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 and 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
1. Allocation of Resources
The allocation of resources at a firm focuses primarily on two resources: people and capital. To maximise the value of the entire firm, leaders must determine how to allocate these resources to the various businesses or business units to make the whole greater than the sum of the parts.
Critical factors related to the allocation of resources are:
- 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
2. Organisational Design
The organisational design ensures the firm has the necessary corporate structure and related systems to create maximum value. Leaders must consider the role of the corporate head office (centralised vs decentralised approach) and the reporting structure of individuals and business units – vertical hierarchy, matrix reporting, etc.
Critical factors related to organisational design are:
Head office (centralised vs decentralised)
- 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
Organisational structure (reporting)
- 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)
3. Portfolio Management
Portfolio management looks at how business units complement each other and their correlations and decides where the firm will “play” (i.e. what businesses it will or won’t enter).
Corporate Strategy related to portfolio management includes:
- 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
4. Strategic Tradeoffs
One of the most challenging aspects of corporate strategy is balancing the firm’s tradeoffs between risk and return. It’s essential to have a holistic view of all the businesses combined and ensure that the desired levels of risk management and return generation are being pursued.
Below are the main factors to consider for strategic tradeoffs:
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.
Corporate Strategy is different from business strategy, as it focuses on managing resources, risk, and return across a firm, as opposed to looking at competitive advantages.
Leaders responsible for strategic decision making have to consider many factors, including allocation of resources, organisational design, portfolio management, and strategic trade-offs.
By optimising all of the above factors, a leader can hopefully create a portfolio of businesses worth more than just the sum of the parts.
Which of these strategies is your organisation pursuing or has been successful for your organisation? Leave the comments in the comments box.