Corporate versus business-unit strategy: what the centre is for

A business-unit strategy answers how to win in a chosen market: which customers, what offer, why they choose you, and at what cost. A corporate strategy answers three different questions: which businesses to own, how much capital and attention each gets, and what the centre adds.

The last asks what the centre does that makes each business worth more than it would be on its own. Most groups have a set of business unit strategies and no corporate strategy. The "group strategy" is the unit plans stapled together with a cover page.

The two are different jobs, done by different people and judged by different tests. Confusing them produces a familiar shape. The head office second-guesses the units' operating decisions, and never decides which units it should have.

Two different questions

The business unit asks whether its offer is compelling to its target customers, and competitive against the alternatives. It asks whether its cost base is right for that offer, and which capabilities it leans on. Its strategic goal is competitive advantage, and its market is the customers it serves.

The centre asks different things. What businesses are we in, and should that change? How should the businesses relate to each other, if at all? Where should the next dollar of investment go? And how does the centre add value?

Its strategic goal is to own these businesses better than anyone else would. Its market is the market for the businesses themselves.

The confusion usually runs one way. Centres find business unit questions more interesting, because they are about customers and products. So they drift into answering them. Business unit leaders then stop owning their strategies. The corporate questions go unanswered, because everyone is busy with the business unit ones.

What corporate strategy is not

A vision or an aspiration for the group. A wish that the business units will grow. The annual operating decisions, or the year-to-year budget. A series of acquisitions and disposals with no theme connecting them. And a detailed organisation design.

All of these appear in group strategy documents in place of the three questions below.

The three corporate questions

Which businesses? The portfolio question. For each business, ask how attractive its industry is and how strong its position is. These are the same two axes as any where-to-play analysis, one level up. That sorts the businesses into ones to grow, ones to fix, ones to harvest and ones to exit.

Then comes a third question the unit cannot ask of itself: is this group the natural owner? Could another owner, with different skills, linkages or capital, extract more value from this business than we do? If so, the business is worth more to them than to us. Holding it destroys value, even if it is profitable.

Example: An industrial group owns a profitable services unit that shares no customers, suppliers or skills with the manufacturing businesses. The centre adds nothing to it beyond a treasury function. A services group would pay for it what it earns for us, plus the value of running it alongside their own. The unit is a good business with the wrong owner.

How much to each? Capital and senior attention are the centre's real levers. The enacted corporate strategy is where they went. A group that says its future is in one business and puts its capital into another has a corporate strategy of the second.

The three horizons do their work here, at group level. They sort the core that funds the rest, the businesses being built, and the options.

What does the centre add? Only four real answers exist.

It improves each business on its own, by appointing its leaders, setting its targets, and challenging its strategy. It creates links between businesses that they would not create themselves: shared customers, pooled buying, transferred skills. It runs shared services that cost less, or work better, than what the businesses could buy outside. Or it does corporate development: acquisitions, disposals and new ventures that no single unit could.

Each answer carries a question. How does a centre that spends a tenth of its time on a business improve on the people who spend all of theirs? Why have the units not already exploited the links out of self-interest? Can a group service beat an external specialist? If the centre cannot answer these for its own portfolio, it is a cost.

Cohesion: the unit pages nest under the group's

A group with a corporate strategy can show it on one page. The page shows the businesses it has chosen and the weight of investment across them. It also shows the links it is exploiting, and what the centre does. Under it sit the unit pages, each with its own where-to-play and how-to-win. Each is visibly consistent with the group's choices.

If a unit's page could belong to any parent, the group has not made its choices. If the group's page could describe any portfolio, it has not either.

Example: A family group holds a distribution business, a property portfolio and a minority stake in a software firm. Its group strategy document is three unit plans.

Asked the three questions, the family concludes that the property is an investment. The centre adds nothing to the software stake. The distribution business is the only one it is the natural owner of. The corporate strategy that emerges is one page, and most of it is about what to stop owning.

The five stages of clarity about where you can win

Clarity about where you can win is one of the practices in the advantage dimension of a Stages of Excellence strategy assessment. Read at the group level, the five stages describe a portfolio:

• Lagging: The business believes it can win everywhere it chooses to show up.
• Basic: Ability to win is asserted per market, not assessed.
• Competent: Attractiveness and ability-to-win are scored honestly by segment, and the weak quadrants are named.
• Advanced: The portfolio has been pruned to fights you can win with real exits from the rest.
• Leading: Where-to-play shifts as the ability-to-win evidence shifts, ahead of the P&L forcing it.

Most groups are at the second stage. Each unit's plan asserts it can win, and the centre has never scored them side by side.

Frequently asked questions

We are a single business. Does any of this apply? Only the discipline of separating the two kinds of question. A single business with several product lines or regions still has a small portfolio question. Which lines get the capital, and should any go?

Is a holding company a corporate strategy? Only if the holding company answers the third question. A centre that supplies capital and reads the monthly numbers is a shareholder.

The businesses would be worth the same with any other shareholder. The shareholder model is legitimate. It still falls short of a strategy, and it should not carry a head office cost.

When should a group sell a good business? When someone else is its natural owner. Another parent would earn more from it because of what they can add, and the group cannot match that. Profitability is not the test. Relative ability to add value is.

How big should the centre be? As big as the value it adds, and no bigger. Some centres cannot name which of the four sources of value they provide, or roughly what each is worth. For them, the right size is zero.

Who writes the corporate strategy? The people who own the three questions: the chief executive and the Board. Business unit leaders contribute. But a committee of unit leaders will write a corporate strategy that keeps and grows every unit.

• Does your group have a strategy, or a stapler? Take the check.
• The Stages of Excellence in strategy
• Where to play: how to diagnose markets