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 s, 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: Competitive strategy concerns how to create competitive advantage in each of the businesses in which a company competes. Corporate strategy concerns two different questions: 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. The corporate strategies of most companies have dissipated instead of created shareholder value. The need to rethink corporate strategy strategy 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. While there is disquiet about the success of corporate strategies, none of the available evidence satisfactorily indicates the success or failure of corporate strategy. Most studies have approached the question through measuring the stock market valuation of mergers, captured in the movement of the stock prices of acquiring companies immediately before and after mergers are announced. These studies show that the market values mergers as neutral or slightly negative, hardly cause for serious concern. Creating the diversification programs of a company over a long period of time is a much more telling way to determine whether a corporate strategy has succeeded or failed. My study of 33 companies, many of which have reputations for good management, is a unique look value the track record of major corporations. IBM, Exxon, Du Pont, and 3M, for example, focused on start-ups, while ALCO Standard, Beatrice, and Sara Lee diversified almost solely through acquisitions Exhibit 1 has a complete rundown. We studied the — diversification histories of 33 large diversified U. They were chosen at random from many broad sectors of the economy. To eliminate distortions caused by World War II, we chose as the base year and then identified each business the company was in. We tracked every acquisition, joint venture, and start-up made over this period—3, in all. We classified each as an entry into an entirely new sector or field financial services, for examplea new industry within a field the company was already in insurance, for exampleor a geographic extension of an existing product or service. We also classified each new field as related through unrelated to existing units. Then we tracked whether and when each entry was divested or shut down and the number of years each remained part of the corporation. In a few cases, we asked the companies specific questions. It is strategy to determine the success of an entry creating knowing the full purchase or start-up price, the profit history, the amount and timing of ongoing investments made in the unit, diversification any write-offs or write-downs were taken, and the selling price and terms of sale. Instead, we employed a relatively simple way to gauge success: The underlying assumption is that a company will generally not divest or close down a successful business except in a comparatively few special cases. Companies divested many of the entries value our sample within five years, a reflection of disappointment with diversification. Of the comparatively few divestments where the company disclosed a loss or gain, the divestment resulted in a reported loss in more than half the cases. The data in Exhibit 1 cover the entire — period. However, the divestment ratios in Exhibit 2 and Exhibit 3 strategy not compare entries and divestments over the entire period because doing so would overstate the success of diversification. Companies usually do not shut down or divest new entries immediately but hold them for some time to give them an opportunity to succeed. Our data show that the average holding period is five to slightly more than ten years, though many value occur within five years. To accurately gauge the success of diversification, we calculated the percentage of entries made by and by that were divested or closed down as of January If we had included more recent entries, we would have biased upward our assessment of how successful these entries had been. As compiled, these data probably understate the rate of failure. Companies tend to announce acquisitions and other forms of new entry with a flourish but diversification and shutdowns with a whimper, if at all. We have done our best to root out every such transaction, but we have undoubtedly missed some. There may also be new entries that we did not uncover, but our best impression is that the number is not large. Exhibit 1 Diversification Profiles of 33 Leading U. Beatrice, Continental Group, General Foods, RCA, Scovill, and Signal were taken over as the study was being completed. Their data cover the period value through takeover but not subsequent divestments. My data paint a sobering picture of the success ratio of these moves see Exhibit 2. Even a highly respected company like General Electric divested a very through percentage of its acquisitions, particularly those in new fields. Companies near the top of the list in Exhibit 2 achieved a remarkably low rate of divestment. Some bear witness to the success of well-thought-out corporate strategies. Others, however, enjoy a lower rate simply because they have not faced up to their problem units and divested them. Corporate-level 2 Acquisition Track Records of Leading U. Diversifiers Ranked by Percent Divested, — Note: Exhibit 3 Diversification Performance in Joint Ventures, Start-ups, and Unrelated Acquisitions, diversification Companies in same order as in Exhibit 2 Note: Their data cover the period up through takeover, but not subsequent divestments. I calculated total shareholder returns stock price appreciation plus dividends over the period of the study for each company strategy that I could compare them with its divestment rate. While companies near the top of the list have above-average shareholder returns, returns are not a reliable measure of diversification success. Companies like CBS and General Mills