BUSINESS POLICY AND CORPORATE STRATEGY
“The theory’s central management insight is about how a company can create value through
the configuration and coordination of its multibusiness activities”
Business policy refers to the roles and responsibilities of top-level management, the
significant issues affecting company-wide performance and the decisions affecting companies
in the long run. Corporate strategy is the strategy developed and implemented to the goals set
by the company’s business policy. As a company-wide strategy, corporate strategy is
concerned primarily with answering the question “what set of businesses should the company
be in?” and should be distinguished from business strategy, which focuses on answering the
question “how to build a sustainable competitive advantage in specific business or market?”
More specifically, corporate strategy can be defined as the way a company creates value
through the configuration and coordination of its multibusiness activities. As such, the subject
of corporate strategy is the diversified multibusiness corporation. In this entry we first
describe the content of a theory of corporate strategy, then we present the evolution of
corporate strategy, and we conclude with a discussion of the importance of a theory of
corporate strategy.
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From an academic point of view (as opposed to a more managerial or practical point of view),
the main objective of a theory of corporate strategy is to understand why do such
multibusiness firms exist and what is the relationship between diversification and
performance. The question of why multibusiness firms exist is particularly important because
the neoclassical theory of the firm assumes the sole existence of single-business firms
operating in near perfect markets and competitive equilibrium. The existence of profitable
multibusiness firms in the real world challenges this assumption. Therefore, the reasons of the
existence of multibusiness firms require specific theoretical developments. It is also critical
for a theory of corporate strategy to explain how the multibusiness firms create value at the
corporate level that cannot be created by neoclassical single-business firms or shareholders
investing in single-business firms. Such a theory should also explain the roles of corporate
headquarters in managing multiple businesses and corporate resources. Thus, corporate
strategy has implications for corporate governance and the control of the work of managers. A
considerable body of theory has evolved within the disciplines of strategy, economics,
finance, marketing, organization theory, and international business that have salient
implications for the management of corporate strategies.
Academic interest in developing a theory of corporate strategy has been continuously growing
since the raise of multibusiness firms at the beginning of the 20th century. If multibusiness
firms were almost unknown in 1900, it is today the dominant type of organizations for the
conduct of business activities. In the United States, about 60 percent of economic output is
undertaken by multibusiness firms. The percentage is similar in Western Europe, while
specific forms of multibusiness firms, such as Keiretsu in Japan and Chaebols on Korea, are
also ubiquitous in other parts of the world. To understand the role of these multibusiness firms
and develop a theory of corporate strategy, academic research has emphasized three sets of
issues: First, the determinant of firm scope: why is it that some firms are highly specialized in
what they do while others embrace a wide range of products, markets, and activities? Second,
what is the linkage between scope and performance? Third, what are the implications of this
linkage for the management of multibusiness firms in terms of organizational structure,
management systems, and leadership?
The most comprehensive framework presenting the key elements of a theory of corporate
strategy has been outlined by David Collis and Cynthia Montgomery. They argue that
multibusiness firms exist because they create corporate advantage by aligning four elements:
a corporate vision about the goals and objectives of the firm. This vision is, then,
implemented based on the firm’s stock of resources and portfolio of businesses. In addition,
the implementation of the corporate vision and its alignment with the firm’s resources and
businesses should be configured and coordinated through a set of corporate structure, systems,
and processes defining the roles of the corporate headquarters. When these four elements—
vision, resources, business, and roles of the headquarters—fit together shareholder value is
created that cannot be duplicated by financial investors on their own, providing a corporate
advantage to the multibusiness firm.
In this framework, nicknamed the corporate strategy triangle by the authors, corporate vision
refers to the definition of the domain of the firm’s activities and is primarily concerned with
establishing the boundaries of the firm. The corporate vision should address the question:
What set of businesses should we be in? The vision should also outline a set of corporate
goals and objectives pertaining to the choice of the firm’s main corporate value-creation
mechanisms. Michael Porter proposed a classification of four generic mechanisms—sharing
resources between businesses, transferring core competences across businesses, creating an
efficient internal capital market through portfolio management, restructuring—that should
provide the multibusiness firm with a corporate advantage.
