Determinants and consequences of corporate development and strategy function size

Abstract

The corporate development and strategy function at headquarters is critical for contemporary firms’ strategy activities, yet we know little about its design and structure. We explore how firms determine the need for strategy resources at the corporate level and, thus, the corporate development and strategy function size, as well as the extent to which they benefit from this structural choice. Drawing on a survey of chief strategy officers from 105 large listed European firms, as well as archival data, our analysis indicates that (a) the number of corporate development and strategy function employees differs substantially across firms, suggesting distinct corporate development and strategy function types and economies of scale in the corporate development and strategy function; (b) environmental, strategic, and structural factors explain this variance; and (c) the corporate development and strategy function size is consequential for a firm’s performance, although one size does not fit all firms. Overall, the study highlights the importance of strategy professionals and functions for a firm’s strategy processes.

Keywords

chief strategy officers corporate development and strategy function corporate headquarters corporate strategy planning unit strategy department

Introduction

The contemporary corporation is characterized by a portfolio of diverse product and geographic operating units and a (structurally) separate corporate headquarters (CHQ) entity (Chandler, 1962, 1991; Collis et al., 2007; Menz et al., 2015). The CHQ plays a key role in economically justifying a firm’s presence in multiple businesses (Collis and Montgomery, 1998). Indeed, besides performing obligatory and shared services functions, the CHQ’s primary role is to create value for the overall firm (Chandler, 1991, 1962; Collis et al., 2007; Foss, 1997). To perform these activities, the CHQ hosts corporate executives and staff, as well as central functional units in areas such as finance and human resources (HR) (Menz et al., 2015), referred to as corporate functions (Campbell et al., 2012; Gospel and Sako, 2010; Kunisch et al., 2014).

Of all corporate functions, the most important is probably the one responsible for a firm’s corporate development and strategy. Indeed, early on, corporate-level planning was described as the core CHQ activity, since it “molds the shape of all other plans because it encompasses basic decisions for these plans” (Murdick, 1964: 37). The emergence of the corporate planning function dates to the 1950s, with Greenwood (1964) noting that “the trend toward formal LRP [long-range planning] since World War II has been accompanied by the formation of many special planning staffs at the corporate level of American business” (pp. 227–228). This function’s prevalence has since increased substantially. While an early survey revealed that 55% of large US firms had a centralized planning function in the late 1970s (Ang and Chua, 1979), a more recent study reported 94% in 1999 (Collis et al., 2007).

Initial field-based research has illustrated that in contemporary corporations, this corporate function is usually responsible for tasks relating to the firm’s strategy processes, which range from strategic analyses and planning to execution and corporate development activities, such as mergers and acquisitions (M&A) and alliances (Angwin et al., 2009; Breene et al., 2007; Kaplan and Norton, 2005; Menz et al., 2013). For instance, the Corporate Strategy Office of the US technology firm Cisco, led by senior vice president and chief strategy officer (CSO) Hilton Polanski, includes (a) “strategy development, planning, and execution,” (b) “acquisitions,” (c) “venture-type investments and investment-backed alliances,” and (d) the “corporate technology group” (Cisco, 2017). Another example is the Corporate Development function at the German logistics firm Deutsche Post DHL Group, which reports to the CEO and is responsible for “corporate strategic projects, strategic planning, corporate organization, and market research,” as well as “directly engaged in mergers and acquisitions” (Deutsche Post DHL Group, 2017). Thus, although this function has similar core responsibilities across large firms, it has different names, including corporate development, planning, and strategy, which we summarize here as the corporate development and strategy function (CDSF).

Owing to its involvement in a firm’s strategic decisions and its roles in coordinating and integrating other units, this function has a special position in the CHQ (Kaplan and Norton, 2005). While administrative functions are usually performed in the CHQ owing to potential scale economies and efficiency gains (Collis et al., 2007), corporate development and strategy as a key entrepreneurial function is presumed to contribute to a firm’s corporate advantage through superior capabilities and resources. For instance, in contrast to other value-adding corporate functions, such as marketing and research and development, corporate planning is one of the few functions that exists irrespective of a firm’s specific corporate strategy (Berg, 1973). Thus, this function provides a unique empirical setting to enhance our understanding of the CHQ’s value creation.

In light of the CDSF’s prevalence, multifaceted roles, and apparent importance, the lack of knowledge about this core CHQ function, particularly about its structure and design, motivated this study. As the sparse research indicates, firms make two main structural decisions concerning their CDSF. The first structural choice relates to the CDSF’s location in the organizational hierarchy. For instance, several field-based studies conclude that a close relationship between a firm’s strategy function and its CEO is important, ensuring sufficient resources and senior executives’ attention (Breene et al., 2007; Kaplan and Norton, 2005). Unsurprisingly, in the vast majority of firms, the strategy function reports directly to the CEO (Angwin et al., 2009; Menz et al., 2013). However, a recent large-scale study reveals that while a firm’s strategic and structural complexity affects the decision to have the CDSF’s head, the CSO, in the top management team (TMT), this decision alone does not impact performance (Menz and Scheef, 2014).

This finding suggests that a closer examination is required of the second structural choice, which relates to the CDSF’s workforce size. Interestingly, although early studies of the CDSF often refer to the function’s size as a key structural feature (e.g. Ang and Chua, 1979; Friedrich and Van’t Land, 1974; Litschert, 1967), this has not been substantiated. The few initial field-based studies indicate that choices regarding the CDSF’s structure and design affect its effectiveness, and that its strategy capabilities and information-processing capacities and, thus, its personnel resources, are particularly decisive (Breene et al., 2007; Kaplan and Norton, 2005; Menz et al., 2013).

In contrast to the CDSF’s hierarchical location, the function’s size appears to differ substantially across firms, ranging from small teams of two or three corporate strategists (Angwin et al., 2009) to departments with more than 50 employees (Grant, 2003). Some contemporary corporations have an even larger CDSF. For instance, the Group Strategy and Planning function of Germany’s largest bank, Deutsche Bank, employed about 70 professionals in 2011 (Deutsche Bank, 2012), and the Corporate Strategy Office of South Korea’s conglomerate Samsung had about 200 staff in early 2017 (Reuters, 2017), which is similar to Cisco’s approximately 200 corporate strategy staff in 2016 (Network World, 2016). This variance and the generally limited understanding of the CDSF have led to the questions of how firms determine how many people to employ in the CDSF and to what extent they benefit from this structural choice.

To analyze these questions, we opted for an exploratory empirical research approach. Such an approach, which focuses on identifying the facts and patterns in the data rather than testing formal hypotheses based on theory (Helfat, 2007; Oxley et al., 2010), is appropriate when relatively little is known about an interesting phenomenon and/or no theory can fully explain it (Hambrick, 2007). Using survey and archival data from 105 European firms, our study explores the extent to which environmental, strategic, and structural factors affect choices regarding the CDSF size and these decisions’ consequences. With our study, we extend early and more recent work in this area (e.g. Bazzaz and Grinyer, 1981; Javidan, 1987; Kaplan and Norton, 2005) and motivate future theory-testing studies. Thereby, we contribute more broadly to the understanding of corporate functions (Campbell et al., 2012; Kunisch et al., 2014) and the CHQ’s inner workings (Collis et al., 2007; Kleinbaum and Stuart, 2014; Menz et al., 2015).

