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Business units are individual divisions within a company, often organized based on specific products,
services, or markets. An organizational entity with its own unique mission, set of competitors, and
industry.

A business-level strategy can help your organization to achieve a competitive advantage in the
marketplace and how an organization should compete. They provide a way to think about providing
value to customers by exploiting your core competencies.

To succeed in a competitive market, every company needs to develop a clear strategy to achieve a
sustainable competitive advantage over its competitors. What is a competitive advantage? A strategy
that can be easily reproduced by its competitors. Porter’s Generic Strategies is a tool that can help
you select a clear strategy.

So, what are Business-Level Strategies?

Business-level strategies refer to what businesses do to gain competitive advantage in the market.

Companies must choose between 3 types of competitive advantage:

Cost leadership = Choosing to be the cheapest supplier in the industry

Differentiation = choosing to create the most unique and desirable products in the industry.

Focus= Deciding to focus only on the niche market within the industry

To complete his model, Porter made two additions:

1) First, the focus strategy is divided in 2 parts: Cost Focus and Differentiation Focus. Cost focus
means being the lowest cost provider in the niche, whereas differentiation focus means being
the most desirable offering within your niche market.
2) Second, by showing that failure to choose a strategy or trying to mix and match strategies will
result to: a stick in the middle strategy

Now organizations must also choose between 2 types of competitive scope:

Broad market = so you serve a big market

Narrow market = so you focus on a niche (a small market)

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Plotting all these factors in a matrix gives us the 5 generic business-level strategies:

Note that no one generic strategy is better than another. An organization can succeed by using any of
these strategies. Choosing the right generic strategy will depend on both what your competitors are
doing (the external environment) as well as what your core competencies are and where your
strengths lie (the internal environment).

Let’s look at each of the five generic business-level strategies in turn.

1° Cost Leadership Strategy

This strategy is aimed at organizations that want to compete for a broad customer base based on
price.
A misconception regarding this strategy is that returns are lower. This is not the case. To maintain
returns above the average and provide the lowest price, the organization must continually focus on
internal efficiencies.

Common mechanisms to reduce costs include:

- Establishing rigid cost controls.

- Constructing cutting edge facilities to produce at scale but also at low cost.
- Take advantage of economies of scale
- Creating low-cost production facilities

It is important to note that a cost leadership strategy doesn’t just mean deciding to be the cheapest.
That’s not enough because a similarly priced competitor could undercut your prices to steal your
customers. You need to examine what you can do differently from your competitors to maintain your
position as the lowest-cost producer. A key problem with this strategy is that cutting costs is not easy
to accomplish!

Cost Leadership Example

- Amazon / Walmart / Ryanair

Amazon is a great example of a company using a cost leadership strategy.

It aims to attract many customers. It keeps prices low by using its vast buying power to purchase
products at low prices. Added to this is the absence of physical stores and state-of-the-art distribution
facilities to pass these savings on to consumers but still maintain high margins.

Risks
- By being so focused on cost reduction, you can neglect what your customers actually want.
- Rivals may successfully copy your approach.
- New technologies can lead to cost reductions that eliminate your competitive advantage
overnight.

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2° Differentiation Strategy
This strategy is for firms that want to offer unusual products and services based on the firm's
uniqueness. Typically, firms will focus on creating unique features to win in the marketplace. They
also usually charge a higher price to their customers, to offset the cost of being unique.

Common mechanisms of differentiation include:

- Superior quality
- Higher customer service levels
- Unique branding and design
- Uniqueness

Companies with a differentiation strategy often have loyal customers because of the perceived
uniqueness of their products. This loyalty in turn reduces concurrency! ç
Risks

- Your customers might decide that your uniqueness isn’t worth your higher price.
- Competitors could imitate some of your unique characteristics, causing you to lose part of
your uniqueness.

Differentiation Strategy Example

Apple is an example of a firm operating a differentiation strategy to sell its laptops to a broad market.
Their unique design and engineering allow them to stand out in the marketplace.

This allows them not only to charge a high price but also to fight against possible competitors.

3° Focused Cost Leadership Strategy

These organizations compete on price but also stand out because they focus on serving a niche
market.

The only difference between this strategy and cost leadership is that firms in this category target a
limited segment of an industry at the exclusion of all other segments.

Common mechanisms to adopt a focused cost leadership strategy include:

- Focusing on serving a small group of customers.

- By understanding the needs of your small market, you can reduce costs to serve the needs of
that market.

Focused Cost Leadership Example:

Monster Energy operates in the energy drink niche of the soft drink and aims to charge less than its
most well-known competitor: Red Bull.

Aldi offers items at the lowest possible prices. Efforts are targeted to consumers with low to moderate
income.

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4° Focused Differentiation strategy

This strategy is like the differentiation strategy except that it focuses on a very narrow segment of the
market. These firms compete by offering unique features to a small market segment.

Common mechanisms to focus on include:

- Select a small and profitable subset of the market.

- Focus on areas with the lowest competition -
Focus on a segment where substitution is difficult.

Focused Differentiation Example

Rolls Royce cars is an example of a company using a focused differentiation strategy. Their cars are
synonymous with prestige, quality, and engineering excellence. They are premium-priced and focused
on a tiny subset of the global car market.
Mercedes Benz is an automobile manufacturing company. The company's commitment to innovation,
safety features, style, and cutting-edge technology.

Risks

- Your niche might be targeted by broad market firms with greater economies of scale. -
Your competitors could divide your niche into smaller niches.

5° Integrated Cost Leadership/Differentiation strategy or stuck-in-the-middle strategy

This strategy involves producing low-cost products with differentiated features. This strategy consists
of simultaneously focusing on two competitive advantages: cost and differentiation. This strategy is
often called a hybrid strategy.

This can be a high-risk strategy because you need to invest in both reduction and differentiation. The
reason why firms struggle to both differentiate and lead on cost is that differentiation is usually very
expensive. Combining the 2 strategies is difficult, but businesses able to do so can perform
exceptionally well. Some businesses begin with a differentiation strategy and integrate low costs as
they grow, developing economies of scale along the way.

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Integrated Cost Leadership/Differentiation or stuck in the middle strategy (example)

IKEA is a great example of a business with an integrated cost leadership and differentiation strategy. It
sells unique products that you can’t get elsewhere. It invests in its own designers to achieve this. It
also sells its products at a low price. It invests in automation and logistics to do this.

Risks

- The firm may find itself “stuck in the middle.” This is where a firm’s product isn’t cheap
enough to compete with its competitors and nor is it differentiated sufficiently.
- The other thing to be aware of is: It can be challenging to reduce costs by increasing
differentiation.

Conclusion:

First, business strategy plays a crucial role in supporting an organization motivated by innovation by
providing direction, focus, and resources for growth efforts. By adopting an appropriate strategy for
its operations, an organization can create a competitive advantage and achieve its overall goals.

Porter’s generic strategies ultimately say that there is only one way for companies to gain a
sustainable advantage: by offering greater value than their competitors. This greater value can take
one of two forms, either lower prices or better uniqueness, and you can apply both approaches to
either the broad market or to a narrow niche within the market.

In summary, there are essentially three strategies an organization can use to differentiate itself in the
market: cost leadership, focus, or differentiation. Cost leadership aims to increase market share by
focusing on low-cost production. Focus looks to dominate a small market segment by exclusively
focusing on that segment. Finally, differentiation aims to increase market share by making your
product or service different and unique.