How can executives achieve a match between expected external environmental conditions and internal organizational capabilities that facilitates improved performance? This paper argues that a firm's choice of ‘reference points’ can help achieve strategic alignment capable of yielding improved performance and potentially even a sustainable competitive advantage. Building upon prospect theory and other relevant theoretical perspectives, the strategic reference point (SRP) matrix is developed. A firm's SRP consists of three dimensions: internal capability, external conditions, and time. A theory is developed which posits an optimal SRP structure, and propositions are offered which articulate the expected relationships between the SRP, strategic choice behavior, and firm performance. The paper closes with some suggestions for using strategic reference points in both research and practice.

We explore three theoretical perspectives that look at output flexibility as a competitive udvantage for small firms as was initially described by Stigler (1939). First, small firms are more willing to fluctuate their output. As a result: second, small firms can trade cost ineficiency with volume flexibility to increase their profits; third, output flexibility is u more viable source of competitive udvantage in rvolatile und capital-intensive industries, and less viable in profitable industries. Indeed, the empiricul analysis of over 3000 companies representing 83 industries during the 197947 time period supports our theoretical perspectives. Future reseurch directions that combine firm flexibility and other strategic dimensions are discussed in the context of providing a general strategic framework for small firms competing against large ones.

Previous studies on strategic groups have mainly focused on their static characteristics in order to test the theory of strategic groups and intraindustry performance differences (Porter, 1979; Cool and Schendel, 1988; Fiegenbaum and Thomas, 1990). In contrast, this study takes a longitudinal, dynamic perspective and describes the forces driving strategic group membership and structural evolution. It proposes that a strategic group acts as a reference point for group members in formulating competitive strategy. A partial adjustment model of strategic mobility is then developed which incorporates the idea of a strategic group as a reference group. It models strategic change in an industry both within and across strategic groups. The model is tested in the context of an in‐depth industry analysis of the more significant firms in the insurance industry over the 1970‐84 time period. The results suggest that strategic groups act as reference points for firm strategies and that predictions of future firm strategies and industry/group structures may also be successfully derived.

The concept of strategic groups has been accepted as an important unit of analysis in understanding competitive strategy (Porter, 1980; McGee and Thomas, 1986; Hatten and Hatten, 1987). This study builds upon previous research (Hatten et al., 1978; McGee and Thomas, 1986; Harrigan, 1985; Cool, 1985; Cool and Schendel, 1987, 1988) and provides a general framework for the formation of strategic groups based upon important aspects of firm strategy. This framework is applied to the insurance industry over the 1970–84 time period and strategic implications are drawn. The empirical findings demonstrate that some performance differences exist among strategic groups, and also indicate that the structure of strategic groups (both in terms of the number, and the membership) changes over time. The use of this framework for understanding competitive positioning and developing dynamic theories of strategic group movement is also discussed.

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