Business Strategy: The Three Management Layers
In past articles (see below) I have written about laying the foundation for setting a business strategy. In this article, I discuss the layers or levels of strategy formulation. For small firms, the owner/operator will probably develop all three of these. In larger firms, the levels of strategy formulation will be broken up between different level managers.
Corporate Level Strategy
At the very top level of the strategy hierarchy is the corporate level strategy. Hill and Jones state those who set these policies must answer this: "What businesses should we be in to maximize the long-run profitability of the organization?"1 The profitability of the firm is the key. However, profitability must be weighed with the interests of the stakeholders. The stakeholders of a firm are those people that have some positive interest in the firm. These stakeholders include investors and employees but may include others such as suppliers and customers who have an interest in the firm's success. The goal is to set a plan to fully utilize the firm's capabilities and resources for the benefit of the firm as well as its stakeholders. Typically, these strategic plans are for five years2 but should be reviewed annually.
The members of the firm that should be setting the corporate level strategy are the highest members of the firm. These are corporate-level personnel such as Presidents, CEOs, and members of the Board of Directors to just name a few. These people need to be able to see the large picture of the firm, its resources and capabilities, in order to determine the direction of the firm.
Business Level Strategy
The middle strategic policy layer is the business level. The corporate level strategy discussed above is taken and broken down further into more detailed actions. Hill and Jones1 as well as Pearce and Robinson2 both state that the focus of this level is to position the firm in the market so the firm has an advantage over the competitors. This positioning might include adopting one of three generic strategies: cost leadership, differentiation, or niche placement. The goal is to position the firm in the market so as to maximize long-term profitability and meet the interests of the stakeholders.
Those setting the policies for the business level are business and corporate managers. These manage particular areas of the firm such as a division or strategic business unit. These people have the ability to see what is happening it their specialized part of the business and market.
Functional Level Strategy
At the bottom of the strategy hierarchy is the functional level strategy. Those deriving this type of strategy take both the corporate level strategy and the business level strategy and break them down to the operational level. Hill and Jones state, "Competitive advantage stems from a company's ability to attain superior efficiency, quality, innovation, and customer responsiveness."1 These all lie at the operating level of the organization. Cutting costs through efficiency, maintaining quality, and good customer service all contribute to superior performance. But keeping the firm current and "fresh" through innovation allows the firm to lay the groundwork for performance in the future.
Those making these policy decisions are "composed principally of managers of product, geographic, and functional areas."2 These are plant managers, regional directors, and even department managers. These people are the ones who should have a firm grasp of what is happening at the grassroots level and ensuring that the company's core values as laid out in the mission statement are being implemented.
This article has discussed the different levels of strategy decisions a firm must make. For large firms, this decision-making process will include many people. For small firms, the process will include few, possibly even one. Nevertheless, a plan is laid down on all levels to achieve long-term profitability and meet the needs of all the stakeholders. For additional reading on strategy, click on the links below.
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Additional Strategy Articles
- Business Strategy: "This Is a Football", Part 1
This article is the first in a series on developing a strategy. Developing a good mission statement forms the basis for everything the firm does.
- Business Strategy: "This Is a Football", Part 2
This article looks at the second step in developing a business strategy: determining the strengths and weakness of the firm.
- Business Strategy: "This Is a Football", Part 3
This article is third in a series about actions needing to be performed before creating a business strategy. Specifically, the firm needs to examine opportunities and threats in the market.
- Business Strategy: "This Is a Football", Part 4
This article is the conclusion of a four part series on laying the foundations before developing a business strategy. This development includes a mission statement and an honest SWOT analysis.
1Hill, Charles & Jones, Gareth (1998). Strategic Management: An Integrated Approach (4th ed). Houghton Mifflin: Boston.
2PEarce, John & Robinson, Richard (1991). Formulation, Implementation, and Control of Competitive Strategy (4th ed). Irwin: Boston.