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What is the difference between a business strategy and a commercial strategy, and which one do you need?

We’re typically asked this question at least once a month. Hopefully, this helps all our advocates out there. Warning: we’ve gone into the archives for this one.

A commercial strategy covers everything on the customer side of the factory gate; a full business strategy also covers what happens inside it. The short answer to which one you need: if your product or service is sound and the problem is winning and keeping customers, you need a commercial strategy. If the problem is cost, capacity or supply, you need a full business strategy.

What is the difference, in plain terms?

We use a factory analogy frequently to explain this. Picture a factory. Inside the walls sit the raw materials, the production line, plant capacity and the cost of making each unit. Getting that right is the job of a full business strategy, which also reaches back to suppliers and out to how capital is allocated. The back end of the business.

At the factory gate, and beyond it, a different set of questions begins. Who buys what the factory makes? Why do they choose it over the alternatives? What do they pay, through which channels, and how do you win the next customer and keep the last one? Those questions belong to a commercial strategy.

The two fail in different ways. A factory can run flawlessly and still sit on unsold stock. A full order book is worthless if the line cannot deliver. Each needs its own answer, and a business can be strong on one side and weak on the other.

What does each one cover?

The two overlap heavily, but a full business strategy is the larger set: it contains the commercial strategy and adds the inside of the factory. Harvard professor Michael Porter’s value chain gives the same split a formal shape by dividing a firm into primary activities (inbound logistics, operations, outbound logistics, marketing and sales, service) and support activities such as procurement. Read this way, a commercial strategy lives mainly in marketing and sales, service and the outbound end. A full business strategy spans the whole chain.

What does the research say?

Here’s the archive part… no single study draws the line exactly where this article does. Taken together, though, these sources suggest that the customer side of the gate is its own discipline and that it pays.

Start with Porter. Back in 1996, he argued that running your operations well is necessary, but it isn’t a strategy, because competitors can copy it. What they can’t easily copy is a clear market position, and that comes down to choosing which customers, products, and needs you’ll serve. That’s a customer-side decision.

Theodore Levitt got there even earlier. In his 1960 Harvard Business Review classic, ‘Marketing Myopia’, he argued that industries fade when they focus on what they make instead of what customers actually need. The railroads thought they were in the railroad business, not transportation. Hollywood thought it was in the movie business, not entertainment.

There’s data too. McKinsey looked at more than 200 commercial capabilities across 200 clients and found that companies with the strongest commercial capabilities grew revenue about 1.9 points faster, and earnings about 4.7 points faster, than their sector peers. It’s McKinsey’s own data, and it shows a link rather than proving cause, but it’s a telling pattern.

We’re not saying operations don’t matter; of course they do. Operational and strategic agendas are both essential. The point is that they are different agendas.

Which one do you need?

Start by asking where the business is being held back:

Customers are the limit. Leads, conversion, pricing power or retention are weak, while delivery already works. You need a commercial strategy.
Channels are the limit. Your go-to-market channels aren’t performing, or you don’t have enough of them. You need a commercial strategy.
The factory is the limit. Costs are too high, capacity is short, quality slips or supply is unreliable. You need a full business strategy, or at least the operational half of it first.
Both are limits. You need a full business strategy, with the commercial work as one part of it.

Does the type of business matter?

In our experience, these types of businesses are the most likely to need a commercial strategy first:

• Businesses with no production constraints, e.g. software companies
• Brand owners and distributors that outsource production, e.g. craft, stationery and technology brands
• Wholesalers
• Franchisors and licensors
• Service businesses

When is a commercial strategy not enough?

Where the economics sit inside the factory, a market-facing strategy cannot carry the business alone. Capacity-constrained, price-competitive industries lean on operational excellence for good reason. Many organisations also explore vertical integration to improve speed, build know-how or secure scarce strategic assets. Zara is a strong example of this strategy in action, integrating design, manufacturing and distribution to respond quickly to fashion trends.

A commercial strategy assumes the factory can deliver what it promises. Where that promise rests on supply chain or cost structure, those questions need their own owner. We focus on the market-facing side, so we advise pairing a commercial strategy with operational expertise.

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This article is written by Lisa Edmonds, Founding Partner of Emmet Consulting, and draws on recent conversations and projects delivered for our B2B clients in distribution, telco and technology.

Research sources:
Porter, M. E. What Is Strategy?, Harvard Business Review, November–December 1996.
Levitt, T. Marketing Myopia, Harvard Business Review, 1960 (HBR Press synopsis).
Groves, R., Lueck, K. and Redaelli, S. Commercial excellence: Your path to growth, McKinsey & Company, October 2018.
Kachaner, N. and Whybrew, A. When ‘Asset Light’ Is Right, Boston Consulting Group, September 2014.
Porter’s value chain: MasterClass summary of Competitive Advantage (1985).