Managing the Multibusiness 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 Multidivisional Structure: Theory of the M-Form

Efficiency advantages of the multidivisional firm: Recognizes bounded rationalitytop 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 Divisionalized Firm in 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 structurescorporate 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 Functions of Corporate Management

Decisions over diversification, acquisition,
divestment

Managing the Corporate Portfolio

Resource allocation between businesses. Business strategy formulation Monitoring and controlling business
performance

Managing the individual businesses

Managing linkages between businesses

Sharing and transferring resources and

capabilities

The Development of Strategic Planning Techniques: General Electric in the 1970s

Late 1960s: 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 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.

Portfolio Planning Models: The GE/ McKinsey Matrix

Industry Attractiveness

High Medium Low Low Medium High

Business Unit Position Industry Attractiveness Criteria

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

Business Unit Position

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

Portfolio Planning Models: The BCG Growth-Share Matrix

Earnings: low, unstable, growing Earnings: Cash flow: high stable, growing neutral invest for growth

Annual real rate of market growth (%)

Cash flow: negative

HIGH

Strategy:

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

Strategy:

Earnings: Cash flow: Strategy:

low, unstable neutral or negative divest

Earnings: Cash flow: Strategy:

high stable high stable milk

LOW Relative market share

HIGH

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

Annual real rate of market growth (%)

10

Frozen food division

Health foods division

Fruit juices division Bakery division

-2

0.1

0.5

1 Relative market share

1.5

2.0

Current position Previous position. Area of circle proportional to $ sales.

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 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 Restructuring to Create Value: The McKinsey Pentagon

Current market value
1

Current perceptions gap

Maximum raider opportunity

Company 2 value as is
Strategic and operating opportunities

RESTRUCTURING FRAMEWORK
4

Optimal 5 restructured value

Total company opportunities

Potential value 3 with internal improvements

Disposal/acquisition opportunities

Potential value with external improvements

Exxons Strategic Planning Process

Economic Review Energy Review Discuss-ion with contact director Approval by Mgmt. Committee

Business Plans

Stewardship Review

Stewardship Basis

Financial Forecast

Corporate Plan

Investment Reappraisals

Annual Budget

Corporate Control over the Businesses

2 basic approaches Input control Output (or performance) control

Monitoring & approving business level decisions

Setting & monitoring the achievement of performance targets Primarily through performance management system, including operating budgets and HR appraisals

Primarily through strategic planning system & capital expenditure approval system

Goold & Campbells Corporate Management Styles: Financial and Strategic Control
Hig h Strategi c planning Strategic control Holding compan y Flexible strategic Tight strategic CONTROL INFLUENCE Financial control

Centralized

Low

Tight financial

Corporate Management Applications of PIMS 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 Linkages between Businesses

KEY ISSUEHow does the corporate center add value to the business? BASIS OF BUSINESS LINKAGESSharing of resources and capabilities.

SHARING OCCURS AT TWO LEVELS: Corporate levelcommon corporate services Business levelsharing resources, transferring capabilities
PORTERS ANALYSIS OF BUSINESS LINKAGES AND CORPORATE STRATEGY TYPES Portfolio management Parent creates value by operating an internal capital market RestructuringParent create value by acquiring and restructuring Inefficiently-managed businesses Transferring skillsParent creates value by transferring capabilities between businesses Sharing activitiesParent creates value by sharing resources between businesses

ROLE OF DOMINANT LOGICimportance of corporate managers perception of linkages

What Corporate Management Activities are Implied by Porters Concepts of Corporate 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 the Management of Multibusiness Corporations: Lessons from General Electric

Jack Welchs transformation of GEs structure and management systems:
Delayering --- from 9 or 10 layers of hierarchy to 4 or 5 Decentralizing decisions. Reformulating strategic planningfrom formal, document-intensive analysis to direct face-to-face discussion of key issues. Redefining the role of HQfrom 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 the Management of Multibusiness Corporations: Lessons from ABB

Key features of ABBs corporate management system: Matrix organizationboth product and country / regional coordination, but reporting requirements flexible. Radical decentralizationABBs 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 ABBs 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 the Management of Multibusiness Corporations: Bartlett & Ghoshals Analysis of Key Management Processes

Managing the tension between short-term ambition

RENEWAL PROCESS

Creating and maintaining organizational trust

Shaping and embedding corporate purpose

Managing operational interdependencies and personal networks

Linking skills, knowledge, and resources

Creating and pursuing opportunities

Developing and nurturing organizational values Establishing strategic mission & performance standards Top Management

Reviewing, developing, and supporting initiatives Middle Management

Front-line Management