Many companies have one overarching goal: to earn a profit and create a return for shareholders. To achieve their goals, corporations may own multiple business units in various industries. Business-level strategy is used to obtain a customer base and sell a product at a profit. Corporate-level strategy, on the other hand, is used when deciding what business units to sell and purchase, and how to integrate operations and find synergies between them.
Business-level strategy focuses on how to attain and satisfy customers, offer goods and services that meet their needs, and increase operating profits. To do this, business-level strategy focuses on positioning itself against competitors and staying up to date on market trends and technology changes.
Economist Michael Porter theorizes that there are two main types of business strategy: cost leadership and differentiation. A business can also integrate these two strategies.
Cost Leadership and Differentiation
Cost leadership is the tactic of winning over customers through aggressive pricing and making profits through high efficiency. For example, a car manufacturing company like Kia that prices its vehicles on the lower end of the price spectrum is employing a cost leadership strategy.
A company that differentiates adds unique features or services that command a higher selling price. A car company like Tesla that offers premium electric vehicles is using differentiation to create a competitive advantage in the market. Although cost leadership and differentiation may seem like opposite ends of the spectrum, many businesses use aspects of both strategies. For example, Toyota offers a hybrid electric vehicle that offers unique features but maintains a modest price point.
Compared to business strategy, corporate strategy examines success from a higher level. Corporate strategy is focused on obtaining a mix of business units that will allow the company to succeed as a whole.
Corporate strategy seeks to make a set of business units more than the sum of its parts. It can do this by developing relationships between business units, which allows them to share resources and avoid duplication of efforts. A corporation may also choose to take over one of its suppliers, which ensures it has more control over the availability and pricing of supplies. This is referred to as vertical integration.
An important consideration of corporate strategy is the diversity of the corporation's portfolio of businesses. For example, if a financial services company only owns businesses that focus on tax preparation, the whole corporation could go under if tax laws change. By purchasing companies in slightly different industries, like financial accounting and personal finance services, it can decrease its risk of losses. It can also shield the company from liquidity risk by purchasing companies with complimentary cash flows. For example, a tax preparation company makes most of its revenue in tax season, so a business that earns revenue year-round can provide support during slow times.