What is the MECE Framework – McKinsey Toolbox
In this post, we cover the MECE principle and how you can apply it to sharpen your thinking and simplify complex ideas into something that can easily be understood.
Dec 6, 2023
In this article, we will dive deeper into the topic of corporate strategy. Note that when we talk about “corporate strategy” we mean it in the same way that it is used by McKinsey, Bain, and BCG (see links for each firm's perspective on corporate strategy). Across all three firms, corporate strategy typically refers to the overall portfolio strategy that a diversified company can employ, whereas business level strategy refers to how you create and sustain a competitive advantage within a certain industry.
A diversified company is made up of a number of distinct businesses (or business units) as well as a corporate headquarter. These parts together form an enterprise.
Corporate strategy in a nutshell, has one single purpose: making sure the whole equals more than the sum of its parts.
In other words, the goal of a corporate strategy is to create a roadmap for sustained value creation across its entire portfolio. This means both enabling each business to fulfill its strategic potential and deciding where, when, and how to shift the entire portfolio in a new direction.
Corporate strategy goes by various names, such as portfolio strategy, organizational strategy, or simply company strategy.
In a standard organizational structure, business units (also called strategic business units) function as semi-autonomous entities, each focusing on its own markets, customer segments, and value propositions. These units collectively constitute the corporation and are coordinated by a central corporate head office. The degree of coordination depends on the type of corporate strategy you choose (see the section on Examples of corporate strategy further down).
Renowned strategy scholar Michael Porter defines corporate strategy as…
A diversified company has two levels of strategy: business unit (or competitive) strategy and corporate (or companywide) strategy. Competitive strategy concerns how to create competitive advantage in each of the businesses in which a company competes. Corporate strategy concerns two different questions: what businesses the corporation should be in and how the corporate office should manage the array of business units.
Corporate strategy is what makes the corporate whole add up to more than the sum of its business unit parts.
The corporate strategy serves as the all-encompassing strategy for the entire organization. It establishes boundaries and provides guidance for the strategies of individual business units. In addition, it allocates and coordinates resources across the group to both enable each strategic business unit to reach its full strategic potential, and to add or divest new businesses that will bring the entire organization to the next step of growth. Finally, a corporate strategy also lays out how to communicate to external stakeholders, especially with public companies where TSR and stock price are important factors.
Ideally, the corporate strategy comprises a set of objectives and actions designed to empower the group to generate value that exceeds the cumulative impact of its individual components.
The primary objective of a corporate strategy is to formulate a roadmap for consistently generating value throughout its entire portfolio.
There are five main elements of creating a corporate strategy:
First, your corporate strategy must state the overall mission, vision, and purpose of the organization. This serves to unify the organization and act as a directional tool when making choices on things like potential acquisitions, overall strategy, where to double-down on investments and innovations etc.
A good example of a corporate mission and purpose is Unilever. Even though they are a multinational conglomerate with over 400 brands in their portfolio, they still manage to articulate a unified purpose - “to make sustainable living commonplace” - that guides their strategy overall and the choices made on a day-to-day basis in each business unit and team.
In addition to a mission, vision, and purpose, the corporate strategy should also lay out some more tangible ambitions in terms of a target portfolio and qualitative and quantitative goals.
The quantitative goals are often externally or market-driven (depending if you are a public company) and should define what good looks like for the organization and thereby define what the full value creation potential is thought to be.
The qualitative goals are often more internally or company-driven and should articulate the key elements of the target portfolio as well as align and energize internal and external stakeholders.
When setting a unified vision and ambition in your corporate strategy ask yourself:
Second, your corporate strategy should include a review of your company’s entire portfolio of business units (or products/brands, depending on the way it is set up).
A portfolio review allows the organization to decide what to focus on, which industries and markets to compete in, how to diversify the company’s portfolio of products and services, etc. In its essence, the portfolio review allows you to identify the businesses or assets with the highest strategic potential, both stand-alone and as a part of the group, and their path to achieving this full potential.
In practice, the portfolio review means making difficult choices on where to acquire, divest, and transform the portfolio, and importantly, how to allocate resources at a high level across business units (i.e., which businesses do you invest in for innovation and growth versus which businesses should be optimized for efficiency and cash-maximization). Allocating resources is an element in itself (covered in the next section), but the portfolio review lays out the guide to which businesses or assets should receive resources.
To do a portfolio review, you need to have sufficient strategic insight into each business unit to understand their current potential, future opportunities or threats, and how to tackle them.
The strategic insight often comes from the business unit strategy, and the portfolio overview is then created in a matrix with one axis looking at the BU’s current ability-to-win or growth (internal) and the other axis looking at the BU’s market conditions and changes (external) (BCG’s Growth-Share matrix) and McKinsey’s GE matrix) are classic examples of a portfolio tool).
When making portfolio choices in your corporate strategy, ask yourself:
See our Business Strategy template for ready-to-use slides on both a portfolio overview and a business level strategy.
