Which kind of strategy have you adopted for your business? Is it the right one?
“If you build it, they will come” doesn’t necessarily ring true anymore when you’re just a fish in a big competitive ocean. To get an edge over your competition, a business-level strategy is needed for long-term success.
There are many types of business-level strategies – too many to count! Here, we’ll take you through the five main strategies so you can weigh up which is best for you, or even discover if you’ve been using the right one.
What is a business-level strategy?
Put simply, a business-level strategy addresses the question of how a business aims to compete in its particular industry. In other words, it’s how a business differentiates itself from its competitors.
It may now be easy to grasp what a business-level strategy is, but it gets a little more complicated when you try to figure out which strategy to use.
There are so many ways a business can stand out from the crowd and different business strategies that one could use – the trick lies in finding the right strategy for your business.
Let’s look at a simple example: Let’s say you’re a new pizza restaurant opening up in town, you’d need to figure out if you’ll be competing by say offering the lowest-priced pizza (cost leadership strategy). On the other hand, you could opt for being unique by opening the first vegan pizza in town (differentiation strategy).
The 5 different types of business-level strategy:
Although there are many different types of business-level strategies, we’ll take you through the five main ones. Use them wisely to find your business’s competitive advantage…
- Cost leadership – competing with a wide range of businesses based on price
- Differentiation – competing by using a product or service with entirely unique features
- Focused differentiation – not only competing through differentiation (uniqueness of product/service) but also by selecting a small portion of the market to focus on
- Focused low-cost – competing not only through price but by also selecting a small portion of the market to focus on
- Integrated low-cost differentiation – competing by using both low cost and differentiation
Keep reading for more detail about each of these along with business strategy examples for each!
1. What is cost leadership?
A cost leadership business-level strategy is a strategy that businesses use to increase efficiency and reduce production costs to make it below that of the industry average (or competition in the area). In other words, a business charging lower prices for its products than others in the same industry – the cheapest of its kind around!
Consumers are becoming more and more aware of the choices available to them. They’re often on the lookout for how to increase their purchasing power. One way to grab their attention is to use a pricing strategy that no one else is using – one that customers simply can’t refuse. Using this business strategy could gain you more business due to offering a much stronger value proposition to customers.
How is cost leadership applied to businesses?
A business could lower the final cost of their product or service by cutting costs elsewhere in the business. For example, by having small production costs (buying on a large scale for example), few middlemen, fewer employees, etc. Such businesses can offer the same level of quality products or services compared to their competition. This allows them to offer the very same thing for a smaller buck.
Wal-Mart and Costco are good cost leadership business strategy examples. Their operations are so efficient and large scale that they can get the lowest pricing on goods, enabling them to sell them for prices of a much more affordable nature than other retailers.
Who is cost leadership best for?
This strategy will only work if you can lower your production costs enough to still make a profit at the end of the line and outprice your competition. This means it’s often best for larger corporations as they are able to buy in larger quantities (thus lowering production costs). It may not be the best idea for Mom and Pop stores or small chains. For elite brands such as Gucci or Apple, a cost leadership strategy is out of the question and likely to backfire (read more about how small businesses compete with big corporations).
- Increase profits – by gaining more business
- Market domination over time – unless your competitors are willing to undercut (and go into the minus) it will become impossible for competitors to survive allowing for market domination over time
- Improves business stability – when a trade war occurs or a downturn in the economy, companies with the lowest prices and costs survive
- Requires a large sales volume for success – it’s most successful when a large volume of sales is reached to maintain profitability
- Requires capital that may not be available – must be able to achieve large sales volumes while scaling before running out of money. If the business is unable to reach stability before depleting capital reserves, then they could find themselves filing bankruptcy. This is why taking a Line of Credit or Business Loans is a good idea for all businesses to keep cash flow flowing, and allow for expansion
- Could cause cuts in areas that harm the business – this strategy is all about cutting costs, and corners, which could mean cutting costs in critical areas such as customer support and R&D (thus reducing product innovation)
2. What is differentiation?
A differentiation strategy is all about providing a product or service with unique attributes when comparing against the competition (something that Become has gotten very adept at doing!). It’s all about making the product or service really stand out from the crowd – one that solves a problem that no one else has. It requires innovation and out of the box thinking. To execute the differentiation strategy, you’d need to conduct extensive market research to find a gap in the market that needs filling, or by improving an existing product or service.
How differentiation is applied to businesses?
Differentiation is applied to businesses by simply taking a product or business and making it better or different than the competition. There are many examples of differentiation in the real world – take the cosmetics brand LUSH for example. They are advocates of handmade and ethical buying, making them stand out from their competition (Sephora and Etsy). Their shops offer quality customer service with a one-of-a-kind retail experience where customers can touch, try and feel the products in the store.
Who is differentiation best for?
Differentiation is one of the main strategies that businesses use to compete for customers in their industry. Just about any industry or business could use this technique. The trick is to find the pain-points of your competitors’ customers and solve them.
- Turn clients into fans by creating brand loyalty – the right small business branding strategy can make all the difference. If people love what you’re doing, they will share it. This shows when taking the LUSH example above – they have a huge fan base!
- Marketing efforts become easy – when you have a unique selling point (USP), it makes it much easier to market your product or service
- If you create a product in high demand, you can price it higher!
- High cost – providing a distinct quality could make for high research and development costs. New product elements could increase the final production costs
- Too different could be bad – if a product is too unfamiliar or complex to the consumer, they may shy away
- Excludes some buyers – you can’t please everyone and by differentiating to a very small niche – if said niche isn’t large enough you may not become profitable
3. What is focused differentiation?
A focused differentiation business strategy involves targeting a specific or small group of customers with differentiated products. This means your product or service should have unique features that meet the demands of a niche market.
