Four Logics of Corporate Strategy

Organizations often struggle with corporate strategy because executives lack clarity on how parts of the business fit together to create and capture economic value. A simple framework can help leaders understand the relationship between corporate and business unit strategies.

Corporate strategy is the set of choices that diversified corporations such as IBM, Walt Disney, and Tata Group make to create and capture value across their businesses over time. It’s a crucial driver of financial performance for multi-business enterprises. A recent meta-analysis found that a business unit’s corporate parent accounts for more of its financial performance than the industry where that business unit competes.1 According to a McKinsey & Co. survey, 83% of senior executives said that the effective reallocation of resources across business units is the single biggest driver of revenue growth.2

Although executives understand the importance of corporate strategy in theory, many struggle to develop one in practice and link it to business unit priorities. According to a separate survey of nearly 2,000 managers running multi-business corporations, only one in five executives said their company had an effective process for developing and revising corporate strategy.3 Just one-third of respondents said that their corporate strategy process and business unit strategy reviews were fully integrated.4

In our experience, organizations often struggle with corporate strategy because executives lack clarity on how the parts of the corporation fit together to create and capture economic value. Unless executives have a shared understanding of the relationships between corporate headquarters and the business units and among different businesses, they risk talking past one another when discussing strategy. We have helped dozens of top teams formulate their strategy, and along the way we have found that a simple matrix can help crystallize how the parts of the business fit together to maximize performance. Once executives come to a shared understanding of this fundamental issue, they can decide who should lead the strategy development process and how to integrate corporate and business unit strategies.

Most of the research on corporate strategy emphasizes how the corporate parent assembles its portfolio of businesses and how it adds value to each business unit.5 In our matrix, we represent this relationship with the vertical axis, labeled Corporate-Business Unit Linkage, which measures how reliant the business units are on corporate resources and capabilities to make money.6 (See “Defining the Four Logics of Corporate Strategy.”) Companies such as Trader Joe’s and Burberry Group score high on Corporate-Business Unit Linkage because their stores depend completely on corporate assets to succeed. Indeed, if you stripped a Trader Joe’s store of the company’s brand, economies of scale, and distinctive portfolio of private-label products, all you’d have left is an undifferentiated local grocery store. Private equity firms’ portfolio companies, which typically operate as stand-alone entities, lie at the other extreme of the Corporate-Business Unit Linkage dimension.

When assessing where your company lies in terms of the linkage between corporate and business units, focus on capabilities and resources (such as the ability to develop new products or brand) that are critical to creating and capturing economic value. If corporate shared services (for example, human resources, legal, or accounting) could be easily outsourced, they aren’t strategic — just convenient. The key question isn’t whether business units run independently of corporate but the extent to which they could.

The Business Unit-Business Unit Linkage (shown on the horizontal axis of “Defining the Four Logics of Corporate Strategy”) represents how dependent the business units are on one another to create and capture value. At the left are companies such as General Electric and Tata Group whose portfolio companies run independently of one another. At the other end of the spectrum are companies such as IBM, where the different business units (in this case, consulting, software, hardware, and financing) need to work together to provide integrated solutions to customers.

Defining the Four Logics of Corporate Strategy

The matrix below plots four distinct logics of corporate strategy. As shown here, the linkages are on a continuum from low (virtually independent) to high (completely dependent).

Combining the dimensions into a two-by-two matrix results in four distinct ways to think about corporate strategy:

• Portfolio: “Portfolio” logic guides traditional conglomerates such as GE and Tata Group as well as private equity firms such as KKR & Co. and The Blackstone Group.
• Leverage: Companies whose business units make heavy use of the corporate brand, technology, and other expertise such as Trader Joe’s and Burberry pursue a “leverage” logic.
• Federal: The “federal” logic includes loose confederations of businesses that band together to pass business to one another, jointly lobby regulators, or share best practices, all without a powerful corporate parent. Examples include Star Alliance in airlines and The Leading Hotels of the World in lodging.
• Integrative: The “integrative” logic describes companies in which business units rely both on corporate assets and one another to succeed. For example, Walt Disney theme parks, movie studios, consumer products, and children’s television divisions all use the company’s iconic brands and characters to increase customers’ willingness to pay, and they generate revenues by cross-promoting and selling one another’s products.

