Types of Businesses

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Last Updated:November 30, 2023

What are the Types of Businesses?

Business strategy refers to all the steps a company takes to achieve its goals and fulfill its mission and vision.

It entails comprehending what the company does, what it requires, and must do to achieve its objectives.

This data assists business owners in making resource allocation decisions and setting priorities. When everyone in the organization understands the strategy, a framework is established to keep the team moving in the same direction.

There are numerous ways for a company to stand out from the crowd and various business strategies to employ - the key is to find the right strategy for your company.

Consider this simple example: Assume you're a new pizza restaurant in town, and you want to know if you'll compete by, say, offering the cheapest pizza (cost leadership strategy).

On the other hand, you could choose to stand out by opening the first vegan pizza shop in town (differentiation strategy).

Decisions about strategy will steer your company in the right direction. With so many options, keeping your vision in mind is critical. So here are some questions to ask yourself and your team as you go:

What exactly are we?
How do we distinguish ourselves?
What direction do we want to take in the future?

Once you have a general idea of your business goals, narrow your questions to the more immediate objectives that will help you get there.

Maintain realism: keep your plan of action within the constraints of your available resources, user base, and specific market needs.

Key Takeaways

There are numerous business strategies; we have listed the top five.
To choose and implement the best one, you must put yourself in your customers' shoes, research the market, and think deeply about the fundamentals of your business. With this in mind, creating your strategy should be a lot easier.
Good strategic planning can significantly impact the outcome and profits of your business, no matter how large or small it is.

Three Types of Business Strategies

In the business world, there are at least three basic types of strategy with which people must be concerned:

General strategy
Corporate strategy
Competitive strategy

This article aims to clarify the distinctions between and among these three strategies and provide some questions to consider when considering all three.

1. General Strategy

A strategy refers to how a specific goal will be achieved. As a result, strategy, In general, is concerned with the relationships between ends and means, with the outcomes we seek and the resources available to us.

Both strategy and tactics involve devising and then carrying out plans designed to achieve specific goals.

For the most part, strategy is concerned with how you deploy or allocate the resources at your disposal, whereas tactics are concerned with how you employ or use them.

Strategy and tactics work together to bridge the gap between goals and means. The terms strategy and tactics come from the military.

Their application in business and other civilian enterprises has necessitated little modification regarding the overall strategy. Corporate strategy & competitive strategy, on the other hand, deviate significantly from the military definition of strategy.

2. Corporate strategy

A company's corporate strategy defines the markets and businesses it will operate. Corporate strategy is typically determined in the context of defining the company's mission and vision, that is, stating what the company does, why it exists, and what it aspires to become.

3. Competitive strategy

Competitive or business strategy defines the basis on which a given business will compete.

The competitive strategy is based on a company's capabilities, strengths, and weaknesses with market characteristics and its competitors' corresponding capabilities, strengths, and weaknesses.

According to Michael Porter, a Harvard Business School professor and the reigning guru of competitive strategy, industry competition is driven by five fundamental factors:

First, new entrants pose a threat.
The threat of alternative products or services
Supplier bargaining power
Buyers' bargaining power
Existing firm competition.

According to Porter, competitive strategy can take one of three generic forms in response to these five factors: (1) focus, (2) differentiation, and (3) cost leadership.

Corporate and Competitive Strategy Influencing Factors

According to strategy writers, several factors can be the foundation for developing corporate and competitive strategy. These are some examples:

Products and services provided
Resources from nature
Methods of sales promotion
Capacity-capability in production
Users-clients served
Size/growth objectives
Methods of distribution
Types of technology markets and their requirements
Profit/return objectives

According to Michael Treacy and Fred Wiersema, "value disciplines" should be used to determine strategy (corporate or competitive). They present three fundamental "value disciplines":

Operational Excellence: Strategy is based on creating and delivering goods and services. The goal is to be the industry leader in price and convenience.

Customer Intimacy: Strategy is based on tailoring and shaping products and services to fit an ever-narrower definition of the customer. The goal is long-term customer loyalty and customer profitability.

Product Leadership: Is generation Strategy is based on the continuous production of cutting-edge products and services. The goal is to commercialize new ideas quickly.

The five different types of business-level strategies

When deciding on a business strategy, your first stop should be a review of your business plan. Next, you will learn about your strengths and weaknesses, competitive challenges, and resource allocation.

