LYNCH. KELLER AND OZMENT Strategy is conceptualized as either cost leadership or differentiation as initially defined by porter and as examined by others Although Porter Identified a third choice, focus, several authors have made a convincing case that focus Is a subset of cost leadership or differentiation Capabilities are the skills and knowledge that enable firms to make use of their assets"There are many capabilities on which firms rely to pursue managerial objectives. Some are related to specific functions such as finance, operations, logistcs, OI marketing Few studies have thoroughly Identified and measured capabilities specific to functional areas, although an exception is logIstIcs, for whIch scales have been developed ' Moreover, logIstIcs Is mentioned frequently as a functional area that may provide sustainable competitive advantage and supenor firm performance" Thus, In his study, capabilities are defined as logistIcs capabilities OVERVIEW OF THE LITERATURE We begin with an overview of literature related to strategy, resources, distInctive capabilities. and logistics capabilities This is followed by an explanation of study methods, Including develop- ment of a model and hypotheses as well as discussions of the data constructs, and tests of reliabIlity and validity The hypotheses are tested, followed by the implications of the findings Finally, the limitations of the study are discussed, together with suggestions for future research Generic Business Strategies Strategy research focuses largely on factors external to the firm, such as market conditions and ompetition Porter identified three generic strategies differentiation, cost leadership, and focus These, although not mutually exclusive, are based on issues of competition and barriers to market ntry. Porter suggests that the firm s position in the market and its strategy are shaped by five market forces" These are the threat of new entrants, rivalry within the industry, buyer power, suppler power, and the threat of substitution A firm may pursue superior performance after careful consId eration of these market forces with the goal of either selecting an attractive industry or developing a strong competitive position within an ndustry It does this through a cost leadership strategy or a differentiation strategy Barney perceives thIs view of strategy as very externally( market)orented nd as dealing primanly with the opportunities and threats with which a firm must contend He contrasts thIs with an internally (resource)orented approach to strategy One shortcoming of the market forces perspective( Porter's generIc strategy ) Is Its inability to explain how firms achieve different levels of performance even when they compete within the same Industry and use the same strategy It may be necessary to include capabilities in the strategy performance relationship Porter himself stated, " CompetitIve strategy is about being difterent It means liberately choosing a different set of activities to deliver a unique mix of value The essence of strategy Is in the activities-choosing to perform activities differently or to perform difterent activities than rivals"Of particular interest to this study are the activities mentioned by Porter that seem closely tied to the capabilities associated with the resource-based theory of the firm