What is business strategy [Levels, Components, Examples]

Any business’s ability to succeed depends on how well its Strategy works. A company’s strategy outlines how it wants to expand profitably and compete in a market.
Businesses all around the globe offer products and services in cutthroat marketplaces where they must raise owner and shareholder value to remain in business.
This necessitates a strategy that aids managers in directing their choices and efficiently allocating resources to meet important goals. This plan is called Business Strategy.

What is a Business Strategy?

An organization’s plan of action to realize its goals and vision is outlined in a business strategy, which also serves as a roadmap for decision-making to increase the company’s financial stability in a cutthroat industry.
Many websites, in an effort to decrease complexity. use the shorter definition of strategy, which is: A high-level plan that aids a firm in achieving its goals.
Even if this is still true, it does not provide a clear picture of how these objectives are really met. Continue reading to understand the depth of business strategy.

What distinguishes strategy from tactics?

It’s important to comprehend the differences between a strategy and a tactic before we go into the specifics of developing a plan.
Despite the frequent confusion between the two, they mean completely different things:

Strategy

An organization’s long-term goals and the plan it has to achieve them are referred to as its strategy. In other words, it demonstrates the path to achieving the stated goal.

Tactic

The particular steps used to accomplish the goals in accordance with the strategy are referred to as a Tactics

For instance, business A’s strategy can seek to enter the smartphone market as the least expensive supplier. Then, their management must bargain with suppliers to lower the prices of the electronic components used in manufacturing. This is a tactic to achieve the strategy.

Several levels of business tactics

The corporate, business, and functional levels are the three levels at which strategies are commonly applied.

The strategic framework of an organization is made up of all three levels:

1. Corporate Level:

Corporate-level strategies are the highest management’s strategic plans for the organization. They serve as the foundation for the mission and vision statements and significantly affect the success of the business over time. They serve as a guide for choices including expansion, purchases, diversification, and investments.

2. Business Level:

Strategies at the business level are integrated into the corporate vision, but they are focused on a particular industry. At this stage, the vision and goals are translated into specific business strategies that determine how an organization will compete in the market.

3. Functional Level:

Strategies at the functional level are intended to explain how functional divisions like marketing, human resources, or research and development might complement the established corporate and business strategies of a company.
A company often employs various methods at each level. In order to effectively represent the various demands of each layer, this is very crucial.
Even if there is a chance that different strategies will have competing priorities and goals, these risks may be minimized with proper risk management. In a moment, we shall return to this statement.

Why is it crucial to have a Business strategy?

Any firm must have a plan in place to be successful.
It essentially represents the firm’s strengths and weaknesses and clarifies how the company intends to react to challenges and opportunities in the market in which it competes.
A strategy considers the available resources and how to effectively use them to accomplish its stated goals.
Because of this, a strategy is often referred to as the management of a company’s lighthouse: It unifies the work of all functional divisions and provides its staff with a Northstar to help them make decisions on a daily basis.
To illustrate this argument even further, suppose a company doesn’t have a plan for how it would compete in a market:
Without such a plan, each department’s operations would be disorganized, which would reduce the organization’s overall performance. This incoherence inevitably leads to a loss of competitive advantage, which the market will take advantage of.

How should a company plan be created?

An organization’s plan of action to realize its goals and vision is outlined in a business strategy, which also serves as a roadmap for decision-making to increase the company’s financial stability in a cutthroat industry.
The description given above already includes some helpful guidance on how to create a successful strategy:
A business’s vision, aims, and long-term growth, and competitiveness must all be outlined in a plan.
There are five stages in the process of developing a strategy:

1. Define your vision
2. Specify your most important goals.
3. Examine your industry and the market.
4. Explain how to achieve a competitive edge.
5. Create a plan of action

Step 1: Define your vision

Some resources suggest that strategy formulation should begin by defining the organization’s objectives. This, however, goes too far, too quickly since it assumes that the product, the market, and the intended audience have already been established.
A strategy must first take into account the organization’s basic beliefs and its projected future position in the market in order to be effective. This is sometimes referred to as the business’s vision.
Some of the most well-known businesses have vision statements like this one from Apple:
Apple

“To be earth’s most customer-centric company; to build a place where people can come to find and discover anything they might want to buy online.”

This is a crucial phase in the process of developing a strategy because it makes sure that the planned strategy accurately matches the demands of the target market.

