What is a corporate strategy? Is corporate strategy different from the business unit strategy? Is the process a corporate strategy development process is the same for a business unit?
Corporate strategy is the most challenging of all strategy engagements since engagements lack an objective function, are less quantitative than one would assume, and require stronger business acumen/business judgment to interpret ambiguous findings.
Summary: We focus on the first two steps in a corporate strategy development engagement. How a partner develops the overall viewpoint he will bring to the engagement, and the process to develop an objective function/problem statement. This will eventually lead us to the three parts of all corporate strategy development studies: selecting a market, the segment of the value chain to service, and the business model.
Imagine you are the CEO of HBO. You are pondering your corporate strategy. Do you need a new corporate strategy or need to better execute your existing corporate strategy?
For years you ruled the roost as the most celebrated cable channel with the lions share of Emmy Awards. You produced premium content, charged premium fees, and had very few competitors. Network channels like Fox, ABC, CBS, and NBC could not compete with you since they were FCC regulated and restricted on the content they could produce.
Along comes Netflix, Hulu, and Amazon Prime Video. All with different corporate strategies and business models. Initially ignored as a Silicon Valley upstart, Netflix alone has grown to equal you on Emmy Awards and nominations, and is growing at a faster rate while your cable audience is shrinking. Hulu has scooped the coveted Emmy for Drama. Amazon Prime scooped Julia Roberts.
Netflix is outspending you on content production and trying to control licensing. Disney is about to enter the game along with Apple, Facebook, and other media companies. What would you do?
That is a corporate strategy question. It is not IT nor digital strategy. At its core, it is not requiring HBO to fix pricing, distribution, branding or licencing. No one solution to any of these issues, no matter how good it is, will fix the overall problem.
In corporate strategy engagements, a company will rarely ask for a new corporate strategy. Typically, a client is in such dire straits that they are considering all options which imply a corporate strategy development/review is needed. That is code for everything is on the table. The example above highlights a few important markers to identify a corporate strategy engagement.
This threat from Netflix is requiring HBO to decide who they will be in the future.
AT&T wants HBO to serve more genres versus edgy adult shows.
HBO must decide which parts of the value chain they will serve. This is a fancy way of saying who are their customers.
HBO had no direct access to consuming since it licensed shows to cable, networks, and streamers. Now it is also building an OTT streaming platform.
HBO must decide on their business model. Another fancy way of saying how they will make money.
Allow ads in their Apps?
Cancel licensing deals in the US?
Rescind licensing deals worldwide?
Can they afford to do these things?
In this piece, we will unpack this process, using a different example, so you can both understand corporate strategy and why it is done the way it is done.
When you see the numerous corporate strategy training programs on our websites or even participate in the corporate strategy development engagement at a company, either as a consultant or client, there is an important part you do not see.
This part comes before the engagement itself but you need to understand it to understand corporate strategy.
When a strategy partner arrives at a client, they will usually arrive at a bespoke solution for that client. However, their point-of-view (POV) is influenced before the study in one of the two important ways.
If you read HBR, McKinsey Quarterly, BCG Perspective, Deloitte, or any major strategy journals you will notice that strategy firms almost always conduct aggregate analyses for their reports and books. This is part of the general research a firm will do.
An aggregate analyses in corporate strategy is one where you take all the companies in a sector, country, region etc., and plot them on some graph to see who produces the most value.
For example, here is the one we did for media companies owned by the state.
There is no go-to graph or even universally accepted definition of value. So do not go searching for one. You will find hundreds of examples. Some firms use TSR, especially BCG, while others use ROIC and others will use Total Return on Cash Flows.
There is no one right answer since there is enough debate in corporate strategy about which is the right metric. Choose the one you believe is appropriate for you and the situation.
Once the partners have this graph they focus on the companies which produce the most value and start trying to understand why and how they created this value.
Well, one reason is that it allows them to find patterns, identify the leading companies and think about the common attributes of these leading companies. They can thereafter take these insights to new clients to help them become leading companies. You have surely seen reports about The 5 things all successful PE firms do etc. This is where those reports originate.
Yet, there are other reasons for doing these aggregate strategy analyses:
Bias for analyses. Clients and even general readers will usually disregard anything not based on some type of analyses. Even if the client cannot understand the analyses and even if the analyses are wrong, as some probably are, anything backed by analyses is considered credible. The market gets what the market wants.
Analyses lead to books, articles and new reasons to meet a client. If a partner repeats the same analyses from 1970 but only uses new data from 2000-2018, it still gives the firm valuable new reasons to produce articles, books, and engage clients. It is still useful. So new analyses are the first part of the whole marketing machine.
Clients tend to find more analogies credible versus one detailed analogy. It is much easier to meet a client and discuss 5 analogies from 5 different companies ranked highly in the analyses versus discuss 5 analogies from 1 company. If you present one analogy to a client they will almost always ask for more examples.
