Business Strategy – What is it Defined as and Some Examples & Components!

Denise Elizabeth P
Senior Financial Editor & Contributor

Date Published: August 30, 2021

The efficacy of a business’s strategy determines how successful a business will be.

A strategy describes how a company plans to establish itself in a market and expand while generating profits.

All around the world businesses sell products in markets which are very competitive.

In order for them to survive in such markets, it is necessary for them to raise the value for their shareholders and owners.

In order to accomplish crucial objectives, managers of these businesses need a plan that will aid them in effective resource management and decision making.

This plan is what is called a business strategy.

In this article we will cover the following: the definition of a business strategy; how strategy and tactics differ; the different levels of business strategies in the corporate level, business level and functional level; the importance of having a business strategy; formulating a business strategy in five steps from determining your vision, establishing top level objectives, studying the market and your business, determining how to get a competitive edge, and setting up a strategy framework; business strategy types; measuring the success of a strategy; and lastly, the examples of a business strategy.

Let’s get started!

Business Strategy

The Definition of Business Strategy

A business strategy can often be defined as the following:

“A business strategy lays out the course which leads to the achievement of the distinct objectives and vision of an organization and regulates the decision-making processes to better the company’s financial security in a competitive market.”

This given definition is quite technical and might seem difficult to fully comprehend, so it is possible to simplify what a business definition is by thinking of it as:

“A high-level plan that helps a business accomplish its objectives.”

This definition, while oversimplified, is still correct, but it does not give insight as to how these objectives are actually achieved.

We will use the former definition in order to provide a better and more complete understanding of business strategy.

Strategy and tactics – how do they differ?

It is important to first understand the difference of a strategy from a tactic before going into the basics of making a strategy.

While people find these terms similar enough in meaning to be used interchangeably, it is important to note their difference:

A strategy encompasses the long-term objectives of an organization and the method with which it plans to achieve them; it shows the way to attaining the company’s vision.

On the other hand, a tactic is what you would call the exact steps or actions you would take to achieve the goals set in accordance with the strategy.

For example, to gain a competitive edge, a company decides to sell its products at the lowest possible price in the market (this is the strategy).

Their managers will then need to adjust work schedules, negotiate with suppliers, buy more efficient machinery, etc. (these are tactics).

Another way to understand what a strategy is from what a tactic is, is by the following saying:

“Strategy is getting behind enemy lines to capture an objective. Tactics is making sure you don’t die before then.”

 

The different levels of Business Strategies

The corporate, business, and functional level are the three levels at which strategies are generally used.

These three levels together form the strategic framework of an organization:

  1. Corporate Level: Strategies in the corporate level form the mission and vision statement and have a significant effect on the company’s long-term operations. They regulate decisions around acquisitions, growth, investments, and diversification.
  2. Business Level: Strategies in the business level blend into the corporate vision, but they focus on a specific business. At this level, the vision and objectives are turned into detailed strategies that advise a business as to how it is going to gain a competitive edge in the market.
  3. Functional Level: Strategies at this level determine how functional departments (like HR, R&D, and Marketing) can support the business and corporate strategies determined by an organization.

A firm having multiple strategies at each level is quite common.

This is actually very important to guarantee that the various requirements of each layer are reflected accurately.

Although there is a risk of inconsistent objectives and priorities when using multiple strategies, it is possible to minimize these risks if handled properly.

Types of Business Strategy

The importance of having a Business Strategy

It is crucial for a business to have a strategy in order to succeed.

A strategy highlights the strengths and weaknesses of a company and determines how a company should respond to threats and opportunities which may show up in the market that the business operates in.

Taking into account the resources at hand, a strategy shows how to best distribute them in order to effectively accomplish its objectives.

The efforts of all functional departments are aligned by a strategy. That is the reason why a strategy is often called the lighthouse of company management: it guides a company’s employees in their daily decision making, like the North star guides sailors at night.

To illustrate this point, let’s say a business tries to enter into a competitive market without a strategy:

Without a strategy, all departments would be making disorderly and uninformed decisions.

The employees of each department would be lost, not knowing what to do and their efforts would be wasted.

This chaos will result in an inability to gain a competitive edge, which will then be exploited by other competitors in the market.

Formulating a Business Strategy

When it comes to formulating a business strategy, it is said that:

“A business strategy lays out the course which leads to the achievement of the distinct objectives and vision of an organization and regulates the decision-making processes to better the company’s financial security in a competitive market.”

Understanding the above definition should already shed light on how to create an effective business strategy; a strategy needs to lay out the vision of a business, define its goals and how it is going to expand and compete in the long run.

The strategy building process can be divided into five steps:

Step 1: Determine your vision

Step 2: Establish top-level objectives

Step 3: Study the market and your business

Step 4: Determine how to get a competitive edge

Step 5: Set up a strategic framework

Below, we will be discussing each of the steps involved in the process of building a strategy.

formulating a business strategy

Step 1: Determine your vision

If you search around online, you will find that most sources tell you that formulating a strategy begins with determining the objectives of your organization, but it is much too soon to already be doing that; it assumes that you have already done all the necessary research in order to determine the market, the target customers, and the offering.

