Generic strategies and financial performance persistence in the banking sector in indonesia

Abstract

This study investigated the association between bank strategic positioning and performance. The central issue in the management literature has been to identify the sources of competitive advantage that allow firms to achieve and retain persistent superior performance over their competitors. Either cost leadership or differentiation strategy could build a bank’s competitive advantage. Hypothetically, a cost leadership strategy creates competitive advantages through operational efficiency, hence, the superior performance of banks which adopt such strategies logically to be more persistent over time compared to banks with a differentiation strategy. This study conducted an empirical investigation of the hypothesis using a sample of 216 firm-years over the period 2009-2013. Constructs from audited financial-level archival data were developed to capture a bank’s strategic positioning. These constructs were then used in empirical models that explore the persistence of bank performance. Using confirmatory factor analysis, the empirical results indicate that although both cost leadership and differentiation strategies have positive effects on contemporaneous performance, only a cost leadership strategy allows a bank to have persistent superior performance in the following period.