Hierarchical levels of strategy

Strategies allow business owners and managers to develop goals and objectives to accomplish in the business. The purpose of a strategy is to improve a companys production output and profitability. Owners and managers often create strategies for different levels of their company. 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 corporation is then to manage its business units and products so that each is competitive and so that each contributes to corporate purposes. The focus is such more in a diversified firm. While a 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 the product lines. Many managers consider the business level to be the proper focus for strategic planning. There are three levels at which strategy needs to be formulated in a business: Corporate level Business level Functional/departmental level

Corporate Level Strategy

Corporate level strategy is fundamentally 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. 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. Diversification Diversification is a corporate business strategy where companies attempt to enter as many economic markets as possible through their products. Companies often sell goods or services in local, national and international markets. This allows the company to earn the maximum amount of profit through volume sales. Companies may also choose to diversify their product mix, creating new or different products to enter new business industries and sectors. A product mix with several different styles of goods or services ensures that a company can recover from the sluggish sales of one product line with the success of another. Competitive Advantage Business owners and managers often desire to create a competitive advantage for their company. This corporate business strategy allows the company to produce higher-quality products or sell products at a cheaper cost than other companies in the business environment. A competitive advantage is achievable by lowering business costs, or by reducing or outsourcing functions the company cannot compete effectively and efficiently. 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 Level Strategy

A strategic business unit may be a division, product line, or other profit center 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 that can be implemented at the business unit level to create a competitive advantage and defend against the adverse effects of the five forces. Cost Leadership Cost leadership is a conceptually simple strategy. The goal of a cost leadership strategy is to be the lowest cost provider of a product or service in the market. By offering low prices, a business hopes to gain a large market share, making it possible to achieve large profits off of small margins. While this concept is easy, the actual practice can be difficult, especially for small businesses, because it requires an efficient supply chain to keep costs down. Differentiation While the cost leadership strategy relies on low prices to gain customers, the differentiation strategy relies on non-price incentives to win over consumers. Examples of non-price incentives include customer service, quality and convenience. Businesses that rely on a differentiation strategy do not, typically, offer the lowest prices, but gain customers on the basis of these other factors. For example, a gourmet restaurant does not win customers over with low prices, but normally relies on factors such as excellent customer service and food quality to justify higher prices than a fast-food restaurant. Focus Low-Cost Focus The low-cost focus strategy is similar to the cost leadership strategy, however, this strategy does not aim to be the cheapest provider in the overall market. Instead, this strategy aims to be the lowest price provider to a niche market. For example, a company that sells specialized shoes for people with wide feet may

have the lowest prices in that niche, but not in the overall shoe market. This strategy allows a company to compete, on the basis of price, in a niche market. Differentiation Focus The differentiation focus strategy, like the differentiation strategy, provides a non-price incentive for customers. Like the low-cost focus strategy, however, it does not cater to the whole market, but rather to a niche. For example, a company that sells insurance to small businesses might offer the best service to that niche market, but not to other markets (such as large corporations or consumers).

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 input 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. Utilize Resources A functional strategy improves the way a company uses its economic resources. These resources include raw materials, labor, facilities and equipment. Companies develop production processes to ensure a streamlined operation where no duplicate processes exist. Acquiring the best resources at the cheapest cost is also a functional strategy. Owners and managers typically review their companys processes to determine where improvements can be made. Limiting the waste or inefficient use of facilities is also a focus of this strategy.

Integrate Activities Integrating various activities is another focus of functional strategies. Owners and managers must ensure each department focuses on completing overall business goals and objectives in the best way possible. Production, advertising, inventory and the supply chain are a few functions which may benefit from integration in a company. Individual managers often work with other departments to ensure each department works to improve business operations.