louri and Pepelasis-Mingolou, 2002) and a business tradition that ledto some norms of firm behavior that, to a certainextent, appear to survive to date.1 In general, owingto all the disadvantages associated with factors

1 In this connection, Louri and Pepelasis Mingolou (2002) havenoted that one of the basic structural continuities of the Greekeconomy underlying its difference from more advanced West-ern economies has been the incomplete transition from mer-cantile/family capitalism to the joint stock company/corporatecapitalism.

such as small size2 and family ownership (e.g.,lack of resources and managerial know-how, con-ventional management cultures, etc.), together withweak internationalization and a consequent lackof national champions, Greek firms espoused con-servative low cost, if not opportunistic, strategies.The results were disappointing. The aforemen-tioned Report on the Competitiveness and Indus-trial Strategy in Greece noted that Greek indus-try’s position in the European markets was dete-riorating, as manifested in the loss of share inboth domestic and foreign markets, and the lossof cost competitiveness. Success in cost leader-ship would normally require cumulative volumeof production and the associated experience-curveeffects, which are made possible though economiesof scale and scope, learning, capital–labor substi-tution, or procuring inputs at costs below rivals(Hout, Porter, and Rudden, 1982; Abernathy andWayne, 1974; Dess and Rasheed, 1992). All ofthese cost-reduction factors, however, were beyondthe reach of the average Greek firm.

In the 1990s the situation changed dramati-cally mainly because of the advent of the Maas-tricht treaty and the visible (at the time) prospectof Greece entering the EMU. These develop-ments have been instrumental in legitimizing aninstitutional environment that exerted strong con-formance pressures towards modernization andthe improvement of competitiveness at both themacro- and microeconomic fronts (Kazakos, 2001).It has been widely recognized since that Greekfirms require restructuring, modernization, andmore elaborate strategic profiles if they are to dealeffectively with the increasing pressures stemmingfrom accession to the EMU and, more generally,globalization. The main issue at stake has beenthat, within the new competitive landscape, Greekfirms could no longer remain protected and had,therefore, to become competitive. In fact, duringthe entire period, Greek firms have increasinglyfound themselves ‘trapped’ in between two con-flicting sources of competitive pressure: one stem-ming from the widespread inflow of technologi-cally advanced, branded products from establishedcompetitors operating in the EU, and another,

2 Greek firms have the smallest average size in the EU. It is alsointeresting to note that whereas in countries such as Portugal andIreland, which are commonly compared with Greece, the averagefirm size has increased since 1988, reflecting the changes occur-ring in view of the EU-financed Internal Market Programme,such changes were not observed in Greece (Liargovas, 1998).



stemming from the inflow of products from emerg-ing countries with even lower labor costs.

Against this background, Greek firms in the mid1990s were (and still are) at a crossroad. They hadto forego their eroding low cost advantage andturn towards more differentiated strategies, e.g.,creating a differentiated image through advertis-ing, or turning towards quality and technologicalsuperiority in order to survive the escalated compe-tition. The quest for more elaborate strategic pro-files, however, is not an easy task for Greek firms.Seen from a resource-based perspective, differ-entiation presupposes a number of organizationalarrangements, including organizational conditionsfavoring innovation and creativity, marketing ori-entation, exploitation of new information technolo-gies, greater reliance on alliances and networking,among others.

In general, though, these traits do not appear tocharacterize the average Greek firm. Recent stud-ies have identified a range of problems pertinentin the majority of Greek firms: lack of financialand technological resources, outdated productionmethods, inadequately trained personnel, low laborproductivity, ‘passivity’ in marketing, concentra-tion of power and control in the hands of topmanagement, autocratic management styles, andlimited use of modern management ‘tools’ andsystems to support strategy making and implemen-tation (Bourantas and Papadakis, 1997; Bourantas,Anagnostelis, and Mantes, 1990; Georgas, 1993;Koufopoulos and Morgan, 1994; Liargovas, 1998;Papadakis, 1995; Makridakis et al., 1997; Skuras,Dimara, and Vakrou, 2000). Despite clear indi-cations that efforts have indeed been initiatedtowards modernization and change (Spanos, Pras-tacos, and Papadakis, 2001), the fact remains thatthe overwhelming majority of Greek firms is inher-ently disadvantaged in pursuing pure differentia-tion, particularly when compared with establishedforeign competitors. Furthermore, it is not only dif-ficult for them to implement differentiation, butalso their image as differentiated producers maynot be credible in the eyes of the average con-sumer.3

3 The Report on the Competitiveness and Industrial Strategynoted in this respect that whereas consumer behavior in Greeceshowed clear signs of convergence with patterns observed inadvanced economies, production standards of Greek industriesshowed signs of divergence with those of Southern Europeancountries.

Along this line of reasoning, it can be arguedthat some form of a hybrid strategy appears tobe preferable over pure generic strategies. Thisis an interesting point in relation to the previousdiscussion about the viability of hybrid vis-a-vispure strategies. Despite theoretical arguments infavor or against, and inconclusive empirical evi-dence obtained elsewhere, hybrid strategies maybe the only feasible and attractive strategic alter-natives for Greek firms. They are feasible for atleast three reasons: First, they do not require therange of assets that are deemed necessary for pur-suing pure forms of differentiation or cost leader-ship. As such, implementing hybrid strategies rep-resents an incremental, intermediate step towardsthe pursuit of more elaborate strategic profiles,which is more in congruence with the limitedcapabilities of Greek firms. Timing and speed ofresponse is a critical aspect of effective compet-itive behavior (Hamel and Prahalad, 1994; Stalkand Hout, 1990). Given the situation describedabove, Greek firms simply could not afford towait until they were ready to successfully imple-ment pure strategies. Second, combining efficiencyand differentiation-based forms of advantage isnot prohibitively difficult, even in the case ofsmall-sized firms, as previous research has shown(Helms, Dibrell, and Wright, 1997; Beal, 2000).Building brand image and/or improving qualitythrough investments in advertising and moderntechnologies may also result in efficiency gainsvia higher market share and cumulative volumeof production (Phillips et al., 1983; White, 1986;Wright, 1987). Finally, taking into account the factthat throughout the 1990s the average Greek firmused outdated production equipment (e.g., Reporton the Competitiveness and Industrial Strategy inGreece, 1997; Skuras et al., 2000), investments intechnology could positively affect both efficiencyand quality through more streamlined and modern-ized production processes.

Hybrid strategies may also be more attractivefor Greek firms for a number of reasons. First,they are essential for securing a defensible bal-anced position against rivals pursuing pure strate-gies. Through such hybrid strategies, Greek firmscould, on the one hand, attain a reasonable costparity against (i) competitors from larger and moreadvanced economies enjoying scale and scopeeconomies, and (ii) competitors from emergingmarkets enjoying even lower labor costs. Com-pared to the latter, Greek firms could also enjoy a



differentiation advantage. On the other hand, theycould close part of the gap with pure differentiatorsand possibly derive additional benefits from theirlower cost position. Seen from the opposite angle,relying on a pure low cost strategy would resultin Greek firms’ profit margins being under con-stant pressure, whereas pursuing pure differentia-tion strategies would entangle them in competitivebattles they could not possibly win.

Second, the mutually reinforcing benefits stem-ming from a balanced strategic position seem tomatch well with the needs and expectations of theaverage Greek consumer who, having approachedin the 1990s European standards in terms of con-sumption patterns, lifestyles, social attitudes, anddemographics (Kouremenos and Avlonitis, 1995),nevertheless enjoys only a fraction of the Euro-pean consumer’s disposable income.4 Third, pastresearch has shown that a balanced position maybe more appropriate for firms operating in matureindustries with standardized products, as is thecase with the vast majority of Greek firms (Louriand Anagnostaki, 1995). For example, Hall (1980)has found that achieving a low cost position rela-tive to competition coupled with acceptable qualityis an effective way for gaining profitable volumeand market share growth in the context of matureindustries. Other researchers (see, for example,MacMillan, Hambrick, and Day, 1982; Hamer-mesh and Silk, 1979; Anderson and Zeithaml,1984) have reached similar conclusions.

Extending the arguments above, it is also logi-cal to assume that hybrid strategies are preferablecompared with a stuck-in-the-middle alternative,the latter defined as a strategy with no distinctive,simply average, emphasis on all generic strategydimensions. Taken together, the following propo-sition may be true in the Greek context:

Proposition: On average, hybrid strategies areexpected to lead to higher levels of profitabilitycompared with pure, ‘stuck-in-the-middle’, and,of-course, ‘no strategy’ alternatives.

