Playing To Win

Corporate vs. Business Unit Strategy

The Art of Aggregation

Source: Roger L. Martin, 2022

I get a constant stream of questions about the difference between corporate and business unit (BU) strategy. They are indeed different. But there is an important nuance that goes beyond distinguishing between these two categories of strategy. That nuance is the subject of my 19th Year II Playing to Win/Practitioner Insights (PTW/PI) piece: Corporate vs Business Unit Strategy: The Art of Aggregation Strategy. You can find the 71 previous PTW/PI here.

The Important Nuance

Corporate strategy and BU strategy are indeed different. As one questioner opined, corporate strategy seems ‘squishier.’ And I would agree that Meta’s corporate strategy doesn’t sound as concrete and compelling as, say, Instagram’s strategy. There is a reason for that, which I will get into. But the difference is more nuanced than corporate strategy versus BU strategy. The real difference is between Indivisible Strategy and Aggregation Strategy. The reason why the nuance is important is that in any sizable company, there are multiple levels of aggregation. Corporate is just one such level.

Take P&G for example (because I know it well). P&G has a corporate strategy. P&G is an aggregation of a set of distinct businesses. Beauty Care belongs under P&G and has a strategy — as do its siblings at Baby Care, Laundry Care, Oral Care, etc. Hair Care belongs to Beauty — along with Skin Care and Deodorants. Shampoos & Conditioners (Shampoo for short) belongs under Hair Care — along with Styling Aids. Head & Shoulders belongs to Shampoo — along with Pantene and Herbal Essences. If P&G is ‘corporate,’ what is ‘BU?’ And whatever is defined as BU, what does that make the other levels in this stack?

What is the Indivisible Strategy Level?

The first question to answer is what is the base level for competition, what I think of as the Indivisible Strategy level? I characterize it as indivisible because you can’t usefully sub-divide the strategy any further because if you go another level down, the strategy of the parts at that lower level will be functionally identical to one another.

That is clearly not the case at the P&G level because competition in Beauty is dramatically different than in Laundry or Baby. They have different consumers, competitors, jobs to be done, manufacturing, raw materials, etc. It is not the Beauty level because Shampoo is very different than Skin Care. But it is not Shampoo either because Head & Shoulders strategy is very different from Pantene strategy. But what about Head & Shoulders? One level below are Head & Shoulders-branded variants such as Classic Clean, Itchy Scalp, Green Apple, etc.

While one could argue that because they aren’t entirely identical offerings, Classic Clean, Itchy Scalp and Green Apple have different strategies, for all practical purposes, Head & Shoulders is the Indivisible Strategy level. The Where-to-Play (WTP) across the variants is a narrowly defined territory and the How-to-Win (HTW) is nearly identical: the best active ingredient and the identical and most trusted brand name in the space — Head & Shoulders.

I would argue that Head & Shoulders is the level at which competition truly takes place. Head & Shoulders needs to have a better WTP/HTW combination than the competitors there — Selsun Blue, Neutrogena T/Gel, and Nizoral. Nothing can save Head & Shoulders if it doesn’t have a strong WTP/HTW in that competitive space. Probably few consumers even know that the products are made by P&G, Sanofi, J&J and Kramer Labs, respectively. And even if they did know that Head & Shoulders is made by P&G, that fact alone almost certainly would not cause them to select it over its competitors. What matters to the consumer is whether Head & Shoulders outcompetes Selsun Blue et al — or not.

In this way, for every company no matter how big and/or diversified, the fundamental building block of strategy is Indivisible Strategy. Without strong building blocks, no sturdy strategy can be assembled.

[Aside: There is a geographic dimension to this question as well because competition and therefore strategy is often different by geographic region. For example, in China, Head & Shoulders competes against a different competitive set (e.g., Unilever’s Clear shampoo plus local competitors) than in the US. There is an analogous question as to the indivisible level. Is it global, continental, national or regional? I will take up this dimension of strategy in next week’s piece.]

Aggregation Strategy

All levels above the Indivisible Strategy level are aggregations of multiple building blocks of strategy. Shampoo is an aggregation of the Head & Shoulders, Pantene, Herbal Essences, etc. building blocks. Each aggregation level needs a strategy as well, but the strategy questions are somewhat different. They still need to have a compelling WTP/HTW combination, but it is different than at the Indivisible Strategy level. At the Indivisible Strategy level, the WTP questions are what customers, products/services, geographies, and vertical stages and the HTW question is how will I achieve either a low-cost position or differentiation with my chosen customers versus competitors?

At each Aggregation Strategy level, the WTP question is: what portfolio of businesses with what weighting of investment across the portfolio will we choose to maintain? And the HTW question is: by what means will we seek to add competitive value to that portfolio of businesses. Back to Meta/Instagram, the Aggregation Strategy of Meta, which is about how it seeks to add value to its portfolio, is always going to sound ‘squishier’ than the strategy of Instagram to outcompete Snapchat, Tik Tok and its other image-sharing application competitors.

