STRATEGY LEVELS

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Although alignment of strategic initiatives is a corporate-wide effort,
considering strategy in terms of levels is a convenient way to distinguish
among the various responsibilities involved in strategy formulation and
implementation. A convenient way to classify levels of strategy is to view
corporate-level strategy as responsible for market definition,
business-level strategy as responsible for market navigation, and
functional-level strategy as the foundation that supports both of these
(see Table 1).

CORPORATE-LEVEL STRATEGY

Corporate-level strategies address the entire strategic scope of the
enterprise. This is the “big picture” view of the
organization and includes deciding in which product or service markets to
compete and in which geographic regions to operate. For multi-business
firms, the resource allocation process—how cash, staffing,
equipment and other resources are distributed—is typically
established at the corporate level. In addition, because market definition
is the domain of corporate-level strategists, the responsibility for
diversification, or the addition of new products or services to the
existing product/service line-up, also falls within the realm of
corporate-level strategy. Similarly, whether to compete directly with
other firms or to selectively establish cooperative
relationships—strategic alliances—falls within the purview
corporate-level strategy, while requiring ongoing input from

Level of Strategy


Definition


Example


Corporate strategy


Market definition


Diversification into new product or geographic markets


Business strategy


Market navigation


Attempts to secure competitive advantage in existing product or
geographic markets


Functional strategy


Support of corporate strategy and business strategy


Information systems, human resource practices, and production
processes that facilitate achievement of corporate and business
strategy

business-level managers. Critical questions answered by corporate-level
strategists thus include:

1. What should be the scope of operations; i.e.; what businesses should the
   firm be in?
2. How should the firm allocate its resources among existing businesses?
3. What level of diversification should the firm pursue; i.e., which
   businesses represent the company’s future? Are there additional
   businesses the firm should enter or are there businesses that should be
   targeted for termination or divestment?
4. How diversified should the corporation’s business be? Should we
   pursue related diversification; i.e., similar products and service
   markets, or is unrelated diversification; i.e., dissimilar product and
   service markets, a more suitable approach given current and projected
   industry conditions? If we pursue related diversification, how will the
   firm leverage potential cross-business synergies? In other words, how
   will adding new product or service businesses benefit the existing
   product/service line-up?
5. How should the firm be structured? Where should the boundaries of the
   firm be drawn and how will these boundaries affect relationships across
   businesses, with suppliers, customers and other constituents? Do the
   organizational components such as research and development, finance,
   marketing, customer service, etc. fit together? Are the responsibilities
   or each business unit clearly identified and is accountability
   established?
6. Should the firm enter into strategic alliances—cooperative,
   mutually-beneficial relationships with other firms? If so, for what
   reasons? If not, what impact might this have on future profitability?

As the previous questions illustrate, corporate strategies represent the
long-term direction for the organization. Issues addressed as part of
corporate strategy include those concerning diversification, acquisition,
divestment, strategic alliances, and formulation of new business ventures.
Corporate strategies deal with plans for the entire organization and
change as industry and specific market conditions warrant.

Top management has primary decision making responsibility in developing
corporate strategies and these managers are directly responsible to
shareholders. The role of the board of directors is to ensure that top
managers actually represent these shareholder interests. With information
from the corporation’s multiple businesses and a view of the entire
scope of operations and markets, corporate-level strategists have the most
advantageous perspective for assessing organization-wide competitive
strengths and weaknesses, although as a subsequent section notes,
corporate strategists are paralyzed without accurate and up-to-date
information from managers at the business-level.

CORPORATE PORTFOLIO ANALYSIS

One way to think of corporate-level strategy is to compare it to an
individual managing a portfolio of investments. Just as the individual
investor must evaluate each individual investment in the portfolio to
determine whether or not the investment is currently performing to
expectations and what the future prospects are for the investment,
managers must make similar decisions about the current and future
performances of various businesses constituting the firm’s
portfolio. The Boston Consulting Group (BCG) matrix is a relatively simple
technique for assessing the performance of various segments of the
business.

