We live in a world of multinational companies. Organizations buy and sell business units, exchanging billions of dollars weekly. These businesses form part of an organizational portfolio, carefully considered and structured by many people before deciding to buy or sell. These decisions are part of the modern corporate strategy.
But what are the details of a modern corporate strategy? What role do corporate strategists fulfill? And what are the six pillars of corporate strategy? We will answer all these questions and many more to give a clear and structured approach to forming your modern corporate strategy.
What Is A Corporate Strategy?
Many organizations today have extensive portfolios of companies and businesses varying in size and type. It is essential to coordinate the decision and judge the risk involved in these decisions in a standardized way as much as possible. Doing so increases the success rate and boosts revenue, ensuring growth and securing a sustainable competitive advantage.
According to Statista’s 2021 research, 51% of companies are not increasing their workforce to adapt to the current environment as part of a corporate strategy. This statistic highlights the need for companies to consider corporate strategies to increase adaptability in an increasingly volatile market.
The role of the corporate strategy is buying and selling companies and business units for an organization’s portfolio. Risk management is a large part of developing corporate strategy and is one of its most challenging aspects because it is difficult to judge. Yet huge risk can lead to a high yield of success, making risk essential to the corporate strategy process.
What Is The Difference Between Corporate Strategy And Business Strategy?
Whatever a company’s size, it must have a corporate strategy. However, the same cannot be said about business strategies, as larger organizations only need them. The business strategy is part of grounding the corporate strategy in reality. This stage ensures it is practical and will work on a functional level.
The best way to view this difference is that corporate strategy is abstract, and business strategy is concrete. Both are needed first to create a vision (corporate strategy), then ground it in reality (business strategy), so the ideal works.
The Six Pillars Of Corporate Strategy
Organizations use the six pillars of corporate strategy to guide decisions about acquisitions and selling. The first step is to create a corporate strategic vision.
1. Creating A Vision
Strategic planning should begin with defining the central components of the vision. This process involves the organization establishing the company’s objectives, mission, and potentially corporate values. The visioning aspects created by leadership help leaders develop essential skills needed for the future.
Visions should look 3-5 years into the future and include as many key staff members as possible for the optimal strategic mix of perspectives. The central vision is to create a blueprint for the desired position the leadership wants the organization to be in the future.
2. Resource Allocation
We can divide the resource allocation for organizations into two resources: Capital and people. Both human and capital resources have advantages and disadvantages, but both are critical components for a successful strategic planning process.
The most efficient allocation is only possible with the consideration of the critical factors of each type of resource:-
- It is best to allocate resources across businesses to optimize the risk-adjusted return.
- Leaders can use capital resources to analyze external opportunities such as mergers and acquisitions.
- Organizations should distribute capital resources between internal projects and external opportunities.
- People-based resources involve positioning leaders where they provide the most benefit and value.
- People maintain an adequate supply of talent for all businesses within the organization.
- People-based resources define core competencies and support appropriate distribution across the organization.
Follow the functions of people and capital resources as a guide to ensuring optimal use of resource allocation across businesses in an organization’s portfolio.
3. Setting Functional Objectives
Visioning aspects created need to be transformed into functional objectives. These objectives must be clear and easy for the staff at all levels to follow. Objectives must be reviewed as part of a continuous process to ensure success.
4. Organizational Design
The organizational design must be structured to allow several functions to take place effectively. This process involves frequent reporting of quality, delegation, and structural aspects:-
- Formulate centers of excellence.
- Establish structures for governance.
- Set up reporting structures, such as military, top-down, or matrix reporting.
- Define appropriate ways to delegate authority.
- Allocate separate responsibilities to different roles to balance risk and return generation levels.
- Integrate business units and purposes using mergers to eliminate redundancies.
- Create a system for significant commitments and initiatives to be broken down into smaller projects.
- Establish whether decisions will come from the bottom up or the top down.
- Establish how much each business unit can maintain authority over its decisions.
Organizations must consider all of these aspects to ensure an effective organizational design.
5. Portfolio Management
Portfolio management involves an organization looking at the portfolio and deciding how business units interact and which businesses the organization will enter or leave.
The specific details of portfolio management include:-
- Creating strategic planning for future opportunities may lead to significant investments.
- The company assesses the marketplace to support the best ‘plays’ for competitive advantages and ensure portfolio balance.
- Making decisions about which business units should receive investment.
- Using diversified companies for risk management prevents these risks from being transferred to other businesses.
- Establishing the level of vertical integration the organization should have.
When corporate strategists follow these principles of portfolio management, portfolios remain balanced.
6. Strategic Trade-offs
Strategic trade-offs serve three functions: to create incentives, generate cash, and manage risk. Incentive structures serve a significant role in managers’ risk and return levels. The best approach is to separate risk management responsibilities and return generation to allow staff to conduct each at the appropriate level for long-term success.
Return generation involves higher risk strategies for higher rates of return. True product differentiation and cost leadership are examples of high-risk and high-return plays. However, these depend on structured plans and successful execution.
Risk is a huge component of corporate strategy. Risk is involved in every organizational play and every corporate strategist decision. Business units’ level of autonomy is crucial in managing risk. But it is also essential for business units to communicate their risks, so risk management strategies are comprehensive.