Following Oxley et al.’s (2010) suggestions for a “just-the-facts” empirical approach, we describe the study’s method in the next section and then present its results. Finally, we discuss how the findings inform extant knowledge and future research on the CDSF.

Method

Owing to the lack of research on the CDSF, specifically its design and structure, we examined a comprehensive set of environmental, strategic, and structural contextual factors that may affect the number of CDSF staff, as well as several consequences for the firm. While our empirical research design follows the recommendations for fact-based research (Hambrick, 2007; Helfat, 2007; Oxley et al., 2010), the identification of the variables is based on a review of previous research on the CDSF, the CHQ, strategy professionals, and strategic planning (Collis et al., 2007; Egelhoff, 1991; Menz and Scheef, 2014; Rogers et al., 1999; Wolf and Floyd, 2013). Although fact-based inquiry does not rely on formal hypotheses, we considered it appropriate to not only describe the data and the measurement of each of the variables but also explain the rationale for their inclusion, as well as the basic logic for their association with the CDSF size. Indeed, the overall study is implicitly guided by contingency logic (Burns and Stalker, 1961; Chandler, 1962; Child, 1975; Donaldson, 2001; Galbraith, 1973) that contextual factors affect choices regarding the CDSF size and its effectiveness.

Sample and data

We used survey and archival data of large listed European firms for our study. Information on the CDSF size and other features was obtained from a survey of the largest firms located in 14 European countries, which was part of a larger study of CSOs and their CDSF.¹ Depending on the size of the economy, we selected the 30–100 largest publicly listed companies in each of these countries, since only relatively large firms have a dedicated CDSF. This sample allowed us to analyze the CDSF of firms with different corporate strategies and across different industry sectors. Furthermore, listed firms ensure data availability and the consistency of financial and other firm data. We next screened publicly available sources, such as annual reports, press releases, company websites, and professional social media platforms, to collect the contact information of the highest-ranking executive responsible for corporate development and strategy. If we were unable to find any information about this executive position, we contacted the respective firms. Our final contact database included 500 executives with titles such as senior vice president strategy, head of strategic development, and executive vice president corporate development, summarized as CSOs (Menz and Scheef, 2014).

In 2013, we invited these senior executives to participate in our English electronic survey. After several rounds of follow-ups, we received 121 questionnaires, yielding a response rate of 24%. Of the respondents, 110 provided information on the structure and design of their firm’s CDSF. We obtained these firms’ archival data through the Thomson One database, annual reports, and press releases. Missing archival data reduced the sample size by five cases to a final sample of 105 firms for the analysis of the determinants of the CDSF size and by eight cases to a final sample of 102 firms for the analysis of the CDSF size’s consequences. To account for potential sample selection and nonresponse biases, we compared the average number of employees and sales of the respondents’ firms to those of firms for which we could not identify a CSO and to those of the nonrespondents. In both analyses, t-tests revealed no significant differences between the groups.

CDSF size

This study’s main variable is the CDSF size, operationalized as the total number of employees of the corporate function responsible for corporate development, strategy, and related tasks. Specifically, we asked the CSOs to state the number of employees (fulltime equivalents, FTEs), which included the respondent, in their department as at the end of 2012. To be considered a CDSF, the respective function had to have at least one employee, which is consistent with previous research on other central functions (Kale et al., 2002). In two cases, the CDSF had only one employee, namely the CSO. Furthermore, an initial inspection of the CDSFs in our sample revealed very large functions with the number of employees exceeding 100, which deviated far from the mean CDSF size. Owing to this skewness, we log-transformed the CDSFs’ number of employees.

Determinants of CDSF size

In contemporary corporations, firms’ external environment and internal organizational context usually affect decisions regarding the CHQ and its various subunits’ design and structure (Menz et al., 2015). Specifically, as elaborated below, we explored the extent to which several characteristics of the overall firm’s environment, strategy, and structure affect the CDSF size.

Environmental factors

We examined the influence of three environmental aspects on the CDSF size: industry change, industry volatility, and industry fragmentation. Owing to our study’s focus on the firm’s corporate level, we used aggregate measures of the firm’s overall business portfolio by calculating the industry environment of all two-digit standard industrial classification (SIC) code segments in which a firm operates. Thereafter, we weighted the measures by the respective segment’s sales (Karim et al., 2016). To calculate the three industry measures, we considered all listed European firms active in the identified two-digit SIC code segments. In line with previous research (Hambrick and Cannella, 2004), we deemed measures based on two-digit SIC codes as sufficiently accurate, while ensuring that every SIC code segment consisted of at least four firms, and that the study’s sample remains sufficiently large.²

First, a firm’s industry change may affect the strategic task demands and, thereby, the CDSF size. Both industry growth and decline, and the correspondingly high levels of uncertainty, may increase the need to develop new strategic plans or revise the existing plans, which are normally the CDSF’s tasks (Bazzaz and Grinyer, 1981; Breene et al., 2007). We measured industry change by regressing the industry sales against time (from t-5 to t-1) for all two-digit SIC code segments. The beta-coefficient of the regression was then divided by the average sales of the respective industry segment during the five years (Karim et al., 2016). By using the absolute values of industry change, we included both industry growth and decline.

Second, a firm’s industry volatility may influence the size of the CDSF. For firms with businesses operating in volatile industries that bear great uncertainty regarding their future developments, formulating strategies becomes more difficult and plans need to be adjusted more frequently than in industries with stable growth (or decline) (Grant, 2003). For instance, while developing scenarios or establishing strategic foresight systems is critical in volatile industries, it may require strategy resources and expertise for the CDSF. To measure industry volatility, we again draw on the regressions computed to calculate industry change. However, for this measure, we divided the standard errors of the slope coefficients by the average industry sales during t-5 and t-1 (Karim et al., 2016).

Third, a firm’s industry fragmentation may determine the amount of personnel resources the CDSF requires. Fragmented industries are characterized by a relatively high number of competitors and, therefore, are very heterogeneous, whereas, in concentrated industries, a few rivals dominate the market (Porter, 1980). Since performing competitive analysis (or supporting the businesses in it) is usually a task of the CDSF (Breene et al., 2007; Menz and Scheef, 2014), industry fragmentation is likely to relate to the CDSF size. We measured industry fragmentation as the inverse of the four-firm market concentration ratio within each two-digit SIC code segment in t-1.

Strategic factors

We considered three factors that characterize the firm’s corporate strategy and its execution, which are likely to determine the strategic task demands on the corporate level and, thereby, the size of the CDSF: diversification strategy, acquisition activity, and alliance activity.