How do leaders know which logic applies to their company? Answering the questions in “Assessing the Logic of Your Corporate Strategy” will help you place your company on the matrix.

Assessing the Logic of Your Corporate Strategy

Corporate strategy is the set of choices diversified companies use to create and capture value across the parts of the business. The choices are largely driven by how business units work with one another and how they use corporate resources and capabilities. The questions in this chart can help you crystallize the underlying logic that drives your corporate strategy. Then calculate the average for the linkage between corporate and business units and the average for questions on business units’ dependence on one another. These averages will help you plot where your organization falls on the matrix in “Strategies by Quadrant.” Use the boxes as guidance for what form the strategy should take in each quadrant

CORPORATE-BUSINESS UNIT LINKAGE: UNITS’ DEPENDENCE ON CORPORATE RESOURCES AND CAPABILITIES	Strongly disagree	Disagree	Neutral	Agree	Strongly agree
Corporate brands, technology, and other resources allow our units to charge a price premium relative to competitors.	1	2	3	4	5
Corporate economies of scale, bulk purchasing, operational expertise, or other factors give our business units a significant cost advantage relative to competitors.	1	2	3	4	5
Corporate resources or capabilities are hard to imitate and protect us from rivals and new entrants.	1	2	3	4	5
Switching from corporate services (for example, legal, human resources, or accounting) to outside vendors would dramatically hurt the performance of business units.	1	2	3	4	5
Our business units could not compete as stand-alone businesses without corporate support.	1	2	3	4	5
	Average score:

BUSINESS UNIT-BUSINESS UNIT LINKAGE: UNITS’ DEPENDENCE ON ONE ANOTHER	Strongly disagree	Disagree	Neutral	Agree	Strongly agree
Our business units need to coordinate with one another to serve the same customers.	1	2	3	4	5
Our business units offer complementary products or services.	1	2	3	4	5
Our company sells integrated solutions that draw on different parts of the business.	1	2	3	4	5
Our company needs to provide a unified customer experience across different parts of the business.	1	2	3	4	5
Our business units need to share knowledge, expertise, or technology to compete effectively.	1	2	3	4	5
	Average score:

Not all business units in the integrative quadrant are equally dependent on corporate resources or on other business units. For example, Pacific Investment Management Co. (PIMCO), the large asset-management organization based in Newport Beach, California, has historically enjoyed considerable autonomy from Allianz, its German parent. Some corporations organize their business units into clusters of similar companies that closely coordinate. The industrial conglomerate Danaher, for example, has acquired hundreds of businesses over the past 30 years and combined them into clusters in areas such as dental and life sciences and diagnostics. The businesses within each cluster work closely together to serve the same customer segments, but collaboration across clusters is less important. If your organization depends on external partners or pursues a platform strategy, be sure to consider the outside stakeholders when plotting your position on the Business Unit-Business Unit Linkage axis.

The relationships among the various parts of the business can evolve over time. To offer customers a seamless experience, retailers such as Burberry are forging tighter links across their historically autonomous online operations and physical stores. When analyzing your own organization, start by understanding your current position but focus on where you want the company to be in the future. Functional and shared service activities should follow any shifts in corporate strategy. For example, if you want to shift from the portfolio quadrant to the leverage quadrant, shared services must migrate from having an exclusive focus on business unit priorities to supporting the overall corporate strategy.