Building on this basic statement, we can advancethe following hypothesis:

Hypothesis 1: On average, pure strategies willlead to lower levels of profitability compared

4 In the mid 1990s, the average per capita disposable incomein Greece amounted to little more than 50 percent of the EUaverage (source: Eurostat, National Accounts 1970–95).

with hybrid strategies, but at the same timethey will be more successful than ‘no strategy’alternatives.

Continuing with hybrid strategies, it could beargued that their success is contingent upon twointerrelated factors. First, it depends on the num-ber of generic dimensions that are simultaneouslyemphasized. This remark is a logical extension ofour basic proposition. Clearly, if hybrid strategiesare generally more successful than pure genericstrategies, then, the more complex and ‘multidi-mensional’ the strategic profile of a firm, the morebalanced and defensible its strategic position willbe, and hence the higher its profitability. Put differ-ently, a combination of three generic dimensionsbeing simultaneously emphasized is better than acombination of two, which, in turn, is better than acombination where just one dimension is distinc-tive, and the remaining two are given average orlow emphasis.

The second factor relates to the centrality of thelow cost dimension in the Greek context, a perhapscommon feature in most economies that are in theprocess of catching up. As already noted, low costhas been the prevailing strategic priority in the1970s and 1980s, at least for those firms for whichstrategy choice represented a serious managerialquestion. It needs to be stressed, however, that lowcost still remains, perhaps to a decreasing extent,the only one ‘real’ advantage many Greek firmspossess relative to their counterparts from moreadvanced economies. It seems, therefore, logical toassume that the success of a hybrid strategy willdepend on the inclusion of low cost as a primarycomponent in any such combination. Hence:

Hypothesis 2a: The strength of the positive rela-tionship between a hybrid strategy and prof-itability will be directly related to the numberof generic dimensions distinctively emphasized.

Hypothesis 2b: Hybrid strategies, featuring lowcost as a distinctive dimension, will lead tohigher levels of profitability than hybrid strate-gies that do not.

In the context of this study, firms placing aver-age (that is, neither high nor low) emphasis onall generic strategy dimensions are said to employa ‘stuck-in-the-middle’ strategy (see also Miller



and Dess, 1993). By definition then, stuck-in-the-middle is a particular underdeveloped form ofhybrid strategy. The profitability impact of thisstrategy would be expected to lie in an inter-mediate position: one that is below that of theother hybrid strategies, given that it involves onlyaverage emphasis on all strategy dimensions, buthigher than that of ‘no strategy’ alternatives. Wedo not know, however, how it compares with purestrategies. It could be argued that a ‘jack of alltrades but master of none’ strategy (Miller andDess, 1993) cannot be really better than a purestrategy, particularly if this is a strategy of lowcost. On the other hand, a stuck-in-the-middlestrategy may be a preferable alternative consid-ering the previous arguments about the difficultyof Greek firms to implement pure differentiationstrategies and their eroding cost advantage. Hence,the following null hypothesis can be proposed:

Hypothesis 2c: A ‘stuck in the middle strategy’will lead to higher level of profitability than ‘nostrategy’ alternatives, but will be less successfulthan other forms of hybrid strategies.

Industry effects on profitability

Structural variables are represented using industryconcentration, entry barriers (i.e., industry adver-tising, cost efficiency, capital, and technologyintensity), and growth. Prior theory and researchin both fields, IO and strategic management, haveadvocated the predominant role of these indus-try structural factors in determining profitability(Robinson and McDougall, 1998).

Within the dominant SCP framework of IOresearch, it is generally assumed that industrystructure, principally in the form of industry con-centration and entry barriers, are key determinantsof profitability (Bain, 1956, 1959; Mason, 1939;Caves, 1972; Koch, 1974; Mann, 1966). In particu-lar, it is hypothesized that these industry character-istics serve to insulate some firms from excessivecompetition, thus ensuring them higher than nor-mal profitability.

Within this line of reasoning, industry concen-tration (structure) fosters collusion (conduct) andhence monopoly pricing (performance). Marketconcentration is expected to increase cooperativebehavior, because monitoring is easier, signalingis more likely to be perceived, and firms areless likely to compete away high margins (e.g.,

Qualls 1974; Ramaswamy, Gatignon, and Reib-stein, 1994; Scherer and Ross 1990). Conversely,firms within an unconcentrated industry will likelybehave competitively, driving down profitability.Another argument is that concentration affectsprofitability through the large-share firms’ abil-ity to control prices (i.e., monopoly power) inde-pendently of their disposition towards collusion(Leach, 1997). There also exists a vast body ofempirical studies, which has found a positive rela-tionship between concentration and profits (e.g.,Weiss, 1974; Martin, 1983; Imel and Helmberger,1971).

Concentration may be advantageous in that itallows high prices and consequently high prof-itability, but unless there exist considerable bar-riers to entry, high profits will attract new entrantsand hence the ability to collude will be under-mined (Scherer and Ross, 1990). According toBain (1956, 1959), product differentiation is animportant industry structural characteristic sinceit constitutes the most important source of entrybarriers. Traditional IO theory posits that adver-tising promotes product differentiation, leading tohigher barriers to entry and higher profit mar-gins for industry incumbents. The key issue hereis that when buyers have long-established prefer-ences for the products of existing firms, as a resultof high industry advertising intensity, potentialentrants would face the difficult problem of hav-ing to break down established loyalties. It followsthat the advantage enjoyed by existing incumbentsallows them to increase price, and hence profitmargins, above the level that would prevail in theabsence of high entry barriers.

Similar protection may stem from high capitalto sales ratios for industry members. High capi-tal requirements can discourage potential entrantsin that they are signaling the presence of sub-stantial scale economies that, in turn, limit thenumber of firms that can profitably enter an indus-try (Scherer and Ross, 1990). Large economies ofscale in an industry can discourage entry; unlesslarge-scale entry is feasible, an entrant will haveto produce at a higher cost than existing firms.Another source of scale-related barriers to entryis industry productivity. Defined as the averagevalue-added per employee, high industry efficiencymay be attributed to the existence of economiesof scale in production. It follows that the greaterthe level of industry efficiency, the greater the



difficulty for potential entrants. Finally, invest-ments in technology modernization and renewalmay be used by industry incumbents to stay aheadof potential entrants, thus constituting barriers toentry (Mansfield, 1983; Orr, 1974).

Within the IO tradition, a large number of struc-ture–performance studies have included an indus-try growth variable. Hay and Morris (1991) havenoted that, in theory, the relationship betweengrowth and profitability may be positive or neg-ative. High growth could increase profit marginswhen investment in additional capacity has notcaught up with demand (Scherer and Ross, 1990).On the other hand, it could reduce margins becauseoligopolistic discipline will be harder to maintainin a situation of high growth (Bain, 1959). Forexample, Bass, Cattin, and Wittink (1978) andWillmore (1994) have argued that in an indus-try characterized by only moderate growth andhigh concentration the positive effect of marketshare on profitability is stronger because firms cancoordinate their efforts in oligopolistic fashion, afact that enhances the industry’s rate of return.High growth may also make it more difficult forincumbent firms to sustain their market share bypreempting demand. Hence, entry would be eas-ier and, consequently, profit margins would fall(Hay and Morris, 1991). Empirical evidence, how-ever, seems to point towards a positive relationshipbetween industry growth and profitability. Accord-ing to Hay and Morris (1991), over three-quartersof all empirical IO studies have found a signifi-cantly positive association. In the strategic man-agement literature, high industry growth is asso-ciated with environmental munificence (Lumpkinand Dess, 1996), the latter signifying an envi-ronment with ample resources and opportunitiesfor incumbent firms. Environmental munificence isgenerally considered to exert a positive influenceon firm profitability (e.g., Kotha and Nair, 1995;Dess and Beard, 1984).

Regarding the Greek context, prior research con-centrates mostly on the role of industry structure onfirms’ entry and exit decisions (e.g., Anagnostakiand Louri, 1995; Louri and Anagnostaki, 1995;Fotopoulos and Spence, 1998, 1999) rather thanprofitability. In fact, empirical evidence concerningthe profitability impact of structural characteristics,such as those examined in this study, is very scant.There exists some research focusing on the Greekfood industries (Vlachvei and Oustapassidis, 1998;Oustapassidis and Vlachvei, 1999). These studies

confirmed the existence of a positive impact ofentry barriers (i.e., industry advertising and capi-tal intensity) on profitability. In contrast, concen-tration was found insignificant, whereas industrygrowth was positive and significant only in thoseindustries that were categorized by the researchersas highly differentiated.

Because there are no particular a priori reasonsto expect that structure–profitability relationshipsin Greece will be different from those postulatedby the literature and related empirical evidence,and because the available body of relevant studiesin Greece is particularly thin to suggest otherwise,the following hypotheses will be tested:

Hypothesis 3: Industry concentration positivelyaffects profitability.

