strategy+business: Corporate Strategies and News Articles on Global Business, Management, Competition and Marketing

One Company, Two Identities, One Strategy

Ken Favaro

Ken Favaro is a contributing editor of strategy+business and the lead principal of act2, which provides independent counsel to executive leaders, teams, and boards.

 

I once asked the new head of corporate strategy at one of the world’s largest telecommunications companies whether his organization is a single business with multiple parts or a portfolio of businesses with a common owner. He answered, “The former.” If I were to ask his fellow traveler at, say, GE or Time Warner, the most likely answer would be, “The latter.” But the right answer is both.

Big companies that operate simultaneously as a single entity and a business portfolio are more agile and durable enterprises. Each mode of operation reinforces and even multiplies the benefits of the other. Being a single entity enables organizations to achieve scale economies, leverage technology and a common brand, transfer best practices, share the best people, exchange valuable information, present “one face” to the customer, coordinate sales or pricing, and stamp out duplication. Being a portfolio enables the businesses to shape their own individual paths in pursuit of their particular markets and the results expected of them (thus heightening their sense of responsibility), tightening the perceived link between their actions and results, and intensifying their motivation to perform. Being both at the same time enables the individual businesses to gain from being part of a bigger whole while having enough freedom to compete in their own particular markets, thus creating an even stronger whole.

Big companies that act as both a single entity and a business portfolio are more agile and durable.

Take Disney. Its strategy is to create and commercialize “corporate franchises,” such as Frozen and The Avengers, that strengthen the earnings power of each business in its broad portfolio of resort parks, movies, gaming, retail, theater, and more. Chief executive Bob Iger can hold the individual businesses accountable for their own results and for strengthening the corporate franchises from which they all benefit. Moreover, with a strategy that brings real competitive advantages to its businesses, Disney has a more stable enterprise; those businesses have no better place to live than in the House of Disney.

Even highly diversified companies should have strategies that equip them to benefit from acting as one and many at the same time. For example, Berkshire Hathaway, the ultimate conglomerate, has a strategy to create value with three distinctive capabilities: generate “free” capital, allocate capital better than the capital markets, and attract well-managed companies that want to be part of the Berkshire family. Berkshire is famous for leaving its individual businesses alone, but chief executive Warren Buffett is equally famous for managing the entire enterprise as a self-contained cash-generating and investing whole that neither raises outside capital nor returns it (at least for now). Berkshire’s businesses gain from being allowed to operate with great latitude in their own markets while also contributing to the company’s enormously effective capital generation and deployment enterprise. They operate both as free states and as cogs in a much bigger economic machine.

Without strategies such as Disney’s and Berkshire’s, a company will sooner or later suffer three problems. The first is unnecessary operational complexity. That head of strategy for the telecoms company to whom I posed the “single entity or business portfolio” question? There was more to his answer. “We are the former,” he told me, “but we operate as the latter.” This identity crisis creates difficulties. His company’s various lines of business serve the same customers and use common assets and technology, but the company is organized around essentially autonomous business units. Inevitably, the business units have become fiefdoms and essentially off-limits to everyone in “corporate” except the CEO.

Imagine how this complicates his job. He can’t effectively delegate corporate staff activities such as marketing, technology, and HR or get the business units to coordinate so his company can take full advantage of its scale and scope. They just want to hunker down and be left alone, because the company has no strategy enabling them to strengthen the whole in ways that materially benefit each of them. That unnecessarily complicates the company’s ability to exploit its scale and reach, and to get the business units contributing to one another’s success.

The second problem is increased scope for making strategic mistakes. For example, large companies buy and sell businesses all the time. Should they prioritize those that would strengthen the company as a single entity or those that would make a strong addition to its portfolio? Again, the answer is both. But without a strategy that accounts for both, a company inevitably defaults to one or the other and exposes itself to serious missteps. Microsoft over-paid for Skype in 2011 and Nokia’s mobile devices and services business in 2014 because, although both were supposed to strengthen Microsoft’s core business, neither could stand on its own in the company’s portfolio. Conversely, Time Warner’s acquisition of AOL failed because even though it was a profitable addition to its portfolio, Time Warner had no strategy that benefited AOL or was served by AOL. Its “strategy” was simply to get into a seemingly attractive business.  

Lastly, problem number three: Big companies are more fragile when they lack strategies that simultaneously nurture their single-entity and business-portfolio selves. For example, GE is retrenching to a pure-play industrial company by selling off its financial-services business — which used to account for more than half of the company’s earnings. HP is splitting itself into two new companies, one for its PC and printers business and another for its enterprise computing products and services. And Alcoa is dividing itself into a “downstream” company and an “upstream” one. All three are examples of what happens to companies without a strategy that enables a broad business portfolio to act as a single entity: When times get tough, the lack of strategic integrity in their portfolio can no longer be ignored, and they are ultimately forced to break into smaller enterprises.

To avoid these three problems — unnecessary operational complexity, high risk of strategic errors, and corporate fragility — companies need strategies that make each business in its portfolio part of a bigger business powered by distinctive capabilities that are essential to winning in all its markets.

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One Company, Two Identities, One Strategy