By understanding which logic of corporate strategy they want their business to follow, executives can develop the right type of strategy for individual business units and the enterprise as a whole. In the portfolio logic, for example, corporate strategy will focus primarily on developing guidelines for deciding which businesses to enter, fund, or exit. At the same time, each business unit will need to have its own stand-alone strategy. In the integrative quadrant, in contrast, corporate will need rules for managing the portfolio, developing and leveraging corporate resources and capabilities, and managing interdependencies across units. In that quadrant, business units will need strategies that allow them to win as stand-alone entities while at the same time aligning with the corporate strategy. (See “Strategies by Quadrant,” which provides guidance on what corporate and business unit strategy might look like for each logic.)

Strategies by Quadrant

Plot your average scores from “Assessing the Logic of Your Corporate Strategy” for your Corporate-Business Unit and Business Unit-Business Unit linkages on this matrix. Once you have determined which quadrant your organization falls into, the blue shaded text will provide guidelines on the form the corporate strategy should take, and the gold shaded text will provide guidelines for business-unit strategies.

Once leaders agree on the right logic of corporate strategy for their organization, they can formulate a strategy with an eye toward implementation. To translate their strategy into action, leaders should articulate a handful of strategic priorities to serve as guidelines for activities, priorities, and investments throughout the organization. Our article titled “How to Develop Strategy for Execution” describes the process for translating strategy — at the business unit or corporate level — into concrete objectives to drive results.

Donald Sull, Stefano Turconi, Charles Sull, and James Yoder

REFERENCES (6)

1. Estimates of the relative importance of corporate, industry, and business unit factors on business unit financial performance vary across studies employing different samples and methodologies. For a recent meta-analysis that puts these divergent findings into context, see B.S. Vanneste, “How Much Do Industry, Corporation, and Business Matter, Really? A Meta-Analysis,” Strategy Science 2, no. 2 (June 2017): 121-139.

2. Y. Atsmon, “How Nimble Resource Allocation Can Double Your Company’s Value,” August 2016, www.McKinsey.com.

3. McKinsey & Co., “Creating More Value With Corporate Strategy: McKinsey Global Survey Results,” January 2011, www.McKinsey.com. Results based on an online survey with 2,313 executives, most of whom worked at multi-business corporations representing a cross-section of industries, geographic markets, and functions.

4. McKinsey & Co., “Creating More Value With Corporate Strategy,” exhibit 6. Integration of corporate strategy process with business unit strategy reviews of 33.8% is the weighted average of effective developers of strategy (n=151) and the rest of respondents (n=1,793).

5. For influential articles on how corporate parents add value to their business units, see M.E. Porter, “From Competitive Advantage to Corporate Strategy,” Harvard Business Review 65, no. 3 (May-June 1987): 43-59; and A. Campbell, M. Goold, and M. Alexander, “Corporate Strategy: The Quest for Parenting Advantage,” Harvard Business Review 73, no. 2 (March-April 1995): 120-132.

6. See A.M. Brandenburger and H.W. Stuart Jr., “Value-Based Business Strategy,” Journal of Economics & Management Strategy 5, no. 1 (March 1996): 5-24. We use making money as shorthand for value creation and capture.

What drives a company’s success? Highlights of survey findings

by Paul Leinwand and Cesare Mainardi

Survey snapshot

A Strategy& survey shows that companies find it harder to understand their own strengths than to understand their customers. By knowing themselves well and leveraging their distinctive strengths to build a clear identity, companies can outperform their peers. But many companies aren’t basing their strategies on this insight, the study finds. In fact, companies have widely divergent views on how to develop strategy, despite evidence that a capabilities-driven approach delivers the best returns.

We find that a capabilities-driven approach to value creation leads to higher returns, on average, than other ways of doing strategy. Capabilities-driven companies owe their success to having a truly distinctive way of providing value, a powerful set of capabilities, and coherence between their strategy and their capabilities. By contrast, companies that compete on the basis of economies of scale, lucrative assets, or diversification fare less well.