Hypothesis 4: Industry entry barriers positivelyaffect profitability.

Hypothesis 5: Industry growth positively affectsprofitability.

METHODS

Model specification

The relationship between a firm’s profitability andthe explanatory variables is modeled as follows:Profitability = f [controllable variables (i.e., strat-egy); noncontrollable variables (i.e., industry struc-tural elements)] (see also, Kotha and Nair, 1995;Hansen and Wernerfelt, 1989). More specifically,we estimate the following base model:

PCMit = β0 + β1Xi(t−1) + β2Zi(t−1) + εit (1)

where PCMit is the price–cost margin for firm i

in year t (i.e., 1996), and Xi(t−1), Zi(t−1) representthe industry and firm-specific explanatory variablesrespectively, lagged 1 year (i.e., 1995).

We include lagged explanatory variables forstatistical and theoretical reasons. First, the factthat our theoretical model includes firm strategyvariables implies the possible existence of simul-taneity. It is well known that when endogenousvariables are used as regressors, the correlationbetween those variables and the disturbance termrenders the OLS estimates biased and inconsistent.



For this reason, lagged rather than contempora-neous strategy variables are specified as instru-ments in an attempt to alleviate the possibilitythat profitability and competitive strategy behaviorare jointly determined. Second, the specification oflagged strategy variables also draws on theoreticalrationale. Since strategy is linked to investmentsthat imply a long-term commitment, it might belogical to argue that its impact requires a certaintime lag before it affects firm profitability.

Within this line of reasoning, industry struc-tural elements may also be considered as, at leastpartly, endogenous (Porter, 1990). To some extent,they may represent the outcome of firms’ collec-tive action within a given industry at any point intime. On this account, some researchers have sug-gested that not only may industry structure influ-ence firm strategy and performance but also thatfirm conduct and performance are likely to feedback and influence industry structure (Stricklandand Weiss, 1976; Pagoulatos and Sorensen, 1981;Martin, 1993a). Hence lagged as opposed to con-temporaneous industry variables are specified inEquation 1.

In addition to the base model we also specifiedan extended model where we have included laggedprofitability as a proxy for firm resources andcapabilities:

PCMit = β0 + β1Xi(t−1) + β2Zi(t−1)

+ β3PCMi(t−1) + εit (2)

where PCMi(t−1) is the price–cost margin lagged1 year (i.e., 1995) and Xi(t−1), Zi(t−1), as before, areindustry and strategy variables.

One argument that could justify the inclusionof lagged profitability to account for idiosyncraticfirm competencies, which are by definition ‘unob-servable’ (Godfrey and Hill, 1995), is that it canbe a proxy for variables that are omitted fromthe model. In this respect, Coleman (1968) assertsthat PCMt−1 can be viewed as a surrogate of allthe variables that remain implicit in the systemunder investigation. Hence, in his view, the sizeof the effect of PCMt−1 allows the evaluation ofthe completeness of representation of the empiricalsystem (Coleman, 1968: 441). Within this line ofreasoning, then, lagged profitability serves to con-trol, at least partially, for omitted factors that mayinfluence profitability. Based on this, a number ofauthors (e.g., Jacobson and Aaker, 1985; Jacob-son, 1988, 1990; Szymanski et al., 1993) used

lagged performance to approximate unobservablefirm effects and thus to control for a possibly spuri-ous industry and/or strategy effect on profitability.

Another interpretation for the meaning of laggedPCM in Equation 2 relates to the partial adjustmentmodel (Maddala, 1977). Following this model’slogic, strategy and industry variables are assumedto explain some unknown or ‘desired’ value PCM∗

t

of profitability rather than the actual observedvalue of PCMt . Then the ‘real’ substantiveequation would be

PCM∗t = β0 + β1Xt−1 + β2Zt−1 + εt (3)

PCM∗t may be viewed as the equilibrium level

of firm profitability or, alternatively, the one thatrepresents the firm’s real objective (Tuma andHannan, 1984). In this model the firm strivesto minimize the difference between PCM∗ andPCM over time, but the actual change in PCMwould equal only some fraction a of the differencebetween PCM∗

t and PCMt−1. Formally then,

PCMt − PCMt−1 = a(PCM∗t − PCMt−1) (4)

with a representing the adjustment coefficient, orput differently, the extent to which the gap betweenthe desired and actual level of profitability is nar-rowed from time t − 1 to time t .

Substituting Equation 3 in Equation 4 and re-arranging terms yields

PCMt = aβ0 + (1 − a)PCMt−1 + aβ1Xt−1

+ aβ2Zt−1 + aεt (5)

which has the same general form of the extendedmodel specified in Equation 2. From Equation 5 itis interesting to note that the effects of the inde-pendent variables Xt−1 and Zt−1 can be interpretedin two ways (Finkel, 1995): in their raw form theyrepresent the short-term or transient effect of Xt−1

and Zt−1 on PCM or �PCM across the period cov-ered by the variables. Dividing these values by ayields β1 and β2 of Equation 1 above, which rep-resent the long-run effects of Xt−1 and Zt−1 on theequilibrium or desired value PCM∗

t .A potential estimation problem for both the

base and the extended models is heteroscedasticitycaused by greatly differing size of units of obser-vation. So, White’s (1980) method is employed inestimation to correct for heteroscedasticity.



Data

The database contains census data on Greek manu-facturing, at the establishment level, for the period1995–96.5 These data were compiled by the NSSGand are consistent with the Standard IndustrialClassification based on NACE REV1 of EURO-STAT. The study examines only establishmentsthat were present in both years and had a size ofat least 20 employees. This yields a total of 1921observations. Although the unit of analysis corre-sponds to the establishment level, it is generallyaccepted that the overwhelming majority of Greekmanufacturing firms are one-establishment enter-prises (Fotopoulos and Spence, 1998; Droucopou-los and Thomadakis, 1993). Industry-level data arecomputed at the 4-digit SIC level. The averageplant size is 55 employees.

Specification of variables

The study uses price–cost margin (PCM) asan appropriate index of firm profitability, onwhich the impact of strategy and industry-level factors is tested. It is specified as (valueadded—wages—salaries)/(value of sales) for1996. As such, it is highly associated with thefirm’s gross margin. The PCM represents theproportional difference between output price perunit and the marginal cost of producing anadditional unit. Hence, a high PCM value reflectsthe firm’s ability to elevate price above costsand/or lessen average costs. The former situationwould denote the firm’s monopoly power ordifferentiated posture whereas the latter wouldreflect the firm’s cost efficiency.

The PCM is not a common index of profitabilityin strategic management although it is extensivelyemployed in the IO literature (e.g., Collins and Pre-ston, 1969; Cubbing and Geroski, 1987; Uri, 1988;Gisser, 1991). Martin (1993b), for example, hasargued that the PCM index can be used when avail-able to test SCP relationships in empirical studiesprovided that one controls for differences in capitalintensity. The reliance of this study on PCM as anindex of profitability was primarily dictated by thenonavailability of appropriate data to compute rateof return measures such as return on investment or

5 Comparable data were also available for 1994. The analysisconcentrates on the 1995–96 period since inclusion of the 1994figures as 2-year-lagged explanatory variables does not addsubstantively to the aims of the present research.

return on assets. Although the use of such variableswould have been desirable, it is worth noting thataccounting measures of profitability obtained fromsmall firms are often criticized for being unreli-able and subject to varying accounting conventionsor even to managerial manipulation for a varietyof reasons, for example avoidance of corporateor personal taxes (see Dess and Robinson, 1984;Sapienza, Smith, and Gannon, 1988; Powell andDent-Micallef, 1997).

The study examines three generic strategy di-mensions: low cost, marketing, and technology-based differentiation. We approximate the dimen-sion of low cost using a measure of employeeproductivity (i.e., value added per employee) (seealso Hambrick, 1983). High values of this mea-sure signify success in cost efficiency, and hencea realized low cost position. The marketing dif-ferentiation dimension is gauged using advertisingintensity (i.e., ratio of advertising expenditures torevenues). A similar measure, technology intensity(i.e., ratio of investment in new equipment to rev-enues) is used to express emphasis on technologydifferentiation.

We should note that, consistent with the vastmajority of empirical research on strategic man-agement (e.g., David et al., 2002; Berman et al.,1999; Kotha and Nair, 1995; Geletkanycz andHambrick, 1997; Venkatraman, 1989) we focushere on realized, not intended strategies. Accord-ing to Mintzberg (1978), a firm’s realized strategydenotes an observable pattern in a stream of actionsthat are reflected in strategic resource deploymentsin key areas, such as marketing, technology, andthe use of human resources. In contrast, strategicintentions constitute perceptual phenomena that areincapable, alone, of capturing the complex natureof strategy, which, in fact, may be formed unin-tentionally (Mintzberg, 1978: 935).