had extremely profitable base businesses that subsidized poor diversification track records. I would like to make one comment on the use of shareholder value to judge performance. Linking shareholder value quantitatively to diversification performance only works if you compare the shareholder value that is with the shareholder value that might have been without diversification. Because such a comparison is virtually impossible to make, measuring diversification success—the number of units retained by the company—seems to be as good an indicator as any of the contribution of diversification to corporate strategy. My data give a stark indication of the failure of corporate strategies. Only the lawyers, through bankers, and original sellers have prospered in most of these acquisitions, not the shareholders. Any successful corporate value builds on a number of premises. These are facts of life about diversification. They cannot be altered, and when ignored, they explain in part why so many corporate strategies fail. Diversified companies do not compete; only their business units do. Unless strategy corporate strategy places primary attention on nurturing the success of each unit, the strategy will fail, no matter how elegantly constructed. Successful corporate strategy must grow out of and reinforce competitive strategy. Obvious costs such as the corporate overhead allocated to a unit may not be as important or subtle as the hidden costs and constraints. A business unit must explain its decisions to top management, spend time complying with planning and other corporate systems, live with parent company guidelines and personnel policies, and forgo the opportunity to motivate employees with direct equity ownership. These costs and constraints can be reduced but not entirely eliminated. Shareholders can diversify their own portfolios 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 by providing tangible benefits value offset the inherent costs of lost independence and to shareholders by diversifying in a way they could not replicate. To understand how to formulate corporate strategy, it is necessary to specify the conditions under which diversification will truly create shareholder value. These conditions can be summarized in three essential tests:. The industries chosen for diversification must be structurally attractive or capable of being made attractive. The cost of entry must not capitalize all the future profits. Either the new unit must gain competitive advantage from its link with the corporation or vice versa. Of course, most companies will make certain that their proposed strategies pass some of these tests. But my study diversification shows that when companies ignored one or two of them, the strategic results were disastrous. In the long run, the rate of return available from competing in an industry is a function of its underlying structure, which I have described in another HBR article. An unattractive industry like steel will have structural flaws, including a plethora of substitute materials, powerful and price-sensitive buyers, and excessive rivalry caused by high fixed costs and a large group of competitors, many of whom are state supported. Diversification cannot create shareholder value unless new industries have favorable structures that support returns exceeding the cost of capital. An industry need not be attractive before diversification. In fact, a through might benefit from entering before the industry shows its full potential. Unless the close fit allows substantial competitive advantage, however, such comfort will turn into pain when diversification results in poor returns. Royal Dutch Shell and other leading oil companies have had this unhappy experience in a number of chemicals businesses, where poor industry structures overcame the benefits of vertical integration and skills in process technology. Another common reason for ignoring the value test is a low entry cost. Sometimes the buyer has an inside track or the owner is anxious to sell. Even if the price is actually low, however, a one-shot gain will not offset a perpetually poor business. Almost always, the company finds it must reinvest in the newly acquired unit, if only to replace fixed assets and fund working capital. Many that rushed into fast-growing industries personal computers, video games, and robotics, for example were burned because they mistook early growth for long-term profit potential. Industries are profitable not because value are sexy or high tech; they are profitable only if their structures are attractive. Diversification cannot build shareholder value if the cost of entry into a new business eats up its expected returns. Strong market forces, however, are working to do just that. A company can enter new industries by acquisition or start-up. Acquisitions expose it to an increasingly efficient merger market. An acquirer beats the market if it pays a price not fully reflecting the prospects of the new unit. Yet multiple bidders are commonplace, information flows rapidly, and investment bankers and other intermediaries work aggressively to make the market as efficient as possible. In recent years, new financial instruments such as junk bonds have brought new buyers into the market and made even large companies vulnerable to takeover. Philip Morris paid more than creating times book value for Seven-Up Company, for example. Simple arithmetic meant that profits had to more than quadruple to sustain the preacquisition ROI. Since there proved to be little Philip Morris could add in marketing prowess to the sophisticated marketing wars in the soft-drink industry, the result was the unsatisfactory financial performance of Seven-Up and ultimately the decision to divest. In a start-up, the company must overcome entry barriers. Bearing the full cost of the entry barriers might well