Resources constitute the most critical building blocks of corporate strategy, because they
determine not what a firm wants to do but what it can do. This is, resources determine in
which businesses the firm can have sustainable competitive advantage. By sharing and
transferring resources across related business, the firm can achieve synergies and economies
of scope, sources of corporate advantage. Moreover, the presence of excess resources that are
mobile and fungible provides an incentive for the firm’s diversification, as well as a direction
for its diversification strategy (which businesses can we enter?).
Businesses refer to the industries or markets in which the firm operates. The composition of
the firm’s portfolio of businesses is critical for the implementation of the corporate vision and
the long-term success of its corporate strategy. The firm’s business portfolio influences the
extant to which it can share resources across businesses or transfer skills and competencies
from one business to the other, as these value creating mechanisms require businesses to be
related. Alternatively, the firm could invest in unrelated businesses to spread risk or move
away from declining industries. In addition, the realization of an efficient internal capital
market and the implementation of a restructuring strategy require businesses to be somewhat
unrelated to lead to a corporate advantage.
To implement a corporate strategy or corporate value creation mechanism, the firm’s
headquarters plays an important role in coordinating and configuring the activities of the
businesses. The corporate headquarters influences business units’ decisions through the firm’s
organizational structure, systems, and processes. However, the extant of the involvement of
the corporate headquarters in the activities of its business units should depend on the
corporate vision, the resources the firm possesses, and the level of relatedness between its
businesses, this is what Michael Goold and colleagues call a firm’s parenting style. The
headquarters should minimize its involvement and delegate most operational decisions to
business units, making them as independent as possible to spread risk and minimize overhead
costs; alternatively, it can play an important role in the business units’ decision-making
process to increase coordination across business units in order to force collaboration to
achieve a corporate advantage through synergies.
The theory of corporate strategy does not suggest that there should be a single best corporate
strategy to create a corporate advantage. Quite the opposite, there exist various strategies that
are equally profitable despite the fact that they are based on various combinations of the four
elements of the corporate strategy triangle. Several theoretical perspectives have been used to
justify the value creation potential of these different combinations: Industrial organization
theory, transaction cost theory, agency theory, the dominant logic, the resource-based view,
strategic contingency and institutional theories, and real option theory. These theoretical
perspectives provide the building blocks necessary to explain connections between the
elements of the corporate strategy triangle.
From a theoretical point of view, multibusiness firms can exist for many reasons. Principally,
a diversification strategy helps increase the firm’s corporate value by improving its overall
performance, through economies of scope or increase revenues, which is why single-business
firms seek to diversify their activities into related and unrelated businesses. Some firms also
diversify to gain market power relative to competitors, often through vertical integration or
mutual forbearance. However, other reasons for a firm to diversify its activities may have
nothing to do with increasing the firm’s value. Diversification could have neutral effects on a
firm corporate advantage, increase coordination and control costs, or even reduce a firm’s
revenues and shareholder value. These reasons pertain to diversification undertaken to match
and thereby neutralize a competitor’s market power, as well as diversification to expand the
firm’s portfolio of businesses to increase managerial compensation or reduce managerial
employment risk, leading to agency problems. Incentives to diversify come from both the
external environment and a firm’s internal environment. External incentives include antitrust
regulations and tax laws, whereas internal incentives include poor performance, uncertain
future cash flows, and the pursuit of synergy and reduced risk for the firm. Although a firm
may have incentives to diversify, it also must possess the resources and capabilities to create
corporate value through diversification.