This information can assist you in developing the most influential business strategy for your specific company.

Good strategic planning can significantly impact the outcome and profits of your business, no matter how large or small it is.

Although there are numerous business-level strategies, we'll review the five most common ones. Then, use them wisely to identify your company's competitive advantage.

Cost leadership entails competing on price with a wide range of businesses.
Differentiation entails competing with a product or service that has distinct features.
Focused differentiation entails competing through differentiation (uniqueness of product/service) and focusing on a small portion of the market.
Focused low-cost - competing not only on price but also by focusing on a small portion of the market.
Integrated low-cost differentiation entails competing on both price and differentiation.

Cost leadership

A cost leadership business-level strategy is one that businesses use to increase efficiency and reduce production costs so that they are lower than the industry average (or competition in the area).

In other words, a company that charges lower prices for its products than competitors in the same industry - the cheapest of its kind!

Consumers are becoming increasingly aware of the options available to them.

They are constantly looking for ways to increase their purchasing power.

Use a pricing strategy that no one else is using - one that customers cannot refuse.

This business strategy could help you gain customers by providing a much stronger value proposition.

How does cost leadership affect businesses?

A company could reduce the final cost of its product or service by cutting costs elsewhere.

For example, low production costs (for example, by purchasing on a large scale), few middlemen, fewer employees, and so on.

Compared to their competitors, such businesses can provide the same quality products or services. This enables them to provide the same service for a lower price.

Wal-Mart and Costco are good examples of cost leadership business strategies.

Their operations are so efficient and large-scale that they can get the best prices on goods, allowing them to sell them at much lower prices than other retailers.

Advantages

The advantages are:

Increase profits by acquiring more clients.
Market dominance over time - unless your competitors are willing to undercut (and go into the minus), competitors will be unable to survive. Allowing for long-term market dominance
Improves business stability: When there is a trade war or an economic downturn, the companies with the lowest prices and costs survive.

Risks

The risks are:

Requires a high sales volume to be successful - it is most successful when a high volume of sales is reached to maintain profitability.
Requires capital that may or may not be available - must be able to achieve high sales volumes while scaling before running out of funds. If the company cannot achieve stability before depleting its capital reserves, it may declare bankruptcy. This is why obtaining a Line of Credit or a Business Loan is a good idea for all businesses to maintain cash flow and allow for expansion.
This strategy is all about cutting costs and corners, which could mean cutting costs in critical areas like customer support and R&D (thus reducing Product innovation).

Differentiation

A differentiation strategy is about providing a product or service distinct from the competition (something that Become has mastered!).

It all comes down to making the product or service stand out from the crowd by solving a problem that no one else has.

It necessitates creativity and thinking outside the box. For example, to implement the differentiation strategy, you'd need to conduct extensive market research to identify a market gap that needs to be filled, or you could improve an existing product or service.

How does a business use differentiation?

Differentiation is used in business by simply making a product or service better or different than the competition. There are numerous examples of differentiation in the real world, such as the cosmetics brand LUSH.

They are proponents of handmade and ethical purchasing, which sets them apart from the competition (Sephora and Etsy).

Their stores provide excellent customer service and a one-of-a-kind retail experience where customers can touch, try, and feel the products on display.

Advantages of differentiation

1- Create brand loyalty to convert customers into fans - the right small business branding strategy can make all the difference.

People will spread the word if they like what you're doing. This is evident in the LUSH example: they have a large fan base.

2- Marketing efforts become much easier - having a unique selling point (USP) makes marketing your product or service much easier.

3- You can charge more for a product that is in high demand.

Risks of differentiation

1- High cost - providing a distinct quality may result in high Research and development costs. New product elements may raise final production costs.

2- Too different may be harmful - if a product is unfamiliar or complex to the consumer, they may avoid it.

3- Some buyers are excluded - You can't please everyone, and by differentiating to a very small niche - if that niche isn't large enough - you might not be able to become profitable.

Focused distinction

A focused differentiation business strategy involves offering differentiated products to a specific or small group of customers.

This means that your product or service should have distinct features that meet the needs of a specific market.

How does focused differentiation work in a business?

Niche or "narrow" markets can be defined in various ways, such as focusing on a specific sales channel, such as only selling online.