dissipate any potential profits. Otherwise, other entrants to the industry would have already eroded its profitability. In the excitement of finding an appealing new business, companies sometimes forget to apply the cost-of-entry test. The more attractive a new industry, the more expensive it is to get into. A corporation must bring some significant competitive advantage to the new unit, or the new unit must offer potential for significant advantage to the corporation. Sometimes, the benefits to the new unit accrue only once, near the time of entry, when the parent instigates a major overhaul of its strategy or installs a first-rate management team. Other diversification yields ongoing competitive advantage if the new unit can market its product through the well-developed distribution system of its sister units, for instance. This is one of the important underpinnings of the merger of Baxter Travenol and American Hospital Supply. When the benefit to the new unit comes only once, the parent company has no rationale for holding the new unit in its portfolio over the long term. Once the results of the one-time improvement are clear, the diversified company no longer adds value to offset the inevitable costs imposed on the unit. It is best to sell the unit and free up corporate resources. The better-off test does not imply that diversifying corporate risk creates shareholder value in and of itself. Doing something for shareholders that they can do themselves is not a basis for corporate strategy. Diversification of risk should only be a by-product of corporate strategy, not a prime motivator. Executives ignore the better-off test most of all or deal with it through arm waving or trumped-up logic rather than hard strategic analysis. One reason is that they confuse company size with shareholder value. In the drive to run a bigger company, they lose sight of their real job. They may justify the suspension of the better-off test by pointing to the way they manage diversity. By cutting corporate staff to the bone and giving business units nearly complete autonomy, they believe they avoid the pitfalls. Such thinking misses the whole point of diversification, which is to create shareholder value rather than to avoid destroying it. The three tests for successful diversification set the standards that any corporate strategy must meet; meeting them is so difficult that most diversification fails. Many companies lack a clear concept of corporate strategy to guide their diversification or pursue a concept that does not address the tests. Others fail because they implement a strategy poorly. My study has corporate-level 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 creating the right circumstances, today some make more sense than diversification. 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 the 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 that reflect corporatewide fundraising ability. It introduces professional management skills and discipline. Finally, it provides high-quality review and coaching, unencumbered by conventional wisdom or emotional attachments to the business. The logic of the portfolio management concept rests on a number of vital assumptions. Acquired companies must be truly undervalued because the parent does little for the new unit once it is acquired. To meet the better-off test, the benefits the corporation provides must yield a significant competitive advantage to acquired units. The style of operating through highly autonomous business units must both develop sound business strategies and motivate managers. In most countries, the days when portfolio management was a valid concept of corporate strategy are past. Other benefits have also eroded. Large companies no longer corner the market for professional management skills; in fact, more and more observers believe managers cannot necessarily run anything in the absence of industry-specific knowledge and experience. Another supposed advantage of the portfolio management concept—dispassionate review—rests on similarly shaky ground since the added value of review alone is questionable in a portfolio of sound companies. Through benefit of giving business units complete autonomy is also questionable. Setting strategies of units independently may well undermine unit performance. The companies in my sample that have succeeded in diversification have recognized the value of interrelationships and understood that a strong sense of corporate value is as important as slavish adherence to parochial business unit financial results. But it is the sheer complexity of the management task that has ultimately defeated even the best portfolio managers. As the size of the company grows, portfolio managers need to find more and more deals just to maintain growth. Supervising dozens or even hundreds of disparate units and under chain-letter pressures to add more, management begins to make mistakes. Eventually, a new management team is installed that initiates wholesale divestments and pares down the company to strategy core businesses. Reflecting these realities, the U. In developing countries, where large companies are few, capital markets are undeveloped, and professional management is scarce, portfolio management still works. But it is no longer a valid model for corporate strategy in advanced economies. Nevertheless, the technique is in the limelight today in the United Kingdom, where it is supported so far by a newly energized stock creating eager for excitement. But this enthusiasm will wane—as well it should. Portfolio management is no way to conduct corporate strategy. Unlike its passive role as a portfolio manager, when it serves as banker and reviewer, a company that bases its strategy on restructuring becomes an active restructurer of business units. The new businesses are not necessarily related to existing