First, a firm’s product diversification strategy may affect the number of staff the CDSF requires. Related diversification strategies increase the amount and complexity of the strategic activities at the firm’s corporate level (Geringer et al., 2000; Henderson and Fredrickson, 1996) because they, for example, involve the exploitation of commonalities across the business portfolio (Hill et al., 1992; Hoskisson, 1987). Conversely, we expect unrelated diversification strategies to reduce the strategic task demands at the corporate level, because operational synergies are relatively limited. Hence, the CDSF’s activities, such as managing corporate-wide strategic initiatives (Kaplan and Norton, 2005), are likely to depend on the firm’s diversification strategy. We used Palepu’s (1985) entropy measure in t-1, which distinguishes between the degrees of a firm’s related, unrelated, and total diversification of its business portfolio.

Second, a firm’s acquisition activity may determine the CDSF’s resources and capabilities. Acquisitions create additional task demands and complexity for a firm’s senior management (Haspeslagh and Jemison, 1991), thus, influencing the organization of its strategy activities, for example, the structural choice to have a CSO in the TMT (Menz and Scheef, 2014). Since the CDSF typically coordinates or performs acquisition tasks, such as target selection, due diligences, and post-merger integration (Angwin et al., 2009; Breene et al., 2007; Mason, 1968), a firm’s acquisition activity is likely to affect the CDSF size. We measured a firm’s acquisition activity as the logarithm of the median number of acquisitions during the previous three years from t-3 to t-1 (Laamanen and Keil, 2008).

Third, a firm’s alliance activity may affect the CDSF size. Strategic alliances are another indicator for additional task demands (Kale et al., 2002) and are considered as “[…] another management challenge for stressed-out executives, as big companies enter into literally thousands of relationships spanning the globe” (Breene et al., 2007: 91). Given that the CDSF frequently manages the firm’s alliance portfolio (Menz et al., 2013), a firm’s alliance activity is likely to determine the CDSF size. Similar to a firm’s acquisition activity, we measured a firm’s alliance activity as the logarithm of the median number of alliances during the previous three years from t-3 to t-1.

Structural factors

Finally, we explored the extent to which a firm’s corporate structure determines the CDSF size. Specifically, we considered three factors of the firm’s structure: firm size, span of control, and organizational divisionalization.

First, a firm’s size is one of the most obvious structural features that may determine the CDSF size. The size of an organization is positively related to its complexity and the corresponding information-processing demands (Egelhoff, 1991; Henderson and Fredrickson, 1996). Large firms implement administrative coordination mechanisms, such as “sophisticated planning and control systems,” to cope with complexity (Mintzberg, 1979: 230). In light of the CDSF’s pivotal role in these activities (Angwin et al., 2009; Paroutis and Pettigrew, 2007), firm size is likely to affect the CDSF size. We measured firm size as the logarithm of the firm’s total number of employees (FTEs) at the end of t-1.

Second, a firm’s span of control may affect the CDSF size. Span of control, conceptualized in our study as the number of businesses reporting directly to the CHQ, relates to the amount of information that central functions need to consolidate (Collis et al., 2007), particularly the CDSF. The number of business units represents the firm’s horizontal scale and indicates the complexity of the strategizing activities for the CDSF, for example, organizing the firm’s overall strategy process, including the strategic analysis and target-agreement process, which may thus influence the CDSF size. We measured a firm’s span of control as the number of business units on the first level of structural separation below the CHQ in t-1.

Third, a firm’s organizational divisionalization may determine the CDSF’s resources and capabilities. In divisionally organized firms, much of the strategizing occurs on the divisional level, whereas functionally organized firms have more functions centralized at the CHQ (Collis et al., 2007). In the latter firms, the CDSF usually has to deal with higher corporate-level complexity and is therefore responsible for a broader range of strategy activities, including market and competitive strategies (Hoskisson, 1987), which may affect the CDSF size. As the firm’s structure is usually reflected in the top management roles (Guadalupe et al., 2014; Menz, 2012), we calculated a firm’s divisionalization as the fraction of divisional TMT members in relation to the overall number of TMT members in t-1, based on the TMT members’ titles as published in the annual report.

Consequences of CDSF size

Even though the CDSF plays an important role in the firm’s strategy processes and may contribute to its corporate advantage (Grant, 2003; Javidan, 1987; Kaplan and Norton, 2005), there is little systematic evidence of its implications. Javidan’s (1987: 305) study reveals that the extent to which the CDSF performs various roles is correlated with its perceived effectiveness, especially with its “impact on strategic decisions” and “contribution to firm performance.” Menz and Scheef (2014), on the other hand, find that the structural decision to have the CDSF head in the TMT does not affect financial performance. To account for the variety of CDSF’s potential consequences, we explore the extent to which the CDSF size may be associated with three different, widely applied types of performance: a firm’s growth, profitability, and financial market performance. We analyzed three years subsequent to measuring the CDSF size of all the performance measures, since the CSO (and thus the CDSF) is considered “the guardian of that space one to three years out, when the decisions made (or not made) today will show consequences” (Breene et al., 2007: 91).

First, the CDSF size may affect a firm’s growth, specifically its sales growth. One of the key CDSF responsibilities is to ensure future growth and the firm’s viability (Breene et al., 2007; Menz et al., 2013). A recent study revealed that more than 80% of CSOs consider exploration and growth-oriented activities, such as supporting new business (model) development and (very) important aspects of their role (Menz et al., 2013). In some firms, the highest ranking strategy executive bears the title “chief growth officer” (Breene et al., 2007; Menz and Scheef, 2014). The CDSF’s personnel resources support growth-oriented activities and, thus, the achievement of a growth strategy. We measured firm growth as the compound annual growth rate (CAGR) of its sales from t+1 to t+3 (Cho and Pucik, 2005).

Second, the CDSF size may affect a firm’s profitability, specifically its return on assets (ROA). On one hand, more CDSF staff increases the firm’s capacity to conduct comprehensive analyses covering a wide range of strategic issues and to develop alternative strategic options—activities that improve the quality of the firm’s strategic plans and decisions (Javidan, 1987). The number of staff also ensures that strategies are executed with sufficient rigor and speed, which may be particularly important in respect of opportunities that arise quickly, such as acquisitions (Kaplan and Norton, 2005). On the other hand, the number of CDSF employees may also be associated with substantial direct and indirect costs. CDSF employees are usually highly qualified and have strong strategy-related expertise (Breene et al., 2007), for example, they often have an MBA degree from a top business school and several years of consulting experience (Menz et al., 2013), thus, demanding relatively high salaries. Increasing the CDSF size may also involve internal and external coordination and administrative costs. Decision making and information processing within the CDSF may become more complex and slow down, because larger organizational units tend to be more bureaucratic and hierarchical (Collis et al., 2007). We measured firm profitability as its average ROA during the three years from t+1 to t+3 (Cho and Pucik, 2005).

Third, the CDSF size may affect a firm’s financial market performance, specifically its market-to-book ratio (MTB). The inclusion of this outcome in our study follows a similar logic as the one for firm profitability, but assuming that the stock markets anticipate a CDSF’s long-term contributions before they become visible in a firm’s accounting-based performance. We measured a firm’s financial market performance as its average MTB during the three years from t+1 to t+3 (Cho and Pucik, 2005). This market-based measure reflects the premium shareholders place on the firm’s equity and, thus, expresses the stock market expectation regarding the firm’s future development.