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In the mid 1960s, corporate strategy was defined by Kenneth Andrew as “the pattern of
objectives, purposes, or goals, stated in such a way as to define what business the company is
or is to be in and the kind of company it is or is to be.” Following this definition, he argued
that the choice of the business(es) the company is or is to be should be based on the twin
appraisals of the company external and internal environments. An internal appraisal of
strengths and weaknesses of the company should lead to the identification of distinctive
competencies; and external appraisal of the threats and opportunities from the external
environment should lead to the identification of potential success factors. However, the
corporate strategy of multibusiness firms has undergone enormous change in the last 50 years,
affecting both their scope and their organizational structure. The merger and acquisition
(M&As) booms in the 1960s and 1980s extended the scope of multibusiness firms, often to
the point where corporate value was destroyed by excessive coordination costs and
unprofitable use of free cash flows. A emphasis on profitability and the creation of
shareholder value became prevalent in response to the economic downturns and interest rate
spikes of 1974–76, 1980–82, and 1989–91, which exposed the inadequate profitability of
many large, diversified firms. Increased pressure from shareholders and financial markets,
including a new breed of institutional investors (e.g., pension funds), led to the rise of
shareholder activism and a stricter control of managers’ diversification activities. In the
1990s, capital market pressures forced many diversified firms to reassess their business
portfolios, the involvement of their headquarters, and the way they coordinated and
configured their multimarket activities. For example, a swath of chief executive officers
(CEO) firings in the early 1990s highlighted the increasing power of corporate board
members. An even bigger threat to incumbent management was the use of debt financing by
corporate raiders and leveraged buyout (LBO) associations in their effort to acquire and then
restructure underperforming firms. The lesson to other poorly performing multibusiness firms
was clear: Restructure voluntarily and de-diversify or have it done to you through a hostile
takeover. As a result of this shareholder pressure, corporate managers increasingly focused
their attention on the stock market valuation of their firm. The dominant trends of the last two
decades of the twentieth century were downsizing and refocusing. Large diversified firms
reduced both their product scope by refocusing on their core businesses, and their vertical
scope, through outsourcing. Reductions in vertical integration through outsourcing involved
not just greater vertical specialization but also a redefinition of vertical relationships. The new
vertical partnerships typically involve long-term relational alliances that avoid most of the
bureaucracy and administrative inflexibility associated with vertical integration. The
narrowed corporate scope also has been apparent in firms’ retreat from product
diversification. More recently, new collaborative structures, such as joint ventures, strategic
alliances, and franchising, have become more popular.
Mirroring these changes in firms’ corporate strategy, the theoretical lenses and normative
prescriptions for corporate strategy theory have evolved over time. From an emphasis on
financial performance in the 1960s, through managing the corporation as a portfolio of
strategic business units and searching for synergy between them in the 1970s; to the emphasis
on free cash flow and shareholder value in the 1980s; then to the refocusing on core
competencies in the 1990s; and finally the industry restructuring in the beginning of the
twenty-first century, corporate strategy theory has continued to change and become more
sophisticated. In the beginning of the twenty-first century, the development and exploitation
of organizational capability has become a central theme in strategy research. The recognition
has dawned that a strategy of exploiting linkages (i.e., relatedness) across different business
sectors does not necessarily require diversification and that a wide variety of strategic
alliances and other synergistic relationships might exploit economies of scope across
independent firms.
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The theory of corporate strategy does not only have enthusiastic supporters, skeptics have
questioned its importance and relevance, arguing that corporate strategy does not matter. This
view largely stems from empirical results derived from a series of early variance
decomposition studies that identified negligible corporate effects associated with profitability
differences between firms. However, more recently, scholars have reassessed with more
sophisticate techniques the relative importance of industry, business, and corporate factors in
determining profitability differences between firms and found that corporate strategy account
for between 8.2 and 23.7 percent of performance differences. These recent results
demonstrate that corporate strategy does matter.
Another critic of the theory of corporate strategy is its overreliance on economic theories,
such as agency and transaction costs theories, and shareholder value as its ultimate yardstick
to measure the success of corporate strategy. These critics argue that these economic theories
rely on a key, but also controversial, assumption of managerial opportunism. For example,
these economic theories assume that managers are often opportunistic and only motivated by
self-interest; but this assumption has been subject to frequent challenges. Some scholars hold
that most managers actually are highly responsible stewards of the assets they control and do
not behave opportunistically. With this alternative view of managers’ motives, they propose a
stewardship theory, according to which shareholders should install more flexible corporate
governance systems to avoid frustrating their benevolent managers with unnecessary and
costly bureaucratic controls. The assumption of managerial opportunism has also important
implications in the way firms interact with their strategic partners and how headquarters
control business units’ managers.