corporate-level. All that is necessary is unrealized potential. The restructuring strategy seeks out undeveloped, sick, or threatened organizations or industries on the threshold of significant change. The parent intervenes, frequently changing the unit management team, shifting strategy, or infusing the company with new technology. Then it may make follow-up acquisitions to build a critical mass and sell off unneeded or unconnected parts and thereby reduce the effective acquisition cost. The result is a strengthened company or a transformed industry. As a coda, the parent sells off the stronger unit once results are clear because the parent is no longer adding value and top management decides that its attention should be directed elsewhere. A conglomerate with units in many industries, Hanson might seem on the surface a portfolio manager. In fact, Hanson and one or two other conglomerates have a much more effective corporate strategy. Although a mature company suffering from low growth, the typical Hanson target is not just in any industry; it has an attractive structure. Its customer and supplier power is low and rivalry with competitors moderate. The target is a market leader, rich in assets but formerly poor in management. Hanson pays little of the present value of future cash flow out in an acquisition premium and reduces purchase price even further by aggressively selling off businesses that it cannot improve. In this way, it recoups just over a third through the cost of a typical acquisition during the first six months of ownership. Like the best restructurers, Hanson approaches each unit with a modus operandi that it has perfected through repetition. Hanson emphasizes low costs and tight financial controls. To reinforce its strategy of keeping costs low, Hanson carves out detailed one-year financial budgets with divisional managers and through generous use of performance-related bonuses and share option schemes gives them incentive to deliver the goods. If it succumbs to the allure of bigness, Hanson may value the course of the failed U. When well implemented, the restructuring concept is sound, for it passes the three tests of successful diversification. The restructurer meets the cost-of-entry test through the corporate-level of company it acquires. It limits acquisition premiums by buying companies with problems and lackluster images or by buying into industries with as yet unforeseen potential. Intervention by the corporation clearly meets the better-off test. Provided that the target industries are structurally attractive, the restructuring model can create enormous shareholder value. To work, the restructuring strategy requires a corporate management team with the insight to spot undervalued companies or positions in industries ripe for transformation. The same insight is necessary to actually turn the units around even though they are in new and unfamiliar businesses. These requirements expose the restructurer to considerable risk and usually limit the time in which the company can succeed at the strategy. The most skillful proponents understand this problem, recognize their mistakes, and move decisively to dispose of them. The best companies realize they are not just acquiring companies but restructuring an industry. Unless they can integrate the acquisitions to create a whole new strategic position, they are just portfolio managers in disguise. Another important difficulty surfaces if so many other companies join the action that they deplete through pool of suitable candidates and bid their prices up. Perhaps the greatest pitfall, however, is that companies find it very hard to dispose of business units once they are restructured and performing well. Human nature fights economic rationale. Size supplants shareholder value as the corporate goal. The company corporate-level not sell a unit even though the company no longer adds value to the unit. While the transformed units would be better off in another company that had related businesses, the restructuring company instead retains them. Gradually, it becomes a portfolio manager. The strategy need to keep growing intensifies the pace of acquisition; errors result and standards fall. The restructuring company turns into a conglomerate with returns that only equal the average of all industries at best. The last two concepts exploit the interrelationships between businesses. In articulating them, however, one comes face-to-face with the often ill-defined concept of synergy. If you believe the text of the countless corporate annual reports, just about anything is related to just about anything else! But imagined synergy is much more common than real synergy. Such corporate relatedness is an ex post facto rationalization of a diversification undertaken for other reasons. Even synergy that is clearly defined often fails to materialize. Instead of cooperating, business units often compete. A company that can define the synergies it is pursuing still faces significant organizational impediments in achieving them. But the need to capture the benefits of relationships between businesses has never been more important. Technological and competitive developments already link many businesses and are creating new through for competitive advantage. In such sectors as financial services, computing, office equipment, entertainment, and health care, interrelationships among previously distinct businesses are perhaps the central concern of strategy. To understand the role of relatedness in corporate strategy, we must give new meaning to this ill-defined idea. I have identified a good way to start—the value chain. I call them value activities. It is at this level, not in the company as a whole, that the unit achieves competitive advantage. I group these activities in nine categories. Primary activities create the product or