Corporate vs. Business vs. Functional Strategy: Who Decides What

A corporate plan made of five divisional plans

In July 1979, International Harvester's strategic and financial planners produced a thick document titled “Corporate Strategic Plan: International Harvester.” It was an amalgam of five separate strategic plans, each written by one of the operating divisions ¹. The overall strategy, as Richard Rumelt summarizes it, was to increase the company's share in each market, cut costs in each business, and so raise revenue and profit ¹.

The plan was detailed. What it lacked was a level of its own. The overall strategy was the divisional one repeated: more share and lower costs in each business. And the problem that cut across all of them, inefficient production and the worst labor relations in US industry in Rumelt's account, went unmentioned ¹.

The short answer. Strategy is usually described at three levels. Corporate strategy decides which businesses the company should own and how the parent will make them more valuable than they would be elsewhere. Business strategy decides how one business unit will win in its market: where it competes and why customers will choose it. Functional strategy decides how each function, such as operations, sales, R&D or IT, will make the choices that support the business's way of winning.

That is the textbook version. The argument of this page is about how the levels connect. The three levels are a chain of constraint, not a stack of documents. Each level's strategy is real only if it narrows the choices of the level below. A corporate strategy that is the sum of the business plans has no level of its own. A functional strategy that would fit any business strategy is a budget request.

If you can unstaple it, it isn't a corporate strategy.

Three levels, three different questions

Michael Porter opened his 1987 article on the subject by calling corporate strategy, the overall plan for a diversified company, both the darling and the stepchild of management practice: the darling because CEOs had been obsessed with diversification since the early 1960s, the stepchild because almost no consensus existed about what corporate strategy is ⁴. The confusion has not gone away, and most of it comes from treating the levels as sizes of the same thing. They are different questions. For definitions, see the Lexicon entry on corporate strategy.

In a single-business company the top two levels collapse into one. The corporate question still exists, though, every time the company considers an acquisition or a second business, and that is usually when a company discovers it never had a corporate strategy.

Corporate strategy: the parent has to earn its keep

Andrew Campbell, Michael Goold and Marcus Alexander framed the corporate question as two questions most chief executives fail to address: what businesses should this company, rather than rival companies, own and why? And what organizational structure, management processes and philosophy will foster superior performance from its businesses ²?

The words that do the work are “rather than rival companies.” Every business in a portfolio could be owned by someone else: a competitor, a private equity fund, its own public shareholders. A corporate strategy has to say why it is worth more under this parent. David Collis and Cynthia Montgomery put the default outcome bluntly: most multibusiness companies are the sum of their parts and nothing more ³. The Lexicon calls the market's verdict on that outcome the conglomerate discount.

In practice, the corporate level earns its keep through a few specific choices, and a corporate strategy document should state each of them:

• The portfolio logic. The rule that decides which businesses belong, written so that it would rule some attractive businesses out.
• The capital rule. How money moves between units, and what a unit must show to get more or keep what it has.
• What is shared. Which resources, capabilities or customers are pooled across units, and why sharing beats each unit doing it alone.
• How the center manages. How much the center decides, how much it leaves to units, and which few things it will always intervene on.

Nothing in Rumelt's account of Harvester's plan resembles any of the four. What he describes is five divisional plans and a summary graph ¹. The corporate strategy team page covers how the people who own this level actually spend their time.

Business strategy: one field, one way to win

Business strategy is the level most people mean when they say strategy. Porter's definition in his 1996 article is the clearest: the essence of strategy is choosing to perform activities differently than rivals do ⁵. A business strategy names a position, the customers it will serve and the needs it will meet, and the trade-offs it accepts to serve them.

Porter's example is Southwest Airlines, which offered short-haul, low-cost, point-to-point service between midsize cities and secondary airports in large cities, and avoided large airports and long distances ⁵. That is a where-to-play and how-to-win choice for one business. The Playing to Win page shows how to choose that pair; the point here is what it does to the levels on either side.

Upward, a good business strategy tells the corporate level what the unit needs that it cannot get alone, and what it would refuse even if offered. Downward, it tells every function what to optimize for. That second job is where business strategies most often fail, because the functions were never told.

Functional strategy: where strategies are quietly decided

In 1969, Wickham Skinner argued that a company's manufacturing function is typically either a competitive weapon or a corporate millstone, and seldom neutral ⁶. His warning still applies to every function: what appear to be routine manufacturing decisions frequently come to limit the corporation's strategic options, binding it to facilities, equipment, people and policies that may take years to turn around ⁶.

