Skip to main content

THE TWO LEVELS OF STRATEGY

The word strategy has many modifiers in the business world: portfolio, diversification, differentiation, growth, market share, shareholder value, customer, brand, product, pricing, cost, manufacturing, supply chain, channel, distribution, sourcing, IT, digital, people, communications, investor relations, and M&A among them. All of these forms of strategy are variations of the two most fundamental types: corporate and business. Typically, corporate strategy is seen as being relevant to a company as a whole, whereas business strategy is reserved for the individual businesses within a company.

But things get more complex when you consider the most fundamental questions that a strategy needs to answer:
1. Who is the target customer?
2. What is the value proposition for this target customer?
3. What are the essential capabilities required to deliver that value proposition?

In considering a company operating in multiple businesses (think Siemens, UBS, Unilever, Reliance, and Saudi Aramco), these questions are difficult to answer for the company as a whole — if not meaningless. They can only really be answered for each of the individual businesses within a company. Does this mean that a company’s corporate strategy is just a roll-up and integration of the strategies for its individual businesses? No, not at all. A corporate strategy adds two more critical questions to the list:
4. What businesses should the company be in?
5. How should the company add value to those businesses?

Adding value to the businesses means contributing to the ability of each business to outperform its peers. In other words, the individual businesses should be able to draw on some distinctive capabilities that are available to all parts of the enterprise, and that give the businesses an edge in their own target markets. For PepsiCo, direct store delivery is one of these enterprise-wide capabilities; corporate sales and marketing is one for IBM; General Electric has a distinctive capability in developing general managers; and so on. Those enterprise-wide capabilities that are truly differentiating may reside in the corporate center or in particular businesses. Either way, to the degree that all the businesses are able to benefit from such capabilities, they create a “coherence premium”: the ability of a company to be worth more than its sum-of-parts valuation. Without a coherence premium, there is no economic rationale for the individual businesses to be under the same corporate roof and, thus, there is no raison d’ĂȘtre for the company itself.

A coherent corporate strategy results from an iterative approach to addressing questions 4 and 5. It must be iterative because the answers to these two questions depend a lot on each other. In other words, the businesses that should define a company’s shape depend in part on its capabilities and how they add value to the businesses’ performance. Likewise, how a company should add value to its businesses depends in part on which businesses make up — or could make up — its portfolio.

Unfortunately, most strategists hardly bother with how the company adds value to its businesses (question 5), much less give the question an honest answer. This is why the so-called conglomerate discount is so prevalent, even for companies operating in highly integrated businesses. It also explains why companies such as ConocoPhillips, Fortune Brands, Sara Lee, Kraft, McGraw-Hill, Tyco (again), and ITT (again) have begun to break up or divest businesses in recent years, with shareholders applauding.

Finally, an important nuance: For most large, complex companies, the questions of corporate strategy — questions 4 and 5 — are relevant at multiple levels, not just for the company overall. For example, a division with multiple businesses (consider consumer banking at Citi or GE’s industrials group) represents more of a corporate portfolio than a single business unit. In fact, most divisions, segments, groups, and even business units can be thought of as having a portfolio of smaller businesses within them, thus making the questions of both corporate and business strategy relevant to their strategies.

Business leaders, strategic planners, and even strategy consultants often confuse business and corporate strategy. You can keep them straight by being clear on the questions that are relevant at your level.


AUTHOR PROFILE:
Ken Favaro is a senior partner with Booz & Company based in New York. He leads the firm’s work in enterprise strategy and finance.

Comments

Popular posts from this blog

ESSENCE OF ENGAGEMENT IN DIGITAL SPACE

Once again, I’m not a social media marketing expert and I don't pretend to be one. My social media marketing knowledge is limited to the things I learn everyday by observation. Many of you have already gone through my previous blog namely, ‘Marketing in a Digital Space’. Those who didn’t get the chance to go through; don’t sweat. You may read it from the link below: http://meet-ehtesham.blogspot.com/2017/04/interviewer-to-candidate-do-you-have.html
That article was about the principles of promotion when you are in digital space. It mostly tells you about “going digital and acting normal”. At the final paragraph, I mentioned that we should put more and more WOW elements in social media to be successful. There were other points as well. But this is the toughest and most important of all.
Very recently I have conducted an experiment. Let me give you the background first. I have almost 700+ friends and 1K+ followers on my Facebook. My posts are usually pretty boring and hence very few…

ADVERTISING SIMPLIFIED

That day, I was going through an article which says that 38% of US adults use ad-blockers in their mobile phones and 0.35% average display ad click-through rate. Furthermore, Havas Media Group UK has already frozen spending on Google and YouTube. Another research shows that general visitors of different webpages (in desktop version) cannot recall any brand/communication/contents that are placed in the right side of the website. Can you imagine this? So, what are the ways to overcome this? Many advertisers these days are coming up with some phenomenon infotainments, infographics, interactive contents, etc. through different media channels (both conventional and social media) to keep their customers engaged. But how successful they are?
I don’t consider myself as a creative person. Moreover, the marketing knowledge I have is the very basic. So, pardon me if I sound loud to you. In case of developing a creative/ad, I personally follow a simple theory. Trust me, it helps a lot. The theory …

MARKETING TODAY IN DIGITAL SPACE

Interviewer to a candidate, “Do you have any leadership quality?” The candidate replied, “I believe so. I have 87 followers on Facebook.”
I think this joke clearly illustrates how digitization has impacted our everyday lives. One of the things we do first in the morning is to check our mobile phone’s notification bar. While working, eating, even in a close social gathering, we tend to check our mobile phones repeatedly. ‘What did I miss? What did I miss?’. Moreover, we tend to easily believe what we see in social media, especially, on Facebook. We rarely check the authenticity of the news or content. Why? It is because 1.2K people that I don’t even know and 54 people from my circle (maybe) liked the post. Strange! Yes, this is an alarming scenario.
One of the commonly and frequently used IMC (integrated marketing communication) terms is 360 degree marketing approach. Yes, 360 means using all possible communication channels at once to push certain message(s). Good idea. And I’m not agai…