This is part one of Breaking Down Corporate Strategy, a three-part series of articles where I explore the components of corporate strategy, the factors that steer its development, as well as the interesting relation it has with game theory.
Common sense is the bare minimum required to develop a business strategy. Some of the biggest businesses in the world started with a simple idea and a simple business model. But it’s safe to say that none of those businesses became global corporations with just common sense.
Because at that level, things are no longer obvious and there are hundreds of variables involved in every decision. At that level, a business strategy is no longer sufficient, and corporate strategy becomes a necessity.
This article is about corporate strategy — about its components and its impact on a corporation. It is concerned with questions like “How do we know whether a merger will be more valuable than the sum of its parts? And “whether the best use of limited capital is Research & Development or a new factory?” Or “do we need to expand our portfolio, and if so, should the acquisition be adjacent to us or is vertical integration also a viable option?”
Corporate strategy can answer these, and many other questions by developing frameworks and theories at the highest level of an organization. But before that, we must answer a different question: what is a corporate strategy?
What is a corporate strategy?
The goal is every corporation is to maximize the competitive advantage of every individual business (or product line). Therefore, corporate strategy means taking a portfolio approach that applies to every single business of a corporation. In that sense, corporate strategy sits above the different business strategies.
However, corporate strategy isn’t limited to multi-business corporations — it’s often executed in single-unit businesses because at a broader level, corporate strategy is a mindset. In the real world, some businesses or departments are bound to do better than others.
And the corporate strategy guides all of the different activities of a company so it can work towards a singular goal. In a corporation, it might be adopting different business strategies to meet their top goal while in a single-unit business, it might be to bring together functional departments to work more efficiently together. But the overall effect is that corporate strategy becomes a balancing act — ensuring that no part of the company is left with underutilized or completely exhausted resources.
Forces Driving Corporate Strategy
What creates the competitive advantage and what erodes it? The answer is quite a few factors — both external and internal. For instance, one of the more obvious forces driving corporate strategy is the firm’s growth objectives and plans:
- Do they want to increase revenues by 50 percent?
- What vehicles will be used to deliver that growth?
- Where are the value drivers to achieve those goals?
Before any strategy can be developed, a policy needs to be laid down which will help in interpreting the strategy for every decision. Although very broad, the company policy is just as important in shaping the corporate strategy as it is for interpreting it. But what about other forces?
As you can imagine, there are quite literally hundreds of individual factors influencing a corporation, and listing every single one of them is outside the scope of this article. So instead, we’ll focus on the major driving forces, starting with…
Competition (Porter’s Five Forces)
Typically, competition would be any other company that offers a similar service or product. But what about competition. The market competition includes all of the firms that are fighting over the same Share of Wallet (SOW) of customers. We want to ensure that any company that offers a similar set of products/services does not occupy a larger percentage of our customer’s expenses.
Coming back to the topic, there is another question we must ask, who is the competition? Michael Porter answered this question in a famous 1979 Harvard Business Review article by identifying the “five forces” (of competition). Following is a brief explanation of each of Porter’s forces:
- Competitive rivalry
This is the force that we typically refer to when we talk about competition in general, also known as direct competitors. Competitive rivals refer to all of the businesses that offer a very similar service or product (Coca-Cola versus Pepsi, Chevrolet versus Ford, SpaceX versus ULA, etc).
2. The threat of substitutes
Even companies that aren’t “direct competitors” can pose a threat if their product or service is a substitute for one’s own product or service. Most commonly, these companies solve the same consumer problem but with different technology or method. A common example is tea and coffee. They are two distinct products but because they serve a very similar purpose, they can be substituted with one another.
3. The threat of new entrants
Corporate strategy cannot rely on just competition that already exists because there is a consistent threat of new companies entering the market (that is assembling a similar product set and attracting your customers). Of course, the severity of this threat can vary wildly depending on your industry. For instance, if your target industries have few barriers to entry, the threat of new entrants will be much greater. Additionally, in certain forms of markets like oligopolies, the scope of retaliation is low and thus new entrants do not pose much of a threat.
