Understanding these strategies is critical to writing a good strategic business plan.
1. Cost Strategies
Cost leadership is one of the types of business strategy companies use to increase efficiencies and reduce production costs below the industry average or their closest competitor.
What Does Cost Leadership Mean?
Cost leadership means a company that reduces production costs relative to its competitors and thus can charge lower prices for its products than other companies in the industry to gain market share.
The modern business environment is a very complex and sophisticated one with consumers being aware of the choices available to them. One way firms differentiate themselves is through competitive pricing.
Businesses who have the least production costs are able to offer the same level of product quality compared to their competitor for a much lower price.
Consumers are constantly looking to increase their purchasing power. If that cannot be achieved through an increased income, then buying more at a lower price is the next best alternative.
Businesses who seek to be cost leaders tap into this opportunity to offer the average consumers great products at great prices.
Business Strategy Examples
American airline, Southwest Airlines, is known for providing passengers with lower airfare prices in comparison to competitors. They also provide passengers with additional perks such as free snacks which many other airlines have either removed or will charge extra.
This concept is just as prevalent in the manufacturing industry where firms develop new operations to cut costs in an effort to lower prices for their customers.
2. Differentiated Product Strategies
The second basic strategy is product differentiation. Product differentiators often sell a very unusual or innovative product or service.
Product differentiation is one of the types of business strategy that showcases the differences between products. Differentiation looks to make a product more attractive by contrasting its unique qualities with other competing products.
Successful product differentiation creates a competitive advantage for the product’s seller, as customers view these products as being unique or superior.
This can be as simple as packaging the goods in a creative way, or as elaborate as incorporating new functional features. Sometimes differentiation does not involve changing the product at all but creating a new advertising campaign or other sales promotions instead.
Product differentiation determines what sets one product apart from other similar products, and it uses that difference to drive consumer interest.
Product differentiation is often subjective, aiming primarily at altering customer perspective on one item when compared to another, even if the actual differences are minuscule or entirely aesthetic.
Ideally, it demonstrates that the product cannot only do everything your competitors’ items can but that there is an additional benefit, such as additional features, higher overall quality or a lower cost.
Examples of a Product Differentiation Business Strategy
Lower costs can relate to the initial purchase price or any operating and upkeep costs associated with the item.
For example, if Company X produces a coffee maker with the same features as Company Y, Company X may choose to offer a lower selling price for its coffee maker to differentiate it from the competitor.
If the accessories or a disposable part of Company X’s offering cost less than Company Y’s, this can differentiate between the two products.
When functional aspects of the two products are identical, other non-functional features can be highlighted.
This can be as simple as a change in design or styling, such as the product’s colour.
At times, the most effective way to make one product stand out from another is with unique advertising. In that regard, it may be possible to differentiate one brand from another when no discernible differences in the products actually exist.
Effects of Product Differentiation
Aside from bringing in consumer interest, product differentiation business-level strategies may increase brand loyalty and even allow for a higher price point.
If a product is perceived to be better than competitors, whether that belief is based on fact or not, it may encourage consumers to purchase the brand due to its image.
Certain images may even allow for a higher selling price if the item is seen as highly desirable.
A firm that relies on a differentiation strategy competes on the basis of the special features of its products or services. The key to making this strategy work is being able to charge your customers more for those special features than the special features cost you.
Differentiation needs to produce increased revenues in excess of increased costs.
3. Focus Strategies
The focus strategy is really a hybrid of the cost and differentiation strategies.
This business-level strategy states that in some ways, a firm is really good about managing costs, and in other ways, this firm is really good about differentiating products or services.
A firm may choose to take this hybrid approach because it understands a particular audience or niche of customers or category of products.
In other words, the firm can, through this focused approach, serve a particular market better than anybody else. This firm is going to be the best at serving a particular niche.
Firms that are successful in a focus strategy are able to tailor a broad range of product development strengths to a relatively narrow geographic market segment, or to a particular buyer group or segment.
They also target market segments that are less vulnerable to substitutes or where a competition is weakest in order to earn an above-average return on investment.
The first two types of business strategy are aimed at achieving their objective industry-wide. Focus strategies, however, are built around serving a particular target or niche extremely well.
The strategy is based on the assertion that the firm can serve its narrow strategic target more effectively or efficiently than more broadly based competitors.