Control variables

We controlled for other factors that may affect the CDSF size and its consequences but which lay outside our study’s conceptual scope. To account for different macroeconomic dynamics in the 14 countries in our sample, we included their median gross domestic product (GDP) growth between t-3 and t-1 (Newman and Nollen, 1996), using data retrieved from Eurostat. When analyzing the performance consequences of the CDSF size, we controlled for the respective measure’s industry performance in the two-digit SIC code segment from t+1 to t+3.

As the firm’s performance situation may affect the choices regarding the CDSF size and its effects, we accounted for prior performance, using the ROA in t-1 to analyze the determinants of the CDSF size, the ROA in t0 to analyze the effect of the CDSF size on firm growth and profitability, and the MTB in t0 for the effect of CDSF size on financial market performance. In the analyses of the consequences of the CDSF size, we considered firm size, diversification, acquisition activity, and alliance activity as other potentially influential control variables. Moreover, we controlled for TMT size in t-1, including the logarithm of the number of executives stated in the annual report. The number of executives in the TMT may indicate the amount of strategy resources a firm needs and, thus, may affect the CDSF size.³

We also controlled for the CDSF’s other important structural feature besides its size, namely the function’s location within the organizational hierarchy. CDSFs that report directly to the CEO may have a higher status and may be granted more resources than those reporting to other executives, such as the chief financial officer. Using a dummy variable, we asked the function’s heads to indicate whether they have a direct CEO reporting line, which was coded as 1 and 0 otherwise. Finally, we accounted for the CSO position tenure in years, as CDSF heads with longer position tenures might have more legitimacy and power, thus obtaining more resources. A similar reasoning suggests that CSO tenure is associated with our study’s outcomes.

Results

Descriptive results

Figure 1 shows the number of employees in the CDSF against the total number of firm employees (both in FTEs). It illustrates the substantial variance in the CDSF size across firms—ranging from just one employee to 110 employees—and indicates a positive correlation between firm size and the CDSF size. The geometric mean CDSF size is 6.72 FTEs (0.53 per 1000 FTEs) and the median CDSF size is five FTEs (0.52 per 1000).

Table 1 displays the differences in the CDSF size (absolute values and per 1000 FTEs) across regions, industry sectors, and firm size clusters. There are relatively small differences in the CDSF size between firms domiciled in four different European regions, with median CDSF sizes of 5 FTEs in Benelux (0.55 per 1000), Latin European (0.58 per 1000), and in Nordic countries (0.43 per 1000), and 7 FTEs in German-speaking countries (0.53 per 1000).⁴ The variance of the CDSF size across the industry sectors is, however, considerable, ranging from 4 FTEs in consumer goods/retail firms (0.31 per 1000), 5 FTEs in industrial firms (0.56 per 1000), 6 FTEs in life sciences firms (0.33 per 1000), 6.5 FTEs in general services firms (0.39 per 1000) to 8 FTEs in financial services firms (1.28 per 1000). Hence, only controlling for the firm size, the CDSF in financial services firms is between twice and more than four times larger than the CDSF in other sectors’ firms.

Table 1.

Descriptive information on CDSF size.

	All	Region				Industry sector					Firm size
		DACH countries	Nordic countries	Latin European countries	Benelux countries	Financial services	Consumer goods and retail	Industrial	Lifesciences	Services	Fewer than 5000 FTEs	5000 to 25,000 FTEs	More than 25,000 FTEs
Number of firms	105	57	20	15	13	19	13	44	7	22	29	43	33
CDSF size (in FTEs)
Arithmetic mean	11.7	10.2	6.9	19.1	17.0	7.9	16.1	7.6	13.3	20.0	6.2	8.5	20.7
Geometric mean	6.7	6.7	5.3	8.4	7.8	6.7	6.1	5.8	7.8	9.0	4.9	5.5	11.6
Minimum	1.0	1.0	3.0	3.0	2.0	3.0	1.0	2.0	3.0	1.0	1.0	2.0	3.0
Maximum	110.0	110.0	36.0	100.0	100.0	18.0	110.0	35.0	40.0	100.0	22.0	100.0	110.0
Percentiles 10%	3.0	3.0	3.0	3.4	2.2	3.0	3.0	3.0	3.0	3.0	2.0	3.0	4.0
50%	5.0	7.0	5.0	5.0	5.0	8.0	4.0	5.0	6.0	6.5	5.0	5.0	12.0
90%	21.2	17.0	10.6	65.2	32.4	14.2	34.4	15.1	34.0	83.2	10.4	12.8	39.2
CDSF size per 1000 FTEs
Arithmetic mean	1.26	1.27	0.75	0.94	2.40	2.22	0.35	1.03	0.70	1.64	3.15	0.72	0.31
Geometric mean	0.53	0.56	0.48	0.35	0.78	1.00	0.22	0.62	0.32	0.45	2.20	0.50	0.16
Minimum	0.01	0.04	0.04	0.01	0.08	0.09	0.01	0.05	0.04	0.04	0.26	0.08	0.01
Maximum	17.50	9.88	2.64	2.98	17.50	9.88	1.10	3.94	1.75	17.50	17.50	6.31	1.46
Percentiles 10%	0.10	0.12	0.15	0.05	0.25	0.13	0.06	0.15	0.04	0.07	0.81	0.24	0.04
50%	0.52	0.53	0.43	0.58	0.55	1.28	0.31	0.56	0.33	0.39	2.70	0.45	0.15
90%	2.88	3.01	2.00	2.85	5.48	5.68	0.78	2.76	1.57	2.81	5.68	1.49	0.75

CDSF: corporate development and strategy function; FTE: fulltime equivalent.

An intriguing finding of the descriptive analysis is that the size of the firm matters for the CDSF size but not as one would expect at first sight. By distinguishing between three different firm size clusters—small firms with fewer than 5000 employees, medium-sized firms with 5000–25,000 employees, and large firms with more than 25,000 employees—we find that larger firms also have a larger CDSF in absolute terms (see Figure 1), whereas the CDSF size per 1000 FTEs decreases substantially with increases in the firm size—from a median of 2.70 per 1000 FTEs for small firms to 0.15 per 1000 FTEs for large firms. Figure 2 illustrates this negative correlation between the CDSF size per 1000 FTEs and a firm’s size. This indicates that firms benefit from “economies of strategizing” at the corporate level and suggests the need to control for firm size in subsequent analyses.

Table 2 shows the descriptive statistics and correlations of all the variables. Since all the correlations are below 0.5 (except for the correlations between related and unrelated diversification, as well as between related diversification and span of control), multicollinearity was not an issue in our analysis. The variance inflation factors, which are all below two, also verified this.

Table 2.

Descriptive statistics and correlation coefficients.

