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Global Advisors | Quantified Strategy Consulting

corporate strategy
Term: Business Unit Strategy

Term: Business Unit Strategy

Business Unit Strategy, as described by Richard Koch, focuses on how a single business or division within a larger corporation achieves and sustains competitive advantage within a specific, well-defined market or “arena” (a product-market segment). This level of strategy is about winning in one particular space, rather than deciding which spaces to play in.

Key Elements of Business Unit Strategy (per Koch):

  • Arena-Specific: Business unit strategy operates within the boundaries of a particular product, service, or customer group—what Koch calls an “arena”.
  • Competitive Advantage Focus: It is centrally concerned with how a business beats competitors. Koch identifies two principal sources:
    • Cost Leadership: Supplying a comparable product at a lower price and cost than rivals.
    • Differentiation: Offering a product that is more useful, easier to use, or more aesthetically pleasing than competitors’ products.
  • Simplicity and Scale: Koch emphasizes that both cost and differentiation advantages are often achieved by having a product that is simpler and produced at a larger scale than rivals.
  • Market Share in Context: The value of market share is only meaningful when assessed in the context of the specific arena relative to competition, often within highly specialized or niche markets.
  • Resource Deployment: At the business unit level, strategy dictates how to deploy resources and capabilities to maximize success in the chosen arena.
 

Business Unit vs. Corporate Strategy (per Koch):

 
Business Unit Strategy
Corporate Strategy
Scope
Single market or arena (product-market segment)
Multi-business, deciding “where to play” as an organization
Key Question
How do we win here?
Which arenas/markets should we be in?
Focus
Achieving and sustaining competitive advantage against rivals
Portfolio management; value creation across businesses
Basis
Cost leadership or differentiation within the market
Allocation of resources and synergies across units

Richard Koch asserts that the heart of any firm is the product-market segment(s) where it holds or can hold a distinctive edge, whether through cost or uniqueness, and that “strategy” at this level is about defending and growing that advantage.

In summary, business unit strategy is about how to compete and win within a chosen market, whereas corporate strategy is about deciding which markets or businesses to be in and optimizing the whole portfolio for maximum value. Koch’s work draws on the importance of focusing efforts—guided by the 80/20 principle—on those few arenas where success is most likely and most valuable.

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Term: Corporate Strategy

Term: Corporate Strategy

Corporate strategy, as outlined by Richard Koch, refers to the overarching plan and direction for a multi-business organization, focusing on where the firm should compete and what kinds of businesses it should own or enter. This type of strategy is concerned with the selection and management of a portfolio of business units, industries, or product-market segments, and the allocation of resources among them. Koch emphasizes that corporate strategy is about understanding and choosing the arenas in which a firm operates, especially in cases where multiple distinct business areas are involved.

Related theorist: Richard Koch

Corporate strategy asks questions such as:

  • In which markets or industries should the company operate?
  • How should resources be allocated among business units?
  • How should the businesses be structured to maximize overall value and competitiveness?

It focuses on creating value through synergies, developing core competencies shared across units, and ensuring that the whole organization delivers more value than the sum of its parts.

Business Unit Strategy vs. Corporate Strategy (as per Koch)

 
Corporate Strategy
Business Unit Strategy
Scope
Multi-business, multi-industry; whole corporation
Single business or product-market segment
Focus
Where to compete (which arenas/businesses)
How to compete (within a chosen arena/business)
Key Questions
What businesses should we own? How do we manage the portfolio? What is the right mix for overall advantage?
How do we win in our chosen market/industry? What is our source of competitive advantage?
Resource Allocation
Allocates capital and resources across business units and functions
Deploys resources to maximize advantage within a specific unit or market
Value Creation
Pursues synergies, portfolio optimization, and leveraging core capabilities across units
Pursues cost leadership, differentiation, or focus strategies for competitive edge in a defined arena

Koch stresses that, at the business unit level, strategy centers on achieving competitive advantage within a specific product-market segment or arena—by either being the lowest-cost producer or by offering a product that is markedly more attractive to customers than competitors’ offerings. In contrast, corporate strategy is about identifying and managing the “few arenas” (businesses) that generate the most value, and ensuring they work together to deliver superior results for the corporation as a whole.

“At the heart of a firm is one or more product-market segments or arenas in which it operates. If the firm operates in several arenas, one of them, or a few, will supply most or all the cash and profit the firm generates… In these few arenas, which are the intersection of the product and a similar group of customers, the firm has competitive advantage.”
— Richard Koch.

In summary, corporate strategy is about the selection and management of a portfolio of businesses to create overall value, whereas business unit strategy is about achieving and sustaining competitive advantage in a chosen market or segment. Koch’s distinction makes it clear: corporate strategy sets the direction for the whole enterprise; business unit strategy wins the battle in each chosen arena.

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Fast Fact: Some of your business segments are destroying value – which?

Fast Fact: Some of your business segments are destroying value – which?

By Stuart Graham

Key insights

We often see uncertainty in our clients about whether to focus on RONA or growth. While both are obviously important, which will create the greatest value for their companies and shareholders?

We introduced the market-cap curve to help answer this question by plotting the well-known valuation equation for combinations of RONA and growth at a constant valuation.

RONA / growth combinations along the curve preserve the company valuation. Combinations above the curve increase the valuation and combinations below the curve decrease the valuation.

It is easy to see from the graph that companies with high RONA and low growth will benefit more from growth improvements while companies with low RONA and high growth will benefit more from RONA improvements.

The market capitalisation curve provides a useful boundary for capital allocation when business segment performance are plotted against the curve.

ANY performance improvement of ANY business unit raises the aggregate performance and therefore moves the curve outwards – i.e. increases company value.

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Strategy Tools: Growth, Profit or Returns?

Strategy Tools: Growth, Profit or Returns?

By Stuart Graham and Marc Wilson

Stuart is a manager and Marc is a partner at Global Advisors.
Both are based in Johannesburg, South Africa.

Growth, profit or returns? It’s all three, however we find that the relationship between these and shareholder value creation is poorly understood – if at all.

All three measures become critical to the way forward as companies navigate the Covid-19 crisis.

After ensuring business survival, navigating through the Covid-19 crisis requires returns on invested capital AND growth to deliver shareholder returns. S&P 500 companies averaged 13% RONA and 5% revenue growth (CAGR) through the financial crisis (2008-2012) .

Monolithic survival approaches may starve compensating growth opportunities – a portfolio approach is required.

Key insights

Returns are not enough – companies must also grow to create value.

Profits and cash flows cannot increase indefinitely through cost-reduction, efficiency, business mix, etc – top-line growth is critical.

Returns must be above costs of capital to be value accretive.

S&P 500 companies averaged 13% ROIC and 5% revenue growth (CAGR) through the financial crisis (2008-2012).

Margins and revenue growth, or even profit growth in themselves don’t answer that question of whether shareholder value was created or destroyed. There are many examples of where growth and high margins actually destroy value.

Company valuations reflect an aggregate of their business portfolio – rebalancing segments based on their growth and return profiles can lift company value.

Growth requires investment – at the very least in the working capital required to support revenue growth.

Measuring RONA or ROIC and Revenue growth shows whether business activity is value accretive or destructive.

You can use the Global Advisors Market Cap (valuation) framework to map your business – and agree action to deliver improved shareholder returns.

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Global Advisors | Quantified Strategy Consulting