What does corporate strategy truly consist of?
The past few weeks, I have been pouring over strategic management books and articles when my curiosity was sparked by this question. Endeavoring to better understand what corporate strategy truly entails and how sustainable competitive advantage relates to corporate strategy, I came upon one of my now favorite articles. It is one written by Michael Porter (a pioneer in strategy) and found in a Harvard Business Review book of consolidated articles on the topic called, Strategy: Seeking and Securing Competitive Advantage. (It’s newly added to my reading list and I highly recommend this book to those who are interested in strategy and the truth behind long-held corporate myths.) According to this article, corporate strategy can be broken down into four concepts; portfolio management, restructuring, transferring skills, and sharing activities
To begin, the most widely used concept in corporate strategy is portfolio management. Furthermore, it is also the most commonly held strategy concept in many organizations both large and small worldwide. In a nutshell, most of these activities consist of the acquisition of attractive businesses in hopes to add shareholder value and to diversify. Managers choose to add companies in order to gain a competitive advantage and to capitalize on future profits. There are dangers and downsides to this concept that are becoming more common as markets become more and more developed. One example of the dangers of this concept is acquiring a company because of a hot trend such as in the technology industry. The best practices for portfolio businesses are to stay within the boundaries of the matching industry when looking to acquire a new company. It is important to not just look for good companies that will add value in the short term but also ones that will add sustainable long term value. If a company is acquired because of short term benefits, it will cost in the long run…especially the sell off price (lol). According to Porter, shareholders are actually better off diversifying themselves. These days, portfolio management is becoming less fitting in advanced markets. Relying solely on portfolio management as a strategy of large company is a prerequisite to failure. Hopefully this concept will become a prehistoric dinosaur to advanced economies.
The second concept of corporate strategy may be closely related to portfolio management. If (and usually when) portfolio management fails, the next concept often comes into play (but the two may not be mutually exclusive). When I hear the word “restructuring” I’m programmed to think downsizing or its disguise name “rightsizing”. Restructuring, (I stand corrected) is the shift of strategies or a significant change in a business unit in order to capitalize on “unrealized potential”. A company that I know fairly well is under restructure at this time. The restructuring process brought the company to divide business units into tiers. Labor and management were changed to reflect the sales of that unit. Companies targeted for this concept of corporate strategy are usually ones with declining ROI and struggling units. The company that I spoke of is actually growing at a substantial pace so I am curious as to the basis of this decision. My assumption is that the restructure is just one part of an advanced long-term strategy that combines two or more of the four concepts. A company with a successful restructure is usually characterized by strengthened business units and reduction of costs.
These two are the most common concepts that occur outside the corporation. The other two occur within and rely on the interrelationships between business units. Relying solely on one concept is possible but some advanced corporations may not find this such a strong strategy. A combination is ideal if corporate strategy is crafted with the long-term in mind. The first two may not be the most ideal concepts but may be necessary depending on the circumstances.