	Mean	SD	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20
1 CDSF size (log)	1.905	0.914	1.00
2 GDP growth	0.019	0.012	0.05	1.00
3 Prior performance (ROA)	0.061	0.050	0.03	0.04	1.00
4 TMT size (log)	1.539	0.588	0.19⁺	−0.36***	0.04	1.00
5 CEO reporting line	0.714	0.454	0.13	0.01	0.27**	−0.01	1.00
6 CSO position tenure	2.838	3.163	−0.16⁺	−0.01	−0.03	−0.11	0.01	1.00
7 Industry change	0.034	0.030	−0.14	−0.04	−0.02	0.06	−0.01	0.09	1.00
8 Industry volatility	0.019	0.013	−0.02	−0.20*	−0.12	0.09	0.02	−0.09	0.41***	1.00
9 Industry fragmentation	0.563	0.153	0.13	−0.12	−0.21*	0.10	0.04	−0.05	0.07	−0.08	1.00
10 Related diversification	0.668	0.483	0.20*	0.00	−0.27**	0.07	−0.02	0.17⁺	−0.16	−0.15	0.20*	1.00
11 Unrelated diversification	0.299	0.375	−0.12	0.04	0.23*	0.12	0.21*	−0.05	0.03	0.10	−0.17⁺	−0.53***	1.00
12 Total diversification	0.967	0.428	0.13	0.03	−0.10	0.18⁺	0.16	0.15	−0.15	−0.08	0.08	0.67***	0.28**	1.00
13 Acquisition activity (log)	0.667	0.720	0.29**	0.08	0.01	0.21*	0.09	0.02	−0.11	−0.11	−0.12	0.01	0.18⁺	0.17⁺	1.00
14 Alliance activity (log)	0.453	0.625	0.41***	0.00	−0.15	0.25*	−0.08	−0.02	−0.20*	−0.10	−0.13	0.02	0.10	0.12	0.32***	1.00
15 Firm size (log)	9.477	1.520	0.42***	0.03	0.00	0.27**	0.10	0.00	−0.18⁺	−0.03	−0.27**	0.05	0.16	0.19*	0.48***	0.46***	1.00
16 Span of control	3.810	1.641	0.11	−0.05	−0.18⁺	0.18⁺	0.07	0.12	−0.11	−0.08	0.15	0.64***	0.12	0.83***	0.21*	0.14	0.18⁺	1.00
17 Divisionalization	0.361	0.287	0.02	−0.17⁺	0.07	0.44***	0.21*	0.11	0.10	0.13	−0.03	0.13	0.23*	0.35***	0.41***	0.01	0.31**	0.22*	1.00
18 Sales growth (t+1 to t+3)^a	−0.093	0.099	0.05	0.19⁺	0.15	−0.20*	−0.02	−0.06	0.00	−0.09	0.02	−0.07	−0.08	−0.15	−0.18⁺	−0.18⁺	−0.10	−0.17⁺	−0.19⁺	1.00
19 Average ROA (t+1 to t+3)^a	0.050	0.043	0.08	0.10	0.57***	0.06	0.06	0.03	−0.07	−0.25*	−0.02	−0.20*	0.07	−0.16	−0.03	−0.10	0.05	−0.13	−0.06	0.31**	1.00
20 Average MTB (t+1 to t+3)^a	1.981	1.436	0.02	0.03	0.39***	0.24*	−0.06	−0.08	−0.04	−0.15	−0.04	−0.13	0.07	−0.09	0.05	−0.07	0.08	0.00	−0.01	0.14	0.59***	1.00

CDSF: corporate development and strategy function; CEO: chief executive officer; CSO: chief strategy officer; GDP: gross domestic product; ROA: return on assets; TMT: top management team; MTB: market-to-book ratio; SD: standard deviation.

N = 105.

N = 102.

p < 0.10; *p < 0.05; **p < 0.01; ***p < 0.001.

Determinants of CDSF size

To explore the determinants and consequences of the CDSF size, we used lagged ordinary least squares (OLS) regression analysis. Table 3 presents the results of the analysis of the determinants of CDSF size. Model 1 contains only the control variables, whereas Models 2–4 each, respectively, also includes the potential environmental, strategic, and structural determinants of the CDSF size. Model 5 includes all the independent variables. To verify our analysis, we also performed the analysis using unrelated instead of related diversification, as displayed in Model 6. Compared to Model 1, adding the independent variables increases the statistical significance of Models 3–6 (p < 0.001).

Table 3.

Results of OLS regression analyses for CDSF size.

	Model 1	Model 2	Model 3	Model 4	Model 5	Model 6
Constant	1.127** (0.389)	0.747(0.560)	0.899* (0.356)	−0.909(0.581)	−1.551* (0.729)	−1.517* (0.747)
Controls
GDP growth	9.798(7.705)	11.149(7.865)	3.733(6.940)	5.014(7.192)	3.709(6.550)	6.456(6.710)
Prior performance (ROA)	−0.579(1.813)	0.041(1.889)	1.881(1.692)	−0.034(1.715)	3.164⁺ (1.646)	2.961⁺ (1.688)
TMT size (log)	0.345* (0.161)	0.346* (0.161)	0.064(0.152)	0.255(0.170)	0.078(0.158)	0.084(0.161)
CEO reporting line	0.293(0.200)	0.257(0.202)	0.267(0.179)	0.267(0.191)	0.234(0.172)	0.267(0.177)
CSO position tenure	−0.041(0.028)	−0.033(0.028)	−0.057* (0.025)	−0.038(0.026)	−0.041⁺ (0.024)	−0.036(0.024)
Environment
Industry change		−5.192(3.309)			−0.182(2.812)	−1.168(2.859)
Industry volatility		3.524(7.539)			9.207(6.294)	8.758(6.447)
Industry fragmentation		0.758(0.607)			1.542** (0.532)	1.534** (0.547)
Strategy
Related diversification			0.483** (0.170)		0.739*** (0.208)
Unrelated diversification						−0.603** (0.216)
Acquisition activity (log)			0.184(0.117)		0.241⁺ (0.126)	0.181(0.127)
Alliance activity (log)			0.544*** (0.136)		0.425** (0.141)	0.434** (0.145)
Structure
Firm size (log)				0.248*** (0.058)	0.196** (0.062)	0.195** (0.063)
Span of control				0.031(0.053)	−0.128* (0.060)	0.020(0.049)
Divisionalization				−0.619⁺ (0.337)	−0.652⁺ (0.330)	−0.419(0.338)
F	1.970⁺	1.700	5.410***	3.980***	5.250***	4.700***
R ²	0.091	0.124	0.311	0.249	0.449	0.422
Change in R²	N/A	0.034	0.220***	0.158***	0.359***	0.332***
N	105	105	105	105	105	105

CDSF: corporate development and strategy function; CEO: chief executive officer; CSO: chief strategy officer; GDP: gross domestic product; OLS: ordinary least squares; ROA: return on assets; TMT: top management team.

Unstandardized regression coefficients; standard errors in parentheses.

p < 0.10; *p < 0.05; **p < 0.01; ***p < 0.001.

Change in R² relative to Model 1.

