Managing the Multibusiness Corporation

1
Managing the Multibusiness Corporation
OUTLINE

• Structure of the Multidivisional Company
• Theory of the M-Form
• The divisionalized firm in practice
• The Role of Corporate Management
• Managing the Corporate Portfolio
• Portfolio planning techniques
• Value-based management and corporate
  restructuring
• Managing Individual Businesses
• Managing Internal Linkages
• Recent Trends

2
The Theory of the M-Form

• Efficiency advantages of the multidivisional
  firm
• Recognizes bounded rationality--top management
  has limited decision-making capacity
• Divides decision-making according to frequency
• -- high-frequency operating decisions at
  divisional level
• -- low-frequency strategic decisions at
  corporate level
• Reduces costs of communication and coordination
  business level decisions confined to divisional
  level (reduces decision making at the top)
• Global, rather than local optimization-
  functional organizations encourage functional
  goals. M-form structure encourages focus on
  profitability.
• Efficient allocation of resources through
  internal capital and labor markets
• Resolves agency problem-- corporate management an
  interface between shareholders and business-level
  managers.

3
Introduction The Tasks of Corporate Strategy In
the Multibusiness Corporation

• Determining the companys business
  portfolio--diversification, acquisition,
  divestment
• Allocating resources between the different
  businesses
• Formulating strategy for the different businesses
• Controlling business performance
• Coordinating the businesses and creating overall
  cohesiveness and direction for the company

4
The Divisionalized Firm in Practice

• Constraints upon decentralization. Few
  diversified companies achieve clear division of
  decision making between corporate and
  divisional levels. On-going dialogue and conflict
  exists between corporate and divisional managers
  over both strategic and operational issues.
• Standardization of divisional management. Despite
  potential for divisions to differentiate
  strategies, structures and styles--- corporate
  systems may impose uniformity.
• Managing divisional inter-relationships. Managing
  relationships between divisions requires more
  complex structures e.g.. matrix structures where
  functional and/or geographical structure is
  imposed on top of a product/market structure.

5
The Functions of Corporate Management
Decisions over diversification, divestment,
and allocating resources between businesses.
Managing the Corporate Portfolio
--Assisting business strategy formulation --Moni
toring and controlling performance of the
businesses
Guidance and control of individual businesses
Sharing and transferring resources and
capabilities
Managing linkages between companies
6
The Development of Strategic Planning Techniques
General Electric in the 1970s

• During late 1970s, GE encountering problems of
  direction, coordination, control and
  profitability
• Corporate planning responses
• Portfolio Planning Models-- matrix-based
  frameworks for evaluating business unit
  performance, formulating business strategies, and
  allocating resources
• Strategic Business Units-- a business comprising
  a group of closely-related products that is
  meaningful for strategy formulation
• PIMS-- a database which quantifies the impact of
  strategy on performance. Used to appraise SBU
  performance and guide business strategy
  formulation

7
Portfolio Planning Models Their Uses in
Strategy Formulation

• Allocating resources-- the analysis indicates
  both the investment requirements of different
  businesses and their likely returns
• Formulating business-unit strategy-- the analysis
  yields simple strategy recommendations (e.g..
  build, hold, or harvest)
• Setting performance targets-- the analysis
  indicates likely performance outcomes in terms of
  cash flow and ROI
• Portfolios balance-- the analysis can assist in
  corporate goals such as a balanced cash flow and
  balance of growing and declining businesses.

8
Portfolio Planning Models The GE/ McKinsey
Matrix

• Business unit position
• Industry Attractiveness Criteria Business
  Unit Position
• - Market size - Market share
  (domestic,
• - Market growth global, and relative)
• - Industry profitability - Competitive
  position
• - Inflation recovery - Relative
  profitability
• - Overseas sales ratio

Low
Medium
High
Low
HARVEST
Industry Attractiveness
Medium
HOLD
High
BUILD
9
Portfolio Planning Models The BCG Growth-Share
Matrix
HIGH
Earnings low, unstable, growing Cash flow
negative Strategy analyze to determine
whether business can be grown into a
star, or will
degenerate into a dog
Earnings high stable, growing Cash flow
neutral Strategy invest for growth
Annual real rate of market growth ()
Earnings high stable Cash flow high
stable Strategy milk
Earnings low, unstable Cash flow
neutral or negative Strategy divest
LOW
HIGH
LOW
Relative market share
10
Portfolio Planning Models Applying the BCG
Matrix to BM Foods Inc.
Frozen food division
Health foods division
-2 0 2 4 6 8 10
Annual real rate of market growth ()
Fruit juices division
Bakery division
2 1.5 1 0.5 0.1
Relative market share
Current position Previous position. Area of
circle proportional to sales.
11
Do Portfolio Planning Models Help or Hinder
Corporate Strategy Formulation?