How is focused differentiation applied to businesses?
Niche or “narrow” markets can be defined in many ways, it could, for example, mean focusing on a particular sales channel such as only selling online. It could also be in terms of a demographic group, think of a hotel that offers many activities for children (or without). Both these hotels have focused their differentiation to a particular market – one with children, and one that is dedicated more to romantic couples looking for peace and quiet.
Consumers seeking out a unique product such as a high-end camera, or environmentally safe nail polish (you name it) are willing to pay premium prices.
Who is focused differentiation best for?
In markets where product comparison knowledge is very important (such as camping equipment), new stores could find it difficult to compete with firms that are following a focused differentiation business strategy. This type of strategy is good for businesses that have found a niche they’d like to specialize their products or services in that also has sufficient demand. Just make sure to do plenty of market research before you dive in.
- Can charge very high prices – even higher than those simply following the differentiation strategy, as you are offering a unique experience/product/service
- Competition is limited – if you’ve specialized in a very niche area, to a niche audience, you’re likely to have limited competition
- Build customer loyalty – if you’re selling, for example, plastic-free eco-friendly shampoo bars, you’re going to target a very specific individual that despite higher prices, will continue to return to you for shampoo due to the health benefits to hair and the environment, thus building strong customer loyalty
- Limited demand could limit growth capabilities
- Your niche could simply disappear or be outcompeted by larger competitors (think about gun stores that went under when WalMart and Wholesale Sports starting selling firearms)
- Could be outcompeted by businesses adopting an even narrower focus – think about a clothes store that sells winter apparel vs a new store that specializes in gloves. A consumer that needs gloves specifically may choose the glove store as they can receive more choice and specific guidance there
4. What is focused low-cost?
A focused low-cost business strategy is very similar to a focused strategy – one that focuses on a small niche of customers but with one small difference, you guessed it – it’s lower cost!
If your business doesn’t appeal to a larger market, then it’s best to focus on a niche. You may not be able to have low prices for all of your products and/or services, you can try to be the lowest-cost provider in the market for that specific niche. This could help your business to stand out against its other competitors.
How is focused low-cost applied to businesses?
Rather than having low prices all around, you’ll pick and choose which products have ‘normal’ prices and one specific one or two that’s much lower.
Businesses will not only compete on price but also a very select small segment of the market, one example, is a company that sells to the government alone.
Who is focused low-cost best for?
This strategy can be effective when there’s competition but competitors are not strong or if a small or specific segment of customers are capable of creating a remarkable difference in the revenues.
- Low cost
- Draw in a narrow market segment
- Increase brand affinity – from having a specialized product
- Could be too specific for the market – make sure there is enough demand for your product/service
- Future growth could be limited – if you specialize too much, then future expansion could be tough
5. What is integrated low-cost/differentiation strategy?
An integrated low-cost/differentiation strategy is where a business has differentiated products that are offered at a lower cost. This new hybrid business strategy could be on it’s way to becoming increasingly popular as global competition increases. Compared to companies relying on a single strategy, those that integrate two may be able to position themselves to adapt much quicker to environmental changes.
How is integrated low-cost applied to businesses?
Products and services from businesses following this model aren’t as differentiated as those following the differentiation strategy, nor are costs as low as the low-cost leaders. Using this “midway” strategy means that businesses must be able to consistently adapt by reducing costs while adding unique (differentiated) features to keep the customer happy.
Hybrid business strategy examples include Air Arabia. The clever flight company offers quality service when it comes to comfort but offer an economic fare by simply cutting back on premium in-flight services. Another great example is IKEA who both differentiate in design and offer low-cost products. It seems, just competing on price is no longer enough!
Who is it best for?
This hybrid business-level strategy is good for businesses that have a market niche where the buyer’s needs and preferences are different from the rest of the current market. If you want your business to really stand out and have the manpower to focus on both differentiation, and low-cost production to keep the price down – then this strategy could be best for your business.
- Great for gaining customer loyalty – there’s a huge value for customers both in the product and price
- Adaptable business model – can easily adapt to environmental changes
- Your business will have both unique features and be relatively low-cost
- Involves compromise – you’ll neither be the lowest cost nor the most differentiated company
- Risk of becoming “stuck in the middle” – the company could lack the expertise that comes with directly following either a cost leadership or differentiated business strategy
- Multi-tasking – the business needs to be capable of simultaneously focusing on reducing costs and adding unique features that customers value and are willing to pay a slightly higher price for
How to choose the right business-level strategy for your company
You may now be scratching your head and wondering which of these business-level strategy examples is best for your business. Here we’ll give you a few questions you should ask yourself when picking your strategy.
1. Is your company’s market broad or narrow and who are your customers?
Broad = a wide market
Narrow = limited to one or a few market segments
2. Figure out whether the competitive position focuses on the lowest total cost or if it focuses on product differentiation.
Low cost = your company works to achieve the lowest costs in production and distribution
Product or service leadership = your company is putting a focus on a product/service that’s unique from the competition
3. Put it all together – once you have a firm idea of your business’s competition, audience and competitive position, you should be able to see where you fit and begin developing your strategy
How to develop and implement a business-level strategy
Once you’ve chosen which business-level strategy you feel will work best for your business it’s time to create your business’s goals (including your company’s vision) and pricing strategy. Once you’ve got that down, a strategic plan can be created outlining how to achieve them. Make sure to check in on your progress to make sure you are really scaling your business.
There are so many different business strategies, here we outlined the top 5. To choose and implement the correct one, you’ll need to put yourself in your customer’s shoes, look at the market and think deeply about the core foundations of your business. With this in mind, developing your strategy should become much, much easier.
Good strategic planning can seriously impact the outcome and profits of your business no matter how big or small.