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 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 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
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 M-
form
 The Functions of Corporate Management

Managing the —Decisions over diversification, acquisition,

Corporate divestment
Portfolio
—Resource allocation between businesses.

Managing the — Business strategy formulation

individual —Monitoring and controlling business
businesses
performance

Managing
linkages —Sharing and transferring resources and
between capabilities
businesses
The Development of Strategic Planning Techniques:
General Electric in the 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 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 B
U
I L
H D
O
Medium L
H D
A
R
V
Low E
S
T
Low Medium High
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
 Portfolio Planning Models: The BCG
Growth-Share Matrix
Earnings: low, unstable, growing
Cash flow: negative Earnings: high stable, growing
Annual real rate of market growth (%)

Strategy: analyze to determine Cash flow: neutral

?
HIGH

whether business can

be grown into a Strategy: invest for growth
star, or
will degenerate
into a dog

Earnings: low, unstable Earnings: high stable

Cash flow: neutral or negative Cash flow: high stable

LOW

Strategy: divest Strategy: milk

LOW HIGH
Relative market share
Annual real rate of market growth (%)
Applying the BCG Matrix to Time Warner Inc.

Cable TV
12

Networks
8

Cable Film
Magazine
4

production
Publishing
0

Bakery division
-4

Music
-8

AOL

Relative market share

Position in 2003 Position in 2000. (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 Maximum raider
gap opportunity

Company Optimal
2 5 restructured
value as is RESTRUCTURING value
Strategic and
FRAMEWORK
Total company
operating opportunities
opportunities

Potential value 3 Disposal/acquisition 4 Potential value

with internal opportunities with external
improvements improvements
 Exxon’s Strategic Planning Process

Economic Discuss- Approval

Review Business -ion with by
Plans contact Mgmt.
Energy Review
director Committee

Stewardship Stewardship Financial Corporate

Review Basis Forecast Plan

Investment Annual
Reappraisals Budget
 Corporate Control over the Businesses

2 basic approaches

Input Output (or performance)

control control

Monitoring & approving Setting & monitoring

business level decisions the achievement of
performance targets

Primarily through strategic Primarily through performance

planning system & capital management system,
expenditure approval including operating budgets
system and HR appraisals
Goold & Campbell’s Corporate Management
Styles: Financial and Strategic Control

High
Centralized
CORPORATE INFLUENCE

Strategic
planning

Strategic
control

Holding Financial
company control
Low

Flexible strategic Tight strategic Tight financial

CONTROL INFLUENCE
 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 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 Corporate Management Activities are Implied by
Porter’s “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 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 the Management of Multibusiness
Corporations: Lessons from ABB

Key features of ABB’s corporate management system:

Matrix organization—both product and country / regional

coordination; flexible reporting requirements
•Radical decentralization—ABB’s corporate HQ was tiny (<100
staff). Decision making authority lay with individual national
subsidiaries (mostly small or medium-sized businesses).
•Bottom-up management. Each business had its own balance
sheet and could 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 caused ABB todismantle its matrix and adopt simpler line
of business structure
 Rethinking the Management of Multibusiness
Corporations: Bartlett & Ghoshal’s Analysis
of Key Management Processes

Managing the tension RENEWAL PROCESS

between short-term
ambition Creating and maintaining Shaping and embedding
organizational trust corporate purpose

Managing operational INTEGRATIO

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