Abstract/Summary

Purpose The purpose of this paper is to present 13 propositions about how internal strategic fit (often referred to as fit) impacts the business performance of low cost and differentiated services. It then uses these relationships to develop two “fitness ladder” frameworks to help practitioners understand how to improve fit given their business strategy (low cost or differentiation) and performance objectives (operational, financial or competitiveness). Design/methodology/approach In total, 11 strategic business units were studied that perform differently and provide a range of low cost and differentiated services to understand how changes in internal strategic fit impacted business performance over a 7 year period. Findings The findings suggest aligning systems with market needs does not improve performance. Instead, firms serving low cost markets should first focus managers’ attention on processes and centralise resources around key processes, before reducing process flexibility and automate as many steps as possible to develop a low cost capability that is difficult to imitate. By contrast, firms serving differentiated markets should first focus managers’ attention on customers and then locate resources near them, before increasing customer contact with their processes and making them more flexible so they can develop customer knowledge, relationships and services that are difficult to imitate. Research limitations/implications Some significant factors may not have been considered as the study only looked at the impact of 14 internal strategic fit variables on 7 performance variables. Also, the performance changes may not be a direct result of the strategic fit improvements identified and may not generalise to other service organisations, settings and environments. Practical implications The strategic fit-performance relationships identified and the “fitness ladder” frameworks developed can be used by organisations to make decisions about how best to improve fit given their different market needs, business strategies and performance objectives. Originality/value The findings offer more clarity than previous research about how internal fit impacts business performance for low cost and differentiated services.