What type of strategy is concerned with how a company chooses to compete in its chosen line of business?

A firm's relative position within its industry determines whether a firm's profitability is above or below the industry average. The fundamental basis of above average profitability in the long run is sustainable competitive advantage. There are two basic types of competitive advantage a firm can possess: low cost or differentiation. The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them, lead to three generic strategies for achieving above average performance in an industry: cost leadership, differentiation, and focus. The focus strategy has two variants, cost focus and differentiation focus.

1. Cost Leadership

In cost leadership, a firm sets out to become the low cost producer in its industry. The sources of cost advantage are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials and other factors. A low cost producer must find and exploit all sources of cost advantage. if a firm can achieve and sustain overall cost leadership, then it will be an above average performer in its industry, provided it can command prices at or near the industry average.

2. Differentiation

In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions itself to meet those needs. It is rewarded for its uniqueness with a premium price.

3. Focus

The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others.

The focus strategy has two variants.

(a) In cost focus a firm seeks a cost advantage in its target segment, while in (b) differentiation focus a firm seeks differentiation in its target segment. Both variants of the focus strategy rest on differences between a focuser's target segment and other segments in the industry. The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments. Cost focus exploits differences in cost behaviour in some segments, while differentiation focus exploits the special needs of buyers in certain segments.

References

• Porter, Michael E., "Competitive Advantage". 1985, Ch. 1, pp 11-15. The Free Press. New York.

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What are the Types of Business Strategy? 

There are generally 3 (sometimes broken into 4) Types of Business Strategies:

• Organizational (Corporate) Strategy
• Business (Competitive) Strategy
• Functional Strategy
• Operating Strategy

Back to: STRATEGY & PLANNING

What is a Corporate Strategy?

A corporate-level strategy, often referred to an an organizational-level strategy, focuses on vision, mission, values, or purpose of the organization. 

It often relates to the company’s core value proposition and objectives that it hopes to achieve in doing so. 

It may also regard what the company stands for and how it will be perceived by stakeholders and third parties. 

Organizational Strategies are generally broken down into:

• Growth-Based Strategies,
• Stability Strategies,
• Retrenchment Strategies, or
• Mix of these Strategies

What is a Competitive Strategy? 

A competitive strategy, often referred to as a business-level strategy, focuses on how a business unit will compete against competitors within the market. 

Implementing a business unit’s competitive strategy should further the organization-level strategy. 

The primary understanding of competitive strategies comes from Michael Porter’s Generic Strategies, which include:

• Cost-Based Strategy,
•  Differentiation Strategy, and 
• Focus (Niche) Strategy.  

The objective of competitive strategy is to create a sustainable competitive advantage. 

Another influential source on competitive advantage is the Resource-Base View (RBV) of the firm, which focuses on the effective use of firm resources to create competitive advantage. 

Porter’s Value Chain, and the concept of a value chain in general, which quantifies activities along the value delivery process. This provides and understanding or where competitive strategies can be effectuated. 

What is Functional Strategy? 

A functional strategy concerns how a functional division of a company will achieve its objectives. Carrying out a functional strategy is in support of a business unit’s competitive strategy through maximizing resource productivity. It focuses on developing competence in pursuit of a competitive advantage.  Major functional areas include marketing, accounting, finance, operations), Research and Development, and Human Resources. 

Three factors characterize the formulation of functional-level strategies:

• Short-term nature of the objectives,
• How specific are the objectives, and
• Extent of involvement of managers. 

The functional strategy will revolve around key individuals in the functional area and focus on key operational aspects in the value chain, such as productivity, pricing, logistics, cost-effectiveness, efficiency, product design, product branding and image, product-life cycle, etc. 

What is an Operating strategy?

While often included within a functional strategy, an operating strategy is concerned with how the component parts (operating divisions) of an organization deliver effectively the corporate, business and functional -level strategies in terms of resources, processes and people. They are at departmental level and set periodic short-term targets for accomplishment.

Related Topics

• What is Strategy?
• What is Business Strategy?
• What is Management Strategy (Strategic Management)?
• Types of Business Strategy?
• Competitive Advantage
  • First Mover Advantage Definition
• Organizational Dynamics
  • Synergy - Definition
• Business Model Overview
  • Business Model Canvas - Explained
  • Razor Blade Business Model
  • Click and Mortar Model
• How Management Develops a Strategic Plan
  • Mintzberg's 5 Ps of Strategy

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