The third element of a corporate strategy is allocating resources, more specifically, making financial decisions on where and when to invest in new acquisitions or businesses, how to balance investments versus shareholder returns, how to allocate resources across different business units or product lines, etc.
In general, there are three main areas of financial choices for public companies:
A. Capital structure
The capital structure refers to the combination of debt and equity within a company. While diving deep into this subject is beyond our scope here, at the corporate strategy level, it is crucial to determine the funding allocation across the portfolio and establish financial guardrails for that funding. Factors such as shareholder payout requirements, preferred leverage levels, and risk tolerance often shape decisions in this regard.
B. Capital deployment
After establishing the allocated funding and corresponding guardrails, the corporate strategy must distribute this funding among portfolio businesses based on the outcomes of the portfolio review. This usually involves investments and acquisitions in businesses or assets with significant strategic potential, while simultaneously reducing costs through efficiency improvements and other optimizations in businesses that are closer to realizing their full potential.
C. Capital markets communication
For public companies or those with external stakeholders such as VC funds, the final aspect of your financial strategy involves encapsulating your various decisions within a compelling narrative. This narrative should align strategically with your overall strategy, ideally contributing to an increase in your external value.
When allocating resources in your corporate strategy ask yourself:
The fourth crucial element of an effective corporate strategy focuses on how the corporate entity can optimize the performance of each business unit, aiming to achieve a collective impact greater than the sum of the individual parts. The role or form that the corporate parent should take to achieve this needs to be considered in three main areas:
Best Portfolio Operator:
The portfolio operator aspect refers to the way the corporate parent can utilize the portfolio to create synergies that maximize the value creation across business units. This can be both across different value chain(s) and fostering collaboration between business units.
The best owner aspect refers to the corporate capabilities to capture value across current businesses and actively develop the portfolio through the integration of new businesses and shedding old assets. This can be in the form of both management and operating capabilities, as well as proprietary assets like brand or technology.
Best Culture Champion:
The best culture champion aspect refers to the ability of the corporate parent to create a shared mission and alignment across the portfolio and instill values and behaviors that serve to energize and mobilize talent across the organization.
The final component of a corporate strategy involves outlining a comprehensive roadmap for continuous value creation. The level of detail in this roadmap may vary depending on the extent of the corporate parent's involvement in each business unit strategy. However, a commonly recognized framework for such roadmaps is to divide them into three time horizons: short-term, medium-term, and long-term.
Different consulting houses use different terminologies for these horizons. BCG calls it Funding The Journey (short-term) and Winning in the Medium Term (medium-term) when talking about Digital Transformations. McKinsey has their famous Three Horizons of Growth that are similarly divided into the short-, medium-, and long-term. And Bain talks about Quick Hits, the 3-5 Year Plan, and Next-stage Thinking when discussing corporate strategy.
Common to all of them is the general concept of dividing your roadmap into a) immediate opportunities, b) bigger opportunities that need more work to realize, and c) long-term, transformational initiatives and ideas.
The first horizon a) is most often focused on quick wins or low-hanging fruit that can save cash or quickly increase revenues within existing products and services. These cash-generating initiatives help fund the bigger, longer-term initiatives.
The second horizon b) is most often centered around big opportunities to increase the enterprise value, e.g., through bigger innovations to products or business models. These opportunities typically need a time scale of 3-7 years before the return on investment becomes positive.
The third horizon c) is where you find the truly transformative opportunities and initiatives that will (if done right) future-proof the company beyond the foreseeable next few years. These opportunities can range from complete transformations of the corporate portfolio and overall purpose and business to a potential exit or handover strategy.
Every opportunity should be broken down into initiatives and actions, and then assembled into a coherent roadmap. The level of granularity in this roadmap tends to diminish as the timeline extends further into the future.
Depending on how the corporate parent is organized compared to business units, the roadmap will include more or less concrete elements for each business. It is important, however, that the corporate office sum up the efforts across portfolios and make sure any shared resources are not overextended.
When creating your corporate strategy roadmap, ask yourself:
There are many examples of corporate strategies. The most relevant way that we have come across to classify corporate strategy is the four-quadrant matrix approach by Donald Sull, Stefano Turconi, Charles Sull, and James Yoder in their MIT Sloan Management Review article “Four Logics of Corporate Strategy.”
Here, the they divide corporate strategy into four archetypes depending on the degree of connection between the business units and the corporate parent and the degree of connection between the business units themselves. This results in four types of corporate strategy:
A solid corporate strategy can lift the entire organization and each business unit up, and is integral to creating sustained competitive advantage as a whole.
However, it is an often overlooked discipline (see e.g., this article from McKinsey), and there are many mistakes that can be made along the way.
Here, we’ve gathered some of the most common mistakes we’ve seen:
However, if you’re aware of these common mistakes and make sure to include the five core components listed above, you’re well on your way to creating a solid corporate strategy.