Three Levels of Strategy: Corporate Strategy, Business Strategy and Functional Strategy

August 29, 2020 Lars de Bruin 9 Comments Business Strategy, Corporate Strategy, Functional Strategy,
Hierarchy of Strategy, Levels of Strategy, Strategic Management, Strategy, Strategy Pyramid

Strategy is at the foundation of every decision that has to be made within an organization. If the strategy
is poorly chosen and formulated by top management, it has a major impact on the effectiveness of
employees in pretty much every department within the organization. In our previous article on ‘What is
Strategy?!‘ we have already tried to define and explain what business strategy refers to and what is NOT
considered to be part of strategy. In this article, we will dissect strategy in three different components or
‘Levels of Strategy‘. These three levels are: Corporate-level strategy, Business-level strategy and
Functional-level strategy. Together, these three levels of strategy can be illustrated in a so called
‘Strategy Pyramid’ (Figure 1). Corporate strategy is different from Business strategy and Functional
strategy. Even though Corporate-level strategy is at the top of the pyramid, we start this article by
explaining Business-level strategy first.Three Levels of Strategy Pyramid

Figure 1: Three Levels of Strategy Pyramid

Business-level strategy

The Business-level strategy is what most people are familiar with and is about the question “How do we
compete?”, “How do we gain (a sustainable) competitive advantage over rivals?”. In order to answer
these questions it is important to first have a good understanding of a business and its external
environment. At this level, we can use internal analysis frameworks like the Value Chain Analysis and the
VRIO Model and external analysis frameworks like Porter’s Five Forces and PESTEL Analysis. When good
strategic analysis has been done, top management can move on to strategy formulation by using
frameworks as the Value Disciplines, Blue Ocean Strategy and Porter’s Generic Strategies. In the end,
the business-level strategy is aimed at gaining a competitive advantage by offering true value for
customers while being a unique and hard-to-imitate player within the competitive landscape.

Functional-level strategy

Functional-level strategy is concerned with the question “How do we support the business-level strategy
within functional departments, such as Marketing, HR, Production and R&D?”. These strategies are often
aimed at improving the effectiveness of a company’s operations within departments. Within these
department, workers often refer to their ‘Marketing Strategy’, ‘Human Resource Strategy’ or ‘R&D
Strategy’. The goal is to align these strategies as much as possible with the greater business strategy. If
the business strategy is for example aimed at offering products to students and young adults, the
marketing department should target these people as accurately as possible through their marketing
campaigns by choosing the right (social) media channels. Technically, these decisions are very
operational in nature and are therefore NOT part of strategy. As a consequence, it is better to call them
tactics instead of strategies.

Corporate-level strategy

At the corporate level strategy however, management must not only consider how to gain a competitive
advantage in each of the line of businesses the firm is operating in, but also which businesses they
should be in in the first place. It is about selecting an optimal set of businesses and determining how
they should be integrated into a corporate whole: a portfolio. Typically, major investment and
divestment decisions are made at this level by top management. Mergers and Acquisitions (M&A) is also
an important part of corporate strategy. This level of strategy is only necessary when the company
operates in two or more business areas through different business units with different business-level
strategies that need to be aligned to form an internally consistent corporate-level strategy. That is why
corporate strategy is often not seen in small-medium enterprises (SME’s), but in multinational
enterprises (MNE’s) or conglomerates.

BCG Matrix and Levels of Strategy Video Tutorial

Example Samsung

Let’s use Samsung as an example. Samsung is a conglomerate consisting of multiple strategic business
units (SBU’s) with a diverse set of products. Samsung sells smartphones, cameras, TVs, microwaves,
refrigerators, laundry machines, and even chemicals and insurances. Each product or strategic business
unit needs a business strategy in order to compete successfully within its own industry. However, at the
corporate level Samsung has to decide on more fundamental questions like: “Are we going to pursue the
camera business in the first place?” or “Is it perhaps better to invest more into the smartphone business
or should we focus on the television screen business instead?”. The BCG Matrix or the GE McKinsey
Matrix are both portfolio analysis frameworks and can be used as a tool to figure this out.

