A diversified company has 2 levels of strategy:
1. Business unit (competitive): how to create competitive advantage in each business?
2. Corporate (companywide): concerns two different questions: what businesses the corporation should be in and how the corporate office should manage the array of business units?
Most corporate strategies have dissipated instead of created shareholder value. Now we have to rethink to corporate strategy according to past diversification strategies failed and large takeover possibilities over every firm.
In order to study the diversification program of a firm we have to analyze it over the long run. Porter found that on average corporation divested more than half their acquisitions in new industries and more than 60% of their acquisitions in entirely new fields. He calculated for each company he could compare with its divestment rate the total shareholder returns. Shareholder returns are not a good measure of diversification success! This measure could work only if you compare the shareholder value that is with the shareholder value without diversification.
Premises to corporate strategy.
1. Competition occurs at the business unit level
2. Diversification inevitability adds costs and constraints to business units 3. Shareholders can readily diversify themselves trough portfolio diversifications without paying acquisition premium. The corporate strategy cannot succeed unless it truly adds value! Under which conditions diversification can create shareholder value? 1. The attractiveness test for the industry in which diversify Diversification cannot create shareholder value unless new industries have favorable structures that support returns exceeding the coc. If this isn’t the case the company must have the capability to restructure the industry or to have a competitive advantage. An industry need to be attractive before entering. A company...