Corporate Level Strategy vs. Other Strategy Work
What makes corporate level strategy different from any other strategy work?
In this series of articles we discuss the approach used to help a major power utility develop a corporate level strategy to meet increasing power demand and manage rising blackouts threatening to cripple economic growth and foreign-direct-investment. This is part 2. You can read part 1 here.
A great book on the corporate strategy problem of picking a winning market is “The Strategy Paradox” by Michael Raynor of Deloitte S&O. A chapter of the book explaining this problem can be found here.
For confidentiality reasons, we have modified some of the details in these articles. All >650 power point files and >650 training videos of this complete training program will soon be released as part of our Executive Program.
Corporate Level Strategy vs. Other Strategy
This power sector study is a corporate level strategy study. It is not a general strategy study, not a business unit strategy study, not a market entry study nor any other type of strategy study, although we will have elements of the analyses in these other studies within our study.
Corporate level strategy differs from all other types of strategy work (market entry strategy, business unit strategy, etc). It is much tougher to do, and there is a specific reason for this.
In a corporate level strategy study the consulting team must determine the objective function for the client. They must determine what type of business the client should be. The team must basically predict where a market will go in the next 10 years and even if it will exist. If they are too conservative the client will stick to its maturing core business and if they misread the shifts in the market they can send a client down an expensive and fatal path.
In every other type of consulting study, the overall objective function is known and given to the team.
Business Unit Strategy
This has profound implications for the difficulty of the work and the skills needed. I will explain the difference with an example.
Let’s assume we were developing a strategy for just the generation business unit / division of the client. In that case, it would be a business unit strategy. At face value, the tools, techniques and skills the consulting team would deploy appear to differ a little but they would look pretty similar. In fact, there are many management consultants who would not be able to see the difference.
However, if you look carefully, you would see stark differences. Corporate level strategy study starts off less analytic and then shifts to heavy analyses. That start is the key.
Irrespective of the limited information we may have about the generation division, we can and must always refer to the corporate level strategy of the company. Having this corporate direction makes a significant difference.
In fact, let’s assume we know nothing about the generation division. Let’s assume we only know about the corporate parent.
If the corporate level strategy of the parent is to secure large industrial clients and electrify as much of the population as possible by providing the lowest cost power, that corporate strategy goal becomes the guideline for the generation division’s business unit strategy.
Therefore, the goal of the generation division becomes: what mix of power stations will produce the lowest cost power and in what order, where and how should they be built?
Can you see how the business unit strategy is using the existing corporate level strategy as a guide and how easy the work becomes with this guide?
Provided the corporate level strategy is known, can you see how the objective function of the generation division can be inferred without knowing much about the division?
In our Executive Program training videos we use a lighthouse analogy. The corporate level strategy is the lighthouse and the business units are ships trying to navigate towards it.
Once you know the objective function things become relatively easy. You simply use the brainstorming approach to build out a structure, prioritize the key areas, build hypotheses for the prioritized areas, develop a storyboard and conduct the analyses to test the hypotheses. Based on the results of such analyses the hypotheses are either proved or disproved, at which point you refine the storyboard.
It is that easy. Well, not very easy but easier than having no reference point.
Let’s use a different example to make sure you understand this point. It is not easy to grasp so do not worry too much if you need the second example.
Let’s assume we were developing an executive skills development strategy for the HR department of the power utility. Now, let’s also assume we know little about the HR department and their needs.
Even if we knew next to nothing about the HR department, we can reasonably infer that whatever strategy we develop for HR must enable the corporate level strategy. The HR strategy cannot hinder or invalidate the corporate level strategy.
So assuming the corporate level strategy is the same as before, the HR strategy must be to focus skills development on ensuring employees can plan, build, maintain and operate the fleet of low cost power stations.
You can infer the majority of a business unit’s strategy from the corporate level strategy. In other words, business unit strategy is about the plan to ensure the business unit is set up and operated to support the corporate level strategy.
Also note that business unit strategy uses more analytic tools and more of the conventional analytic tools. There is a lot of analyses in business unit strategy to see which parts of the business create value, which can be sold or shutdown and how the unit should be run to maximize production value.
