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To accompany contemprory strategy analysis concepts techiniques application chapter16slides

Managing
Managing the
the Multibusiness
Multibusiness
Corporation
Corporation
OUTLINE









Structure of the Multidivisional Company
o Theory of the M-form
o The divisionalized firm in practice
The Role of Corporate Management
Managing the Corporate Portfolio

o Portfolio planning techniques
o Value-creation through corporate
restructuring
Managing Individual Businesses
Managing Internal Linkages
Recent Trends


The
TheMultidivisional
MultidivisionalStructure:
Structure: Theory
Theoryof
ofthe
the M-Form
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.


The
The Divisionalized
Divisionalized Firm
Firm in
in Practice
Practice


Constraints upon decentralization.
– Difficult to achieve clear division of decision making between
corporate and divisional levels.
– On-going dialogue and conflict between corporate and divisional
managers over both strategic and operational issues.



Standardization of divisional management
– Despite potential for divisions to develop distinctive strategies and
structures—corporate systems may impose uniformity.



Managing divisional inter-relationships
– Requires more complex structures, e.g. matrix structures where
functional and/or geographical structure is imposed on top of a
product/market structure.
– Added complexity undermines the efficiency advantages of the Mform


The
The Functions
Functions of
of Corporate
Corporate Management
Management
Managing the
Corporate
Portfolio

—Decisions over diversification, acquisition,

Managing the
individual
businesses

— Business strategy formulation
—Monitoring and controlling business

Managing
linkages
between
businesses

divestment

—Resource allocation between businesses.

performance

—Sharing and transferring resources and
capabilities


The
The Development
Developmentof
of Strategic
Strategic Planning
PlanningTechniques:
Techniques:
General
GeneralElectric
Electricin
inthe
the1970’s
1970’s
Late 1960’s: GE encounters 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 —GE reorganized around
SBUs (business comprising a strategically-distinct
group of closely-related products
 PIMS —a database which quantifies the impact of
strategy on performance. Used to appraise SBU
performance and guide business strategy formulation


Portfolio
Portfolio Planning
Planning Models:
Models: Their
Their
Uses
Uses in
in Strategy
Strategy Formulation
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.


Industry Attractiveness

Portfolio
Portfolio Planning
Planning Models:
Models:
The
The GE/
GE/ McKinsey
McKinsey Matrix
Matrix

B

High

H
Medium

H

A

R

Low
Low

V

E

S

O

L

U

I L
D

D

T
Medium

High

Business Unit Position
Industry Attractiveness Criteria

Business Unit Position

- Market size
- Market growth
- Industry profitability
- Inflation recovery
- Overseas sales ratio

- Market share (domestic,
global, and relative)
- Competitive position
- Relative profitability


Portfolio
Portfolio Planning
Planning Models:
Models: The
The BCG
BCG
Growth-Share
Growth-Share Matrix
Matrix

HIGH

low, unstable, growing

Cash flow: negative

Earnings:

high stable, growing

Strategy:

Cash flow:

neutral

Strategy:

invest for growth

analyze to determine
whether business can
be grown into a
star, or
will degenerate
into a dog

Earnings:

LOW

Annual real rate of market growth (%)

Earnings:

low, unstable

?

Earnings:

high stable

Cash flow:

neutral or negative

Cash flow:

high stable

Strategy:

divest

Strategy:

milk

LOW

Relative market share

HIGH


Annual real rate of market
growth (%)
-2
0
2
4
6
8
10

Portfolio
Portfolio Planning
Planning Models:
Models:Applying
Applying the
the
BCG
BCG Matrix
Matrix to
to BM
BM Foods
Foods Inc.
Inc.

Frozen food
division

Health foods
division

Fruit juices
division

0.1

0.5

1
1.5
Relative market
shareposition.
Previous

Current position
Area of circle proportional to $ sales.

Bakery division
2.0


Do
Do Portfolio
Portfolio Planning
Planning Models
Models Help
Help or
or Hinder
Hinder
Corporate
Corporate Strategy
Strategy Formulation?
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
• Ambiguous:The positioning
of a business depends
critically upon how a market is
defined
• Ignores synergy: the analysis
takes no account of any
interdependencies between
businesses


Corporate
Corporate Restructuring
Restructuring to
to Create
Create
Value:
Value: The
The McKinsey
McKinsey Pentagon
Pentagon
Current
market
value
1
Current perceptions
gap

Company
2
value as is
Strategic and
operating
opportunities

Maximum raider
opportunity

RESTRUCTURING
FRAMEWORK

Potential value 3
with internal
improvements

Disposal/acquisition
opportunities

4

Optimal
5 restructured
value
Total company
opportunities

Potential value
with external
improvements


Exxon’s
Exxon’s Strategic
Strategic Planning
Planning Process
Process
Economic
Review
Energy Review

