strategy+business is published by PwC Strategy& Inc.
 
or, sign in with:
strategy and business
Published: April 27, 2012

 
 

The Two Levels of Strategy

Business strategy is best distinguished from corporate strategy by the different perspectives that business leaders and strategic planners must bring to bear.

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.

THE STRATEGY+BUSINESS COLLECTION: THE EXECUTIVE GUIDE TO STRATEGY

The Executive Guide to Strategy This article is featured in the strategy+business compendium “The Executive Guide to Strategy,” designed exclusively for smartphones and tablets. The collection features our best thinking on creating and implementing the right strategy for your organization—with insights from top leaders including Capable Strategist author Ken Favaro, HBS Professor Cynthia Montgomery, strategy expert Ram Charan, and Kellogg School’s Mohanbir Sawhney.

To download, select your device:

Available on the iPad App Store  Available on the iPhone App Store
Download for Kindle  Download for Magzter
Download for Zinio

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 rollup 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’être 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.

 
 
 
 
Close
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.

Close