A2 Blog Finance 101

How Business Strategies Impact Financial Statements

The performance of a business depends on various factors, strategy is one of them. Business strategies should be determined by considering the company’s objectives and goals, industry trends, nature of the entity, and budget. No matter which strategy is implemented, it will inevitably impact the financial statements.

Cost Leadership Strategy

Businesses utilizing this strategy aim to have a competitive advantage and large market share by increasing efficiency to reduce costs which impacts pricing. To achieve this, companies may:

  1. Decrease operational costs by implementing advanced technology

  2. Take advantage of economies of scale, increasing the production quantity to decrease fixed costs per unit.

  3. Source raw material

  4. Purchase higher quantities to enjoy cost savings

Product Differentiation Strategy

This business strategy focuses on providing the market with a product that has special features or services from its competitors. Unlike the cost leadership strategy, the main objective is not to reduce costs. The objective is to appeal to a target market, establish value proposition, and brand loyalty with the intent to charge higher prices. This may be accomplished by:

  1. Innovation

  2. Sophisticated marketing strategies

  3. Host research studies and surveys

Niche/Focus Strategy 

A niche/focus strategy is a hybrid of cost leadership and product differentiation strategies. The focus is on managing lower costs while capturing higher profit margins due to focused marketing efforts. This strategy balances and blends the pros and cons of cost leadership and product differentiation.

Financial Statements Implication 

The business strategy needs to be in alignment with a company’s financial plan.

A business executing a cost leadership strategy may have more assets on hand such as inventory and fixed assets. Two important financial ratios when using the cost leadership strategy are the rate of return on assets and the asset turnover. Whereas, a product differentiation strategy may have higher R&D and marketing expenses. Due to the lower operational costs, cost leadership strategy businesses may enjoy higher net income profits. These implications are not absolute and can vary based on industries.