The use of these objective indicators allows us toassess the extent to which firms exhibit observed,realized patterns of strategic behavior. In particu-lar, we treat these variables as indicants of genericstrategy dimensions on which a firm can score low,medium, or high. We thus develop a model ofpn = 27 possible strategy combinations resultingfrom n = 3 elements (low cost, marketing differ-entiation, technology differentiation) taking p = 3possible values (low, medium, high). For each ofthe three variables (dimensions), we identified thehighest, middle, and lowest thirds based on theobserved values in each plant’s respective 4-digit



industry. Thus, it was necessary to exclude fromsubsequent analyses all 4-digit industries populatedwith less than three plants, to arrive at the finalnumber of 1856 observations. Table 1 presentsthese combinations together with a characterizationfor each.

Out of these 27 combinations, using dummy andeffects coding schemes (see below in the Resultsand Discussion section) we define 11 variables toexamine the performance outcomes of 12 distinctstrategy types. More specifically, the study exam-ines the effects of three pure strategies (COST,ADV, and TECH) and seven different forms ofhybrid strategies (COST + ADV + TECH,

COST + ADV, COST + TECH, ADV + TECH,COST + OTHER, ADV + OTHER, and TECH +OTHER). In keeping with the extant literature,we isolate the ‘stuck-in-the-middle’ as a particularform of hybrid strategy (STUCK) that correspondsto the group of firms that fall near the average onall three dimensions. The remaining seven combi-nations collectively define a reference group (‘nostrategy’) characterized by no clear or presumablyunattractive strategy combinations.

Industry variables include concentration, entrybarriers, and growth. Concentration, measuringthe number and size distribution of firms ineach industry, was gauged by the well-known

Table 1. Theoretically derived strategy types

Combin- Generic strategy dimensionsation no.

Value added∗ Advertisingintensity

Technologyintensity

Strategy type Variable

Pure strategy alternatives1 HIGH LOW LOW Pure low cost COST2 LOW HIGH LOW Pure marketing

differentiationADV

3 LOW LOW HIGH Pure technologydifferentiation

TECH

Hybrid strategy combinations4 HIGH HIGH HIGH ‘3-dimensional hybrid’ COST + ADV +

TECH5–6 HIGH HIGH AVERAGE or

LOWAdvertising and low cost COST + ADV

7–8 HIGH AVERAGEor LOW

HIGH Low cost and technologydifferentiation

COST + TECH

9–10 AVERAGEor LOW

HIGH HIGH Advertising and technologydifferentiation

ADV + TECH

11–13 HIGH AVERAGEor LOW

AVERAGE orLOW

Low cost plus average orlow emphasis on theothers

COST + OTHER


HIGH AVERAGE orLOW

Advertising plus average orlow emphasis on theothers

ADV + OTHER


AVERAGEor LOW

HIGH Technology differentiationplus average or lowemphasis on the others

TECH + OTHER

20 AVERAGE AVERAGE AVERAGE Average emphasis on alldimensions

STUCK

Unclear or unattractive combinations21 AVERAGE AVERAGE LOW Low or average emphasis ‘No strategy’22 LOW AVERAGE AVERAGE on all dimensions (reference23 LOW AVERAGE LOW group)24 AVERAGE LOW AVERAGE25 AVERAGE LOW LOW26 LOW LOW AVERAGE27 LOW LOW LOW

∗ HIGH value added signifies a low cost position. LOW value added signifies the opposite.



Herfindahl index based on the domestic sales ofindustry incumbents, i.e., excluding exports. Entrybarriers were represented using four measures.First, product differentiation was measured as theindustry-wide advertising intensity (ratio of totalindustry advertising to industry total shipments).Second, cost efficiency was measured as industryvalue added per total number of employees.Third, capital intensity was operationalized as theindustry capital over sales ratio. Because capitalfigures were not available, fuel and electricityexpenditures were used as a proxy, as is commonin similar studies (see, for example, Shapiroand Khemani, 1987; Fotopoulos and Spence,1997; Droucopoulos and Thomadakis, 1993). Therationale justifying the use of that proxy is that fueland energy consumption goes hand in hand withmechanization and hence capital intensity. Finally,technology intensity was gauged using industry-wide investment in new equipment as proportionof revenues. Industry growth was operationalizedin terms of industry sales. This variable alsoreflects general macroeconomic conditions. It iscommonly used in similar research (Dess andBeard, 1984; Yasai-Ardekani, 1989). White (1982),for example, rationalized its use as an index of‘industry newness’ or as a proxy for ‘expandingpossibilities.’

All the measures used to represent generic strat-egy dimensions and industry structure were speci-fied as 1-year lags prior to 1996, with the excep-tion of the industry growth variable, which wasspecified as the rate of increase in total industryshipments between 1995 and 1996.

Controls

The study includes both firm- and industry-specific variables as controls in the analyses.Some researchers have used market share as anelement of strategy since it provides an indexof the firm’s domestic scale of operations (e.g.,Hambrick, 1983). Others use market share as adimension of firm performance. On this account,a large body of empirical literature (see, forexample, Schoeffler, Buzzell, and Heany, 1974;Buzzell, Gale, and Sultan, 1975; Phillips et al.,1983; Prescott, Kohli, and Venkatraman, 1986) hasfound a positive relationship between market shareand profitability.

Export intensity has also been used as a mea-sure of the firm’s scope of operations (e.g., Kotha

and Nair, 1995). Even if this is not necessarilytrue,6 this variable is included because interna-tionalization is an important strategy ingredientin the Greek context, since it generally signifiesa dynamic and risk-prone strategic posture. Pastresearch has used capital intensity as a measurereflecting asset parsimony, that is, the degree towhich the firm’s assets used per unit of outputare few (Kotha and Nair, 1995). Asset parsimonyrepresents an added element in Porter’s typology,which together with cost efficiency defines a mea-sure of the firm’s overall efficiency and henceits emphasis towards lowering costs (Hambrick,1983). Capital intensity is included as a con-trol variable for the sake of parsimony. Had weused four instead of three strategy dimensions theresulting classification of strategy types (i.e., 34 =81 possible combinations) would have made theanalysis particularly cumbersome. Because capi-tal figures were not available, fuel and electricityexpenditures at the plant level were used insteadas a proxy.

The final firm-related control variable utilizedin this study concerns labor flexibility. Flexibilityreflects the firm’s ability to adjust labor quantityto changing demand conditions. During the 1990s,Greek firms were allowed somewhat more latitudein using flexible employment arrangements (e.g.,part-time contracts) relative to the past. Hence, itwould be interesting to examine whether this hadan effect on profitability. This variable is measuredusing the ratio of limited-term employment to totalemployment.

We have also included two industry measuresas controls. Their inclusion basically stems fromthe fact that some of the firm controls can alsobe observed and measured at an aggregate levelof analysis. Hence, their estimated effect on prof-itability could be confounded with that of industry-level differences. For example, it is possible thatthe measure of a firm’s export intensity does notonly reflect its own specific achievement but alsoan advantage shared by other firms in its industry.To alleviate this problem the analysis includes ascontrols two industry average measures, i.e., exportintensity, and labor flexibility.

At this point, it is also important to note thatthe inclusion of industry capital and advertisingintensity as measures of entry barriers partially

6 As one of the reviewers has noted, a firm could well export itsentire production and still be very focused in its target segments.



corrects for some of the deficiencies associatedwith the use of price–cost margin as profitabil-ity index. It is well known that PCM is simplya short-run operating profit margin that may berelatively high simply because a firm is capital(Harris, 1986) or advertising intensive. As Carter(1978) and Chappell and Cottle (1985) note, fail-ure to control for capital and advertising inten-sity could result in a spurious positive relation-ship between concentration and profitability sinceit could only be reflecting large firms’ greater cap-ital and advertising costs per unit of output. Asbefore, all these measures are specified as 1-yearlags prior to 1996.

Finally, we include firm size (i.e., natural loga-rithm of the number of employees in 1996), oneof the most frequently used contextual variables,in order to remove whatever effects this may haveon profitability.