Porter makes the same point from the business side. The importance of fit among functional policies, he wrote, is one of the oldest ideas in strategy ⁵. At Southwest, the fast gate turnaround that made the position work depended on well-paid gate and ground crews and flexible union rules, on not offering meals or seat assignments, and on flying only one type of aircraft, the Boeing 737 ⁵. Operations, labor relations, product and fleet policy each made a functional choice, and the choices only make sense together.

Rumelt's Nvidia example shows functional strategy following a business strategy. Once the guiding policy was to release a new chip every 6 months instead of the industry's 18, the R&D organization had to change: three development teams on overlapping schedules, heavy investment in simulation and emulation, and control of driver software taken back from board makers ¹. None of those would be in an R&D strategy written on its own.

So the test for a functional strategy is simple. Swap in a different business strategy. Would the functional strategy change? If the IT strategy would read the same for a low-cost business and a premium one, it is a list of projects the function wants. That is not useless, but it is not strategy, and it will spend the business's money on the function's priorities.

A functional strategy that would fit any business strategy is a budget request.

A worked example: three levels in one industrial group

Notice that the most consequential decision, stopping the Asia pump line, was made at the corporate level even though it looked like a business-unit product decision. And the IT change, which looked technical, only made sense once the corporate strategy named the service network as what the parent adds.

Where the levels collide

The clean picture breaks in three predictable places.

• Shared functions serving different strategies. A shared procurement or IT function serves units with opposite ways of winning: one competing on cost, one on speed. If the shared function has one strategy, at least one unit is being served badly. The corporate strategy has to say which units' needs come first, or let units opt out.
• Unit heads who want a bank, not a parent. Business unit leaders often prefer a corporate level that allocates capital and otherwise stays away. Sometimes that is right. But then the corporate strategy must explain why owning the units together beats each standing alone, because Goold, Campbell and Alexander's question, why this company rather than a rival, does not go away ².
• Functions writing upward. Some functions write their strategy from their own benchmarks and then ask the businesses to fit. Skinner's warning runs both ways: functional choices made without the strategy can quietly decide it, for years ⁶.

The strongest objection to this page is that the chain of constraint is too top-down. Some of the best corporate strategies were discovered when a unit found something that worked and the center was wise enough to back it. That is true, and it does not contradict the chain. Discovery flows upward; constraint flows downward. A unit's discovery becomes corporate strategy when the corporate level chooses to fund it and to say no to something else to do so. Until then it is a good result in one unit.

Monday morning

1. Write the corporate sentenceComplete: “We own these businesses together because…” If the answer is about size, diversification of risk or history, the corporate level has not yet said what it adds.
2. Find one no at each levelName one thing the corporate strategy forbids the units, one thing each business strategy forbids its functions, and one thing each function has stopped doing. Blanks show where the chain is broken.
3. Run the swap test on one functionTake the function with the largest budget and ask whether its strategy would change under a different business strategy. If not, rewrite its priorities starting from the business's way of winning.
4. Unstaple the planPull the corporate plan apart into its unit plans. List what is left over. That remainder is your corporate strategy. If nothing is left, that is your finding.

International Harvester's 1979 plan was thick, detailed and sincere, and it was five plans pretending to be one. The test of a corporate strategy is not how much it contains. It is what would be missing if you took it away.

Questions

What is the difference between corporate, business and functional strategy?

Corporate strategy decides which businesses a company should own and how the parent makes them more valuable together. Business strategy decides how a single business unit will win in its market: where it competes and why customers choose it. Functional strategy decides how a function such as operations, sales or IT makes the choices that support that business's way of winning.

Does a single-business company need a corporate strategy?

Its corporate and business strategies are usually the same document. The corporate question reappears whenever the company considers an acquisition, a new business or a divestiture: why should this company, rather than someone else, own that business? Answering it before the deal is on the table is much easier than after.

How do you know if a functional strategy is any good?

Swap in a different business strategy and ask whether the functional strategy would change. If an IT or operations strategy would read the same for a low-cost business and a premium one, it reflects the function's own priorities rather than the business's way of winning. Good functional choices fit together and only make sense for one strategy.

What is the most common corporate strategy mistake?

Treating the corporate plan as the sum of the business unit plans. If the units submit plans before any portfolio, capital or sharing choices are made at the center, the corporate level can only add them up. A corporate strategy should state what the parent adds that the businesses could not get under another owner.

Where to go next

• What a Corporate Strategy Team Actually Does
• Playing to Win: Running the Five Choices as One Decision
• Corporate Strategy
• Conglomerate Discount
• Value Chain Analysis