04 The Role of Corporate Strategy

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“Those who are victorious plan effectively and change decisively. They are like a great river that maintains its course but adjusts its flow...they have form but are formless. They are skilled in both planning and adapting and need not fear the result of a thousand battles: for they win in advance, defeating those that have already lost.”

-Sun Tzu

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In practice, no business’ trajectory is as simple, or straightforward, as the strategies above suggest. That’s because businesses constantly face external challenges - such as changes to the addressable market, competitive dynamics, eroding market share, product disruptions - that can throw them off course. These don’t have to be threats either, many changes create opportunities for growth, if businesses can take advantage. In either case, managers face constant pressure to allocate capital in a way that moves the business to more valuable “possibility frontiers.” This is the goal of corporate strategy. 

Let’s start with what can “shift the curve” around valuation. Think back to the Growth-Share Matrix. Any factor that impacts growth rate or share can move a business to a higher or lower possibility frontier. Some are internal and the business can control (e.g., new product introduction, M&A); some are external and the business cannot control (e.g., macroeconomic conditions, competitive pressure). What ties them together is that these factors all impact expected future valuation. There are also myriad frameworks designed to identify these factors. Porter’s Five Forces, SWOT Analysis, PEST Analysis - the list goes on. But this isn’t designed to be a business school course. What’s important is how managers can respond. Let’s walk through a quick example:

Imagine an enterprise software company which has pursued a “growth at all costs” strategy. After years of double-digit growth, the market is reaching full adoption and growth is slowing, shifting this company to a lower valuation frontier (lower growth, equivalent share). Investors are also shifting their focus towards EBITDA, rewarding monetization in the top and bottom-line over net-new customers.

In response to these trends, a competitor recently made a large acquisition, opting to buy market share and consolidate its cost base. However, the company in question moved slowly, and interest rates have ticked up in the meantime, making financing an acquisition less attractive. It is also worried about continued market consolidation and the ensuing “war for customers,” so wants to keep some powder dry to focus on product enhancements and customer experience improvements. What options does this company have? 

Executives could still pursue an acquisition to increase share, but would have to redirect opex from growth-focused marketing and sales spend to offset the interest rate premium. They could also attempt to steal share by reducing price - i.e., a “loss-leader”-esque position - but risk shrinking EBITDA if they can’t balance “P times Q” or handle new customer volumes at scale. They could lean heavily into complementary products, moving beyond the core in search of new revenue, but that risks splitting their focus at a time when retention and expansion in the installed base is critical. If they’re lucky, previous investments in R&D - i.e., revolutionary product development - might have given them an ace-in-the-hole to supercharge growth and counteract market trends.. 

These imperfect options all reveal the importance of “container-izing” functional spend so the business can respond flexibly to new market and competitive dynamics. Removing spend from Marketing and Sales might be easy if the company has optimized the fixed vs variable costs of customer acquisition. Expanding revenue from existing customers might be easy if the company has balanced investment in evolutionary vs. revolutionary product development. Retaining the most valuable customers might be easy if the company has married up cost to acquire, cost to serve, and cost to retain in how it optimizes lifetime value. 

As we said at the outset, the goal of corporate strategy is to allocate capital in a way that moves the business towards more valuable “possibility frontiers.” To do this, managers need to container-ize functional spend according to the three fundamental strategies, and game-plan out how to quickly adapt from one “container” to another. If this seems daunting, remember that out of all the capabilities in the end-to-end value chain, only around ten percent are actually differentiated when executing on one of the three business strategies.