The three levels of strategy is a framework used for strategic planning that dates back to the 1960s. Since then the business environment has dramatically changed requiring leaders to adopt new approaches.
The three levels of strategy is based on a top-down strati planning process. But in today’s fast-paced and more complex world there are several problems with the top-down approach as demonstrated by these statistics:
Research from the Economist Intelligence Unit found that
61% of executives admit their organisations often struggle to bridge the gap between strategy formulation and implementation.
The case studies tell the tale: Nokia, Yahoo, Blockbuster, and Kodak are just a few of the companies that ended up on the scrap heap.
A recent study by McKinsey found that the average life-span of companies listed in Standard & Poor’s 500 was 61 years in 1958. Today, it is less than 18 years.
Furthermore, McKinsey believes that, in 2027, 75% of the companies currently quoted on the S&P 500 will have disappeared.
Many corporates are failing to adapt to market conditions and disruptive competitors.
Over the last 20 years,
52% of companies on the Fortune 500 list have disappeared due to various factors like technological advancements, poor strategic decisions, and market shifts
Research shows that incumbents fail because leaders do not have rigid mindsets, do not have capabilities that translate market intelligence into operational changes, and of course rigid strategic plans.
The old top-down, hierarchical strategy plans are redundant and need to change to be more agile and adaptive.
Why? First, the environment and context of business is very different to when this strategic framework was developed.
Second, organizing today is very different and requires more agile and adaptive structures to enable more bottom-up and top-down planning such as OKRs.
But it is not just planning that has to change.
It is the fundamental way of organizing a firm that has to shift to meet the complexity of today’s complex business environment.
The New Paradigm For Corporate Strategy – Ecosystem Organizing
The New Paradigm of Strategy
Today’s business environment is fast-paced, unpredictable, and constantly evolving. Strategy is no longer a fixed plan but a flexible, adaptive approach to navigate rapid market changes.
- Companies face global competition and must respond to shifting customer demands, technological advancements, and economic uncertainty.
- Digital technologies have reshaped how organisations operate, from AI and cloud computing to data analytics and automation.
- This digital transformation allows for greater efficiency and innovation but also challenges organisations to stay agile and integrated.
- Cross-functional teams, real-time decision-making, and collaboration are now crucial to breaking down silos and responding swiftly to the market.
The traditional way of organizing as a hierarchy is giving way to more dynamic models, such as ecosystem structures, which allow for faster decision-making, more adaptive operations, and a greater capacity to innovate.
As an example, A notable example is Haier, the Chinese appliance giant, which transformed its operations through the “Rendanheyi” model.
This approach breaks down the company into small, independent micro-enterprises that operate like startups.
Each micro-enterprise is responsible for its own P&L, and employees are encouraged to act as entrepreneurs. The focus is to structure the whole organisation around the customer: to enable zero distance to the customer.
The Ecosystem Organization
Ecosystem organising is not just a trend; it’s the future of corporate structure. Firms that fail to shift to this model within the next decade risk obsolescence. By decentralising operations into self-managed, agile micro-enterprises, companies unlock adaptability, speed, and innovation—key to thriving in today’s market.
Traditional, siloed hierarchies cannot compete with this level of flexibility and customer-centric focus. Like Haier, those embracing ecosystem organising will lead, while those clinging to outdated structures will fall behind, struggling to respond to rapid change and market demands. The choice is simple: adapt or fail.
The Difference Between Strategy and Strategic Planning
It’s important to distinguish strategy from strategic planning.
Strategy involves defining long-term goals and the approach to achieve them.
Strategic planning, on the other hand, is more systematic, focusing on the procedures and frameworks to put the strategy into action.
Introduction to the Three Levels of Strategy
The concept of the “three levels of strategy” comes from theories in strategic management by scholars like Igor Ansoff and Alfred Chandler in the 1960s.
Ansoff’s work, Corporate Strategy, identified corporate, business, and functional strategies as a multi-layered approach to strategy planning.