service, deliver and market it, and provide after-sale support. The categories of primary activities include inbound logistics, operations, outbound logistics, marketing and sales, and service. Support activities provide the inputs and infrastructure that allow the primary activities to take place. The categories are company infrastructure, human resource management, technology development, and procurement. The value chain defines the value types of interrelationships that may create synergy. The second is the ability to share activities. Two business units, for example, can share the same sales force or logistics network. The value chain helps expose the last two and most important concepts of corporate strategy. The transfer of skills among business units in the diversification company is the basis for one concept. While each business unit has a separate value chain, knowledge about how to perform activities is transferred among the units. For example, a toiletries business unit, expert in the marketing of convenience products, transmits ideas on new positioning concepts, promotional techniques, and packaging creating to a newly acquired unit that sells cough syrup. Newly entered industries can benefit from the expertise of existing units and vice versa. These opportunities arise when business units have similar buyers or channels, similar value activities like government relations or procurement, similarities in the broad configuration of the value chain for example, managing a multisite service organizationor the same strategic concept for example, low cost. Even though the units operate separately, such similarities allow the sharing of knowledge. Of course, some similarities are common; one can imagine them at some level between almost any pair of businesses. Countless companies have fallen into the trap of diversifying too readily because of similarities; mere similarity is not enough. Transferring skills leads strategy competitive advantage only corporate-level the similarities among businesses meet three conditions:. The activities involved in the businesses are corporate-level enough that sharing expertise is meaningful. Broad similarities marketing intensiveness, for example, or a common core process technology such as bending metal are not a sufficient basis for diversification. The resulting ability to transfer skills is creating to have little impact diversification competitive advantage. The transfer of skills involves activities important to competitive advantage. Transferring skills in peripheral activities such as government relations or real estate in consumer goods units may be beneficial but is not a basis for diversification. The skills creating represent a significant source of competitive advantage for the receiving unit. The expertise or skills to be transferred are both advanced and proprietary enough to be beyond the capabilities of competitors. The transfer of skills is an active process that significantly changes the strategy or operations of the receiving unit. The prospect for change must be specific and identifiable. Almost guaranteeing that no shareholder value will be created, too many companies are satisfied with vague prospects or faint hopes that skills will transfer. The transfer of skills does not happen by accident or by osmosis. The company will have to reassign critical personnel, even on a permanent basis, and the participation and support of high-level management in skills transfer is essential. Many companies have been defeated at skills transfer because they have not provided their business units with any incentives to participate. Transferring skills meets the tests of diversification if the company truly mobilizes value expertise across units. This makes certain the company can offset the acquisition premium or lower the cost of overcoming entry barriers. The industries the company chooses for diversification must pass the attractiveness through. Even a close fit that reflects opportunities to transfer skills may not overcome poor industry structure. Opportunities to transfer skills, however, may help the company transform the structures of newly entered industries and send them in favorable directions. The transfer of skills can be one-time or ongoing. If the company exhausts opportunities to infuse new expertise into a unit after the initial postacquisition period, the unit should ultimately be sold. The corporation is no longer creating shareholder value. Few companies have grasped this point, however, and many gradually suffer mediocre returns. Yet a company diversified into well-chosen businesses can transfer skills eventually in many directions. If corporate management conceives of its role in this way and creates appropriate organizational mechanisms to facilitate cross-unit interchange, the opportunities to share expertise will be meaningful. By using both acquisitions and internal development, companies can build a transfer-of-skills strategy. The presence of a strong base of skills sometimes creates the possibility for internal entry instead of the acquisition of a going concern. Successful diversifiers that employ the concept of skills transfer may, however, often acquire a company in the target industry as a beachhead and then build on it with their internal expertise. By doing so, they can reduce some of the risks of internal entry and speed up the process. Two companies that have diversified using the transfer-of-skills concept are 3M and Pepsico. The fourth concept of corporate strategy is based on sharing activities in the value chains among business units. McKesson, a leading distribution company, will handle such diverse lines as pharmaceuticals and liquor through superwarehouses. The ability to share activities is a potent basis for corporate strategy because sharing often enhances competitive advantage by lowering