Corporate strategy is really about 2 things:
- portfolio selection – which business should you be active in? It is about diversification and divestiture.
- portfolio organization – how should you organize to create value across your businesses.
Corporate headquarters are important because they are the place where corporate strategy is made, but they are ultimately responsible for ensuring corporate advantage. Often time in headquarters you will find corporate management functions like treasury, risk management, taxation, financial reporting, legal counsel, etc. These are often referred to as obligatory functions.
Who controls headquarters?
Headquarters controls the businesses. But the controllers of headquarters could be family, state, other firms or the public. Different countries have different variations. Many of these firms have at least one important controlling shareholder. For a multi-business firm, sometimes you can buy shares in the parent company (the firm or legal entity that owns and operates the businesses), or you can buy the shares in the businesses themselves.
A share has two types of rights:
- Cashflow rights: you are entitled to a share of profits.
- Voting rights: you are entitled to vote on important matters.
Families often have shares with more voting rights than other shareholders. A family owner can increase its control in 2 ways:
- Through shares with extra voting rights
- Adopting a pyramid structure, by which ownership of a business goes through a chain of companies. They control much more than they own.
Headquarters influence models
There are 4 different ways that a headquarters can influence its businesses. We can think of the headquarters influence models along 2 dimensions:
- The nature of the relationship between the businesses in the portfolio. There are 2 ends along this dimension:
- stand-alone: the headquarters does not encourage any meaningful relationship. Headquarters influence is felt solely through the direct relationship between the headquarters and the businesses. The businesses benefit independently from a valuable resource located at the headquarters.
- linkage: the headquarters encourages the businesses to work closely together. Headquarters influence is felt through the relationships between businesses, that are administered under the supervision of the headquarters.
- The nature of the relationship between the headquarters and the businesses.
- directive control (more steering on behavior): the headquarters is heavily involved in the strategic decision of the businesses.
- evaluative control (more steering on outcomes): headquarters lets the responsibility of the strategic decisions with the businesses, headquarters would evaluate the decisions afterwards through monitoring of outcomes and financial targets.
The most suitable approach will depend on the key resources and synergies that can be shared across portfolio of businesses.
Resource Allocation
Every year headquarters must decide how to spread its investments across the portfolio of different businesses. Resource allocation is the most important tool that headquarters has to influence the businesses.
Financial perspective
We give more funding to business with higher returns and less funding to the business with lower returns.
Uncertainty perspective
This is a common problem, we are deciding on investments where some of the costs are known upfront, but the returns in the future are unknown. This is a classic tradeoff called exploitation and exploration.
| Exploitation | Making investments in businesses we know well and closely related to our current portfolio. |
| Exploration | Making investments in businesses we don’t know so well, but which may turn out to be next big win. |
The best known resource allocation model is BCG matrix (Boston Consulting Group). The basic advice is you need a balanced portfolio.
| Market growth: high | Question Mark ensure your growth is satisfied in the future. | Star they have high growth and you are well positioned. |
| Market growth: low | Dog not needed | Cash Cow give you funding for the future growth. |
| Market share: low | Market share: high |
The key idea is you want to invest now in some businesses that will give you a high return in the future.
Social perspective
The consequence of unfair allocation would be losing motivation and suffered business performance. It is important to remember we invest in people not just projects. People have feelings and will react if the allocation is deemed unfair. Many successful corporate strategies rely on collaboration. Their is a tendency towards equal allocation.
Synergy perspective
When the return of a business depends not only on how much it gets, but also on how much other businesses get, the synergies exist between these businesses. Synergies are important to corporate advantage and resource allocation, but it is absent from the main framework of resource allocation, for example BCG matrix does not mention synergies at all. An investment in one business does not affect the return of other businesses. More over the classification of businesses in that framework rely on the concept of business strategy (i.e. industry attractiveness and competitive advantage in that industry). The classification did not review the synergies between businesses. Synergistic portfolio framework is designed to address this problem.
Synergistic portfolio framework
The framework contains 2 axis: Incoming benefit and outgoing benefit.
| Incoming benefit | how much does this business gain / lose from belonging to this portfolio |
| Outgoing benefit | how much do the other businesses gain / lose from the presence of this business |
Synergies for a business is the sum of the incoming and outgoing benefits. By dividing the coordinates using the diagonal, there are six categories:
| Incoming benefit | Outgoing benefit | |
| Fits | + | + |
| Givers | – (above diagonal) | + |
| Altruists | – (below diagonal) | + |
| Misfits | – | – |
| Takers | + (above diagonal) | – |
| Parasites | + (below diagonal) | – |
If you want corporate advantage, invest in categories above the diagonal: Fits, Givers, and Takers.
In order to find the incoming and outgoing benefits for each business, compare the current situation with the situation where we would divest the business through a spin-off.
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