RESULTS AND DISCUSSION

The descriptive statistics and zero-order corre-lations between the dependent and independentvariables are presented in the Appendix. Table 2reports the OLS regression results for both thebase and the extended models (Equations 1a and

Table 2. OLS regression results for PCM

Base model Extended model

Dummycoding (1a)

Effectscoding (1b)

Dummycoding (2a)

Effectscoding (2b)

Industry variablesConcentration −0.0004 −0.0004 0.0002 0.0002Advertising intensity 10.006∗∗∗ 10.006∗∗∗ 0.380∗∗ 0.380∗∗

Cost efficiency 0.005∗∗∗ 0.005∗∗∗ 0.001∗ 0.001∗

Capital intensity 0.303∗ 0.303∗ 0.041 0.041Technology intensity 0.298∗ 0.298∗ 0.096 0.096Growth rate (1995–96) 0.038 0.038 0.048 0.048

Firm strategy variablesCOST 0.012 −0.072∗∗∗ 0.018 −0.010ADV −0.068∗∗ −0.153∗∗∗ −0.009 −0.038∗

TECH −0.053∗∗ −0.139∗∗∗ −0.015 −0.044∗∗

COST + ADV + TECH 0.139∗∗∗ 0.097∗∗∗ 0.037∗∗∗ 0.022∗∗∗

COST + ADV 0.152∗∗∗ 0.109∗∗∗ 0.041∗∗∗ 0.026∗∗∗

COST + TECH 0.121∗∗∗ 0.078∗∗∗ 0.031∗∗∗ 0.016∗

ADV + TECH 0.052∗∗∗ 0.010 0.024∗ 0.009COST + OTHER 0.100∗∗∗ 0.058∗∗∗ 0.017† 0.002ADV + OTHER 0.047∗∗∗ 0.004 0.011 −0.003TECH + OTHER 0.051∗∗∗ 0.008 0.020∗ 0.006STUCK 0.083∗∗∗ 0.041∗∗∗ 0.042∗∗∗ 0.027∗∗∗

Unobservable effectsPCMlagged 0.698∗∗∗ 0.698∗∗∗

Firm controlsCapital intensity −0.296∗∗ −0.296∗∗ 0.041 0.041Export intensity −0.018 −0.018 −0.002 −0.002Market share 0.117∗ 0.117∗ 0.022 0.022Flexibility 0.035† 0.035† −0.021 −0.021Size (log employees) −0.013∗∗ −0.013∗∗ −0.004 −0.004

Industry controlsAverage export intensity −0.016 −0.016 −0.018 −0.018Average flexibility 0.018 0.018 0.031 0.031Constant 0.051∗∗ 0.094∗∗∗ 0.010 0.034

Log of likelihood function 1237.57 1237.57 1680.17 1680.17Adjusted R2 0.2343 0.2343 0.5245 0.5245

† p < 0.10; ∗ p < 0.05; ∗∗ p < 0.01; ∗∗∗ p < 0.001



1b and 2a and 2b respectively). In the followingparagraphs, we focus mainly on the base modelresults. Discussion of the findings obtained withthe extended model will be postponed until a latersection where we consider specifically the role oflagged performance.

In Equation 1a (as in Equation 2a), strategyvariables are represented using dummy coding,whereas in Equation 1b (and 2b) we use effectscoding. It is important to note that the two cod-ing methodologies are alternative but mathemat-ically equivalent. Hence, given the same data,Equations 1a and 1b (as well as 2a and 2b) yieldidentical log of likelihood function, R2, and par-tial coefficients for all variables except for strategytypes.

It is well known that in dummy coding eachregression coefficient represents a contrast betweenthe group in question and the reference group.In other words, the regression coefficient βi of,for example, the ‘pure innovation’ dummy, showshow much higher or lower is the mean PCM ofthe firms belonging in this strategy group in com-parison to the mean PCM of firms belonging inthe reference, that is, the ‘no strategy’ group. Infact, the latter is given by the intercept of theequation (assuming that the remaining continuousindependent variables are all zero) (Hardy, 1993).In effects coding, the contrast is between the groupin question and the remaining groups. Effects cod-ing is therefore particularly appropriate when eachgroup is compared with the entire set of groupsrather than with a single reference group as is thecase with dummy-variable coding. With effects-coded variables, then, the regression coefficient ofa particular group may be interpreted as a mea-sure of the ‘eccentricity’ or the ‘uniqueness’ ofthe specified group in comparison to an ‘average’value for the entire sample (Cohen and Cohen,1983; Hardy, 1993).

Strategy effects

Hypothesis 1 predicted that pure strategies occupyan intermediate position in the value ladder, beingless profitable than hybrid strategies but more suc-cessful compared to the least attractive ‘no strat-egy’ alternative. Results in Table 2 partially sup-port this hypothesis. In Equation 1a (the dummy-coded variables equation), the coefficients for theseven hybrid strategies are all positive and signifi-cant, indicating that their impact on profitability is

significantly stronger than that of the ‘no strategy’alternatives. Moreover, they are larger in magni-tude compared with the coefficients for the threepure strategies. In fact, the coefficients for ADVand TECH, i.e., the two pure differentiation strate-gies, are found negative and significant, whereasthe coefficient for COST, i.e., the pure low coststrategy, is positive but insignificant.

In Equation 1b (the effects-coded variablesequation) the coefficients for the hybrid strate-gies are generally positive and significant, with theexception of ADV + TECH, ADV + OTHER andTECH + OTHER, which are positive but insignifi-cant. In contrast, the coefficients for the pure strate-gies are all negative and significant, indicating thatthese groups of firms score significantly below theaverage in terms of profitability.

The differences among the pure and hybridstrategies coefficients were also tested using a t-test and were found to be highly significant.7 Takentogether, these findings strongly suggest that (a)hybrid strategies are more profitable than purestrategies, thus confirming the first part of Hypoth-esis 1, and (b) contrary to the second part ofHypothesis 1, pure strategies are producing resultsthat, compared with those of the ‘no strategy’group, are either not different, in the case of purelow cost, or, are even worse, in the case of puredifferentiation strategies.

Hypotheses 2a and 2b predicted that the strengthof the relationship between a hybrid strategy andprofitability would depend on (a) the number ofgeneric strategy dimensions strongly emphasized,and (b) on the presence of the low cost dimen-sion among those strongly emphasized. The resultsin Table 2 generally support these hypotheses,since: (i) the three most successful hybrid strate-gies (i.e., COST + ADV, COST + ADV + TECH,COST + TECH) are those that comprise two orthree strategy dimensions, with low cost being oneof the dimensions emphasized; (ii) the three lesssuccessful strategies (i.e., ADV + TECH, TECH +OTHER, ADV + OTHER) are those that either

7 The test statistic is given by t = (βi − βj )/[var(βi) + var(βj ) −2cov(βiβj )]1/2, where βi and βj are the unstandardized regres-sion coefficients for strategy groups i and j respectively.Because Equations 1a and 1b are mathematically equivalent, theresults of the test apply to the coefficients of both equations.The smallest t-value obtained in testing the difference in thecoefficients was 3.34 (p < 0.001).



emphasize only one dimension or, when emphasiz-ing two, do not include low cost as a key compo-nent. Note also that the coefficients for these hybridalternatives are the only ones found insignificant inEquation 1b, suggesting that these strategies leadto only average profitability compared to the entireset of possible alternatives; (iii) COST + OTHERis the only hybrid strategy among those empha-sizing just one dimension that has a significantpositive coefficient in Equation 1b, something thatobviously relates to the fact that this dimension islow cost.

As regards the stuck-in-the-middle strategy, wepredicted tentatively that it should be more suc-cessful than the ‘no strategy’ alternatives and lesssuccessful than the other hybrid strategies, butexpressed no definitive argument with respect toits position relative to pure strategies (Hypothesis2c). The results in Table 2 show that stuck-in-the-middle occupies an intermediate position amonghybrid strategies, partially supporting this hypoth-esis. The coefficient for STUCK is positive andsignificant in both the dummy and the effects-coded equations. This finding suggests that, ceterisparibus, stuck-in-the-middle firms are not onlymore successful compared to those belonging inthe ‘no strategy’ group (Equation 1a), as predictedin Hypothesis 2c, but also succeed in obtainingabove average profitability (Equation 1b). In fact,stuck-in-the-middle firms are found more prof-itable than those firms following pure strategiesas well as those pursuing hybrid combinations thatinvolve advertising and/or technology but not lowcost. Overall then, stuck-in-the-middle appears tobe a more profitable strategy than hypothesized.

