Planning starts with vision and mission and concludes with setting goals and objectives. In-between is the critical role played by strategy. Specifically, a strategy captures and communicates how vision and mission will be achieved and which goals and objectives show that the organization is on the right path to achieving them.
At this point, even in terms of strategy formulation, there are two aspects of strategizing that you should recognize. The first, corporate strategy answers strategy questions related to “What business or businesses should we be in?” and “How does our business X help us compete in business Y, and vice versa?” In many ways, corporate strategy considers an organization to be a portfolio of businesses, resources, capabilities, or activities.
You are probably familiar with McDonald’s, for instance, and their ubiquitous golden arches fast-food outlets. However, you may be less likely to know that McDonald’s owned the slightly upscale burrito vendor Chipotle for several years as well.1Carpenter, M. A., & Sanders, W. G. (2008). Fast food chic? The Chipotle burrito. University of Wisconsin Business Case. The McDonald’s corporate strategy helped its managers evaluate and answer questions about whether it made sense for McDonald’s set of businesses to include different restaurants such as McDonald’s and Chipotle. While other food-service companies have multiple outlets—YUM! Brands, for example, owns Taco Bell, Pizza Hut, and Kentucky Fried Chicken—McDonald’s determined that one brand (McDonald’s) was a better strategy for it in the future, and sold off Chipotle in 2006. The following figure provides a graphic guide to this kind of planning.
The logic behind corporate strategy is one of synergy and diversification. That is, synergies arise when each of YUM! Brands food outlets does better because they have common ownership and can share valuable inputs into their businesses. Specifically, synergy exists when the interaction of two or more activities (such as those in a business) create a combined effect greater than the sum of their individual effects. The idea is that the combination of certain businesses is stronger than they would be individually because they either do things more cheaply or of higher quality as a result of their coordination under a common owner.
Diversification in contrast, is where an organization participates in multiple businesses that are in some way distinct from each other, as Taco Bell is from Pizza Hut, for instance. Just as with a portfolio of stock, the purpose of diversification is to spread out risk and opportunities over a larger set of businesses. Some may be high growth, some slow growth or declining; some may perform worse during recessions, while others perform better. Sometimes the businesses can be very different, such as when fashion sunglass maker Maui Jim diversified into property and casualty insurance through its merger with RLI Corporation. 2iRetrieved October 30, 2008, http://www.secinfo.com/dRqWm.89X3.htm#34fPerhaps more than a coincidence, RLI was founded some 60 years earlier as Replacement Lens International (later changed to its abbreviation, RLI, in line with its broader insurance products offerings), with the primary business of providing insurance for replacement contact lenses.
There are three major diversification strategies: (1) concentric diversification, where the new business produces products that are technically similar to the company’s current product but that appeal to a new consumer group; (2) horizontal diversification, where the new business produces products that are totally unrelated to the company’s current product but that appeal to the same consumer group; and (3) conglomerate diversification, where the new business produces products that are totally unrelated to the company’s current product and that appeal to an entirely new consumer group.
Whereas corporate strategy looks at an organization as a portfolio of things, business strategy focuses on how a given business needs to compete to be effective. Again, all organizations need strategies to survive and thrive. A neighborhood church, for instance, probably wants to serve existing members, build new membership, and, at the same time, raise surplus monies to help it with outreach activities. Its strategy would answer questions surrounding the accomplishment of these key objectives. In a for-profit company such as McDonald’s, its business strategy would help it keep existing customers, grow its business by moving into new markets and taking customers from competitors like Taco Bell and Burger King, and do all this at a profit level demanded by the stock market.
Management 2020 text remixed from multiple sources under a CC Attribution-NonCommercial-ShareAlike 4.0 International License. View a complete list of original sources.
