What is Corporate Strategy?Corporate Strategy takes a portfolio approach to strategic decision making by looking across all of a firm’s businesses to determine how to create the most value. To develop a corporate strategy, firms must look at how the various businesses they own fit together, impact each other, and how the parent company optimises human capital, processes, and governance. Corporate Strategy builds on top of business strategy, which is concerned with the strategic decision making for an individual business.What are the Components of Corporate Strategy?There are several essential components of corporate strategy that leaders of organisations focus on. The main tasks of corporate strategy are:
- Allocation of resources
- Organisational design
- Portfolio management
- Strategic tradeoffs
- Identifying core competencies and ensuring they are well distributed across the firm
- Moving leaders to the places they are needed most and add the most value (changes over time, based on priorities)
- Ensuring an appropriate supply of talent is available to all businesses
- Allocating capital across businesses so it earns the highest risk-adjusted return.
- Analysing external opportunities (mergers and acquisitions) and allocating capital between internal (projects) and external opportunities
- Determining how much autonomy to give business units
- Deciding whether decisions are made top-down or bottom-up
- Influence on the strategy of business units
- Determine how large initiatives and commitments will be divided into smaller projects
- Integrating business units and business functions such that there are no redundancies
- Allowing for the balance between risk and return to exist by separating responsibilities
- Developing centres of excellence
- Determining the appropriate delegation of authority
- Setting governance structures
- Setting reporting structures (military / top-down, matrix reporting)
- Deciding what business to be in or to be out of
- Determining the extent of vertical integration the firm should have
- Managing risk through diversification and reducing the correlation of results across businesses
- Creating strategic options by seeding new opportunities that could be heavily invested in if appropriate
- Monitoring the competitive landscape and ensuring the portfolio is well balanced relative to trends in the market
- Firm-wide risk is mainly depending on the strategies it chooses to pursue
- True product differentiation, for example, is a very high-risk strategy that could result in a market leadership position or total ruin
- Many companies adopt a copycat strategy by looking at what other risk-takers have done and modifying it slightly
- It’s essential to be fully aware of the strategy and associated risks across the firm
- Some areas might require true differentiation (or cost leadership), but other areas might be better suited to copycat strategies that rely on incremental improvements
- The degree of autonomy business units have is vital in managing this risk
- Higher risk strategies create the possibility of higher rates of return. The examples above of true product differentiation or cost leadership could provide the most return in the long run if they are well executed.
- Swinging for the fences will lead to more home runs and more strikeouts, so having the appropriate number of options in the portfolio is important. These options can later turn into big bets as the strategy develops.
- Incentive structures will play a significant role in how much risk and return managers seek.
- It may be necessary to separate the responsibilities of risk management and return generation so that each can be pursued to the desired level.
- It may help manage multiple overlapping timelines, ranging from short-term risk/return to long-term risk/return and ensure appropriate dispersion.
Evita Veigas
4 min read