Corporate and Business Strategy Compared: Where and How to Win

Corporate strategy answers which activities to be in. Business strategy answers how to win in the one already occupied. The two questions split by what is being asked, never by size or seniority. One act can be both: paying Rs 21,00,000/- for 70 per cent of a binding workshop added a second activity and bought the stage that had been setting the rate for the whole works, and the same rupees did both jobs.

One business, one year, more spent and less earned. What actually happened?

Definitions can wait. The definitions only earn their keep once something sits in front of the reader that refuses to fit in one box. So a business comes first. Anjani Stationers Private Limited, invented for these notes and trading nowhere, makes hard bound registers. Two years of its figures follow, both of them for the business on its own, and the second year is the one that gives everybody trouble.

Read the second row and the fifth row together and the year stops looking like a puzzle. The business sold more. The business kept the same share of every rupee of sales after the costs that rise and fall with volume. The contributionWhat is left out of a year's sales once the costs that rise and fall with volume have been taken off. Contribution is the pot that everything standing still has to be paid out of. margin barely moved, 42.75 per cent then 42.78 per cent. And it still reported less. The whole of the difference sits in the standing baseThe part of a year's cost that stays where it is whatever the volume. Rent, salaries and insurance sit here, and the total is the same whether the works runs flat out or half empty.. The standing base rose by more than the extra contribution the year earned.

The year closes on its own arithmetic rather than on anybody's word for it. Contribution rose Rs 12,90,000/-. The standing base rose Rs 24,40,000/-. Take the first from the second and Rs 11,50,000/- is left. The fall in operating profit is exactly that, to the rupee, with no residue left over for any other cause. Nothing else happened to this business's year that the accounts cannot see. No price collapsed, no material got dearer, nothing was written off.

Now the second half of the same twelve months, and this is the part that turns a set of figures into a decision. At the start of its second year Anjani Stationers paid Rs 21,00,000/- in cash for 70 per cent of Chitra Binding Works Private Limited. Chitra's identifiable net assetsEverything a business holds that can be named and measured on its own, less everything it owes, valued as at the day somebody buys into it. on that day were Rs 25,00,000/-, of which the 70 per cent bought was Rs 17,50,000/-, so the goodwillThe amount left over once every asset and every liability that could be named has been named and measured. Goodwill is arrived at by subtraction, and it is not a measure of anybody having paid too much. that appears in the accounts is Rs 3,50,000/-. The founder keeps the other 30 per cent. Anjani Stationers appoints the majority of its board.

So here is the year in one breath. A business took on Rs 24,40,000/- of new standing cost, sold Rs 30,00,000/- more, earned Rs 12,90,000/- more contribution, reported Rs 11,50,000/- less operating profit, and bought into the workshop carrying out one stage of its own line. A commitment and its result sit on different clocks, so a year read on its own settles nothing about the decision. The cost of a commitment lands the moment it is made. The commitment was made before the revenue it hoped for was known, so whatever it was aimed at cannot possibly land in the same twelve months.

A household rents a second room in March for work that needs the space. In October it takes on the second job the room was meant to make possible. By December the year is worse. Nothing about the reason for taking the room has changed. Anybody in that household would say so, and would be baffled at being told the room was a mistake because of a number in December.

So what separates a corporate strategy question from a business strategy question?

Most readers arrive with a ladder in their head. Corporate strategy on top, larger sums, signed higher up. Business strategy underneath, smaller, operational, delegated. The ladder feels tidy. A ladder also forces a choice of rung, and the payment above sits on two rungs at once. The confusion comes from there and from nowhere else.

The split is by which question is being answered, never by size, by spend or by who signed it. The first question is which activities the business should be in. The first question is answered by entering an activity, by leaving one, or by holding on to the ones already run for another year. The second question is how it wins in the one it is in. The second question is answered by what a business does to its own price, its own costs, its own line or its own buyers.

Keeping the two questions apart buys a reader something worth setting out. The first question says whether the shape of the business changed, meaning what it actually does for a living. The second says whether its position inside an activity changed, meaning how well it does that thing against everybody else doing it. Shape and position are read off different published figures. Keeping the two apart is worth the trouble for that reason alone.

Somebody runs a tea stall. Deciding whether to keep running one stall or open a second in the next lane is the first question. Deciding whether to replace the burner that has been slowing the first stall down all year is the second. Nobody at the stall would call one of those decisions senior to the other. The two decisions are simply about different things, and the money involved settles nothing about which is which.

Can one act answer both questions at once?

The same Rs 21,00,000/- answered both questions, and a reader who files it under one has lost the other. That is worth earning twice rather than asserting once, so read the same purchase from each side in turn.

