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.

"Chapter 3.3, Measurement of Risk and Variable definition:
Several different measures of risk have been discussed in the strategic management literature. In order to evaluate which measure of risk is appropriate for the study at hand, it is helpful to review recent findings on the significance of risk measures. This is done in the next section as well as a presentation for the variables chosen for the study at hand.
Miller and Bromiley identified three groups that represent the variables used in the literature to measure risk: stock returns, financial ratios, and income stream uncertainty. In the first group, stock market returns, systematic risk and unsystematic risk are measures of risk. Systematic risk is the sensitivity of the return on a firm’s stock to general market movements. Unsystematic risk is a unique firm or industry risk, not shared by the market in general. Investors can eliminate unsystematic risk through portfolio diversification. Various studies have used systematic and unsystematic risk as a risk measure. Aaker and Jacobsen found that systematic and unsystematic risk have a significant positive influence on performance from a shareholders’ perspective. The logic behind their argumentation is that firms with high unsystematic risk tend to have problems attracting better managers that can improve performance.
- The second group of risk measures is based on financial ratios, such as the debt-to-equity ratio, capital intensity, and R&D intensity.
- The debt-to-equity ratio is a standard measure in corporate finance to measure a firm’s risk of bankruptcy. It measures the relationship of a firm’s total debt to the sum of common equity. A firm’s risk of bankruptcy increases with an increase in debt. Capital intensity is the ratio of capital to sales. Corporate risk increases if a firm uses large amounts of capital that can become obsolete if technological change makes a capital investment worth little or nothing. R&D intensity reflects the extent to which a company chooses to develop new products. Uncertainty about the successful development of new products is twofold.
First a firm does not know specifically the relationship between R&D investments and the actual introduction of new products. Second the firm does not know specifically if rivals introduce products that affect the value of the R&D investment. R&D intensity is measured by the ratio of R&D expenditures to sales.
- Stock returns and financial ratios cannot be taken into account in this investigation due to a lack of financial data about capital structures or stock prices. Therefore the study focuses on the third group of risk measures: Income stream uncertainty. Income stream uncertainty includes historical returns variability and measures derived from analyst’s forecasts. In strategy research, historical fluctuations of income streams are among the most common risk measures, because reductions or fluctuations in revenues often result in unpleasant managerial actions, such as lay-offs or reductions in capital investments. Stable revenues though, result in the adequate implementation of corporate strategies and increase the stability of employment, which reduces the firm’s risk. Risk measures derived from analysts’ forecasts interpret deviations in earnings per share as an indicator about the uncertainty for future income streams.
Miller and Bromiley point out that the best proxy for measuring risk is revenue volatility, because stable revenues make it easier for management to deal with different stakeholder groups. The greater the amplitude of fluctuations, the higher is the probability that a firm will come in financial distress in the future. This can be examined by measuring the fluctuations of revenues from past years.
The survey (Appendix I, question 1.6) provides data about revenues from three years. These revenues form the basis of the risk variable, because the fluctuations of the revenues are measured on behalf of a variance formula.
Main Variable:
According to Porter’s taxonomy strategic memberships of firms (Appendix I, question 10.1), form the foundation for the independent variables of this study. Firms are categorized among cost leadership (‘cost leadership’), differentiation (‘technological leadership’,‘industry leader in bringing new products to market’,‘industry leader for the implementation of new processes and practices’) and focus (‘individualized solutions to customers’,‘specialization on market segments’).
A fourth group is implemented, which represents those firms that do not have a clear strategic orientation towards one of Porter’s strategies (‘stuck in the middle’). Since firms rate for themselves which strategy they pursue, it is assumed that strategic membership is precisely examined.
Firms can choose among four scales in how far they pursue a strategy. Porter’s strategies are detected if a respondent ranks its strategy on one of the three possible categories at the highest scale. If there is no clear categorization possible than a firm comes in the fourth group, stuck in the middle. This procedure helps to clearly separate those firms that concentrate their strategic orientation towards one of Porter’s strategies and those firms that have multiple strategic orientations.
- Figure 4 shows the distribution of strategic choices among the sample under investigation. From the 3.606 firms 152 can clearly be characterized as firms with a differentiation strategy, 392 firms have a cost leadership strategy and 334 firms have a focus strategy. The biggest fraction is the fourth group, stuck in the middle with 1836 firms. Firms that are neither considered as firms with a Porter strategy, nor stuck in the middle (n=892), have strategies that cannot clearly be assigned to one of the four groups. Examples include firms that have their main competencies in forming alliances, or reacting to innovations from competitors. These firms are not considered for further analysis."