The broader picture emerging from these resultscan be summarized as follows: First, it appearsthat the best strategy for the Greek environmentis a combination of marketing-based differentia-tion and low cost (COST + ADV). The prevalenceof this particular combination over the remaininghybrid strategies should come as no surprise, sinceit might be taken to confirm what casual observa-tion reveals about the typical character of strate-gies adopted by Greek firms. On the one hand,unable to compete against international rivals onthe basis of superior quality and (particularly)innovation, Greek firms appear to strive to differ-entiate themselves by emphasizing advertising andother marketing-related techniques to mimic theimage of established foreign rivals (Droucopou-los and Thomadakis, 1993). A recent study found

that marketing orientation development positivelyaffects performance in a sample of Greek indus-trial and consumer goods companies (Avlonitis andGounaris, 1997). This type of differentiation maybe especially useful in an environment with hardlyany technological leaders among its industrial pop-ulation and where business expenditures on R&Das a percentage of GDP is the lowest among themember states of the EU (European Trend Charton Innovation, 2000).

On the other hand, as stressed earlier, low costhas been and continues to be Greek firms’ majorcomparative advantage over rivals from advancedeconomies. Further, value for money is of highimportance to Greek consumers. A recent studyfound that, in contrast to consumers from otherEuropean regions who generally associate highprices with quality and are prepared to pay pre-mium prices for quality products, Greek consumersplace a higher emphasis on value for money whenevaluating quality (Henchion and McIntyre, 2000).Our finding adds to these observations the notionthat it is the combination of marketing differentia-tion and low cost, not their pursuit in a pure form,that results in above average profitability.

Second, the strategy comprising all three genericdimensions (COST + ADV + TECH) appears tobe very successful, even though its coefficient isnot the highest as predicted by Hypotheses 2a and2b. It is worth noting, however, that the t-testfor the difference between this and the highestcoefficient found (i.e., COST + ADV) is statisti-cally insignificant (t = 1.08, p > 0.10). Hence, itappears that simultaneous pursuit of all genericstrategy dimensions is not only feasible, but alsorewarding, at least for firms in the Greek context.

Third, as discussed above, the results appear tohighlight the particular significance of the low costdimension as a key component of hybrid strate-gies. Regarding low cost as a pure strategy, it isinteresting to note that the dummy-coded coeffi-cient for COST is the only one of the pure strategycoefficients that is positive, albeit not significant.It appears therefore that pursuing a pure low coststrategy, in contrast to pure differentiation strate-gies, leads to results that are at least no worse thanthose obtained by ‘no strategy’ alternatives. It doeslead, however, to below average profitability whencompared to the expected value of PCM across allgroups (Equation 1b). Taken together, these find-ings confirm our basic argument that despite thefact that in the past Greek firms tended to base



their strategies primarily, if not exclusively, on lowcosts, this in itself is less effective in the time frameof the study (mid 1990s).

The firm-level control variables also yield someinteresting results with significant coefficients inthe base, but not in the extended model. Capitalintensity has a strong, negative association withprofitability. This is in line with a number ofprevious studies (e.g., Hambrick and Lei, 1985;Hambrick and MacMillan, 1984). Market sharehas a positive impact on PCM, as one wouldnormally expect given the vast empirical evidenceconfirming this relationship. A similar finding wasalso obtained in the Greek context (Spanos andLioukas, 2001). Flexibility has a weak positiveimpact, whereas export intensity and firm size haveno effect.

Taken together, these findings generally supportour proposition that in the Greek context hybridstrategies are not only viable but are also moresuccessful than pure strategies. On this account,however, two issues deserve particular attention.First, it could be argued that our operationaliza-tion of pure strategies is perhaps overtly strin-gent. Recall from Table 1 that in defining, forexample, the COST variable, we asked that afirm scores high on the cost dimension and lowon both the differentiation dimensions. Porter’sconceptualization, however, is somewhat differentfrom that when he notes that ‘a cost leader mustachieve parity or proximity in the bases of dif-ferentiation relative to its competitors to be anabove average performer, even though it relieson cost leadership for its competitive advantage’(Porter, 1985: 13). Within this line of reasoning,COST + OTHER is nearer to Porter’s idea of apure low cost strategy, as ADV + OTHER andTECH + OTHER are nearer to his idea of puredifferentiation strategies. It is interesting to note,however, that even under this prism our mainconclusion does not change; hybrid strategies stillappear to be more profitable than pure strategies.As already noted, the coefficients for COST +OTHER, ADV + OTHER, and TECH + OTHERare lower than the coefficients of the other hybridstrategies. The differences in the coefficients areall statistically significant at the 0.01 level, exceptfor the difference between ADV + OTHER andADV + TECH (t = 0.40, p > 0.10) and betweenCOST + OTHER and COST + TECH (t = 1.48,p > 0.10). The only change in the interpretation ofresults shown in Table 2 is that now pure strategies

should not be considered inferior compared withthe ‘no strategy’ alternatives. Still, however, theyappear to lead to below-average profitability exceptfor pure low cost, as indicated by the coefficientsin Equation 1b.

Second, it is important to stress that our resultshold particularly for the time frame of the study(mid 1990s). One could reasonably expect thatthe tendency towards pure differentiation strategieswould have evolved and further intensified duringthe last period as a result of ever increasing envi-ronmental pressures for change. It thus remains asan open question to examine what effect this mighthave on Greek firms’ profitability.

Industry effects

In IO theory, industry concentration constitutesperhaps the most critical industry structural ele-ment. Our results, however, do not confirm thisnotion since the concentration variable was foundinsignificant in both the base and extended mod-els. This is interesting since one might logicallyexpect seller concentration to have a positive andsignificant impact. Hypothesis 3 states that sellerconcentration positively affects firm profitabilitysince higher concentration gives firms a greaterdegree of control in managing price through col-lusion, and hence profits (Bain, 1951). As aresult, concentrated industries are often associatedwith relatively less competition and consequentlywith higher return for incumbent firms (Hill andHansen, 1991).

Within the IO field, a number of studies haveempirically examined these assertions (e.g., Bain,1956; Demsetz, 1973; Mann, 1966; Stigler, 1968).The relevant findings, however, are not unequiv-ocal. These studies generally suggest that highlyconcentrated industries are the most profitable, butthe differences in industry profitability betweenmoderate and low levels of concentration werefound to be small. On the other hand, Brozen(1970), McGee (1988), and others have providedevidence of an insignificant relationship betweenconcentration and profitability.

In the field of strategic management the enquiryon the alleged relationship between concentrationand profitability is less frequent and has also pro-duced mixed results. For example, Harrigan (1981)and Tsai, MacMillan, and Low (1991) provide par-tial evidence that firms operating in highly concen-trated industries are more successful. In contrast,



Biggadike (1979) and McDougall, Robinson, andDeNiso (1992) provide partial support for exactlythe opposite, that is, firms in low concentratedindustries are more profitable.

Within the Greek environment, empirical inves-tigation is scant and has produced results that arein line with those obtained in the present research.For example, the aforementioned recent studies ofthe Greek food industries (Vlachvei and Oustapas-sidis, 1998; Oustapassidis and Vlachvei, 1999)found that concentration has insignificant effectson profitability. Another study (Tsaliki and Tsoul-fidis, 1998) that investigated the impact of struc-tural variables on manufacturing industries prof-itability using census data for the years 1969, 1973,1978, and 1984 could not establish any clear-cut relationship between concentration and perfor-mance. Overall, profitability gains from exercisingmonopoly power in Greek manufacturing appearsto be rather limited, as manifested by the weakcoefficients reported in Table 2.

Hypothesis 4 argued that as the entry barriers inan industry rise, the probability of entry diminishesand, hence the potential for industry incumbentsto engage in monopolistic practices increases. Asa result, profitability should be higher in industriescharacterized by high entry barriers because inthese industries the established firms may be lesssensitive to the response of potential entrants whensetting profit margins. The results shown in Table 1generally support this hypothesis.8 The industryadvertising intensity and cost efficiency variablesare found with positive and significant coefficientsin both the base and extended models, whereas thecapital and technology intensity variables, despitebeing positive, are found significant in the base

8 The logic underlying this hypothesis is based on the premisethat industry variables are fully ‘exogenous,’ that is, they areindependent of individual firms’ actions. Hence, the direction ofrelationship is from industry barriers to profitability (e.g., tech-nology intensity → PCM). As one of the reviewers has noted,however, it may well be the opposite, that is, in the most prof-itable industries incumbents invest more in technology becausethey have the resources to do so. Alternatively, industries thatare more desirable may attract more capital and therefore spendmore. Hence, the relationship is: PCM → technology intensity.Put differently, it could be argued that industry variables are notfully exogenous; they determine, but are also determined by,firms’ actions. Note, however, that precisely because of that wehave specified industry variables as 1-year lags. Even though itis very difficult to disentangle cause and effect in the theoreticaldiscussion of the entry barriers–profitability relationship, includ-ing industry elements as 1-year lags ascertains that, in termsof statistical results this year’s PCM cannot contemporaneouslyfeed back on last year’s entry barriers.

model only. It appears that the inclusion of laggedprofitability absorbs much of the effect of barriersto entry variables, as indicated by the decreasein the level of significance from the base to theextended model of the first two variables and theinsignificance of the latter two. Apart from thedifferences between the two models, however, thebroader picture is in line with relevant empiricalfindings obtained in other countries such as theUnited States, Canada, Japan, Australia, and theUnited Kingdom (see, for example, Scherer andRoss, 1990: 437; Orr, 1974). Results obtained inthe context of Greek food industries provide thesame picture: high intensity of both advertisingand capital act as barriers to entry and increaseprofitability of incumbent firms.

