By Michael E. Porter
Publisher: Harvard Business Review
Number Of Pages: 22
Publication Date: 1987-05-01
ISBN-10 / ASIN: B00005RZ1N
ISBN-13 / EAN: Binding: Digital
A study of the diversification records of 33 large U.S. companies from 1950 to 1986 shows that diversification--whether through acquisition, joint venture, or start-up--generally has not brought the competitive advantages or profitability expected. Portfolio management, restructuring, transferring skills, and sharing activities are four concepts of corporate strategy that companies most commonly use. Portfolio management no longer works very well in the United States because of its highly developed capital market. Restructuring is merely a stopgap measure that will not build shareholder value over the long term because it usually produces an unwieldy conglomerate. Companies have the best chance of being successful at diversification if they capitalize on the existing relationships between business units by having them transfer skills and share activities. McKinsey Award Winner.
Summary: A clear introduction into diversificationRating: 4
Michael E. Porter is a Professor of Business Administration at the Harvard Business School and a leading authority in the field of competition and strategic management. This article was published in the May-June 1987 of the Harvard Business Review and won the McKinsey Award for the best article that year.
"A diversified company has two levels of strategy: (1) business unit (or competitive strategy) and corporate (or companywide) strategy." Competitive strategy concerns the creation of competitive advantage in each of the businesses, corporate strategy concerns the scope and the management of the corporation. The aim of corporate strategy is 1 1=3. In this article the author reports on findings from his study into the diversification record of 35 large, U.S. companies between 1950-1986 period. The results were shocking and the author warns the reader that "any successful corporate strategy builds on a number of premises": (1) Competition occurs at the business unit level; (2) diversification inevitably adds costs and constraints to business units; and (3) shareholders can readily diversify themselves. Porter then continues by introducing three essential tests to specify the conditions under which diversification will create shareholder value: (1) The attractiveness test; (2) the cost-of-entry test; and (3) the better-off test. Each of these tests is explained and discussed in detail. Once these tests have been met, companies need a clear concept of corporate strategy to guide their diversification. According to the author, four mutually exclusive concepts of corporate strategy are put into practice. The first two concepts - portfolio management and restructuring - require no connections between business units, the other two - transferring skills and sharing activities - depend on them. "Ignoring any of the concepts is perhaps the quickest road to failure." Last but not least, Porter provides a 7-steps action program for choosing a successful corporate strategy. The author also recommends a corporate theme to ensure that the corporation creates shareholder value. The article is complemented with a summary of the data from his study and a useful table of the concepts of corporate strategy.
Great, clear article on the traps of diversification based on extensive academic evidence. The article is based upon intensive academic research. The author also provides an useful action program for those companies that aim to diversify in the near future. This article should be read by all managers and MBA-students. The author uses simple US-English.