Using a sample of 229 Portuguese manufacturing organisations, this study examines the mediating role of innovation on the relationship between strategy and performance. Data was collected using questionnaire and a SEM was used to examine the relationships among strategy orientations, innovation and performance. In this study three strategy orientations found in previous studies were used: 1) marketing differentiation; 2) product innovation differentiation; 3) production and service efficiency. A set of hypotheses was tested, the results of which provided some insight into the importance of innovation as a mediator of a firm's performance. The results show a hierarchical sequence in the dissemination of innovation within a firm, beginning with innovative internal and external organisational practices. From a practical perspective, managers should be aware of the importance of innovation as an integral part of competitiveness because the success of any strategic orientation is very much contingent on such innovative capacity.