There are three premises of corporate strategy, which any successful corporate strategy is built on a number of premises. The first premise is competition occurs on the business unit level, which diversified companies do not compete, only their business units do. The second premise is diversification inevitably adds costs and constraints to business units. Hidden costs and constraints are very important and subtle for a business. These costs and constraints can be reduced, but not entirely eliminated. The last premise is shareholders can readily diversify them themselves, which they 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 unit by providing tangible benefits that offset the inherent costs of lost independence and by diversifying in a way they could not replicate.
In order to increase shareholder value for the corporation, these strategies should pass: the attractiveness test, the cost-of-entry test, and the better-off test. The attractiveness test concerns how attractive is the industry, which the rate of return on an investment of an industry is the underlying structure that makes the industry attractive. The attractiveness test evaluat...
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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. However, 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. With a sharper focus on the tests of diversification and the explicit choice of a clear concept of corporate strategy, companies’ diversification track records from now on can look a lot different.
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