Corporate strategy: Central or divisional?

It is already common for corporations to be comprised of a number of divisions, each focusing on a specialized task. A corporation structured this way is deemed to be more organized and productive. However, more often than not communication between divisions, or rather the lack of it, can be a quite a challenge. Despite this, corporate managements are used to implementing an all-encompassing strategy. It compels the divisions to work with each other through creating shared services.

According to Freek Vereulen of Harvard Business Review, who is an Associate Professor of Strategic & International Management at the London Business School and an expert on the topic of growth, this corporate strategy is a fool’s errand. He says that there is really no need to synergize all these divisions under one corporation. However, he acknowledges that there must of course be a rationale for this. The rationale is indeed simple. When companies flourish, they tend to venture to related business areas.

As Vermeulen gives the example, a firm may have the tendency to eventually expand from steel to engineering products because they require steel, then soon into engineering services, and may even establish a reputation in elevators, prompting the corporation to create another division for that task. Although under one corporation, what these divisions do, are actually independent of each other – having their own management teams and operations. Vermeulen adds that corporations also have the initial idea that when the divisions are grouped together, they yield greater value, making it easier also for investors to diversify across different kinds of businesses as they can customize them to suit their own needs. This is consequently the main rationale behind the corporate mindset that there is a need for a joint strategy and joint synergies.

With this strategizing habit, Vermeulen has come to view the value and role of a corporate top management differently. For him, corporations should not be the ones setting the strategy for “they simply exist as investment vehicles” and the strategizing is a task for senior executives. Thus, Vermeulen, in his article “Corporate Strategy is a Fool’s Errand”, discusses the roles he sees for the executives.

Firstly, he thinks that corporate executives should be portfolio managers. They should know the business well – have an in-depth understanding of the business’ strategies and competitive advantages and be capable of seeing details that external investors overlook. The second role of executives is that of a board of directors, although the executive should be better informed and aware. The executive should have thorough insight in the business’ inner operations, make sure that funds are utilized appropriately and that strategies are set right. The last role is the corporate top management’s capability to provide funds and become an in-house bank. Although other parties also have a prerogative in this matter, we all know that everything makes it easier for those who are on top. Besides the speed in allocation, executives also have the needed information to identify potential targets, thus being able to make money easily available for investors.

Vermeulen may be right in his assumption that overarching corporate strategy is not the only option for corporations. However, as long as a corporation is aware of its purpose and advantage and the roles of corporate top management are well-played, then maybe it does not really matter if it is a central or divisional strategy.

Knut Harald Nylænde is the founder and incumbent Chief Executive Officer of Moxie AS, an investments group based in Oslo. In his several years of business and management consulting experience, Knut has demonstrated his capacity to manage and run several companies at a time.