The BCG matrix classifies business-unit performance on the basis of the
unit’s relative market share and the rate of market growth as shown
in Figure 1.

Products and their respective strategies fall into one of four quadrants. The typical starting point for a new business is as a question mark. If the product is new, it has no market share, but the predicted growth rate is good. What typically happens in an organization is that management is faced with a number of these types of products but with too few resources to develop all of them. Thus, the strategic decision-maker must determine which of the products to attempt to develop into commercially viable products and which ones to drop from consideration. Question marks are cash users in the organization. Early in their life, they contribute no revenues and require expenditures for market research, test marketing, and advertising to build consumer awareness.

If the correct decision is made and the product selected achieves a high
market share, it becomes a BCG matrix star. Stars have high market share
in high-growth markets. Stars generate large cash flows for the business,
but also require large infusions of money to sustain their growth. Stars
are often the targets of large expenditures for advertising and research
and development to improve the product and to enable it to establish a
dominant position in the industry.

Cash cows are business units that have high market share in a low-growth
market. These are often products in the maturity stage of the product life
cycle. They are usually well-established products with wide consumer
acceptance, so sales revenues are usually high. The strategy for such
products is to invest little money into maintaining the product and divert
the large profits generated into products with more long-term earnings
potential, i.e., question marks and stars.

Dogs are businesses with low market share in low-growth markets. These are
often cash cows that have lost their market share or question marks the
company has elected not to develop. The recommended strategy for these
businesses is to dispose of them for whatever revenue they will generate
and reinvest the money in more attractive businesses (question marks or
stars).

Despite its simplicity, the BCG matrix suffers from limited variables on
which to base resource allocation decisions among the business making up
the corporate portfolio. Notice that the only two variables composing the
matrix are relative market share and the rate of market growth. Now
consider how many other factors contribute to business success or failure.
Management talent, employee commitment, industry forces such as buyer and
supplier power and the introduction of strategically-equivalent substitute
products or services, changes in consumer preferences, and a host of
others determine ultimate business viability. The BCG matrix is best used,
then, as a beginning point, but certainly not as the final determination
for resource allocation decisions as it was originally intended. Consider,
for instance, Apple Computer. With a market share for its Macintosh-based
computers below ten percent in a market notoriously saturated with a
number of low-cost competitors and growth rates well-below that of other
technology pursuits such as biotechnology and medical device products, the
BCG matrix would suggest Apple divest its computer business and focus
instead on the rapidly growing iPod business (its music download
business). Clearly, though, there are both technological and market
synergies between Apple’s Macintosh computers and its fast-growing
iPod business. Divesting the computer business would likely be tantamount
to destroying the iPod business.

A more stringent approach, but still one with weaknesses, is a competitive
assessment. A competitive assessment is a technique for ranking an
organization relative to its peers in the industry. The advantage of a
competitive assessment over the BCG matrix for corporate-level strategy is
that the competitive assessment includes critical success factors, or
factors that are crucial for an organizational to prevail when all
organizational members are competing for the same customers. A six-step
process that allows corporate strategist to define appropriate variables,
rather than being locked into the market share and market growth variables
of the BCG matrix, is used to develop a table that shows a businesses
ranking relative to the critical success factors that managers identify as
the key factors influencing failure or success. These steps include:

1. Identifying key success factors. This step allows managers to select the
   most appropriate variables for its situation. There is no limit to the
   number of variables managers may select; the idea, however, is to use
   those that are key in determining competitive strength.
2. Weighing the importance of key success factors. Weighting can be on a
   scale of 1 to 5, 1 to 7, or 1 to 10, or whatever scale managers believe
   is appropriate. The main thing is to maintain consistency across
   organizations. This step brings an element of realism to the analysis by
   recognizing that not all critical success factors are equally important.
   Depending on industry conditions, successful advertising campaigns may,
   for example, be weighted more heavily than after-sale product support.
3. Identifying main industry rivals. This step helps managers focus on one
   of the most common external threats; competitors who want the
   organization’s market share.
4. Managers rating their organization against competitors.
5. Multiplying the weighted importance by the key success factor rating.
6. Adding the values. The sum of the values for a manager’s
   organization versus competitors gives a rough idea if the
   manager’s firm is ahead or behind the competition on weighted key
   success factors that are critical for market success.

