Corporate Strategy

• Corporate strategy, the overall plan for a diversified company, is both well-loved yet misunderstood.
• CEOs have pursued diversification since the early 1960s.
• Lack of agreement persists regarding what corporate strategy is and how to create it.
• There are two strategy levels in diversified firms, specifically business unit strategy and corporate strategy.
• Creating a competitive advantage in each business that exists in a company involves a competitive strategy.
• Corporate strategy has two concerns namely, the businesses a corporation should be involved in, and how the corporate office should manage these units.
• Corporate strategy assures the corporate adds up to more than the sum of its business unit parts.
• Corporate strategies have had poor real world, practical results.
• Most of 33 prestigious U.S. companies studied from 1950-1986 had divested most acquisitions.
• Corporate strategies have more often dissipated than created shareholder value.
• Rethinking corporate strategy is essential.
• Corporate raiders succeed by acquiring and dismembering companies because of failed corporate strategy.
• Raiders, using junk bond financing, may expose any sized company to takeover.
• Some firms have started significant restructuring initiatives in view of the failure of diversification.
• Some companies have not responded at all.
• Strategic issues remain regardless of the response.
• Those who have restructured must determine what to do next in order to avoid repeating the past.
• Non responders need to realize their vulnerability.
• To survive, firms must learn what constitutes good corporate strategy.

A Sober Picture

• The success of corporate strategies is met with unease although no available data show success or failure.

• Most research has measured stock market values to value mergers, particularly stock price variations of acquiring firms before and after merger announcements.

• Michael E. Porter is a professor at Harvard Business School.

• Porter is the author of Competitive Advantage (1985) and Competitive Strategy (1980).

• Studies indicate market rates mergers as neutral or marginally negative, causing minimal alarm.

• Short-term market reaction does not adequately measure of diversification’s long-term success.

• No executive would judge a corporate strategy based on short-term reaction.

• Evaluating a company's diversification programs over a long duration is a more accurate way to ascertain whether the corporate strategy was a success.

• Thirty three companies were studied with focus on the track record of major corporations.

• On average, companies entered roughly 80 new industries and 27 new fields.

• Most new entries were acquisitions at just over 70% and startups at 22%, while roughly %8 were joint ventures.

• Startups were the focus of IBM, Exxon, Du Pont, and 3M.

• ALCO Standard, Beatrice, and Sara Lee diversified through acquisitions.

• Data shows an unflattering view of diversification success.

• On average, businesses divested over half of its new industry purchases and 60% of its brand new industry acquisitions.

• Over 70% of all acquisitions in new sectors had been given up by fourteen firms.

• At 74%, the average divestiture rate is startling.

• General Electric, a highly regarded corporation, sold off a substantial portion of its acquisitions, especially those in new sectors.

• Companies at the top of Exhibit 2 recorded low rates of divestiture.

• Others have lower rates due to neglecting problem units and not divesting them.

• Shareholder returns (stock price appreciation plus dividends) was calculated for each research firm to compare with its divestiture rate.

• Firms are near the top of the list with above average shareholder returns while returns don't reliably assess diversification success.

• Returns often relies heavily on the underlying attractiveness of firms' base industries.

• CBS and General Mills, for instance, had extremely profitable base companies that subsidized subpar diversification results.

• Connecting shareholder value to diversification performance quantitatively only works when comparing shareholder value with and without diversification.

• Quantifying success or failure is hard due to the impossible nature of comparing performance,

• Diversification success can be judged by the number of units a company maintained.

• The data show the failure of corporate strategies.

• During the study, 6 out of 33 firms were acquired.

• Only the lawyers, investment bankers, and initial sellers profited from the majority of these acquisitions, not the shareholders.

Premises of Corporate Strategy

• Successful corporate strategy is based on a range of premises.
• These premises are about reality of diversification.
• Premises shouldn't be changed, and when dismissed, clarify in part why so many corporate strategies fail.

Competition at the Business Unit Level

• Diversified firms do not compete; only their business units do.
• Unless a corporate strategy nurtures the success of each unit, the strategy will lack success, no matter how elegantly constructed.
• Successful corporate strategy will reinforce competitive strategy.

Diversification Adds Costs and Constraints Inevitably

• Corporate overhead allocated to a unit may not be as important, therefore hidden costs and constraints are important.
• Units must explain their choices to top management, take time to comply with corporate or planning systems, abide by parent guidelines and HR policies, and forego motivating workers with direct equity ownership.
• These expenditures and constraints can be lowered but not removed completely.

