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From Competitive Advantage to Corporate Strategy

Michael Porter, Harvard Business Review
by

Kaushal Tolia

on 9 May 2012

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Transcript of From Competitive Advantage to Corporate Strategy

From Competitive Advantage to Corporate Strategy By: Michael Porter, Harvard Business Review May 1987 Kaushal Tolia
Elissa Rechsteiner
Doug Englehart 2 Levels of Strategy C mpetitive Strategy

C rporate Strategy Competitive Strategy It is concerned with how a company can
gain a competitive advantage through a
distinctive way of competing. Corporate Strategy It concerns 2 different questions:

What business the corporation
should be in?

How the corporate office should
manage the various business units? Premises of Corporate Strategy ( 1 )
Competition occurs
on business unit level. ( 2 )
Diversification inevitably adds costs and constraints
to business units ( 3 )
Shareholders can readily diversify them themselves Passing the Essential Tests Attractiveness Test Cost-Of-Entry Test Better-Off Test Diversified companies do not compete, only their business units do. Any successful corporate strategy is build on a number of premises. Hidden costs and constraints are very important and subtle for a business. These costs and constraints can be reduced but not entirely eliminated. They can diversify their own porfolios of stocks by selecting those that best match their preferences and risk profiles. These premises mean that corporate strategy cannot succeed unless it truly adds value to business units:

1. By providing tangible benefits that offset the inherent costs of lost independence.

2. Adds value to shareholders by diversifying in a way they could not replicate. How attractive is the industry? The rate of return on an investment of an industry is the underlying structure that makes the industry attractive. An attractive industry with a high average return of investment will be difficult to enter because entry barriers are high, suppliers and buyers have less bargaining power, competition is high. An unattractive industry like steel will have structural flaws, powerful & price sensitive buyers, excessive competition caused by high fixed costs. Industries are profitable not because they are sexy and high tech, they are profitable only if their structures are attractive. What is the cost of entry? A company can enter new industries by acquisition or
start-up. Acquisitions expose it to an increasingly efficient merger market. In a start-up, the company must over-come entry barriers. The more attractive a new industry, the more
expensive it is to get into. Will the business be better off? Diversification should only be a by-product of
corporate strategy, not a prime motivator. Most companies will make certain that their proposed strategies pass some of these tests. But study clearly shows that when companies ignore one or two of them, the strategic
results were disastrous. Concepts of Corporate
Strategy Portfolio Management Restructuring Transferring Skills Sharing Activities "Ignoring any of the concepts of corporate strategy is perhaps the quickest road to failure." Choosing a Corporate
Strategy Action Plan Identify interrelationships among already existing business units Select the core businesses that will be the foundation of the corporate strategy Creating horizontal organizational mechanisms to facilitate interrelationships among the core business units Pursuing diversification opportunities that allow shared activities Pursuing diversification through the transfer of skills if opportunities for sharing activities are limited or exhausted Pursuing a strategy of restructuring if this fits the skills of management or no good opportunities exist for forging corporate interrelationships. Paying dividends so the shareholders can be the portfolio managers Creating a Corporate
Theme Condition 1 Condition 2 Condition 3 Business activities are similar enough that
sharing knowledge would be meaningful Skills must be useful to key business activities Expertise or skills to be transferred must be beyond competitors capabilities It refers to the overall strategy for a diversified company. Cooperative not compete On-going infusion Similarities not enough Lower costs &
increase differentiation Economies of
scale Move more rapidly down the learning curve Michael Porter Any opportunities to transfer skills or share activities? 1 2 How? Attractive industry?
Sustainable competitive advantages? It evaluates industry structure and potential. Issues:
- Test ignored if company a close fit
- Less attractive/low entry cost but not a good fit
- Fast growth company equated to attractiveness Assess if competitive advantage brought to parent company or new unit. Balancing current business activities with new industry acquisitions


Success: undervalued acquisition meets attractiveness and
COE test

Challenges:
- Increased capital market competition
- Need for industry specific knowledge
- Growth of company & diversity: leads to more mistakes
- Positive: fewer large companies in underdeveloped
countries Seek underdeveloped/sick companies/industries.

Success:
- Utilize & pass the 3 tests
- Ability to find undervalued companies with
growth potential
Challenges:
- Restructurer exposed to more risk
- Time limit for success
- Hold onto restructured company
- Growing depletion of restructuring pool
with increased competition CBS wanted to be an "entertainment company" so they built a group of businesses related to leisure time. NEC Corporation implemented a "C & C" theme by merging computers and communication. Finally.... Competitive Strategy Corporate Strategy for your attention..!!! 3 4 5 6 7 Strong corporate Identity
Mission statement emphasizes intergration
Incentives for business-wide success How? Inventory strongest existing
business activities Stepping stone for sharing activities in the future
Full transcript