Module 1B: Importance of Business Strategies PDF

Strategic Thinking Module 1B - Importance of Business Strategies The Importance of Strategy Strategy answers the questions about a business. How will it run? What is the market? How does the business compete against simila...

Strategic Thinking Module 1B - Importance of Business Strategies The Importance of Strategy Strategy answers the questions about a business. How will it run? What is the market? How does the business compete against similar businesses? What is the profit model and profit potential? How much inventory and how many employees are needed to perform daily functions? The list of questions is a long one. And, ultimately, the answers to those questions are used to form a good business strategy. The two key elements behind any business are the major goals and the strategy to reach those goals. The third part is the execution to make it all happen. Without the strategy, a path to achieving goals is not clearly defined, and the business will hit roadblocks without any immediate solutions to move forward. Big Picture Role of Strategy The overarching strategy is essentially the business structure and core functions. Business owners and managers build departments to handle specific tasks and setup processes to execute the core operating functions. This strategy runs the business on a daily basis. It’s the way in which products or services are built or sold while maintaining operational objectives. After the big picture strategy built, specific strategies are developed around each department and task. How can the product improve? Where can we penetrate new markets? Questions of this nature are constantly developing and contributing to a refined set of strategies. Specific Strategies A few specific and common good business strategies are hiring, marketing and sales. Other aspects of the business are often stabilized after the initial structural strategy is achieved. Hiring, marketing and sales however are always evolving and they contribute to productivity and bottom line profitability. A hiring strategy is critical for reducing turnover and finding quality to produce productive employees. Building robust job descriptions clearly states your desires and filtering through employees to find the best hires is intensive. Good help is hard to find as some business owners say. Marketing strategy is used to build and define your brand through strategic messaging. Marketing will ultimately create the business motto, logos and messages that are used in advertising and sales collateral. The sales strategies differ from marketing because they are directly responsible for generating revenue. Sales functions on goals and strategies for inbound and outbound processes. How will the business reach potential customers and bring them to the business? How will the business go out and find the customers to make sales directly? These two questions are common starting points for building the sales process. The company can then build scripts for cold calling, train inside sales teams to receive and convert customers and create outbound sales processes to get in front of customers and win their business. It’s a competitive world and a well thought out strategy is critical for both marketing and sales. Pricing Strategies Even though the concept of pricing strategy sounds easy, it is actually quite complex. Many businesses have a set it and forget it mentality, but those who test and price products based on their market, can better maximize sales and revenue. In some cases, that means pricing above the median market to distinguish the brand. In others, it means acquiring inventory in bulk and pricing below the market on a tighter margin to drive more sales. Pricing is tightly associated with the brand and how that brand is portrayed and received by the consumer. https://smallbusiness.chron.com/importance-business-strategies-4630.html Good Corporate Strategy – Everything You Need to Know October 6, 2016 Corporate Strategy Corporate strategy is a unique plan or framework that is long-term in nature, designed with an objective to gain a competitive advantage over other market participants while delivering both on customer/client and stakeholder promises (i.e. shareholder value). Another, much simpler corporate strategy meaning is to see it as a set of decisions where a company would place its bets for the future. Given that every organization has a limited amount of resources, it needs to decide how it will prioritize the use of these resources. Different types of corporate strategy Though no two strategies are ever the same, corporate strategy can be classified into four different groups: Growth strategy Stability strategy Retrenchment strategy, and Re-invention strategy Each type of corporate strategy has a number of sub-types as illustrated in the picture below. Here is a brief overview of each strategy type with examples. 1. Growth Strategies Growth strategies aim to achieve considerable business growth in the areas of revenue, market share, penetration, etc. This can be achieved either through concentration where the company is still focusing on its core business and builds it out or through diversification where a company decides to diversify based on the number of approaches that are described in detail below. 