Any company can set goals. The real challenge is determining how to achieve those goals. That’s where business level strategy comes into play.
Business level strategy is intended to provide a company with a competitive advantage. The Houston Chronicle explains that a business level strategy is chosen based on the strengths and weaknesses of the company’s products or services and on how it wants to be perceived by its customers. The goal of business level strategy is to maximize profits and return on investment by taking advantage of the company’s strengths.
To illustrate the concept, imagine three grocery stores:
- The first is a no-frills discount store that provides a limited selection of products. It has cut operating costs to the bone and passed on the savings to customers through low prices.
- The second is a fully appointed supermarket offering a wide selection of natural and organic products and first-rate customer service, but with higher prices.
- The third is a neighborhood farmers market that specializes in locally grown produce and other specialty items geared to the tastes of its local clientele.
All three stores are thriving despite their different approaches to the market. The first store benefits from a strategy that distinguishes its offerings based on price. The second has adopted a strategy of differentiation by offering unique products and services that its customers value. The third owes its success to a strategy that focuses its efforts on niche markets.
What these three stores have in common is that each devised a solid business level strategy that aligns day-to-day operations with long-term goals.
What Is Business Level Strategy?
The concepts that underlie business level strategy arose from work done by Harvard Business School professor Michael Porter beginning in the 1980s. Porter’s three-level model places business level strategy in the middle of a hierarchy between corporate level strategy at the top and functional level strategy at the bottom.
Forbes answers the question “What is business level strategy?” by describing it as the process of defining the business’s “unique value proposition to attract customers.” Rather than trying to compete in market segments where the competition is stronger, the business focuses solely on customer segments where it can leverage its competitive advantage.
The Role of Each Organizational Hierarchy Level
Business level strategy is the middle layer of the three-part organizational hierarchy that places corporate level strategy at the top and functional level strategy at the bottom, as ClearPoint Strategy explains:
Corporate Level Strategy
Corporate level strategy defines the organization’s vision and main purpose. It’s the primary driver of all business decisions, from the C-level executives to line business managers. This level is most important for companies that have multiple lines of business. It often takes the form of a mission statement or vision statement.
Business Level Strategy
Business level strategy determines how the business’s resources will be spent. For large companies, each business unit will have its own business level strategy based on services, products, divisions or multiple related departments. The goals are to differentiate the business from the competition and create specific objectives and initiatives.
Functional Level Strategy
Functional level strategy applies at the department level and ensures that the corporate level strategy and business level strategy are implemented in the day-to-day operations of the company. This level is dominated by measuring the progress toward achieving specific objectives and by implementing projects that define the actions that will achieve the objectives.
From an organizational perspective, the functional level concerns managers charged with business functions, such as marketing, human resources, research and information technology, while the business level involves the heads of business units of a corporation, such as the investment management, insurance and retail banking operations of a major bank. The corporate level is the domain of the board of directors, audit committee and general manager/CEO.
Examples of Business Level Strategy
No two businesses are identical. That’s why there are as many distinct types of business level strategy as there are companies competing for customers. The financial services firm Become describes the strengths and challenges of five examples of business level strategy:
Companies gain an edge on the competition by finding ways to reduce their operating expenses to levels that are below the industry average or lower than those of competitors in their target markets. A benefit of this approach is that it attracts the growing number of cost-conscious customers who are looking for ways to increase their purchasing power. The value proposition the company offers is difficult for customers to turn down.
Cost leadership is a popular strategy with large operations that can take advantage of production economies of scale and that can generate the large sales volumes the strategy requires. Cost leadership often requires ready access to capital to fund ongoing operations and expansion. The strategy isn’t well-suited to small companies or elite brands.
Cost Leadership Resources
- Cost Leadership Strategies for Small Business: The Balance Small Business’s Sherry Gray describes cost leadership as “a competitive strategy designed to maximize profits by delivering the best possible product with the lowest possible production costs.”
- Cost Leadership & Competitive Advantage: Russell Huebsch of the Houston Chronicle explains that offering the lowest prices in the industry attracts customers and stifles competition.
Some products and services stand out so well from the competition that they almost sell themselves — almost. Companies that adopt a differentiation business level strategy highlight the attributes of their products and services that give them an edge over competitors.
An organization may distinguish itself by connecting with customers in another way, such as by emphasizing its ethical policies or its reliance on handmade materials. Many businesses are differentiated by the quality of the services they provide to customers, such as by offering them a one-of-a-kind retail experience. For example, Apple Stores are noted for the distinctive customer service offered by the specially trained and certified employees who work behind the stores’ Genius Bars.
The advantages of differentiation are the brand loyalty it builds with customers, easy marketing by leveraging a product’s unique attributes and higher prices for high-demand items. However, differentiating a product usually requires a big investment in research and development, and the product may be so distinct that it attracts only a niche market.
