Linking Porter’s Generic Strategies to Firm Performance

In today’s global market, with the increasing internationalization of firms, the uncertainty surrounding business decisions has become more pronounced. Firms are faced with the daunting task of finding answers to questions like, “What do we have to do?” and “How do we do it?” As a result, the importance of having a good strategy has never been greater.

One of the first challenges that firms encounter when entering a new market is finding a way to survive. Statistics and studies have shown that approximately one-third of new European firms do not make it past their second year, and 50%-60% of them fail to survive beyond their seventh year [^1^].

In today’s competitive landscape, firms are not only focused on survival but also on increasing their market share and profitability. Shockingly, around 55% of new entrants fail within the first five years [^2^]. While about 83% of newborn enterprises in 2011 managed to survive in 2012, there has been a gradual decrease over the years, with only 45% of businesses established in 2007 still active in 2012, as reported by Eurostat [^2^]. The death rate of organizations tends to decrease as they age [^3^,^4^].

Newly established organizations face a “liability of newness” [^5^], which means they must learn to survive and create successful operational patterns despite limited resources [^6^]. Slightly older organizations may experience a “liability of adolescence,” where their failure rate follows an inverted U-shaped pattern as they age [^7^]. On the other hand, organizations in the decline phase attempt to find ways to extend their lifecycles in the market. Older organizations can also face a “liability of obsolescence” if they become inert and fail to adapt to changes in their environment [^8^].

To survive, increase profitability, and gain market share, firms must develop effective strategies. Organizations that can only survive within a limited range of resources are referred to as “specialists,” while firms that can thrive using a wide range of resources are known as “generalists” [^9^]. Empirical research has shown that generalist organizations tend to have a longer lifespan compared to specialized organizations [^10^]. Generalist firms typically operate at full capacity when responding to unforeseen environmental demands, whereas specialist organizations tend to focus on routine operations [^11^]. Generalist firms are also more likely to introduce new products and expand beyond their usual market segments [^11^]. However, the balance between generalization and specialization can be influenced by the typical duration of environmental fluctuations [^6^].

Research in this area has demonstrated that firms can face intense competition throughout their lifecycle, which can lead to failure. This has led to a curiosity to investigate the relationship between Porter’s generic strategies and firm performance as a means to mitigate the risk of failure. The findings from this study contribute to the strategic literature by providing empirical evidence and offering insight to business strategists who aim to enhance their organization’s chances of survival, increased profits, and market share.

In today’s highly competitive, turbulent, and volatile market, driven by rapid technological advancements, managers are seeking ways to create a competitive advantage and adapt successfully to the evolving technological and industrial landscape. One major area of strategy research examines the link between strategy type and firm performance [^12^,^13^,^14^,^15^,^16^,^17^], often referred to as generic strategies [^18^].

This paper will delve into the characteristics of Porter’s generic strategies, namely low-cost strategy, differentiation strategy, and focus strategy, and explore their relationship with firm performance. It will provide a literature review in the second section, present the research hypotheses in the third section, outline the methodology used to test these hypotheses in the fourth section, and analyze the model used in the fifth section. Furthermore, the sixth section will present the results of the hypotheses testing and provide a discussion of the findings. This study concludes with key insights and impactful conclusions.

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