1A. Concentration If a company aspires to growth while remaining in the same space it is currently operating, this is a concentration growth strategy. Here it is important to distinguish between a few options: Vertical Integration (participating in more value-added activities) Horizontal Integration (same activities, different geography or different products) Vertical Integration - Vertical Integration (i.e. executing on more value chain steps than in the past e.g. by being involved in distribution activities, supplier activities, etc.) An example of a vertical integration would be a travel agent who gets licensed in order to not only sell travel packages but also receive commission from travel insurance sales (a product that is often sold in tandem with travel packages)  Horizontal Integration - Horizontal integration assumes expansion into other geographies and/or the offering other products/services into the same market where the company already operates. An example of horizontal integration would be the expansion of Tim Hortons into the United States or expansion into lunch meals within its existing Canadian market. 1B. Diversification Diversification is a very wide-spread type of strategy that may include the aspiration of the company to grow based on changes in product/service offering, introducing new products services, or even moving into entirely new spaces. Basis diversification Basis diversification means that a company preserves its current offering, but is able to differentiate its product/service from other competitors by unique capabilities/features/ characteristics. In this case, a product/service value-added in the eyes of a customer/client is higher. As a rule, it justifies a higher price. Cost leadership Cost leadership is a special type of concentration strategy where a company is able to offer the same product/service at a more attractive price (e.g. via superior, more cost-efficient Operations). For example, this strategy can be seen with Mazda offering its more affordable vehicles that are competitive with other players in a higher price bracket in terms of quality and functionality, but at a lower price point. Adjacent growth Adjacent growth is an exciting strategy space for any organization. This strategy is often reliant on an organization feels that it has reached its limits in its core business. In this case, a company explores opportunities to grow in a space related to its core business – it can be an additional product/service, adjacent industries, additional set of customers, etc. For adjacent strategies, it is important to identify the most promising adjacent niches and “attack” them instead of boiling the ocean of potential opportunities. If an online platform has been comparing banking products and then decided to move into the comparison of insurance products, that would be an adjacent growth strategy. Conglomerate growth Conglomerate growth is the opposite of basis diversification. It means that an organization looks to expand into businesses which are not (or are but very loosely) linked to its core. There are fewer synergies across such businesses but nevertheless, this strategy has shown to be feasible for many companies. In some cases, it is a strong brand that allows a company to propel the conglomerate business e.g. in the case of Virgin Group. 2. Stability strategies do not have growth and new business development in their focus but rather are geared towards getting “more” out of the existing business (i.e. profitability-driven-strategy) or “stay-as-it-is” (i.e. Status-quo strategy) because the current situation already works well for the organization. 2A. Status-quo Status-quo strategies often focus on maintaining the existing performance of a business and can include such elements as acquisition of potential companies that pose a threat to the existing business, work with regulators to develop business entry barriers, etc. The reasons to choose a status-quo strategy can be varied e.g. already being very successful, not having opportunities for growth, regulatory regulations, etc. 2B. Profitability-driven A profitability-driven strategy is often linked to a desire to boost company evaluation (e.g. prior to selling the business, before an initial public offering) and has enterprise value in the focus of the strategy. The variety of levers used for this strategy type spans across portfolio optimization, cost-cutting, adjustment of pricing, etc. 3. Retrenchment Strategies This set of strategies is almost the opposite of status-quo or growth strategies. It is a defensive strategy where the main objective is to change the negative trajectory and improve the company’s position either through aggressive changes or “cutting off” the parts that pull it down. 3A. Turnaround A turnaround strategy is based on a dramatic change from the previous course of action (e.g. due to a bad decision, company mismanagement, loss of market share, shrinking industry, etc.) It includes such measures as crisis management, financial restructuring of the company, revamping the company’s product and servicing, aggressive cost-saving initiatives e.g. via robotic process automation, employee retention, etc. In most cases, implementing a turnaround strategy is a heavy exercise for the entire organization that touches every single part of a company. 3B. Divestiture Divestiture strategy involves ‘getting rid’ of parts of a business for a number of reasons such as a decision to focus on the core businesses (e.g. when a business line does not fit into the overall business landscape), the poor performance of certain business lines, attractive sale opportunities, etc. Divestiture strategies typically lead to lower complexity of the rest of the business and releasing a part of resources that can be reinvested into the business lines a company decides to keep. 4. Re-invention strategies often include taking the existing industries/businesses which have not changed for decades and re-inventing them, often with the support of new technologies. Here one can distinguish between evolutionary strategies and revolutionary strategies. 