Strategy can be divided up into three distinct strategy levels, which can add some complexity to strategy alignment within an organization. There are plenty of articles out there that explain what each strategy level is, but things become quite vague when it comes down to how these different levels actually connect together and support each other.
In this article, we aim to clear up the confusion surrounding the relationship between the strategy levels, and give a clear process for the development of functional strategy to ensure there is alignment with corporate strategy. This is part of the reason why we created our Free Corporate Strategy Template, this customizable template provides the opportunity for you to plan your own corporate strategy!
For the purpose of this article, we will walk through the process of aligning functional strategy for an organization that has one business unit, and as such is utilizing only corporate strategy and functional strategy.
What is functional level strategy?
Functional level strategies are those put in place at the operating level of an organization, and will facilitate the achievement of corporate (or business) level strategy. Typically, functional level strategies will be created for departmental units - the strategic needs and goals of, for example, the Human Resources department, will differ substantially from those of IT. Which is why most organizations will have multiple functional strategies, and each department will need its own.
In terms of strategic planning, functional strategy should be the last strategy level created in an organization, as it is the strategy level that defines the 'how', after corporate strategy has defined the 'where' and business strategy the 'what'.
If you're not clear on the other strategy levels, check out this article, or for a quick overview - corporate strategy is the broadest ranging and defines overall company direction, business strategy is focused on being competitive in an industry or area of the market, and functional strategy is focused on defining the specific actions functional departments will take to best achieve business and corporate strategy.
The relationship between functional strategy and corporate strategy
As mentioned earlier, the strategy levels you choose to employ in your organization will depend on the size and structure of your company. For example if you're a large organization with multiple businesses operating under an umbrella company, you're going to need all three strategy levels: a corporate strategy for the organization as a whole, business strategy for each of your different businesses and functional strategy for the different departments in each of the businesses.
On the other hand, organizations with one business unit will not need a separate corporate and business strategy, and will instead create a combined corporate and business strategy for the organization, plus functional strategy for each of their departments. This is the scenario we will focus on for this article, and in this instance, functional strategies' relationships with corporate strategy is very tightly bound. The corporate strategy will define the direction of the business and what it wants to achieve, and the functional strategies should then be created in order to define how to go about supporting corporate goals and objectives.
Why should you be concerned about Functional Level Strategy?
Ultimately, the success of functional level strategies have a direct correlation to the success of your organization's corporate level strategy. Even the most well designed corporate level strategies will fail to produce results if functional level strategy is insufficiently well addressed, poorly aligned, or poorly executed (or all three).
Functional level strategy is the direct concern of actors at the departmental level, but this certainly doesn’t mean that corporate level strategists can ignore it. In fact, coordinating the strategic initiatives of disparate departmental units is probably one of the most significant tasks of corporate level strategists.
For example, a company pursuing a retrenchment strategy at a corporate level will need to make decisions regarding the profitable and unprofitable elements of the organization at a functional level. Communicating with and understanding these elements, and the way they interact, will be critical to the success of this strategy.
Making the decision to outsource or otherwise shrink less directly profitable elements of a business, such as HR or IT will have an impact on the effectiveness of other functional level elements such as sales. Understanding the way that these departments interact is contingent on getting good data from functional level elements.
5 steps to align functional strategy with corporate strategy
Strategic plans at the corporate level are slightly abstract, they generally contain a broad ranging vision, and the high level objectives/goals, all of which can be hard to make tangible. In order for organizations to actually execute their corporate strategy and achieve these high level goals (and ultimately their vision), it is necessary to further break up these goals into clear and concise actions. This is where functional strategy comes into play.
Functional level strategy is characterized by a strong emphasis on detail, metrics and practicality. As a result, functional level strategy development involves a much greater level of communication and feedback both vertically and horizontally than strategy development at the corporate levels. Recognizing this fact is the key to aligning functional strategies with the broader goals of corporate strategy.
Achieving success at functional strategy can be a daunting prospect. Thankfully, there are some straight-forward steps which any strategic planner can take to ensure excellent results.
Step 1 - Share and communicate corporate strategy with functional unit leaders
Ideally functional unit leaders will be involved or at least informed throughout the creation of corporate strategy. Even if they weren't though, it's not too late. Department heads need to gain an understanding of the corporate strategy and the goals and objectives that their department can support, in order to create an aligned functional strategy. A strategy walk through meeting should take place between organizational and functional leaders to put everyone on the same page. We've already created a guide on how to share and get feedback on your strategy, so if you're not sure how to go about this process, check out this guide.
As a quick checklist, you should come out of the meeting with a solid understanding of:
- The goals/objectives/KPIs that each department will 'own'.
- The goals/objectives/KPIs that each department will 'contribute to'. E.g. If the head of sales owns the corporate strategy objective 'Increase year on year revenue by x%' - the sales department may also need support from marketing, customer success etc.
- The timelines associated with each goal/objective/KPI.
- A clear understanding of what success looks like for each goal/objective/KPI.
Step 2 - Functional leaders begin formulating strategy
The second step should allow department heads the time to interpret the objectives they own from the corporate strategy and begin to formulate a functional strategy for how they can best achieve these objectives. In the process of creating functional strategy, department heads should pay special attention to the support they will need from different departments. The key components of functional strategy should include:
- Objectives or Goals
- KPIs for each Objective/Goal
- Projects or work plans for each Objective/Goal
- Ownership and accountability for every action and decision in the strategy
- Timelines and milestones
Steps 3 - Foster communication
As noted earlier, bilateral communication is critical to the success of corporate strategy as a whole. Within a hierarchy, horizontal communication, as well as top-down communication is generally easier to achieve than truly bilateral vertical communication. It is important to consider the needs of the various parties involved, as well as clearly defining which parties should be involved. Taking the time to create an environment which can foster this communication is an important factor in creating an effective functional level strategic plan.
Step 4 - Revise functional and corporate level strategies
At this point in the process, corporate and functional leaders should come back together to share and review functional strategy and how it aligns with corporate strategy. Are functional objectives too narrow or too broad? Are your KPIs too optimistic? How does this functional objective contribute to the corporate strategy. Asking these questions can be the difference between a cohesive relationship between corporate and functional strategy, and one that is poorly aligned and ineffective. Corporate leaders should provide feedback and recommendations to ensure close alignment between the strategy levels.
Step 5 - Implement proposed changes to functional strategy
You may have found in the review process that certain objectives in the functional strategy didn't have clear alignment with corporate level objectives. So, even if departments successfully execute and achieve these objectives, there won't be an impact on the success of the corporate objectives. If this is the case, the objective probably needs to go. Having objectives that don't align with corporate objectives/goals will end up stealing time and attention away from those that do correlate with the success of your corporate strategy. Everything you do has an opportunity cost, which is why strategic alignment between strategy levels is so important.
Functional leaders should make proposed amendments to their strategies based on the feedback from the previous step.
Following the steps outlined above should help you along the process of creating an aligned functional strategy. Ultimately, functional level strategy is a core component of any corporate strategy. Taking the time to understand functional level needs and objectives will pay off in the long term.