From Corporate Strategy to Corporate Theory

In the corporate environment, strategy is often synonymous with “sustainable competitive advantage”. Strategic analysis is about discovering and targeting attractive markets and then forming “positions” which can be occupied and defended; however Todd Zenger points out that “equity markets are full of companies with powerful positions and sluggish stock prices.” In “What is the Theory of Your Firm?” (June 2013 HBR) he asserts that companies should focus less on competitive advantage and more on growth that continues to create value. To do so he suggests considering what is your corporate theory – a reference point to organize assets, activities and resources in order to create value.

Here’s how to move from Corporate Strategy to Corporate Theory followed by further considerations (“et alors”).

From Corporate Strategy to Corporate Theory

The “occupy and defend a position” of corporate strategy should be reconsidered by instead focusing on a corporate theory whereby there is a “rulebook” (and/or a toolkit) for creating value. A good corporate theory requires three strategic “sights” which are:

Foresight

There must be good foresight about the industry’s future. Beliefs and expectations need to be fully “articulated”, but they need to be balanced: neither too generic nor too specific; and well communicated but still a unique offer. (Think Apple 1997-2011.)

Foresight highlights domains in which to search for cross-sight.

Insight

Corporate insight is needed to identify which unique internal capabilities (rare, distinctive and valuable) can optimize the future. If competing companies own identical assets and resources and replicate or surpass your activities, then your foresight might be undermined.

Insight focuses the search for foresight and cross-sight.

Cross-sight

Cross-sight is the key to see which assets can be configured to create value. Identifying “complementarities” is necessary to create value by assembling (or buying) assets that can be combined with existing ones to create value. (Think Disney…)

Cross-sight reveals valuable complementarities, highlighting the domain of foresight.

Et alors

In the article by Zenger, two words are often repeated: consistency and coherence. This is potentially what differentiates corporate strategy from corporate theory. The theory is upstream of the strategy and if well defined should mean that your subsequent strategies are coherent and consistent. The example of Disney is cited as a success story in the article. Disney had a good theory which was coherent and consistent (the foresight of fantasy family entertainment, the insight that design and animations were their key offers and cross-sight of combinations between parks, films, tv, comics and merchandise etc..). So even though it looked like they were diversifying, they were in fact coherent and consistent with their “theory”.  Any deviation from this tends to result in less success whether that is corporate failure (e.g. AT&T) or underperforming share price due to lack of growth prospects (e.g. Walmart). To have a theory, ask how you consistently and coherently create value!