4A. Evolutionary Evolutionary strategies typically do not change the business model but strongly evolve the way service is delivered; they can significantly change a company’s product/service because they unlock a new dimension of value for customers. An example of such a business would be Netflix where the movies are delivered not as physical rentals (i.e. Blockbuster) but through a digital subscription. 4B. Revolutionary Revolutionary strategies often change the entire business model unlocking value for existing and new stakeholders. That often leads to significant shifts in market dynamics. Some technologies such as blockchain and artificial intelligence are seen as enablers that will fuel many reinventions and must be seen as a fundamental component of any technology strategy plan. Uber can serve as an example of such a business where it fully re- invented the way people provide and use rental car services impacting both drivers (i.e. new drivers, existing taxi drivers) and passengers. Michael Porter’s Four Corporate Strategy Types The different strategy types shown above are not the only ones that exist. Michael Porter’s four corporate strategy types are one of the most widely recognized ways of distinguishing different strategies. Stability Strategy, Expansion Strategy, Retrenchment Strategy and Combination Strategy. According to Porter, these are the two distinguishing factors in strategies: The breadth of the market a company wants to cover (also called market focus) A strategic advantage that can be either low cost or unique product/service capabilities. That results in four different types of corporate strategy types: Narrow market + Unique product / service capability = Narrow market + Low cost capability = Focus strategy Focus strategy Broad market + Unique product / service capability = Broad market + Low cost capability = Cost leadership strategy Differentiation strategy These strategies represent a subset of strategies we mentioned earlier, mainly growth strategies, and do not account for strategies targeting maintaining status quo, divestiture, and as seen in many recent examples, re-invention strategies. Red Ocean Strategy vs Blue Ocean strategy Two other terms that are often used in the strategy context are RED OCEAN STRATEGY and BLUE OCEAN STRATEGY. These two again, represent a bit of a different view on the corporate strategy types mentioned above. Red ocean strategy means that a company chooses to compete in a market with plenty of competitors (RED = bloody fight for leadership). This strategy focuses on existing demand and requires a company to have specific or niche capabilities to differentiate itself from its competitors e.g. low-cost offering, unique product/service capabilities. The main potential for growth, when using this type of strategy, comes from “re-distribution” and “winning/losing” market share and that can be limited. Blue ocean strategy means that a company chooses to address a new market with unaddressed demand. This space does not have significant competition yet and often offers vast opportunities for growth (BLUE = deep, calm ocean). It can be very promising but also carries a significant uncertainty since there are no other successful players to look up to and learn from. Why does good corporate strategy matter?  Important Steps in Planning Process While still a relatively young discipline, corporate strategy has made incredible strides in the business world over the past 40 years. Concerned with the overall purpose and scope of the business to meet stakeholder expectations, corporate strategy is heavily influenced by investors in the business and acts to guide strategic decision-making throughout the enterprise at all levels. To succeed, a good strategy needs both a solid foundation and the ability to evolve and change in real time. Business is not static, corporate strategy shouldn’t be either. Organizations face several challenges when designing and putting into practice corporate strategies. So, what exactly is the foundation of a solid corporate strategy? A good corporate strategy consists of six elements that together promote a corporate advantage. These elements can be represented in a Corporate Strategy Triangle, where the sides of the triangles are the foundations of a solid strategy: Resources, Businesses, Organization. The importance of corporate strategy is in focusing on an organization with all its resources and capabilities on accomplishing clearly defined mid- and long-term objectives. Professor Richard Rumelt of UCLA argues that where companies go wrong is when they make their strategy too complicated. It is also by our natural tendency to try and satisfy all possible constituencies (the CEO, the Board, key investors, etc.), it is here that strategies often become convoluted and lose focus. To achieve a competitive advantage, each arm of the triangle has to be strong enough to support the triangle uniformly, yet flexible enough to evolve with the business. The business must be in a position to leverage this triangle of strengths to bring about competitive advantage. The point is when these three arms of the triangle do not match up, any advantage that a business has eventually fallen away. 10 Key Corporate Strategy Components A good corporate strategy is more than a description of the company’s vision or mission. It is not a long list of tasks that need to be accomplished. We believe that a good corporate strategy has several essential components: A good corporate strategy is more than a description of the company’s vision or mission. It is not a long list of tasks that need to be accomplished. We believe that a good corporate strategy has several essential components: 1. A set of clearly defined objectives which are quantified, anchored in financials (e.g. enterprise value, profitability, growth) and linked to a timeline 2. A clearly defined product or/and service offering that clarifies four dimensions: a. What products/services we offer (including clearly defined value-added) b. Who is our customer/client? c. What markets we serve (e.g. geography)? d. At what price do we offer our product/service? 