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Home > Business Strategy Best Practice > Corporate-Level Strategy

Business Strategy Best Practice

Corporate-Level Strategy

by David Sadtler

Table of contents

Executive Summary

  • The parent company should add more value than other owners could.

  • The skills at the center need to match the improvement opportunities in the businesses.

  • Geographic and sectoral diversification are to be avoided; there are other ways to grow.

  • Vertical integration is unlikely to succeed.

  • When value added no longer seems feasible, demerge or break up completely.

  • Good central managers never stop demanding real and substantial value added.

Introduction

Implementing a successful corporate-level strategy has become an urgent priority for all corporations. Parent companies must demonstrate that they are creating stockholder value by their own actions and initiatives, and not just reaping the profits of the businesses in their charge. The sanctions for being seen to fail in this challenge can be severe. At the very least, stock prices will suffer; at the other extreme, predators will force a breakup.

A Framework

The challenge of corporate-level strategy is to ensure that value is being added to every business in the company’s portfolio. That value must, of course, exceed its cost. Corporations with good corporate strategies do even better: they add more value than other companies in the same businesses.

Ensuring that this value-added process is productive requires several actions by top management:

  1. It must identify ways in which each business can be helped. This help must make possible a major improvement in business performance. Without an understanding of where improvement potential exists, the search for value added cannot be real and substantial. These improvement opportunities should be identified and agreed on through managerial dialog and business-planning systems.

  2. Central management must make sure that it possesses the skills to provide the help needed. Different kinds of improvement opportunities require different forms of help. Management must see that it has those capabilities.

  3. It must construct a portfolio of businesses in which this constructive fit—useful skills attuned to the needs of the businesses—exists. How businesses can be helped is bound to change over time. The strength of the fit must be continually reappraised.

  4. Management must ensure that it is sufficiently familiar with the requirements for the success of each business and that it will not damage that business, whether by approving the wrong investment proposals, appointing the wrong general managers, or giving poor strategic guidance.

Questions for Management

The pursuit of added value often presents managers with challenging issues to resolve.

How can we grow if our core business is limited in terms of further expansion? This question arises when management has divested businesses that didn’t fit and is left with one core business. If it has a commanding market share, competes in a nongrowing market, and has little opportunity for overseas expansion, the dilemma can be a real one. This is especially true in an era in which capital markets reject diversification and demand that companies stick to their knitting.

Capital markets are wary of any form of corporate diversification. They are simply being pragmatic: experience has shown them that diversification doesn’t work well. What is the single-business company to do to find growth opportunities? There are four possible answers:

  1. Seek a way to reinvent the business by looking for new customers, new markets, new ways to present the product, and a better package of customer value to offer. Even commodity products can be differentiated by offering them in a different service context. First, make certain that growth limits really have been reached.

  2. Consider moves into related businesses that share existing resources and skills. Such initiatives should possess the same requirements for success. If not, the management skills both at the business-unit level and in the parent company may be inadequate to the challenge.

  3. Operate a nursery of new ideas. Business unit managers are always on the lookout for new products and markets. The more promising should be regarded as new-product research and development initiatives. Those that offer promise can then receive modest investment until there is a persuasive reason to make a serious commitment.

  4. Although unconventional in today’s environment, it may be smart simply to operate the existing low-growth business for cash flow, eschewing major growth aspirations. Mature industries can often be sustained for a long time without heavy investment and achieve above-average returns.

What’s wrong with vertical integration as a way of extending the opportunities for a stagnant business? In other words, why shouldn’t we acquire our customer to guarantee an outlet for our products?

Vertical integration has increasingly lost favor among thoughtful managers. While it may seem like a sensible proposition to guarantee a supply of raw materials or markets for your products, vertical integration frequently exhibits three major shortcomings:

  1. When one division sells products to another division, disagreement often arises about transfer pricing and product and service quality. The selling division realizes it has a captive customer and often works less hard to retain the business. Much time is wasted resolving such intramural issues.

  2. Entry into new upstream or downstream businesses often involves competing with your existing customers. Several corporate breakups have been the result of the realization that this problem was insoluble under the existing ownership arrangements.

  3. Entry into new businesses often involves dealing with differing requirements for success; it thus requires a new range of managerial skills and capabilities, both at the business-unit level and in the parent company. Mistakes are made, and the business suffers competitively.

Is it wise to limit the number of eggs in our basket? Management teams often seek positions in different industrial sectors simply to spread risk. They reason that when one sector is unattractive owing to a cyclical market turndown, other sectors can take up the slack. While this can give comfort to management teams, it’s an unwise strategy in today’s markets. Capital markets will say: “We can spread our own risk; you do what you know how to do.” The management team that focuses its effort and investment on areas in which it has demonstrable skills will be rewarded appropriately in capital pricing. The same caution should be applied to overseas diversification. Some management teams intentionally direct investment to different parts of the world in order to limit exposure in any one area. Unless such geographic expansion is initiated to strengthen one’s competitive positioning in a particular global marketplace, the investment community is likely to scorn this form of expansion. There are simply too many downsides to investment abroad to undertake it without a solid competitive business rationale. Currency exposure, entry into alien market environments, and bone-wearying travel all represent significant costs of expanding internationally.

The pressures to build a bigger company are enormous: managers are taught to believe that their enterprise must grow or die; ambitious executives want new challenges—they expect to get paid more when the company gets bigger, and they may believe that economies of scale are always the reward from sheer size. But the pressures of bureaucratic cost, operating manager motivation, decision-making complexity, internal competitive conflicts, suspicion of remote top managers inequitably enriching themselves, and the like all represent potential downsides to great size. To be responsible stewards of stockholder interest, directors and top managers must continually examine and manage this implied trade-off. Failure to do so can be the ultimate destroyer of value-added strategy.

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Further reading

Books:

  • Galbraith, Jay R. Designing Organizations: An Executive Guide to Strategy, Structure, and Process. San Francisco, CA: Jossey-Bass, 2002.
  • Goold, Michael, et al. Corporate-Level Strategy. New York: Wiley, 1994.
  • Kare-Silver, Michael de. Strategy in Crisis. New York: New York University Press, 1998.
  • Kraines, Gerald A. Accountability Leadership: How to Strengthen Productivity through Sound Managerial Leadership. Franklin Lakes, NJ: The Career Press, 2001.
  • Mintzberg, Henry. The Rise and Fall of Strategic Planning. New York: Prentice Hall, 1994.
  • Useem, Michael. Leading Up: How to Lead Your Boss So You Both Win. New York: Crown Business, 2001.

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