Product/Service Differentiation Resources
- The Advantages of a Product Differentiation Strategy: The Houston Chronicle’s Luanne Kelchner points out that a differentiation strategy “creates a perceived value among customers and potential customers.”
- Product Differentiation and What It Means for Your Brand: Meredith Hart of HubSpot describes the success a body-care brand has achieved by using a product differentiation strategy.
- Product Differentiation: On Investopedia, Carol M. Kopp defines product differentiation as a marketing strategy that depends on identifying and communicating the unique attributes of a company’s products.
Focused differentiation is a business level strategy that targets a specific market segment with a differentiated product that provides the unique characteristics that the market segment demands. The niche markets that companies can target with this approach can be distinguished by sales channels, such as online, or by demographics, such as families with small children.
Examples of focused differentiation include high-end cameras targeting prosumers (amateurs who buy products suitable for use by professionals) and environmentally safe cosmetics. An advantage of this strategy is the willingness of consumers to pay high prices for these niche products or services. The approach also builds brand loyalty and benefits by having fewer potential competitors. However, market growth will likely be limited, the niche can quickly evaporate or a competitor can steal customers away by focusing on an even smaller niche in the market.
Focused Differentiation Resources
- Business Level Strategy Explained: Expert Program Management explains that focused differentiation is distinguished from other types of differentiation by targeting a “very narrow segment of the market.”
- What Is Business Level Strategy? (+ 5 Examples): By aiming at a small customer base, focused differentiation allows businesses to serve their customers with “maximum efficiency,” as TrackTime24’s Jacek Pytlik writes.
An amalgam of the focused and cost leadership approaches targets niche markets with a low-cost strategy that applies to only a subset of the company’s full line of products or services. An example is a firm that sells some of its products exclusively to the government and submits competitive bids on government contracts.
Companies can take the best advantage of this strategy in markets that aren’t highly competitive or those in which a specific market segment is capable of generating a great deal of revenue. The strategy can help a company build brand affinity by offering specialized products in relatively small markets. If the market is too small, however, demand likely won’t be sufficient to enable the company to achieve profitable growth.
Focused Low-Cost Resources
- What Focused Low Cost Strategy Is and Its Advantages: According to Bizinfuse, the reasoning behind the focused low-cost strategy is to attract new customers and increase revenue by lowering prices rather than spending money to improve the product.
- Five Types of Business Level Strategy: Vapulus presents this strategy as a version of cost leadership that targets a small market segment.
Integrated Cost and Customer Differentiation
Another amalgam approach is based on offering differentiated products at low cost. An advantage of combining two strategies is the ability to respond quickly to changes in markets by shifting focus from one approach to the other depending on which will lead to higher sales.
To be successful, the integrated cost and customer differentiation strategy must constantly adjust to reduce costs while simultaneously adding unique features that customers demand. The approach works best in niche markets that serve customers who are looking for features that aren’t in demand in mainstream markets.
Integrated Cost and Customer Differentiation Resources
- What Is Value Chain Analysis? Kayla Harrison of Business News Daily describes the goal of value chain analysis as breaking down each business process to find “opportunities for innovation.”
- How to Capture More Value with Price Segmentation: CFO’s Brian Huff explains how a company can gain value by differentiating prices based on what the customer is willing to pay.
Business Level Strategy Definitions
The competitive advantage that business level strategy depends on takes one of three basic forms. Fast Capital 360 explains how each of the three types of business level strategy provides an edge over the competition:
- Cost leadership is achieved by reducing operating expenses below the industry average and either passing on the savings to customers or increasing the business’s profit margins.
- Differentiation is achieved by offering unique products or services that customers value.
- Focus is achieved by applying cost leadership or differentiation to niche markets in ways that more broadly focused competitors can’t match.
How to Apply the Cost Leadership Business Level Strategy
Controlling costs is a fundamental tenet of all businesses striving for long-term success. The challenge of cost control is to maintain quality while keeping costs in check. Expert Program Management describes techniques companies can use to bring their operating costs below the industry average while meeting the needs of customers.
Competing on price requires attracting a broad customer base, but cost leadership doesn’t mean the company’s returns must also be lower than the industry average. By continually improving processes, companies can offer the lowest price while maintaining above-average returns. Three mechanisms are commonly used to reduce costs without compromising quality:
- Implement rigid cost controls.
- Invest in state-of-the-art production techniques that optimize economies of scale.
- Standardize the product or service and focus on a handful of models.
How to Apply the Differentiation Business Level Strategy
The goal of the differentiation business level strategy is to broaden the company’s customer base by offering unique products and services that customers are willing to pay a premium for. The higher prices offset the increased cost of producing the unique offerings. Companies typically differentiate themselves in one of four ways:
- They offer the highest-quality products in the market.
