What is Corporate Strategy?
A corporate strategy is a set of deliberate choices that a corporation makes to maximize its value over a period of time, which includes specific guidelines with respect to how it will create and distribute the value that it extracts from its multiple business units.
In a company with a single business unit the goal of its strategy is fairly straightforward: maximizing the valuation of that business for its shareholders over the foreseeable future. But in a company with multiple products or business units the boundaries of its strategy are sometimes not that straightforward.
While the difference between a “corporate-level” and a business strategy may seem evident and to some extent trivial, keeping a clear distinction between the two is necessary for a good understanding of strategy.
Most of the concepts that are typically associated with a business strategy such as competition, market forces and disruption usually refer to the strategy of a particular product or business unit. But when we talk about a corporate-level strategy, we are referring to a set of guidelines that govern the behavior of a company that owns more than a single business unit.
While each unit must have its own strategy set at the business level, taking into account the particularities of the market and its incumbents, a Corporate Strategy must still be set at the “mothership” level to guide the general behavior of the corporation as a whole and of each of its business units.
Below is a rundown of what you’ll learn in this article:
- Breaking Down corporate-level strategy
- How to create a winning corporate strategy
- Centralizing cash management at the corporate-level
Without further do, let’s dive in.
Breaking Down Corporate-level Strategy
Based on our definition of corporate-level strategy, a multi-business corporation must seek to maximize its value as a whole, even if that means sacrificing some of its business “units” to favor others that are more promising.
For example, at a given point in time, you may decide that it is better to reinvest profits from a strong business, that happens to be in a dying industry, onto a weak unit that’s getting traction in a fast growing market, rather than trying to protect the market position of the dying business.
Because the goal is the maximization of the organization’s value as a whole, its executives must sometimes pursue this type of cross-business optimization, even if that means achieving suboptimal results in a particular business unit.
There are other examples of corporate-level strategy that may be more familiar to you. Amazon, for example, runs its massive e-commerce platform as a standalone business, while owning other businesses like Amazon Web Services (AWS), a cloud computing business; Zappos, an online shoe and clothing retailer; and Whole Foods Market, a brick-and-mortar supermarket chain specializing in organic food. These operate as independent business units.
Because these units each operate in different markets and face a completely different set of conditions and threats, each must have its own business-level strategy, operated under the guidance of Amazon’s corporate strategy.
A corporate strategy establishes a series of choices that an organization makes with respect to how it will create and distribute the value extracted from its business units and from that, we can conclude that to really extract the most out of your company’s resources, you must adopt some kind of portfolio approach to how you manage the units and allocate resources.
Let’s see how that can be done.
How to Create a Winning Corporate Strategy
When it comes to managing different business units through a corporate-level strategy, we suggest adopting a portfolio mentality, where you seek to maximize the value that the portfolio (i.e., the different business units) creates as a whole over a period of time. That will help you to better balance efforts across the different business units and make better capital allocation decisions.
One way to do this is by placing your business units in a four by four matrix based on their competitiveness and the growth potential of their markets.
Those familiar with classic strategy tools will note that this is an updated take on the Growth-Share Matrix introduced by the Boston Consulting Group (BCG) in its early days, where we are using competitiveness and market potential as proxies for the original dimensions.
Following BCG’s naming convention for each of the quadrants, we can define each business unit as one of these:
- Cash cows: Businesses with a strong market position in a low growth market. These units produce a healthy cash flow that can be used to fund other businesses.
- Stars: Units with strong positioning in high growth markets. These businesses usually need lots of cash to retain their share of the market and will eventually become cash cows when the market reaches its maturity. Because of their strong position, they yield high returns on the company’s money, so they must be an investment priority.
- Pets: These are business units with a weak position in a low-growth market. Pets usually yield a low return on the company’s money, the reason why many experts call them “cash traps,” so by Jack Welch’s rules these business units should be either sold or closed.
- Question marks: These are businesses with a weak position in a strong market. They need cash injections to fund their growth, but that investment won’t yield high returns until the business achieves a stronger position. By Jack Welch’s rules they should be fixed (e.g., fund their growth) or sold.
To select where each business fits in the matrix you can assess its competitiveness based on its ability to defend a profitable position in the foreseeable future, something that’s usually related to factors like margins, size, recent growth, market share, profitability, technological position, intellectual property, reputation, image, brand strength and people.
The power of allocating businesses in this matrix is in helping you see how the different units can help each other to produce the maximum growth as a whole.
For example, the cash flow coming from cash cows is best used to finance the growth of stars and question marks. The question marks that are not selected for growth money, then, must be sold to other companies for which they could create some synergies.
The question marks quadrant is also the best candidate for mergers and acquisitions. Since those units are performing poorly in a market that shows strong potential, a quick way to gain the strengths you need to make them a star is through strategic M&A or JVs.
Pets are units that are performing poorly in a weak market, so unless they are strategic in nature (e.g., being used to develop a key technology), they should be closed or divested. Alternatively, some pets could be repositioned to target a different market where they could perform better.
When trying to come up with a corporate level strategy, adopting a portfolio approach will usually provide a more intuitive way to make decisions and to better allocate resources.
Centralizing Cash Management at the Corporate-level
If you run a company with multiple business units, product divisions or maybe a few international operations, you necessarily have to give each one the freedom to make strategic decisions.
At the end of the day, a business strategy is no more than the answer to the threats the company faces, and each market will need a different game plan (i.e., business-level strategy) to win.
For that reason, you must give the executives in those units the leeway they need to do their jobs. But there’s one exception to that rule: capital allocation decisions must be centralized and made at the corporate level.
Companies with a more serious approach to capital allocation enforce centralized management of the cash produced by each individual unit, even if those operate as individual businesses. In plain English, the cash those businesses produce must be sent to the headquarters where it will be reallocated in the way that executives at that level understand that creates the most value to shareholders.
We call this approach the “cash factory” since the company’s individual business units are seen purely as cash machines whose only job is to produce cash and send it over to the headquarters, and executives at corporate-level decide how that money will be distributed across all operations or invested towards new areas.
By sitting at the center of the cash factory, CEOs can make decisions to properly balance resource allocation across business units in a way that creates the most value for shareholders. They can move the money produced by cash cows into star businesses, or into other growth areas to finance longer-term plays.
Amazon, for example, subsidizes its aggressive retail division which loses money in heart-stopping proportions with money from successful cash-making businesses like web services (AWS) and Prime. That cross-subsidization is only possible through a centralized cash approach at the corporate level.
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Reeves, Martin; Moose, Sandy; Venema, Thijs. BCG Classics Revisited: The Growth-Share Matrix. BCG.com. June 2014. URL: https://www.bcg.com/en-us/publications/2014/growth-share-matrix-bcg-classics-revisited.aspx