A competitive strength assessment is superior to a BCG matrix because it
adds more variables to the mix. In addition, these variables are weighted
in importance in contrast to the BCG matrix’s equal weighting of
market share and market growth. Regardless of these advantages,
competitive strength assessments are still limited by the type of data
they provide. When the values are summed in step six, each organization
has a number assigned to it. This number is compared against other firms
to determine which is competitively the strongest. One weakness is that
these data are ordinal: they can be ranked, but the differences among them
are not meaningful. A firm with a score of four is not twice as good as
one with a score of two, but it is better. The degree of
“betterness,” however, is not known.

CORPORATE GRAND STRATEGIES

As the previous discussion implies, corporate-level strategists have a
tremendous amount of both latitude and responsibility. The myriad
decisions required of these managers can be overwhelming considering the
potential consequences of incorrect decisions. One way to deal with this
complexity is through categorization; one categorization scheme is to
classify corporate-level strategy decisions into three different types, or
grand strategies. These grand strategies involve efforts to expand
business operations (growth strategies), decrease the scope of business
operations (retrenchment strategies), or maintain the status quo
(stability strategies).

GROWTH STRATEGIES

Growth strategies are designed to expand an organization’s
performance, usually as measured by sales, profits, product mix, market
coverage, market share, or other accounting and market-based variables.
Typical growth strategies involve one or more of the following:

1. With a concentration strategy the firm attempts to achieve greater
   market penetration by becoming highly efficient at servicing its market
   with a limited product line (e.g., McDonalds in fast foods).
2. By using a vertical integration strategy, the firm attempts to expand
   the scope of its current operations by undertaking business activities
   formerly performed by one of its suppliers (backward integration) or by
   undertaking business activities performed by a business in its channel
   of distribution (forward integration).
3. A diversification strategy entails moving into different markets or
   adding different products to its mix. If the products or markets are
   related to existing product or service offerings, the strategy is called
   concentric diversification. If expansion is into products or services
   unrelated to the firm’s existing business, the diversification is
   called conglomerate diversification.

STABILITY STRATEGIES

When firms are satisfied with their current rate of growth and profits,
they may decide to use a stability strategy. This strategy is essentially
a continuation of existing strategies. Such strategies are typically found
in industries having relatively stable environments. The firm is often
making a comfortable income operating a business that they know, and see
no need to make the psychological and financial investment that would be
required to undertake a growth strategy.

RETRENCHMENT STRATEGIES

Retrenchment strategies involve a reduction in the scope of a
corporation’s activities, which also generally necessitates a
reduction in number of employees, sale of assets associated with
discontinued product or service lines, possible restructuring of debt
through bankruptcy proceedings, and in the most extreme cases, liquidation
of the firm.

• Firms pursue a turnaround strategy by undertaking a temporary reduction
  in operations in an effort to make the business stronger and more viable
  in the future. These moves are popularly called downsizing or
  rightsizing. The hope is that going through a temporary belt-tightening
  will allow the firm to pursue a growth strategy at some future point.
• A divestment decision occurs when a firm elects to sell one or more of
  the businesses in its corporate portfolio. Typically, a poorly
  performing unit is sold to another company and the money is reinvested
  in another business within the portfolio that has greater potential.
• Bankruptcy involves legal protection against creditors or others
  allowing the firm to restructure its debt obligations or other payments,

  typically in a way that temporarily increases cash flow. Such
  restructuring allows the firm time to attempt a turnaround strategy. For
  example, since the airline hijackings and the subsequent tragic events
  of September 11, 2001, many of the airlines based in the U.S. have filed
  for bankruptcy to avoid liquidation as a result of stymied demand for
  air travel and rising fuel prices. At least one airline has asked the
  courts to allow it to permanently suspend payments to its employee
  pension plan to free up positive cash flow.

