Business Level Strategy

Business-level strategy focuses on how to attain and satisfy customers, offer goods and services that meet their needs, and increase operating profits. To do this, business-level strategy focuses on positioning itself against competitors and staying up to date on market trends and technology changes.

Economist Michael Porter theorizes that there are two main types of business strategy: cost leadership and differentiation. A business can also integrate these two strategies.

A Business-Level Strategy can help your organization achieve a competitive advantage in the marketplace. They provide a way to provide value to customers by exploiting your organization’s core competencies.

Business level strategies are relate to a particular business are known as business level strategies. It is developed by the general managers, who convert mission and vision into concrete strategies. It is like a blueprint of the entire business.

Types of Business Level Strategies

1. Cost Leadership

Cost Leadership is a situation in which market leader sets the price of a product or service, and competitors feel compelled to match that price.

Cost Leadership is perhaps the clearest of the three generic strategies. In it, a firm set out to become the low-cost producer in its industry. The firm has a broad scope and serves many industry segments, and may even operate in related industries, the firm’s breadth is often important to its cost advantage.

The sources of cost advantages are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials, and other factors. A low-cost product must find and exploit all sources of cost advantage. Low-cost producers typically sell a ‘standard’ or ‘no frills’ product and place considerable emphasis on reaping scale or absolute cost advantages from all sources.

2. Differentiation

The second generic strategy is Differentiation. In a Differentiation Strategy, a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions it to meet those needs. It is rewarded for its uniqueness with a premium price.

The means for Differentiation are peculiar to reach industry. Differentiation can be based on the product itself, the delivery system by which it is sold, the marketing approach, and a broad range of other factors. In construction equipment, for example, Caterpillar Tractor’s Differentiation is based on product durability, service, spare parts availability, and an excellent dealer network. In cosmetics, Differentiation tends to be based more on product image and the positioning of counters in the stores.

In a differentiation strategy, a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions it to meet those needs. Differentiation will cause buyers to prefer the company’s product/service over the brands of rivals. An organization pursuing such a strategy can expect higher revenues/margins and enhanced economic performance.

The challenge in finding ways to differentiate that creates value for buyers and that are not easily copied or matched by rivals. Anything a company can do to create value for buyers represents a potential basis for differentiation.

Successful differentiation creates lines of defence against the five competitive forces. It provides insulation against competitive rivalry because of brand loyalty of customers and hence lower sensitivity to price. The customer loyalty also provides a disincentive for new entrants who will have to overcome the uniqueness of the product or service.

3. Focus and Niche Strategies

The third generic strategy is focus. This strategy is quite different from the others because it rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment of group of segments in the industry and tailors its strategy to serving them to the exclusion of others. By optimizing this strategy for the target segments, the focuser seeks to achieve a competitive advantage in its target segments even though it does not possess a competitive advantage overall.

The focus strategy has two variants, in cost focus, a firm seeks a cost advantage in its target segment, while in differentiation focus, and a firm seeks differentiation in its target segment. Both variants of the focus strategy rest on differences between a focuser’s target segments and other segments in the industry. The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments.

Cost focus exploits differences in cost behaviour in some segments, while differentiation focus exploits the special needs of buyers in certain segment. Such differences imply that the segments are poorly served by broadly targeted competitors who serve them at the same time as they serve others.

The focuser can thus achieve competitive advantage by dedicating itself to the segments exclusively. Breadth of target is clearly a matter of degree, but the essence of focus is the exploitation of a narrow target’s differences from the balance of the industry. Narrow focus in and/or itself is not sufficient for above-average performance.

A focuser takes advantage of sub-optimization in either direction by broadly-targeted competitors. Competitors may be underperforming in meeting the needs of a particular segment, which opens the possibility for differentiation focus. Broadly-targeted competitors may also be over performing in meeting the needs of a segment, which means that they are bearing higher than necessary cost in serving it. An opportunity for cost focus may be present in just meeting the needs of such a segment and no more.

There are two aspects to this strategy, the cost focus and the differentiation focus. In the cost focus, a firm seeks a cost advantage in its target market. The objective is to achieve lower costs than competitors in serving the market; this is how cost producer strategy focused on the target market only. This requires the organization to identify buyer segments with needs/preferences that are less costly to satisfy as compared to the rest of the market. Differentiation focus offers niche buyers something different from other competitors. The firm seeks product differentiation it its target market.

Both variants of the focus strategy rest on differences between a focuser’s target market and other markets in the industry. The target markets must either have buyers with unusual needs or else the production and delivery system that best serves the target market must differ from that of other industry segments. Cost focus exploits differences in cost behaviour in some markets. While differentiation focus explants its special needs of buyers in certain markets. A focuser may do both to earn a sustainable competitive advantage though this is difficult.

Focus strategy is successful if the organization can choose a market niche where buyers have distinctive preferences, special requirements, or unique needs and they developing a unique ability to serve the needs of the target buyer segments. Even though the focus strategy does not achieve low cost or differentiation from the perspective of the market as a whole, it does achieve this in its narrow target.

However, the market segment has to be big enough to be profitable and it has growth potential. The organization has to identify a buyer group or segment of a product line that demands unique product attributes. Alternatively, it has to identify a geographical region where it can make such offerings.

Focusing organizations develop the skills and resources to serve the market effectively. They defend themselves against challengers via the customer goodwill they have built up and their superior ability to serve buyers in the market.

The competitive power of a focus strategy is greatest when the industry has fast-growing segments that are big enough to be profitable but small enough to be of secondary interest to large competitors and no other rivals are concentrating on the segment. Their position is strengthened as the buyers in the segment require specialized expertise or customized product attributes.

A focuser’s specialized ability to serve the target market niche builds a defence against competitive forces. Its focus means that either organization has a low cost option as its strategic target, high differentiation, or both. The logic that has been laid out earlier for cost leadership and differentiation also is applicable here.