We also see that companies with a clear identity — standing for something unique and consistent over time — tend to perform better than others. But how do they develop that identity? Again, a capabilities-driven approach is the answer.

Finally, the survey shows why many companies find pursuing this kind of success so hard. Their approach to strategy gets in the way: They do strategy at the margins — with a short-term perspective and too many initiatives — instead of pursuing a strategy that promotes long-term success. Contrary to common belief, most companies’ problem with strategy is not insufficient understanding of the market, but rather insufficient knowledge of and reliance on their own distinctive strengths.

Companies that embrace the challenge of building and leveraging this self-knowledge are on their way to creating greater value.

“Many companies focus too much on the outside when developing their strategy, and don’t combine that market-back perspective with a clear view of what their organization is great at doing. In this survey, as in all the research we’ve done on the topic of value creation, we see that essential advantage lies within. A few differentiating capabilities drive a company’s identity and success.”

—Cesare Mainardi, chief executive officer, Strategy&

The 10 companies with the clearest identity*

• Apple
• BMW
• Caterpillar
• Coca-Cola
• Honda
• LVMH
• Royal Dutch Shell
• Toyota
• Volkswagen
• Walmart

* Identified by survey participants from a list containing the 15 largest public companies (by market capitalization) across regions in each of seven industries.

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Key findings of the survey

Our findings provide critical insights into what drives success, the importance of a clear identity, and the top issues in strategic development.

What drives success?
The survey found that there is no dominant strategy or school of strategy. We asked survey participants to rate the importance of seven drivers of success, and their responses were surprisingly mixed. Economies of scale were rated as the most important driver of success, followed closely by powerful capabilities and lucrative assets.

For the best-performing companies, success — measured in terms of three-year growth of total shareholder return (TSR) — is attributable to what we call a capabilities-driven approach to strategy. These companies’ drivers of success most often include three distinct elements: a truly distinctive way of providing value, powerful capabilities, and coherence between the two.

Companies that owe their success to more asset-driven factors (economies of scale, lucrative assets, or diversification) have measurably lower performance.

Does identity matter?
Companies considered to have a clear identity — standing for something unique and consistent over time — have superior three-year TSR growth compared with companies that lack a clear identity.

In addition to promoting overall success, the three elements of a capabilities-driven strategy also drive a company’s strong identity, according to respondents.

Building a strong identity is very hard to do. The most challenging aspect is defining the identity and determining precisely how the company is going to add value for its customers.

What’s wrong with strategy development?
We asked respondents to rank the most problematic issues companies face in developing strategy. “Having too many strategic initiatives” was ranked as the biggest problem by more respondents (29 percent) than any other issue.

That was closely followed by “focusing too much on short-term performance improvement and too little on what will create long-term success” (27 percent of respondents).

Contrary to common belief, insufficient market focus is not the biggest problem — only 7 percent of respondents consider “ignoring external market forces” to be the most problematic issue.

Overall, only about one out of three respondents (36 percent) indicated that the top leaders of their companies were effective at both strategy development and execution, although both dimensions strongly correlate with company performance.

Key finding: Companies have widely divergent views about how to chase success

Exhibit 1: The world’s largest companies have divergent views on what drives success

• We asked survey participants to identify the most important drivers of success for the three companies they know best among the 15 largest in their industry. We found that no approach is clearly dominant.
• Pursuing economies of scale was perceived to be the most important success driver (score of 2.0), followed by powerful capabilities (1.8) and lucrative assets (1.6).

“The application of strategy to the business context is new — just about 50 years old. But in those 50 years we’ve seen countless theories, frameworks, and books being developed. The challenge now is that many companies pursue multiple theories of value creation at the same time.”

—Paul Leinwand, partner, Strategy&

Survey respondents’ perceptions of Apple and Microsoft help to illustrate the differences in how companies approach strategy. Respondents draw a very clear — and very distinct — picture of each company’s strategy.