• Liquidation is the most extreme form of retrenchment. Liquidation
  involves the selling or closing of the entire operation. There is no
  future for the firm; employees are released, buildings and equipment are
  sold, and customers no longer have access to the product or service.
  This is a strategy of last resort and one that most managers work hard
  to avoid.

BUSINESS-LEVEL STRATEGIES

Business-level strategies are similar to corporate-strategies in that they
focus on overall performance. In contrast to corporate-level strategy,
however, they focus on only one rather than a portfolio of businesses.
Business units represent individual entities oriented toward a particular
industry, product, or market. In large multi-product or multi-industry
organizations, individual business units may be combined to form strategic
business units (SBUs). An SBU represents a group of related business
divisions, each responsible to corporate head-quarters for its own profits
and losses. Each strategic business unit will likely have its’ own
competitors and its own unique strategy. A common focus of business-level
strategies are sometimes on a particular product or service line and
business-level strategies commonly involve decisions regarding individual
products within this product or service line. There are also strategies
regarding relationships between products. One product may contribute to
corporate-level strategy by generating a large positive cash flow for new
product development, while another product uses the cash to increase sales
and expand market share of existing businesses. Given this potential for
business-level strategies to impact other business-level strategies,
business-level managers must provide ongoing, intensive information to
corporate-level managers. Without such crucial information,
corporate-level managers are prevented from best managing overall
organizational direction. Business-level strategies are thus primarily
concerned with:

1. Coordinating and integrating unit activities so they conform to
   organizational strategies (achieving synergy).
2. Developing distinctive competencies and competitive advantage in each
   unit.
3. Identifying product or service-market niches and developing strategies
   for competing in each.
4. Monitoring product or service markets so that strategies conform to the
   needs of the markets at the current stage of evolution.

In a single-product company, corporate-level and business-level strategies
are the same. For example, a furniture manufacturer producing only one
line of furniture has its corporate strategy chosen by its market
definition, wholesale furniture, but its business is still the same,
wholesale furniture. Thus, in single-business organizations, corporate and
business-level strategies overlap to the point that they should be treated
as one united strategy. The product made by a unit of a diversified
company would face many of the same challenges and opportunities faced by
a one-product company. However, for most organizations, business-unit
strategies are designed to support corporate strategies. Business-level
strategies look at the product’s life cycle, competitive
environment, and competitive advantage much like corporate-level
strategies, except the focus for business-level strategies is on the
product or service, not on the corporate portfolio.

Business-level strategies thus support corporate-level strategies.
Corporate-level strategies attempt to maximize the wealth of shareholders
through profitability of the overall corporate portfolio, but
business-level strategies are concerned with (1) matching their activities
with the overall goals of corporate-level strategy while simultaneously
(2) navigating the markets in which they compete in such a way that they
have a financial or market edge-a competitive advantage-relative to the
other businesses in their industry.

ANALYSIS OF BUSINESS-LEVEL

STRATEGIES

PORTER’S GENERIC STRATEGIES.

Harvard Business School’s Michael Porter developed a framework of
generic strategies that can be applied to strategies for various products
and services, or the individual business-level strategies within a
corporate portfolio. The strategies are (1) overall cost leadership, (2)
differentiation, and (3) focus on a particular market niche. The generic
strategies provide direction for business units in designing incentive
systems, control procedures, operations, and interactions with suppliers
and buyers, and with making other product decisions.

Cost-leadership strategies require firms to develop policies aimed at
becoming and remaining the lowest cost producer and/or distributor in the
industry. Note here that the focus is on cost leadership, not price
leadership. This may at first appear to be only a semantic difference,
but consider how this fine-grained definition places emphases on
controlling costs while giving firms alternatives when it comes to pricing
(thus ultimately influencing total revenues). A firm with a cost advantage
may price at or near competitors prices, but with a lower cost of
production and sales, more of the price contributes to the firm’s
gross profit margin. A second alternative is to price lower than
competitors and accept slimmer gross profit margins, with the goal of
gaining market share and thus increasing sales volume to offset the
decrease in gross margin. Such strategies concentrate on construction of
efficient-scale facilities, tight cost and overhead control, avoidance of
marginal customer accounts that cost more to maintain than they offer in
profits, minimization of operating expenses, reduction of input costs,
tight control of labor costs, and lower distribution costs. The low-cost
leader gains competitive advantage by getting its costs of production or
distribution lower than the costs of the other firms in its relevant
market. This strategy is especially important for firms selling unbranded
products viewed as commodities, such as beef or steel.

