Does Corporate Strategy Still Matter?Posted: October 23, 2011
Teppo recently asked us whether the fundamental questions of strategy have changed since Rumelt, Schendel & Teece’s classic work. Relatedly, Mike wondered if strategy has lost sight of foundational questions and is now ceding territory to Economists.
One critical shift has been away from corporate strategy (multi-business firms and M&A). To an extent, this was fueled by debates over whether industry matters (see classic articles by Rumelt and McGahan and Porter) as well as the rise of the resource-based view. Lost in the shuffle were the prospects for corporate strategy research…
This has practical implications. I’m about to begin a module on corporate strategy (can you tell it’s my teaching semester) and this question looms large. I need to justify to my students why, given miniscule corporate effects, I am spending so much time on this topic. I think it points to a fundamental flaw in the way some of this research has been interpreted.
Consider McGahan and Porter’s finding that the corporate parent effect is a paltry 4% — hardly worth our time, perhaps. This means that in a very small number of cases, all of a firm’s business units seem to perform better (or worse) presumably due to the management of the corporate headquarters. This logic works fine if the HQ has already worked it’s magic on the business units (like GE selling off any units that fail to be #1 or #2 in their industries).
What if the portfolio includes units that are in various stages of transformation as the HQ applies their capabilities? In this case, variance decomposition methods would ascribe much of the variance to the business unit level but that might vastly understate the actual contribution of corporate capabilities. Indeed, very few theories of corporate value would lead us to expect that all units would simultaneously out-perform their competition. As new businesses are acquired, operational synergies are sought or inefficient businesses are transformed. At any given time, the portfolio should include great variance in performance.
Selection bias may be a problem as well. If a firm acquires under-performing firms and increases operational efficiency, a common strategy would be to sell off the best performing units and use the cash to repeat the cycle. The best performers are systematically culled and our research methods may lead us to conclude that corporate parents are not adding value.
Despite hundreds of COMPUSTAT-driven diversification studies, there is still much to learn. Looking around us, it should be clear that firms continue to struggle with corporate strategy problems. We continue to see some firms splitting off into smaller units even as others bulk up with unrelated diversification. Consider Netflix’s recent decision to split the company only to reverse itself a few weeks later. And what’s with HP anyway?
All this points to a need to return to this fundamental, but unanswered, question. What would a new research agenda for corporate strategy look like in a post variance decomposition world?