The one major shortcoming of the top-down approach is that it assumes a company wants to remain in a similar market space and compete on similar dimensions against similar competitors.
Think about performing a simple top-down analysis on all the major cable, streaming and network companies like ABC, NBC, FOX, CBS, FX, Showtime, HBO, Turner, CNN etc. You could plot TSR by the number of genres served or even the number of shows produced.
Your analyses could correctly indicate that companies serving narrow genres, like crime drama or adult themes, with fewer shows produce the most value.
The problem with relying on this approach is that the right solution for HBO in the long-term may not be for them to even remain in this space.
For several reasons:
Assuming the analyses is correct, HBO may create even more value by becoming a different company. It may actually create more value by only producing shows for other companies and close its brand. In this scenario, HBO ceases to be a brand we know and simply white-labels shows to other companies like Netflix.
Analyses are based on the past. The future of this space may lead to declining returns, increased competition, and significant commoditization. So the top-down analyses alone could lead to a corporate strategy where HBO becomes the most valuable player in a less attractive space.
If the best corporate strategy is radically different from the existing strategy, in that HBO will change its business model and the type of company it is, understanding the value in a space where HBO will not compete will not help. That is the danger of loosely grouping a company in a sector where it does not belong, and analyzing it along those dimensions.
As HBO wades into OTT streaming is it a media, technology or distribution company? Is it something else?
Another example of this grouping error would be understanding how handset makers create value and presenting that analyses to Microsoft when they are about the exit the handset space. Even the best analyses would not have helped. More useful analyses would have been to understand how software companies have used handset operating system licenses and intellectual property to create value.
So, in the bottom-up POV a partner is thinking about what is unique about this client and how that will lead to them either have a slightly different corporate strategy from peers or a radically different corporate strategy.
The discussion above on corporate strategy only delves into what influences a partner before they even arrive. Now, let’s look at what happens as the team arrives and the engagement begins.
Corporate strategy development is harder than others types of strategy since the problem statement is usually not given to the team unlike in other types of strategy. Think of the problem statement as a lighthouse. No matter how lost an engagement team may be, they can always rely on the problem statement to guide them.
In pricing strategy, the goal is usually to create a strategy to help improve performance of a business unit and/or raise corporate earnings and/or achieve a market share goal.
In business unit strategy the goal is usuallyt o create a strategy to help improve performance of a business unit and/or raise corporate earnings and/or achieve a market share goal.
In distribution strategy, the goal is usually to create a strategy to help improve performance of a business unit and/or raise corporate earnings and/or achieve a market share goal.
In corporate strategy, these guidelines do not exist. There is no lighthouse.
The purpose of a corporate strategy development study is to determine an objective function and thereafter maximize it. You could argue that increasing shareholder value is the objective function but that is the same as saying nothing.
Without an initial objective function…
…you cannot build a decision tree…
…cannot prioritize the branches…
…cannot build hypotheses for the prioritized branches…
…cannot build analyses/exhibits to test the hypotheses…
…cannot build work plans from the data needed for each test…
…and cannot build storyboards from the exhibits.
That is the approach we use in all other types of engagements and it does not work in corporate strategy.
A more general analyses approach must be used to structure the study. This relies very heavily on business judgment. Which is why corporate strategy is so much more difficult to do.
So, literally, anything and everything is on the table w.r.t the clients future.
A corporate strategy development engagement team that lacks vision and the ability to see new ways to create value is always going to recommend a familiar strategy under the excuse that is implementable.
Who would have recommended Apple jump from computers to music players, phones, tablets, and watches? The majority of consulting firms would have recommended Apple introduce variations of laptops and PCs and stay in that space. They would have called that implementable strategy.
In other words, in the absence of an objective function they would have picked a product-based objective function: how does Apple become the PC and laptop manufacturer with the highest TSR?
We are going to use examples from our corporate strategy program to explain how to develop a problem statement in corporate strategy. It will help to read the very brief description of the program here. You have to ask 4 loose questions and think carefully about the answers.
Why does the company exist?
Is the reason for its existence still valid?
If the reason has changed, should the company still exist or just change its strategy?
What do the shareholders want and need?
Who are the shareholders?
Have their needs changed?
Are their wants or needs more important than that of the client?
What is happening with the market and/or competitors?
Is the client’s’ business model appropriate for the current and future market?
What will competitors do when the client changes?
What are the resource constraints of the company?
Can the client implement the needed strategy?
How is the client impeded by its resource constraints?
The danger here is to focus on the marketing statements and public relations claims companies publish in their annual reports and proxy statements. Why a company tells you it exists and why it was created, or continues to exist, are two different reasons.
Where a company is wholly-owned or legally controlled through special voting shares by an outside company, the needs of the majority owner will usually explain why the company exists.
In most western companies where shareholding is fractured, the company usually exists to exploit some asset advantage where it is a product, library of content or licenses.