First, only one environmental factor is significantly related to the CDSF size. A firm’s industry fragmentation has a significant positive effect on the CDSF size in the full model (Model 2: not significant; Model 5: p < 0.01), whereas industry change and industry instability do not affect it.⁵ Second, two of the three strategic factors are strongly associated with the CDSF size. Related diversification is positively related to the CDSF size (Model 3: p < 0.01; Model 5: p < 0.001), whereas unrelated diversification has a negative effect on the CDSF size (Model 6: p < 0.01). Furthermore, a firm’s alliance activity positively affects the CDSF size (Model 3: p < 0.001; Model 5: p < 0.01). A firm’s acquisition activity, however, only relates significantly to the CDSF size in the full model (Model 3: not significant; Model 5: p < 0.1). Third, depending on the model, two or three structural factors determine the CDSF size. The firm size (Model 4: p < 0.001; Model 5: p < 0.01) is positively related to the CDSF size, whereas a firm’s span of control (Model 4: not significant; Model 5: p < 0.05) and divisionalization (Models 4 and 5: p < 0.1) have a negative effect on the CDSF’s number of staff. Interestingly, Model 6 shows that a firm’s acquisition activity, span of control, and divisionalization do not predict the CDSF size when unrelated diversification instead of related diversification is included. As discussed below, this suggests that, depending on the firm’s corporate strategy, different CDSF types exist.⁶

Table 4 summarizes the analysis results of the determinants of the CDSF size, including the effect directions, significance levels, and predicted effect sizes (based on full Models 5 and 6). While the CDSF is a relatively small function, its size depends on the firm’s internal, and partly on its external, context. For example, Model 5 predicts that firms pursuing a related diversification strategy and actively undertaking acquisitions and forming alliances at values of one standard deviation above the mean have a CDSF that is more than twice as large as that of firms with an average value in these areas.⁷

Table 4.

Summary of the results and effect sizes.

Model 5				Model 6
Determinant	Effect on CDSF size	Predicted CDSF size		Determinant	Effect on CDSF size	Predicted CDSF size
		−1 SD	+1 SD			−1 SD	+1 SD
Industry change	n.s.	n.s.	n.s.	Industry change	n.s.	n.s.	n.s.
Industry volatility	n.s.	n.s.	n.s.	Industry volatility	n.s.	n.s.	n.s.
Industry fragmentation	Positive**	x 0.79	x 1.27	Industry fragmentation	Positive**	x 0.79	x 1.26
Related diversification	Positive***	x 0.70	x 1.43	Unrelated diversification	Negative**	x 1.25	x 0.80
Acquisition activity (log)	Positive+	x 0.84	x 1.19	Acquisition activity (log)	n.s.	n.s.	n.s.
Alliance activity (log)	Positive**	x 0.77	x 1.30	Alliance activity (log)	Positive**	x 0.76	x 1.31
Firm size (log)	Positive**	x 0.74	x 1.35	Firm size (log)	Positive**	x 0.74	x 1.35
Span of control	Negative*	x 1.23	x 0.81	Span of control	n.s.	n.s.	n.s.
Divisionalization	Negative+	x 1.21	x 0.83	Divisionalization	n.s.	n.s.	n.s.

CDSF: corporate development and strategy function; SD: standard deviation.

p < 0.10; *p < 0.05; **p < 0.01; ***p < 0.001.

Consequences of CDSF size

Table 5 shows the results of the analysis of the consequences of CDSF size. Models 1, 2, and 5 present the direct effects of CDSF size on, respectively, a firm’s growth (sales growth), profitability (ROA), and financial market performance (MTB). CDSF size is positively associated with a firm’s subsequent sales growth (p < 0.05), whereas it is not significantly related to the ROA and the MTB. In short, the CDSF’s amount of personnel resources appears to facilitate the implementation of the firm’s growth strategy but has no significant direct impact on its financial performance.

Table 5.

Results of OLS regression analyses for sales growth, ROA, and MTB.

	Sales growth	ROA			MTB
	Model 1	Model 2	Model 3	Model 4	Model 5
Constant	0.102	0.000	0.003	−0.012	0.273
	(0.074)	(0.028)	(0.028)	(0.027)	(0.539)
Controls
Prior performance^a	−0.068	0.506***	0.509***	0.507***	0.952***
	(0.189)	(0.074)	(0.073)	(0.071)	(0.051)
Industry performance	0.664***	0.004	0.008	0.000	0.008
	(0.164)	(0.028)	(0.027)	(0.026)	(0.021)
GDP growth	1.528*	0.131	0.092	0.213	6.525
	(0.732)	(0.289)	(0.286)	(0.278)	(5.516)
CEO reporting line	−0.019	−0.009	−0.010	−0.010	−0.351*
	(0.020)	(0.008)	(0.008)	(0.008)	(0.152)
CSO position tenure	−0.002	0.001	0.001	0.001	−0.004
	(0.003)	(0.001)	(0.001)	(0.001)	(0.022)
Firm size (log)^b	−0.015⁺	0.003	0.002	0.004	0.020
	(0.008)	(0.003)	(0.003)	(0.003)	(0.056)
Diversification^c	−0.028	−0.007	−0.001	−0.005	0.016
	(0.021)	(0.009)	(0.010)	(0.009)	(0.167)
Acquisition activity (log)	−0.014	−0.005	−0.005	−0.009	0.007
	(0.014)	(0.006)	(0.006)	(0.006)	(0.107)
Alliance activity (log)	−0.027	−0.002	−0.003	−0.006	0.042
	(0.018)	(0.007)	(0.007)	(0.007)	(0.128)
CDSF size
CDSF size (log)	0.025*	0.001	0.001	−0.001	−0.076
	(0.012)	(0.005)	(0.005)	(0.004)	(0.090)
Interactions
CDSF size (log) x
Diversification			0.022⁺
			(0.012)
Acquisition activity (log)				0.017**
				(0.006)
F	3.530***	6.110***	6.010***	6.960***	37.360***
R ²	0.280	0.402	0.424	0.460	0.804
Change in R²	N/A	N/A	0.022⁺	0.058**	N/A
N	102	102	102	102	102

Unstandardized regression coefficients; standard errors in parentheses.

For Models 1–4: ROA in t0; for Model 5: MTB in t0.

For Model 1: log sales; otherwise log employees.

For Model 1: related diversification; otherwise total diversification.

p < 0.10; *p < 0.05; **p < 0.01; ***p < 0.001.

Given these results, we also explored whether the CDSF size affects a firm’s performance under certain conditions. Indeed, following a contingency logic and considering initial qualitative fieldwork findings, the tasks that the CDSF needs to perform may determine its optimal number of employees (Kaplan and Norton, 2005). Hence, a CDSF should be sufficiently large to meet the task demands of the firm’s specific context. To analyze this aspect, we examined the extent to which the interaction terms between the CDSF size and the various environmental, strategic, and structural factors relate to the three performance measures. Models 3 and 4 in Table 5 include the two significant interaction terms (only significant interaction terms are presented). First, as displayed in Model 3, the interaction term between the CDSF size and total diversification is positively related to the ROA (p < 0.1). Figure 3 shows, using values of one standard deviation above and below the mean, that diversified firms are more likely to benefit from a large CDSF size than other firms. Second, as displayed in Model 4, the interaction term between the CDSF size and the acquisition activity is positively associated with firms’ future ROA (p < 0.01). Figure 3 shows that firms with a high (low) acquisition activity benefit (suffer) when the CDSF size increases.⁸

Discussion

Motivated by a lack of knowledge about the CDSF, we studied how firms determine the need for and organization of strategy resources at the corporate level and, thus, the size of the CDSF, as well as the extent to which they benefit from this structural choice. While our exploratory analysis of the determinants and consequences of the CDSF size allows us to shed light on a previously largely unexplored phenomenon (Hambrick, 2007), as discussed in the following, the results call for future (theory-testing) studies to help us improve our understanding of the various facets of the CDSF.

