Business strategy defines the approach, tactics and strategic plan adopted by a business to attract customers and achieve its business goals. It is a very broad term that encapsulates everything a business does to make money. From partnering with other firms and attracting top talent to acquiring new technology all comes under the gamut of business strategy.
In this article, we will look at a few common business strategies and see some actual examples of the same from the business world. You can learn more about different business concepts with this simple smart business system.
1. Cornering a fledgling market
One very common business strategy is for larger firms to gain a stronghold in a growing market through aggressive M&A activity. Think of the Fortune 500 firm that buys out a competitor, or when a larger firm merges with a competitor to corner a young market.
Example: Facebook’s Instagram acquisition
In April 2012, Facebook changed the mobile startup scene overnight by acquiring the photo sharing startup, Instagram, for an unprecedented $1B. Keep in mind that until then, Instagram had *just* 30M users and did not have an established presence on the Android OS. To most outsiders and pundits, this looked like a rather rash decision from a pre-IPO Facebook.
Fast forward to 2014 and Instagram’s user base has shot past 150M. It is the dominant photo sharing app on all mobile platforms. More importantly, it attracts the adolescents and teens that are leaving Facebook in droves.
Facebook’s strategy in acquiring Instagram was to a) corner the fledgling mobile image sharing market, and b) hedge its bets for future growth. The $1B price tag may have seemed exorbitant in 2012, but looks almost cheap today. Instagram allows Facebook to compete in a market where it doesn’t have a very strong presence, and helps it retain younger users. Furthermore, by buying Instagram, Facebook ensured that it has a competitive advantage over Google, Microsoft, and other competitors.
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2. Product differentiation
Standing out from the competitors is a key requirement for business success. Unless consumers can spot your product from me-too competitors, you’ll have a hard time making sales. Businesses can do this either by highlighting their product’s superior technology, features, styling, heritage, pedigree or price. You can see this strategy at play in virtually every business, especially B2C businesses.
A great example of this can be seen in Apple’s approach to products.
Example: Apple iPad Air vs. competitors
The new Apple iPad Air costs $274 to make and retails for $499 – a margin of 45%. Competing tablets often cost nearly $200 less. Apple is able to command such premiums because it has successfully differentiated its product from competitors. The Apple iPad marketing, for instance, highlights following features:
Lightness: The iPad Air is lighter, thinner than competitors.
Display Quality: The Retina display is visually superior to competing tablets.
Software: Apple highlights both the base iOS and the bundled Apple software as being better than what competitors offer.
Engineering: Apple seldom fails to highlight its superior engineering and material quality than competitors.
Ease of Use: Since Apple makes both the hardware and software, it often emphasizes its products’ ease of use.
Note that Apple almost never plays up its products’ price. The same is true for the iPad Air, which is priced not to sell in volume, but to become an aspirational product. This preserves Apple’s reputation as a superior, aspirational brand.
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3. Gaining a technological advantage
In our technology-centric world, technological advantage can often translate into improved productivity, better sales, or even market domination. Nearly every large firm spends millions of dollars in R&D to develop even better technology. It isn’t uncommon for organizations to even buy up smaller firms just to gain access to their technology (as shown in the Facebook-Instagram example above).
A technological advantage doesn’t always have to be in terms of actual technology. It can also mean acquiring and retaining key employees that can help a business gain a technological advantage. The recent trend of acqui-hires among startups is a good example of this approach.
Let’s look at a couple of examples of this business strategy.
Example: Apple-Google-Microsoft-Samsung patent war
Some of the largest technology firms in the world, including Apple, Google, Microsoft, Samsung and RIM are locked into a long and ongoing war to acquire and hoard patents. In 2011, for instance, a consortium of companies led by Apple and Microsoft, bid nearly $4.5B for thousands of patents held by Nortel. The business strategy behind this move was to:
Gain a technological advantage over competitors
Prevent competitors from gaining the same advantage
This is just one example; companies often engage in lengthy legal wrangling to gain a technological advantage through patents (case in point: the ongoing Apple-Samsung patent lawsuits). The message is quite clear: superior technology can offer tangible real-world benefits to businesses.
Example: Amazon invests in delivery drones
A couple of months ago, Amazon stirred the imaginations of futurists and sci-fi fans everywhere when it announced that it was developing drones for delivering small packages. Although drones have been around for some time, most of them were used in military applications. Using drones is a sound business strategy for Amazon for four reasons:
By using drones, Amazon will gain a real technological advantage over competitors who must rely on less efficient ground transportation
Nearly 86% of Amazon packages are under less 5lbs, which makes drones the perfect delivery vehicles.
Drones will allow Amazon to reach rural areas where delivery networks aren’t as efficient.
Drones can significantly improve delivery times in dense urban areas.
This is one example where a near-futuristic technology offers real-world advantages to a business.
4. Pricing strategies
Businesses essentially have two choices when pricing their products:
Keeping prices low to attract more customers. Since profit margins are very low, the business must sell a lot of products to make money.
Pricing a product beyond the reach of ordinary consumers, and hence, giving it aspirational value.
Let’s look at some examples of these two approaches:
Example: Walmart, Ikea’s low prices
Walmart uses its position as the largest retailer in the world to bargain for low prices with suppliers and manufacturers. At the same time, Walmart keeps its profit margins very low, selling in volume instead. This enables the company to price its products far below competitors which ultimately helps it sell more.
The Swedish furniture brand Ikea follows the same approach. By selling its self-assembled furniture pieces in large volumes (the retailer has 338 stores in 40 countries), Ikea is able to price its products very aggressively.
Example: Ferarri prices its cars for exclusivity
Italian auto maker Ferrari pulled in revenues of $3.3B in 2012 with a net profit of $334M. It sold a total of 7,318 cars over the year which translates into a profit of ~ $45,640 per car.
In contrast, the Hyundai motor corporation sold 2.94M cars in 2011 and made a profit of $9B. This works out to a profit of ~ $3,058 per car.
This illustrates Ferrari’s pricing strategy. By pricing its products beyond the reach of ordinary consumers, Ferrari is able to retain the air of exclusivity. This (and the exceptional quality of the cars, of course) enables the company to retain such a huge profit margin per car.
These are just some examples of strategies used by different businesses. Every business will be different and will have to adopt different strategies for success.
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