Chandler’s Strategy and Structure explored how company structures support strategic goals, focusing on a layered view.
Michael Porter later clarified the differences between corporate and business strategies in his work on competitive advantage, shaping the framework still used in both business and academic settings today.
Strategy shapes organisational choices and aligns resources effectively. Michael Porter defined strategy as “the creation of a unique and valuable position involving a different set of activities.“
In contrast, Henry Mintzberg argued that strategy often emerges through unplanned actions and adjustments rather than precise planning. Both perspectives highlight that strategy is not static; it must evolve based on internal and external influences.
The Three Levels of Strategy: Corporate Strategy
Corporate strategy shapes a company’s overarching direction, defining its purpose, structure, and allocation of resources. Alfred Chandler’s principle that “structure follows strategy” suggests that a company’s structure should support its strategic priorities.
Vision, Mission, and Values
A corporate vision sets the desired future state, while the mission clarifies the company’s current purpose.
Values guide decision-making and behaviours, influencing both culture and strategy.
For example, Apple’s emphasis on innovation shapes its product strategy, while Patagonia’s sustainability-driven mission sets a foundation for social impact.
Culture’s Role in Strategy
Corporate culture either drives strategy or poses challenges to its execution.
Edgar Schein described culture as shared assumptions guiding behaviour. When aligned with strategic goals, culture becomes a powerful enabler.
Under Jack Welch, GE had a culture focused on results and growth. However, as markets evolved, this same culture became rigid and limiting. This shift shows that culture must evolve with strategy to remain effective.
Portfolio Management and Resource Allocation
Portfolio management optimises the mix of business units, ensuring resources like capital, talent, and technology support strategic goals.
Tools like the BCG Matrix help categorise business units based on their market position, guiding decisions to invest, divest, or hold.
For example, Johnson & Johnson balances has a diverse units across pharmaceuticals, medical devices, and consumer products to minimise risk and drive growth.
Resource allocation remains critical.It’s important to place the right bets and focus resources in the right areas.
McKinsey research found that dynamic reallocation boosts shareholder returns by 30%. However, many companies struggle to adapt their resource distribution to evolving market needs, often leading to stagnation.
CSR and Sustainability as Strategy
CSR and sustainability have taken a more central part of corporate strategy. Aligning CSR activities with core business objectives can enhance brand reputation and foster customer loyalty.
Unilever’s “Sustainable Living Plan” is a strategic example, integrating social responsibility to drive both profit and social benefits.
Roadmapping
In simple terms it helps break down complex goals into actionable steps, facilitating clear communication across teams.
Roadmapping in corporate strategy provides a visual pathway to achieve long-term goals. It outlines key milestones, timelines, and the initiatives necessary to realise strategic objectives, ensuring that all business units align their activities with the corporate vision.
A roadmap offers both a guide for execution and flexibility for recalibration as market conditions or priorities change.
Partnerships and Ecosystem
Partnerships and ecosystems enable firms to tap into resources that would otherwise be costly or time consuming to develop. Moreover, they often incur additional costs and resources that sit outside the core capabilities of the firm.
Forming alliances with other organisations, such as suppliers, technology firms, or industry peers, provides access to new markets, technologies, and shared resources.
For instance, Apple’s ecosystem relies on partnerships with app developers, manufacturers, and suppliers, enhancing its product value and reach.
Companies can create dynamic value chains, leverage complementary strengths, and increase innovation potential. But they can also grow the market beyond their own capabilities and increase the ‘pie’ rather than simply compete for a slide of it.
Mergers and Acquistions
M&A is a key aspect of corporate growth strategy, often aimed at entering new markets, acquiring new technologies, or consolidating market share.
Acquisitions enable quick access to new capabilities or customer bases, while mergers can create synergies and operational efficiencies.
Mergers and acquisitions (M&A) also drive growth, but come with risks – 70% of M&A deals fail to meet their intended value due to poor integration or strategic misalignment, according to a Deloitte report.