Interpretation of the findings

The study’s first insight is that there is a substantial variation in the number of CDSF staff across firms, both in absolute terms and relative to firm size, which suggests distinct CDSF types and economies of scale in the CDSF. The cross-industry sample of 105 large listed European firms with CDSF sizes ranging from 1 to 110 FTEs allowed us to analyze the CDSF size differences between firms. The CDSF differs widely across industry sectors, firms of different sizes, and corporate strategies, while the geographic region in which the firm is domiciled seems to not matter much. While previous field-based research cumulatively leads us to suggest differences in CDSF size (Angwin et al., 2009; Grant, 2003), our study offers the first large-sample evidence that a variety of CDSFs exist.

Our analysis reveals major differences in the CDSF across broader industry sectors, even when controlling for firm size. This suggests that the CDSF plays different roles in different industries, and that specific CDSF types and configurations of the strategy processes depend on industry recipes and characteristics, such as the extent of regulation. Notably, financial services firms have a relatively large CDSF, perhaps because of the sector’s regulatory compliance requirements, risk management issues, and (digital) transformation, which increase the task demands. An alternative explanation is that depending on the industry sector, approaches to organize the corporate development and strategy-related activities vary. For instance, consumer goods and retail firms typically have strong centralized marketing functions that perform strategy-related tasks, such as competitive analysis, which may explain these firms’ relatively small CDSF.

The study also reveals that with increasing firm size, the CDSF size relative to firm size decreases. One explanation is that as firms increase in size, they tend to become more unrelated diversified and divisionalized and therefore have a relatively smaller CDSF than smaller firms. However, a post hoc analysis of the relationship between CDSF size per 1000 FTEs and firm size that controlled for unrelated diversification and divisionalization confirmed our initial result. Thus, it appears that having a CDSF involves some fixed costs, and that firms may benefit from economies of scale in the CDSF. Indeed, when discussing our study results with CSOs, they suggested that in order to function effectively, a minimum CDSF size is required, usually a team of about three to five, which is largely independent of a firm’s size. While previous research suggests economies of scale in the CHQ’s administrative roles, such as performing public company and shared services, because they involve repetitive information-processing tasks (Collis et al., 2007), our study indicates that economies also exist for entrepreneurial CHQ functions, like the CDSF.

The study’s second insight is that firms particularly make decisions pertaining to the need for and organization of strategy resources and capabilities at the corporate level, thus, concerning on the number of CDSF staff, under consideration of the strategic and structural task demands. Notably, these findings are consistent with those of research on the other structural CDSF choice, its location in the organizational hierarchy (Menz and Scheef, 2014). However, since we find that only an industry’s competitiveness significantly affects decisions concerning the number of strategy staff, it appears that the specific environmental characteristics are less important in determining the CDSF’s task demands.

Notably, we find that a strategy of related diversification is positively related to CDSF size, while unrelated diversification is negatively related. This result extends previous research findings on overall CHQ size to a specific discretionary corporate function (Collis et al., 2007). One explanation for this is that related diversifiers usually adopt a strategic planning parenting style, which may require more corporate-level resources, while unrelated diversifiers more often rely on a financial control style (Goold and Campbell, 1987). Thus, depending on a firm’s corporate strategy, there are different approaches to staffing the CDSF. One CDSF type, the corporate planner, focuses on corporate strategic planning tasks; another, the corporate developer, has a broader corporate development role with additional responsibility for strategy execution activities, such as M&A, alliances, and corporate venturing. Firms with a portfolio of unrelated businesses seem to opt for the former, smaller CDSF type, while related diversifiers, such as financial services firms, often have the latter, larger CDSF type.

Further supporting this insight, our study also reveals that a firm’s divisionalization determines the CDSF’s size, which is in line with earlier research, suggesting that corporate planning departments are smaller in divisionalized firms that delegate strategy activities to their divisions (Friedrich and Van’t Land, 1974; Grant, 2003). Owing to our study’s focus on the design of a specific corporate function and its determinants, we did not consider divisional managers responsible for business development and strategy activities. Although there are fulltime strategists on multiple levels (Paroutis and Pettigrew, 2007), it is not uncommon for business unit managers to fulfill these tasks in addition to their other, more operational, responsibilities, which complicates defining and identifying their strategy-related contributions (Ang and Chua, 1979). Nonetheless, future research should examine how strategizing activities are orchestrated in multidivisional firms and particularly study the roles of the CDSF and strategy staff elsewhere in the organization.

The study’s third insight is that the CDSF size appears to be associated with a firm’s performance, although one size does not fit all firms. The results indicate that the CDSF size is positively associated with a firm’s subsequent sales growth but not its profitability (ROA) and market based-performance (MTB). An explanation for this finding is that more CDSF staff may imply more resources, information-processing capacity, attention, and legitimacy for dealing with future growth, which is a key CDSF responsibility (Breene et al., 2007; Menz et al., 2013), while the CDSF does not directly affect short-term to mid-term financial performance, which is prioritized by other corporate functions, such as finance and operations.

However, our results indicate that the CDSF size does affect a firm’s profitability under certain conditions. First, firms that align their strategy capabilities at the corporate level and, thus, the number of CDSF staff with the requirements of their diversification strategy have a higher profitability (ROA). For example, a Swiss consumer goods firm that was 1.5 times more diversified than the sample median and had a CDSF size (relative to its firm size) 2.8 times as large as the sample median (about 1.44 per 1000 FTEs) exceeded the average ROA from t+1 to t+3 of the sample median by 1.6 percentage points. This pattern, which suggests that one size does not fit all firms, is consistent with research findings that a fit between the corporate strategy, structure, and systems (Hill et al., 1992), or between the strategy and the planning processes (Rogers et al., 1999), improves performance.

Second, a relatively large CDSF benefits active acquirers’ future ROA, probably because receiving a larger amount of dedicated resources for their various M&A activities may particularly matter to them. For instance, a medium-sized media company headquartered in a Nordic country that performed three times as many acquisitions as the average firm in our sample and that had more than twice as many staff in its CDSF (relative to its firm size) than the industry and region median (about 0.81 per 1000 FTEs) exceeded the median ROA of our sample by 3.5 percentage points. Previous studies suggest that M&A-related learning processes and post-acquisition decisions occur in the CDSF (Zollo and Singh, 2004), and that acquisition experience increases the future ROA (Barkema and Schijven, 2008). Interestingly, compared to the other determinants, a firm’s acquisition activity had little if there is any significant effect on CDSF size. An explanation for this could be that extraordinarily active acquirers tend to create dedicated M&A functions, sometimes separate from the CDSF, which then assume some of the M&A-related activities the CDSF usually performs. Hence, while firms seem to neglect the task demands associated with M&A when staffing the CDSF, a firm’s specific acquisition activity should guide decisions regarding the CDSF’s design.