By focusing on shareholder value, corporate strategy theory also takes a narrow view on
corporate responsibilities. Stakeholder theory broadens this view by arguing that firms and
their managers are responsible not only to their shareholders but to a larger group of
stakeholders. However, when multiple stakeholders’ interests represent ends to be pursued,
managers must make corporate strategic decisions that balance these multiple goals rather
than just maximize shareholder value. The stakeholder theory of corporate strategy, in turn,
proposes that managers’ goals should be developed in collaboration with a diverse group of
internal and external stakeholders, even if they support potentially conflicting claims.
However, if the number of stakeholders to whom firms and managers are accountable
increases, the scope of a firm’s corporate responsibilities also increases. It has been argued
that not one but four types of corporate social responsibilities exist: economic, legal, ethical,
and philanthropic. Multibusiness firms’ managers’ strategic choices therefore must reflect a
compromise between various considerations—of which shareholder value is just one.
These recent developments still need to be incorporated into a comprehensive theory of
corporate strategy. Such a theory should start to relax some of the main assumptions the
economic theory of corporate strategy, such as managerial opportunism and shareholder value
maximization. Mitigating the idea that every manager is opportunistic would require that a
comprehensive theory of corporate strategy should build on the developments of stewardship
theory. Relaxing the assumption that the ultimate goal of a corporate strategy and managers’
sole responsibility is the maximization of shareholder value would require a comprehensive
theory of corporate strategy to broaden its perspective to accommodate multiple stakeholders.
Finally, expanding firms’ corporate responsibilities from making a profit to encompass
broader economic, social, and environmental responsibilities would also require new
theoretical developments for a theory of corporate strategy.
In this entry, we presented the theory of corporate strategy and its key components. We
establish that corporate strategy encompasses decisions, guided by a vision and more specific
goals and objectives, about the scope of the firms in terms of their businesses, resources, and
the leveraging of those resources across businesses, as well as the role of corporate
headquarters for the organizational structure, systems, and processes. There is no single best
corporate-level strategy; rather, many value-creating corporate strategies can be developed
based on different configurations of the various components of corporate strategy. Firms’
corporate strategies and their theoretical rationales have evolved over time in response to the
pressures of the firm’s external as well as internal environments. Diversification is one of the
main elements of corporate strategy, such that a firm’s level of diversification influences its
performance and that corporate strategy matters. However, a theory of corporate strategy
encompass more than the link between diversification and performance. A theory of corporate
strategy also incorporate or influence a theory of the growth of the firm, a theory of the
organizational structure of the firm, a theory of multipoint competition, as well as a theory of
corporate governance.
-- Olivier Furrer
See also:
BCG Growth Matrix; Business Groups; Diversification Strategy; Matrix Structure; Resource
Based View of the Firm; Strategy and Structure; Transaction Cost Theory.
Further Readings:
1. Andrews, K.A. (1971). The Concept of Corporate Strategy. Burr Ridge, IL: Dow-JonesIrwin.
2. Chandler, A. D., Jr. (1962). Strategy and structure. Cambridge, MA: MIT Press.
3. Chandler, A. D., Jr. (1990). Scale and scope. Cambridge, MA: Harvard University Press.
4. Collis, D. J., & Montgomery C. A. (2005). Corporate strategy: A resource-based
approach. 2nd ed. Boston, MA: McGraw-Hill/Irwin.
5. Furrer, O. (2011). Corporate level strategy: Theory and applications. London and New
York: Routledge.
6. Furrer, O., Thomas, H., & Goussevskaia, A. (2007). The structure and evolution of the
strategic management field: A content analysis of 26 years of strategic management
research International Journal of Management Reviews, 10, 1–23.
7. Goold, M., Campbell, A., & Alexander, M. (1994). Corporate-level strategy: Creating
value in the multibusiness company. New York: John Wiley & Sons.
8. Grant, R. M. (2002). Corporate strategy: Managing scope and strategy content. In A
Pettigrew, H. Thomas, & R. Whittington (eds.), Handbook of Strategy and Management,
London: Sage, 72–97.
9. Porter, M. E. (1987). From competitive advantage to corporate strategy. Harvard Business
Review, 65, 42–59.
10. Rumelt, R. P. (1974). Strategy, structure and economic performance. Cambridge, MA:
Harvard University Press.
11. Teece, D. J. (1982). Toward an economic theory of the multiproduct firm. Journal of
Economic Behavior and Organization, 3, 39–63.