cost or raising differentiation. Creating not all sharing leads to competitive advantage, and companies can encounter deep organizational resistance to even beneficial sharing possibilities. These hard truths have led many companies to reject synergy prematurely and retreat to the false simplicity of portfolio management. A cost-benefit analysis of prospective sharing opportunities can determine whether synergy is possible. Sharing can lower costs if it achieves economies of scale, boosts the efficiency of utilization, or helps a company move more rapidly down the learning curve. Sharing can also enhance the potential for differentiation. A shared order-processing system, for instance, may allow new features and services that a buyer will value. Sharing can also reduce the cost of differentiation. A shared service network, for example, may make more advanced, remote servicing technology economically feasible. Often, sharing will allow an activity to be wholly reconfigured in ways that can dramatically raise competitive advantage. Sharing must involve activities that are significant to competitive advantage, not just any activity. Conversely, diversification based on the opportunities to share only corporate overhead is rarely, if ever, appropriate. Sharing activities inevitably involves costs that the benefits must outweigh. One cost creating the greater coordination required to manage a shared activity. More important is the need to compromise the design or performance of an activity so that it can be shared. A salesperson handling the products of two business units, for example, must operate in a way that is usually not what either unit would choose were it independent. Many companies have only superficially identified their potential for sharing. Companies also merge activities without consideration of whether they are sensitive to economies of scale. When they are not, the coordination costs kill the benefits. Companies compound such errors by not identifying costs of sharing in advance, when steps can be taken to minimize them. Costs of compromise can frequently be mitigated by redesigning the activity for sharing. The shared salesperson, for example, can be provided with a remote computer terminal to boost productivity and provide more customer information. Jamming business units together without such thinking exacerbates the costs of sharing. Despite such pitfalls, opportunities to gain advantage from sharing activities have proliferated because of momentous developments in technology, deregulation, and competition. The infusion of electronics and information systems into many diversification creates new opportunities to link businesses. The corporate strategy of sharing can involve both acquisition and internal development. Internal development is often possible because the corporation can bring to bear clear resources in launching a new unit. Start-ups are less difficult to integrate than acquisitions. Companies using the shared-activities concept can also make acquisitions as beachhead landings into a new industry and diversification integrate the units through sharing with other units. The fields into which each has diversified are a cluster of tightly related units. Marriott illustrates both successes and failures in sharing activities over time. Marriott began in the restaurant business in Washington, D. Because its customers often ordered takeouts on the way to the national airport, Marriott eventually entered airline catering. From there, it jumped into food service management for institutions. Marriott then began broadening its base of family restaurants and entered the hotel industry. More recently, it has moved into restaurants, snack bars, and merchandise shops in airport terminals and into gourmet restaurants. In addition, Marriott has branched out strategy its hotel business into cruise ships, theme parks, wholesale travel agencies, budget motels, and retirement centers. Marriott shares a number of important activities across units. A shared procurement and distribution system for food serves all Marriott units through nine regional procurement centers. Marriott also has a fully integrated real estate unit that brings corporatewide power to bear on site acquisitions as well as on the designing and building of all Marriott locations. Start-ups or small acquisitions are used for initial entry, depending on how close the opportunities for sharing are. To expand its geographic base, Marriott acquires companies and then disposes of the parts that do not fit. Marriott has largely failed in diversifying into gourmet restaurants, theme parks, cruise ships, and wholesale travel agencies. In the first three businesses, Marriott discovered it could not transfer skills despite apparent similarities. Standardized menus did not work well in gourmet restaurants. Running cruise ships and theme parks was based more on entertainment and pizzazz than the carefully disciplined management of hotels and mid-price restaurants. The wholesale travel agencies were ill fated from the start because Marriott had to compete with an important customer for its hotels and had no proprietary skills or opportunities to share with which to add value. Following the shared-activities model requires an organizational context in which business unit collaboration is encouraged and reinforced. Highly autonomous business units are inimical to such collaboration. The company must put into place a variety of what I call horizontal mechanisms—a strong sense of corporate identity, a clear corporate mission statement that emphasizes the importance of integrating business unit strategies, an incentive system that rewards more than just business unit results, cross-business-unit task forces, and other methods of integrating. A corporate strategy based on through activities clearly meets the better-off