Competing Effectively: Environmental Scanning, Competitive Strategy, and Organizational Performance in Small Manufacturing Firms

Environmental scanning is generally viewed by strategic management scholars as a prerequisite for formulating effective business strategies. Moreover, effective scanning of the environment is seen as necessary to the successful alignment of competitive strategies with environmental requirements and the achievement of outstanding performance. This study of small manufacturing firms competing in a wide variety of industries examines the effect of the frequency and scope of environmental scanning on environment-competitive strategy alignment. Results suggest that obtaining information on several aspects of specific environmental sectors (for example, customers, competitors, suppliers) facilitates alignment between some competitive strategies and environments (that is, industry life cycle stages) whereas the frequency of scanning has no effect on such alignments. Superior firm performance is a major objective of all the stakeholders of a firm. Strategists and strategic management scholars generally agree that both large and small firms that align their competitive strategies with the requirements of their environment outperform firms that fail to achieve such alignment (Chaganti, Chaganti, and Mahajan 1989; Venkatraman and Prescott 1990). Environmental scanning is widely viewed as the first step in the process linking strategy and environment (Hambrick 1982; Daft, Sormunen, and Parks 1988). The underlying premise is that scanning the task and general environment allows a firm to learn about (1) opportunities that it may be positioned to take advantage of and (2) conditions or events that threaten its performance or survival (Bourgeois 1980; Lang, Calatone, and Gudmundson 1997), thus enabling the firm to formulate a competitive strategy congruent with critical environmental conditions. Although research on environment-strategy alignment is extensive (Anderson and Zeithaml 1984; Miller and Toulouse 1986; Zahra 1993), tests of the hypothesis remain inconclusive due to several theoretical and methodological issues. Moreover, only a few empirical studies have examined relationships between Porter's (1980) generic competitive strategies and environmental scanning (Jennings and Lumpkin 1992; Tyler, Bettenhaus, and Daft 1989; Yasai-Ardekani and Nystrom 1993), and none of them focused exclusively on small businesses. Further, despite apparent linkages between the environment, competitive strategy, environmental scanning, and firm performance, no studies were found that examined probable interrelationships. This study attempts to address these gaps in the literature by delineating and empirically testing a theory-based model of factors that affect firm performance (specifically, environment/competitive strategy alignment and environmental scanning). The model is particularly applicable to small bus inesses, as it recognizes the central, often dominant, role that the CEO (or entrepreneur) plays in small firms. Integrative Model and Supporting Research This study is part of a larger study in which an integrative model was developed to test contingency theories that link environmental conditions (industry life cycle stages), competitive strategy (a modified version of Porter's generic strategy framework), CEO characteristics (functional experience), scanning (frequency and scope of scanning), and organizational performance. The integrated alignment model shown in Figure 1 incorporates: (1) external alignment (alignment between competitive strategy and an industry life cycle stage and its effect on performance); (2) internal alignment (alignment between competitive strategy and CEO functional experience and its effect on performance); and (3) the impact of frequency and scope of scanning on external alignment. The major theme of the model is that both external and internal alignment influence a firm's performance. The second theme, the focus of this study, is that successful environment-competitive strategy alignment is significantly impacted by the scanning behavior of the CEO (or entrepreneur). …