Cost leadership provides firms above-average returns even with strong
competitive pressures. Lower costs allow the firm to earn profits after
competitors have reduced their profit margin to zero. Low-cost production
further limits pressures from customers to lower price, as the customers
are unable to purchase cheaper from a competitor. Cost leadership may be
attained via a number of techniques. Products can be designed to simplify
manufacturing. A large market share combined with concentrating selling
efforts on large customers may contribute to reduced costs. Extensive
investment in state-of-the-art facilities may also lead to long run cost
reductions. Companies that successfully use this strategy tend to be
highly centralized in their structure. They place heavy emphasis on
quantitative standards and measuring performance toward goal
accomplishment.

Efficiencies that allow a firm to be the cost leader also allow it to
compete effectively with both existing competitors and potential new
entrants. Finally, low costs reduce the likely impact of substitutes.
Substitutes are more likely to replace products of the more expensive
producers first, before significantly harming sales of the cost leader
unless producers of substitutes can simultaneously develop a substitute
product or service at a lower cost than competitors. In many instances,
the necessity to climb up the experience curve inhibits a new entrants
ability to pursue this tactic.

Differentiation strategies require a firm to create something about its
product that is perceived as unique within its market. Whether the
features are real, or just in the mind of the customer, customers must
perceive the product as having desirable features not commonly found in
competing products. The customers also must be relatively
price-insensitive. Adding product features means that the production or
distribution costs of a differentiated product will be somewhat higher
than the price of a generic, non-differentiated product. Customers must be
willing to pay more than the marginal cost of adding the differentiating
feature if a differentiation strategy is to succeed.

Differentiation may be attained through many features that make the
product or service appear unique. Possible strategies for achieving
differentiation may include warranty (Sears tools have lifetime guarantee
against breakage), brand image (Coach handbags, Tommy Hilfiger
sportswear), technology (Hewlett-Packard laser printers), features
(Jenn-Air ranges, Whirlpool appliances), service (Makita hand tools), and
dealer network (Caterpillar construction equipment), among other
dimensions. Differentiation does not allow a firm to ignore costs; it
makes a firm’s products less susceptible to cost pressures from
competitors because customers see the product as unique and are willing to
pay extra to have the product with the desirable features.

Differentiation often forces a firm to accept higher costs in order to
make a product or service appear unique. The uniqueness can be achieved
through real product features or advertising that causes the customer to
perceive that the product is unique. Whether the difference is achieved
through adding more vegetables to the soup or effective advertising, costs
for the differentiated product will be higher than for non-differentiated
products. Thus, firms must remain sensitive to cost differences. They must
carefully monitor the incremental costs of differentiating their product
and make certain the difference is reflected in the price.

Focus, the third generic strategy, involves concentrating on a particular
customer, product line, geographical area, channel of distribution, stage
in the production process, or market niche. The underlying premise of the
focus strategy is that the firm is better able to serve its limited
segment than competitors serving a broader range of customers. Firms using
a focus strategy simply apply a cost-leader or differentiation strategy to
a segment of the larger market. Firms may thus be able to differentiate
themselves based on meeting customer needs through differentiation or
through low costs and competitive pricing for specialty goods.

A focus strategy is often appropriate for small, aggressive businesses
that do not have the ability or resources to engage in a nation-wide
marketing effort. Such a strategy may also be appropriate if the target
market is too small to support a large-scale operation. Many firms start
small and expand into a national organization. Wal-Mart started in small
towns in the South and Midwest. As the firm gained in market knowledge and
acceptance, it was able to expand throughout the
South, then nationally, and now internationally. The company started with
a focused cost-leader strategy in its limited market and was able to
expand beyond its initial market segment.

