Abstract: Based on the publicly available financial data of Chinese listed companies from 2001 to 2006, two factors capturing firms’ competitive strategy tendency are contructed using Confirmatory Factor Analysis (CFA). These factors are then used in empirical models to explore the effect on the short term performance and the sustainability of firm performance. The results indicate that although both low cost and differentiation strategies have a positive effect on short term performance, the firms pursuing a differentiation strategy have higher performance than firms pursuing a low cost strategy. It is found that only the differentiation strategy allows a firm to achieve and sustain superior performance in the long range, because the advantages from low cost strategy are easily imitative and the competitive edges based on the differentiation strategy are difficultly imitative. In sum, the differentiation strategy is better than the low cost strategy at the aspect of achieving and maintaining sustainable competitive advantage.