Some plays, such as true product differentiation, are high-risk strategies, leading to market leadership or collapse. This potential outcome is why many organizations emulate what other companies are doing to avoid risk and adjust it to create feasible opportunities.
The Three Levels Of Corporate Strategy
Three levels of corporate strategy represent the purpose of the new strategy. Whether an organization intends to improve customer engagement of a targeted customer base or make a play in a new market, the corporate strategist must choose the corporate strategy level carefully.
1. Corporate Level Strategy
The corporate strategy level involved decisions made from the top down, influencing the primary goal of the business and the goals of lower levels.
Corporate strategy-level decisions include forward or backward integration, managing the degree of diversification, and geographic scope. Nike has retail stores globally, while Macy’s department store mostly has stores in the US only, showing differences in geographic area and strategic decisions at the corporate level.
2. Business Level Strategy
Business strategy-level decisions involve gaining a competitive advantage within a chosen market. For organizations with many business units in different markets, such as Amazon, goals and objectives must be allocated based on each unit’s needs and fulfilling overall goals at the corporate level.
An example of a business strategy-level decision is how Apple gains a competitive advantage over other tablet manufacturers. Apple gains this edge through the recognition of the Apple brand and the exciting and positive image the brand has maintained.
3. Functional Level Strategy
Every functional area of a business, such as the finance department, IT, HR, or sales, needs to utilize a functional level strategy. Functional level strategies guide a department of a business unit to achieve its goals, augment operations and ensure the company meets the organization-level strategic goals.
Production, research and development (R&D), and financial strategies operate at the functional strategic planning level.
A corporate strategist must be aware of all three levels of corporate strategy. This awareness ensures a comprehensive approach and the best strategy for the right decision, as all decisions impact all business units within an organization.
The Benefits Of A Corporate Strategy
There are many benefits to a well-designed and executed corporate strategy, which increase in size as the organization grows. Today, even SME-sized new businesses need to consider investing in a corporate strategy to receive its essential advantages.
Corporate strategies allow organizations to make abstract needs into concrete and achievable goals. Corporate strategists achieve this direction by aligning the three corporate strategy levels, allowing each business unit to fulfill core competencies and realize goals.
Adaptability is key to remaining resilient in a business world characterized by technological disruption. Corporate strategists achieve optimal performance when utilizing and constantly developing a corporate strategy to fit the threats and opportunities of a constantly changing business landscape.
In embracing adaptability within their corporate strategy, 65% of Statista-surveyed companies in 2021 utilized an automation platform to modernize legacy business practices.
Corporate strategy can motivate employees, significantly improving the employee experience to desired levels and raising employee retention. When staff follows a corporate strategy, they are focused on moving forward with clear direction as part of a dynamic team achieving consistent overall growth.
How To Implement A Corporate Strategy
Any new business must ensure a corporate strategy is built and implemented as soon as possible to meet the dynamic needs of the marketplace. Implementation of a corporate strategy is split into three classes using external and internal capabilities to characterize each class.
Growth strategies help grow a business in a particular direction to improve value creation. Examples are: using backward or forward integration or entering new markets.
Stability strategies strengthen the position of a company by increasing flexibility. Stability strategies can use this flexibility to engage in future retrenchment strategies. Stability strategies are more conservative, investigating strategic opportunities for the future and prioritizing profit preservation.
Retrenchment strategies are employed when profits are negatively affected by a business outcome. A retrenchment strategy is needed when the organization eliminates a poorly selling product line or business units become unprofitable.
The corporate strategist can use these three classes appropriately to ensure success as part of broader, overarching corporate strategic objectives.
How To Measure Your Corporate Strategy
When success is measured, planning and implementing your corporate strategy will have far more value. Corporate strategists can formulate metrics in collaboration with CIOs to achieve this task, but the CIO must consider the many changing variables.
Begin by listing metrics to track. Metrics can be split into milestones to record the completion of a project by a specific date, like launching a website or investing in a new piece of technology. The corporate strategist can use Key Performance Indicators (KPIs) to record the success of more quantitative objectives, like profit growth and revenue.
To ensure success, align KPIs with strategic objectives, make them clear and straightforward for staff to follow, ensure data is updated frequently and incorporate KPIs into workflows for easy access.
Planning, Adaptability, Success
Corporate strategies are essential for every organization of any size. The benefits of corporate strategies increase with time, giving high ROI when planned and executed well. The keys to a successful corporate strategy are robust planning and adaptability.
Corporate strategies implemented early on can also reduce redundancies. 71% of Statista surveyed companies reduced staffing ‘aggressively’ or ‘somewhat’ to adapt to a changing business environment. Companies might have avoided these redundancies if they had acted sooner with a coordinated, more aggressive corporate strategy, increasing growth with greater people-based resources.
In today’s volatile market, technological disruption is constant. The adaptability provided by corporate strategies allows resilience through structured decisions on digital adoption. The third element of any successful corporate strategy is measuring success from start to finish through carefully chosen metrics and KPIs. When an organization considers planning, adaptability, and success, it can feel the benefits for years to come as they thrive into the future.