The Three Levels of Strategy: Business Strategy
Business strategy focuses on how a specific unit competes in its market, delivering value and differentiation.
It asks: “How do we compete here?” This level of strategy aligns with corporate goals but remains adaptable to market needs, a concept first introduced by Igor Ansoff.
Strategic and Financial Flexibility
Strategic degrees of freedom give units the flexibility to change market positioning quickly.
Netflix’s pivot from DVD rentals to streaming and content creation is a good example of this sort of adaptability.
Changing business priorities also requires changes in financial flexibility. This is where dynamic budgeting and pricing strategies allow business units to adjust to market changes effectively.
Defining the Playing Field and Growth
Another aspect of the business strategy level is identifying the right market segments where it is possible to gain a competitive advantage.
Strategies at the business level focus on market penetration, product development, and diversification to expand a business’s reach.
Amazon’s entry into cloud computing, groceries, and entertainment shows how it harnessed the core capabilities to expand into new markets.
Developing The Business Strategy
Building a strong business strategy requires careful analysis, alignment with corporate objectives, and a readiness to adapt.
Tools such as SWOT analysis, Porter Five Forces, and customer journey map assist in identifying opportunities and shaping strategies to compete effectively.
The Three Levels of Strategy: Functional Strategy
Functional strategy focuses on optimising specific business functions like marketing, finance, operations, and human resources to support broader business unit and corporate strategies.
Each function develops its strategy to ensure alignment with higher-level objectives while enhancing its operational effectiveness.
Aligning Functional Goals with Business Strategy
A key element of functional strategy is ensuring that departmental goals align with the business unit’s competitive positioning.
For example, if a business strategy focuses on creating a differentiated value proposition through its customer experience, then the marketing function must prioritise brand positioning and customer engagement tactics.
Meanwhile, HR would focus on building customer-centric skills within the workforce. Hence, the synergies across the functional strategies complement each other and contribute to achieving the overall business units strategic goals.
Process Efficiency and Resource Allocation
Functional strategies also concentrate on process efficiency and resource allocation.
For example, the operations function aims to optimise production processes, reduce costs, and manage supply chains to support product availability and quality.
Finance functions focus on managing cash flow, capital investments, and risk to align with corporate growth targets. Therefore, cross-functional coordination becomes critical, as improvements in one area can affect the performance of others.
Functional Strategy as a Driver of Innovation and Agility
It is important to recognizse that often the people at a functional level have the knowledge, skills, and insights to that enable innovation ideas to surface.
Functions that remain adaptable and forward-thinking are better positioned to support the business’s overall ability to respond to market changes and strategic shifts.
Measuring Performance and Impact
Functional strategies need to have clear performance metrics to measure progress and impact on overall corporate goals.
KPIs (Key Performance Indicators) and OKRs (Objectives and Key Results) are commonly used frameworks to track achievements and identify areas for improvement – see post on OKR vs KPI.
This ongoing assessment ensures that functional activities contribute to business unit goals and, in turn, the corporate strategy.
A New Level 4 – The Operational Strategy
Defining Operational Strategy in the Digital Era
The Operational strategy is focused on transforming business objectives into efficient, high-quality processes.
In the context of the todays fast-paced digital era, this transformation heavily relies on the integration of technology and that means organisations need to quickly adapt and evolve based on the changes in markets and customer demands.
Digital transformation is a now a core capability and focus requiring a distinct strategy to ensure fit with the overall vision and mission of the firm.
Digital Transformation and Its Impact on Operations
Digital transformation leverages technologies like artificial intelligence (AI), the Internet of Things (IoT), blockchain, and cloud computing can enhance operational efficiencies, customer experience, and business scalability.
According to MIT Sloan, 89% of executives recognise the need for a “digitally empowered organisation.”
However, digital transformation is not just about adopting individual technologies; it is about achieving synergy between multiple digital tools to transform core business activities.
The Multiplier Effect: Blockchain, IoT, and Platforms
The convergence of technologies like blockchain and IoT can create a “multiplier effect” on operations.
