Abstract: The effects of basic competitive strategy on firm performance have always been a focus in academic circles; however, there is the divergence on the findings of the empirical studies. Based on the extant correlative literature, a conceptual model to embody the relationship of competitive, innovation selection, and firm performance is constructed by using incremental innovation and radical innovation as mediators. An empirical study with a sample of 316 firms from questionnaire is conducted. The results show that both low cost strategy and differentiation strategy have a distinct positive impact on the firm performance, but their respective influence mechanisms are different. Low cost strategy can effect on the firm performance both directly and indirectly by a mediator of incremental innovation, but differentiation strategy only inderectly effet’s on the firm performance by a mediator of radical innovation.

Key words: low cost strategy, differentiation strategy, incremental innovation, radical innovation, firm performance