4. Customer bargaining power
The bargaining power of customers is the culmination of numerous factors that give consumers control over the transaction. For instance, a greater number of available substitutes increases the buyer power as they can simply choose a different vendor. In contrast, loyalty programs and vendor lock make it less attractive to switch brands and thus decrease the bargaining power of customers.
5. Supplier bargaining power
Like consumers, suppliers too, hold control over the transaction between themselves and the corporation. And like consumers, fewer suppliers means each will have more bargaining power. In essence, the company becomes the “consumer” of raw supplies. Similarly, suppliers can form labor unions and reduce the power of corporations, just like how companies can agree not to enter price wars and thus lower the bargaining power of customers.
Product Mix
In essence, the product mix refers to the market offering(s) that a corporation has for sale. Product mix can include anything (usually made up of products and services, but even an idea can be sold). When we talk about the company portfolio, we’re usually referring to the product mix.
Like competition, the product mix is a force made up of various factors. Let’s take a look at the individual factors behind the product mix.
- Width
The width refers to the different product lines or industries that a corporation operates under. For instance, a sports accessories company may have separate product lines of equipment for basketball, soccer, golf, baseball, etc. In multi-business companies, the width of their product mix may span industries. For instance, Samsung not only creates mobile phones but also laptops, SSDs, LCD panels, and more.
2. Length
The length of the product mix refers to the total number of products a firm carries or offers,
3. Depth
The product mix is 3 dimensional and each individual product under a specific product line can have additional specifications, models, or trims that make them different.
4. Consistency
Consistency refers to how close products are to each other under a specific product line. For instance, a company that shares many of the same parts along its different product lines will be more consistent. Additionally, consistency can also be determined on the basis of use cases, price bracket, distribution channel, industry, etc.
Pricing Strategy
Developing a pricing strategy is incredibly tricky. So much so in fact there are entire subfields of economics dedicated to understanding the effects of price changes. Most people believe that demand and supply dictate price and while those are two of the main factors influencing price, there are dozens of other factors that are equally, if not, more important for your particular business.
For instance, there is the important concept of price elasticity. If your product mix is highly consistent, even a small change in price may mean one product completely cannibalizes the sales of another. On the other hand, even a big increase in price may not have any impact on your product, this would mean the product is inelastic or “sticky”.
The “stickiness” of products is an extension of price elasticity as it is not limited to price.Very sticky products will have little to no effect on sales even if major changes are introduced (as long as it still serves the same ultimate purpose).
When we’re developing a business strategy, we want to develop a strategy that maximizes that individual product line’s or business’ profits. However, when developing the corporate strategy, we must look at the bigger picture. For instance, in order to enter a new market, a penetrative pricing strategy might be the way to go because we know that profits from other businesses’ are enough to offset the loss (there are numerous tax benefits to this as well but that’s not what we’ll talk about today).
Market Landscape
This is a big one. So far the driving forces that we’ve talked about have either been internal or very close to the business, market landscape, on the other hand, is completely external and mostly independent of the company’s actions. In other words, very difficult to influence. So what are the factors that make up the market landscape? There are a few but the biggest ones are technological advancements, political environment, economy, social environment, and local/national laws.
The corporate strategist must identify how these factors are affecting the corporation’s position (not just the businesses)and come up with plans to counter any negative influence while encouraging positive influence.
To do this, the upper management can take a number of steps depending on the position and goal. Since the ultimate goal of most companies is growth, they focus on something called growth levers. And that’s exactly what we’ll take a look at next.
This is part one of Breaking Down Corporate Strategy, a series of articles where I explore the components of corporate strategy and the factors that steer its development. The second part of this series will go live shortly. Feel free to hit Follow to get a notification when it does.