It could also be in terms of a demographic group; consider a hotel that provides numerous activities for children (or without).

Both of these hotels have tailored their offerings to a specific market - one for families and another for romantic couples seeking peace.

Consumers looking for a one-of-a-kind item, such as a high-end camera or environmentally friendly nail polish (you name it), are willing to pay a premium.

Advantages of focused distinction are:

Because you are providing a unique experience/product/service, you can charge very high prices - even higher than those simply following the differentiation strategy.
Competition is limited - if you've specialized in a niche area to a niche audience, you'll most likely have little competition.
Build customer loyalty - if you're selling plastic-free eco-friendly shampoo bars.

For example, you'll be targeting a particular individual who, despite higher prices, will

continue to return to you for shampoo due to the health benefits to hair and the environment, resulting in solid customer loyalty.

Risks of focused distinction are:

Limited demand may limit growth potential.
Your niche could vanish or be surpassed by larger competitors (think about gun stores that went under when Walmart and Wholesale Sports started selling firearms)
Businesses with a narrower focus may out-compete them - consider a clothing store is selling winter apparel versus a new store specializing in gloves. A consumer needing gloves may go to a glove store because they will have more options and specific advice.

Low-cost focus

A focused low-cost business strategy is similar to a focused strategy in that it focuses on a small niche of customers, but with one key difference: it is less expensive!

If your business does not appeal to a larger market, it is best to specialize.

You may not be able to offer low prices on all of your products and services, but you can strive to be the lowest-cost provider in the market for that particular niche. This could help your company stand out among its competitors.

How does focused low-cost affect businesses?

Rather than having low prices everywhere, you'll choose which products have 'normal' prices and one or two that are significantly lower.

Businesses will compete not only on price but also on a particular small market segment, such as a company that only sells to the government.

Advantages of low-cost focus

1- Low cost.

2- Target a specific market segment.

3- Increase brand loyalty through the use of a specialized product.

Risks of low-cost focus

1- You may be too specific for the market; ensure sufficient demand for your product/service.

2- Future growth may be limited - if you specialize too much, future expansion may be difficult.

Integrated low-cost/differentiation strategy

An integrated low-cost/differentiation strategy is one in which a company offers differentiated products at a lower cost.

As global competition heats up, this new hybrid business strategy could become increasingly popular.

Companies that integrate two strategies may be able to position themselves to adapt to environmental changes much faster than those that rely on a single strategy.

How does integrated low-cost business work?

Products and services from companies that use this model are not as differentiated as those that use the differentiation strategy, nor are their costs as low as those of the low-cost leaders.

Using this "midway" strategy requires businesses to consistently adapt by reducing costs while adding unique (differentiated) features to keep customers happy.

Air Arabia is an example of a hybrid business strategy. The astute flight company provides quality service in terms of comfort while maintaining an affordable fare by simply cutting back on premium in-flight services.

Another great example is IKEA, which distinguishes itself through design while providing low-cost products. It appears that simply competing on price is no longer sufficient.

Advantages of integrated low-cost/differentiation strategy are:

Excellent for gaining customer loyalty - there is significant value for customers in both the product and the price.
Adaptable business model - can easily adapt to environmental changes.
Your company will have both unique characteristics and be relatively low-cost.

Risks of integrated low-cost/differentiation strategy are:

Involves compromise - you will not be the cheapest or most differentiated company.
The risk of becoming "stuck in the middle" - the company may lack the expertise that comes with pursuing either cost leadership or differentiated business strategy.
Multitasking - The company must be able to focus on cutting costs while also adding unique features that customers value and are willing to pay a slightly higher price for.

How to Select the Best Business-Level Strategies for Your Organization

You're probably scratching your head right now, wondering which of these business-level strategy examples is best for your company.

Here are some questions you should ask yourself when deciding on a strategy.

1. Is your company's market large or small, and who are its customers?

A broad market = a large market

Narrow = restricted to a single or a few market segments.

2. Determine whether the competitive position is based on the lowest total cost or product differentiation.

Low cost = your company strives for the lowest possible production and distribution costs.

Product or service leadership means that your company focuses on a product or service that is distinct from the competition.

3. Put it all together - once you have a good understanding of your company's competition, audience, and competitive position, you should be able to see where you fit in and start developing your strategy.