Wednesday, November 9, 2011

From Competitive Advantage to Corporate Strategy

In this post I wish to provide a brief summary of the chapter “From Competitive advantage to corporate strategy” from Michael Porter’s book “On competition”

Competitive strategy deals with creating competitive advantage in each of the businesses that the firm competes. There are several ways of creating a sustainable advantage. One of these ways is reinventing your business model when needed as is discussed in the article. Thus, competitive strategy operates at the business unit level of a large business conglomerate.

Corporate strategy deals with the larger questions of which lines of businesses are most profitable and how to manage an array of businesses together.

Corporate strategy works on the following premises:

1) Diversified firms compete at the business unit level

2) Diversification adds costs and constraints to business units

3) Shareholders can often diversify more cheaply than firms

Three questions that should be asked before considering diversification are:

1) How attractive is the industry: In terms of market share and profits in the future but also in terms of fit and alignment with the company’s existing line of businesses.

2) What is the cost of entry? (Alternately, are there barriers to exit?)

3) Will the business as a whole be better off by entering this industry?

Some of the popular corporate strategies are:

Portfolio management: Companies aim to create shareholder value mainly through acquisition of under-valued companies. This method was very popular earlier but is now widely considered to be a strategy of the past.

Restructuring: By restructuring the company aims to strengthen the business by seeking out underdeveloped, sick or threatened organizations and restructuring them. The restructuring can happen by way of infusing the unit with a new management team or the latest technology. After the unit is profitable, it sold off by the parent.

Transferring skills an sharing activities: These methods seek to capture the benefits of interrelationships that exist between the various business units of the firm.

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