research article about business level strategies

• Open access
• Published: 13 January 2020

Linking Porter’s generic strategies to firm performance

• Xhavit Islami 1 , 2 ,
• Naim Mustafa 2 &
• Marija Topuzovska Latkovikj 3  

Future Business Journal volume  6 , Article number:  3 ( 2020 ) Cite this article

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In this study, the significance of using Porter’s generic strategies in firms that operate in competitive environments is investigated. The aim is to indicate the effects of Porter’s generic strategies (low-cost strategy, differentiation strategy, and focus strategy) on firm performance. The questionnaires of the study have been prepared, the responses have been obtained, and the econometric model is constructed to measure these relationships. Findings stemmed by data that were taken from 113 firms that operate in the Republic of Kosovo. t test, Pearson’s correlation analysis, and multivariate regression analysis were used to provide testing of hypotheses. Econometric results suggest that pursuing differentiation strategy provides higher firm performance compared to two other Porter’s generic strategies (low-cost strategy or focus strategy) that have a positive impact as well.

Introduction

Increasing the global market, internationalize of firms, nowadays, the uncertainty of firms is increased much more, consequently the ambiguity of firms on answering the questions, what do we have to do? and how to do it? is increased. As well as a lot of other questions that enhance the need to have a strategy, so the importance of strategy is greater today than ever before. In addition to this, it is valuable answering the question, what is the importance of having a good strategy?

The first challenge faced by firms that enter into the market is finding a way to survive in that market. Statistics and studies that are done have shown approximately one-third of new European firms do not reach the second year of their existence, whereas 50%–60% of them do not manage to survive till the seventh year [ 1 ].

Currently, firms are losing their energy to find methods that offer them to maintain the existing position in the market, as well as to increase the market share and profit. About 55% of new entrants fail in the first 5 years [ 2 ]. According to Eurostat [ 2 ], about 83% of newborn enterprises in 2011 have survived in 2012, whereas over the years a gradual decrease is marked only 45% of created enterprises in 2007 which were active in 2012. The death rate of organizations tends to decrease as they age [ 3 , 4 ]. Newly born organizations suffer a “liability of newness” [ 5 ], in which they have to learn how to survive, and must create successful patterns of operations despite having limited resources [ 6 ]. Slightly older organizations can suffer a “liability of adolescence” in which they can survive for a time on their initial store of resources, but then their failure rate tends to follow an inverted U-shaped pattern as they age [ 7 ], whereas firms in the phase of decrease try to find ways in order to have a longer life circle in the market. Older organizations can suffer a “liability of obsolescence” if their operations are highly inertial and unchanging and become increasingly misaligned with their environment [ 8 ].

So, to survive, to be more profitable, and to increase the market share, firms should create strategies. Regarding organizational strategies, organizations are referred to as “specialists” if they can survive only within a limited range of resources. However, firms are referred to as “generalists” if they can survive using a wide range of resources [ 9 ]. Empirical research has shown that organizations that are more generalist in nature tend to last longer than specialized organizations [ 10 ]. Generalist organizations tend to have more resources than they need for routine operations, and only operate at full capacity when responding to unanticipated environmental demands [ 11 ]. Generalist organizations also tend to introduce more new products and reach beyond their typical market segments than do specialist organizations [ 11 ]. However, the strength of generalization versus specialization can be influenced by the typical duration of environmental fluctuations [ 6 ].

Researches of this scope have shown that firms during their life cycle can be faced with strong competition that leads them to failure. This was the reason that aroused our curiosity to research the relationship between Porter’s generic strategies and firm performance, as a way that can decrease the failure scale of firms. The findings of this paper enrich the strategic literature by empirical evidence and offer an opportunity for business strategists to choose the path that will provide for their organizations to survive, to increase the profit, and to increase the market share.

On these days, firms are coping with a very competitive, turbulent, and unstable market that stems from prompt technological development. Therefore, the manager’s focus is on creating a competitive advantage by creating a new way of strategic development, which is appropriate for them and enables a successful adaption to that technological and industrial changes. A major stream of strategy research examines the relationship between strategy type and firm performance, which was done by [ 12 , 13 , 14 , 15 , 16 , 17 ]. These strategy types are sometimes called generic strategies [ 18 ].

The rest of this paper is organized as follows: The second section includes literature review regarding Porter’s generic strategies that present the characteristics of low-cost strategy, differentiation strategy, and focus strategy, as well as their way of relation with firm performance. In the third section, the research hypotheses are presented, whereas the fourth section deals with the methodology used to test the raised hypotheses. In the fifth section, the model used is presented and analyzed. In the sixth section, hypotheses are tested and discussion for results is included, and this study ends with some contributive conclusions.

Research objective

After Porter’s generic strategies are read and analyzed, strategists fall into confusion that which strategy should be pursued or which strategy to implement in their organization to provide better performance for their firms. Even though Porter has analyzed carefully the industry environment, competitive forces, and competitive strategies that should be built by firms to achieve competitive advantages, it lacks on presenting strategies by quantitative results, identifying how much “separately” each of the three generic strategies impacts on firm performance. As these data are missing, strategists may pursue the wrong strategy without knowing that in the long-term periods they are destructing their industry and their business as well. Therefore, to fill this gap in the literature, the objective of this study is to use the quantitative method to measure the relationship between each of the three Porter’s generic strategies with firm performance, in order to enrich the existing literature and to bring something new and clearer strategy for strategists on pursuing Porter’s generic strategies.

The research aim is to analyze the possible influence by implementating Porter’s generic strategies: (a) low-cost strategy; (b) differentiation strategy; and (c) focus strategy in the firm performance of the production sector, and also to find out which of these three strategies is more significant with increasing firm performance.

Literature review

Since the early 1980’s, Michael Porter’s strategic typology has been one of the most widely accepted methods of discussing, categorizing, and selecting company strategies [ 19 ].

We focused on Porter’s generic strategies’ framework for a couple of reasons. Firstly, Porter’s framework of generic strategies is inherently tied to firm performance. Secondly, Porter’s framework overlaps with other typologies. Porter’s differentiation strategy resembles [ 20 ] prospector strategy, and Porter’s strategy of cost leadership is similar to Miles and Snow’s defender [ 21 , 22 ] cost leadership strategies. Porter’s focus strategy is very much like Miller and Friesen’s [ 23 ] niche innovator strategy (cited by [ 24 ]).

To make clearer the term “strategy” are presented several strategy definitions. Schendel and Hofer [ 25 ], defined strategy as: “strategy provides directional cues to the organization that permit it to achieve its objectives, while responding to the opportunities and threats in its environment.” “Strategy is analyzing the present situation and changing it if necessary. Incorporated in this is finding out what one’s resources are or what they should be” [ 26 ]. Cannon [ 27 ], “Strategies are the directional action decisions which are required competitively to achieve the company’s purpose.” Strategies are potential actions that require top management decisions and large amounts of the firm’s resources [ 28 ]. In addition, strategies affect organization’s long-term prosperity, typically for at least 5 years, and thus are future oriented. Strategies have multifunctional or multidivisional consequences and require consideration of both the external and internal factors facing the firm.

Porter’s model and generic strategies are considered as an important part of management theories, through which it is explained the firm behavior toward competitors in a certain industry. The term “generic strategy” refers to a wide area of usage and opportunity to create competing advantage despite the industry, the sort, and size of organization [ 29 ]. Strategy is an essential part of any effective business plan. By using an effective competitive strategy, a company finds its industry niche and learns about its customers [ 18 ]. According to Porter, strategies allow organizations to gain competitive advantage from three different bases: cost leadership, differentiation, and focus [ 18 , 30 ]. Porter calls these bases generic strategies [ 28 ].

Meaning of low-cost strategy relationship with firm performance

Low-cost strategy emphasizes producing standardized products at a very low per-unit cost for consumers who are price sensitive [ 28 ]. According to Griffin [ 31 ], low-cost strategy is a strategy in which an organization attempts to gain a competitive advantage by reducing its costs below the costs of competing firms.

It is worth mentioning that according to Thompson et al. [ 32 ], a low-cost provider’s foremost strategic objective is meaningfully lower costs than rivals—but not necessarily the absolutely lowest possible cost. In striving for a cost advantage over rivals, company managers must incorporate features and services that buyers consider essential.

Low-cost strategy puts importance in an increment in organizational performance. It includes the process by which the company is capable of producing or distributing goods and services with a lower cost than the competitors [ 33 ]. Porter defines a low-cost strategy as trading of standard products 30 combined with aggressive prices [ 18 ]. Pursuing low-cost strategy should be considered not as a product/service offered which is an inferior product, but as a product/service that has same comparative qualities with competitors and an appropriate price [ 33 ]. It is worth mentioning that Porter [ 30 ] has shown the relationship between low-cost strategy and firm performance, and he found that low-cost strategy is a successful way to realize stable competing advantage through reducing and controlling the cost and as a result raising organization performance.

Numerous authors explained that low-cost strategy can be defined by two alternative types (e.g., see [ 32 , 34 , 35 ]). Type one is a low-cost strategy that offers products or services to a wide range of customers at the lowest price available on the market. Type two is a best-value strategy that offers products or services to a wide range of customers at the best price value available on the market.

The reason that why organizations continue to pursue low-cost strategy is that it helps firms to increase their performance; for the sake of low cost, the company is capable of selling the product and service with a lower price and still providing the same level of profitability with the competitors [ 36 ], and protecting the organization from powerful suppliers by ensuring necessary flexibility inside the area of profit to cope with an increment in input prices [ 33 ], it serves as a barrier for entrants in conditions of the economic scale, control, and cutting the expenses [ 33 , 36 ], as well as through experience of curve [ 37 ].

Strategists should be careful about decision making to pursue the low-cost strategy, and it does not provide a permanent competitive advantage for companies that use low cost or best value. Low-cost strategy must achieve their competitive advantage in the way that is very difficult to copy or match by competitors. If the low-cost method can be found relatively easy by rivals or is inexpensive to imitate that strategy, the low-cost advantage will not last long enough to yield a valuable edge in the marketplace [ 28 ], which claims that in a manner that low-cost strategy is successful in improving organization performance, it must fulfill two ways to accomplish this: (a) perform value chain activities more efficiently than rivals and control the factors that drive the costs of value chain activities and (b) revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities. But, both of these steps could be imitated by competitors, and therefore, strategists should analyze in detail the competitors and their ability to respond with the same strategy, before they decide to apply the low-cost strategy. By pursuing a low-cost strategy, firms must be careful to use no such aggressive price cut which leads their profits to be low or not existing. Using this strategy constantly is mindful of technological breakthrough cost-saving or any other value chain progress by rivals that could erode or destroy the firm’s competitive advantage.

A successful low-cost strategy usually infiltrates the entire firm, as evidenced by high efficiency, low overhead, limited perks, intolerance of waste, intensive screening of budget requests, wide spans of control, rewards linked to cost containment, and broad employee participation in cost control efforts [ 34 ].

Can the differentiation strategy serve as a tool for increasing firm performance? Yes

Differentiation strategy is one of Porter’s key business strategies [ 38 ]. Differentiation refers to the development of a unique product or service [ 28 , 30 , 33 , 36 , 39 , 40 , 41 , 42 , 43 , 44 ]. Differentiation strategy is a strategy in which an organization seeks to distinguish itself from competitors through the quality of its products or services [ 31 ].

