GEOStrategy

Understanding the Three Levels of Business Strategy

I believe it is always important to address the fundamentals of any discipline.  We often get trapped by the short-hand of our own jargon and forget the underlying principles behind the concepts. This is certainly true of strategy. In my research for a new book on adaptive strategy, I've been amazed at some of the blurry thinking about strategy.  For this reason I would like to address in this posting, the simple but important distinctions between the three levels of strategy.  Because this is my blog, I will use my own definitions of the levels of strategy: 

Level 1 – Go-to-Market Strategy which focuses on products and markets

Level 2 – Competitive Strategy or Business Unit Strategy which is about creating and sustaining a competitive advantage

Level 3 – Corporate Strategy or Portfolio Management which is about creating additional value through the intelligent combination of businesses.

My assertion is that Level 1 or go-to-market strategy is the level of strategy best understood by practicing executives.  It is where the rubber meets the road and where most marketing and strategy energy is spent. The biggest strategic mistakes in go-to-market strategies are related to faulty research or focusing on markets as they exist today rather than where they are headed.  But the real effectiveness are go-to-market strategies are driven by the power and discipline of the competitive strategy.

Competitive Strategy or business unit strategy is the essence of competition and the ultimate source of sustainable success. It drives the need for go-to-market strategies. Companies get off track with competitive strategy when they confuse it with operational efficiency or benchmark to their competitors to the point they lose their unique advantage. Competitive Strategy is about doing things differently than your competition and making disciplined trade-off decisions about what you choose to do and not do.  It is about aligning all activities to ensure they support and reinforce the competitive advantage. And it is about sustaining a core positioning while innovating your business model to keep up with product and market cycles.

Corporate strategy, in my view, it the least understood, most difficult to get right, and the most misapplied of the three. It should be about combining businesses to strengthen the competitive strategy of all of them.  It is often about growth for the sake of growth or a misguided substitution of performance improvement for strategy.

I will start in the middle, because competitive strategy or business unit strategy is really where companies create and drive a competitive advantage.  In formulating a competitive strategy, you must analyze the industry structure and the nature of competition along with your core competencies and key assets to determine how best to position your company in a unique and advantageous position on the competitive landscape.  You must then create or a business model that allows you to create and capture value differently than all competitors within the field of competition.  Next, you must align all internal activities and processes so that they support the strategy and reinforce each other.  Finally, you invest in the additional core competencies and assets that you need to fully leverage and sustain this competitive advantage.  Every decision you make must be in concordance with the strategy and strengthen the competitive advantage.

Once the competitive strategy is set, you have a disciplined process to determine which markets fit with the organizations strategy and what product offerings and positions can be chosen.  You are then ready to develop go-to-market strategies.  This is the most basic of all strategies, and describes how organizations choose which markets to enter, which products to develop, and how to position products in the market to achieve the greatest competitive advantage.

There are two parts to a go-to-market strategy:  1) determining which products and which markets to enter; and 2) determining how to position and market products within a given market.  If your competitive strategy is not firmly in place, there is always the temptation to enter markets where you cannot compete successfully over time or make acquisitions or investments that do not reinforce the strategy.  This can be a waste of resources and also weaken the core strategy.  Once you have selected the products and markets to focus on, market research is the key tool to support go-to-market strategy formulation.  You need insights from customers, intelligence on competitors, and you need to understand distribution channels and market trends to determine how to position and price products, what kind of strategic messaging will be most effective, and through what channels to most effectively market your products.  Go-to-market strategies should always be a slave to competitive strategy;  you must have the discipline to avoid the most enticing opportunities that dangle their low-hanging fruit if they do not help you reinforce your competitive strategy.

Corporate Strategy is more sophisticated and elusive.  It is often viewed as portfolio management or a way to diversify risk.  Shareholders have the ability to manage their own investment portfolios; however, so this should not be the primary mission of corporate strategy.  Corporate strategy should be about combining businesses in a way that adds value to each.  It can be about diversification against market cycles but only if the business units in total can share competencies or resources or achieve greater performance as a result of being part of one organization.  In short, the whole must be greater than the sum of the parts.  To this end, there must be an inner strategic mission (Core Purpose) of the corporation that articulates the special formula by which this synergy can be achieved.  The sobering fact is that companies typically divest the majority of acquisitions or investments they make in new businesses because they ignore this simple concept. Michael Porter's research into competitive strategy revealed that companies ultimately divested over half of the acquisitions they made in new industries.

A successful corporate strategy starts with a core purpose that defines the organization.

Jim Collins (Built to Last and Good to Great) outlines five characteristics that must exist in a corporate core purpose:

• One, it absolutely has to be inspiring to those inside the company.
• Two, it has to be something that could be as valid 100 years from now as it is today.
• Three, it should help you think expansively about what you could do but aren't doing.
• Four, it should help you decide what not to do.
• Last, your expression of what you stand for has to be truly authentic to your company. Companies that fail on this count are often the ones that really don't stand for anything and never will.

Ultimately, however, when new businesses are added to a corporate portfolio they must be able to share resources, skills, or activities in a way that creates a stronger competitive position for all.  Otherwise, there is no reason to combine them in a single organization.  Like go-to-market strategy, corporate strategy should also be enslaved to the business unit competitive strategy.  This is a simple concept but one that is ignored at great cost.  Corporate executives should declare a kind of Hippocratic oath to first do no harm to any business unit or shareholders’ wealth when seeking growth opportunities.