An empirical investigation into the strategic responses of U.S. manufacturing firms operating in mature industries threatened by foreign competition

Abstract

During the past decade, U.S. manufacturing firms have found themselves operating in increasingly competitive global markets (Young, 1985). In those global markets are large and aggressive foreign firms anxious to increase their sales and profitability at the expense of their U.S. rivals (McMillan, 1985). The study seeks to discover systematic patterns of strategic responses that can contribute to firm success in mature threatened manufacturing industries. A review of the literature in the fields of economics, finance, organization theory and strategic management reveals two conflicting strategic patterns for firms operating in mature manufacturing industries threatened by foreign competition. One strategic response is readaption. Readaption involves meeting head-on the foreign threat and restricting diversification to related areas. A second strategic response is retrenchment and diversification into unrelated areas. To test which of the prescribed response patterns is more effective in promoting firm financial performance four hypotheses were generated. The hypotheses were tested by employing, three samples, a large-sized extensive sample and two small-sized intensive samples. The extensive sample was utilized to investigate whether related diversifiers outperformed unrelated diversifiers in a sample of firms, all of which were operating in mature industries threatened by foreign competition. The two intensive samples were used to examine business level strategy responses of four firms in each industry. The extensive sample results indicate that in the face of significant foreign import threat there were no significant financial performance differences between firms pursuing related and unrelated diversification strategies during the period 1979- 1985. Year by year analysis of the data indicated that before the period of the rapid appreciation the dollar in foreign exchange markets, 1979-1981, related diversifiers outperformed unrelated diversifiers, but those performance differences disappeared during the high dollar time period, 1982-1985. The results of the intensive sample indicate that a hybrid business level strategy containing elements from both the readaptive strategy and the retrenchment and diversification strategy was most effective in competing in global markets. The results also indicated that there were different successful business level response patterns in the capital intensive industry examined than in the labor intensive industry examined.