Stewardship
Review

Business
Plans

Stewardship
Basis

Investment
Reappraisals

Discuss-ion with
contact
director

Financial
Forecast

Annual
Budget

Approval
by
Mgmt.
Committee

Corporate
Plan


Corporate
Corporate Control
Control over
over the
the Businesses
Businesses
2 basic approaches
Input
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,
including operating budgets
and HR appraisals


Goold
Goold &
& Campbell’s
Campbell’s Corporate
Corporate Management
Management
Styles:
Styles: Financial
Financial and
and Strategic
Strategic Control
Control
High
CORPORATE INFLUENCE

Centralized
Strategic
planning
Strategic
control

Low

Financial
control

Holding
company
Flexible strategic

Tight strategic
CONTROL INFLUENCE

Tight financial


Corporate
Corporate Management
Management
Applications
Applications of
of PIMS
PIMSAnalysis
Analysis
• Setting performance targets
—feeding business unit strategic and industry data into the PIMS
regression model gives performance norms for the business
(PAR ROI).
• Formulating business unit strategy
— PIMS model can simulate the impact of changing strategic
variables.
• Allocating investment funds between businesses
— PIMS Strategic Attractiveness Scan comparison different
business units’ strategic attractiveness and their cash flow
characteristics


Managing
Managing Linkages
Linkages between
between Businesses
Businesses
KEY ISSUE—How does the corporate center add value to the business?
BASIS OF BUSINESS LINKAGES—Sharing of resources and capabilities.
SHARING OCCURS AT TWO LEVELS:
• Corporate level—common corporate services
• Business level—sharing resources, transferring capabilities
PORTER’S ANALYSIS OF BUSINESS LINKAGES AND CORPORATE
STRATEGY TYPES
• Portfolio management— Parent creates value by operating an internal
capital market
• Restructuring—Parent create value by acquiring and restructuring
Inefficiently-managed businesses
• Transferring skills—Parent creates value by transferring capabilities
between businesses
• Sharing activities—Parent creates value by sharing resources between
businesses
ROLE OF DOMINANT LOGIC—importance of corporate managers’
perception of linkages


What
What Corporate
CorporateManagement
Management Activities
Activities are
are Implied
Implied by
by
Porter’s
Porter’s“Concepts
“Conceptsof
ofCorporate
Corporate Strategy”
Strategy”
(1) Portfolio Management
• Using superior information and analysis to acquire attractive companies at
favorable prices (e.g. Berkshire Hathaway).
• Minimizing cost of capital (e.g. GE)
• Create efficientt internal system for capital allocation (e.g. Exxon-Mobil)
• Efficient monitoring of business unit performance (e.g BP-Amoco).
(2) Restructuring: Intervening to cut costs and divest under performing assets (e.g.
Hanson during 1980s & early 1990s)
(3) Transferring skills:
—Transferring best practices (e.g. Hewlett-Packard)
—Transferring innovations (e.g. Sharp)
—Transferring key personnel between businesses (e.g. Sony)
(4) Sharing activities:
—Common corporate services (e.g. 3M)
—Sharing operational resources and functions (e.g. sales and distribution,
manufacturing facilities).


Rethinking
Rethinkingthe
theManagement
Managementof
of Multibusiness
Multibusiness
Corporations:
Corporations: Lessons
Lessonsfrom
from General
GeneralElectric
Electric
Jack Welch’s transformation of GE’s structure and management systems:
•Delayering --- from 9 or 10 layers of hierarchy to 4 or 5
•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”, “six-sigma”).


Rethinking
Rethinkingthe
the Management
Managementof
ofMultibusiness
Multibusiness
Corporations:
Corporations: Lessons
Lessonsfrom
fromABB
ABB
Key features of ABB’s corporate management system:
Matrix organization—both product and country / regional
coordination, but reporting requirements flexible.
•Radical decentralization—ABB’s corporate HQ is tiny (<100 staff).
Decision making authority lies with individual national
subsidiaries (mostly small or medium-sized businesses).
•Bottom-up management. Each business has its own balance
sheet and can retain 1/3 of net income.
•Informal collaboration and integration.
Yet, for all of ABB’s apparent success at reconciling coordination with
Decentralization, by 2002-03, deteriorating profitability and complexity of
matrix structure causes ABB to adopt simpler line of business structure


Rethinking
Rethinking the
the Management
Management of
of Multibusiness
Multibusiness
Corporations:
Corporations: Bartlett
Bartlett&& Ghoshal’s
Ghoshal’sAnalysis
Analysis
of
of Key
KeyManagement
ManagementProcesses
Processes
Managing the tension
between short-term
ambition

Managing operational
interdependencies and
personal networks

RENEWAL PROCESS
Creating and maintaining
organizational trust
INTEGRATIO
N PR

Shaping and embedding
corporate purpose

OCESS

Developing and
Linking skills, knowledge,
nurturing organizational
and resources
ENTREPRE
values
NEURIAL P
Creating and pursuing
ROCESS
opportunities
Establishing
Reviewing, developing, and
strategic mission &
supporting initiatives
performance standards
Front-line Management

Middle Management

Top Management



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