Corporate strategy and capital allocation determine which businesses you grow, which you harvest, which you fix or exit and where you take strategic investments to secure for future, profitable growth. These are some of the most important decisions taken at the corporate or holding company level. In the best case, wrong decisions at this level represent an opportunity cost; in the worst case, they destroy shareholder value.
As Figure 13.1 illustrates, corporate strategy, capital allocation and performance management represent a continuous cycle.
Actions on all three levels are necessary. Developing a long-term strategic vision while the underlying business flounders is a bit like Nero playing fiddle while Rome burned: it may provide some short-term intellectual stimulation, but the priorities are misplaced. Conversely, myopically focusing on the last basis point at the expense of strategic thinking may lead to top-quartile returns for many years but runs the risk of waking up like Rumpelstiltskin to a dramatically changed, increasingly unfamiliar market.
With this in mind, value managers need to be prepared to answer the following questions regarding corporate strategy.