A common danger is to assume a company exists to serve customers. While that is true, the hard part is determining whom those customers should be. That is what the corporate strategy development process will determine so the customers should not be treated as fixed. The value chain analysis will determine who the customer should be.
In the example below, we determine Empire International, a wholly-owned subsidiary of Empire Energy, was created to serve a need that is no longer as urgent as the forth-coming capital expansion program of Empire Energy.
Notice how we answer this question in just one slide with a clean and direct headline. The slide can be read by anyone and understood even if they lack context. This work is done in Week 0 of an engagement. This is the planning week before a team arrives on the client site and uses publicly available data to arrive at the initial hypotheses.
This example with Empire International works where there is a clear majority shareholder with very specific needs. Generally, companies have fractured shareholders who want to see growth, returns, and moderate risk. In general, one should not worry about shareholders unless it is a majority shareholder or wholly-owning shareholder with specific needs for the business.
As the business changes focus, the composition of shareholders will naturally change. That is perfectly fine.
A business that is failing today will be punished by shareholders tomorrow, even if it takes time for the shareholders to catch on to the problem. It is, therefore, best to introduce necessary business changes when needed even if it is something shareholders initially do not understand.
Communicating to them is an entirely different story should be done and if done right, shareholders will understand and accept the changes.
Empire International is a stated-owned-enterprise. They are like Fannie Mae, Freddie Mac, Airbus, Emirates, Petrobras, Sinopec, Singapore Air, Transnet etc. In these situations, this analysis is much easier to do. One need simply look at the original reason the government founded the entity. This will indicate what the shareholder wants and needs.
Competitor analysis is usually the poorest part of a typical study. There is a tendency to conduct superficial analyses, focus on statements from annual reports and the biggest problem of all, is to assume that competitors can both articulate their competitive position and remain committed to that course of action.
Too much of competitor analyses on strategy engagements assume deliberate, thoughtful and rational competitors when most companies are just the opposite. Good competitive and market analyses need to reflect this ambiguity and chaos in the market.
In corporate strategy, one has to think about how the behavior of competitors will change over time, how that will change the market and how changes in the market will in turn impact competitors. It is a continuous back-and-forth process versus assuming a competitor takes a static position. One change from one competitor or one part of the market ripples across everything and those changes are hard to predict.
In Empire International’s case, it entered the market as a lower-cost player and still struggled. Over time Chinese and Korean players entered the market at an even lower cost. Empire International is now the middle-cost player with a lower quality offering. It has no chance of competing in these markets.
Resources in corporate strategy are not only capital, employees or fixed assets. The organizational structure is a resource. The culture is a resource.
Some things ignored by everyone else in the market, could be a resource advantage, like the nationality of a CEO.
A Chinese CEO of a western firm is probably going to have an easier time negotiating with the Chinese government, all other things being equal. In this step ask yourself whether the company can implement its existing strategy.
Empire International is running out of cash. It is essentially in the worst position since it is at a turnaround or transformation stage and cannot tap the capital markets.
Now comes both the interesting, creative and harder part requiring strong business judgment. We need to use the 4 questions above to develop the problem statement/objective function. So, what do we know:
#1 Given the changes in the market, EI does not have a valid reason to exist as a separate company.
#2 As the sole shareholder of EI, EE’s need will supersede the needs of EI’s management and other stakeholders.
#3 Fierce competition and lack of a technology edge have made EI more dependent on EE.
#4 EI has little cash to fund its operations and none to invest in new ventures/initiatives.
You have to use this to think about the most important problem EI needs to solve, given EE’s needed. Expect this to be an iterative process. You will likely come up with many variations but need to always go back to these 4 guides above to ensure they are not compromised. This is not something that happens in a day. It can take a few days of thinking.
Something like this would work:
What does EI need to become to meet the needs of EE, while managing its cash position and resources to prepare for the costly transition to a likely new business model and corporate strategy?
Even this would do…
What does EI need to become to meet the needs of EE?
We make this process look much simpler than it is. Yet, all the links here will help you find some helpful videos behind most of the steps.
In this article, we have covered quite a bit about corporate strategy development, but we have been focused. We have covered just the first two parts of a corporate strategy.
What influences a partners’ thinking?
How to develop an objective function/problem statement in corporate strategy?
Future articles will cover other steps in the process.
We generally try to avoid placing links into the articles leading to content in our paywall. However, in this case, most of our corporate strategy episodes sit behind a paywall and we had to make an exception.
For newer Premium members (less than 6 consequitive months) reading this article, the following links will help you improve your understanding and practice of the concepts above.
For loyalty members, FC Insiders, you will find more advanced content on StrategyTraining.com showing you how we applied the concept.
We have put together some better definitions of the process and the overall process within an engagement. It also helps to understand that a transformation program is very different. Do not worry too much if you struggle with this. In an actual engagement, teams are not so disciplined in their approach and it is fine to start with some simpler goals. If you are thinking about how to sell this type of work it’s important to not rely too much on the proposal.