The final important industry element examinedin this study refers to industry growth. Hypothesis5 stated that industry growth is expected to posi-tively influence profitability since it usually reflectsincreases in demand. Porter (1980), for example,argues that rapid industry growth ensures incum-bents’ strong financial performance even in thepresence of market share gains from new entrants.Peltzman (1977) reasons that rapid growth can beuseful for small firms allowing them to lower costsand assimilate critical knowledge and skills inorder to successfully compete in their product mar-kets. In the same vein, White (1982) views industrygrowth as an index of expanding possibilities forSMEs. Our results, however, do not support thishypothesis, as the coefficient was found positivebut insignificant in both the base and the extendedmodels. This finding is not without precedents inthe empirical literature. For example, Robinsonand McDougall (1998) found no differences in theperformance of entrepreneurial ventures based onthe growth rate of the venture’s industry. Theydid find performance differences, however, on thebasis of the industry’s stage of life cycle. In a meta-analysis of the market share–profitability relation-ship, and contrary to their hypothesis, Szymanskiet al. (1993) found a negative association betweenmarket growth and profitability. They argued thatthis finding could be explained by the perils ofrapid growth adversely affecting profits, an argu-ment also made by Aaker and Day (1986). Anotherstudy (Moulton, Thomas, and Pruett, 1996), con-trary to what one would normally expect, foundmore business failures in growing than in declin-ing industries. In the Greek food industries, theimpact of industry growth was significant only



in those industries that were highly differentiated.When examined in the entire sample, the effectwas insignificant.

Finally, the industry-level control variables werefound to have no effect on profitability in both thebase and extended model.

The role of lagged performance

Results of the extended model (Equations 2a and2b, Table 2) clearly show that, for the greatestpart, profitability variance must be attributed tothe dominance of lagged price–cost margin, whichin turn absorbs much of the significance of theremaining explanatory variables. This is not sur-prising if one considers the possibility that theimpact of strategy and industry variables on prof-itability is contemporaneous rather than lagged.9

If this is true, then the inclusion of lagged PCM,which is being measured at exactly the same timeas the other explanatory variables, will necessarilyresult in masking much of their influence on nextyears’ PCM.

At a more general level, however, the effectsof strategy and industry variables are qualitativelysimilar, albeit not identical, to those obtained withthe base model. We have already indicated the dif-ference in the coefficients of entry barriers fromthe base to the extended model, which, however,do not seriously alter the broader picture. The sameholds with respect to all our main conclusionsregarding strategy effects. Specifically, as in thebase models results, hybrid strategies are found tobe more successful than pure strategies, which inturn are found to be less successful than ‘no strat-egy’ alternatives. In addition, both the importanceof the number of strategy dimensions emphasizedand the importance of low cost as a key ingredientin mixed strategies emerge as key findings.

Besides these qualitatively similar conclusions,however, the extended model results point primar-ily to the overwhelming influence of lagged PCM.The particularly strong positive effect of past prof-itability is in line with the results provided byMueller (1986), who concluded that profit differ-ences among U.S. firms appear persistent over timesince profit rates in the 1950s were found posi-tively correlated with their 1970s counterparts. In

9 It should be stressed, however, that reverse causality is alsopossible. As noted earlier, this is one of the reasons that led usto specify lagged independent variables in our models.

analogy to an individual’s income (Finkel, 1995),it might be argued that a highly successful firmwill be in an advantageous position to imple-ment costly and demanding strategies that willenable it to sustain or even improve its currentposition.

The principal argument for the inclusion of pastprofitability is based on the premise that laggedPCM may account for the effect of unobserv-able firm competencies on profitability. As notedin the theoretical background, the resource-basedview (Barney, 1986, 1991; Rumelt, 1991; Werner-felt, 1984), in sharp contrast to traditional IO the-ory and Porter’s competitive strategy framework,postulates that higher than normal profitability isultimately a return to unique, idiosyncratic firmcompetencies.

According to Jacobson (1988, 1990), Kotha andNair (1995), and others, this is precisely the ratio-nale justifying the use of past performance inexplaining current success. Jacobson (1988), forexample, asserts that lagged profitability accountsfor the unobservable effects of managerial skillsand luck. Failure to include this variable, his argu-ment goes, will not only produce biased and inef-ficient estimates of the effects of the independentvariables, but will also result in a seriously mis-specified theoretical model in explaining firm per-formance. Within this line of reasoning, the strongpositive coefficient of lagged PCM may be takenas an indication of the importance of unobservablefirm effects on profitability.

Counter-arguments exist, however, concerningthe use of past performance as an indicant of unob-servable firm effects. Buzzell (1990), for exam-ple, while agreeing that more attention should begiven to the effects of unobservable factors on per-formance, is not convinced that the methodologyemployed by Jacobson to distinguish between theeffects of strategy and other, not directly observ-able, determinants of profitability was appropriate.In a similar vein, it could be argued that past per-formance may represent not only such unobserv-able idiosyncratic firm competencies but also pastindustry circumstances. Put differently, it is possi-ble that lagged PCM represents partly the effectsof idiosyncratic firm qualities and partly those ofindustry characteristics prevailing in a period priorto the time interval studied. In this sense, then,it could be that the effects of stable ‘stocks’ oforganizational capabilities and past industry con-ditions are confounded within a single indicant



(i.e., lagged profitability). Hence, even though theresults indicate a strong positive effect of past prof-itability, it would not be advisable to infer that thisimpact is entirely attributed to idiosyncratic firmcompetencies.

The second argument justifying the inclusion oflagged PCM relates to the notion that industryand strategy variables may explain some unknownor ‘desired’ value of profitability rather than theone actually observed. Interpreting the results ofthe extended model from the partial adjustmentperspective, we calculate a as 1 − 0.698 (i.e., 1 −lagged PCM coefficient) = 0.302, indicating thatGreek firms’ profitability adjusted by 30 percentto its targeted (or equilibrium) level from 1995 to1996. The long-run effects of one-unit increasesin the industry and strategy values obtain whenwe divide each of the coefficients in Table 1 by0.302 (see Finkel, 1995, and Gujarati, 1995, foran elaboration). Our results therefore provide anestimation of both the transient and the long-run effects of industry and strategy variables onprofitability.

The relative importance of industry andstrategy effects on profitability

Our results could also be used to provide someinsights regarding the relative importance ofindustry and strategy impact on profitability. Themethodology employed to disentangle the twotypes of effects compares the full specification inthe base model10 with the restricted specificationsthat contain either the strategy or industryvariables. More specifically, following otherresearchers (e.g., Hansen and Wernerfelt, 1989;Kotha and Nair, 1995), we determine the relative

10 Obviously, there is no difference in the variance decompositionanalyses whether we use Equation 1a or 1b (base model)since they are mathematically equivalent. Our choice of notusing the extended model (Equations 2a and 2b) deservessome more explanation. Since the effect of lagged PCMcannot be unambiguously decomposed into unobservable firmand past industry effects, applying to the extended modelthe same variance–decomposition methodology used for thebase model would not add much to our understanding ofthe relative influence of strategy and industry factors. Thisis more so because the variance accounted for by theindependent variables in Equation 2a (or 2b) reflects their short-term influence on profitability. As noted earlier, from a partial-adjustment perspective, dividing these coefficients by a (i.e.1 − the coefficient of lagged PCM) gives an estimate of theirlong-run effects. However, a similar estimate of the percentageof variance explained by these ‘transformed’ coefficients cannotbe obtained.

importance of industry and strategy effects byperforming F -tests to compare both the full andrestricted specifications. The results are presentedin Figure 1.

Figure 1 starts at the bottom with the full spec-ification (Equation 1a or 1b in Table 2) encom-passing both industry and strategy variables andthen presents the significance of F -tests betweenthe full and the two restricted models. Finally, therestricted models are tested against the null specifi-cation that contains only size as a control variable.As evidenced from this figure, strategy and indus-try effects are highly significant whether alone, i.e.,as incremental additions to the null specification,or in combination as components of the full specifi-cation. Moreover, strategy variables explain morethan twice as much profit variance than industryvariables (i.e., 15% vs. 6.7%).

