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Description
A perennial question for the corporate office is "How can we add value?" For many senior executives, the "Hippocratic oath" of corporate management seems to be the answer: First, do no harm. Divisional autonomy has gone from managerial principle to mantra. The corporate office is there simply to set and enforce performance targets. But in a world increasingly obsessed with private equity, the power of focus, and the discipline of debt, is there really a role for even the most mildly diversified firm and the corporate layer of management that such diversification necessarily creates?
I believe so, but only if we expand our horizons beyond merely "adding value" to including the critically important but typically overlooked problem of managing strategic uncertainty.
Why this is important, and how to do it more effectively, is what I hope to describe in this article.
Of strategies competitive and corporate
I've found it useful to define strategy as "how an organization creates and captures value in a specific product market." In my experience, this definition is both sufficiently precise to have substantive content yet inclusive enough to capture what most people feel should be part of so critical a concept. Reflect for moment on what you think your organization's strategy is in light of this definition and see if you find it consistent with your intuition.
The most significant element of this definition lies in its most easily overlooked part: that strategy is about how to create and capture value in a specific product market. This highlights the importance of defining clearly the organization and product market that are the focus of strategy.
For example, this definition makes the question "What is General Motors' strategy" incoherent, for embedded in that question is the assumption that there is a single product market in which General Motors competes, which of course is not true: Chevy's Corvette and GMC's Montana mini-van are only the weakest of substitutes. Few people, when they go shopping for a car, consider the possibility of getting one instead of the other.
And so my proposed definition captures only competitive strategy, that is, the ways in which an organization competes, since competition for revenue, and hence profits, takes place ultimately at the product market level.
What, then, is corporate strategy? The most widespread view is that improving the competitive strategies of the operating units is the essence of corporate strategy. The corporate office should be focused on, for example, the identification and capture of synergies between operating units. There remains considerable debate about how best to do this. But the underlying assumption--that corporate strategy supplements competitive strategy--goes unchallenged, begging the question whether the corporate office can make any other kind of contribution.
This assumption blinds us to the other half of the value equation: uncertainty. It is indisputable that generating returns is critical, and an operating division's competitive strategy is a description of how that unit hopes to create and capture the value required to deliver those returns. But as those familiar with financial theory and practice will know, there can be no returns without risk. Indeed, in a very real sense, accepting risk is the price of those returns, and the hope of more of the latter can only be purchased at the price of more of the former.
And so we have the opportunity to... |
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