What is ‘functional strategy?’ (And should functions even have strategies?)

Admin October 7, 2025 No Comments

Six years ago, I wrote (with colleague Jennifer Riel) a Harvard Business Review article on functional strategy. But the questions about functional strategy keep coming unabated. It is a vexatious issue for CEOs, functional leaders, and boards of directors. So, I thought it would make sense to dedicate a Playing to Win/Practitioner Insights (PTW/PI) to Functional Strategy: The Three Key Functional Leader Tasks. And as always, you can find all the previous PTW/PI here.

How Did We Get Here?

In the business world today, there are great differences of opinion as to what functional strategy is or even whether functions should have strategies. A prevalent view holds that functions shouldn’t have strategy; they “just execute.” In my experience, it is a hot and contentious issue. I understand why. Functions have become huge in terms of both dollars spent and people employed. In that 2019 article, we pointed out that on average, the Dow Jones 30 companies spent $20 billion per year on their functions in 2017, and it would undoubtedly be more today. So, there is lots at stake.

It was a much simpler world through the mid-1950s when companies were functionally organized. The CEO acted as the sole integrator and made the set of decisions that would currently be called strategy. Starting in the late 1950s and continuing through the 1960s and 1970s, virtually all large companies converted to business unit (BU) organizations—in large part because they had diversified, and coordinating across the various product lines had become ever more difficult within a functional structure.

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It is interesting to me that two prominent business concepts—business strategy and organizing by BU—came along historically at the same time. In the 1960s, both were considered avant-garde. If you were a cool, leading-edge company, you did strategy and converted your functional organization to a BU one.

I believe, although it is speculation, that because the two were linked to cool ideas, when a company converted to BU structure, it naturally put the BUs in charge of strategy—that was seen as new age management in the 1960s and 1970s. It made sense. BUs were mini versions of the company, and the company CEO did strategy—so why not devolve strategy responsibility to BU presidents?

While it made sense, it didn’t have to be so. Apple is one of the world’s giant diversified companies—and, of course, one of the world’s most successful. And as my friends Joel Podolny and Morten Hansen wrote in an interesting Harvard Business Review article: The functional heads, not the product heads, are in charge of strategy at Apple.

However, Apple is a tiny exception to the rule of BUs running strategy. And that created challenges as functions struggled to figure out how to serve multiple product masters. Plus, companies found that it was hard to maintain functional excellence and motivation when the BUs were so obviously in charge. This gave rise to another corporate concept—matrix management—which gained popularity in the 1970s and was considered avant-garde for a time. In this approach, neither BU nor function was singularly in charge. Rather, they worked together to figure things out—including strategy. Somewhat unsurprisingly, enthusiasm for this structure faded pretty quickly after it was put into practice extensively.

That all brings us to today, and the dominant approach is that BUs will do strategy. In a small minority of cases, it is a collaborative task in a matrix management environment. In a minuscule proportion of cases, like with Apple, functional heads have responsibility for strategy. This begs the question: What should functions do with respect to strategy in today’s dominantly BU-led world?

Balancing 3 Tasks

As context, it is important to recognize that functions can’t not do strategy because strategy is what you do—and since functions do some things and not others, they are making strategy choices. A function can’t say that the BUs do strategy, so we don’t. The only question is whether you make explicit and conscious strategy choices backed by compelling logic or just do a bunch of largely random stuff.

In my view, functional leaders need to balance three strategic tasks. The three tasks are in tension, which is what makes functional strategy hard. There is no way to make the tension go away—it just needs to be managed on an ongoing basis.

1. Serve Individual BU Customers

The first task is to serve the functional needs of each BU’s strategy. BUs are your customers, and you must be responsive to their needs. In many respects, you can think of your function supplying key Must-Have Capabilities (MHC) and running important Enabling Management Systems (EMS) for the BUs.

For example, at Four Seasons Hotels & Resorts, the human resources (HR) function provides the Four Seasons Hotels BU (the biggest but not only BU) its key MHC—long-serving hotel staff that are motivated and capable of providing the differentiated guest service central to the BU Where-to-Play/How-to-Win (WTP/HTW) strategy choice. And HR operates some of the BU’s key EMS—its recruiting and career management processes, for example.

To produce those MHC and run those EMS for the Four Seasons Hotels BU requires upstream choices for Four Seasons HR in its WTP and HTW. HR’s WTP focuses disproportionately on hiring, training, and career planning. Its HTW involves spending wildly greater resources on interviewing candidates personally rather than hiring from résumés or the internet, as Four Seasons’ competitors do. It has a specific EMS to carry it out, including the hotel manager conducting the final interview.