This finding is in line with evidence fromanother study (Droucopoulos and Thomadakis,1993) that sought to examine the determinants ofsmall establishment shares in Greek manufactur-ing. The study found that whereas the contributionof industry variables ranged from 12 percent to 20percent, firm variables increased explained vari-ance to a range between 46 percent and 56 percent.Taken together, these results seem to corroborateempirical evidence based on U.S. data that demon-strate the predominance of firm (i.e., corporateplus business) over industry effects on profitabil-ity (see Bowman and Helfat, 2001, for a thoroughreview).

Two points should be mentioned here. First, thepresent research does not distinguish between busi-ness and corporate effects as is usually done in thevariance decomposition literature. As noted in thedata section, our observations are at the establish-ment level; hence, we have no way of capturingthe effects, if any, of corporate, as opposed tobusiness, strategy on profitability. This, however,should not be taken as a serious limitation giventhe fact that the overwhelming majority of Greekenterprises are single-business firms. Hence, whatwe term ‘strategy effects’ is equivalent to Rumelt’s(1991) ‘business effects.’ Second, in decompos-ing price–cost margin variability we treat strat-egy and firm controls as one ‘block’ of variablesrepresenting the total firm effects on profitabil-ity. The same holds for industry effects wherewe include structural and industry control vari-ables.



Full specification (Base model, Table 1)(Industry and Strategy effects)

(adj. R2 = 0.2343)

Restricted specification: Industry effects only(adj. R2 = 0.0759)

∆R2 (over the null equation) = 0.0674

Restricted specification: Strategy effects only(adj. R2 = 0.1588)

∆R2 (over the null equation) = 0.1503

Null specification(firm size only)

(adj. R2 = 0.0085)

F = 23.084p < 0.001

F = 20.479p < 0.001

F = 21.073p < 0.001

F = 23.372p < 0.001

Figure 1. Testing the relative influence of strategy vs. industry factors on profitability

CONCLUSIONS

The primary aim of this study was to test hypothe-ses and provide evidence with respect to theimpact of strategy and industry-level variables onfirm profitability. The hypotheses regarding theeffects of strategy were based on the propositionthat hybrid, as opposed to pure strategic alter-natives, are more feasible and attractive giventhe idiosyncrasies of the national context. In test-ing the hypotheses a two-model specification wasemployed: a base model containing both strategyand industry determinants and an extended modelthat also included lagged profitability as a proxyfor unobservable firm assets.

At the firm level, different forms of strategywere found to have different effects on prof-itability. The specific results largely support ourhypotheses about the suitability of hybrid over pureforms of competitive advantage. They also confirm

that the more generic strategy dimensions includedin the strategy mix the more profitable the strategyis, provided that one of the key components islow cost. Pure strategies generally appear to pro-duce below average results. Firms pursuing puredifferentiation strategies are found less profitableeven when compared with firms having no clearstrategy. Finally, stuck-in-the-middle, conceptual-ized as a particular underdeveloped form of ahybrid strategy, appears to be more profitablethan hypothesized, yielding above average per-formance. The findings also indicate a significantinfluence of industry structure on firm profitability.More specifically, the study confirms the positiveimpact of industry entry barriers. The effects ofindustry concentration and growth were not sig-nificant.

The inclusion of past performance did notchange these basic conclusions; it did absorb,however, much of the explanatory power of



strategy and industry variables, promoting pastperformance as the most important determinant ofsubsequent firm profitability.

Overall, our findings seem to pronounce firmstrategy variables over those of industry structure.When considering the relative importance of bothclasses of effects in explaining profitability, a dom-inance of strategy variables seems to emerge. Firm-strategy variables account for more than twice asmuch profit variance as industry effects. Being inline with empirical results provided in the extantliterature, this finding might be taken to generalizesimilar conclusions drawn from different contexts.

Taken together, these findings have interestingpolicy implications, which may add to the ongoingdebate on the issues surrounding the competitive-ness of smaller economies, like Greece, being inthe process of catching up. The results indicatethat success depends more on firm-level strate-gic choices than on industry conditions. Providedthat these findings are confirmed in comparablenational contexts, they suggest that the respon-sibility for converging with the more advancedeconomies rests as much on the effectiveness ofnational-level policies for structural adjustment ason firm-specific actions. Managerial implications,in turn, follow directly from our main conclu-sion; hybrid strategies are to be preferred overpure strategies. It appears that a combination ofmarketing-based differentiation and low cost is themost successful strategy in the Greek context.

In summary, these results shed some light on thedeterminants of firm profitability in the Greek envi-ronment but should, however, be evaluated in lightof the study’s limitations. The choice of variablesused was dictated by the available data source. Thedatabase employed is unique and reliable in itscoverage of Greek manufacturing industries, basedon Eurostat standards. The measures available areconsistent with those used in previous studies withthe exception of price–cost margin as a measureof profitability. While extensively used in the IOliterature, the price–cost margin is less common instrategic management research. The limitation withPCM is that it is essentially a margin variable mea-suring the difference between revenue and the costof materials without, however, directly subtractingthe cost of capital. If investments in technology areused to reduce capital expenditures, then the PCMas a performance variable may not be as sensi-tive to this strategy as if one were using a moreconventional index of profitability, such as return

on investment. Hence, it is possible that the nega-tive coefficient for the pure strategy of technologyintensity relates to this inherent limitation of thePCM index. Another problem relates to employeeproductivity as an indicant of cost efficiency. First,this variable has a direct mathematical link to PCMgiven that value added appears in the nominatorof both variables. This is not a serious limitation,however, because we have regressed against PCMstrategy types, not generic strategy dimensions perse. Second, it is possible that a firm can enjoy highvalue added because it has achieved substantialdifferentiation and so can command a price pre-mium. Hence, even though employee productivityhas been used in past research (e.g., Hambrick,1983; Anderson and Zeithaml, 1984) to representrealized cost efficiency, it can also reflect differen-tiation. Unfortunately, this variable was the onlychoice we had with the data available.

The fact that our variables are measured at theestablishment, as opposed to firm level, also cre-ates some concerns about the data. We believe,however, that this does not seriously affect thevalidity of our results because, as indicated earlier,the vast majority of Greek firms are small-sized,one-establishment enterprises. As such, establish-ment and firm-level strategic decisions are insep-arable in most cases. A final limitation, which isnevertheless common in studies using ‘objective’data, is the lack of fine-grained measures captur-ing subtle dimensions of firm conduct such asproduct quality, innovation efforts, and the like.More pronounced is the lack of indicators thatcould approximate idiosyncratic firm competenciessuch as managerial skills, organizational knowl-edge, etc. Such data would allow a more directassessment of the effects of firm competencies onperformance than was possible in this study. Futureresearch employing better proxies of the otherwiseunobservable firm competencies would hopefullyadd to our understanding of the sources and deter-minants of firm performance.

A related issue for future research involvesthe examination of which capabilities underlaythe successful implementation of hybrid strategies.Arguably, those internal capabilities must reflectdifferent, more elaborated managerial and organi-zational arrangements compared to Greek firms’past situation. Moreover, this is a question thattakes an added significance for economies in theprocess of catching up, where firms are strivingto improve their competitiveness. This, however,



would require a different research design, because,as noted above, objective data are clearly notappropriate for assessing firm capabilities. Anotherand obvious extension of the present study wouldinvolve the examination of the impact of indus-trial market structure and firm conduct within amore homogeneous sample of industries, e.g., inspecific sectors. Moreover, an alternative to ourtheoretically derived classification of strategy typescould be a data-driven categorization based oncluster analysis. It would be interesting to seewhether this methodological choice leads to quali-tatively similar conclusions as regards the nature ofstrategies pursued and their impact on profitability.Future research could also examine contingenciesin the impact of strategy types by examining thefit between strategy content and industry structuralelements.

Finally, one could argue that our results reflectthe outcomes of strategies in transition, from asingle emphasis on cost, towards more elaboratedstrategic repertoires—a transition, however, thatcould not be reflected in our analysis, since ourdata cover only the 1995–96 period. A morelengthy data coverage, extending to date, wouldallow us to examine trends in the patterns of strate-gies pursued and their impact on profitability underincreasing levels of national economy integrationinto the European and global environment.

ACKNOWLEDGEMENTS

The authors wish to express their gratitude to thetwo anonymous SMJ reviewers for their valu-able comments and suggestions. Also, they thankH. Louri, E. K. Soderquist, and N. Vonortas fortheir comments. In conducting the research, thefirst author was partly supported by the Innovation& Knowledge Management Center, ManagementScience and Technology Department, Athens Uni-versity of Economics and Business.

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Strategy and industry effects on profitability: evidence from Greece

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