Value Proposition and Offer

A successful business strategy relies on the offering and the value proposition of the firm.
In contrast to the value proposition, which explains why customers should purchase the products and services in the first place, the former describes what is being delivered.
The value proposition clarifies the purpose of a company’s existence and distinguishes it from competitors. In other words, it outlines how a business intends to generate demand and engage in market competition.
Take a look at Shopify as an example of this. Their value proposition is to offer a single eCommerce platform that lets its customers sell across multiple channels. The value proposition of Shopify explains the benefits of using their platform and how it differs from competing ones.

Customers

Identifying the sort of clientele a firm serves is a crucial step in developing a successful business plan.
Consumers (B2C) and companies (B2B) are two different categories of customers (B2B).
Both groups purchase products and services according to distinct standards, justifications, and motives. Knowing them enables a business to tailor its approach to precisely meet its unique demands and desires.

Target Market

Finally, it’s important for strategy developers to understand the market that their product and value proposition is aimed.
If a company sells to consumers (B2C), a market can be determined by socio-demographic factors like gender, age, occupation, education, income, wealth, and place of residence. If, however, the offering is aimed at other businesses (B2B), markets are typically determined by factors like the targeted customer groups’ industries, businesses, or sales models.
If you’re interested in finding out more about the particulars of market segmentation, I suggest reading this essay by Annmarie Hanlon.

Step 2: Establish your top-level objectives

Setting an organization’s overarching objectives comes next in developing a company strategy after establishing the vision.
These goals often center on boosting a company’s sales and earnings since they secure its survival and raise shareholder value if it is listed on a public exchange.
Because of this, a strategy simply seeks to provide a response to the query of how a company may successfully compete in the market to increase its income while also strengthening its financial position.
Note that no goals to fulfill a company’s purpose or represent its fundamental values are included in the creation of top-level objectives.
This is so because a generic business strategy’s only goal is to raise the economic worth of the firm for its owners or shareholders.
Later, while creating lower-level plans, like the marketing or operational strategy, the fundamental values and purpose are taken into consideration.

Step 3: Examine your business and the market

After the vision and goals have been established, strategy developers must understand the advantages and disadvantages of their company as well as the opportunities and threats facing the industry.
A SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats) may be used to do this:

The information gathered during a SWOT analysis is the foundation for the design of a strategy that takes into account the internal features of the organization and the external condition of the market segment.
With the use of these insights, decision-makers can make sure that a company’s strengths take advantage of market possibilities while also addressing any weaknesses or dangers that can jeopardize the organization’s long-term performance.
A SWOT analysis might reveal many tactics.

Step 4: Define how to gain a competitive advantage

The topic of how the specified objectives are attained is addressed in the fourth phase of the strategy development process.
Businesses that operate in cutthroat markets must plan how they will raise demand, boost sales, and compete in the market.

Various Types of Business Strategies

Michael E. Porter, a professor at Harvard Business School, defined three categories of generic strategies that companies might choose from when determining their competitive advantage:
Cost leadership

differentiation

focus
Companies may, however, be unable to successfully implement one of these general tactics. This is referred to as being “stuck in the middle” by Porter.
In this situation, a business doesn’t provide a product or service that is distinctive enough to draw people in. The cost of the product is also too expensive to successfully compete in the market.
Poor sales performance from failing to obtain a competitive edge may jeopardize the future company’s viability.
Let’s examine the various strategies in more detail to see how a business might achieve a competitive edge:

Cost Management

The capacity of a business to manufacture goods at the lowest cost in its sector is referred to as cost leadership.
The capacity to generate and retain cost advantages across the supply chain, economies of scale, or unique technology may all help to attain this cost advantage.
The cost leadership approach calls on a company to successfully reduce its cost structures while maintaining typical industry-level pricing for its goods.
For instance, by lowering prices and using economies of scale, Ryanair effectively competes in the aviation sector. Because of this, Ryanair’s entire fleet consists of a single kind of aircraft—the Boeing 737-200.

Differentiation

A company uses a differentiation strategy when it wants to provide a special offer that its target clients would appreciate. The offer must be seen as much more value by buyers than competing industry options. A business may then demand greater pricing for its goods in exchange.
Starbucks is a fantastic example of a business that has effectively used a differentiation strategy. Although it markets coffee as a broadly accessible product, people are prepared to pay a premium because of its stylish outlets and the unmatched variety of flavor options.