Firms utilizing a focus strategy may also be better able to tailor
advertising and promotional efforts to a particular market niche. Many
automobile dealers advertise that they are the largest-volume dealer for a
specific geographic area. Other dealers advertise that they have the
highest customer-satisfaction scores or the most awards for their service
department of any dealer within their defined market. Similarly, firms may
be able to design products specifically for a customer. Customization may
range from individually designing a product for a customer to allowing the
customer input into the finished product. Tailor-made clothing and
custom-built houses include the customer in all aspects of production from
product design to final acceptance. Key decisions are made with customer
input. Providing such individualized attention to customers may not be
feasible for firms with an industry-wide orientation.

FUNCTIONAL-LEVEL STRATEGIES.

Functional-level strategies are concerned with coordinating the functional
areas of the organization (marketing, finance, human resources,
production, research and development, etc.) so that each functional area
upholds and contributes to individual business-level strategies and the
overall corporate-level strategy. This involves coordinating the various
functions and operations needed to design, manufacturer, deliver, and
support the product or service of each business within the corporate
portfolio. Functional strategies are primarily concerned with:

• Efficiently utilizing specialists within the functional area.
• Integrating activities within the functional area (e.g., coordinating
  advertising, promotion, and marketing research in marketing; or
  purchasing, inventory control, and shipping in production/operations).
• Assuring that functional strategies mesh with business-level strategies
  and the overall corporate-level strategy.

Functional strategies are frequently concerned with appropriate timing.
For example, advertising for a new product could be expected to begin
sixty days prior to shipment of the first product. Production could then
start thirty days before shipping begins. Raw materials, for instance, may
require that orders are placed at least two weeks before production is to
start. Thus, functional strategies have a shorter time orientation than
either business-level or corporate-level strategies. Accountability is
also easiest to establish with functional strategies because results of
actions occur sooner and are more easily attributed to the function than
is possible at other levels of strategy. Lower-level managers are most
directly involved with the implementation of functional strategies.

Strategies for an organization may be categorized by the level of the
organization addressed by the strategy. Corporate-level strategies involve
top management and address issues of concern to the entire organization.
Business-level strategies deal with major business units or divisions of
the corporate portfolio. Business-level strategies are generally developed
by upper and middle-level managers and are intended to help the
organization achieve its corporate strategies. Functional strategies
address problems commonly faced by lower-level managers and deal with
strategies for the major organizational functions (e.g., marketing,
finance, production) considered relevant for achieving the business
strategies and supporting the corporate-level strategy. Market definition
is thus the domain of corporate-level strategy, market navigation the
domain of business-level strategy, and support of business and
corporate-level strategy by individual, but integrated, functional level
strategies.

Joe


Thomas

Revised by


Scott


B.


Droege

FURTHER READING:

D’Aveni, Richard A. “Corporate Spheres of
Influence.”

MIT Sloan Management Review

45: 38–46.

Deephouse, D. “To Be Different, or to Be the Same? It’s a
Question (and Theory) of Strategic Balance.”

Strategic Management Journal

20 (1999): 147–166.

Digman, L.

Strategic Management.

Houston: Dame, 1997.

Dyer, J.H., P. Kale, and H. Singh. “When to Ally and When to
Acquire.”

Harvard Business Review

82 (2004): 108–116.

Hambrick, D., I. MacMillan, and D. Day. “Strategic Attributes and
Performance in the BCG Matrix.”

Academy of Management Journal

(1982): 500–509.

Kroll, M., P. Wright, and R. Heiens. “The Contribution of Product
Quality to Competitive Advantage: Impacts on Systematic Variance and
Unexplained Variance in Returns.”

Strategic Management Journal

20 (1999): 375–384.

Porter, M.

Competitive Advantage: Creating and Sustaining Superior Performance.

New York: Free Press, 1985.

——.

Competitive Strategy: Techniques for Analyzing Industries and
Companies.

New York: Free Press, 1980.