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Exhibit 2: Comparing drivers of success for Apple and Microsoft

• Apple’s success is perceived to be primarily based on its distinctive way of providing value and the coherence between its strategy and its capabilities.
• Microsoft’s success is perceived to be primarily based on its scale and lucrative assets.

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Exhibit 3: Apple and Microsoft are perceived to have different strategic approaches

• Apple is seen as having a much more focused approach to strategy. Respondents regard it as using a clear value proposition to target a specific customer segment and focusing on a few capabilities in which it achieves excellence.
• Microsoft, on the other hand, is seen as following a more balanced approach. Respondents regard it as tailoring value propositions to various customer segments and being good across many capabilities rather than focusing on excellence in a few.

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Key finding: Companies competing with a capabilities-driven approach are more successful

Exhibit 4: Companies’ performance depends on their sources of success

• Although each of the seven success drivers listed in Exhibit 1 is used by a significant percentage of companies, they have very different impacts on companies’ success.
• The more a company’s success is perceived to be capabilities-driven — based on a clear way to play, powerful capabilities, and coherence — the more successful the company tends to be (as measured by TSR growth over three years). Companies that are seen as most consistently following such a capabilities-driven approach include Apple, Caterpillar, Honda, PetroChina, SAP, Standard Chartered, Toyota, and Volkswagen.
• Companies that are seen as competing on the basis of assets, scale, and, diversification have significantly lower TSR growth, on average, than companies that follow a capabilities-driven approach.

“Our findings are very much in line with our beliefs about capabilities. Successful companies choose a differentiating way of creating value for customers, build a bespoke system of capabilities that supports this way to play, and focus their activities on those areas that benefit from their unique strengths.”

—Cesare Mainardi, chief executive officer, Strategy&

“We have ample evidence that differentiation through capabilities leads to sustainable advantage. In fact, given the competitive intensity in today’s business environment, companies need more than just one or two great products to win in the long term — differentiation through capabilities is quickly becoming the only path to sustainable value creation in most industries. Coherent companies, in every industry we’ve studied, outperform their less coherent competitors.”

—Paul Leinwand, partner, Strategy&

Key finding: Companies with clear identities enjoy stronger performance

Exhibit 5: Companies with clear identities enjoy stronger performance

• We asked survey participants to tell us how clear an identity the various companies in their industry have — that is, how clearly those companies are perceived to stand for something unique and consistent over time.
• Their responses helped to demonstrate that a clear identity correlates with performance — the stronger the identity, the higher the company’s three-year TSR growth. The effect is significant: Companies whose identity is perceived to be clearer than the average have a three-year TSR growth that is more than 3 percentage points higher than that of their peers.

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Exhibit 6: The clarity of a company’s identity depends on its sources of success

• Companies with a clear identity compete based on the same three capabilities-related factors that drive success in general: a truly distinctive way of providing value, powerful capabilities, and coherence.
• Companies that base their success on assets, scale, and diversification are perceived to have a weaker identity.

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Key finding: Strategists’ biggest problems are having too many disconnected initiatives and not focusing on what will create long-term success

Exhibit 7: Too many initiatives and a short-term focus are the biggest issues for strategy development

• Two issues emerged as the most problematic when we asked survey respondents to rate the significance of strategic issues: having too many strategic initiatives that are disconnected and focusing too much on short-term performance. In other words, companies aren’t addressing the fundamental questions of strategy that will allow them to create long-term success.
• Contrary to common belief, insufficient market focus does not appear to be the problem — only 7 percent of respondents consider “ignoring external market forces” to be the most significant issue.
• Overall, only about one third of respondents (36 percent) indicated that their leaders were effective at both answering the fundamental questions about strategy and keeping their company on track in execution.

“Companies rarely fail simply because they don’t understand the market, but many struggle because they don’t understand and leverage what is great about themselves.”