The differences between Indivisible Strategy and Aggregation Strategy are as shown in the illustration below:

Source: Roger L. Martin, 2022

This same set of questions applies at each level from the level immediately above the Indivisible Strategy Level all the way to the very top of the company in question — i.e., Shampoo and Hair Care and Beauty Care and P&G. For this reason, corporate strategy is not distinctively different than any of the other Aggregation Strategy levels. It just represents the highest level of aggregation.

Adding Value with Reinforcing Rods

Each level of aggregation automatically adds two categories of costs to the level below, starting with the Indivisible Strategy level. The first is the expenses that each aggregation level incurs, which in the end must be borne by the indivisible businesses, either in the form of cost allocations or higher profitability requirements out of which the aggregation costs are paid. The second is the cost of inflexibility. The businesses below can’t make important decisions without gaining the approval of the aggregation level above it.

Given that they inevitably impose these costs on the level below, each level’s Aggregation Strategy must identify and define a means of adding more competitive value to the level below than the costs it imposes. If it doesn’t, that aggregation level should not exist because the excess of costs imposed versus benefits added will make the indivisible businesses less competitive. And that is value destroying, if not deadly.

The mechanism that enables value added to be higher than costs imposed is a valuable competitive benefit which is made possible by having a portfolio of businesses versus just any one of them. I call these benefitsreinforcing rods. A concrete multi-story building will fall apart as it is built taller if each story is simply stacked one on top of the next. But it can enjoy the benefits of being a taller building (superior views, better use of underlying real estate) if steel reinforcing rods run through the concrete structure linking the stories. Without reinforcing rods, the building gets weaker as it grows taller. With reinforcing rods, the building can safely grow taller and increase in value.

While Aggregation Strategy doesn’t change the WTPs of the business below, it can strengthen their HTWs by enhancing the strength of their Must-Have Capabilities (MHC). Such enhanced MHC would enable the businesses below to provide value for their customers that they couldn’t do on their own, and/or enable them to provide value for their customers at a lower cost than would have otherwise been the case. The aggregated level is only able to do so because it has the breadth of businesses below it across which to spread the costs of developing and deploying the valuable MHC reinforcing rod.

There are many examples:

- Sharing a valuable distribution system as with Frito Lay in its snack business or Pfizer in its pharmaceutical business

- Providing a powerful brand name as with Mercedes Benz or BMW

- Sharing data as with American Express or Google

- Sharing consumer knowledge as with P&G

- Sharing manufacturing as with Boeing across commercial and military versions of aircraft

- Providing a valuable brand to another business as with L’Oréal Age Perfect skin care brand, which it provided to the cosmetics business when it was launched

- Providing technical knowledge, as with Apple reapplying web-rendering experience from its PC business to its smartphone launch.

In the P&G/Head & Shoulders example, it means Shampoo providing more scale-effective hair care R&D across its six major Hair Care brands. It means Beauty providing more proprietary consumer understanding across the entire Beauty businesses. It means P&G providing huge buying scale in advertising for Beauty (and all the rest of its businesses). In this way, Head & Shoulders is better off by being a part of Shampoo and Hair Care and Beauty Care and P&G. And P&G, Beauty Care, Hair Care and Shampoo are made better off by having the Head & Shoulders business.

None of the above activities will add the value imagined without Enabling Management Systems (EMS) for making sure that the value is delivered. Otherwise, it will be a fantasy — which is more the norm than the exception. At P&G there are EMS to make sure that powerful advantages can be transferred across businesses. In branding, there are advertising copy testing systems. In go-to-market, there are multi-functional customer teams that help individual businesses get better shelf-space and retailer support than they would if they went to market on their own. In R&D, there are product research techniques/processes that help businesses across the company better understand consumers and their needs. In commercialization of innovation, there are systems for blind testing of products to improve the chance of their success when launched.

Practitioner Insights

There are two fundamental kinds of strategy: Indivisible Strategy and Aggregation Strategy. You need to start by defining your indivisible businesses. These are the foundational building blocks of your strategy. Each one needs an Indivisible Strategy featuring, at its heart, a compelling WTP/HTW choice. Without that, nothing productive can be built on top of these foundational building blocks.

Then, you must insist that every level above must help the level below it by having an Aggregation Strategy which demonstrably produces greater competitive benefits to the level below than the costs it inevitably imposes. If it can’t do so, you must get rid of that aggregation level, which will strengthen competitiveness. If it can help some businesses in the level below it, but not others, you must get rid of the businesses below that it can’t help. Those businesses will be better off elsewhere. Instead of keeping businesses that you competitively harm, get rid of them and instead look to add businesses that you can competitively help.

Prune and expand ceaselessly and thoughtfully to ensure that you have winning Indivisible Strategies as well as Aggregation Strategies that augment and extend those wins. It is a back-and-forth process across the levels of the company that relentlessly improves the competitiveness of the entire enterprise.

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Roger Martin

Professor Roger Martin is a writer, strategy advisor and in 2017 was named the #1 management thinker in world. He is also former Dean of the Rotman School.