According to Porter [ 30 ], if product or service is unique, this strategy provides high customer loyalty. Therefore, if customers perceive the product or service as unique, they are loyal to the company and willing to pay the higher price for its products [ 40 , 45 ]. According to Hesterley and Barney [ 46 ], differentiation of product or service is an expression of individual and group creativity inside firms, which means that the risk of imitating differentiation is depended on firms’ capacity to be creative in finding methods that make the product unique. And for this strategy, Porter 30 showed the relationship with firm performance and the advantages that firms earn from pursuing differentiation strategy referring to realizing higher incomes compared with competitors because of mark trust, quality, and perception that clients have for the company product.

It is worth mentioning that even differentiation strategy does not defend the firm strategy from imitation by competitors forever, and David [ 34 ] wrote that differentiation does not guarantee competitive advantage, especially if standard products sufficiently meet customer needs or if rapid imitation by competitors is possible. According to him, successful differentiation can mean greater product flexibility, greater compatibility, lower costs, improved service, less maintenance, greater convenience, or more features.

A successful differentiation strategy allows a firm to charge a higher price for its product and to gain customer loyalty because consumers may become strongly attached to the differentiation features [ 28 ] declares that to the extent that differentiating attributes are tough for rivals to copy, a differentiation strategy will be especially effective, but the sources of uniqueness must be time-consuming, cost-prohibitive, and simply too burdensome for rivals to match. Therefore, the firm should pay attention when it decides to pursue the differentiation strategy. In their research, Guisado-González et al. [ 47 ] have found that implementation of a differentiation strategy in the manufacturing innovative companies influences positively the probability of establishing agreements of R&D cooperation and innovation with other organizations.

The ways that managers can enhance differentiation based on value drivers according to Thompson et al. [ 32 ] include the following: create product features and performance attributes that appeal to a wide range of buyers; improve customer service or add extra services; invest in production-related R&D activities; strive for innovation and technological advances; pursue continuous quality improvement; increase marketing and brand-building activities; seek out high-quality inputs; and emphasize human resource management activities that improve the skills, expertise, and knowledge of company personnel.

Is it possible that firms implement differentiation strategy and low-cost strategy simultaneously?

Given the beneficial impact of both strategies on the firm competitive position, it logically will raise the question: Can a firm simultaneously implement both strategies? After all, if each strategy separately can improve firm performance, wouldn’t be better for the firm to implement both of them? The answers to these questions are not compatible between authors.

According to Hesterly and Barney [ 48 ], the answer is No: These strategies cannot be implemented simultaneously. In their view, the organizational requirements of these strategies are essentially contradictory. Low-cost strategy requires simple reporting relationships, whereas product differentiation requires cross-divisional/cross-functional linkages. According to them, firms that do not make this choice of strategies (medium price, medium market share) or that attempt to implement both strategies will fail. These firms are said to be “stuck in the middle.”

In the Porter strategy trade-off paradigm, opposed strategic dimensions could not be pursued at the same time without creating some sort of inefficiency in the firm’s value chain [ 18 , 43 ]. This is because strategic positioning, such as differentiation and low cost, involves contradictory activities and resource allocation that are mutually exclusive. Another approach of strategy which is called “blue ocean strategy” argues the opposite; even more, they go beyond that firms can apply all these activities simultaneously: elimination, reduction, growing, and creating.

Strategic authors [ 49 ] have analyzed the “blue ocean strategy” by conducted a study of business launches in 108 companies. They found that 86% of these launches were line extensions, i.e., incremental improvements to existing industry offerings within red oceans, while a mere 14% were aimed at creating new markets or blue oceans. While line extensions in red oceans did account for 62% of the total revenues, they only delivered 39% of the total profits. By contrast, the 14% invested in creating blue oceans delivered 38% of total revenues and a startling 61% of total profits. Given that business launches included the total investments made for creating red and blue oceans (regardless of their subsequent revenue and profit consequences, including failures), the performance benefits of creating blue oceans are evident. In this explanation, blue ocean strategy looks a bit like differentiation strategy, because it creates something different from existing products. So, what is the relationship between blue ocean strategy and differentiation strategy?

The explanation of the relationship between the blue ocean strategy and differentiation strategy is given in the following: Blue oceans are defined by untapped market space, demand creation, and the opportunity for highly profitable growth. Although some blue oceans are created well beyond existing industry boundaries, most are created from within red oceans by expanding existing industry boundaries. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. The term “blue ocean” is an analogy to describe the wider potential of market space that is vast, deep, and not yet explored. It will always be important to navigate successfully in the red ocean by outcompeting rivals [ 49 ]. So the main direction which is promoted by blue ocean strategy is to create something (product or service) different from the products or services that exist in the market.

Another question is regarding the relationship between blue ocean strategy and low-cost strategy. Is blue ocean strategy basically a low-cost strategy, i.e., is it about capturing the low end of a market with a low enough price? ( www.blueoceanstrategy.com ). The answer is No; blue ocean strategy pursues differentiation and low cost simultaneously by reconstructing market boundaries. A blue ocean strategic move captures the mass of target buyers not through low-cost pricing, but through strategic pricing. The key here is not to pursue pricing against the competition within an industry but to pursue pricing against substitutes and alternatives that are currently capturing the non-customers of your industry.

Focus strategy in the function of improving firm performance

Focus strategy is proposed from Porter 30 as a generic strategy, which has shown that if the firm implements the focus strategy in an appropriate way, its performance will be increased. Focus strategy is a strategy in which an organization concentrates on a specific regional market, product line, or group of buyers [ 31 ].

Through focus strategy, the company has as a purpose to serve a segment in the close market [ 30 , 39 , 40 , 41 , 42 , 43 , 50 ]. Pursuing this strategy provides firm the integration of wide range activities that are connected with differentiation and low cost in a particular segment from which company generates higher profits, and Pulaj [ 33 ] states that firms advantage during implementation of focus strategy are higher. One of the advantages is firm’s capacity to act with high speed in order to adjust the changes in the environment, taste, and preferences of consumers. Focusing on a specific market with different needs from the others, it creates an advantage compared to rivals based on the knowledge and experience in fields related to competencies such as low cost or differentiation. According to David [ 28 ], a successful focus strategy depends on an industry segment that is of sufficient size, has good growth potential, and is not crucial to the success of other major competitors. Strategies such as market penetration and market development offer substantial focusing advantages.

According to authors [ 32 , 34 , 35 ], focus strategy has two alternative types. Type one is a low-cost focus strategy that offers products or services to a small range (niche group) of customers at the lowest price available on the market. Type two is a best-value focus strategy that offers products or services to a small range of customers at the best price value available on the market. Sometimes called “focused differentiation,” the best-value focus strategy aims to offer a niche group of customers the products or services that meet their tastes and requirements better than rivals’ products do.

Midsize and large firms can effectively pursue focus-based strategies only in conjunction with differentiation or cost leadership-based strategies. All firms in essence follow a differentiated strategy. Because only one firm can differentiate itself with the lowest cost, the remaining firms in the industry must find other ways to differentiate their products. Focus strategies are most effective when consumers have distinctive preferences or requirements and when rival firms are not attempting to specialize in the same target segment [ 28 ].

The conceptual model derived from the relationship between Porter’s generic strategies and firm performance

The literature for strategies provides numerous theories, research methodologies, and ideas on the strategy–performance relationship [ 12 ]. Researchers have found the link between generic strategies and performance lessened by situational variables including a focus on manufacturing and profitability [ 51 ]. To investigate the generic strategies and performance link, many researchers began utilizing approaches found to be generalizable across industries, specifically those proposed by Porter [ 18 , 30 ].

Several researchers have treated this relationship and later on were supported by other researchers (see [ 52 , 53 , 54 , 55 , 56 , 57 , 58 ]). Some of the research supported singular generic strategies also produces results which sow seeds of doubt about the relationship between singular generic strategy and superior performance, and it appears some businesses succeed only when they combine differentiation and low-cost generic strategies [ 55 ]. Allen and Helms [ 12 ] seek further research on the relationship between strategy and firm performance, including potential moderators of this relationship, which is clearly needed in order to advance strategic theory.

Therefore starting from the existing literature for strategy, it will be presented the relation between Porter’s generic strategy and firm performance. Figure  1 shows the conceptual model of this study. Authors were agreeing on the importance of generic strategies, but researchers have not determined yet, which of the three generic strategy frameworks helps more the firm to increase its performance. It seems that some combination of practices is more effective, but propositions on strategic practices have remained largely untested and there is a recognized need for empirical works in this area. This exploratory research begins to fill this gap in the literature and find out which of the three generic strategies is better to pursue by firms.

Source : By author

Conceptual model.

Figure  1 presents the research conceptual model, which figuratively summarizes hypotheses that will be explored below.

Hypotheses and research questions

Based on the abovementioned literature in this section, the hypotheses of the study are presented. By testing the hypotheses of this study, the gap in the existing strategic literature that deals with the relationship of linking Porter’s generic strategies with firm performance will be filled. In order to provide the empirical evidence for the most important of Porter’s generic strategy, which enables the firm to increase the competitive environment, the following hypotheses have to be tested:

Low-cost strategy has a positive relationship with firm performance that operates in a competitive environment.

Differentiation strategy has a positive relationship with firm performance that operates in a competitive environment.

Focus strategy has a positive relationship with firm performance that operates in a competitive environment.

By testing these hypotheses, the data will be taken for each Porter’s strategy separately, but to clarify more, the aim of this paper was to create two research questions. These questions show that the study has accomplished the required rules to get the final results:

Are the respondent firms operating in the competitive industry? This question stresses the environment where the firms were competing, as it is well known that Porter’s generic strategies are suitable only for firms that operate in the competitive industry. If the respondent firms were not operating on a competitive industry, the results of this study would not be significant for strategic literature.

Which of the three Porter’s generic strategies has more impact on firm performance? Answering this question provides for strategists in business and academic circles the final result that is the core goal of this study. By testing the above hypotheses, the data provide whether Porter’s generic strategies have a positive or negative relationship with firm performance. After results are taken from hypotheses test by the multivariate regression, the answer to this question is found out.

Methodological approach

The methodology consists of a combination of primary and secondary data that have been used to realize this study. The article has been prepared using the analysis of secondary data for literature review (scientific publications and articles from specialized databases, such as Science Direct, Springer Nature, Emerald, and other credible databases), whereas primary data in the form of the quantitative survey conducted in respondent firms that operate their business activities in the republic of Kosovo. For the empirical analysis of the study, the data were gathered by self-administered questionnaires. The participants were randomly chosen. To measure the impact between variables in this study, SPSS version 25 program has been used.

Data collection

From 150 questionnaires that in total were distributed to 150 firm’s managers, only 127 valid questionnaires are obtained (so the scale of responses was 84.6%). Even though 127 filled questionnaires were returned, 14 of them lacked in data and cannot be entered in the further analysis; therefore, only 113 questionnaires with full data were analyzed. The questionnaire is designed to take the evaluation of firm’s managers regarding the pursuing of Porter’s generic strategies in their firms. Responded firms operate in produce sector. The scale used in questionnaire is based on a five-point Likert scale (1—strongly disagree, 2—disagree, 3—neutral, 4—agree, 5—strongly agree).

The questionnaire is created based on the analysis of [ 28 ] which has shown the factors under which each of the Porter’s generic strategies will be effective:

Low-cost strategy can be especially effective under the following conditions (when price competition among rival sellers is especially vigorous; when the products of rival sellers are essentially identical and supplies are readily available from any of several eager sellers; when there are few ways to achieve product differentiation that have value to buyers; when most buyers use the product in the same ways; when buyers incur low costs in switching their purchases from one seller to another; when buyers are large and have significant power to bargain down prices; when industry newcomers use introductory low prices to attract buyers and build a customer base).