Read as a which-activities decision, it is plain. Before the purchase this business ran one activity, making registers. Afterwards it ran two. A binding workshop is a business in its own right, with its own customers and its own books. Year one carried no investment line, no goodwill and no outside share, so the group appeared in year two rather than having always been there.

Read as a how-to-compete decision, it is just as plain, but one operating fact has to be known first. The works runs three stages at published rates: cutting 150 an hour, printing 125, binding 100. A line of stages running one after another makes what its slowest stage makes, so the works makes 100 an hour and binding is the stage setting the rate for everything upstream of it. Binding is precisely the stage that had been setting the rate, so the purchase stops being corporate news and starts being an operating decision.

Say the honest thing straight after, in the open, before anybody gets comfortable. The fit is not a verdict. The same year’s operating profit fell Rs 11,50,000/-. Both statements are published and both are true, and presenting the fit as proof the decision was right quietly converts a description into advice.

What did the commitment cost, and what can anybody actually see?

The Rs 24,40,000/- is the honest centre of the year. The rise comes down to six words: people, space, and a binding operation the business bought into. Three things named. Not one of them is priced. The accounts carry no line that prices them.

A second treatment, working the same two years from the costs side, supplies a split, and it supplies it with a label welded on. Employee benefits rose Rs 6,00,000/-. The fixed part of other operating costs rose Rs 11,40,000/-, mostly a second warehouse taken during the year. Depreciation and amortisation rose Rs 7,00,000/- on the assets bought. The three limbs sum to Rs 24,40,000/- exactly, and the label carried with them reads that the split is an estimate, not a disclosure. A figure and its label are one object, and separating them manufactures a disclosure nobody ever made. The label travels with the figure or the figure does not travel.

Two treatments in these notes therefore say different-sounding things and do not contradict each other at all. One says, truly, that the accounts carry no line stating what the rise was spent on. The other supplies an estimate and calls it one, equally truly. The components are on the face of the statement even though the split is not, so both hold at the same time. An estimate that says so is better evidence than a disclosure that is missing, and the label is what makes it so.

One line is worth not crossing. The third limb of that estimate is depreciation on assets bought. The third thing named in the six-word list is a binding operation the business bought into. Buying a shareholding for cash creates no depreciation in this business’s own accounts at all. The depreciation limb and the binding operation are not the same item, and neither maps onto the other. Two lists of three that happen to be the same length are still two lists.

A shopkeeper can say the rent bill went up by a known amount, to the rupee. The rise comes straight off the bank statement. Asked how much of the rise came from the new back room rather than from the renewal on the front, the honest answer is a considered estimate, said out loud to be one. The shopkeeper is not being evasive. The gap between the two answers is the gap between what is settled and what is inferred.

What is Conglomerate Diversification, and what can a reader outside test about it?

Push the first of the two strategy questions to its edge and conglomerate diversification appears: which activities to be in, answered by entering an activity that shares no stage, no input and no buyer with the ones already run. Nothing carries over. The new activity is not upstream, not downstream and not alongside; it is simply another thing the same holders now hold.

What conglomerate diversification removes is the whole point, and the removal is the teaching rather than an aside. With no shared stage there is nothing for an operating fit test to stand on. Whether the new activity helps the old one run better has no published evidence behind it at all. Not weak evidence. None. A reader outside can still add the two revenues together and can still read two sets of costs, and neither of those tells them anything about fit.

What this business actually did stands against that, and the contrast can be drawn for exactly that reason. Anjani Stationers bought the stage inside its own line. The fit test therefore had somewhere to stand, and its result is on the record. The published evidence allows the fit test to be run in one direction and not in the other, and saying so is the finding rather than the gap.

Somebody who runs a bakery buys the flour mill that supplies it. Ask whether the mill helps the bakery and there are things to look at: what the bakery was paying, how often it waited for flour, what the mill can turn out. The same person buys a scooter repair shop across town instead. Ask the same question about the scooter shop and nothing joins the two. There is nothing to look at. The two directions worked against each other in full, and what a discount attached to an unrelated collection of activities means, are covered separately under Horizontal vs Conglomerate Diversification and in the material on valuing one business against another.

How Corporate Strategy Affects a Company’s Business Mix: where does the second activity show up?

In general the question becomes a slogan, so answer it about the business in front of the reader. Anjani Stationers' mix moved from one activity to two in a single year, and the accounts show the mix only on the consolidated set. Name the basis in the same breath as the figure every single time, or print nothing. Two readers looking at two bases, neither of them saying which, is a conversation that cannot end.

