Porter's Generic Strategies and Firm Performance
Discussion of the findings and their implications
In this section, the discussion will go deeper inside Porter's generic strategies and their relationship with firm performance. Also, alternatives to pursue each of the three generic strategies and their implication on the practical implementation are presented.
The first hypothesis (H1) has declared that low-cost strategy has a positive relationship with firm performance. The firm that pursues the low-cost strategy will increase its performance. Empirical results provided that low-cost strategy explains 31.2% of firm performance; based on this result, H1 is accepted (H1↑). The results of Table 7 show that for each 1% of applying an increase in low-cost strategy in firm performance will be raised with 31.2% if other variables remain unchanged. This result shows that if an organization is implementing the low-cost strategy will have higher performance than its competitors that operate in the same industry but are not pursuing the low-cost strategy. The competitive advantage achieved by the low-cost strategy may be vague when competitors in the industry start to imitate that strategy. Low-cost strategy enables the firm to sell its product/service with a lower price compared to its competitors because of lower costs of producing products/service; as a result of this, they win a competitive advantage in the industry. According to Kume, firms that follow low-cost strategy have two advantages: (a) for the sake of low cost, firm is capable of selling products and services with lower prices than its rivalries and of having the same level of profit with them; (b) if fighting for the competition is raised, the cost leader is more resistant compared to other competitors.
The second hypothesis (H2) has declared that differentiation strategy has a positive relationship with firm performance. The firm that pursues the differentiation strategy will increase its performance. The empirical results provided that differentiation strategy explains 43.9% of firm performance; based on this result, H2 is accepted (H2↑). For each 1% increase of applying differentiation strategy, the firm performance will be raised by 43.9% if the other variables remain unchanged. Even firms that apply differentiation strategy suffer from the imitations action by the competitors in that industry. Differentiation strategy enables firms to sell their product/service with a higher price than its competitors in the industry because firms that pursue differentiation strategy meet the needs of consummators in the way that competitors cannot fulfill; matching of these unique needs derives as a result of offering unique products or services by the firm. These firms firstly investigate the market with the aim to identify the consumers' needs and then offer the unique service/product in accordance with consumers' need.
The distinction between pursuing low-cost strategy and differentiation strategy is that: Low-cost strategy is related to economizing operations processes of productions that make possible to produce products/services with low-cost, whereas differentiation strategy is related to uniqueness of operational processes on the value chain that makes possible to produce products/services in a unique way which increases the value of its products, and as a result of this, the price of its products is increased as well.
The third hypothesis (H3) has declared that focus strategy has a positive relation with firm performance. The firm that pursues the focus strategy will increase its performance. The empirical results provided that focus strategy explains 31.5% of firm performance; based on this result, H3 is accepted (H3↑). For each 1% increase of applying focus strategy, the firm performance will be raised by 31.5% if the other variables remain unchanged. Pursuing the focus strategy enables the firm to sell its product/service in a "niche" market that is not occupied by competitors. Focus strategy gives a competitive advantage until the moment when its competitors show interest in this part of the market. When this niche market becomes an attractive part for competitors, the firm will be faced with higher competition. In this situation, competitive firms will be forced to pursue low-cost strategy or differentiation strategy in order to survive and to increase profitability or market share.
To sum up, the application of Porter's generic strategies brought an increment to respondent firms' performance. H1, H2, and H3 are accepted/supported. Firms that apply low-cost strategy, differentiation strategy, and focus strategy have better performance compared to firms that do not apply Porter's generic strategies. In this study, as a result of the empirical analysis, which of the generic strategies has a higher impact on firm performance? can be identified. Results from respondent firms have shown that the firms that apply the differentiation strategy have a higher performance compared to firms that pursue the low-cost strategy or focus strategy. The visual appearance of linking Porter's generic strategies to the firm performance that is generated from the empirical analysis can be summarized as shown in Fig. 2.
Fig. 2
Results from this study for the process of Porter's generic strategies' impact to firm performance. Notes: Standard deviations in parentheses.*p < 0.10; ***p < 0.01; b = non-standardized coefficients.
Therefore, the results of this study suggest firms follow more the differentiation strategy compared to two other generic strategies. Bearing in mind the reason that, if firms apply the low-cost strategy this is going to be the first step toward the destruction of their industry in the long-term period. If one firm lowers the price for its product/service, then the competitors in that industry will apply the same strategy (lowering the price for their products/services). Low-cost strategy in a long-term period does not bring the new consumers in the industry but only bring displacement of consumers from one firm to another. As a result of this movement, zero-sum effect is created (one more customer for a firm equals to one less customer for other firms that operate in the same industry, consequently, occur customer movement between firms without bringing new clients in the industry).
On the contrary, a firm that pursues differentiation strategy in the short- and long-term period enables to increase the firm performance. In the short-term period, this method brings profit to the firm as a result of the competitive advantage that is provided by a unique product/service with higher quality than competitors. In the long-term by pursuing the differentiation strategy provides an added value of all industry. As a consequence of strategy imitation by competitors provides a higher quality of product/service that leads the industry on a higher level of quality. By analyzing very clearly, how works this strategy and what advantages it will bring in the industry? It can be explained as: the main objective of the organization managers and strategists is increasing the firm performance over time, but the existing of numerous competitors makes it not easy to achieve it. In the competitive market, the way that firm managers follow to achieve the objective is product/service differentiation, by trying to create something unique in order to be attractive for consumers. This uniqueness can be done by increasing the existing product/service values that are present in the market or bringing new and better products/services in the market. Both of these ways set a higher value of products/services in the industry.
To further simplify these implications, two levels of economic priorities, winning priorities and qualifying priorities, can be used. The winning priorities mean the added value of products that help firms to achieve a competitive advantage in the market, whereas qualifying priorities mean the standard value of products/services that are operating in the market. When new firms try to enter in the market, they should provide products/services at the same level of value with existing products/services in the market. In accordance with these two economic concepts, when firms pursue the differentiation strategy, the winning priorities are created which make them dominate in the competitive market, but in the long-time period, the competitors in order to compete with that industry should copy existing firms' strategy to create products/services in the same value. As a result, in the long-time period, the winning priorities become qualifying priorities; this is the reason why we stress that the value of the industry will be increased by using the differentiation strategy. Firms that pursue differentiation strategy create unique products or services that distinct those by competitors, as a result of accomplishing unique needs and demands of consummators. Our findings suggested that in an economy that competition is getting stronger, where markets are opening, competition is rising, the firms have to earn their success and in order to earn their success, they need to have a strategy, and this strategy should be the differentiation strategy. Firms must focus on bringing a unique product/service, to accomplish unique consummators needs.