The company’s core values and desired future position in the market must first be taken into consideration to allow a strategy to be successful. This is what is known as the company’s vision.

Examples of vision statements from some of the largest companies include:

“Apple strives to bring the best personal computing experience to students, educators, creative professionals, and consumers around the world through its innovative hardware, software, and internet offerings.”

-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.”

-Amazon

The market, the customers, and the offer can be determined based on a well thought out company vision. This crucial step in the strategy building process ensures that the devised strategy shows the actual needs of the related market.

Offer & Value Proposition

An offering lays out what goods and services are offered, while a value proposition justifies why people should purchase them. This is what an effective business strategy builds on.

The value proposition is especially important in markets with homogenous products; it tells people why a company exists and differentiates it from its other competitors. It shows how a company will create demand for its product(s) and how it can compete in the market.

Take Shopify for example. They offer, to their customers, the ability to sell products across multiple channels on a single ecommerce platform. That is their value proposition.

Customers

Customers can be categorized into consumers (B2C) or businesses (B2B). Both groups differ in reasons, motivations, and criteria when it comes to buying goods and services.

Determining the type of customer the company will serve is another important step in making an effective business strategy.

This will allow a company to accurately meet their exact wants and needs in its strategy.

Target Market

Lastly, it is important for strategy builders to be clear about the market that their offering and value proposition are targeting:

  •       If a company plans to sell to consumers (B2C), a market can be determined by demographic and socio-economic factors, such as age, education, gender, income, occupation, wealth and location.
  •       If, however, the company’s offering is targeting other businesses (B2B), markets are typically determined by using factors such as the industry, business or sales model of the businesses targeted by the company.

Step 2: Establish top-level objectives

Once the vision has been determined, the next step is to establish an organization’s top level objectives.

These objectives are generally directed towards increasing the company’s revenue and profits, since that will ensure the company’s ongoing existence while also improving the shareholder value (if publicly traded).

That is the reason a strategy basically deals with the problem of how a business can establish itself in the market to continually increase its sales, while also improving its financial position.

This is the sole purpose of a generic business strategy.

As such, top-level objectives do not include any goals to accomplish a company’s mission or achieve its vision.

These are considered later on when designing the lower level strategies like the operational and marketing strategies.

Step 3: Study the market and your business

After both the company’s vision and the top-level objectives are defined, strategy builders should recognize the strengths and weaknesses of their business as well as the opportunities and threats which may be present in the market.

The SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) is a very helpful tool for this step.

The information obtained during a SWOT analysis may provide insights which will allow managers to utilize their company’s strength to its fullest when opportunities arise, while at the same time minimize the effect of weaknesses and threats to the company’s success.

Step 4: Determine how to get a competitive edge

This step explains how the top-level objectives are to be accomplished. Companies in competitive markets need to determine how they will make a demand for their product, compete with other businesses in the market, and increase their revenues and profits.

Step 5: Setting up a strategy framework

Finishing the previous steps should allow you to create a generic business strategy.

However, it is necessary to translate this generic strategy into more specific lower-level strategies in order to allow functions such as marketing or finance to contribute effectively to it.

The structure of these lower-level strategies that lie beneath the generic business strategy is called a strategy framework.

The strategy framework captures the vision and requirements of each department and coordinates them with the top-level objectives, ensuring the success of the generic business plan.

A few examples of strategies that are conducive to the success of a company’s business strategy which are part of the strategy framework are branding, marketing, product, and operational strategies.

It’s not difficult to see that, in practice, strategic frameworks can become very complex; managers regularly review their strategic framework to make sure that the objectives of the low level strategies and high level strategies do not conflict with one another.

types of business strategies

Types of Business Strategies

When determining the competitive edge of a business, Harvard Business School professor Michael E. Porter identified three types of generic strategies that they can choose from:

  1. Cost Leadership,
  2. Differentiation, or
  3. Focus

If a business is not able to offer a product that is unique enough to attract customers, whilst also being overly expensive to be competitive, then, according to Porter, a business may be “stuck in the middle”.

That term is used to describe a business that has failed to effectively pursue one of the generic strategies.

If a company fails to secure a competitive edge it is well on its way to losing its share in the market, which will threaten the company’s future existence.

To prevent that, let us study the different ways a company can obtain a competitive edge.

Cost Leadership

This refers to a company’s ability to gain an advantage (a lead, if you will) over its other competitors in terms of cost.

That is to say, they are producing a product at a lower cost than their competitors.

This strategy requires a company to effectively decrease its cost structures while simultaneously setting the prices for its products to be in line with the industry average.

This is accomplished by using proprietary technologies, economies of scale, or the ability to create and maintain cost benefits along the supply line.