At Lego, a key aspect of its HTW is bricks that are of remarkably consistent color (so that creations never look patchy) and have perfect clenching power (tight enough to not fall apart but loose enough for children’s fingers to easily separate them). Lego manufacturing function supplies the MHC for this to happen—and it does so by investing disproportionately in color technology and injection molding precision.

In this first task, the imperative is to understand the strategies of each BU well enough to make your own functional strategy choices aimed at producing key aspects of the BUs’ MHC and running supporting EMS.

2. Leverage Across BU’s Current Strategies

If you solely create entirely customized MHC/EMS for each BU, you will be challenged in benefiting from scale or the learning curve. That is not a disaster, but it limits the strategic value a function can add for its company. The second task is to invest in generating MHC that will be leverageable across the businesses—that is, will empower their WTP/HTWs—and will enable your function to leverage scale and learning.

For example, a key aspect of the HTW across all Procter & Gamble’s BUs is product superiority through consumer-valued innovation. The P&G R&D function has a big role to play in that—that is, in delivering the MHC of superior product innovation across the businesses.

P&G R&D delivers this with its functional strategy. Its Winning Aspiration is to deliver to businesses the most valuable innovation in the industry. Its WTP choice is to invest a wildly disproportionate level of resources in what it calls “products research.” That is having a large cadre of engineers and scientists who spend their time interacting with consumers to figure out what innovations would be valuable to them.

It is a distinct WTP choice because its competitors tend to engage in that activity with nontechnical personnel within their marketing or market research functions. Its HTW is to focus its product creation R&D resources on more valuable insights (delivered by products research) at massive scale. Its MHC is to have the biggest and most experienced and talented products research capability in the industry—which it has by a wide margin. And it has EMS that ensure that this unique capability is built and maintained on an ongoing basis.

Because this R&D functional strategy delivers across the BUs, it enables the function to leverage massive scale and get farthest down the learning curve in the industry.

3. Creating Future Opportunities for the BU

The third task is to enable future competitive advantages for the BUs. That is to build a capability that will enable the BUs to pursue valuable strategies that they would not have been able to pursue without it.

Sticking with P&G R&D, its creation of Connect & Develop (which this Harvard Business Review article chronicles) is an example of completing this third task. This initiative tapped the outside world to bring into the incredibly effective commercialization engines within the BUs double the flow of consumer-valuable inventions—thus providing the BUs with more valuable innovation opportunities at a lower cost—many that the BUs would have not come up with otherwise. And if imitation is the sincerest form of flattery, P&G R&D’s initiative has been flattered repeatedly as innumerable companies across various industries have parroted Connect & Develop.

Practitioner Insights

If you are a functional leader, don’t ever let anyone tell you that you don’t have a strategy task, that you are just there to “execute” the BU strategies. Regardless of what they say, you will make strategy choices—because you can’t not make important choices.

Your strategy job is hard. The more straightforward task is BU strategy. It has been around in full force for over half a century. There is lots of support for it, lots of case studies, lots of advisers. There is little written on functional strategy.

It is doubly hard because you do have a tripartite strategy task—and a tricky one because you must balance your effects and resources across the three tasks.

The first task is to understand the WTP/HTW of each BU well enough to design a functional strategy that contributes by supplying each BU the MHC that it needs to win. Of course, any single function can’t supply all the MHC each BU needs. Each function needs to figure out where it can add value to each.

If you don’t accomplish this task, you will be viewed by the BUs as unresponsive and bureaucratic, and they will lobby the CEO to shift your resources into their BUs. However, if you accomplish only this first task, you will spend your functional life racing around, serving potentially disparate needs and spreading your resources thinly.

Go beyond by tackling the second functional strategy task. That entails determining for your function what MHC it can contribute consistently across the BUs. What is the cross-BU throughline for your function? If you follow that throughline, you can provide more value to the BUs, thanks to greater scale and faster learning. And your function will be a key contributor to winning across the BU portfolio. To attempt to keep up, each BU’s competitors will need to have functions that are leveraging across a similarly broad portfolio in a similar fashion, which is unlikely.

The third task—making possible a future for the BUs that wouldn’t be possible otherwise—is the cherry on top. There is no limit to the long-term value that a function can create, whether Connect & Develop by R&D at P&G, the Toyota Production System by manufacturing at Toyota, iconic design by the design function at Apple, or the Frito-Lay direct-store delivery system by logistics at PepsiCo.

One thing to keep in mind, however, is that it is truly a balance. If you focus on the second and third tasks—or even worse, exclusively the third task—because they are more fun and exciting than the first task, the BUs will revolt against you. They need the first output for their strategies. If you don’t give them that, they will be forced to do it themselves and will ask the company to take the resources from you to do it themselves. Doing the first task well gives you the option to do the second. Doing that well gives you an option on the third. And if you get there, you are a great functional strategist!

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