From Competitive Advantage to Corporate Strategy

Topics: Strategic management, Management, Business Pages: 17 (5184 words) Published: December 1, 2010
From Competitive Advantage to Corporate Strategy

By Michael E. Porter

Corporate strategy, the overall plan for a diversified company, is both the darling and the stepchild of contemporary management practice—the darling because CEOs have been obsessed with diversification since the early 1960s, the stepchild because almost no consensus exists about what corporate strategy is, much less about how a company should formulate it.

A diversified company has two levels of strategy: business unit strategy and corporate strategy. Competitive strategy concerns how to create competitive advantage in each of the businesses in which a company competes. Corporate strategy concerns two different questions: what businesses the corporation should be in and how the corporate office should manage the array of business units.

Corporate strategy is what makes the corporate whole add up to more than the sum of its business unit parts.

The track record of corporate strategies has been dismal. I studied the diversification records of 33 large, prestigious U.S. companies over the 1950-1986 period and found that most of them had divested many more acquisitions than they had kept. The corporate strategies of most companies have dissipated instead of created shareholder value.

The need to rethink corporate strategy could hardly be more urgent. By taking over companies and breaking them up, corporate raiders thrive on failed corporate strategy. Fueled by junk bond financing and growing acceptability, raiders can expose any company to takeover, no matter how large or blue chip.

Recognizing past diversification mistakes, some companies have initiated large-scale restructuring programs. Others have done nothing at all. Whatever the response, the strategic questions persist. Those who have restructured must decide what to do next to avoid repeating the past; those who have done nothing must awake to their vulnerability. To survive, companies must understand what good corporate strategy is.

Concepts of Corporate Strategy

My study has helped me identify four concepts of corporate strategy that have been put into practice-portfolio management, restructuring, transferring skills, and sharing activities. While the concepts are not always mutually exclusive, each rests on a different mechanism by which the corporation creates shareholder value and each requires the diversified company to manage and organize itself in a different way. The first two require no connections among business units; the second two depend on them. While all four concepts of strategy have succeeded under the right circumstances, today some make more sense than others. Ignoring any of the concepts is perhaps the quickest road to failure.


The concept of corporate strategy most in use is portfolio management, which is based primarily on diversification through acquisition. The corporation acquires sound, attractive companies with competent managers who agree to stay on. While acquired units do not have to be in the same industries as existing units, the best portfolio managers generally limit their range of businesses in some way, in part to limit the specific expertise needed by top management.

The acquired units are autonomous, and the teams that run them are compensated according to unit results. The corporation supplies capital and works with each to infuse it with professional management techniques. At the same time, top management provides objective and dispassionate review of business unit results. Portfolio managers categorize units by potential and regularly transfer resources from units that generate cash to those with high potential and cash needs.

In a portfolio strategy, the corporation seeks to create shareholder value in a number of ways. It uses its expertise and analytical resources to spot attractive acquisition candidates that the individual shareholder could not. The company provides capital on favorable terms...
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