—Paul Leinwand, partner, Strategy&

“Most companies do strategy at the margins — they look forward from their current messy and incoherent states and pursue the same trends as anyone else in the industry. This set of incremental steps ultimately leads nowhere, because many companies are all chasing after the same small set of opportunities. What companies need to do is real strategy — they need to think bigger and more long-term, working toward a differentiated position that fits their capabilities.”

—Cesare Mainardi, chief executive officer, Strategy&

About the survey

Strategy& developed this survey to better understand what drives the success of the world’s largest companies. The survey assessed the relationship between companies’ approach to value creation and their performance, and studied the role that a company’s identity plays in its success.

We conducted a Web-based survey between February and August 2013 and invited readers of HBR.org and recipients of strategy+business enews and Strategy& Foresight to participate; 720 executives (including 192 at the C-suite level) completed the survey. Participants were asked to select up to three public companies within their industry (from a list of the 15 largest in each of seven industries) and comment on what drives success for those companies as well as their own company; to identify the main challenges companies face in strategy development; and to assess the role that a strong identity plays in promoting a company’s success.

To determine a company’s score for each of seven predefined success drivers, we allocated three points to the driver selected as most important, two points to the second most important, and one point to the third most important. We then normalized the scores so that the sum for the seven drivers equals 10. To enable a comparison across companies, scores for each driver were averaged over all companies.

Based on the survey responses and the company’s performance (as measured by three-year TSR growth from January 2010 to January 2013), we established a link between companies’ success drivers and their actual success.

Learn more about Strategy&’s full body of work on how companies build their essential advantage through capabilities-driven strategy at strategyand.pwc.com/CDS.

Performance Mindset Diamond

This is a framework that one of our professionals used on a recent large scale transformation project with a fairly large team. I was not personally involved in this project, but like the different dimensions. When you are a new project manager at any consulting firm, they teach you to think about your team, and to talk openly with the team about everybody’s motivations, working styles, personalities, etc. I still remember the first time somebody mentioned the skill/will dimension to me. This diamond framework is actually more detailed, and a good checklist to go through at the beginning of a project.

Purpose, People, Process

One of the well known change management frameworks, Purpose, People and Process focuses on key elements that need to be aligned in order for a business to be successful:


Purpose includes elements such as a shared vision, shared values, and commitment, providing strategic direction to the organization in order to engage everybody and get them to act towards these goals. It also often will include shared stories or a history that defines and unites the organization.


People includes factors such as accountability (clear roles, an effective performance evaluation system, constructive feedback mechanisms, a focus on getting things done), Leadership (the right style of leadership, empowered managers) and an effective organizational structure.


Processes include elements like a learning organization (benchmarking, training and coaching, etc.), a culture of continuous improvements (problem solving, creativity and innovation, etc.) and effective information systems (to support decision making, track the right metrics, and capture lessons learned).



The graphic above depicts these three elements, and also highlights the interfaces between them:
Clear purpose and effective processes allow an organization to capture value and execute effective strategic and operational plans.
Effective processes and empowered people will result in an organization that focuses on the key issues and gets the job done.
Empowered people and a clear purpose will provide inspiration to shape an organization and allow it to change and adapt to its environment.

I have seen this framework applied several time, often in the context of a large scale change management effort, or a post-merger management integration project. Note that there are also a variety of alternative versions of the framework: I have seen:
Purpose, People, Power
Purpose, People, Power, Projects (particularly relevant in the context of a PMM project, where the issue is to lay-out a number of specific projects to capture synergies)
People, Purpose, Process, Data
Etc.

And I have seen the various elements graphically depicted as triangles, circles, or sequential boxes. The sequential boxes are actually quite relevant, because there is a certain logic to the framework: Purpose usually comes first, followed by people, then process (and then anything else, if you’re so inclined…).
References:
Collins, James C. and Porras, Jerry I. Built to Last. HarperBusiness. 1994
Goldstein, Jeffrey. The Unshackled Organization. Productivity Press. 1994