Example: A typical example of a firm that uses a cost leadership strategy is low fare airline Ryanair.

They compete in the airline industry by successfully driving down their costs and utilizing economies of scale.

Because of this, Ryanair only operates one type of aircraft (Boeing 737-200) in its entire fleet.

Differentiation

In this strategy, a business makes a unique offer that its target customers find more valuable compared to other similar products.

This will allow the business to increase prices of its products.

Example: Starbucks is a great example of a firm that has successfully differentiated itself from its competitors.

The reason why its customers are willing to pay more is because it has aesthetic stores, and an exceptional number of flavor variations despite coffee being a widely available commodity.

Focus

This is a strategy that aims at a certain niche of the market which has very specific wants or needs that the company can meet.

A company can either have a cost focus or a differentiation focus.

A cost-focused strategy aims to provide a cheaper substitute to the leading product in the market that will appeal to a select group of customers.

A differentiation focused strategy will try to cater to the specific need or want of a small part of the market.

Generally, the products created by this strategy will be made especially for those buyers who are part of the targeted niche.

Example: There are a lot of small shops that specialize in offering a specific product, most of which you can now find online.

Examples of their products are fruits and vegetables for vegans, plus size clothing for plus sized people, and cheap hypoallergenic jewelry for those with really sensitive skin.

business strategies

Measuring strategy success

Business strategies are considered successful when they are directly responsible for increasing and improving competitive and/or financial performance.

Their success can be evaluated by monitoring certain Key Performance Indicators (KPIs).

However, it is important that:

  • The level of achievement of the objectives defined in step two of the strategy formulation process are what the KPIs measure.
  • Before the strategy implementation takes place, the KPIs have already been determined to ensure accurate measurement.

Generally speaking, some or all of the following key performance indicators are measured when implementing a new business strategy:

Growth

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

Competitive Position

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

Financial Performance

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

Individual departments normally determine their own lower-level strategies.

This is why, in practice, companies may measure strategy success in a more detailed manner.

Examples of Business Strategy

Here are two examples of companies that have successfully implemented their generic business strategy to show how the earlier discussed principles are applied: Amazon and Reckitt Benckiser.

Example 1: Amazon

Amazon logo

Amazon is known for its great customer service and fast shipping options.

Its vision is to be earth’s most customer-centric company.

Amazon is making this a reality by continually innovating and developing in existing and new markets.

Because of this, it has managed to grow exponentially and its shareholder value has skyrocketed.

Jeff Bezos himself describes the four principles that guide Amazon in his first shareholder letter from 1997: customer obsession rather than competitor focus, passion for invention, commitment to operational excellence and long-term thinking.

Amazon’s generic business strategy is cost leadership.

It acquires a competitive edge by driving down its costs.

It also has the ability to innovate in competitive markets.

Despite its changes over the years, its focus has always remained the same: serving the needs of customers.

This shows that Amazon is able to use its strengths to overtake its competition that struggles to catch up with the tech giant within several years.

This has prevented most of its competitors from becoming a threat to its existence.

Focusing on price, choice, and economies of scale to create value for its customers are what Amazon’s lower-level strategies (operational, marketing, etc.) all follow.

This strategic framework has allowed Amazon to become one of the most (if not the most) successful tech companies in the 21st century.

Example 2: Reckitt Benckiser

Reckitt_Benckiser_Logo

Reckitt’s brand portfolio consists of major household brands, such as Dettol, Durex, Finish, Nurofen, and Vanish although the company name itself is not well known among consumers,

The company had to modify its business strategy in order to allow itself back on to the path of stable growth when its sales slowed and its competition increased back in 2012.

To accomplish its high-level objectives to boost sales and profits, Reckitt Benckiser focused on research and development (R&D) for new product lines;

In order to stimulate further growth, Reckitt Benckiser did the following:

  •       Raised its budgets in markets that were growing above average;
  •       RB overhauled its marketing strategies and brand and raised budgets in those fields;
  •       RB established and carefully monitored multiple key performance indicators with the goal of increasing its net revenue growth by +200bps vs. market average each year until 2017.

The modifications of its business strategy helped the company to increase its sales and profits above the market average, despite the fact that RB was unable to achieve all of its set targets.

Because of all this, RB grew exponentially in value for its shareholders between 2012 and 2017.

FundsNet requires Contributors, Writers and Authors to use Primary Sources to source and cite their work. These Sources include White Papers, Government Information & Data, Original Reporting and Interviews from Industry Experts. Reputable Publishers are also sourced and cited where appropriate. Learn more about the standards we follow in producing Accurate, Unbiased and Researched Content in our editorial policy.

  1. SBA.gov "Introduction to Strategic Planning" Chapter 2. August 30, 2021

  2. Amazon.com "Amazon Mission Statement" Page 1 . August 30, 2021

  3. Reckitt.com "Mission Statement" Page 1 . August 30, 2021