Differentiation strategy can be especially effective under the following conditions (when there are many ways to differentiate the product or service and many buyers perceive these differences as having value; when buyer needs and uses are diverse; when few rival firms are following a similar differentiation approach; when technological change is fast paced and competition revolves around rapidly evolving product features).

Focus strategy can be especially attractive under the following conditions (when the target market niche is large, profitable, and growing; when industry leaders do not consider the niche to be crucial to their own success; when industry leaders consider it too costly or difficult to meet the specialized needs of the target market niche while taking care of their mainstream customers; when the industry has many different niches and segments, thereby allowing a focuser to pick a competitively attractive niche suited to its own resources; when few, if any, other rivals are attempting to specialize in the same target segment).

Table  1 shows the factors that are included in the questionnaires that were distributed to the respondent firms, in order to make which dimensions are included within each Porter’s generic strategy clear and to define factors that are directly related to pursuing the respective generic strategy. Porter’s generic strategies can be particularly effective under the following conditions, and also this table helps to clarify what is meant and what items that variables have included in this study by low-cost strategy, differentiation strategy, focus strategy, and firm performance.

Questionnaires as an instrument to gather data

In order to obtain the necessary data for this research, primary sources of information were mainly used, and questionnaires were used as data collection instrument, with the target at managers or responsible of the respondent firms. Questionnaires contained four pages, and their preparation was a combination of the questionnaires that have been used for doctoral dissertations from [ 33 , 59 , 60 ], followed by suggestions of three firms’ managers in the produce sector and two university professors; after all the comments and suggestions are incorporated and analyzed, the final version of the questionnaire was written. The questionnaire was sent in June 2017 physically, or by electronic mail if such information was available in the databases used.

Demographic data of respondents firm

Finally, 113 questionnaires were duly completed, broken down by size and age. Table  2 shows the data of respondents concerning demographic data such as: the size, age, and the position of the questionnaire filler in the respondent firm. The questionnaires are filled by owners, directors (CEO), or managers of the respondent firms. The participants are selected randomly. The responded firms are chosen by the firms that operate in the production sector, whereas the size of respondent firms was small and medium-sized firms form 1–250 Footnote 1 employees.

Instrument design

To make the regression analysis, firstly we have to present the link between the independent variables, if the correlation between variables is within the limits (− 0.7 to 0.7); from the general rule of correlation, if the value is outside these limits, variables have strong connection between them, which produces incorrect estimated results. We have multicollinearity when we have a high correlation between independent variables [ 62 , 63 , 64 , 65 , 66 ] cited by [ 67 ].

The model created and variables

In order to show the relationship between Porter’s generic strategies to firm performance, in this section, an econometric model is built based on multivariate regression. This econometric model is not to sue any existing model, but it is used and presented to make our dependent and independent variables that are tested in a mathematical way clearer.

where \(\hat{Y}\)  = dependent variable, α  = non-standardized coefficients (constant), b 1… n  = non-standardized coefficient of variables, x 1… n  = independent variables and ε i  = standard error.

Dependent variable “firm performance” through using non-standardized weights of regression can be presented as follows:

where \(\hat{Y}_{a}\) is the firm performance which uses the low-cost strategy; \(\hat{Y}_{b}\) is the firm performance which uses the differentiation strategy; and \(\hat{Y}_{c}\) is the firm performance which uses the focus strategy.

As it can be seen even in the conceptual model shown in Fig.  1 , three Porter’s generic strategies have an impact on the firm performance, based on the authors [ 40 , 55 , 58 , 68 , 69 , 70 , 71 , 72 , 73 ], who have found on their research studies that a combination of these strategies may bring to the firm the best chance to achieve a higher performance; based on this, the following model ( \(\hat{Y}_{\text{fp}}\) —firm performance) is created:

Independent variables: low-cost strategy (LCS), differentiation strategy (DS), and focus strategy (FS).

Dependent variables: firm performance (FP).

With SPSS software, we have tested Eqs.  2 , 3 , 4 , and 5 ; the results are derived from those econometric tests.

Empirical results

Porter’s generic strategies are applicable in the competitive environment; we have tested the competing environment of respondent firms. Table  3 shows the data for the competitive environment in which respondent firms operate. In the questions presented in Table  3 , the participants had five scales to present their competing environment from 1—not at all competing environment to 5—extremely competing environment. From this table, it can be seen that the highest assessment by the respondent firms has taken the ascertainment “products/services are similar in the market” which is evaluated on average with 4.39 from 5 that was the maximal evaluation, while the lower evaluation has taken ascertainment “a small number of firms are dominant in the market” on average with 2.63 by 5 that was the maximal evaluation. By these results, the answer is found for the first research question: Are the respondent firms operating in the competitive industry? So, the environment where the respondent firms operate is a competitive environment, and these results provide the needed conditions to go further with hypotheses testing that derives by the third section of this study (Table  4 ).

Descriptive statistics

Descriptive data are minimum, maximum, mean, and standard deviation, for all independent variables and dependent variable that are part of this research.

A “Cronbach’s alpha” test was used to evaluate the reliability of the factors as suggested by Nunnally [ 74 ] cited by [ 75 ]. Cronbach’s alpha can be considered an adequate index of the inter-item consistency reliability of independent and dependent variables [ 76 ] cited by [ 75 ]. Nunnally [ 74 ] suggests that constructs should have reliability values 0.7 or greater. Table  5 shows the relationship between the items that are measured, deliberately to see which factors have the highest relationship, and that can be represented by a single variable. The reliabilities for each of the four constructs were adequate since the Cronbach’s alpha values for each were significantly greater than the prescribed 0.7 threshold. So, in this study the values varied from 0.734 (focus strategy) to 0.894 (firm performance), showing that the instruments are sufficiently reliable. Variables LCS 2 , LCS 4 , FS 1 , and FS 3 are moved from further analyses because they have reliability value lower than (< 0.7). In order to see which factors are included within each Porter’s generic strategy, which enables us to test the hypotheses of this research paper, Cronbach’s alpha test is performed for reliability (Table  5 ).

The first-order inter-items for reliability test by Cronbach’s alpha found that items LCS 2 , LCS 3 , FS 2 , and FS 3 are not related enough to put in their box of the question to test their strategy and are removed for further analysis. The differentiation strategy is represented by seven items, and all of them consisted of the level above 0.7 of the reliability test, Cronbach’s alpha 0.779. The dependent variable “firm performance” is made by six questions in the first- and second-order inter-items; the reliability results have shown a Cronbach alpha value of 0.894, which is a high level of reliability. Based on the reliability test (Cronbach’s alpha), all values were above 0.7.

In order to analyze the data and to test the hypotheses, the correlation and regression analyses were applied. To complete the regression and correlation analysis, IMB SPSS statistical software was used. In addition to correlation and regression analyses, descriptive statistics were presented to clarify more the fitness of used variables. Whereas empirical findings presented below show the results achieved by correlation matric and regression analyse.

Correlation analysis

Table  6 shows the Pearson correlation analysis for the independent variables that are taken as a prediction in finding (defining) dependent variable “firm performance,” in order to measure the scale of the relationship between independent variables in this testing. It is presented the connection between low-cost strategy, differentiation strategy, and focus strategy. According to the results presented in the table, it is shown that the relation in between independent variable is inside the allowed borders (+, − 0.7) [ 62 ]. The results showed no potential multicollinearity among variables. The results shown in Table  6 allow us to continue with further analysis to test the regression analysis.

Regression analysis

In order to measure the impact of independent variables in dependent variable “firm performance,” multivariate regression analysis has been used. Regression analysis is presented in Table  7 . According to regression analysis, independent variables that enter in the analysis explain 63.2% of dependent variable “firm performance.” F value is 9.976 (sig. 0.000), which means that the model is statistically important with the significance level α  = 0.05. Independent variable “LCS” is positively connected with dependent variable “FP” by predicting it for 31.2% ( b  = 0.312 and p  = 0.031), which means that for each 1% change in pursuing of the low-cost strategy the firm performance will change by 31.2%. Independent variable “DS” is positively related to dependent variable “FP” by predicting it for 43.9% ( b  = 0.439 and p  = 0.019), which means that for each 1% change in application of the differentiation strategy the firm performance will change by 43.9%. As well, independent variable “FS” is positively related to dependent variable “FP” by predicting it for 31.5% ( b  = 0.315 and p  = 0.028), which means that for each 1% change in application of the focus strategy the firm performance will change by 31.5%. If it is analyzed closely, Table  7 shows that independent variable “DS” has a higher impact in increasing firm performance compared to two other generic strategies. With these results, we answered the second research question: Which of the three Porter’s generic strategies has more impact on firm performance?

Porter [ 18 ] stressed that if firms want to have a strategy in order to achieve a competitive advantage they should pursue three strategies, that he called generic strategies. In accordance with his result and based on the empirical results of this study, Eq.  6 is presented, which shows the participation of each strategy in firm performance.

As shown in Eq.  6 , all the variables that were tested have a positive impact on firm performance; Porter [ 18 , 30 ] has shown that all of his three generic strategies have a positive impact on firm performance, if those are used in the right way. Equation  6 shows something more and tells that by pursuing low-cost strategy in conditions that all the other variables remain unchanged firm performance will be increased for 31.2%; by pursuing differentiation strategy in conditions that all the other variables remain unchanged firm performance will be increased for 43.9%; and by pursuing focus strategy in conditions that all the other variables remain unchanged firm performance will be increased for 31.5%. In this econometric model, exactly the impact of each generic strategy in firm performance is presented, and these results have a positive impact in managers’ decision making and in enriching the strategic literature related on using Porter’s generic strategies and their impact on firm performance.

See the “beta” column of Table  7 . If we increase using low-cost strategy by 1 standard deviation, the firm performance will increase by 0.245 standard deviations, if we increase using differentiation strategy by 1 standard deviation, the firm performance will increase by 0.312, and if we increase using focus strategy by 1 standard deviation, the firm performance will increase by 0.246.

Discussion of the findings and their implications

In this section, the discussion will go deeper inside Porter’s generic strategies and their relationship with firm performance. Also, alternatives to pursue each of the three generic strategies and their implication on the practical implementation are presented.

The first hypothesis (H 1 ) has declared that low-cost strategy has a positive relationship with firm performance. The firm that pursues the low-cost strategy will increase its performance. Empirical results provided that low-cost strategy explains 31.2% of firm performance; based on this result, H 1 is accepted (H 1 ↑). The results of Table  7 show that for each 1% of applying an increase in low-cost strategy in firm performance will be raised with 31.2% if other variables remain unchanged. This result shows that if an organization is implementing the low-cost strategy will have higher performance than its competitors that operate in the same industry but are not pursuing the low-cost strategy. The competitive advantage achieved by the low-cost strategy may be vague when competitors in the industry start to imitate that strategy. Low-cost strategy enables the firm to sell its product/service with a lower price compared to its competitors because of lower costs of producing products/service; as a result of this, they win a competitive advantage in the industry. According to Kume [ 36 ], firms that follow low-cost strategy have two advantages: (a) for the sake of low cost, firm is capable of selling products and services with lower prices than its rivalries and of having the same level of profit with them; (b) if fighting for the competition is raised, the cost leader is more resistant compared to other competitors.