• ADVANTAGES
• Simplicity Can be quickly
• prepaired
• Big picture Permits one page
• representation of the corporate
• portfolio the strategic
• positioning of each business
• Analytically versatile
• Applicable to businesses,
• products, countries,
• distribution channels.
• Can be augmented A useful
• point of departure for more
• sophisticated analysis

• DISADVANTAGES
• Simplicity Oversimplifies the
• factors determining industry
• attractiveness and competitive
• advantage
• AmbiguousThe positioning
• of a business depends
• critically upon how a market is
• defined
• Ignores synergy the analysis
• takes no account of any
• interdependencies between
• businesses

12
Corporate Restructuring to Create Value The
McKinsey Pentagon
Current market value
1
Maximum raider opportunity
Current perceptions gap
Optimal restructured value
Company value as is
2
5
RESTRUCTURING FRAMEWORK
Strategic and operating opportunities
Total company opportunities
3
4
Potential value with internal improvements
Potential value with external improvements
Disposal/acquisition opportunities
13
Managing the Industrial Business
2 main approaches to Parenting Influence
Input (or behavioral) control
Output ( or performance) control
Monitoring approving business level decisions
Setting monitoring the achievement
of performance targets
Primarily through strategic planning system
capital expenditure approval system
Primarily through performance management
system, incl. budgetary process, HR appraisal
system
14
The Role of Corporate HQ Goold Campbells
Corporate Management Styles
Corporate influence very high
Centralized
Strategic planning
Strategic control
Financial control
Corporate influence very low
Holding company
Flexible strategic Tight strategic Tight
financial CONTROL INFLUENCE
15
Application of PIMS Analysis

• Setting performance targets feeding business
  unit strategic and
• industry data into the PIMS model gives a PAR
  ROI.
• Formulating business unit strategy PIMS model
  simulates the
• likely impact of changing strategic variables.
• Allocating investment funds between businesses
• PIMS Strategic Attractiveness Scan permits a
  comparison of different
• business units strategic attractiveness and
  their cash needs / cash
• generation on the basis of their PAR ROI and
  forecast market growth
• rates.

16
Managing Linkages between Businesses

• BASIC ISSUE How does the corporate center add
  value to the business?
• ---Depends on nature and extent of linkages
  between the
• businesses
• SIMPLEST FORM OF LINKAGE Common corporate
  services (e.g. treasury, legal, taxation,
  research, public relations, investor relations)
• PORTERS CLASSIFICATION OF BUSINESS LINKAGES AND
  CORPORATE STRATEGY TYPES
• Portfolio management Parent creates
  value by operating an internal capital market
  between independent businesses
• Restructuring Parent create value by
  acquiring and restructuring inefficiently managed
  businesses
• Transferring skills Parent builds
  competitive advantage by transferring
  capabilities
• Sharing activities Parent shares common
  resources/capabilities
• NEED FOR A COMMON DOMINANT LOGIC
• Close integration between the business portfolio,
  the nature of linkages between the businesses,
  and the management systems of the corporation

17
Corporate Management and the Role of HQ
Porters Concepts of Corporate Strategy

• Four approaches to create value in the
  diversified company
• (1) Portfolio Management
• Acquiring suitable companies at favorable
  prices.
• Minimizing cost of capital
• Increasing efficiency of capital allocation.
• Efficient monitoring of business unit financial
  performance.

(2) Restructuring I ntervening to cut costs and
divest assets (3) Transferring skills transfer
key personnel to exploit strategic commonalties
between businesses (4) Sharing activities
integration to exploit economies of scope in
management functions (e.g. treasury, legal
service) and operating functions (e.g.
distribution, sales).
18
Recent Trends Reinventing GE

• Organizational initiatives of Jack Welch
• Delayering --- from 9 or 10 layers of hierarchy
  to 4 or 5, simultaneously decentralizing
  decisions.
• Reformulating strategic planning --- from formal,
  document-intensive analysis to direct
  face-to-face discussion of key issues.
• Redefining the role of HQ --- from checker,
  inquisitor, and authority to facilitator, helper,
  and supporter.
• Coordinating role of HQ --- corporate HQ to lead
  in creating the boundaryless corporation where
  innovations and ideas flow and where horizontal
  coordination occurs to respond to new
  opportunities.
• HQ as change agent --- corporate HQ driving force
  for continual organizational change (e.g.
  workout).

19
Recent Trends Corporate Management at ABB

• Key Features
• Matrix organization --- both product and country
  / regional coordination --- but reporting
  requirements flexible.
• Radical decentralization ABB corporate HQ is
  tiny (lt100 staff). Decision making authority lies
  with individual country subsidiaries, which are
  typically small or medium-sized businesses.
• Bottom-up management. Each business has its own
  balance sheet and can retail 1/3 of net income.
• Informal collaboration and integration.

20
ABB continued. Bartlett Ghashals
Identification of the Key Management Processes in
ABB
Managing the tension between short-term
ambition Managing operational interdependencies
and personal networks Creating and pursuing
opportunities
RENEWAL PROCESS
Shaping and embedding corporate
purpose Developing and nurturing organizational
values Establishing strategic mission
performance standards
Creating and maintaining organizational
trust Linking skills, knowledge, and
resources Reviewing, developing, and supporting
initiatives
INTEGRATION PROCESS
ENTREPRENEURIAL PROCESS
Front-line Management Middle Management
Top Management