Does Profitability Matter? How Intermediate Objectives & Strategic Focus Influence Search Behavior

Abstract

Profitability is the primary objective of strategic managers–or is it? How might a firm’s strategic focus influence this ranking of objectives? The strategy literature is replete with evidence that profitability is the ultimate performance objective, but we contend that it is not always the first consideration in the decision-making process. We underscore circumstances in which stage-linked objectives that feed into ultimate profitability may take precedence over profitability in managerial decisions. This has critical implications for when the assumptions of the Behavioral Theory of the Firm–that managers become complacent after superior performance, but engage in “problemistic search” after inferior performance–will apply. With this research, we focus on the stage-linked objectives of product quality and product profitability, arguing that superior profitability only leads to complacency when quality is also superior. We also examine whether a firm’s strategic focus, as manifested in its historical linkage between quality and profitability, influences this quality contingency effect. Though we do find that quality performance is a key contingency on the profitability-complacency relationship, we find counterintuitive results about how a quality-based strategic focus influences this effect. This provides some insight into how a firm’s strategic focus influences managers’ tendency toward myopic or forward-looking search.