CORPORATE STRATEGY
CORPORATE STRATEGY
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.
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.
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.
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).
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.
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
Summary
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.
For more reading on strategy, check out the Harvard Business Review resources.