3. A clear understanding of the market/industry and competitive landscape 4. Core capabilities that the organization has AND does not have (e.g. innovation, cost advantage, etc.) 5. Execution approach defining how objectives will be achieved (e.g. through organic growth, acquisitions, etc.) 6. Key elements of Performance management to track the execution journey (e.g. KPIs) 7. Agreed risk management approach (i.e. identified risks and mitigation strategies) 8. Clear change management and leadership approach to drive changes necessary to succeed. 9. A clearly defined strategic roadmap laying out the path forward (i.e. milestones, activities, responsibilities, associated resources, etc.)  10. We believe that there is another essential component of corporate strategy that links all these aspects together – this is a set of scenarios that consider potential strategic developments and represent feasible versions of future developments. A well-defined strategy considers different scenarios to ensure that the company is prepared for unexpected. For example, if a company plans for an essential growth that includes both organic and acquisition- based growth, it should have in its back pocket a scenario of a “pure organic growth” in the event that there are no companies in the market to acquire. Another possible scenario can be changes in regulation that are often hard to predict. For me, a strategy is all about deploying resources effectively and making choices. So, when we work with an organization we frequently think about how can we help an organization take the limited resources it has and deploys that in the most effective way. Often that starts with the problem. What is the problem your company is trying to solve? or in another way, what is your mission and vision? Frequently we find when we work with a company that they haven’t defined the problem they are trying to solve. They don’t have a very clear mission or vision, and they haven’t gone through the thinking to ensure that what they are doing really resonates with their customers. One example, we worked with a client who is a very data-driven organization and they were doing quite well, but what we found was all the data they were collecting was extremely valuable and could be deployed in a much better way if they really became an insights-driven company. The data became the foundation for insights which were much more valuable for their customers. When we work with companies, we think about a process where we first go and define the mission and vision but then we’ll actually work with them, assess the current environment, we’ll look at their competitors, regulation, what’s going on in the industry, customers, consumers, and really understand their industry as a whole and what the opportunities are. How it’s growing, how it’s changing, how technology will impact it going forward. Once we’ve done that, we’ll have a very inclusive exercise where we bring all the leadership together, we’ll roll up our sleeves, and we’ll educate them on everything we’ve researched. Helping them start to make some informed decisions. How do you prioritize? What are the opportunities? and how do we as a leadership team align on what opportunities we as an organization want to pursue? Then, once you’ve identified what those opportunities are we essentially have a set of strategic initiatives. We can then work very closely with an organization to put plans in place to build out those strategic initiatives, what we would call a roadmap. Focusing on the short term, medium term, and long term. We can put together very clear action plans to help an organization go after those strategic opportunities and deliver on the strategy that we have built together. Corporate strategy vs Business strategy vs Functional strategy – how are they different? Very often people talk about different types of strategies referring to strategies that relate only to a particular part of an organization. Often, there is a confusion when talking about corporate strategy vs business strategy vs functional strategy. Let us clarify the differences. Typically, there are three different levels of strategies to distinguish between: 1. Corporate strategy 2. Business strategy (also called business level strategy), and 3. Functional Strategy Here is a summary of differences across these three types and key questions that each strategy should address. - Corporate Strategy STRATEGY FOCUS EXAMPLES OF QUESTIONS COVERED 1. How we add value to shareholders / The focus of the corporate strategy is on the entire increase enterprise value? organization. It determines the path to create value 2. What are the key businesses we want be in? both for shareholders and clients/customers. The strategy spans across the entire portfolio of 3. What are internal (for our company) and external businesses owned by the company and (for our customers/clients) synergies between our functions that enable and empower these businesses? businesses. -Business Strategy STRATEGY FOCUS EXAMPLES OF QUESTIONS COVERED Business strategy (or business level strategy or business 1. What are the services and products we want unit strategy) determines the path forward for a particular to provide our customers/clients? business and customers/clients it is focusing on. Such 2. In what geographies/market segments we aspects as profitability, sustainability, product/service offering, want to play? pricing, customer/client segmentation are focal topics of a business strategy. 