Corporate strategies, portfolio choices, and management memes add value and drive business process improvements over time.
Jacob Miramar

2020-08-19 10:32:00 Wed ET

Corporate strategies, portfolio choices, and management memes add value and drive business process improvements over time.

Andrew Campbell, Jo Whitehead, Marcus Alexander, and Michael Goold (2014)

 

Strategy for the corporate level: where to invest, what to cut back, and how to grow organizations with multiple business divisions

 

Most corporate strategies aim to add value to the business organization. Business builders, lean CEOs, and disruptive innovators strive to develop both portfolio and management strategies. The portfolio strategy helps select business opportunities, and the management strategy helps coordinate the major business processes for business leaders and their team members to pursue these business opportunities. Most portfolio choices rely on human logic and judgment. These choices relate to the core business processes, blue-ocean markets, or geographic locations for key investment decisions. Moreover, these portfolio choices depend on business logic, economic value creation, and capital valuation. The main mantra of most business opportunities empowers most business leaders to serve as venture capitalists and investors who buy low and sell high from time to time. The business organization should take every competitive advantage to maximize net profits and shareholder returns by purchasing below book value and then selling above market value most kinds of new niche business operations.

Most corporate strategies often provide attractive business opportunities, and core financial cash streams support key corporate investment decisions. All prospective deals must align well with core corporate strategies. At the same time, fundamental factors and financial considerations must strengthen the business logic, economic value creation, and capital valuation for these prospective deals. In a fundamental view, both strategic and financial considerations must come into play when senior business leaders and decision-makers assess and evaluate prospective business deals and opportunities.

 

We can learn actionable business insights from Built to Last and Good to Great.

The combination of both portfolio choices and management memes can contribute to most corporate strategies. This logic echoes the long-term empirical analysis of Built to Last and Good to Great elite corporations by Stanford management authors Jim Collins and Jerry Porras. After the transition from average to extraordinary, the great companies tend to generate cumulative stock returns that beat most market benchmarks by at least 7 times in 15 years. This stock return outperformance turns out to be better than twice the stock return on a composite index of elite companies such as Coca-Cola, Intel, GE, and Merck. This long-term empirical analysis is quite special because Collins and Porras focus on the distinctive characteristics of great elite corporations but not just the common characteristics of these great companies.

In other words, Collins and Porras discuss the distinct characteristics of only a few great corporations as these distinct characteristics only prevail among these great companies (not average and even good companies). These distinct characteristics include servant-leadership, meticulous selection of team members, the Stockdale paradox, the hedgehog concept of 3 circles (i.e. passions, core competencies, and rare but valuable resources), a positive culture of systemic discipline, and flywheel compound interest. The prevalent thread suggests that the business organization often needs to re-assess how senior business leaders and decision-makers strive to leverage rare resources, core competences, and team passions to offer the best products and services at the right time in the right place in a cost-effective manner (whereas, most other average and even good companies cannot).

 

  1. Servant-leaders are humble to act in the best interests of the great corporation in accordance with their good will, determination, and perseverance.

 

  1. Most senior business leaders and decision-makers need to get the right people on the bus and then figure out the right direction. (Sometimes it can benefit the whole team for the right people to wear multi-hats in different seats on the bus).

 

  1. The Stockdale paradox suggests that most business leaders must confront the brutal facts. At the same time, however, these business leaders and their team members must never give up hope.

 

  1. The hedgehog concept of 3 circles combines passions, competencies, and rare but valuable resources into both key portfolio choices and management memes.

 

  1. Business leaders, their special advisors, senior specialists, and other individual contributors need to sustain a positive team culture of systemic discipline. (For instance, if the senior management team sets double sales revenue as the next 5-year goal, all team members strive to achieve 20% business growth per year in the next 5 years. Consistent incremental progress trumps sudden eureka.)

 

  1. Once the company attains a sufficient technology threshold for better business growth, business leaders and their team members focus on the core hedgehog without having to fixate on technology diffusion and proliferation.

 

 

The recent 50-year history offers 4 schools of thought for corporate strategies.

Over the past 50 years, there have been 4 primary schools of thought for corporate strategies. These schools of thought include the professional management school, the portfolio mix school, the corporate synergy school, and the capital school. First, the professional management school supports multiple business functions within one great elite company. Senior business leaders and decision-makers often need to possess superior management skills. Business growth arises from fast decisive expansion into blue ocean markets where the extant senior management team has to recruit external advisors and senior specialists in order to make wiser business decisions over time.

Second, the portfolio mix school suggests that most companies should maintain a reasonable mix of business units. These business units can include both large and mature departments as well as lean startups. Their long-term strategic goal should focus on delivering both cash profitability and business growth over time.

Third, the corporate synergy school delves into the creative combination of multiple business units that leverage synergistic relations to boost key overall performance. Scale economies often result from corporate mergers and acquisitions of business operations. Scope economies often arise from the pervasive fact that both special advisors and senior specialists share institutional knowledge with team members. At the same time, both scale and scope economies can result from subject matter expertise that the business organization derives from external consultants. Overall, these organizational synergies help boost both shareholder wealth maximization and stakeholder value maximization.

