Porters (1980) Generic Strategies, Performance and Risk

Porter s (1980) book Competitive Strategy has received a great deal of attention in the strategic management literature. Here Porter claims that competitive strategy is the search for a favorable competitive position in the industry, which can erode or improve, depending on a firm s choice of strategy. He derived a conceptual typology of three generic strategies that has already become a classic among scholars. They are cost leadership, differentiation and focus strategies. Just recently Michael Raynor (2007) challenged Porter s widely accepted typology, by including another dimension in the discussion that previously did not find consideration: risk. He claims that firms that execute pure strategies are much more exposed to corporate risk than firms that execute hybrid strategies. Two arguments support his view. First Porter s and other studies include what is called a "survivor bias", meaning that firms that went bankrupt during the investigation (with a pure strategy) do not play a role in the analysis. Second firms that have hybrid strategies are much more flexible when market preferences shift and are therefore less exposed to strategic uncertainty. Raynor s work is a valuable extension to the strategic management literature that leads to an assessment of strategic choice on at least two dimensions: profitability and risk. The contribution of the study is then twofold. First Porter s typology is tested with German data. Secondly Raynor s argument is tested, whether the very same firms that are more successful have a higher risk of running into corporate bankruptcy. In order to have the necessary information, the first section of the study reviews the literature. Here the generic strategies are explained and the most important studies on the topic are summarized in a table. Then the "Strategy Paradox" is presented that describes Raynor s argumentation for an increase in risk with pure strategies. Two conflicting theories are mentioned that deal with the question whether risk and return is positively or negatively related. In between this first part, two hypotheses are given that are tested with data from the Centre of European Economic Research in Mannheim (ZEW). Section 3 presents the dataset, the variables and the methodology. The results are analyzed in section 4 and the differences in performance and risk are compared among the strategic groups. In section 5 the most important results are discussed and potential explanations are given that lead to suggestions for further research. Additionally implications for managers are proposed and the limitations of the study are mentioned. The paper ends with a conclusion and a personal view on the discussion.