Business-level strategic planning and the generic strategies

Meaning of business-level strategic planning

Strategy is formulated at three levels. Corporate-level strategy decides which businesses the firm should be in. Business-level strategy decides how a particular business, a strategic business unit, will compete in its chosen industry or market to gain a competitive advantage over rivals. Any strategy must take account of what competitors, suppliers, government and others are likely to do, and it sets long-term objectives, a course of action and the resources to follow it. Functional-level strategies support it in marketing, production, finance and human resources.

Business-level strategic planning therefore involves analysing the industry (for example with Porter's five forces), understanding customers and competitors, identifying the firm's own resources and capabilities, and choosing a way of competing that creates more value for customers than rivals do, or the same value at lower cost. Michael E. Porter identified the generic strategies by which this can be done. They rest on two questions: does the firm seek advantage through lower cost or through uniqueness, and does it target the broad market or a narrow segment?

Business-level strategies for competitive advantage

1. Cost leadership. The firm aims to be the lowest-cost producer in the industry, serving a broad market with a standard product at a competitive price. It achieves this through economies of scale, efficient processes, tight cost control, simple products, and favourable access to inputs. Low cost lets it earn profits even when rivals cut prices. Example: a no-frills airline that flies one aircraft type, sells tickets online and turns planes around quickly.
2. Differentiation. The firm offers a product or service that customers see as unique and worth a higher price: through quality, design, brand image, technology, features, customer service or distribution. Customer loyalty reduces price sensitivity. Example: a premium appliance brand known for design and after-sales service.
3. Focus. The firm concentrates on a narrow segment, a particular customer group, product line or region, and serves it better than broad-market competitors. It takes two forms:
   • Cost focus: the lowest cost within the segment (for example, budget hostels for students in one city);
   • Differentiation focus: unique offerings for the segment (for example, a jeweller specialising in bridal designs of one community). Porter's own scheme has these three strategies (focus in its two forms). Beyond it, some firms try to combine fairly low cost with real differentiation, offering good value (often called a best-cost approach); Porter warned that a firm mixing the two without a clear choice risks being stuck in the middle.

How the chosen strategy creates advantage. A strategy works when it matches what the firm is good at to what its chosen customers value, in a position rivals find hard to copy. A firm with efficient, large-scale operations serves price-conscious buyers better by leading on cost; one with strong design or service skills serves buyers who will pay for the difference; a firm with deep knowledge of one segment serves it better than broad-market rivals.

Risks of each strategy

• Cost leadership can be imitated or overtaken by new technology, and excessive cost-cutting may lose sight of customer needs.
• Differentiation can be copied, or customers may stop valuing the difference enough to pay the premium.
• Focus is exposed if the segment shrinks or broad competitors start serving it well.
• A firm that tries to do everything without a clear choice may become stuck in the middle, with neither low costs nor distinctiveness.

Conclusion

Business-level strategic planning chooses how a business will compete. Porter's generic strategies give a clear basis for that choice: the firm must decide whether to win on cost or uniqueness, broadly or in a niche, and then align all its activities with that choice.