Porter, Michael E. (1987), From competitive advantage to corporate strategy, Vol.

59,
Cambridge, MA: Harvard Business Review.
Summarized by: Anubhav Aggarwal
Many corporations choose to grow by acquiring other companies, but not all acquisitions turn
out to be profitable. Such acquisitions need to be guided by a corporate strategy that seeks to
maximize shareholder value. Corporate strategy is what makes the corporate whole add up to
more than the sum of business unit parts. It guides the corporation in choosing the businesses it
should be in and how the array of business units should be managed.
There are four popular concepts of corporate strategy: portfolio management, restructuring,
transferring skills, and sharing activities. The first two do not require the acquired business unit
to be connected with the existing units; the second two depend on such a connection. Although
the concepts are not always mutually exclusive, the way in which they generate value for the
corporation is different for each.
In order to increase shareholder value for the corporation, these strategies should pass:
The attractiveness test. High ROI, high entry barriers, low customer and supplier
bargaining power, and few substitute products.
The cost-of-entry test. If the cost of entry is so high that it prejudices the potential return
on investment, profitability is eroded before the game has started.
The better-off test. How will the acquisition provide advantage to either the acquirer or
the acquired?
Portfolio Management
This corporate strategy is analogous to its namesake in the financial sector, where it refers to an
investors collection of shares in different companies, purchased to spread investment risk. The
corporation acquires sound, attractive companies with competent managers who agree to stay on.
But unlike an individual investor, a corporation using a portfolio management strategy tries to
maximize its return by improving the operations of the acquired companies. It does so by
supplying capital on favorable terms and improving management techniques.
The acquired units are autonomous and do not have to be in the same industries as the existing
units. The top management provides objective and dispassionate review of business unit results
and the teams that run them are compensated accordingly. Portfolio managers categorize units by
potential and regularly transfer resources from units that generate cash to those with high
potential and cash needs.
In order to pass the attractiveness and cost-of-entry tests, a corporation must find truly
undervalued companies. This has become increasingly difficult in well-developed capital
markets where everybody is aware of such companies. To meet the better-off test, the
corporation must provide a significant competitive advantage to the acquired firm or vice-versa.
Normally, no such advantage emerges as the business units are autonomous. But in the end, it is
the sheer complexity of managing a growing set of unrelated businesses that defeats even the
best portfolio management strategy.
Restructuring
Restructuring is similar to portfolio management, except that the corporation takes an active role
in managing and restructuring the acquired business unit. First, it seeks out undeveloped, sick, or
threatened organizations or industries on the threshold of significant change. Then it intervenes
frequently, changing the management team, shifting strategy, or introducing new technologies
until the unit is strengthened. Finally, the corporation sells off the invigorated unit as it is no
longer adding value.
The restructuring strategy passes the attractiveness and cost-of-entry tests as it deliberately seeks
out companies with problems and lackluster images or industries with unforeseen potential. It
also passes the better-off test as the purpose of the acquisition is to intervene and turn around the
business unit. To work, the restructuring strategy requires a corporate management team with the
insight to not only spot undervalued companies or industries ripe for transformation, but also to
actually turn the units around even though they may be in unfamiliar businesses. But perhaps the
most difficult part of this strategy is fighting the human instinct of not wanting to dispose of the
units once they are performing well.
Transferring Skills
Unlike the previous two strategies, the last two concepts exploit the interrelationships between
the acquired and the existing business units. Every business unit is a collection of discrete
activities ranging from sales to accounting that together form a value chain. It is at this activity
level, not the company as a whole, that a unit achieves competitive advantage. One way to do
this is by transferring skills or expertise among similar value chains.
In this strategy, knowledge about how to perform activities is transferred among the units. 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, or the same strategic concept. Even though the units operate separately, such similarities
allow the sharing of knowledge.
Transferring skills is successful only if the activities involved in the businesses are similar
enough that sharing expertise is meaningful, it involves activities that are key to competitive
advantage, and the expertise or skills to be transferred are both advanced and proprietary enough
to be beyond the capabilities of competitors.
This concept of corporate strategy meets the tests of diversification if the company is able to
share proprietary expertise across units. This makes certain the company can offset the
acquisition premium or lower the cost of overcoming entry barriers.
Sharing Activities
The last corporate strategy is also exploits the interrelationships between the value chains of the
business units. But instead of just sharing expertise or skills with another unit, in this case the
units share the activities themselves. The ability to share activities is a potent basis for corporate
strategy because sharing often enhances competitive advantage by lowering cost or raising
differentiation.
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. It can also enhance and reduce the
cost of differentiation. For example, a shared order-processing system may have features from
both the businesses and still cost less than two separate systems.
Like in the case of transferring skills, sharing must also involve activities that are significant to
competitive advantage. Also the benefits of sharing must outweigh its costs. One cost is 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. If a compromise
greatly erodes a units effectiveness, then sharing may reduce rather than enhance competitive
advantage.
In terms of the diversification tests, sharing activities clearly meets the better-off tests, if
implemented successfully, as it generated competitive advantage for all the units involved. It also
meets the cost-of-entry test as other corporations that lack opportunities to share activities will
have lower reservation prices.
Critique
In this article, the author advances the idea of corporate diversification from portfolio
management to a more synergy-oriented view of a multi-business firm based on
interrelationships between business units. He argues 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. This is because strategies based on interrelationships do
not rely on superior insight or other assumptions about an acquired companys capabilities.
Although, the ideas of synergy and competitive advantage were already popular at the time this
article was written, the author goes beyond talking about the general concepts by trying to
illustrate where such synergies can be realized in order to enhance competitive advantage.
One issue that the author ignores is how to manage the organizational complexity that arises out
of integration of new business units. Exactly how can skills be transferred and how can activities
be shared are questions that remain unanswered. Another topic that needs more elaboration is
how to operationalize the diversification tests. For example, in case of the better-off test, it may
be difficult to determine in advance which relationships will actually add value.