Why I’m not a fan of business strategy

Business strategy theories, that is.

This comes from my assigned reading:

According to Porter (1987) entering into another business (by acquisition or internal growth) can only result in increased shareholder value if three essential tests are passed:

 

The attractiveness test. The business must be structurally attractive, or capable of being made attractive. In other words, firms should only enter businesses where there is a possibility to build up a profitable competitive position.

 

The cost-of entry test. The cost of entry must not capitalize all the future profits. In other words, firms should only enter new businesses if it is possible to recoup the investments made.

 

The better-off test. Either the new unit must gain competitive advantage from its link with the corporation or vice versa. In other words, firms should only enter new businesses if it is possible to create significant synergies.

 

My point of contention: it’s hard to think of a business you would want to enter if it (1) isn’t attractive, (2) isn’t profitable, and (3) doesn’t offer any potential synergies. In other words, it’s obvious.

 

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