Focus

The general focus approach simply has a few target market categories in mind. Given that a business only targets a tiny percentage of the larger market segment, Porter’s matrix characterizes the competitive scope in these situations as being limited.
In such a situation, a corporation may choose to concentrate on cost or differentiation:
A company adopts a cost-focused approach while looking to achieve a competitive edge. The company’s offer is a cheap substitute for the top product on the market that nonetheless appeals to a certain demographic of customers.
The differentiation emphasis, on the other hand, aims to address a particular demand in a consumer group. Many small and local firms use this differentiation emphasis as their go-to specialized marketing tactic to take on the bigger chains in their industry.
Small online stores that concentrate on selling vegan and vegetarian goods are excellent examples of businesses that use a general focus approach. They are able to dominate the environmentally and health-conscious client groups due to their specific target market.

Step 5: Create a strategy framework

On the basis of carrying out the above processes, a general business strategy may be developed.
However, until this general strategy is converted into more specialized lower-level strategies, departments like marketing or finance will not successfully contribute to it.

A strategy framework is created when various lower-level plans that support a general corporate strategy are put together.
It guarantees the success of the general business strategy by capturing the goals and demands of each department and relating them to the more important ones.

How to gauge the effectiveness of a plan

Business strategies are effective when they immediately contribute to development and enhanced financial or competitive performance.
A variety of Key Performance Indicators may be tracked in order to assess the effectiveness of a strategic strategy (KPIs).
But it’s critical that…

  • These KPIs track how well the goals specified in step two of the strategy creation process are being achieved.
  • To guarantee precise measurement, the KPIs are established prior to the execution of the plan.

When adopting a new business strategy, the following KPIs—or a combination of them—are often measured:

  • Sales revenue
  • Number of customers
  • Repeat customer sales
  • Customer retention rate
  • Conversion Rate
  • Average Order Value (AOV)
  • Business Volume

Competitive Position

  • Market share
  • Market position
  • Sales win rate
  • Brand awareness & press mentions
  • Margin position vs. industry average
  • Sales growth vs. industry average

Financial Performance

  • Gross Profit
  • Net Profit
  • Operating Profit
  • EBIT and EBITDA
  • Return on Assets
  • Free Cash Flow
  • Operating Cash Flow

In reality, businesses could use a finer scale to assess the performance of their strategies. This is so that each department may choose its own lower-level plans.
The following graph displays an overview of KPIs that is more realistic:

Examples of Business Strategies

I’ve gathered two instances of businesses—Amazon and Reckitt Benckiser—that have effectively carried out their generic business strategy in order to exemplify the previously outlined ideas.

Amazon

The excellent customer service and quick delivery choices offered by Amazon are well-recognized.
Additionally, Amazon realizes its aim of becoming the world’s most customer-focused business by consistently innovating in both exesiting and new regions. The outcome? more expansion and higher shareholder value.
Jeff Bezos himself established the four guiding principles for the business in his first shareholder letter from 1997: obsessing about the customer rather than the competition, being passionate about creation, being dedicated to operational excellence, and having a long-term perspective.
The general business strategy of Amazon aims to obtain a competitive edge by reducing costs (cost leadership), together with its capacity for innovation in market competition.
The customers of Amazon are the main priority at all times.
This enables Amazon to catch up to its rivals, who often struggle to do so, within a few years (ST-Strategy).
The general strategy of concentrating on variety, pricing, and economies of scale to generate value for consumers is followed by all of its lower-level strategies (operational, marketing, etc.).
Amazon has become one of the most prosperous digital corporations of the twenty-first century because of its strategy structure.

Reckitt Benckiser

Reckitt’s brand portfolio includes well-known household names like Finish, Dettol, Nurofen, Vanish, and Durex despite the fact that few customers are familiar with the company’s name.
In order to go back on a path of steady development, the firm had to alter its business plan in 2012 due to sluggish sales and growing competition.
In line with the new strategy, RB focused on R&D for new product lines that enabled it to meet its high-level goals of increasing sales and margins; increased its budgets in markets that grew above-average to spur further growth; overhauled its brand and marketing strategies and increased budgets in those areas; set and closely monitored numerous key performance indicators with the aim to increase its net revenue growth by +200bps vs. market average each.
Reckitt was unable to meet all of its objectives, but changes to its business strategy allowed it to increase sales and earnings beyond the industry standard.
As a consequence, between 2012 and 2017, RB’s stockholders saw a £33 billion increase in value.

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