Fourth, the capital school focuses on the core principle of buying low-cost business units and then overpricing these business units for sale. Capital strategists tend to leverage the resale of business units for financial gains. From time to time, this key capital school often relies on extractive institutions (instead of inclusive institutions) for immediate cash rewards. Sometimes this myopic mentality fits into the broader business context of both longer-term corporate strategies and considerations.

Corporate strategy formulation requires a significant amount of economic value as the central aim of most elite companies that strive to own multiple business units. Economic value creation often tends to drive most corporate investment decisions. Most corporate strategies often provide attractive business opportunities, and core financial cash streams support key corporate investment decisions. All prospective deals must align well with core corporate strategies. At the same time, fundamental factors and financial considerations must strengthen the business logic, economic value creation, and capital valuation for these prospective deals.

 

Economic value creation should drive most corporate investment portfolio choices.

Economic value creation serves as the primary motivation behind all the corporate investment portfolio decisions. Key business leaders, their special advisors, senior specialists, and most other team members must boost proprietary asset utilization in order to expand the business faster with higher prices in a cost-effective manner. The heartland matrix often helps with economic value assessment and evaluation. The heartland is the best position where the business organization can extract high value with minimal risk of economic value erosion. In comparison, the alien territory creates low economic value with high risk of value diversion. The ballast presents both low economic value and low risk of value erosion. Further, the value trap has high potential for both economic value creation and risky value diversion. Overall, business leaders and decision-makers must design sound corporate strategies to maximize economic value creation in the form of sustainably high profits and cash flows. In time, the business organization can invest these cash streams in the next expansion into less competitive blue-ocean markets.

 

Vertical economic value creation often occurs within the internal business structure:

 

  1. Selecting the most competent managers can often be one of the most important personnel decisions for better economic value creation.

 

  1. It is essential for most business leaders and decision-makers to set both ideal and realistic business targets for better synergistic team work.

 

  1. Both business leaders and middle managers must design a consistent powerful performance evaluation process.

 

  1. Both business leaders and middle managers must set most corporate policies and standards in all areas of core business operations.

 

  1. Both business leaders and middle managers should build robust relations with key stakeholders such as customers, suppliers, employees, venture capitalists, outside blockholders, other shareholders, and regulators.

 

  1. Corporate headquarters must provide sufficient technology to support business operations for individual business units and key functions across business units.

 

  1. Corporate headquarters must draw from external consultants and specialists to contribute subject matter expertise that would not be available to business units.

 

  1. Both business leaders and middle managers must design a cohesive corporate brand that epitomizes the business organization with its market niche.

 

 

Horizontal economic value creation often occurs across core business units:

 

  1. Corporate headquarters must help core business units share customers across different blue-ocean markets.

 

  1. Corporate headquarters must promote products and services for core business units to cross-sell at reasonably high prices in a cost-effective manner.

 

  1. Corporate headquarters must strive to attain both scale and scope economies with lower average costs and near-zero marginal costs (especially in corporate procurement and purchase decisions).

 

  1. Corporate headquarters must share rare valuable resources such as technical capabilities, locations, brands, and distribution channels etc.

 

  1. Corporate headquarters must coordinate cross-divisional strategies to improve competitive moats and first-mover advantages.

 

  1. Corporate headquarters must link up and down the global value chain to create better lean solutions in the form of lower waste and excess inventory.

 

  1. Corporate headquarters must share with core business units most institutional knowledge for better standardization.

 

  1. Corporate headquarters should combine valuable resources and investments to enter new blue-ocean markets with few risks, costs, and other obstacles etc.

 

 

Both corporate headquarters and business units must identify attractive business opportunities for economic value creation via people, synergies, and resources etc.

Corporate headquarters must work with business units to identify rare but valuable business opportunities for economic value creation. The business organization can often extract new value from cross-functional people, synergies, and resources etc. Business managers and decision-makers often identify opportunities for economic value creation with both bottom-up and top-down approaches.

With most bottom-up approaches, business management teams must develop lists of tasks that help optimize business unit performance. Middle managers must seek to complete these tasks with little intervention, technical help, or strategic guidance from corporate headquarters. If such business units or middle managers need help from corporate headquarters, key business leaders and decision-makers can have the opportunity to add economic value with actionable long-term strategic insights. From time to time, key business leaders, middle managers, senior specialists, and most other team members can identify new opportunities for better economic value creation by applying institutional knowledge to ferret out common pitfalls, mistakes, failures, setbacks, and obstacles etc. This institutional knowledge shines fresh light on the specific technical deficiencies such that most team members can focus on their unique distinctive capabilities, core competences, competitive moats, and first mover advantages. In light of the technical deficiencies, the business organization either outsources key technical tasks or recruits external consultants to bridge the knowledge gap. Over time, the business organization can seek to develop internal competencies and capabilities to help bridge the knowledge gap with little reliance on external forces. At this stage, business leaders and senior specialists empower most team members to embed these prior technical tasks as part of the institutional knowledge. Iterative continual improvements become both important and possible in this bottom-up way.