On its own, this business reports revenue of Rs 2,70,00,000/- for the second year, one activity, and no investment line at all in the year before. For the group, the consolidated statementsOne set of accounts covering a parent and the businesses it controls, presented as though the group were a single business rather than several. report revenue of Rs 2,95,00,000/-. The group figure is the standalone one plus Chitra Binding Works' own Rs 40,00,000/-, less Rs 15,00,000/- of binding billed from one side of the line to the other and never out of it. Cancelling that intercompany billingAmounts one part of a group charges another part. The charges cancel on the group’s own set. Nothing actually left the group when they were raised. leaves profit untouched.

The rest of the group line comes from the material that built it. Profit for the group is Rs 40,00,000/-, of which Rs 37,00,000/- is attributable to this business's own shareholders and Rs 3,00,000/- to the non-controlling interestThe slice of a controlled business that belongs to holders outside the parent, shown separately so a reader can see whose share of the profit is whose., being the 30 per cent the founder kept. A mix is something a reader sees only on the basis that was drawn to show it, and choosing the basis is part of reading the strategy rather than a step before it.

The next question is a real one and it belongs elsewhere. The effect of those two revenue figures on a growth rate a reader will actually read is covered separately under Organic and Inorganic Growth Compared: One Year, Two Rates. Both rates sit there side by side with the basis attached to each.

How to Analyse a Company’s Strategy: which four steps run on published accounts?

The four steps are a reading procedure, not a checklist of virtues. The procedure runs on what a business publishes, in order, and it ends where the evidence ends. Here are the four steps with this business's own answers filled in beside them.

Step one, find the commitment and size it. What did the business take on that it did not have to, and how large is that against what it already carried? Here, the standing base rose Rs 24,40,000/-, or 49.19 per cent on a base of Rs 49,60,000/-, and a shareholding was bought for Rs 21,00,000/- in cash. Two commitments, two quantities, and step one already forces a statement of what each one is a quantity of.

Step two, name which question it answered, and accept both answers where both are true. Here both are true. Step three, say what the accounts settle and what they merely name. They settle the totals to the rupee and they settle that a group appeared in the second year. The accounts do not settle what any limb of the standing base rise was for, and the one split available is stamped an estimate rather than a disclosure.

Step four, say when it would be known, and this is the step readers skip. The commitment was aimed at a stage that had been holding the whole line, so the evidence that would settle it is what the line makes afterwards and what those registers sell for. One year of published figures is one observation. A procedure that ends in a verdict has skipped step four.

Judging a new oven by one week's bread does not judge the oven. One week’s bread measures one week. Everybody accepts that about an oven and almost nobody accepts it about a set of accounts. Accounts are the harder case of the two.

What is Investment Research, and where does reading a company stop short of it?

Investment research is defined by its output. The method is largely shared, and defining it by method leads nowhere. Reading a company asks what a business is and what it did, and it is finished when the evidence is set out. Research aimed at a decision asks what should be done about it at a price, and it is not finished until a conclusion is attached to it.

Reading a company can stop at the first, and stopping is a position rather than an omission. A reading that stops there produces no target for a share price, no fair value, no rating and no recommendation.

Everything above says what was committed, what it cost, the question it answered and what the accounts settle. None of it says whether anybody should do anything. The step from a described commitment to an instruction needs a price and a holder, and neither has appeared. The two outputs separated in full, and what each one is allowed to conclude, are covered separately under Company Research vs Investment Research: Where They Part.

When would it be known whether the choice was any good?

Put a second business beside the first, one year each, and let the asymmetry do the work rather than hiding it. Anjani Stationers carries a standing base at 27.41 per cent of its revenue and stands 35.93 per cent clear of the revenue that base needs before anything is left over. Setu Bazaar, invented for these notes and trading nowhere, carries a standing base at 62.50 per cent of its revenue, needs 62,500 buyers, counts 50,000, and is therefore 20.00 per cent short of the volume its own standing base needs. Setu Bazaar reports an operating result of minus Rs 2,50,00,000/- and an operating marginThe operating result written as a share of the year's sales, so two years of different size can be set beside each other without one of them looking larger simply for being larger. of minus 12.50 per cent.

Both businesses committed to a standing base ahead of the revenue that would carry it, one stands above its line and one below it, and neither fact is a verdict on either decision. The reason is the whole lesson. One of them carries two published years and the other carries one, so Setu Bazaar is a state and never a movement, with nothing anywhere to say that it did something and then something changed.

One act is one observation. A reader who has watched one commitment through one year has learned the shape of the question and nothing at all about how often the answer comes out either way.