Back to the Basics – Business Strategies

What Are the Different Types of  Basic Strategies in Business?

Some leaders act as if their companies are poised to outperform rivals and, as a result, fail to do the work necessary to devise an effective business strategy. Others attempt to create business strategies, but all too often the strategies are a bit wimpy and not worthy of the name. These leaders fail to recognize that the crux of a business strategy is to provide clear direction or one that supports forceful and coherent action on the part of business units.

A company can select one of three generic business-level strategies in its efforts to provide customer value: cost leadership, differentiation, and focus strategies.

Business-Level Strategy

A business-level strategy describes how a particular business unit will conduct its operations to create a source of sustainable competitive advantage. Whereas the focus of a corporate strategy may be to expand operations, the heart of a business-level strategy may be to cease efforts in a particular market to decrease a company’s marketing expenses. A business-level strategy enables the business unit to develop valuable capabilities, respond to environmental changes and provide a basis of functional-level strategies.

Cost Leadership

A company may compete on a price basis in an attempt to expand its customer base. To be a cost leader, a business standardizes its manufacturing processes to achieve operational efficiencies so it can lower prices but maintain a certain profit margin. The cost leadership strategy is effective when selling standard products and services that appeal to a large population of customers who represent a varied demographic.

The company might control costs by building state of the art facilities and by minimizing the cost of sales, research and development, and service. Wal-Mart is an example of a company that implements this strategy in part by offering “Great Value” products, which is the company’s brand.

Differentiation

Companies implement a differentiation strategy to provide customer value by offering products with unique features. A company might differentiate its products from those of its competitors by offering products of exceptional quality or with advanced technical features. The business might also provide extraordinary customer service and swift product innovation.

Companies that adopt a differentiation strategy include Ralph Lauren and Rolex. These companies may create customer value by creating quality products that require few costly repairs or by offering exceptional customer service.

Focus

When implementing one of two focus strategies, a company enters a narrow market to offer products that meet customer needs.

Using a focused low-cost strategy, a company offers a product at a relatively low price — but not necessarily the lowest price — to gain market share. The strategy is effective for products that offer no competitive advantage or economies of scale unless the product is manufactured in high volumes. For instance, Redbox uses vending machines placed in retail outlets to rent DVDs at a very low price rather than building brick-and-mortar storefronts to do so. Target uses a focused cost strategy to sell inexpensive household goods, clothing and other items.

With a focused differentiation strategy, a company competes in a small, narrow segment of its chosen market. For instance, a company may be a dedicated supplier to an airline manufacturer. As an alternative, a company might offer products on one sales channel, such as the Internet. Another company might target a certain demographic group, such as an apartment complex that caters to people over 65.

Having a clear and defined strategy is what separates truly successful business from the rest of the pack.
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