The second hypothesis (H 2 ) has declared that differentiation strategy has a positive relationship with firm performance. The firm that pursues the differentiation strategy will increase its performance. The empirical results provided that differentiation strategy explains 43.9% of firm performance; based on this result, H 2 is accepted (H 2 ↑). For each 1% increase of applying differentiation strategy, the firm performance will be raised by 43.9% if the other variables remain unchanged. Even firms that apply differentiation strategy suffer from the imitations action by the competitors in that industry. Differentiation strategy enables firms to sell their product/service with a higher price than its competitors in the industry because firms that pursue differentiation strategy meet the needs of consummators in the way that competitors cannot fulfill; matching of these unique needs derives as a result of offering unique products or services by the firm. These firms firstly investigate the market with the aim to identify the consumers’ needs and then offer the unique service/product in accordance with consumers’ need.

The distinction between pursuing low-cost strategy and differentiation strategy is that: Low-cost strategy is related to economizing operations processes of productions that make possible to produce products/services with low-cost, whereas differentiation strategy is related to uniqueness of operational processes on the value chain that makes possible to produce products/services in a unique way which increases the value of its products, and as a result of this, the price of its products is increased as well.

The third hypothesis (H 3 ) has declared that focus strategy has a positive relation with firm performance. The firm that pursues the focus strategy will increase its performance. The empirical results provided that focus strategy explains 31.5% of firm performance; based on this result, H 3 is accepted (H 3 ↑). For each 1% increase of applying focus strategy, the firm performance will be raised by 31.5% if the other variables remain unchanged. Pursuing the focus strategy enables the firm to sell its product/service in a “niche” market that is not occupied by competitors. Focus strategy gives a competitive advantage until the moment when its competitors show interest in this part of the market. When this niche market becomes an attractive part for competitors, the firm will be faced with higher competition. In this situation, competitive firms will be forced to pursue low-cost strategy or differentiation strategy in order to survive and to increase profitability or market share.

To sum up, the application of Porter’s generic strategies brought an increment to respondent firms’ performance. H 1 , H 2 , and H 3 are accepted/supported. Firms that apply low-cost strategy, differentiation strategy, and focus strategy have better performance compared to firms that do not apply Porter’s generic strategies. In this study, as a result of the empirical analysis, which of the generic strategies has a higher impact on firm performance? can be identified. Results from respondent firms have shown that the firms that apply the differentiation strategy have a higher performance compared to firms that pursue the low-cost strategy or focus strategy. The visual appearance of linking Porter’s generic strategies to the firm performance that is generated from the empirical analysis can be summarized as shown in Fig.  2 .

Source : Authors

Results from this study for the process of Porter’s generic strategies’ impact to firm performance. Notes : Standard deviations in parentheses.* p  < 0.10; *** p  < 0.01; b  = non-standardized coefficients.

Therefore, the results of this study suggest firms follow more the differentiation strategy compared to two other generic strategies. Bearing in mind the reason that, if firms apply the low-cost strategy this is going to be the first step toward the destruction of their industry in the long-term period. If one firm lowers the price for its product/service, then the competitors in that industry will apply the same strategy (lowering the price for their products/services). Low-cost strategy in a long-term period does not bring the new consumers in the industry but only bring displacement of consumers from one firm to another. As a result of this movement, zero-sum effect is created (one more customer for a firm equals to one less customer for other firms that operate in the same industry, consequently, occur customer movement between firms without bringing new clients in the industry).

On the contrary, a firm that pursues differentiation strategy in the short- and long-term period enables to increase the firm performance. In the short-term period, this method brings profit to the firm as a result of the competitive advantage that is provided by a unique product/service with higher quality than competitors. In the long-term by pursuing the differentiation strategy provides an added value of all industry. As a consequence of strategy imitation by competitors provides a higher quality of product/service that leads the industry on a higher level of quality. By analyzing very clearly, how works this strategy and what advantages it will bring in the industry? It can be explained as: the main objective of the organization managers and strategists is increasing the firm performance over time, but the existing of numerous competitors makes it not easy to achieve it. In the competitive market, the way that firm managers follow to achieve the objective is product/service differentiation, by trying to create something unique in order to be attractive for consumers. This uniqueness can be done by increasing the existing product/service values that are present in the market or bringing new and better products/services in the market. Both of these ways set a higher value of products/services in the industry.

To further simplify these implications, two levels of economic priorities, winning priorities and qualifying priorities, can be used. The winning priorities mean the added value of products that help firms to achieve a competitive advantage in the market, whereas qualifying priorities mean the standard value of products/services that are operating in the market. When new firms try to enter in the market, they should provide products/services at the same level of value with existing products/services in the market. In accordance with these two economic concepts, when firms pursue the differentiation strategy, the winning priorities are created which make them dominate in the competitive market, but in the long-time period, the competitors in order to compete with that industry should copy existing firms’ strategy to create products/services in the same value. As a result, in the long-time period, the winning priorities become qualifying priorities; this is the reason why we stress that the value of the industry will be increased by using the differentiation strategy. Firms that pursue differentiation strategy create unique products or services that distinct those by competitors, as a result of accomplishing unique needs and demands of consummators. Our findings suggested that in an economy that competition is getting stronger, where markets are opening, competition is rising, the firms have to earn their success and in order to earn their success, they need to have a strategy, and this strategy should be the differentiation strategy. Firms must focus on bringing a unique product/service, to accomplish unique consummators needs.

The aim of this study was to find out the impact of Porter’s generic strategies in increasing firm performance, through analyzing each of the generic strategies: low-cost strategy, differentiation strategy, and focus strategy. To find the relationship between variables of the study, three independent variables “LCS,” “DS,” and “FS,” as well as one dependent variable “FP,” were created. Three propositions have been made in the form of hypotheses: H 1 , H 2 , and H 3 . By the correlation analysis, the relationship between independent variables was moderated, whereas in multivariate regression analysis enough information has been found for the impact of Porter’s generic strategies on firm performance. Pearson’s correlation and multivariate regression results have supported three research hypotheses raised in this research.

Also, two research questions were answered in this study. The first question was answered before the hypotheses verifications and the respondent firms were operating in a competitive industry, whereas after the hypotheses were tested, the second research question was answered. The findings of this research showed that three of Porter’s generic strategies are important to increase firm performance. Also, empirical findings indicated that pursuing the differentiation strategy has a higher impact on increasing firm performance compared to two other Porter’s generic strategies.

Applying Porter’s generic strategies provides the firms to reach successfully the essential purposes of every firm that are to survive, to be profitable, and to increase the market share. This study makes a significant contribution to the scientific and academic value, regarding the impact of Porter’s generic strategies to firm performance in Kosovo, in the region, and beyond.

Availability of data and materials

The data used in this manuscript are primary data, and questionnaires were used as a tool for gathering that data. The distributed questionnaires have contained the anonymity statement on it ensuring respondents that their personal data will not be published anywhere: “Anonymity: Only the investigator will have access to the physics responses. No one will be able to determine, in any written report or article, whether you have participated in this study or not, the data will be published as generalized.” So, we cannot distribute their information, but we are allowed to use and to present it only in the generalized form of results. Also, SPSS is used as a tool for data analyses; as a result, those data are coded by numbers. As such, the data are in the responsibility of the corresponding author.

We have used the definition of small and medium enterprises (SME) based on European Union standards where < 10 employees are micro-, < 50 employees are small-, and < 250 employees are medium-sized enterprise [ 61 ].

Abbreviations

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In strategic management, businesses use a variety of approaches to craft a business model that stands apart from competitors. Among these, types of business-level strategies are particularly effective. Defining and implementing an effective business level strategy is more crucial than ever. This strategy determines how a company will compete in its chosen market or markets and is a vital component of the overall business strategy . An effective business level strategy can significantly enhance a company’s ability to respond to market conditions, leverage its strengths, and achieve sustainable growth.

Business Level Strategy is a crucial component of the strategic management process within any organization aiming to achieve competitive advantage. By focusing on market positioning and meeting the needs and preferences of specific market segments, this strategy helps companies differentiate from competitors and achieve business needs. At Digital Leadership, we recognize the criticality of strategic adaptation and innovation in today’s business landscape. Our expertise in digital strategy and execution places us in a unique position to help businesses leverage their core competencies and navigate through the complexities of market competition.

What is Business Level Strategy?

Business Level Strategy guides firms in navigating competitive markets and aligning their operational activities with broader business goals . This strategic approach focuses on achieving competitive advantage through customer satisfaction, optimizing operational efficiency, and adapting to the ever-changing market dynamics. Understanding Business Level Strategy is crucial for any organization aiming to sustain and enhance its market position.

It provide frameworks that help businesses craft pricing strategies and reduce production costs, ultimately leading to good cost leadership. By following the principles outlined by Michael Porter and focusing on these three strategies, businesses can effectively attract customers and enhance their market position.

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2) understand the competitive environment.

Analyzing your competitive environment allows you to identify key competitors and market trends, helping to position your strategy effectively.

3) Define Strategic Objectives

Clear strategic objectives must be set to guide the direction of your business efforts and to measure progress against these goals.

4) Identify Target Customer Segments

Understanding who your customers are and what they need is crucial in tailoring your business strategy to meet their demands.

5) Select the Right Business-Level Strategy

Choose a strategy—be it cost leadership, differentiation, or focus—that aligns with your company’s strengths and market opportunities.

6) Develop Action Plans

Action plans translate your strategy into actionable steps that can be implemented within your organization.

7) Build Organizational Support Culture

Foster a culture that supports the strategic goals through training, leadership alignment, and employee engagement.

8) Implement and Monitor Key Performance Indicators (KPIs)

Implement the strategies and monitor their success through key performance indicators.

9) Evaluate the Effectiveness of the Strategy

Regularly evaluate the effectiveness of your business strategy to adapt and pivot as necessary.

Importance of Integrating Business Level Strategy in Organizations

As a piece of your  Organizational Strategy,  your  Business Level Strategy  articulates many of the operations that you’ll implement in order to achieve your broader  business goals.  There are several reasons why Business Level Strategy is an important piece of every thriving organization’s overall approach to the work they do.

• Facilitates differentiation from competitors
• Guides decision-making
• Enhances focus and defines target market
• Supports long-term planning
• Facilitates growth and development

(1) Facilitates differentiation from competitors

A strong Business Level Strategy enables an organization to gain a competitive advantage over its rivals.

(2) Guides decision-making

A clear Business Level Strategy helps managers coordinate their efforts and allocate resources effectively. With clear  strategic planning , a business is less-likely to undertake wasteful investments.

(3) Enhances focus and defines target market

Having a well-defined Business Level Strategy enables organizations to focus their efforts on the most critical aspects of their business, including a well-defined target market.

(4) Supports long-term planning

Effective Business Level Strategy provides a foundation for long-term planning and helps organizations set goals and objectives.

(5) Facilitates growth and development

The right Business Level Strategy can help organizations grow and develop by providing a roadmap for expanding into new markets, launching new products, and diversifying their operations.

Business Level Strategy is crucial for organizations to succeed in today’s rapidly  changing business environment . It helps organizations stay focused, make informed decisions, and achieve their  long-term goals.

How to Choose The Right Business Level Strategy To Gain a Competitive Advantage For Your Company?

Selecting the right business level strategy involves understanding your market, assessing your internal capabilities, and aligning your business goals with customer needs. This strategic alignment is crucial for gaining a competitive edge and ensuring the successful business outcome. To choose effectively:

• Assess the Market: Understand the dynamics of your market, including customer behavior, competitor strategies, and emerging trends. This will help identify opportunities where your business can effectively differentiate itself.
• Evaluate Internal Capabilities: Look at your company’s strengths and weaknesses to determine which type of strategy can make the most impact. For instance, if your production costs are inherently lower, a cost leadership strategy may be advantageous.
• Align with Customer Needs: Identify and understand the specific needs and preferences of your target segments. Strategy to attract customers should focus on how your offerings align with their expectations and how you can solve their problems better than competitors.