With top-down approaches, corporate headquarters can identify new opportunities for better economic value creation through several ways. Corporate headquarters can drive synergies with lower average overhead costs across business divisions. Also, corporate headquarters can establish the long-run objectives and key results (OKRs) to help improve divisional team performance management and evaluation. When push comes to shove, corporate headquarters should strive to improve core personnel decisions (because key people are often the most important proprietary assets within the business organization). Overall, both business leaders and senior specialists must offer prescient actionable strategic insights and tactical guidelines for better business operations and divisional team workflows.

 

In some integrative organizations such as Apple and Google, business leaders and decision-makers choose to blur the fine line between corporate headquarters and divisional business units. In these integrative organizations, business leaders often manage the business organization as a unique cohesive portfolio of business units that report to corporate headquarters on a regular basis. Corporate strategies can drive business-unit investment choices, management practices, and key personnel decisions etc. Moreover, integrative business leaders listen to divisional concerns, issues, customer demands, and so on. This unique institutional knowledge proves to be valuable when business-unit middle managers offer the right product choices and service innovations at the right time in the right place. By focusing on economic value creation, integrative business leaders and decision-makers provide logic for both top-down and bottom-up strategic moat management decisions.

 

The integrative business organization can focus on the lean lessons that business leaders can learn from 20+ years of consultancy experiences at McKinsey, Boston Consulting Group (BCG), and London Business School etc:

 

  1. Both business-unit middle managers and senior leaders should invest sufficient time and energy in identifying the main sources of economic value creation.

 

  1. Integrative business leaders must build these main sources of economic value creation into corporate investment portfolio decisions.

 

  1. Corporate headquarters and business units require close team collaboration to re-assess the main sources of economic value creation on a regular basis.

 

  1. Integrative business leaders must better coordinate central business processes and personnel resources for good governance and compliance.

 

  1. Integrative business leaders must identify attractive opportunities for corporate headquarters to add economic value to most synergistic business units.

 

  1. Integrative business leaders must often communicate strategic design through organizational charts, team work streams, and functional action plans etc.

 

  1. Integrative business leaders must retain an active interest in new professional skill development across most synergistic business units.

 

  1. Integrative business leaders should appoint new business leaders and partners to initiate corporate culture changes across most synergistic business units.

 

  1. The new business-unit middle managers lead by example, transfer institutional knowledge to most team members and other subject matter experts, and then follow up with both periodic positive comments, issues, or concerns in response to corporate headquarters. 

 

 

Most corporate strategies aim to add value to the business organization. Business builders, lean CEOs, and disruptive innovators strive to develop both portfolio and management strategies. The portfolio strategy helps select business opportunities, and the management strategy helps coordinate the major business processes for business leaders and their team members to pursue these business opportunities. Most portfolio choices rely on human logic and judgment. These choices relate to the core business processes, blue-ocean markets, or geographic locations for key investment decisions. Moreover, these portfolio choices depend on business logic, economic value creation, and capital valuation. The main mantra of most business opportunities empowers most business leaders to serve as venture capitalists and investors who buy low and sell high from time to time. The business organization should take every competitive advantage to maximize net profits and shareholder returns by purchasing below book value and then selling above market value most kinds of new niche business operations.

Most corporate strategies often provide attractive business opportunities, and core financial cash streams support key corporate investment decisions. All prospective deals must align well with core corporate strategies. At the same time, fundamental factors and financial considerations must strengthen the business logic, economic value creation, and capital valuation for these prospective deals. In a fundamental view, both strategic and financial considerations must come into play when senior business leaders and decision-makers assess and evaluate prospective business deals and opportunities.

Corporate strategy formulation requires a significant amount of economic value as the central aim of most elite companies that strive to own multiple business units. Economic value creation often tends to drive most corporate investment decisions. Most corporate strategies often provide attractive business opportunities, and core financial cash streams support key corporate investment decisions. All prospective deals must align well with core corporate strategies. At the same time, fundamental factors and financial considerations must strengthen the business logic, economic value creation, and capital valuation for these prospective deals.

 

 

This analytic essay cannot constitute any form of financial advice, analyst opinion, recommendation, or endorsement. We refrain from engaging in financial advisory services, and we seek to offer our analytic insights into the latest economic trends, stock market topics, investment memes, personal finance tools, and other self-help inspirations. Our proprietary alpha investment algorithmic system helps enrich our AYA fintech network platform as a new social community for stock market investors: https://ayafintech.network.

We share and circulate these informative posts and essays with hyperlinks through our blogs, podcasts, emails, social media channels, and patent specifications. Our goal is to help promote better financial literacy, inclusion, and freedom of the global general public. While we make a conscious effort to optimize our global reach, this optimization retains our current focus on the American stock market.

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We hope you enjoy the substantive content of this essay! AYA!

 

Andy Yeh

Chief Financial Architect (CFA) and Financial Risk Manager (FRM)

Brass Ring International Density Enterprise (BRIDE) © 

 

 

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