strategy+business is published by PwC Strategy& LLC.
or, sign in with:
strategy and business
(originally published by Booz & Company)


We’re from Corporate and We’re Here to Help

Good vs. Bad Corporate Centers

Our research and experience tell us that unprofitable corporate centers tend to overestimate the benefits of centralized services and underestimate their costs. They tend to politicize capital allocation and human capital such that they achieve less than what the market’s invisible hand would produce on its own. They also tend to manage their portfolios to engineer certain financial outcomes in terms of growth, profitability, and risk. (For example, they buy high-growth businesses in order to lift the company’s overall growth rate or sell low-margin businesses to lift its average margin.)

Profitable ones, on the other hand, tend to invest heavily in effective internal governance and enterprise capabilities, and then fill their portfolios with businesses that gain the most from their specific governance skills and enterprise capabilities. For example, the Danaher Corporation excels at superior governance through its goal deployment process and enterprise-wide capabilities—such as Lean Six Sigma—that enable it to add value across a wide range of businesses. Disney’s magic comes from its uncanny capability to create and monetize family-friendly, child-engaging characters it can feature across a range of entertainment businesses. And then there’s Berkshire Hathaway. It famously has a bare-bones corporate headquarters, with no centralized services, no corporate HR department, and no sharing of enterprise capabilities across its vast, diverse portfolio of businesses. Yet by and large, those businesses consistently outperform in their markets. Is it just coincidence that they all happen to be owned by Berkshire? We think not. Berkshire oversees a mix of highly capital-intensive businesses (such as trains, utilities, and retail) and substantially cash-generative businesses (such as insurance and reinsurance)—both of which benefit greatly from Berkshire’s undeniable investment prowess. It may not be big, but Berkshire’s corporate center is highly profitable.

Corporate center profitability is the key gauge of whether a company is an accelerator, hindrance, or nonfactor in how well its businesses are able to compete and perform in their respective markets; it is the acid test of whether corporate is truly adding value in excess of its costs; and it is the true measure of a company’s corporate strategy. Every strategist should know what it is and how to achieve it.

Author Profile:

Ken Favaro is a senior partner with Booz & Company based in New York and global head of the firm’s enterprise strategy practice.


Follow Us 
Facebook Twitter LinkedIn Google Plus YouTube RSS strategy+business Digital and Mobile products App Store


Sign up to receive s+b newsletters and get a FREE Strategy eBook

You will initially receive up to two newsletters/week. You can unsubscribe from any newsletter by using the link found in each newsletter.