Types of Business Strategies – IBM Blog

In today’s business environment, regardless of product or service, leaders must develop a well-defined business strategy. Without clarity and intention, even the most innovative companies have little chance of success. A successful business strategy must clearly define the organization’s goals, decision-making processes, and long-term business goals. Decisions must also be made with a holistic view of the existing environment, considering the organization’s target markets and key competitors to promote long-term success. Through decades of research, business thinkers have identified several types of business strategies that can help guide an organization’s planning.

The Value of Business Strategy

Developing a business strategy requires critical thinking and extensive market research. As Professor Felix Oberlholzer-Gee of Harvard Business School emphasizes, effective business strategy requires a deep understanding of the company and profound optimism about its potential to achieve outstanding performance. To gain a nuanced understanding of their organization’s future operations, business leaders must carefully consider their key goals, core strengths, and target customers. It is important to identify the people they serve and determine the most effective way to communicate with them.

When an organization engages in comprehensive strategic planning, a well-defined business strategy can:

• Guide your decision-making process to prioritize initiatives and allocate resources effectively.
• Helps all employees have well-defined goals and a clear mission for the organization.
• Strengthen your competitive advantage by gaining a sustainable, informed advantage over your competitors.
• Build an agile company with the ability to quickly adapt to market changes.
• Facilitates long-term planning as the organization grows.
• Provides a practical basis for performance benchmarks and employee evaluations.

3 Broad Types of Business Strategies

Business strategies vary depending on the competitive environment and operations of a particular organization. However, business experts and organizations have identified several specific types of strategies. These business strategies can be categorized into three types:

1. Corporate-level strategy

This strategy represents decisions made by the top management of an organization. This often involves big picture thinking and involves issues such as mergers and acquisitions, portfolio management and diversification.

2. Strategy by function

Functional-level strategies are executed on a small scale and focus on specific departments or business areas, such as human resources (HR) or finance. It is deployed to improve operational aspects of an organization and support enterprise-level or business-level strategies.

3. Business-level strategy

This type of strategy is what most people understand as a business strategy. This concerns how the organization seeks to gain a competitive advantage in its chosen market, whether through differentiation, competitive pricing, or expansion into new markets.

Comprehensive business-level strategies are typically combined with other strategy types. For example, an operations strategy helps align production and delivery processes with the overall business plan. Aligned with the overall business strategy, an innovation strategy guides how an organization integrates new ideas or products into its overall plan.

Ideally, a well-defined business strategy should impact every department and aspect of an organization, providing clear priorities and goals across teams such as marketing, research and development, and HR. With a clearly defined strategy early on, an organization can efficiently develop ancillary business processes such as forecasting or process management.

Evolution of the Core Business Strategy Framework

In the 1980s, Harvard Business School professor Michael Porter developed a set of general strategies that subsequent researchers have built upon. These strategies continue to underpin the most widely used business approaches. Large and small businesses still use these classic business strategies. Porter’s original theory identified three basic types of business strategies, one of which was later split into two variants: These three core strategies are:

1. Cost leadership strategy

Cost leadership strategies focus on gaining market share by providing goods or services at the lowest possible cost. Typically, these organizations operate on a large scale using franchise networks to increase efficiency and speed. In organizations pursuing a cost leadership strategy, competitive advantage lies in offering the lowest cost products to a broad audience. It allocates relatively few resources to research and development or advertising compared to other strategies. This is because success largely depends on economies of scale.

This focus on efficiency and scale can help these organizations withstand challenges from competitors and can often result in higher profits. But that same focus on efficiency can hinder the ability to adapt quickly. If the perception is that your organization’s low prices equate to low-quality products, this can have a negative impact on your business.

2. Differentiation strategy

Organizations that follow a differentiation strategy aim to encourage consumers to pay a premium for unique or highly desirable products. This uniqueness may mean that the new product is more expensive but more reliable or useful than its competitors, or it may include innovative features.

This business model requires careful consideration of marketing strategies and market dynamics. Companies following a differentiation strategy often emphasize research and development efforts to convince customers of the superiority of their products. For example, Nike emphasizes innovation in sportswear to differentiate itself from its competitors.

Implementing this strategy effectively can increase your profits as loyal customers choose your brand repeatedly. It may also reduce the threat of competitors if a unique product is so widely recognized that it fosters significant brand loyalty. However, your organization is still vulnerable if competitors offer cheaper alternatives to price-sensitive buyers.

3. Focus strategy

A focused strategy, also known as a niche strategy, involves aligning the efforts of the entire organization around a very specific customer group, product line, or geographic market. This strategy often aims to target untapped market segments or serve underserved populations.

This strategy can sometimes be similar to a differentiation or cost leadership strategy, but focuses on a small group of consumers. Companies deploying a focused strategy aim to capture a specific market rather than exponentially expand their customer base through lower prices or new product development. There are two types of focus strategies in your niche.

• Cost-focused strategy: This type of strategic management focuses on offering products to specific niche markets at lower prices than competitors.
• Differentiation-focused strategy: This type of business strategy involves developing products and services that are perceived to be superior to competitors, although they may offer products to a niche market at a higher price.

Companies that deploy either focus strategy benefit from the increased expertise gained by specializing in a narrow niche. This specialization allows us to offer specifically tailored products and services to relatively small market segments, potentially promoting more personalized customer interactions and building customer loyalty. Because the product’s target audience tends to be limited, companies using this model can expect greater efficiency and lower marketing and operating costs.

Implement all three levels of business strategy.

Porter’s core business strategies that revolutionized the business world continue to influence modern business practices. Porter argued that organizations should choose one of these basic strategies to avoid wasting resources and confusion in their business goals. According to the professor, choosing a strategy is like deciding what an organization will do. habit Do it for what it is. will do do.

In the years since Porter’s development of general strategy, some thinkers have proposed the possibility of exploring hybrid business strategies that combine aspects of multiple strategies. Nonetheless, the fundamental insight from Porter’s ideas is that organizations need clearly defined boundaries and goals to structure the way they work. This has resonated over the past 30 years and remains a guiding principle for business leaders today.

Porter’s core strategies can be implemented as an enterprise-level, functional-level, or business-level strategy framework. Current realities of customer preferences and market dynamics require organizations to integrate all three types of business strategies.

Business Strategy and IBM

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Learn more about IBM Consulting Strategy Learn how IBM Garage can help your business strategy.