HIERARCHICAL LEVELS OF STRATEGY

Strategy can be formulated on three different levels:

  • Corporate level
  • Business unit level
  • Functional or departmental level

While strategy may be about competing and surviving as a firm, one can argue that products, not
corporations compete, and products are developed by business units. The role of the corporation then is to
manage its business units and products so that each is competitive and so that each contributes to corporate
purposes.
Consider Textron, Inc., a successful conglomerate corporation that pursues profits through a range of
businesses in unrelated industries. Textron has four core business segments:
  • Aircraft - 32% of revenues
  • Automotive - 25% of revenues
  • Industrial - 39% of revenues
  • Finance - 4% of revenues
While the corporation must manage its portfolio of businesses to grow and survive, the success of a
diversified firm depends upon its ability to manage each of its product lines. While there is no single
competitor to Textron, we can talk about the competitors and strategy of each of its business units. In the
finance business segment, for example, the chief rivals are major banks providing commercial financing.
Many managers consider the business level to be the proper focus for strategic planning.

Corporate Level Strategy
Corporate level strategy fundamentally is concerned with the selection of businesses in which the company
should compete and with the development and coordination of that portfolio of businesses.
Corporate level strategy is concerned with:
  • Reach - defining the issues that are corporate responsibilities; these might include identifying the overall
goals of the corporation, the types of businesses in which the corporation should be involved, and the way
in which businesses will be integrated and managed.
  • Competitive Contact - defining where in the corporation competition is to be localized. Take the case of
insurance: In the mid-1990's, Aetna as a corporation was clearly identified with its commercial and property
casualty insurance products. The conglomerate Textron was not. For Textron, competition in the insurance
markets took place specifically at the business unit level, through its subsidiary, Paul Revere. (Textron
divested itself of The Paul Revere Corporation in 1997.)
  • Managing Activities and Business Interrelationships - Corporate strategy seeks to develop synergies by
sharing and coordinating staff and other resources across business units, investing financial resources across
business units, and using business units to complement other corporate business activities. Igor Ansoff
introduced the concept of synergy to corporate strategy.
  • Management Practices - Corporations decide how business units are to be governed: through direct
corporate intervention (centralization) or through more or less autonomous government (decentralization)
that relies on persuasion and rewards.

Corporations are responsible for creating value through their businesses. They do so by managing their
portfolio of businesses, ensuring that the businesses are successful over the long-term, developing business
units, and sometimes ensuring that each business is compatible with others in the portfolio.

Business Unit Level Strategy
A strategic business unit may be a division, product line, or other profit centre that can be planned
independently from the other business units of the firm.

At the business unit level, the strategic issues are less about the coordination of operating units and more
about developing and sustaining a competitive advantage for the goods and services that are produced. At
the business level, the strategy formulation phase deals with:

  • Positioning the business against rivals
  • Anticipating changes in demand and technologies and adjusting the strategy to accommodate them
  • Influencing the nature of competition through strategic actions such as vertical integration and through
political actions such as lobbying.

Michael Porter identified three generic strategies (cost leadership, differentiation, and focus) that can be
implemented at the business unit level to create a competitive advantage and defend against the adverse
effects of the five forces.

Functional Level Strategy
The functional level of the organization is the level of the operating divisions and departments. The strategic
issues at the functional level are related to business processes and the value chain. Functional level strategies
in marketing, finance, operations, human resources, and R&D involve the development and coordination of
resources through which business unit level strategies can be executed efficiently and effectively.
Functional units of an organization are involved in higher-level strategies by providing input into the
business unit level and corporate level strategy, such as providing information on resources and capabilities
on which the higher-level strategies can be based. Once the higher-level strategy is developed, the functional
units translate it into discrete action-plans that each department or division must accomplish for the strategy
to succeed.