Practically speaking, only three basic types of business strategy exist, a cost strategy, a differentiated product or service strategy, and a focus on a niche strategy. Understanding these strategies is critical to writing a good strategic business plan.
Types of Business strategy
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?
What is the definition of cost leadership? It’s a method to reduce costs and produce the least expensive goods in a market or industry in an effort 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 and if that cannot be achieved through an income increment, 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.
A company like Payless is a good example of this strategy. They try to limit the number of employees in their shops and allow customers to serve themselves in an effort to cut operational costs. These cost cutting measures allow them to offer brands that are of a certain quality at an affordable price. Their slogan suggests that customers can get the same quality goods at a lessor price than their competitors.
Wal-Mart is another example of this concept. They have made their operations so efficient and built such a large distribution network that they are able to get preferential pricing on goods and sell them to consumers for less than other retailers. For example, a Lego set at Wal-Mart might sell for 10 percent less than the same set at Target.
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.
Define Cost Leadership Strategy: 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.
The key thing to note about a low-cost strategy, however, is that the firm needs to retain some of the cost savings in order to earn a higher profit level than its competitors. Thus, simply being a low-cost producer isn’t enough. A firm needs to be a low-cost producer and still be able to price products and services at a level high enough that some of the cost savings are retained as profits.
2. Differentiated Product Strategies
The second basic strategy is product differentiation. Product differentiators often sell a very unusual product or service. The Nordstrom department store chain is a good example of this because it offers unsurpassed service, and often (although not always), it offers a great and high-quality selection of items. However, Nordstrom goods cost more. But consumers happily pay the extra amount. Why? Because they get so much more for their money.
What is ‘Product Differentiation’
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.
Product differentiation 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 the competitor items can, but that there is an additional benefit, such as additional features, higher overall quality or a lower cost.
Examples of Product Differentiation
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 two products are identical, other non-functional features can be highlighted.
This can be a simple as a change in design or styling, such as the product’s color. 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.
Effect of Product Differentiation
Aside from bringing in consumer interest, product differentiation as one of the types of business strategy 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 more speculative means, 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 one of the three types of business 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.
As a focus strategy retailer, Target focuses on suburban, middle-class customers by offering those consumers almost the perfect combination of cost savings and differentiated products.
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, is 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.