- They provide industry-leading customer service.
- They offer products that feature unique designs that customers prefer.
- They sell innovative products that are available from no other source.
How to Apply the Focus Business Level Strategy
The two common types of focus business level strategy are focused cost leadership and focused differentiation:
- Focused cost leadership is implemented by targeting a subset of the overall market and offering low prices by reducing operating costs to a level that’s below the industry average. This strategy requires both a thorough understanding of the niche market being targeted and the ability to leverage this knowledge to reduce operating expenses.
- Focused differentiation also targets a market niche, but rather than competing on cost, companies using this strategy offer the niche market unique products and services for which they can charge a premium price. To succeed, this strategy must identify market niches that are profitable, where competition is weak and where there are no practical substitute products.
Examples of Business Level Strategy Variations
Since the initial publication of Michael Porter’s research on competitive analysis in the 1980s, hundreds of variations of strategy frameworks have been devised. Cascade Strategy describes five of the most popular business strategy frameworks that build on the concepts presented in Porter’s three-part strategy model:
McKinsey’s Strategic Horizons
McKinsey’s strategic horizons approach defines three “horizons” intended to keep businesses focused on innovation and growth:
- The core business horizon emphasizes the activities that are closely aligned to the business’s primary source of revenue. Its goal is to improve margins, enhance business processes and ensure a steady cash flow.
- The emerging opportunities horizon looks to extend current operations to take advantage of new potential sources of revenue. The goal is to leverage the current proven business model in new markets.
- The blue-sky horizon takes the business into entirely new areas. It requires patience and a higher level of risk, but promises greater rewards in the long run.
McKinsey’s Strategic Horizons Resources>
- McKinsey’s Three Levels of Growth Can Help You to Innovate: As Cascade Strategy’s Tom Wright explains, the emphasis of the Three Levels of Growth is to keep the company focused on growth and innovation.
- McKinsey’s Three Horizons Model Defined Innovation for Years. Here’s Why It No Longer Applies: On the Harvard Business Review, Steve Blank writes that rather than occurring in sequence, the three horizons now happen simultaneously.
Value disciplines is an approach based on the assumption that the business is most likely to succeed by extending the activities in which it already excels. The organization chooses one of three main value disciplines and bases its entire strategy on that discipline:
- Operational excellence strives to offer customers high-quality products at competitive prices by streamlining processes and minimizing errors.
- Customer intimacy emphasizes meeting the needs of customers and providing unique and rewarding customer experiences to establish long-term relationships with customers.
- Product leadership focuses on creating innovative products that keep the company at the forefront of the market by emphasizing research and development and by implementing a flexible structure that encourages employee performance and creativity.
Value Disciplines Resources
- Value Disciplines: Customer Intimacy, Product Leadership and Operational Excellence: How a company can determine which of the three value disciplines best fits its operating model is examined by Business to You.
- Value Disciplines Model & Your Competitive Advantage: Cascade Strategy’s Pat Ordenes writes that value disciplines help a company focus on the one thing it wants to be noted for.
- Operational Excellence and the Art of Balancing Value Disciplines: SCM World’s Pierfrancesco Manenti examines the impact of modern business’s continuous flow of innovative products on the value disciplines model.
Stakeholder theory is based on adding value for specific groups:
- Goals that have a direct positive impact on employees.
- Goals and outcomes that directly benefit customers.
- Goals that focus on enhancing the local community.
- Goals that directly impact shareholder profitability.
- Goals that benefit society as a whole.
Stakeholder Theory Resources
- The Benefits of Applying the Stakeholder Theory: The belief that profit alone is the measure of a company’s success is challenged by the stakeholder theory, as Tom Wright of Cascade Strategy explains.
- About the Stakeholder Theory: R. Edward Freeman, the creator of the stakeholder theory, emphasizes the need for businesses to create value for all stakeholders rather than solely for shareholders.
Balanced scorecard is a popular strategy framework that divides the business’s efforts into four equal quadrants:
- The customer quadrant focuses on gaining a better understanding of customers to improve customer satisfaction.
- The financial quadrant combines all goals related to revenue generation and other key performance indicators (KPI), such as liquidity and profit margins.
- The internal business process quadrant measures and improves the business processes that are most critical to customers.
- The knowledge, education and growth quadrant is also referred to as the people quadrant; it emphasizes educating employees, learning more about markets and customers, and applying the knowledge to maintain a competitive advantage.
Balanced Scorecard Resources
- How to Implement the Balanced Scorecard (2019 Update): Tom Wright of Cascade Strategy claims that the balanced scorecard is “often misrepresented or poorly implemented” despite its popularity with business managers.
- Balanced Scorecard: Investopedia’s Evan Tarver points out that data collection is key to generating the quantitative results that managers base their decisions on.
