The fit between product market strategy and business model: implications for firm performance

Abstract

We examine the fit between a firm's product market strategy and its business model. We develop a formal model in order to analyze the contingent effects of product market strategy and business model choices on firm performance. We investigate a unique, manually collected dataset, and find that novelty-centered business models-coupled with product market strategies that emphasize differentiation, cost leadership, or early market entry-can enhance firm performance. Our data suggest that business model and product market strategy are complements, not substitutes. ABSTRACTIn this paper, we explore the fit between a firm's product market strategy, and its business model.We develop a formal model in order to analyze and develop theoretical hypotheses on the contingent effects of product market strategy and business model choices on firm performance. By investigating a unique, manually collected data set, we find that novelty-centered business models, coupled with product market strategies that emphasize differentiation, cost leadership, or early market entry, enhance firm performance. KEYWORDS:Product market strategy, business model, performance, contingency theory, competitive strategy.3 Exploring the Fit Between Business Strategy and Business Model: Implications for Firm PerformanceA central objective of strategic management research has been to understand the contingent effects of strategy on firm performance. Contingency theory suggests that there is no optimal strategy for all organizations and posits that the most desirable choice of strategy varies according to certain factors, which are termed contingency factors (Donaldson, 1996). Accordingly, strategic management scholars have examined a wide range of contingency factors, such as aspects of the environment, organization structure (Miller, 1988), technology (Dowling and McGee, 1994), and marketing choices (Claycomb, Germain and Droege, 2000), amongst other things, and explored how these factors interact with strategy variables to determine firm performance.One focus of that literature considers structural forms as contingency factors. An important early contribution to that literature was made by Chandler (1962) who considered the contingency relationship between a firm's strategy and its internal administrative structure (specifically, divisional versus functional form). While this particular pair of strategy/structure variables has been thoroughly addressed (e.g., see Amburgey and Dacin, 1994), the received literature seems to have paid surprisingly "little attention to extending the question of strategy/structure fit issues for other structural forms of organization" (Yin and Zajac, 2004: 365). In this paper, we address this gap in the literature on the contingent effects of strategy on firm performance by introducing the firm's business model as a new contingency factor that captures the structure of firm's boundary-spanning exchanges. We ask the following research question: How do the firm's business model and its product market positioning stra...

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