How can executives achieve a match between expected external environme
ntal conditions and internal organizational capabilities that facilita
tes improved performance? This paper argues that a firm's choice of 'r
eference points' can help achieve strategic alignment capable of yield
ing improved performance and potentially even a sustainable competitiv
e advantage. Building upon prospect theory and other relevant theoreti
cal perspectives, the strategic reference point (SRP) matrix is develo
ped A firm's SRP consists of three dimensions: internal capability, ex
ternal conditions, and time. A theory is developed which posits an opt
imal 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 st
rategic reference points in both research and practice.