Shareholders Can Diversify Themselves

• Investors can diversify their stock holdings by picking ones that align with their preferences and risk profiles.
• Investors are able to diversify for less as opposed to corporations because of shares purchases at market price to prevent high acquisition premiums.
• Corporate strategy can't work unless it adds importance to business units.
• Must provide real, tangible advantages that neutralize lost liberty expenditures to stakeholders by diversifying in ways that they can't reproduce.

Passing the Essential Tests

• Clearly identify the conditions in which diversification truly will create value.
• Conditions summarized in three essential tests:

The Attractiveness Test

• Diversification's industries needs to structurally attractive or capable of being attractive.

The Cost-of-Entry Test

• Entry costs must not capitalize all potential profits.

The Better-Off Test

• Either the new unit will gain a competitive edge by its link with the firm or vice versa.
• Most firms will guarantee their strategies pass certain tests.
• Ignoring one or two of them results in disastrous strategic impacts.

How Attractive Is the Industry?

• The level of return accessible from contending in an industry relies on its underlying organizational structure.
• High ROI industries is difficult to enter since entry restrictions are high and suppliers/buyers have only average bargaining power.
• An unattractive industry has structural faults like buyers, excess competition, and multiple of substitutes materials
• Diversification can't create stakeholder returns if it involves new industries lacking favorable frameworks.
• If the industry doesn't have such proceeds, the agency must be able to restructure that market.
• Gain a sustainable competitive advantage that brings returns above market standard since industries don’t need to be alluring prior with diversification.
• In fact, a company might gain from participating before the industry indicates its full potential, therefore transforming the company's arrangement.
• Corporate harmony is felt will lead to beneficial outcome.
• Businesses ignored basically bad industry structures, so unless the close fit permits big potential competitive edge, such soothe will come to pain, but leads to poor returns.
• Reason of ignoring the glamour test would be low in outlay.
• Occasionally buyer has insights and the owner is anxious to offer, so if the price is low it wont counterbalance a business.
• A corporation must reinvest in newly acquired division if only to replace fixed and working capital
• Diversifying firms proxy target industry appeal. Rushed robotics and video games, for instance, were burned: early growth wasn't measured.
• Industries are only profitable if their systems are attractive.

What is the cost of entry?

• Diversification couldn't build stakeholder revenue once the cost of entering a new operation consumes its projected proceeds.
• Intense marketplace influences function to do exactly that.
• A company can access new segments via acquisition or start up as acquisitions exposing themselves to active, effective merger, while an acquirer beats the marketplace.
• The acquirer only pays a price that completely reflects the outlook of the new department, though some bidders are usual and info flows quick.
• Investment investment bankers effectively work to make industry very productive, specifically junk bonds which have brought greater buyers.
• Large organizations vulnerable to acquisition premiums are high and indicate the upcoming firm projections with arithmetic intending yields to maintain returns of investing.
• As a startup, a corporation must solve entry restriction since attractive industry are more inviting on account of top obstacles the business bearing.
• High entry expenditures may dissolve, otherwise, entering marketplace eroded earnings
• Businesses will fail to apply the cost of entry test since much more inviting marketplace that much more costly to enter

Will The Business Be Better Off?

• A corporation must provide big competitive edge to the brand-new unit with a brand-new unit and provide significant gain to the corporation.
• Returns build most effectively once near time of entryway.
• The father instigates a total overhaul from the procedure and installs a high rated control employees using new gadgets if devices are nicely,
• Diversifying organization and advertising through nicely designed systems as a result.
• The father has no rationalization if outcome is one-time, so is advised to sell with complimentary corporate and shareholders

Portfolio Management

• Portfolio management is based primarily on diversification through acquisition.
• The corporation acquires solid attractive corporations with top managers who comply with a sound corporation

Restructuring

• A company that bases its strategy on restructuring becomes a restructurer of business units.
• The business that's new are necessarily unrelated.
• They all are based around unrealized opportunities.

An uncanny British restructurer:

• Hanson Trust company is one of the several skilled followers
• Has acquired companies; London Brick. Ever Ready Batteries, and SCM

Transferring Skills

• Intended the first two thoughts would create value when it comes to a company and relations it can be selector

An Action Program

• Translate the standards of company operation when it comes to excellent diversification.
• The agencies have to take objective in their own that the corporation includes, only by doing so in a program and is guided by

Sharing Activities

• The ability activities for operations is a major factor