Diversified companies generally have two levels of strategy, including a competitive and corporate strategy. By developing a competitive strategy, the organization aims to win a competitive advantage over its competitors in all fields of interest for the company. At the same time, corporate strategy relates to such significant questions as the appropriate and profitable businesses that the corporation should pay attention to and business unit management.
Researchers and businessmen still have doubts about the implementation of corporate strategy; no exact answer on whether it brings positive or negative effects was given. Hence, sometimes this business tool is considered not trustworthy enough. Porter (1987) underlines that the majority of researched companies preferred to divest more than 50% of their acquisitions in completely new fields of business. However, the success of diversification cannot be easily measured because total shareholder returns cannot be compared with the company’s divestment rate. Hence, the corporate strategy proved to be unreliable in many ways.
Generally, corporate strategies fail because organizations prefer not to follow several principles that create the basis of corporate strategy success. These facts suggest that competition does not occur among diversified companies; only their business units can be considered competitors. Additionally, the costs of developing a corporate strategy that includes planning, interacting with top management, and motivating employees cannot be fully reduced. Moreover, it is suggested that shareholders can diversify themselves (Porter, 1987). One of the integral parts of diversification is choosing an attractive and potentially profitable industry for diversification.
However, the reality is that attractive industries are often difficult and unprofitable to enter. On the opposite, unattractive industries are quite easy to enter but, at the same time, not profitable enough for diversification. Therefore, it is better for an organization to enter an industry before it shows its full potential, and this is the main reason for the uselessness of attractiveness tests. In diversification, it is a common rule that if a unit brings benefits to the company only once, it is better to sell it and free up corporate resources rather than keep the unit.
Despite obvious difficulties, portfolio management is a crucial concept for any organization, and it is based on diversification through acquisition. If correctly implemented, it proved to be effective in both developed and developing countries. On the opposite, the restructuring concept relies on sick and undeveloped industries or companies that can be sold and bought. However, it is a tendency that it is hard for companies to dispose of their units once they are restructured. The concepts of transferring skills and sharing activities generally rely on synergy and the value chain notion. Sharing activities define a system of labor distribution between a company’s business units that will help increase labor productivity (Porter, 1987). The process of choosing a corporate strategy fully depends on organizational characteristics, business past, and the situation in the market. Hence, to successfully implement a corporate strategy, the company needs to consider and estimate its own potential, structure, business units, and potential success.
Reference
Porter, M. E. (1987). Form competitive advantage to corporate strategy. Harvard Business Review. Web.