3. How can we drive profitability why delivering better products/services? -Functional Strategy STRATEGY FOCUS EXAMPLES OF QUESTIONS COVERED Functional strategy deals with a path forward for 1. How can we best enable both internal a particular organization function (e.g. HR, Contact end external clients? Centre, Digital, Technology/IT) in the context of the 2. How can we deliver the best quality of entire organization services in an efficient way? (i.e. how this function adds value to the rest of the 3. How can we help create synergies and organization). Such as aspects as services offered, apply best-practices serving various internal pricing, enabling capabilities, quality of parts of the organization? services are in the focus of 3a functional strategy Here is an example of how various strategy levels may look in a bank. An overall bank strategy is supported/aligned with business strategies of every single business unit (e.g. Retail Banking, Wealth Management, Commercial Banking, Capital Markets). At the same time, functional strategies (e.g. HR strategy, IT strategy, Operations Strategy, Direct Channel Strategy, Innovation Strategy, etc.) must support both Business Units but also the bank itself on the corporate level. Examples of Highly Successful Corporate strategies Below are two well-known examples of successful strategic initiatives. Porsche’s corporate strategy example  While one of the most renowned auto manufacturers in the world, in the early 1990s Porsche found itself on the brink of bankruptcy due to inefficient production methods that focused on engineering and design above consumer needs. The German auto manufacturer’s newly appointed CEO Wendelin Wiedeking remade the company by employing a strategy focused on Japanese manufacturing concepts to improve efficiency and launching new products to increase market appeal. Vehicles like the 911 (midsize premium sport vehicle), Boxster (compact, premium sport vehicle), and Cayman (premium sport coupe) targeted a very specific upscale market, allowing the company to focus its brand and value proposition on this segment of consumers. Additionally, the company introduced new products like the Cayenne (one of the first luxury sport SUVs) targeting wealthy consumers in the market for a luxurious four-door sport vehicle. This carefully designed and brilliantly executed strategy resulted in highest profit margins across the industry (~15%), comparatively other players found themselves far behind in terms of profitability (2016 numbers) e.g. Mercedes (~7%) or Hyundai (~4%) It is interesting to know that Porsche’s profitability is by far higher than that of its parent company, Volkswagen. Toyota’s corporate strategy example Toyota is another iconic name in the automotive world, but its story of success is different than Porsche’s. Toyota did not focus sales on one particular customer segment, instead, it embraced cost leadership and paired it with high quality. In order to deliver on both core objectives, Toyota focused on operations excellence introducing manufacturing and lean concepts that were widely embraced later by other manufacturers in the automotive space and beyond. Such terms as TPS (Toronto Production System), JIT (Just-in-time) manufacturing and LEAN are known to originate in Toyota’s manufacturing. This has enabled the company to offer high-quality products (though in clearly defined configurations) at very competitive prices quickly capturing a significant share of the automotive market. Toyota’s profits per vehicle are not comparable with those of Porsche but they are able to capture a much larger market compensating for lower margins. Is your organization considering developing a new strategy or refreshing an existing one and would like to have external support? We look forward to talking to you about our strategy practice. https://burniegroup.com/good- good corporate-strategy/#1559056865293-c765b86e-1964 The corporate strategy sets the strategic goals for the company as a whole. A business strategy sets the strategic goals for the business unit. If a company is small corporate and business strategies are one in the same. A functional (area) strategy set the strategic goals to deliver on the business or corporate goals AND to continue to strengthen, improve or enhance the functional Like a set of Russian dolls The corporate strategy is the broadest and most long-ranging. It must be developed first to provide direction to the business and functional area planning efforts where the activities are planned and managed. So, it is the largest doll that all the others fit into. The business strategy is next. The business strategy is informed by the corporate goals, the success or challenges of the current strategy, the business’ market conditions including shifts in customer preferences, market innovations, and regulatory shifts. The functional area strategy is last. Functional areas exist to serve the business and the corporation as well as their particular discipline, so they have multiple masters. They need to carefully examine the corporate and business strategic plans for direct or indirect objectives and create a strategy to respond to those needs. Additionally, they need to evaluate their strengths and performance and plan to exceed their standard of performance. Finally, they