By carefully considering these elements, businesses can select a business level strategy that not only complements their strengths and the market environment but also resonates well with desired customer segments.

Challenges of Implementing Business-Level Strategies and How to Overcome Them

Challenges in implementing business-level strategies often include alignment of resources, resistance to change, and market unpredictability. Here’s how to address these challenges:

• Alignment of Resources: Ensure that all parts of the business are geared towards the strategy. This includes allocating budget, manpower, and other resources to support strategic initiatives.
• Resistance to Change: Change can often meet resistance within an organization. Overcoming this requires strong leadership to communicate the benefits clearly and to involve key stakeholders in the strategy development process. Engaging employees early and often helps in gaining their buy-in and making them feel a part of the journey.
• Market Unpredictability: To deal with unpredictability, businesses must remain flexible and agile. Regularly reviewing and adapting the strategy based on market feedback and performance can help stay relevant. Implementing a feedback loop from customers and frontline employees can provide insights that lead to quicker adjustments.

In implementing these strategies, companies can navigate the complexities of market competition and internal dynamics, enabling them to achieve specific goals and foster growth. This strategic approach not only helps in attracting customers who are looking for differentiated offerings but also enhances the company’s ability to compete effectively in new markets and with new products, ultimately ensuring the successful business in the long term.

Case Studies of Business-Level Strategy Implementation

Exploring case studies from successful companies like Apple and Starbucks can provide valuable insights into effective business-level strategy implementations. Both companies have masterfully used business-level strategies to carve out dominant positions in their respective markets through differentiation and a focus on customer loyalty.

Apple: A Synonym for Uniqueness and Differentiation

Apple’s business-level strategy hinges on its unparalleled ability to innovate and create products that define uniqueness in the market. The company’s focus on aesthetic design, user-friendly interfaces, and cutting-edge technology appeals to a specific niche of technology enthusiasts and premium product consumers. Apple not only differentiates its products but also maintains a higher price point to match its brand prestige, which in turn bolsters customer loyalty and premium positioning.

Starbucks: Crafting a Unique Customer Experience

Starbucks employs a differentiation business strategy that goes beyond just selling coffee. It creates a distinctive and comforting “third place” (apart from home and work) which resonates deeply with consumers. By focusing on the ambiance, consistent quality across outlets, and excellent customer service, Starbucks maintains customer loyalty and effectively differentiates itself in a crowded market. Their strategy includes exploring new markets and consistently innovating the customer experience, which keeps the brand relevant and loved.

How to Optimize the Customer Journey in Modern Business Level Strategy Execution

Optimizing the customer journey in the modern business environment involves a meticulous understanding of customer touchpoints and consistently enhancing interactions to improve customer experience and foster loyalty. This requires an integration of cost and differentiation strategies where businesses need to cut costs while enhancing the value offered to customers. This dual approach ensures that the business remains competitive on price while differentiating its offerings to better meet customer needs.

Effective optimization might involve using digital tools to streamline the purchasing process, offering personalized interactions through AI and machine learning, and constantly gathering feedback to refine the customer journey. Each step should be designed to enhance customer satisfaction and deepen engagement, turning one-time buyers into lifelong advocates.

Performance Indicators (KPIs) for Evaluating Business-Level Strategy Success

To measure the effectiveness of business-level strategies , organizations must establish and monitor Key Performance Indicators (KPIs). These indicators help businesses gauge their performance in areas critical to their strategic goals, such as:

• Market Share Growth: Measures the company’s ability to expand its presence in new and existing markets.
• Profit Margins: Keeps track of profitability changes, which reflect the success of cost leadership strategies and the ability to manage costs effectively.
• Customer Satisfaction Levels: An essential metric for assessing how well the company meets customer expectations, a direct outcome of differentiation strategies.
• Customer Retention Rates: Indicates customer loyalty, which is crucial for long-term success and is directly influenced by the company’s ability to maintain its uniqueness and meet customer needs.

By integrating these elements into the business-level strategy , companies can ensure that they not only survive but thrive in competitive markets, leveraging their unique strengths to meet complex and ever-changing market demands.

Frequently Asked Questions

1) what is the advantage of setting business-level strategies.

Setting business-level strategies provides a clear roadmap for operational success and competitive positioning. It enables a company to tailor its operational focus to specific market demands, ensuring that resources are allocated efficiently to drive market share and profitability.

2) How often should a business-level strategy be reassessed?

Business-level strategies should be reassessed annually or whenever significant market shifts occur. This reassessment ensures that the strategy remains relevant and effective in addressing the current market conditions and company objectives.

3) Business-level strategy addresses which overarching question?

It addresses the critical question of how a company can achieve a competitive advantage in its designated market. This involves a deep understanding of the market, competitive forces, customer preferences, and internal capabilities.

4) Can Business Level Strategy Change Overtime?

Yes, business-level strategy can and often does change over time. As market conditions evolve, companies may need to adapt their strategies to maintain competitiveness. This could involve shifting from cost leadership to differentiation, targeting new customer segments, or even redesigning products to better meet the changing needs of the market.

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What is Business Level Strategy? Definition, Types, Examples

Tactical and strategic planning is crucial to the success of your business model. Every company needs it to experience real growth across all key areas and to be prepared for different business cycles . Discover and integrate modern business tactics into its corporate strategy.

Incorporating a business-level strategy, the middle layer in the overall strategy hierarchy, enhances the productivity of your company’s department. It leads to market expansion and better use of business resources.

This guide will cover the A-Z of business-level strategy, including how to implement a business-level strategy.

What is a Business Level Strategy?

The primary business level strategy definition is the strategic planning and implementation processes incorporated by successful businesses in their niche market.

Your choice of business-level strategy is configured to gain a competitive advantage, improve customer satisfaction, and maintain above-average returns.

Most organizations that operate one business often combine their business-level strategy with the corporate-level system to devise a single level of the process.

An effective business-level strategy adequately defines a business's goals and policy standpoint to deliver customer value and gain a tremendous competitive advantage over competitors by using the business's core competencies.

Adopting the right business strategy for your business cannot be overemphasized. It determines the company's direction, defines how it serves its customers, and helps the company establish its brand.

A business can have a corporate-level strategy, a business-level strategy, or a functional-level strategy, depending on the business's organizational structure. In an organization having multiple business units, each unit is a strategic business unit ( SBU ).

Creating a business-level strategy is the best way to bridge the gap between your hyper-specific functional strategy and the more general corporate strategy.

The main difference between business and corporate level strategies is that the former is more focused.

Compared to the corporate strategy level, business-level strategists can develop a more detailed and accurate description of their customers than at the corporate strategy level.

Types of Business Level Strategies

There is no best generic strategy for your business. The best business strategy for you depends on two factors: your customers and competitors.

Although you can incorporate different business-level strategies into your business to give it the needed competitive advantage, some of them stand out.

Here are the main business-level strategies available for you to choose from.

1. Cost-Leadership Business Level Strategy

A cost-leadership business strategy allows businesses to increase their overall efficiency by reducing operational costs. It will enable companies to charge lower prices for their products than their competitors.

With consumers being more aware of their choices than ever before and constantly looking to increase their purchasing power, the onus is on you to use an effective price strategy that distinguishes you in the market and can not be turned down.

There are two main cost-leadership business-level strategy types: broad cost leadership and focused cost leadership. What differentiates them is that the broad cost leadership’s competitive scope is broad in target, while that of focused cost leadership is narrow and focused.

Cost leadership strategy is best suited for businesses capable of lowering their operational costs low enough to post profit margins while outpricing their competition. Businesses offering a lower price than their competitors can use this strategy.

2. Differentiation Business Level Strategy

A differentiation strategy provides a product or service with differentiated features compared to competitors.

Differentiation strategy is characterized by innovation. You must conduct extensive market research , identify exploitable gaps in the market, and tailor your business to offer a product or service that bridges that gap or improves an existing product or service.

This business-level strategy is best suited for any business or industry. A wide range of companies uses it to compete for market share as long as they can identify gaps in the market that need to be filled.

3. Focused Differentiation Business Level Strategy

A focused differentiation business strategy targets a specific and narrow segment of customers . It offers them differentiated products with unique features tailored to the target customers.

The former’s focus on a very narrow segment of the market is what separates the focused differentiation business level strategy from the general differentiation strategy.

Focused differentiation is best suited for markets where understanding product comparison is critical. New businesses find competing with companies using a robust differentiation business strategy challenging.

This strategy is effective for businesses that have identified a niche in the market to tailor their products or services. Focusing on a target audience ensures new businesses can get significant demand for their products or services.

4. Focused Low-Cost Business Level Strategy

The focused low-cost business strategy only focuses on a small niche of customers and comes at a lower cost than a strong strategy. It is best to tailor your focus to a particular niche for businesses that do not seem to appeal to the broader market.

By offering the lowest cost provider in your market niche, your business tends to stand out against a wide range of competitors.

A focused low-cost strategy is best suited for businesses with many competitors. Despite the low cost, they are not market strong, or only a small market segment of specific customers can generate the required revenue for your business.

5. Integrated Low Cost/Differentiation Strategy

Businesses employ an integrated low-cost or differentiation strategy with differentiated products offered to customers at a lower cost than competitors.

As a hybrid business strategy, the integrated strategy is quickly gaining ground brought about by increasing global competition.

The benefit that companies that choose this hybrid business level strategy have over those that rely on a single system is that by integrating these two business level strategies, you position yourself better to adapt to quicker environmental changes.

You can use flexible manufacturing systems to maintain superior quality in the product development process while reducing operating expenses.

This hybrid business level strategy is best suited for businesses that operate in a market niche where the buyer's needs and preferences are entirely different from the rest of the current market.

How to Implement a Business-Level Strategy

You need to identify and implement your business objectives in a way that will offer numerous benefits to your business to implement a business-level strategy successfully.

Apart from identifying your goals, you need to have a detailed plan to help your business achieve all of its highlighted goals.

Here is a list of steps to successfully implement a business-level strategy for your business.

1. Identify Target Market and Consumers

The first step in implementing a successful business-level strategy is identifying all relevant target markets and consumers.

Before successfully implementing the needed changes to your business organization, you need to spell out the market you are seeking to penetrate and the ideal business’s customers to which the market will likely open your business.

Consider your competitors that have already experienced significant success in that same market you are about to venture in, their average pricing, the target market, and customers that patronize their products and services.

2. Find Out the Needs of Your Identified Market

Your competitor's sales should closely guide the needs of your customer base. You need to identify your customer's particular needs and then relate them to the products and services you hope to offer.

Consider the price standpoint of your customer and build your product price around the average price a large majority of your customer base can afford.

3. Find Effective Ways of Catering to Your Customer's Needs

Figure out ways to address your highlighted needs. You need to go back to the table with your company executives and build strategies, including where to seek vendors, getting your products to the desired target, and making them within reach of your customers.

Pick a fair price for your product or service that is favorable to the business and your customer base, as you already have established competitors.

4. Compare Your Business Level Strategies with Competitor's Strategies

Considered the business level strategy your competitors employ that still enables them to post massive profit margins.

Most businesses use cost savings as an effective business-level strategy to return large sums of profits and build brand loyalty.

This strategy is of great help if you are looking for how your competitors' business model is geared at improving and adapting to evolving changes in the narrow market segment.