Contributions and future research

In sum, our study is the first to take a systematic approach to improve our understanding of the CDSF’s design and its consequences, expanding this area’s field-based studies (e.g. Bazzaz and Grinyer, 1981; Javidan, 1987; Kaplan and Norton, 2005). In addition, the study informs research into strategizing activities in complex settings and into the professionalization of strategy (e.g. Grant, 2003; Paroutis and Pettigrew, 2007; Whittington, 2003; Whittington et al., 2011). We complement the literature by exploring the contextual factors that seem to affect decisions on CDSF size and by uncovering the extent to which this structural choice affects outcomes. Overall, our study suggests that the CDSF is a critical element for a firm’s strategic leadership and supports a contingency perspective on fulltime strategists (Menz and Scheef, 2014; Whittington et al., 2017).

Specifically, given the findings on the consequences of CDSF size, our study adds a piece to the puzzle of the benefits of fulltime strategists, informing strategy as practice and strategic leadership research. Research found that the CDSF’s first structural choice, its location in the organizational hierarchy, does not affect performance (Menz and Scheef, 2014), while our study indicates that the other structural choice, the CDSF’s number of staff, which for instance represents its information-processing capacity and resources, may make a difference. However, given our study’s exploratory nature and the limitations regarding the sample, data, and the potential endogeneity issues that we cannot completely rule out, our findings are suggestive and should motivate future studies.

There is an urgent need for research into the CDSF that builds on theory beyond a general contingency logic. Indeed, our study suggests that there are different, partially complementary and partially competing, theoretical explanations for the determinants and consequences of CDSF size, and points to arguments that build on institutional theory, information-processing theory, and the resource-based view. For instance, CDSF size differences across different industry sectors suggest that the organization of corporate development and strategy activities partly depends on a sector’s institutional environment, including the specific regulations. These differences further support the notion of industry-specific approaches toward the CDSF’s structure and design, and suggest that the adoption of best practices (or even trends/fashions) may provide firms with legitimacy. Otherwise, our study indicates that the amount and/or organization of corporate strategy resources may be decisive. In this vein, future studies should focus on how the CDSF staff’s overall quality and capabilities (e.g. using their qualifications or salaries), as well as the CDSF’s collaboration with internal and external strategy-related teams and units (e.g. divisional strategy units and consultants), affect strategic and financial outcomes.⁹

Our study also suggests focusing on the CDSF as a central entity for the firm’s corporate strategy activities may inform research on strategic planning and strategy processes. Assuming that the CDSF size is inversely related to decentralized strategizing and, thus, proxies the extent of formalized, top-down strategic planning, the existence of a (large) CDSF can be interpreted as an analytical tool in the tradition of the design or planning schools of strategy formation (Andrews, 1971; Ansoff, 1965). While our study provides only limited support that systematically organizing corporate strategy processes is beneficial, future research on the CDSF may contribute to the debate on the formation of effective corporate strategies (Ansoff, 1991; Mintzberg, 1990, 1991) and may thereby meet the criticism in strategic planning research of the “lack of empirical investigation of the phenomenon itself” (Grant, 2003: 492).

Since the CDSF is a key central function, our study contributes to the knowledge of corporate functions (Campbell et al., 2012; Kunisch et al., 2014) and, thus, of the CHQ’s functioning (Collis et al., 2007; Kleinbaum and Stuart, 2014; Menz et al., 2015), and thereby, more broadly enhances our understanding of the modern corporation’s organization design. Specifically, the findings suggest that future studies on the CHQ value-added should direct their attention to the CDSF and other selected corporate functions that are presumed to contribute to the firm’s corporate advantage, instead of “black-boxing” the CHQ. Some of our findings may also be valid for other corporate functions; for instance, a firm’s corporate strategy and structure are likely to affect the design of corporate HR and marketing functions. Nonetheless, we encourage scholars to examine the determinants and consequences that are specific to other, potentially value-adding, corporate functions.

Recent research has also indicated that the roles and statuses of corporate functions, such as the CDSF, change over their lifecycle (Kunisch et al., 2014), which may have implications for their design. Grant (2003) documented a decentralization of strategic planning at the oil majors in the 1990s, including the reduction of the number of corporate strategic planners at Mobil from 38 in 1990 to 12 in 1996. While in 2015 Deutsche Bank decided to substantially downsize its CDSF and to discontinue the CSO position (Manager Magazin, 2015), other firms have recently increased the scope of their CDSF’s role. For instance, the new Corporate Development function of Swiss insurance firm Helvetia has the mandate to “support the efficient implementation of the helvetia 20.20 strategy and will also group and drive forward the company-wide initiatives and programmes,” and includes the recently established Digital Ventures department (Helvetia Group, 2017). Owing to our cross-sectional study design and limited data availability, we did not focus on the potential changes of the CDSF that might provide insights into changes at the CHQ (Kunisch et al., 2015).

Conclusion

The study findings offer substantiated insights that business practitioners and consultants should consider when designing the CDSF. Indeed, a wide range of design alternatives is available for large firms, ranging from a small corporate planning team with a few employees to a full-fledged corporate development department with more than 100 employees. Ideally, the CDSF should be equipped with a sufficient number of staff to cope with a firm’s conditions. Our research identifies the criteria that guide decisions on the appropriate number of CDSF staff. While firms do account for several environmental, strategic, and structural factors when designing the CDSF, they should specifically align the CDSF’s size with the firm’s strategic task demands. To conclude, since understanding the CDSF is of great interest to business practitioners and consultants, we trust that our study will stimulate research in this area.

Footnotes

Acknowledgements

We thank Editor Gianmario Verona and three anonymous reviewers for their guidance and helpful comments. We also thank Patricia Klarner, Markus Kreutzer, Sven Kunisch, Tomi Laamanen, Christine Scheef, and the participants of the SMS St. Gallen Special Conference “Rethinking Corporate Headquarters” in 2015 and the AOM 2016 Annual Meeting for the insightful discussions and comments.

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: We gratefully acknowledge the survey funding provided by the consulting firm Roland Berger.

Notes

Author biographies

Markus Menz is an Associate Professor of Strategic Management at the Geneva School of Economics and Management, University of Geneva. Before, he was an Assistant Professor at the University of St. Gallen, where he also received his PhD, and a Visiting Fellow at Harvard University. His research focuses on strategic leadership, corporate strategy, and organization design, particularly chief strategy officers, top management team structures, and corporate headquarters. His work has been published in the Academy of Management Annals, Journal of Management, and Strategic Management Journal, among others.

Fabian Barnbeck is a PhD candidate in Strategy and Management at the University of St. Gallen. He is interested in the upper echelon perspective, corporate strategy, and the entrepreneurial functions of corporate headquarters. His current research focuses on exploring the effects of individual top management team members, such as chief strategy officers and divisional heads, on firm outcomes. He also works for a strategy consulting boutique in Zurich.

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