test because business units gain ongoing tangible advantages from others within the corporation. It also meets the cost-of-entry test by reducing the expense of creating the barriers to internal entry. Other bids for acquisitions that do not share opportunities will have lower reservation prices. Even widespread opportunities for sharing activities do not allow a company to suspend the attractiveness test, however. Many diversifiers have made the critical mistake of equating the close fit of a target industry with attractive diversification. Target industries must pass the strict requirement test of having an attractive structure as well as a close fit in opportunities if diversification is to ultimately succeed. Each concept of corporate strategy allows the diversified corporate-level to create shareholder strategy in a different way. The caveat is that portfolio management is only sensible in limited circumstances. If its business units are in unattractive industries, the company must start from scratch. If the company has few truly proprietary skills or activities it can share in related diversification, through its initial diversification must rely on other concepts. Yet corporate strategy should diversification be a once-and-for-all choice but a vision that can evolve. A company should choose its long-term preferred concept and then corporate-level pragmatically toward it from its initial starting point. Both the strategic logic and the experience of the companies studied over the last decade suggest that a company will create shareholder value through diversification to a greater and greater extent as its strategy moves from portfolio management toward sharing activities. Each concept of corporate strategy is not mutually exclusive of those that come before, a potent advantage of the third and fourth concepts. A company can employ a restructuring strategy at the same time it transfers skills or shares activities. A strategy based on shared activities becomes more powerful if business units can also exchange skills. As the Marriott case illustrates, a company can often pursue the two strategies together and even incorporate some of the principles of restructuring with them. When it chooses industries in which to transfer skills or share activities, the company can also investigate the possibility of transforming the industry structure. When a company bases its strategy on interrelationships, it has a broader basis on which to create shareholder value than if it rests its entire strategy on transforming companies in unfamiliar industries. My study supports the soundness of basing a corporate strategy on the transfer of skills or shared activities. They have made a disproportionately low percentage of unrelated acquisitions, unrelated being defined as having no clear opportunity to transfer skills or share important activities see Exhibit 3. Even successful diversifiers such as 3M, IBM, and TRW have terrible records when they have strayed into unrelated acquisitions. Successful acquirers diversify into fields, each of which is related to many others. Companies with the best acquisition records tend to make heavier-than-average use of start-ups and joint ventures. Most companies shy away from modes of entry besides acquisition. My results cast doubt on the conventional wisdom regarding start-ups. Exhibit 3 demonstrates that while joint ventures are about as risky as acquisitions, start-ups are not. When a company has the internal strength to start up a unit, it can be safer and less costly to launch a company than to rely solely on an acquisition and then have to deal with the problem of integration. Japanese diversification histories support the soundness of start-up as an entry alternative. My data also illustrate that none of the concepts of corporate strategy works when industry structure is poor or implementation is bad, no matter how related the industries are. Xerox acquired companies in related industries, but the businesses had poor structures and its skills were insufficient to provide enough competitive advantage to offset implementation problems. To translate the principles of corporate strategy into through diversification, a company must first take an objective look at its existing businesses and the value added by the corporation. Only through such an assessment can an corporate-level of good corporate strategy grow. That understanding should guide future diversification as well as the development of skills and activities with which to select further new businesses. The following action program provides a concrete approach to conducting such a review. A company can choose a corporate strategy by:. A company should begin to develop a corporate strategy by identifying all the opportunities it has to share activities or transfer skills in its existing portfolio of business units. The company will not only find ways to enhance the competitive advantage of existing units but also come upon several strategy diversification avenues. The lack of meaningful interrelationships in the portfolio is an equally important finding, suggesting the need to justify the value added by the corporation or, alternately, a fundamental restructuring. Successful diversification starts with an understanding of the core businesses that will serve as the basis for corporate strategy. Core businesses are those that are in an attractive industry, have the potential to achieve sustainable competitive advantage, have important interrelationships with other business units, and provide skills or activities that represent a base from which to diversify. The company must first make certain its core businesses are on sound footing by upgrading management, internationalizing strategy, or improving technology. The study shows that geographic extensions of existing units, whether by acquisition, joint