5. Set Common Goals with the Company's Goals

Your goals must be met by all stakeholders of the company and the company as a whole.

Devise a plan for company-wide goals that positions you to consolidate and strengthen your potential within the market. Your business should leverage core competencies to create value that satisfies customers.

Business goals should be specific and should be attainable. You are in constant competition; your goals must be geared towards that solid fact. Successful businesses use the SMART goal framework to set their business and financial goals .

6. Set Unique Goals for your Departments

Individual department goals help the business better segment responsibilities that play a massive role in ensuring the success of the overall company's goals.

Constant communication must be maintained among all quarters of your organization, especially between the corporate level and the employees, to generate the result required and translate into the success of department-assigned tasks.

7. Complete Routine Checks at Each Company Level

Schedule monthly checks that help track your level of progress and ensure you are not diverting from the organization's set goals and objectives.

Your monthly review is done on the corporate level to give room for relevant information to be disseminated down the corporate ladder from department heads to individual department members.

Examples of Business Level Strategies

A breakdown of business-level strategy examples and their application is a good way of understanding how business-level strategy differs from other strategy levels.

The ideal business-level strategy is the one that helps reduce costs and increase return on investment ( ROI ).

Popular business-level strategy examples to aid your understanding include

1. Cost Leadership

An example of business-level strategy businesses employs under cost leadership is offering a product or service at the lowest cost attainable to competitors to gain a considerable market share.

Businesses strive for cost reduction by improving or constructing new and adequate facilities, investing in tools and equipment, and reducing the overhead and administrative expenses of the company.

Cost leaders are companies that are the cheapest manufacturers of a product and providers of a service.

One common misconception about this strategy is that profit margins are lower. You can use rigid cost controls and better facilities for mass-producing products at scale to drive costs and increase your profit margins.

With a focused cost leadership strategy, businesses compete on price with their competitors but focus on a niche market. This strategy helps you better understand your customers’ needs and serve them better.

2. Differentiation

In the case of differentiation, instead of reducing the business operational cost and diverting the money saved to customers, differentiation strategies focus on developing and marketing products to offer customers the most significant value.

There are two forms of differentiation strategy: broad and focused differentiation strategies. What differentiates them is that a broad differentiation strategy focuses on a vast range of customers while a focused differentiation strategy focuses on a smaller number of customers.

The Apple brand, which has created a niche in the smartphone market, is a perfect example. Apple invested heavily in customer service, research and development, and marketing, allowing it to charge a premium price without affecting its market share.

3. Focused Low Cost

Apart from reducing costs from their operations, businesses decide to tailor and divert all their focus and attention to a particular market subset for maximal value as their business-level strategy.

Consider a business that produces and sells manufacturing tools. This business can focus its tool manufacturing strictly on the professional tradesperson market.

4. Focused Differentiation Strategy

This business-level strategy involves a business choosing to differentiate itself from its competitors while focusing a large chunk of its efforts on a smaller subset of its customer market.

The idea behind a focused strategy is that with a smaller target market comes the ability to better understand the business customer base and their needs and successfully deliver the value the customers need.

An example of the focused differentiation strategy is the automobile company Rolls Royce which focuses on offering premium-priced cars for a sub-niche of the global car market.

5. Integrated Low Cost/Differentiation

A hybrid strategy that combines low-cost and differentiation techniques is the most effective approach for several businesses.

The premium fast food restaurant industry is a business venture that utilizes the integrated low-cost/ differentiation strategy to near perfection.

They offer low prices that characterize established food chains and a differentiated range of offerings that take them a step higher than most fast food chains.

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Please note you do not have access to teaching notes, business‐level strategy and performance: the moderating effects of environment and structure.

Management Decision

ISSN : 0025-1747

Article publication date: 29 June 2010

This study aims to examine the moderating effects of external environment and organisational structure in the relationship between business‐level strategy and organisational performance.

Design/methodology/approach

The focus of the study is on manufacturing firms in the UK belonging to the electrical and mechanical engineering sectors, and respondents were CEOs. Both objective and subjective measures were used to assess performance. Non‐response bias was assessed statistically and appropriate measures taken to minimise the impact of common method variance (CMV).

The results indicate that environmental dynamism and hostility act as moderators in the relationship between business‐level strategy and relative competitive performance. In low‐hostility environments a cost‐leadership strategy and in high‐hostility environments a differentiation strategy lead to better performance compared with competitors. In highly dynamic environments a cost‐leadership strategy and in low dynamism environments a differentiation strategy are more helpful in improving financial performance. Organisational structure moderates the relationship of both the strategic types with ROS. However, in the case of ROA, the moderating effect of structure was found only in its relationship with cost‐leadership strategy. A mechanistic structure is helpful in improving the financial performance of organisations adopting either a cost‐leadership or a differentiation strategy.

Originality/value

Unlike many other empirical studies, the study makes an important contribution to the literature by examining the moderating effects of both environment and structure on the relationship between business‐level strategy and performance in a detailed manner, using moderated regression analysis.

• Manufacturing industries
• Performance management

Nandakumar, M.K. , Ghobadian, A. and O'Regan, N. (2010), "Business‐level strategy and performance: The moderating effects of environment and structure", Management Decision , Vol. 48 No. 6, pp. 907-939. https://doi.org/10.1108/00251741011053460

Emerald Group Publishing Limited

Copyright © 2010, Emerald Group Publishing Limited

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What are carry trades and how did they contribute to this week’s global market mayhem?

Currency traders watch monitors near a screen, back, showing the Korea Composite Stock Price Index (KOSPI), top left, and the foreign exchange rate between U.S. dollar and South Korean won, top center, at the foreign exchange dealing room of the KEB Hana Bank headquarters in Seoul, South Korea, Tuesday, Aug. 6, 2024. (AP Photo/Ahn Young-joon)

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BANGKOK (AP) — The mayhem that swept across world markets this week was partly caused by a market strategy known as the “carry trade.”

Japan’s benchmark Nikkei 225 plunged 12.4% on Monday and markets in Europe and North America suffered outsized losses as traders sold stocks to help cover rising risks from investments made using cheaply financed funds borrowed mostly in Japanese yen.

Markets recovered much of their losses on Tuesday. But the damage lingers.

They were jolted by a combination of factors, including dread of a possible recession in the United States, the world’s largest economy, and worries that technology shares have shot way too high this year.

But the scale of the declines was exaggerated by the rush to sell U.S. dollars due to carry trade deals that had helped drive markets to record levels.

What are carry trades?

Carry trades involve borrowing at low cost in one currency to achieve higher returns from investments in another currency. One of the most recent examples has been to borrow Japanese yen, expecting the currency to remain cheap against the U.S. dollar and for Japanese interest rates to remain low. The borrowed funds would then be invested in U.S. stocks and Treasury bonds in anticipation of a higher return.

Why have traders been unwinding their carry trades?

The key factor behind a carry trade is a difference in interest rates. The Bank of Japan has kept interest rates at or near zero for years, trying to encourage more spending and spur economic growth. Last week, it raised its main interest rate from nearly zero . Higher interest rates tend to boost the value of a nation’s currency, and the Japanese yen surged against the U.S. dollar. Traders scrambled to sell higher risk, dollar-denominated assets to cover suddenly higher borrowing costs, plus losses from foreign exchange rate changes and losses in asset values as share prices plunged. Also, hedge funds that conduct carry trades use computer models to help maximize their returns versus their risks. They needed to sell shares to maintain acceptable risk profiles.

Why do carry trades have an outsized impact on markets?

Carry trades tend to make the most sense when foreign exchange rates are relatively stable and investors can tap into higher yielding market opportunities, like the recent runups of stock prices in places like the United States. The recent market upheavals obliged traders to cover their debts by buying yen and other carry trade currencies and selling relatively more of the higher risk assets they bought under more favorable conditions. Also, carry trades are very lucrative when stocks or other investments are rising, but losses can snowball when thousands of traders are pressured to sell stocks or other assets all at once. “A massive global carry trade unwind was the spark that lit the fuse for this market Armageddon,” Stephen Innes of SPI Asset Management said. “One defining characteristic of these self-perpetuating market melts is the vicious cycle where a sell-off increases realized volatility.”

What’s the future risk from carry trades?

The gap between the main interest rate in Japan, now at 0.25%, and the Federal Reserve’s benchmark rate of 5%-5.25% is still wide but is likely to narrow as the Fed cuts rates and Japan raises its rates. Financial markets appeared to have calmed Tuesday, with Japan’s Nikkei 225 index gaining 10.2% and other markets mostly higher. Analysts are divided over whether this bout of volatility in the markets has passed or if there is more to come. Regardless, carry trades have been used for decades. They contributed to a meltdown in Iceland’s financial sector in 2007-2008 where investors borrowed in yen or Swiss francs to take advantage of high Icelandic interest rates. During this latest market upset, Mexico, another focus of the yen carry trade, has seen its peso fall more than 6%. The popular but potentially complicated trading strategy is likely to remain a wild card for investors, especially in times of high market volatility.

More From Forbes

4 ways servant leaders can inspire professional development in the workplace.

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Edward DeAngelis, CEO, EDA Contractors , advocates emotional intelligence and psychological safety.

Servant leadership is very important to me. As business leaders, we strive to build natural and genuine relationships with our workforce, ideally to empower them, as people within the organization, and, in a collective sense, to demonstrate to each individual that the organization, as an entity, recognizes and appreciates…everyone.

To support employee retention and performance, leaders must make engaging with their teams a priority. Employees who feel appreciated and acknowledged may not only stay with an organization and be more productive and positive, but also improve customer experiences, increased sales and profitability for the entire organization.

It is my hope that my legacy, the legacy that I am building, will be one of servant leadership—that I built a company and, with the talents and support of my family, colleagues and remarkable team, gave rise to a community of care that positively impacted countless lives. Servant leaders have the opportunity to do that—to influence lives for the better. I can think of no more honorable opportunity as a business leader than to influence lives for the better.

In today's rapidly evolving work experience, providing employees with pathways to enhance professional development has emerged as a cornerstone of employee engagement and organizational success.

Best High-Yield Savings Accounts Of 2024

Best 5% interest savings accounts of 2024.

This is a very good thing.

Providing professional advancement opportunities can boost confidence, creativity and job satisfaction for employees. By focusing on professional development opportunities and creating career advancement pathways, employees have a roadmap to their personal and professional success within an organization. To achieve this, it's essential to set clear expectations, offer comprehensive training and create a positive work environment. These measures can improve employee performance and help them grasp their responsibilities and growth opportunities.

Here are four ways servant leaders can inspire and support employee development.

Cultivate a culture of continuous learning.

Thought leaders understand that learning doesn't end with formal education but is a lifelong journey. To cultivate a culture where curiosity and a hunger for knowledge are celebrated, leaders must foster an environment that values continuous learning, inspire employees to seek out new skills, stay abreast of industry trends and pursue opportunities for growth. Lead by example when it comes to professional development. Show commitment to your own growth and development by continuously learning from others, developing key relationships and working with coaches. Modeling a dedication to learning and self-improvement can inspire your teams to do the same.

Provide resources and mentorship.

As a thought leader, you must recognize the importance of providing employees with the resources and support they need to succeed in their professional development efforts. Invest in your employees' growth and development—whether it's offering access to online courses, hosting lunch-and-learn sessions or providing financial assistance for further education. Mentorship and coaching are powerful tools for professional development. Help employees unlock their full potential and achieve their goals by pair them with mentors who can offer guidance, support and feedback as they navigate their career paths.

Set clear expectations and collaborative goals.