Three Levels of Strategy Hierarchy

Figure 2: Hierarchy of Strategy

Components of strategic management process

The strategic management process means defining the organization’s strategy. It is also defined as the
process by which managers make a choice of a set of strategies for the organization that will enable it to
achieve better performance.

Strategic management is a continuous process that appraises the business and industries in which the
organization is involved; appraises it’s competitors; and fixes goals to meet all the present and future
competitor’s and then reassesses each strategy.

Strategic management process has following four steps:

1. Environmental Scanning- Environmental scanning refers to a process of collecting, scrutinizing

and providing information for strategic purposes. It helps in analyzing the internal and external
factors influencing an organization. After executing the environmental analysis process,
management should evaluate it on a continuous basis and strive to improve it.
2. Strategy Formulation- Strategy formulation is the process of deciding best course of action for
accomplishing organizational objectives and hence achieving organizational purpose. After
conducting environment scanning, managers formulate corporate, business and functional
strategies.
3. Strategy Implementation- Strategy implementation implies making the strategy work as
intended or putting the organization’s chosen strategy into action. Strategy implementation
includes designing the organization’s structure, distributing resources, developing decision
making process, and managing human resources.
4. Strategy Evaluation- Strategy evaluation is the final step of strategy management process. The
key strategy evaluation activities are: appraising internal and external factors that are the root of
present strategies, measuring performance, and taking remedial / corrective actions. Evaluation
makes sure that the organizational strategy as well as it’s implementation meets the
organizational objectives.

These components are steps that are carried, in chronological order, when creating a new strategic
management plan. Present businesses that have already created a strategic management plan will revert
to these steps as per the situation’s requirement, so as to make essential changes.
Understanding Porter's Five Forces
Porter's Five Forces is a business analysis model that helps to explain why various
industries are able to sustain different levels of profitability. The model was published in
Michael E. Porter's book, "Competitive Strategy: Techniques for Analyzing Industries
and Competitors" in 1980.1 The Five Forces model is widely used to analyze the
industry structure of a company as well as its corporate strategy. Porter identified five
undeniable forces that play a part in shaping every market and industry in the
world, with some caveats. The five forces are frequently used to measure competition
intensity, attractiveness, and profitability of an industry or market.

1. Competition in the industry

2. Potential of new entrants into the industry

3. Power of suppliers

4. Power of customers

5. Threat of substitute products

Competition in the Industry

The first of the five forces refers to the number of competitors and their ability to
undercut a company. The larger the number of competitors, along with the number of
equivalent products and services they offer, the lesser the power of a company.
Suppliers and buyers seek out a company's competition if they are able to offer a better
deal or lower prices. Conversely, when competitive rivalry is low, a company has
greater power to charge higher prices and set the terms of deals to achieve higher
sales and profits.

Potential of New Entrants Into an Industry

A company's power is also affected by the force of new entrants into its market. The
less time and money it costs for a competitor to enter a company's market and be an
effective competitor, the more an established company's position could be significantly
weakened. An industry with strong barriers to entry is ideal for existing companies
within that industry since the company would be able to charge higher prices and
negotiate better terms.
Power of Suppliers
The next factor in the five forces model addresses how easily suppliers can drive up
the cost of inputs. It is affected by the number of suppliers of key inputs of a good or
service, how unique these inputs are, and how much it would cost a company to switch
to another supplier. The fewer suppliers to an industry, the more a company would
depend on a supplier. As a result, the supplier has more power and can drive up input
costs and push for other advantages in trade. On the other hand, when there are many
suppliers or low switching costs between rival suppliers, a company can keep its input
costs lower and enhance its profits.

