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From Competitive Advantage to Corporate Strategy by M. Porter.
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From Competitive Advantage to Corporate Strategyby M. Porter Porter first paints a sobering picture of corporate strategy, then offers (1) an ‘essential test’ to help practitioners evaluate acquisition candidates, and (2) a typology or framework for classifying four approaches to corporate strategy. Finally, he closes with an ‘action plan’ to aid companies in choosing or implementing corporate strategy.
Competitive v. Corporate Strategy Business Level strategy = how to create competitive advantage Corporate strategy = what business to be in and how to best manage them Three premises of Corporate Strategy: • Competition occurs at the business unit level • Diversification adds costs and constraints to business units • Shareholders can easily diversify themselves
… a Sobering Picture of Corporate Strategy … • The divide between competitive and corporate strategy • More than half of all related acquisitions are divested • Nearly 75% of all unrelated acquisitions are divested • No evidence of increased ROI for parent firm In light of these findings, why do businesses continue their M&A activity?
Passing the Essential Tests Porter argues that acquisitions must pass each of the following tests: • Attractiveness test • Cost of entry test • Better off test What do each of these tests require? Based on your own experience or observation, should we include additional tests?
Porter’s Four Concepts of Corporate Strategy • Portfolio management • Restructuring • Transferring skills • Sharing of activities How do these concepts differ? Are some of these concepts better than others? Do they require different organizational skills or abilities?
Porter’s Advice for Choosing a Corporate Strategy • Identify interrelationships among existing businesses • Select core businesses as foundation for strategy • Create horizontal linkages between core businesses • Pursue diversification that allows shared activities, or • Pursue diversification that allows transfer of skills • Pursue restructuring only if it fits existing management skill sets • Pay dividends so shareholders can diversify Final thoughts: how successful have your firms been with their corporate strategy?
So What Have We Learned? • Have corporate strategies of diversification added value to shareholders ? • Why do corporations continue to diversify ? • What can firms do rather than diversify ?