Thought leaders communicate clear expectations and goals for professional development, aligning individual growth with organizational objectives. Work with employees to identify areas for improvement and create personalized development plans that support both short-term skill enhancement and long-term career advancement. Leaders can foster a culture of collaboration by creating a supportive community where employees can learn and grow together. Create opportunities for employees to collaborate on projects, share expertise and learn from one another's experiences.

Recognize achievements and empower everyone.

Thought leaders understand the importance of recognizing and celebrating employees' achievements in their professional development journey. Whether it's a promotion, completion of a certification program or mastering a new skill, take the time to acknowledge and celebrate milestones to foster a sense of accomplishment and motivation among your teams. Empowered employees who have opportunities for growth and development are more engaged and motivated. Provide opportunities for employees to take on new responsibilities and lead projects, which helps them grow and gain confidence.

Servant leaders have the opportunity to empower their workforces to thrive and succeed, one vibrant career at a time.

Servant leadership represents a commitment to shift from more traditional leadership philosophies. With servant leadership, the primary goal is to serve and empower employees. This approach, rooted in the principles of listening, empathy and stewardship, transforms the traditional power dynamics of organizations—resulting in the emergence of positive and inclusive workplaces nurtured by empathetic servant leaders committed to cultivating work environments in which all feel empowered, respected and served. At the end of the day, I find that there is no greater legacy for a business leader to aspire to achieve.

Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?

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How to Scale a Start-Up

A conversation with HBS senior lecturer Jeffrey Rayport on the biggest stumbling blocks to long-lasting success.

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Managing rapid growth is a huge challenge for young businesses. Even start-ups with glowing reviews and skyrocketing sales can fail. That’s because new ventures and corporate initiatives alike must sustain profitability at scale, according to Harvard Business School senior lecturer  Jeffrey Rayport . 

He has researched some of the biggest stumbling blocks to long-lasting success and he explains how to successfully transition out of the start-up phase. Rayport argues that success has a lot to do with an organization’s cash flow and its ability to meet growing demand. But it also involves something he calls “profit market fit,” which is when an enterprise becomes financially sustainable.

Key episode topics include: strategy, start-ups, entrepreneurial business strategy, customer strategy, growth, scaling, demand, cash flow, sustainable business.

HBR On Strategy curates the best case studies and conversations with the world’s top business and management experts, to help you unlock new ways of doing business. New episodes every week.

• Listen to the full HBR IdeaCast episode: Why Some Start-Ups Fail to Scale (2022)
• Find more episodes of HBR IdeaCast
• Discover 100 years of Harvard Business Review articles, case studies, podcasts, and more at HBR.org .

HANNAH BATES: Welcome to HBR On Strategy , case studies and conversations with the world’s top business and management experts, hand-selected to help you unlock new ways of doing business.

Growth is always good, right? It turns out, even growth can be complicated.  For young businesses, rapid growth can create more problems than they can handle. That’s because start-ups aren’t just designed to grow; they have to also figure out how to sustain profitability at scale.

Harvard Business School senior lecturer Jeffrey Rayport says that is a huge stumbling block for many new organizations. In this episode, he explains how to successfully transition out of the start-up phase. He argues that that has a lot to do with an organization’s cash flow and its ability to meet growing demand. But it also involves something Rayport calls “profit market fit” – when an enterprise becomes financially sustainable.

This episode originally aired on HBR IdeaCast in December 2022. Here it is.

CURT NICKISCH: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Curt Nickisch.

As a startup founder, it’s got to feel exhilarating to see new customers streaming in and paying for your product or service. To get to this point, you’ve gone from conceiving your idea, building a small team and getting those early funders to help you test it in the world. Considering how many startups fail, watching customers put money down can make you feel like you’ve slayed a dragon. But watch out. There is another dragon waiting around the corner. Even fast-growing startups that get glowing reviews from customers and the media often end up flaming out. Despite all that positive momentum and growth, they’re just not able to stay profitable at scale.

This scale-up phase of entrepreneurial ventures is a huge challenge, and today’s guest has researched the stumbling blocks to long-lasting success. He says you can overcome them by expanding your business model while at the same time systematically removing internal constraints on growth.

Jeffrey Rayport is a senior lecturer at Harvard Business School, and he’s a co-author with Professor Davide Sola and Martin Kupp at ESCP Business School of the HBR article, “The Overlooked Key to a Successful Scale-up.” Jeffrey, thanks for joining.

JEFFREY RAYPORT: Curt, thank you so much for having me.

CURT NICKISCH: So, what is the scale-up phase and how do startups know when they’re in it?

JEFFREY RAYPORT: So, that is a great question, and it’s really where we began. The startup world orients very much around these ideas of zero to one, getting from the proverbial two guys in a garage or the group of folks in front of a whiteboard to something that has what in lean methodology terms is called product market fit.

And much of the startup world, after 25 years of internet entrepreneurship, focuses very much on that incredibly hard problem of how you stand something up. We think of the scaling phase, we meaning Davide and Martin and I, I’m so glad you mentioned my colleagues in Europe, we think of the scaling phase as beginning with the confirmation of product market fit.

And that means you’ve got an opportunity. It does not mean that you have much in the way of revenues, and most folks at that point have negative profitability. So, for us, the scaling stage begins with confirmed product market fit and moves up a very steep growth curve to the point where a venture can declare that it not only has product market fit, but also profit market fit. Often business models are borne out, not just on a unit economics, but become profitable by dent of scale. And so, those two critical things need to happen in the scaling stage, and those we would argue are where real value creation occurs.

CURT NICKISCH: I love that term profit market fit. What does that look like?

JEFFREY RAYPORT: So, for us, the key initial insight was that what it looks like is not the middle of a curve. And what I mean by that is that the received wisdom from the academic literature, going all the way back to an article by James G. March in the early 1990s, was that there are effectively two stages in the development and evolution of any business enterprise.

And stage one is famously the period of exploration, roughly coincident with this idea of searching for some kind of market demand or market traction. And then the second stage was that ventures and corporations move into the stage called exploitation. And it’s a very, very elegant model, and intuitively it makes sense. You look for opportunity. When you have find opportunity, you figure out how to exploit it for all of its potential economic value.

For us, the problem with that is that we have been seeing, as I think anyone in the business world these days who have got an eye on the startup space, but especially the tech space, a lot of companies where they can be very successful on the road to product market fit, but the wheels come off the bus in some way during the scaling phase. The academic world hasn’t commented a lot on the question of what it takes to get from that zero-to-one phase to the stage of scale. We have deemed that middle stage, not exploration, not exploitation, but the extrapolation phase.

CURT NICKISCH: Where do the wheels come off the bus in this phase?

JEFFREY RAYPORT: It’s interesting. As my colleague Tom Eisenmann has written about in his book Why Startups Fail, there are clearly many, many modes, and Tom has created a typology of them, of why startups fail. He’s looking largely at earlier stage businesses.

CURT NICKISCH: That’s not a lot of solace to people who’ve been there. It’s like, now I know how to name this failure.

JEFFREY RAYPORT: Exactly, exactly. That’s right. That’s some form of consolation as you go through the bankruptcy process, and I shouldn’t joke about that because we’re seeing a lot of that happening right now. We’re seeing a lot of significant meltdowns, most recently the FTX implosion, very much in the scaling phase of a business. And there are many ventures that by dent of their success and moving up that steep portion of the curve, cannot keep up with the demand that they’ve generated. So, some of this is wheels coming off the bus because they actually can’t source enough supply to keep up with demand.

Friendster would be a good example of that, the earliest of the major social platforms. The demise of Friendster had not a lot to do with the question of whether they had product market fit. It had everything to do with whether they could actually serve the tens of millions of simultaneous users who were coming onto the platform. So, one is the issue of being killed by your own success.

Another, of course, is that for businesses that have not yet achieved profit market fit, the issue of securing capital to finance your way to the point at which the business becomes cashflow positive is very significant. And if you have not planned carefully as to how much capital you need to get there or what milestones you need to hit, that’s another way to see a venture run out of fuel before it actually gets to the point of sustainability.

We have seen ventures fall apart on a human level, meaning on the level of organizations not having sufficiently coherent culture, in order to assure that as they go from 50 to 500 to 5,000 people, that people are on mission and that the efforts are aligned. And then I suppose there are ventures, and it seems crazy to say this, but there are ventures and entrepreneurs who attempt to scale into a market that’s not big enough to justify the scale that is part of their vision.

If it turns out that you can win 90% of the share in the market and you’re still a small venture, then actually you’ve got a ceiling on growth and scalability, which means you have nowhere to go. We see that happen quite a lot. We see organizations who think they have a sound go-to-market strategy in order to access the consumers they need to serve, again, to drive scale, who find out that they don’t have either practical means or economically feasible means to reach the customers who are their target market. So, it is all over the map. There are lots of ways to fail.

CURT NICKISCH: So, you’ve given another term to help explain the scale-up phase, calling it extrapolation. Can you just explain what extrapolation is?

JEFFREY RAYPORT: Well, maybe the best way to bring it to life is to talk about one of the companies that we’ve spent a lot of time with, and that’s King Digital Entertainment. It’s a London-based game maker. Many people will know it. It’s been recently acquired by Activision Blizzard. King, people who will not know the corporate name will know Candy Crush Saga, Candy Crush Soda Saga, the mobile casual games that they produce. When they introduced Candy Crush, it became a hit unlike anything they’d ever seen, and their revenues grew 12-fold. Now that meant that in order to keep up with that pace, they had to significantly expand headcount. They had to significantly expand infrastructure.

So extrapolation is often an order of magnitude increase in top line revenues in a relatively short period of time. The companies that we looked at, several dozen companies we’ve written cases about collectively, tend to do this in a relatively compressed period of one to three years. And so, for anyone who has managed steady growth at 10 to 20% a year, think about the idea that over a period of one, two or three years, your revenues go up 10X or 20X or 30X. It starts to describe the unique challenges, not just of growth, but of exponential as opposed to linear growth.

CURT NICKISCH: Your operating costs are going up exponentially too, perhaps.

JEFFREY RAYPORT: Absolutely. And even before the crises of today, think about a company like Uber, which in theory looks very much like the kind of platform dynamics with increasing returns that we just talked about. But the reality is that Uber, by dent of its relentless pursuit of growth, competition in the marketplace from Lyft and others and so forth, managed to move up that growth curve, get all the way to an IPO, establish a public market valuation before the tech meltdown of $100 billion market cap, and they still had not found profit market fit. They had not made the business model work.

That’s changed in the last couple of years as they’ve pursued profitability, as many tech ventures are these days with the change in market sentiment. But what you say is absolutely right, which is the fact that you have a platform does not guarantee that you are achieving profit market fit. That has to be part of what happens during the extrapolation phase, not by accident, but by design.

CURT NICKISCH: What do you need as a company then to begin extrapolating?

JEFFREY RAYPORT: The sufficient conditions, meaning that you’ve got some foundational attributes of your opportunity, but now you actually want to see it come to life. One is understanding, back to what we talked about just a moment ago, that you’ve got an effective way to get to the target customers, that large proportion of the large market that you need to reach to be successful, that you actually have a so-called go-to-market strategy that you believe in that can be successful, that gets you the access. And by the way, in economic terms and unit economic terms, you can support.

It’s also true that you’ve got to have some view, if you don’t have it on day one, to what your approach to monetization will be. And Curt, I know you know the audio industry well, and we both as consumers, I’m sure, have spent many, many delightful hours listening to two of the major streaming services on the planet over the last 10 years, one being Spotify and the other being SoundCloud.