Power of Customers
The ability that customers have to drive prices lower or their level of power is one of the
five forces. It is affected by how many buyers or customers a company has, how
significant each customer is, and how much it would cost a company to find new
customers or markets for its output. A smaller and more powerful client base means
that each customer has more power to negotiate for lower prices and better deals. A
company that has many, smaller, independent customers will have an easier time
charging higher prices to increase profitability.

Threat of Substitutes
The last of the five forces focuses on substitutes. Substitute goods or services that can
be used in place of a company's products or services pose a threat. Companies that
produce goods or services for which there are no close substitutes will have more
power to increase prices and lock in favorable terms. When close substitutes are
available, customers will have the option to forgo buying a company's product, and a
company's power can be weakened.

Understanding Porter's Five Forces and how they apply to an industry, can enable a
company to adjust its business strategy to better use its resources to generate higher
earnings for its investors.
 Not-for-Profit (NFP): An organization that provides some service or good with no
intention of earning a profit. NFP includes Private nonprofit corporations (such as
hospitals, institutes, private colleges, and organized charities) as well as Public
governmental units/agencies (such as welfare departments, prisons, and state
universities)

Strategy control process

1. Premise Control:  Premise control is necessary to identify the key assumptions, and
keep track of any change in them so as to assess their impact on strategy and its
implementation. Premise control serves the purpose of continually testing the
assumptions to find out whether they are still valid or not. This enables the strategists to
take corrective action at the right time rather than continuing with a strategy which is
based on erroneous assumptions. The responsibility for premise control can be assigned
to the corporate planning staff who can identify key asumptions and keep a regular
check on their validity.
2. Implementation Control: Implementation control may be put into practice through the
identification and monitoring of strategic thrusts such as an assessment of the
marketing success of a new product after pre-testing, or checking the feasibility of a
diversification programme after making initial attempts at seeking technological
collaboration.
3. Strategic Surveillance: Strategic surveillance can be done through a broad-based,
general monitoring on the basis of selected information sources to uncover events that
are likely to affect the strategy of an organisation.
4. Special Alert Control: Special alert control is based on trigger mechanism for rapid
response and immediate reassessment of strategy in the light of sudden and
unexpected events called crises.  Crises are critical situations that occur unexpectedly
and threaten the course of a strategy. Organisations that hope for the best and prepare
for the worst are in a vantage position to handle any crisis.
2 marks

1. What is competitive advantage in strategic management?

competitive advantage refers to factors that allow a company to produce goods or

services better or more cheaply than its rivals. These factors allow the productive entity
to generate more sales or superior margins compared to its market rivals.

2. What is McKinsey 7's change management model?

The McKinsey 7-S Model identifies seven components of an organization that must
work together for effective change management: Structure, Strategy, Staff, Style,
Systems, Shared Values, and Skills.

3 balanced scorecard

. A balanced scorecard is a strategic management performance metric that helps

companies identify and improve their internal operations to help their external
outcomes. It measures past performance data and provides organizations with feedback
on how to make better decisions in the future.

4. What is strategic alliance in strategic management?

A strategic alliance is an arrangement between two companies that have decided to

share resources to undertake a specific, mutually beneficial project. A strategic alliance
agreement could help a company develop a more effective process.

5. Different types of stragic control

The four types of strategic control are premise control, implementation control, special
alert control and strategic surveillance. Each one provides a different perspective and
method of analysis to maximize the effectiveness of your business strategy

6. social audit

A social audit is a formal review of a company's endeavors, procedures, and code of

conduct regarding social responsibility and the company's impact on society. A social
audit is an assessment of how well the company is achieving its goals or benchmarks for
social responsibility
7. Different type of strategies

Competitive Strategy:

Corporate Strategy:

Business Strategy:

Functional Strategy:

Operating Strategy

8. Strategic management

Strategic management is the process of setting goals, procedures, and objectives in

order to make a company or organization more competitive. ... Often, strategic
management includes strategy evaluation, internal organization analysis, and strategy
execution throughout the company.