need to stay on par if not ahead of the innovations or regulatory change in their field. One area of strategy development not mentioned by critical for this set of connected strategies is the brand strategy. Just as in most Russian doll designs, each doll has a similar look and feel. You can tell they are a set or related to one another. This is also true with strategy; the strategy that connects all the strategies is the brand strategy. In the development cycle, it is either incorporated into the corporate strategy or developed after the corporate and before the business strategy. How do you keep them all connected? This is both incredibly difficult and practically simple: the planning processes. Like all great strategic thinking, you start at the end and work backward. If the goal of your strategy is to announce a huge shift at a particular event, your planning process has to work back from this event, building in enough time for each layer of planning. When you have accommodated the shortest possible time frame for each, you can see when to schedule your first corporate strategy session. If you don’t have a particular event that drives your planning cycle, use your annual budget as the deadline. Again, work backward giving each planning layer just as much (often not as much as desired) to respond and build a plan based on input from the outer layer of direction setting. For most corporations on a fiscal year that ends with the calendar year, this means that corporate planning begins in the Q2 in the years they conduct strategic planning. Remember, corporate strategy is broadest and most long-range if it is a strong strategy it should not need a full strategy process annually. However, there should be a review of progress and time to evaluate emerging issues that could tweak the strategic direction. The same is true for brand strategy. To ensure all strategy components stay connected and provide aligned guidance requires a very deliberate planning and managing process driven from the corporate level through the functional areas. Yet all too often this objective is led by the CFO or controller's office in as part of annual budgeting not necessarily integrating levels of strategic thinking. The role of ensuring strategic plans are created and connected is a full-time job that should be sponsored by the CEO and given the resources to stay on track. This is one of those investments that pay-off tremendously in the long run. This “neutral party” role has many benefits, not the least of which is to escalate issues up and down the planning chain rapidly so disconnect are spotted and address promptly or changes to planning assumptions are identified and discussed as soon as they are visible. Ultimately, the goal of this role is for the company to stay vision driven and market responsive. Corporate strategy is hierarchically the highest strategic plan of the organization, which defines the corporate overall goals and directions and the way in which will be achieved within strategic management activities. It is a long-term, clearly defined vision of the direction of a company or organization. It helps determine the overall value of the organization, sets strategic goals and motivates workers to achieve them. It sets out a basic plan for what is to be achieved and when. This is done by using strategic goals and basic milestones. However, corporate strategy is also a continuous process that must be able to respond appropriately to changing conditions and surroundings - the market situation. Corporate strategy must include and influence all aspects of the organization and its entire product portfolio. What should a corporate strategy include and cover? Clearly named vision and mission should be part of the strategy. Numerous analytical techniques are used to develop the strategy (see PESTLE, SWOT, VRIO). When implementing the strategy, for example the BSC is used in for the implementation. Corporate strategy influences how a company creates value. This means that it must cover both the product portfolio and the assumptions - resources and organizational aspects. The product portfolio is the basis for the whole company and therefore for the strategy direction. The company needs to be clear about what it wants to deliver, to who it wants to deliver, what are the key competitive advantages, pricing strategies and many other things. They are either part of a corporate strategy or are elaborated in detail in separate but subordinate strategic documents such as business strategies, marketing strategy and the like. Company resources are necessary to deliver products and to propel processes. The corporate strategy must include at least a basic assessment of existing resources (eg using VRIO) and a plan of how new resources will be acquired so that the strategic goals can be achieved. Again, this description is either part of the corporate strategy as such or it is elaborated in detail in partial strategic documents (human resources strategy, financial strategy, IT strategy, etc.). Resources are a key limitation of the operation of companies. Most often lacking human resources. Sometimes companies face a lack of financial resources, sometimes they do not have sufficient technology, sometimes they miss a building permit to build a production hall. The most limiting resource is people - the lack of suitably qualified workers is the most common reason for not achieving the company’s business goals. The organizational model then tells how to set up processes, organizational structure and overall operating principles to achieve strategic goals. It is necessary to set rules of operation, the policies, guidelines, organizational