The Three Levels of Strategy

You’ve most likely heard of strategy in your company. But what is strategy anyway? At what levels is it developed?

In this article we will discuss three levels of strategy: corporate strategy, business unit strategy, and functional strategy.

In exploring corporate strategy, Johnson, Scholes and Whittington state that the strategy establishes the long-run direction and scope of a company and that it determines how resources should be configured to meet the needs of markets and stakeholders.

Michael Porter, a professor at Harvard Business School, emphasizes the need for strategy to define and communicate a company’s unique position and says it must determine how business resources, skills, and competencies should be integrated to create competitive advantage. To make the most of the opportunities that arise in the environment companies need to anticipate and prepare for the future at all levels of the strategy.

In the case of a large company that works in several businesses, it is essential to develop the corporate strategy and then develop it into a strategy for each business unit. In turn, each functional area must have its own strategy to ensure that its daily activities help move the company in the right direction.

On all levels, however, a simple definition of strategy can determine how we will achieve our goals in the following period.

Now that you know what strategy is, let’s drill down a bit further into each of the three levels of strategy – corporate, business-unit, and functional.

The corporate strategy refers to the overall strategy of a company composed of several business units, operating in several markets. Corporate strategy determines how the company as a whole supports and increases the value of business units and answers the question “How should we structure the business as a whole so that all its parties create more value together than individually?”

Corporations can do this by developing strong internal skills, sharing technologies and resources between business units, raising capital cost-effectively, developing a strong corporate brand, and so on.

Therefore, at this level of strategy, we are concerned about how business units should fit within the corporation and understand how resources should be used to maximize value-creation. Methodologies such as Porter’s Generic Strategies, BCG (product portfolio) Matrix, ADL Matrix, and VRIO analysis will help in this type of analysis and planning.

Let’s talk now about business-unit strategy. It’s important to first understand what a “strategic business unit,” or simply a “business unit,” is.

A strategic business unit (SBU) is a fully-functional unit of a company that has its own vision and direction. It focuses on a target customer or market segment. Usually, an SBU operates as an independent entity, while remaining integrated into the larger company. The SBU is accountable to the head of the company about its operations and operating results. It is large enough to have its own support functions such as HR, Marketing, and Finance, among others. Some of the best examples of companies that adopt the SBU concept are ABB, LG, and Proctor and Gamble.

The business unit’s strategy includes defining how it will fulfill its share of corporate strategy, ensuring a significant contribution and added value to the company’s long-term success.

Business-level strategy addresses issues such as, “How do we compete?” and “How do we gain sustainable competitive advantage?” To answer these questions, it’s critical to have a good understanding of the company and its environment. At this level one can use internal analysis structures such as Value Chain Analysis and VRIO, and external analysis structures such as Five Forces and PESTEL analysis. (Several of these have already been addressed in previous issues of this blog!). In the end, business-level strategy aims to gain a competitive advantage by adding value to customers, making the unit difficult to imitate in the competitive landscape.

Finally, we reach the third level, the functional strategy.

The functional strategy is the most detailed of the three levels of strategy, as each functional area, each department, has its own goals.

The most common functional strategies are commercial, financial, human, technology, distribution, marketing, and production strategies. They are composed of the set of plans adopted in the various areas to obtain the results desired by the company.

The functional-level strategy is concerned with the question “How do we support business-level strategy within functional departments such as Marketing, HR, Production and R&D?” These strategies usually aim to improve the operation of the company as a whole from the performance of departments. The goal is to align these strategies as much as possible with the broader business strategy. If the business strategy is intended, for example, to offer products to the elderly, then the marketing department should focus on this segment as precisely as possible through its marketing campaigns, choosing the most appropriate media channels.

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