Several years ago, Davide Sola and I had the pleasure of spending time with the leadership team at SoundCloud in Berlin and then in New York trying to understand their business. This was at a time when the consumer listenership of SoundCloud was around 200 million monthly active users, and that made it, at the time, on a consumer basis, larger than today’s industry leader, Spotify.

So, what was the difference in the outcomes of those companies? SoundCloud at that time was effectively giving away music free of charge to consumers and focused on a very small and vibrant community of musicians who wanted to use SoundCloud as a hosting platform. So, several hundred thousand musicians paid SoundCloud monthly or annual fees to host and stream their music on the platform. It’s very clear, if you’re thinking about market size and scalability, that a market at that time of 300,000 musicians who are monthly active users is a lot smaller than 200 million monthly active users who are consumers or listeners.

Spotify focused first on the hundreds of millions of consumers, and SoundCloud got there late. And even though they managed to do a bunch of the deals they ultimately needed to do with the record labels to clear the copyright protections on that audio content, it was too late, in effect, to save the business from a dramatic recapitalization down round and effect turnaround that has been true of its story to this day.

So understanding how it is you’re actually going to monetize what you’re doing is enormously important, and then there are other attributes that we’ve talked about. There are increasing returns, dynamics to that economic model, understanding how the business will make the most of and leverage network or density effects, things that people refer to as virality or the viral coefficient in the market. And then, of course, none of this comes without capital investment, and that means that if it’s a big, bold, ambitious strategy, it’s going to take capital across multiple rounds of venture funding to get there. And there’s got to be a strategy and a view as to how that capital will come into the enterprise, which means knowing what it’s going to take in terms of milestones to score those additional rounds of capital until you move up the curve and hit that point of profit market fit, at which point the enterprise or the venture, in theory, moves towards sustainability.

CURT NICKISCH: Well, let’s talk about this process then of extrapolation, and what are some of the successful ways you’ve seen startups navigate this phase?

JEFFREY RAYPORT: One we talk about is a business started by a couple of friends of mine, our next door neighbors here in Back Bay in Boston, Niraj Shah and Steve Conine, who are the founders of Wayfair. Anyone who is in the business of refurnishing or furnishing their homes knows that there are only a couple of places to go online to buy furniture and furnishings, and Wayfair is lead among them with these days 14, 15 million SKUs with essentially a platform that is comprehensive to the home category.

Wayfair had a very interesting start back in the early days of Google, days when Yahoo was a big search portal and so forth, they noticed that there were these category sites, people who sold very specific products online, and the very first business that Wayfair established was called racksandstands.com. It was a site, I would call it a product.com site that sold only that category of product, or products plural. They went on to other amusingly named sites like allgrandfatherclocks.com, and they went category by category, niche by niche until the business was nearly a decade old and they had about 250 such sites that sold product very successfully online at competitive prices.

Growth was directly correlated to their ability to stand up additional categories. And by the time you got 250 categories, you could argue that would be a diminishing return strategy. And what clearly would allow you to grow the business was to find a satisfied customer at racksandstands.com and convince her that the next time she needs a grandfather clock, she should go to allgrandfatherclocks.com. But that kind of repeat purchase did not happen because there was no way to know from any one site that they were part of a larger store.

So the point at which they raised real money was at the time when they recognized that the only way to get that kind of repeat purchase and cross-category sale was to put all of these sites on a common platform under a common brand, and that is the point at which they spent two years migrating what was then eight or 10 million SKUs from the 250 product.com sites over to the common platform ultimately branded as Wayfair and spent a good deal of money in marketing and media in order to build that brand.

So, this is interesting. So, this eliminated one significant constraint to growth. They had another constraint which was next on the list, which is that people tend to buy from eCommerce platforms where they have incredibly delightful and satisfying experiences, as defined by an Amazonian gold standard. You get the product quickly, it’s beautifully packaged, the box is clean, what you ordered is actually what’s in the box and so forth. One of the barriers for Wayfair with its dropship model, and even today at your top line of 15 billion and up, the company still is selling roughly 85% of what it offers on its site via dropship, meaning it ships directly from the manufacturer.

Two problems with that at the time. One was that manufacturers are not in the business of serving or fulfilling one-to-one orders. They ship on pallet loads to warehouses that go out to retailers who break down the lots. So, one issue was these folks were not terribly skilled at one-to-one order fulfillment. They didn’t do it quickly, and they didn’t actually have much skill, capability or background in how to package up the product, let alone to put a Wayfair brand on the box.

The guys, Niraj and Steve, recognizing that this was their next constraint, then built a logistics network, something that they call CastleGate, in which they went to their suppliers, their manufacturers, and offered to do two things. One was to educate them in state-of-the-art packaging of product and shipping logistics, so that they could fulfill orders directly dropship in a more consumer or end-user friendly way.

But even more importantly, and this is where CastleGate came in, was to forward position, meaning to move the best selling products on offer into CastleGate owned by Wayfair, so Wayfair distribution points across the country, so that those products could be shipped with lightning speed directly to consumers. And hence, you now have a rising level of satisfaction or net promoter score, NPS, among your users.

CURT NICKISCH: And returns go down. Right.

JEFFREY RAYPORT: That’s right. Returns go down, satisfaction goes up, loyalty increases, people come back and make three more purchases that year instead of two, so all of a sudden lifetime value begins to grow. The third constraint was that they’re an incredibly commoditized category, as you know from walking into any furniture store. In general, this is one of the last big categories of consumer durables where pretty much everything you look at outside of a Knoll or a Herman Miller showroom is largely unbranded. And because furniture is unbranded, especially at the manufacturer level, they don’t have a lot of pricing power.

So one of the things that Wayfair did to increase pricing power for their suppliers and for Wayfair as a retail platform or a marketplace, was to establish a huge number of private label or house-branded lines, essentially to take, whether it’s sofas or it’s mattresses or wall coverings, Wayfair created a bunch of house brands which allowed them to market these as branded products, establish higher price points and hence more gross margin for them as the retail platform to pocket, as well as to share with the suppliers. So, one of the things that we see as a success factor is applying this ruthless and disciplined process to the ways in which you take off the limiters on how scalable the business could be and how large it could become.

CURT NICKISCH: What about your team and your people and your culture? What do you have to do there to make sure that you’re able to reach product market fit from a functioning organizational perspective?

JEFFREY RAYPORT: I am so glad you asked that because that human element is as important, if not more so, than all of the strategy go-to-market and operating dynamics we’ve just been talking about, the support positive economics. What we have seen, of all the ways in which successful scaling CEOs and founders that we’ve studied have delivered the dream here that we’re talking about, is that their version of design for scalability is to put disproportionately heavy emphasis on cultural issues early on. I’ve always thought, in the businesses I encounter in my own experience in the business world, that there are two fundamental ways of thinking about corporate culture, and one is that culture is like the weather. We have no control over it. It’s just something that happens to you. And five years out, if you wind up in Dilbert land with a bunch of cubicles and depressed employees, my God, what went wrong? But it just happened.

And much of large-scale enterprise defaults to that kind of cultural environment, not because they want it, but because it just happens. One of the beauties of being in the startup space, of course, and one of the motivating factors for entrepreneurs is you get to invent the world anew. You get to dream a dream and then live inside it, and it’s your dream. The folks who manage to do that at scale, meaning to get to scale, do it by making some very clear decisions about what kind of culture they want at the very start and driving toward it with mindful investment over time.

There are many, many positive examples of this. One company we’ve spent a good deal of time is the circular commerce company that is a platform selling pre-owned apparel called Thredup. And James Reinhart and a graduate of the school started that venture with a very clear eye to a culture of curiosity, of ambition, of performance, to the point where James would periodically stand up in front of the workforce and essentially let folks know, in a way that I suppose might sound very Elon-like in terms of what’s happening at Twitter right now, that with a human face, he would say, “Look, here is what we’re all about. And if this is not what you are all about, we’ve got an incredibly generous severance plan that will aid you in departing from the enterprise.”

It’s something that Reed Hastings at Netflix is famous for. Many people know what their severance is on the day that they take their job. And as a result, essentially the culture is saying that this is not a family, it’s a team, that people are on a team because they have a useful role to play. When the role is no longer useful, then there needs to be a graceful, respectful way to get them into a different role or take them out of the team. But these ideas, again, whether it’s warm and fuzzy or it’s hard driving, whatever it is, being clear and explicit about it correlates with success in the companies that we’ve studied.

CURT NICKISCH: Jeffrey, you’ve talked a lot about the work that startups have to do on their culture, on understanding their operations and the size of the market and making really strategic choices about getting to the profit market fit that you’re talking about. I’m curious if you think a lot of startups fail in this extrapolation phase, in this scale-up phase because they know their voice is telling them to do that and they just don’t have time to do it because of this compressed timeframe that you’re talking about. Or do they just not know and that’s the reason that they fail at making some of these crucial choices?

JEFFREY RAYPORT: We have a very healthy respect for something that great Austrian military strategist, that is von Clausewitz, used to call the fog of war. I don’t think you can underestimate how challenging it is to do any of what we’re talking about, whether it’s in the launching phase, again in searching for product market fit, or it’s now in this incredibly intense phase moving up the curve towards profit market fit and scale.

So Curt, I would say that we’re talking about immensely talented people who are fully aware, clearly or largely aware, one would hope, of the risks involved. But I think the notion that it is hard to see clearly while you’re in the midst of it is very profound. So, that’s the fog of war argument.

I think the other part of this takes us all the way back, if you will, to the beginning of the conversation and where this article came from. One of the things that we found very interesting, when we’ve taken the ideas in this article back to many of the people we wrote cases about and in several cases we interviewed and quoted in the article and we said, “Here’s our conceptual understanding of what you did to be successful,” without exception, we got very interesting looks, raised eyebrows, a sense of surprise and delight. Nobody was arguing with us about the fact that this was a robust and high fidelity way to describe what they do, but there’s not a single one of them who said, “Oh my God, of course, I had a roadmap. I knew exactly what I was doing.”

I think it illustrates the fact that without actually circumscribing this phase of growth, meaning that without pretending that we move from exploration to exploitation in a nanosecond, but instead saying, wait a second, there’s this middle phase, and it requires different ways of leading and managing and structuring operations, thinking about economics, thinking about culture, planning for the future, raising capital.

There are a bunch of skill sets and capabilities that are unique to success in this phase as well as approaches that we’ve talked about, none of which we as the business world have been paying attention to or will pay attention to in a rigorous way without saying that this phase in the development of any venture is fundamentally different from what comes before and what comes after.

So, I think there is a fog of war version of this, but there’s also the fact that we in the world of practice and the world of academia have a lot to do, we believe, in further understanding this space and further figuring out ways to maximize upside and success while minimizing the very substantial risks that come with the territory.

CURT NICKISCH: Well, Jeffrey, you and your colleagues’ research hopefully will clear some of that fog and give people in that situation some better information for moving ahead. Thanks so much for coming on the show to talk about it.

JEFFREY RAYPORT: Curt, thank you so much.

HANNAH BATES: That was Harvard Business School senior lecturer Jeffrey Rayport – in conversation with Curt Nickisch on HBR IdeaCast .

We’ll be back next Wednesday with another hand-picked conversation about business strategy from Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you’re there, be sure to leave us a review.

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This episode was produced by Mary Dooe, Anne Saini, and me, Hannah Bates. Ian Fox is our editor. Special thanks to Rob Eckhardt, Maureen Hoch, Erica Truxler, Ramsey Khabbaz, Nicole Smith, Anne Bartholomew, and you – our listener.

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