structure, management system and powers and responsibilities of people so that they effectively support to achieve strategic goals. In this respect, there is no optimal model - it is always necessary to use a management system, set processes and organization appropriately to the resources, culture and overall situation in the organization and the market. What works great in one company can cause problems for another company. Thus, corporate strategy must not only define the product and business direction (business, market and financial goals) but also what a firm has to do to achieve these goals. What resources must invest to and how to organize them. What people’s skill profiles need, which competencies must be developed and how they must be used to develop the business. https://managementmania.com/en/corporate-strategy 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. In order to develop a corporate strategy, firms must look at how the various business they own fit together, how they impact each other, and how the parent company is structured, in order to optimize 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 important components of corporate strategy that leaders of organizations focus on. The main tasks of corporate strategy are: 1. Allocation of resources 2. Organizational design 3. Portfolio management 4. Strategic tradeoffs In the following sections, this guide will break down the four main components outlined above. #1 Allocation of Resources The allocation of resources at a firm focuses mostly on two resources: people and capital. In an effort to maximize 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. Key factors related to the allocation of resources are: People o Identifying core competencies and ensuring they are well distributed across the firm o Moving leaders to the places they are needed most and add the most value (changes over time, based on priorities) o Ensuring an appropriate supply of talent is available to all businesses Capital o Allocating capital across businesses so it earns the highest risk-adjusted return o Analyzing external opportunities (mergers and acquisitions) and allocating capital between internal (projects) and external opportunities #2 Organizational Design Organizational design involves ensuring the firm has the necessary corporate structure and related systems in place to create the maximum amount of value. Factors that leaders must consider are the role of the corporate head office (centralized vs decentralized approach) and the reporting structure of individuals and business units – vertical hierarchy, matrix reporting, etc. Key factors related to organizational design are: Head office (centralized vs decentralized) o Determining how much autonomy to give business units o Deciding whether decisions are made top-down or bottom-up o Influence on the strategy of business units Organizational structure (reporting) o Determine how large initiatives and commitments will be divided into smaller projects o Integrating business units and business functions such that there are no redundancies o Allowing for the balance between risk and return to exist by separating responsibilities o Developing centers of excellence  o Determining the appropriate delegation of authority o Setting governance structures o Setting reporting structures (military / top-down, matrix reporting) #3 Portfolio Management Portfolio management looks at the way business units complement each other, 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 tradeoffs between risk and return across the firm. It’s important 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: Managing risk o Firm-wide risk is largely depending on the strategies it chooses to pursue o True product differentiation, for example, is a very high-risk strategy that could result in a market leadership position or total ruin o Many companies adopt a copycat strategy by looking at what other risk-takers have done and modifying it slightly o It’s important to be fully aware of strategies and associated risks across the firm o Some areas might require true differentiation (or cost leadership) but other areas might be better suited to copycat strategies that rely on incremental improvements o The degree of autonomy business units have is important in managing this risk Generating returns o 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. o Swinging for the fences will lead to more home runs and more strikeouts, so it’s important to have the appropriate number of options in the portfolio. These options can later turn into big bets as the strategy develops. Incentives o Incentive structures will play a big role in how much risk and how much return managers seek o It may be necessary to separate the responsibilities of risk management and return generation so that each can be pursued to the desired level o It may further help to manage multiple overlapping timelines, ranging from short-term risk/return to long-term risk/return and ensuring there is appropriate dispersion Corporate strategy wrap-up Corporate Strategy is different than business strategy, as it focuses on how to manage 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, organizational design, portfolio management, and strategic tradeoffs. By optimizing all of the above factors, a leader can hopefully create a portfolio of businesses that is worth more than just the sum of the parts. https://corporatefinanceinstitute.com/resources/knowledge/strategy/corporate-strategy/ Psalm 28:7 The LORD is my strength and my shield; my heart trusted in him, and I am helped: therefore my heart greatly rejoices; and with my song will I praise him.