Ansoff Matrix is a framework that focuses on aggressive sales growth by developing four areas:
- Market development looks to sell existing products and services to new categories of customers by expanding regionally or opening new sales channels.
- Market penetration attempts to sell more existing products to current customers by marketing them more aggressively to these customers, or by offering existing customers more incentives to purchase the products.
- Product development focuses on creating new products that will be sold to existing customers.
- Diversification combines product development and market development; its goal is to create new products that will be sold to new markets.
Ansoff Matrix Resources
- The Ansoff Matrix Helps Organizations to Grow: Cascade Strategy’s Tom Wright presents the Ansoff Matrix as a way to sell more of a company’s current products to new or expanded groups of people.
- The Ansoff Model: Using the Ansoff Matrix to Identify Growth Opportunities: Annmarie Hanlon of Smart Insights explains that companies use the Ansoff Matrix to analyze opportunities to boost sales by showing “alternative combinations for new markets.”
Business Level Strategy vs. Corporate Level Strategy
The primary distinction between business level strategy and corporate level strategy is that the former takes an organizationwide approach, while the latter focuses on the goals of a single business unit. Aligning the two strategies ensures that both share the values and overarching vision that are at the core of the corporate level strategy.
The business level strategy is the middle of the three-level strategy hierarchy. It links the corporate level strategy that is at the top of the hierarchy to the department-focused functional level that serves as the foundation of the hierarchy. The corporate level strategy is designed to help a large organization with several business units to achieve its long-term goals while operating in many distinct markets.
By contrast, the business level strategy is intended to guide a business unit toward the corporation’s shared vision in a single market or a subset of the corporation’s overall markets. As Cascade Strategy explains, the corporate level strategy directs the entire organization, while the business level strategy directs the actions of a single business unit.
Bizfluent describes the focus of a corporate level strategy as calculating the mix of business units that will allow the corporation to succeed as a whole regardless of specific market trends or conditions. This higher-level vision of success contrasts with the business level strategy’s narrower emphasis on satisfying customers and increasing operating profits in the markets that the business unit competes in.
Putting the Types of Business Level Strategy Into Practice: The Five Forces
Michael Porter described the five forces that shape all markets and industries, as Investopedia explains:
- Level of competition in the industry
- Potential for new entrants in the industry
- Power of suppliers
- Power of customers
- Threat of substitute products
Expert Program Management describes how each type of business level strategy takes a different approach to ensure that the forces don’t interfere with the company’s efforts to achieve its strategic goals.
- By offering the lowest prices, companies can remain profitable while competitors reduce their profit margins by cutting prices in an attempt to gain market share.
- The continual emphasis on controlling costs creates a barrier for new companies attempting to enter the market.
- Maintaining the lowest operating costs in an industry allows companies to absorb price increases by suppliers without having to pass on the added cost to customers.
- Demands by powerful customers for lower prices can drive competitors out of a market and create a monopoly for the cost leader, which reduces customer buying power.
- Offering the lowest prices in the market can establish brand loyalty that prevents substitute products from gaining a foothold in the market.
- A company whose products or services are distinguished from those of competitors is able to safeguard its market share by promoting brand loyalty and the uniqueness of its offerings.
- The same brand loyalty and uniqueness establish a barrier to entry for potential new competitors.
- The ability to set higher prices for products or services means companies can absorb supplier cost increases.
- The power of customers is reduced because they’re unable to find alternatives to the company’s products or services.
- Customers are less likely to switch to substitute products because of their brand loyalty and the uniqueness of the company’s offerings.
Focused Cost and Differentiation
- Choosing a hybrid business level strategy that combines focus with either cost leadership or differentiation prevents larger companies from entering the niche market, because the market will be too small for the big firms to capitalize on their economies of scale.
- The combined strategy makes it more difficult for new competitors to take market share because the firms must either overcome brand loyalty and uniqueness or attempt to match prices with the cost leader.
- Similarly, the higher prices that focused differentiators can offer and the higher profit margins of focused cost leaders make these firms better able to accommodate supplier price increases.
- Brand loyalty and the lack of alternative products protect focused differentiators from customers having the power to dictate prices, while the potential for focused cost leaders to gain a monopoly prevents powerful customers from exerting too much influence over prices.
- Both focused cost leaders and focused differentiators are safeguarded from substitute products taking market share, the former by brand loyalty resulting from their low prices and the latter by both brand loyalty and the unique attributes of their products.
Putting Business Level Strategy to the Test for Your Business
There is no cookie-cutter approach to devising a winning business strategy. Each organization will base its operations on its competitive strengths, whether by offering the lowest prices or innovative, in-demand products that are unavailable elsewhere. The time and effort a company invests in crafting and implementing its business level strategy will reap rewards in the short term and long term.