Corporate Level Strategy
In corporate level strategy there is no guidance to which one can refer, there is no beacon. That is why corporate level strategy is so difficult.
The company is not asking you how to increase revenue. The company is asking you what should be their focus and what they should be. They are asking the management consultants for the objective function.
This also introduces a better definition for corporate level strategy work. Many assume that if the work is done for the CEO or Board it must be a corporate level strategy. That is incorrect. Helping the board vet an acquisition is a due diligence study. Helping the CEO assess China is a market entry study. Determining the best product mix for the CEO is a portfolio strategy study.
Strategy is only a corporate level strategy when the consultants must determine the objective function for the overall business. This is hard to do and usually done incorrectly.
Let me give you some examples of this. Imagine it is the height of the iPod craze and Jobs commissions a firm of management consultants to develop Apple’s corporate level strategy. In other words, Jobs wants to know what kind of company Apple should be.
That is the perfect corporate level strategy question. It is broad and sets the future direction of the business.
The management consultants will take one of two paths.
First, they could play it safe and make Apple better in its core computing and music business, or move along adjacencies (similar businesses).
Second, they could be visionary and say Apple should enter the mobile phone space due to several shifts taking place in music and computing.
Now, imagine you are right there at this point in time around 2003 or 2004 with no foresight of Apple’s stunning rise to come. Think about how easy it is to recommend the first path versus the second path. The second path requires creativity. No amount of analyses will result in a recommendation “Enter the mobile phone space” once you hit the enter button to run the spreadsheet.
Companies successful in taking the second path look good in hindsight. At the time, though, because the public applies conventional analyses to the decision, companies often end up looking silly when they make these announcements.
Now, assume Apple took the advice for path one and never launched the iPhone. No one would have known they could have been so much greater.
That is another difference between corporate level strategy and other strategy. It is tough to recognize bad corporate level strategy because you are comparing the average company performance built off an average corporate strategy against what is possible, but a possibility you cannot see because it does not exist.
Think about that for a moment. Imagine how many companies are settling for 7% return in pursuing path 1 versus the industry average when they could achieve 50% or 70% or even 50,000% returns by pursuing path 2?
And you will never know.
The only guidance in corporate level strategy is to maximize shareholder returns.
Yet, there are so many countless ways to maximize shareholder returns that this guidance is not particularly helpful.
Think of Bombardier. They make rail systems and sleek private jets. Go back to 20 or 30 years ago when they decided to buy out a bankrupt aviation company.
Imagine you were leading the consulting team advising them on their corporate level strategy. What would you tell them to do?
Keep a corporate level strategy mindset. Knowing they have major snowmobile and some rail assets, what would you advise them to do? What kind of company should they be? The aviation business is basically worth very little.
Most corporate strategists would advise the safe path. They would advise on expanding around adjacencies and they define adjacencies around product, intellectual property, regions or something like that.
Most consultants would advise on the safe path of building the known assets.
And they are usually wrong. They tend to leave money on the table since they take the safe route.
Bombardier eventually built out a formidable aviation business. Yet, how could the consultants know that Bombardier should go into aviation versus cars, trucks, earthmoving equipment, escalators or the myriad other options on the table? In the universe of possibilities how do you determine that aviation is the next logical step to take?
This is why corporate level strategy work is so hard and not at all like any other type of strategy work. Every other type of strategy work rests heavily on detailed analytics to provide answers. If you applied detailed analytics to corporate level strategy, you would get little value.
Detailed analytics only work once you have chosen the market where you want to play. In corporate strategy you need to pick the market. Only thereafter, can you apply all the conventional analyses.
And be careful about considering market size, growth and profits to be guiding posts when determining corporate level strategy. If it were about those things, then companies would always enter the highest margin markets. And they do not do this. Lots of companies enter low margin businesses and are wildly successful. And lots of companies fail in high margin businesses.
There is a way to develop corporate level strategy given all these problems. There is a technique to help companies make these decisions. That is the technique we will reveal in this study.
To be continued …
In the next piece, we will discuss the very painful choices required in corporate level strategy.
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