Types of business strategy – IBM Blog

In today’s business environment, regardless of the product or service, leaders must develop a well-honed business strategy. Without clarity and intention, even the most innovative companies are unlikely to succeed. A successful business strategy must clearly define an organization’s objectives, decision-making processes and long-term business goals. It must also consider the organization’s target market and major competitors to help ensure that decisions are made with a holistic view of the existing landscape, facilitating long-term success. Through decades of research, business thinkers identified several types of business strategy that can help guide an organization’s plans.

The value of business strategies

Developing a business strategy involves critical thinking and extensive market research. As Professor Felix Oberlholzer-Gee of Harvard Business School emphasized, an effective business strategy requires a deep understanding of your company and a profound sense of optimism about its potential for exceptional performance. To achieve this nuanced understanding of an organization’s future operations, business leaders must carefully consider their primary objectives, core strengths and their target audience. It’s essential to identify the people they serve and determine the most effective ways to engage with them.

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

• Guide the decision-making process to prioritize initiatives and allocate resources effectively.
• Help ensure that all employees have well-defined goals and clear mandates for the organization.
• Enhance competitive advantage by creating a sustainable, informed edge over competitors.
• Create an agile company with the capacity to adapt quickly to market changes.
• Facilitate long-term planning as the organization grows.
• Provide a tangible foundation for performance benchmarks and employee evaluations.

3 broad types of business strategy

Business strategies vary depending on the competitive environment and the operations of specific organizations. However, business experts and institutions identified several specific types of strategies. These business strategies can be categorized into 3 distinct types:

1.     Corporate-level strategy

This strategy refers to decisions made by an organization’s top-level management. It often involves big-picture thinking and pertains to matters like mergers, acquisitions, portfolio management and diversification.

2.     Functional-level strategy

Functional-level strategies are run on a smaller scale and focus on specific departments or areas of a business, such as human resources (HR) or finance. They are deployed to improve aspects of an organization’s operations and support corporate-level or business-level strategies.

3.     Business-level strategy

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

Typically, comprehensive business-level strategies are combined with other strategy types. For instance, an operational strategy facilitates the alignment of production and delivery processes with the overall business plan. An innovation strategy, which aligns with the overall business strategy, guides how an organization incorporates new ideas or products into its overall plan.

Ideally, a well-defined business strategy must impact every department and aspect of an organization, providing clear priorities and objectives across teams like marketing, research and development and HR. With a clearly defined strategy identified early on, organizations can efficiently develop secondary business processes like forecasting or process management.

Evolution of core business strategy frameworks

In the 1980s, Professor Michael Porter from Harvard Business School developed a series of generic strategies, which subsequent researchers built upon. These strategies continue to underpin the most widely employed business approaches. Large corporations and small businesses still use these classic business strategies. Porter’s original theory identified 3 fundamental types of business strategies, with one later splitting into two variants. These 3 core strategies include:

1.     Cost leadership strategy

The cost leadership strategy focuses on gaining market share by providing goods or services at the lowest possible cost. Typically, these organizations operate on a large scale, often by using a network of franchises to enhance efficiency and speed. In organizations pursuing a cost leadership strategy, their competitive edge lies in providing the cheapest goods to a broad audience. Compared to other strategies, they allocate relatively fewer resources to research and development or advertising, as their success relies largely on economies of scale.

This focus on efficiency and scale can help these organizations withstand challenges from competitors and often results in high profits. However, the same focus on efficiency may impede their ability to adapt quickly. If the perception arises that the organization’s lower prices correspond to lower-quality goods, it may negatively impact the business.

2.     Differentiation strategy

Organizations following a differentiation strategy aim to encourage consumers to pay a premium for a unique product or highly desirable product. This uniqueness might mean that the new product is more expensive but also more reliable or useful compared to competitors, or it might involve innovative features.

This business model needs careful consideration of marketing strategies and market dynamics. Businesses following a differentiation strategy often highlight their research and development efforts to convince customers of their product’s superiority. For example, Nike emphasizes its innovations in sportswear to differentiate itself from competitors.

When effectively implemented, this strategy may lead to higher profit margins as loyal customers repeatedly choose the brand. It may also reduce the threat of competitors if the unique product is widely viewed as such, fostering significant brand loyalty. However, organizations remain vulnerable if a competitor offers a cheaper alternative for price-sensitive buyers.

3.     Focus strategy

The focus strategy, also known as the niche strategy, involves aligning an entire organization’s efforts around a highly specific group of customers, product line or geographic market. This strategy often aims to target undiscovered market segments or serve an under-served demographic.

While this strategy may sometimes resemble differentiation or cost-leadership strategies, it focuses on a smaller consumer group. Businesses deploying a focus strategy aim to capture a specific market rather than exponentially expand their customer base through low pricing or novel product development. There are 2 types of focus strategies for niche markets:

• Cost-focus strategy: This type of strategic management focuses on offering products to a specific niche market at a lower price than competitors.
• Differentiation-focus strategy: This type of business strategy may offer products to its niche market at a higher price but involves developing products and services that are seen as superior to the competition.

Businesses deploying either focus strategy can benefit from increased expertise gained from specializing in a narrow niche. This specialization allows them to offer products and services that are tailored specifically to their relatively small market segment, potentially fostering more personalized customer interactions and building customer loyalty. Since the target audience for the product tends to be limited, businesses that use this model can expect higher efficiency and lower marketing and operational costs.

Implementing all 3 levels of business strategy

Porter’s core business strategies, which started a revolution in the business world, continue to influence contemporary business practices. Porter argued that organizations should choose one of these fundamental strategies to avoid resource wastage and confusion in their business goals. According to the professor, choosing a strategy is as much about deciding what an organization won’t do as it is about what it will do.

In the years following the development of Porter’s generic strategies, some thinkers suggested the possibility of exploring hybrid business strategies that combine aspects of multiple strategies.  Still, the fundamental insight from Porter’s ideas is that organizations need clearly defined boundaries and goals in structuring their practices resonated for over 3 decades and remains a guiding principle for today’s business leaders.

Porter’s core strategies can be implemented as corporate-level, functional-level or business-level strategy frameworks. The current realities of customer preferences and market dynamics require organizations to incorporate all 3 types of business strategy.

Business strategy and IBM

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