A diversified company has two levels of strategy: the business unit (or competitive) strategy and the business (or society-wide) strategy. Competitive strategy refers to how to achieve competitive advantages in each of the areas of activity that the company competes with. On the other hand, the business strategy refers to two different questions: In which areas of activity should the company operate and how should its top managers direct all the business units.
Business strategy is what makes the whole of the company as a whole represent more than the sum of its parts, the different business units. This strategy in most companies has reduced the value of net worth instead of increasing it.
The global business world is characterized by economic appreciations of extreme profitability, recovery of investment capital in the shortest time, overlooking all available business management guidelines.
That is why you can see irregular investment cycles, temporary targeting of benefits without a long-term projection, financial movements that exceed the quality of the investment, short analysis of risk levels, etc.
In developing countries, the effects of transnational decision- making in the global competitive space suffer the most. The question that is asked: as a company that is located in a space with no business vision, can it cope with this decision-making ?; How to apply these business strategies at the national level, bearing in mind the fragile complexity and competitiveness of the context?
The characteristics of the business strategy are detailed below, according to Porter.
Business strategy premises
These are unquestionable facts about diversification. They cannot be altered and, when disregarded, explain in part why so many business strategies fail.
• Competition takes place at the business unit level.
• Inevitably, diversification imposes costs and restrictions on business units.
• Shareholders can quickly diversify their investments.
These premises mean that business strategy cannot succeed unless it really adds value: both to business units, providing them with tangible benefits that offset the costs inherent in the loss of independence, and to shareholders, diversifying their investment from a so that it is not within your reach.
Pass the essential tests
To understand how business strategy should be formulated, it is necessary to specify under what conditions diversification will actually increase the value of the shareholders' investment. These conditions can be summarized in three essential tests:
1. The attractiveness test. The sectors chosen for diversification must be structurally attractive or capable of becoming attractive.
2. Proof of entry cost. The cost of entry into the sector should not capitalize on all future benefits.
3. Proof of improvement. The new unit must gain some competitive advantage from its connection to the company, or vice versa.
Business strategy concept
The three tests of fruitful diversification set the standards that any business strategy must meet; compliance is so difficult that almost all diversification attempts are failures.
There are four concepts of business strategy that have been applied in practice:
1. Portfolio management: It is the most used, based on acquisition. The company acquires strong and attractive units with competent managers who agree to remain in front of them. The units acquired are autonomous and their management personnel are remunerated according to their results.
In a portfolio strategy, the company tries to increase the value of the investment of the shareholders in various ways. He uses his knowledge and analytical resources to discover attractive acquisition candidates that the individual shareholder could not discover.
2. Restructuring: The company that is based on this strategy becomes an active structuring of business units.
New units do not necessarily have to be connected to existing ones.
The restructuring strategy consists of looking for underdeveloped companies or sectors, in a problematic situation or subject to threats, on the threshold of significant changes.
3. Knowledge transfer: It has a greater impact as long as three conditions are met: The activities of the different units are easily similar so that it makes sense to share knowledge; knowledge transfers focus on activities important to competitive advantage and the transferred knowledge represents an important source of competitive advantage for the receiving unit.
Knowledge transfer is an active process that significantly modifies the strategy or the operation of the receiving unit.
4. Shared activities: It is based on sharing some activities, it is a solid base of business strategy, because it often increases competitive advantage by reducing costs or enhancing differentiation. It is important to conduct a cost-benefit analysis of opportunities for sharing activities to determine whether synergy is likely to occur.
In conclusion, we can determine that the choice of business strategy allows companies to increase the value of the investment of shareholders through different procedures. The choice of business strategy should not be a final choice, but rather a vision capable of evolving.
If we reflect, and try to capture a proposal to the initial question asked, we can say that a company must seek to create a permanent space of creativity and team innovation, for this, it should form a technical team in its organizational structure that defines the space of action, both locally and internationally. In other words, explore the interrelation of business strategy movements that are carried out at the global level and their effects on the reality of your local sector.
It is with this permanent source of competitive integration, you could be better prepared to act on competitive strategies that can be applied in the local context. In both cases, the vision not only of the company but of the context of action is vital to develop and operate the real effect of said strategies.