If you want help with your business-level strategy, or any other element of your marketing plans, contact ProfileTree today.
Definition: A business level strategy defines a business’s goals and policies to deliver value to customers and have a competitive advantage over competitors. It determines the direction of the business, establishes its brand, and defines how a business serves its customers.
These strategies help businesses satisfy their customers, avoid competition and achieve an edge over rivals.
Adopting the right business strategy is vital for a successful business. A business first identifies its target customers, product range, available resources, competition, market trends, capability, etc. Afterward, they can formulate the business strategy to serve the consumers well.
According to Michael Porter, a business can have three levels of strategies:
- Corporate Level Strategy
- Business Level Strategy
- Functional Level Strategy
Business strategy is in the middle of the Porter pyramid, and today’s article will discuss this strategy in detail.
Types of Business Level Strategies
Porter grouped business strategies into three categories:
- Cost Leadership
- Differentiation
- Focus
#1. Cost Leadership
Cost is key to business.
All businesses compete for pricing, which determines profit margin. A low-priced product can attract a large audience but affect the profit margin, and a high-priced product serves fewer customers, but the profit margin will be high.
Product pricing is a key marketing parameter that helps businesses survive and stay ahead of the competition.
To lower the price, an organization can adopt the following practices:
- Use a simpler process
- Buy consumables in bulk to get the benefit of economy of scale
- Emphasize quality to lower the after-sales cost
- Use standard parts
- Train employees for better performance
An example of a cost leadership strategy is Amazon. Their profit margin is razor-thin, but they are profitable because of economies of scale. They attract large customers by offering products at a lower price.
#2. Differentiation
Being different is key to many businesses’ success. A business can position itself as a market leader through this strategy.
Apple’s products are known for high quality and price. Consumers buy them even though they are pricier than similar products. They care about being different and good quality. This approach supports quality over price.
However, this approach is not applied to price-conscious consumers, who do not buy the high-priced product when a similar lower-priced product is available.
Implementing this strategy is challenging, as developing a unique and different product is not easy.
Businesses study the market to find what competitors are missing and consumers’ requirements. Then they invest a lot of effort in ensuring their product fulfills customers’ requirements and includes features missed by the competitors. Also, the product must be of high quality.
An effective differentiation strategy can take a business to the next level, offering better customer satisfaction and higher profits.
Organizations can adopt integrated low-cost differentiation strategies or high-cost differentiation strategies.
An organization focuses on low-priced products to serve a bigger consumer base in a low-cost integrated strategy. Here, businesses focus on their core competencies, learn to produce products at a lower price, and keep the profit margin low.
Though they do not provide many value-added services, they instead focus on their core service and keep the customer happy. A combination of low price and being different help them cater to a larger market and achieve positive growth. An example of this strategy is budget airways.
High-cost differentiation strategies are adopted by larger businesses to serve a specific niche. This helps them provide the best service and earn premium profits.
#3. Focus
In this business-level strategy, organizations focus on a particular group of consumers and target them with special offers. Since the audience size is limited, organizations can offer a unique experience and serve them in the best possible way.
Usually, competition is not tough in this segment, but consumers are demanding and care about quality and reliability.
An example of this strategy is Rolls Royce. Their cars are costly and designed as per users’ requirements. No other car manufacturer does this.
They offer customers a unique experience and a high-quality product, and customers feel honored using the product.
Many organizations focus on low-cost products. They learn innovative ways to produce a product at a low cost and serve a particular niche.
They use many techniques such as economy of scale, simpler processes, standard parts, skilled employees, focus on quality, etc., to keep the product price low and customers happy.
Usually, small businesses adopt these strategies as they have fewer resources and cannot offer multiple products or serve a larger audience. This strategy requires better marketing and high product volume to benefit the economy of scale.
This business strategy is known as the Focused Low-Cost Strategy.
Summary
Businesses have three strategies – cost, differentiation, and focus – to use and compete with the market. Cost strategies focus on offering low price products to capture the market. Differentiation focuses on unique and different products and particular market segments. Focus targets a limited number of niche consumers.
Every business is unique, and organizations should select business strategies based on their competencies and the market conditions. Businesses do not require all strategies, so they should choose the best strategy to excel.
The goal must be to have a different high-quality product, an edge on the competition, serve the customer well, and earn profits.