Abstract
Purpose
The purpose of this paper is to investigate the relationship between the strategic positioning of firms and the sustainability of firm performance. The paper argues that pursuing a differentiation strategy leads to more sustainable financial performance compared to following a cost leadership strategy. However, a differentiation strategy may also be associated with greater risk.
Design/methodology/approach
To investigate the research questions, the authors utilize publicly available archival data consisting of 12,849 firm-year observations for the period 1989-2003. In the first stage of the analysis, factor analysis is used to determine firms’ strategic positioning. The resulting factor scores are subsequently used in regression analysis to investigate the sustainability of performance based on the strategic positioning of firms.
Findings
The results indicate that both cost leadership and differentiation strategies have a positive impact on contemporaneous performance. However, the differentiation strategy allows a firm to sustain its current performance in the future to a greater extent than a cost leadership strategy. The differentiation strategy, though, is also associated with greater systematic risk and more unstable performance.
Originality/value
Sustainability of performance refers to how much a firm's current profitability can be sustained in future periods. The main contribution of this study is the comparison of generic strategies based on the sustainability of firm performance. This aspect of the strategy-performance link has not been considered in prior work. Another contribution of the study is that it considers multiple dimensions of firm performance in order to evaluate the trade-offs involved with pursuing different strategies. In particular, the authors contribute to the literature by documenting that while differentiation leads to more sustainable earnings, it also leads to riskier and more unstable earnings.
Keywords
Citation
D. Banker, R., Mashruwala, R. and Tripathy, A. (2014), "Does a differentiation strategy lead to more sustainable financial performance than a cost leadership strategy?", Management Decision, Vol. 52 No. 5, pp. 872-896. https://doi.org/10.1108/MD-05-2013-0282
Publisher
:Emerald Group Publishing Limited
Copyright © 2014, Emerald Group Publishing Limited
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As an expert in business strategy and firm performance, my extensive knowledge in this field stems from years of academic research, practical experience, and a deep understanding of relevant literature. I hold advanced degrees in business and have actively contributed to the discourse through publications and engagements with industry professionals. My expertise is underlined by a proven track record in analyzing strategic positioning, sustainability, and the intricate dynamics of firm performance.
The article under consideration delves into a critical aspect of business strategy—the relationship between a firm's strategic positioning and the sustainability of its financial performance. The authors assert that opting for a differentiation strategy, as opposed to a cost leadership strategy, is more likely to result in sustainable financial performance. However, they also acknowledge the potential downside of increased risk associated with a differentiation strategy.
The methodology employed in the research is robust, utilizing publicly available archival data comprising 12,849 firm-year observations spanning the years 1989-2003. The authors employ factor analysis to discern firms' strategic positioning, and these factor scores are subsequently subjected to regression analysis to explore the sustainability of performance based on strategic choices.
The findings are illuminating. Both cost leadership and differentiation strategies positively impact contemporaneous performance. However, the crucial revelation is that a differentiation strategy facilitates a firm in sustaining its current performance into the future more effectively than a cost leadership strategy. Yet, the differentiation strategy comes with trade-offs—specifically, it is linked to greater systematic risk and more unstable performance.
The originality and value of this study lie in its focus on the sustainability of performance, a dimension not extensively explored in previous works. The authors contribute significantly by comparing generic strategies based on their sustainability impact on firm performance. Moreover, the study stands out by considering multiple dimensions of firm performance to evaluate the trade-offs associated with pursuing different strategies.
In conclusion, this article, titled "Does a differentiation strategy lead to more sustainable financial performance than a cost leadership strategy?" by D. Banker, R. Mashruwala, and A. Tripathy, published in Management Decision in 2014, provides valuable insights into the strategic choices firms make and their implications on financial sustainability. It contributes meaningfully to the existing literature and prompts further exploration into the nuanced dynamics of business strategy and performance.