For example, in supply chain management, IoT sensors can track product movement in real-time, while blockchain ‘logs’ the movement and critical checkpoints and also verifies transactions. This provides automation, transparency of tracking shipments.
Companies like Walmart now use blockchain to track produce from farm to store so that they have full supply chain transparency.
Platform Ecosystems as Operational Strategies
Platforms are a powerful operational strategy which allow companies to create new and innovative products and services.
For instance, Apple’s App Store provides a platform for developers to create innovative apps, expanding the value of Apple’s devices without Apple developing every feature itself.
This model leverages external capabilities, allowing developers to build, test, and distribute apps at scale. The App Store creates a diverse ecosystems which enhances Apple’s capabilities and multiplies its innovation capability by harnessing millions of developers worldwide.
Industry 4.0: Transforming Production and Manufacturing
Industry 4.0 represents the next wave of operational transformation.
Whilst previous waves of technology have focused on functional improvements to the firm and the customer experience, Industry 4.0 connects demand with supply and also enahnces the capabilities to innovate and drive huge efficiencies.
Industry 4.0 leverages technologies like robotics, AI, IoT, and smart manufacturing to create highly automated and intelligent production systems.
A 2021 Deloitte report highlights that companies implementing Industry 4.0 practices improve their productivity by up to 25%.
For example, Siemens utilises smart factories where machinery and systems communicate autonomously, reducing errors, improving flexibility, and increasing production speed.
A New Level 5 – Microfoundations Strategy
Microfoundations are the underlying individual actions, decisions, and routines that drive an organisation’s overall capabilities and performance.
Microfoundations are now the “how” and “why” behind firms gaining a competitive edge.
They turbocharge decision-making, improve performance, and drive adaptability at the ground level.
By focusing on the individual actions, skills, and decisions of employees, companies can directly link daily behaviours to strategic goals.
This approach enhances agility, empowers quick and effective choices, and accelerates the ability to respond to market shifts.
Simply put, mastering microfoundations is key to unlocking organisational potential and fuelling sustainable growth.
Microfoundations Level and AI
At the microfoundations level, decision-making quality is paramount to strategy execution.
AI is increasingly transforming this layer by enhancing data-driven decision-making, improving employee productivity, and optimising ground-level behaviours.
McKinsey reports that AI adoption can improve decision accuracy and efficiency by 10–20%, enabling better alignment with overall corporate and business strategies.
AI in Operational and Behavioural Improvements
AI technologies like machine learning (ML), natural language processing (NLP), and predictive analytics are transforming decision-making. They provide real-time insights, helping businesses make quicker, data-driven choices. In customer service, AI-powered chatbots handle routine inquiries, freeing human agents for complex tasks, boosting efficiency, and enhancing customer satisfaction.
In sales and marketing, AI analyses customer behaviour, personalising recommendations to drive engagement. Salesforce’s AI-based CRM helps sales teams make informed decisions fast, aligning sales strategies with broader goals.
In production, AI optimises operations through predictive maintenance, reducing equipment downtime and improving quality control. For example, General Electric’s Predix platform uses AI to monitor equipment health, ensuring cost control and efficiency.
The Problem with The Three Levels of Strategy
The Historical Perspective
If we rewind to the 1960’s, businesses were built for stability, not speed. Large, monolithic companies managed every part of their value chain, relying on manual processes with limited automation. These structures required vast workforces, leading to rigid hierarchies and big, functionally driven departments.
Strategy flowed strictly top-down, with long-term plans set in stone, as the market environment was predictable and stable. Siloed functions like marketing, finance, and operations operated in isolation, hindering communication and collaboration.
The primary focus was on economies of scale, driving cost efficiency and mass production, but sacrificing flexibility and innovation. This approach ensured control but left businesses slow to adapt to change.
Unlike the rigid structures of the past, today’s businesses must be nimble, customer-centric, and ready to pivot as needed to stay competitive.
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