venture, or start-up, had a substantially lower divestment rate than diversification. Corporate-level company must then patiently dispose of the units that are not core businesses. Selling them will free resources that could be better deployed elsewhere. In some cases disposal implies immediate liquidation, while in others the company should dress up the units and wait for a propitious market or a particularly eager buyer. Top management can facilitate interrelationships by emphasizing cross-unit collaboration, grouping units organizationally and modifying incentives, and taking steps to build a strong diversification of corporate identity. A company should inventory activities in existing business units that represent the strongest foundation for sharing, such as strong distribution channels or world-class technical facilities. These will in turn lead to potential new business areas. A company can use acquisitions as a beachhead or employ start-ups to exploit internal capabilities and minimize integrating problems. Companies can pursue this strategy through acquisition, although they may be able to use start-ups if their existing units have important skills they can readily transfer. Such diversification is often riskier because of the tough conditions necessary for it to work. Given the uncertainties, a company should avoid diversifying on the basis of skills transfer alone. Rather it should also be viewed as a stepping-stone to subsequent diversification using shared activities. New industries should be chosen that will lead naturally to other businesses. The goal is to build a cluster of related and mutually reinforcing business units. When a company uncovers undermanaged companies and can deploy adequate management talent and resources to the acquired units, then it value use a restructuring strategy. The more developed the capital markets and the more active the market for companies, the more restructuring will require a patient search for that special opportunity rather than diversification headlong race to acquire as many bad apples corporate-level possible. Paying dividends is better than destroying shareholder value through diversification based on shaky underpinnings. Tax considerations, which some companies cite to avoid dividends, are hardly legitimate reasons to diversify if a company cannot demonstrate the capacity to do it profitably. Defining a corporate theme is a good way to ensure that the corporation will create shareholder value. Having the right theme helps unite the efforts of business units and reinforces the ways they interrelate as well as guides the choice of new businesses to enter. NEC integrates its computer, semiconductor, telecommunications, and consumer electronics businesses by merging computers and communication. It is all too easy to create a shallow corporate theme. It entered such industries as toys, crafts, musical instruments, sports teams, and hi-fi retailing. While this corporate theme sounded good, close listening revealed its hollow ring. Saddled with the worst acquisition creating in my study, CBS has corporate-level the shareholder value created through its strong performance in broadcasting and records. Moving from competitive strategy to corporate strategy is the business equivalent of passing through the Bermuda Triangle. The failure of corporate strategy reflects the fact that most diversified companies have failed to think in terms of how they really add value. A corporate strategy that truly enhances the competitive advantage of each business unit is the best defense against the corporate raider. The studies also show that sellers of companies capture a large fraction of the gains from merger. Jensen and Richard S. Some recent evidence also supports the conclusion that acquired companies often suffer eroding performance after acquisition. Lacy Glenn Thomas Lexington, Mass.: Lexington Books,p. Ravenscraft and Frederick M. This observation has been made by a number of authors. See, for example, Malcolm S. Salter and Wolf A. Weinhold, Diversification Through Acquisition New York: Porter is a University Professor at Harvard, based at Harvard Business School in Boston. He is a coauthor, creating Robert S. Your Shopping Strategy is empty. May Issue Explore the Archive. A Sober Picture While there is disquiet about the success of corporate strategies, none of the available evidence satisfactorily indicates the success or failure of corporate strategy. Where the Data Come From We studied the — diversification histories of 33 large diversified U. Exhibit 4 Concepts of Corporate Strategy. Porter, Competitive Advantage New York: A version of this article appeared in the May issue of Harvard Business Review. About Us Careers Privacy Policy Copyright Information Trademark Policy Harvard Business Publishing:. Harvard Business Publishing is an affiliate of Harvard Business School.
Module 5- Diversification - related and rywuyahyh.web.fc2.com
Module 5- Diversification - related and rywuyahyh.web.fc2.com
3 thoughts on “Corporate-level strategy creating value through diversification”
Given that only the religion of pervasive kenosis can be truly universal, no single historical individual can exhaust its fullness by virtue of his redemptive acts, and no religious institution can grasp and articulate its meaning by means of dogmatic or doctrinal teachings.
Given that only the religion of pervasive kenosis can be truly universal, no single historical individual can exhaust its fullness by virtue of his redemptive acts, and no religious institution can grasp and articulate its meaning by means of dogmatic or doctrinal teachings.
This happens even though courts have said that juveniles are different from adults and in some situations must be treated differently.
Their planets have astral suns and moons, more beautiful than the physical ones.