Corporate Strategy for a Sustainable Growth

1. Corporate Strategy: Building Advantage Beyond Business Units

Corporate strategy differs from business strategy by the fact that the former aims at building a corporate advantage, while the latter a competitive advantage.

Corporate strategy fundamentals. Corporate strategy focuses on creating value across multiple businesses within a firm, rather than competing within a single market. It encompasses two main decision areas:

• Portfolio strategy: Choosing which businesses to own and invest in
• Parenting strategy: Determining how to manage and add value to these businesses

Strategic logics. Four key logics guide corporate strategy decisions:

1. Business logic: Assessing industry attractiveness and competitive positions
2. Added value logic: Identifying ways the parent company can enhance business performance
3. Capital markets logic: Evaluating financial opportunities and market perceptions
4. Governance and compliance logic: Ensuring proper management and regulatory adherence

2. Synergies and Resources: The Core of Corporate Value Creation

When two businesses owned and managed jointly are more valuable than the same businesses owned and managed independently or separately, there is an incentive – an added value – to combine them.

Types of synergies. Corporate value creation often stems from synergies between business units:

• Financial synergies: Economies in financing, tax optimization, risk diversification
• Operational synergies: Efficiency gains, revenue growth, increased market power

Corporate valuable resources. These are assets or competencies that:

• Can be leveraged across multiple businesses
• Contribute to competitive advantages in those businesses
• Are critical for building corporate advantage

Examples include:

• Strong corporate brands
• Proprietary technologies
• Unique organizational capabilities (e.g., M&A expertise)

3. Portfolio Strategy: Balancing Growth and Divestiture

Growth is always a choice resulting from a managerial discretion, unless certain circumstances do not emerge that make it an imperative.

Growth decisions. Portfolio strategy involves:

• Allocating resources to existing businesses
• Entering new businesses
• Divesting from underperforming or non-core businesses

Growth imperatives. Circumstances that may necessitate growth:

• Consolidating first-mover advantage
• Responding to market expansion
• Achieving critical mass
• Industry consolidation or globalization
• Declining core markets
• Increasing bargaining power of customers/suppliers

Divestiture rationale. Reasons for selling or spinning off businesses:

• Unsuccessful portfolio fit
• Poor financial performance
• Shareholder pressure
• Regulatory requirements
• Strategic refocusing
• Opportunity to sell at premium valuations

4. Growth Strategies: Synergy vs. Financial Approaches

Firms opting for a synergy approach in corporate strategy can pursue growth by following three main directions, that can even be mixed together: operational reinforcement, related expansion, and related exploration.

Synergy approach. Focuses on leveraging operational synergies:

• Operational reinforcement: Strengthening existing businesses
• Related expansion: Entering new segments or geographies within current industries
• Related exploration: Diversifying into related industries

Key motivations:

• Efficiency advantages
• Revenue/growth advantages
• Market power advantages

Financial approach. Emphasizes financial synergies and risk diversification:

• Financial reinforcement: Increasing ownership in existing businesses
• Unrelated diversification: Entering new, unrelated industries

Key motivations:

• Financial synergies (e.g., internal capital markets)
• Risk reduction through portfolio diversification
• Acquiring undervalued businesses

5. Mergers, Acquisitions, and Alliances: Expanding Corporate Horizons

Becoming a successful acquirer does not happen by accident. It is the result of three fundamental good practices.

M&A success factors:

1. Aligning motivations with growth strategy
2. Rigorous target evaluation and fair pricing
3. Effective post-acquisition integration

M&A process:

1. Target identification
2. Valuation and negotiation
3. Due diligence and closing
4. Integration
5. Post-deal evaluation

Strategic alliances. Collaborative arrangements between firms:

• Types: Non-equity (e.g., licensing, joint marketing) and equity alliances (e.g., joint ventures)
• Benefits: Speed to market, access to complementary resources, risk sharing
• Challenges: Partner selection, governance, potential conflicts

6. International Expansion: Navigating Global Complexities

The world is not flat.

Globalization realities. Despite increasing integration, significant differences between countries persist:

• Cultural, administrative, geographic, and economic (CAGE) distances
• Liability of foreignness: Challenges faced by firms operating abroad

Market selection factors:

• Strategic importance: Economic variables, market potential, learning opportunities
• Ability to capitalize: Internal capabilities to succeed in the market

Entry modes:

• Non-equity: Exporting, licensing, franchising
• Equity: Joint ventures, wholly-owned subsidiaries

Choice depends on:

• Degree of control desired
• Resource commitment
• Risk tolerance
• Host country regulations

7. Ownership and Governance: Shaping Corporate Direction

Ownership, governance and strategy are three variables interconnected with each other.

Ownership structures. Key dimensions:

• Concentration: Dispersed (public companies) vs. concentrated (controlling shareholders)
• Identity: Families, institutional investors, state, etc.

Governance impact. Ownership influences:

• Strategic priorities and risk appetite
• Decision-making processes
• Resource allocation

Board of Directors. Critical governance body:

• Composition: Size, independence, diversity
• Structure: Committees, leadership roles
• Functioning: Meeting frequency, evaluation processes

Evolving perspectives. Moving beyond public company focus:

• Recognizing the importance of different ownership models
• Emphasizing governance quality in private companies

8. Corporate Headquarters: Orchestrating Multi-Business Success

There are essentially two advantages of this method: ease of use, and the ability to foster more responsibility in leadership because more discretion is maintained in selecting in which businesses the firm should invest to grow, in keeping with its vision.

Key roles:

1. Managing portfolio strategy
2. Building and exploiting corporate valuable resources
3. Performing mandatory administrative duties
4. Providing shared services
5. Designing the organizational context

Value creation mechanisms:

• Stand-alone influence on individual businesses
• Enhancing linkages across businesses
• Centralizing functions and services
• Driving corporate development (M&A, alliances)

Designing effective headquarters:

• Balancing centralization and decentralization
• Aligning structure with corporate strategy approach
• Continuously evaluating headquarters' value-add

9. Organizational Structures: Adapting to Corporate Evolution

No perfect model exists: each has advantages and disadvantages.

Structural evolution. Common progression as firms grow and diversify:

1. Simple/flat structure
2. Functional structure
3. Divisional structure (product, geographic, or market-based)
4. Matrix or hybrid structures (for complex, large organizations)

Factors influencing structure:

• Corporate strategy approach (synergy vs. financial)
• Degree of diversification
• Geographic scope
• Need for coordination vs. autonomy

Key considerations:

• Balancing efficiency and effectiveness
• Facilitating synergies and resource sharing
• Enabling quick decision-making and market responsiveness
• Supporting career development and motivation

10. Leadership: Driving Change and Inspiring Excellence

Leadership is about coping with change: setting direction, aligning people, and motivating and inspiring. Management is about coping with complexity: planning and budgeting, organizing and staffing, controlling, and problem solving.

Leadership roles:

• Designer: Creating cohesive organizations with shared visions
• Teacher: Developing learning capabilities throughout the organization
• Steward: Prioritizing long-term organizational success over personal gain

Leadership domains:

1. Personal leadership: Demonstrating character and credibility
2. Relational leadership: Building trust and understanding
3. Contextual leadership: Providing meaning and direction
4. Inspirational leadership: Motivating and energizing others
5. Supportive leadership: Empowering and developing people
6. Responsible leadership: Balancing stakeholder interests ethically

Collective leadership. Recognizing leadership as a system:

• Developing leaders throughout the organization
• Fostering complementary leadership teams
• Balancing individual strengths and shared responsibilities

Last updated: August 11, 2024