Multi Business Company

7/28/2019 Multi Business Company

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Managing the MultibusinessCorporation

Structure of the Multidivisional Company

o Theory of the M-formo The divisionalized firm in practice

The Role of Corporate Management

Managing the Corporate Portfolio

o Portfolio planning techniques

o Value-creation through corporaterestructuring

Managing Individual Businesses

Managing Internal Linkages

Recent Trends

OUTLINE


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The Multidivisional Structure: Theory of the M-Form

Effic iency advantages o f the mult id iv is ional f i rm:

Recognizes bou nded rat ional itytop management has limiteddecision-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: businesslevel decisions confined to divisional level (reduces decisionmaking at the top)

Global, rather than local optimization:- functional organizations

encourage functional goals. M-form structure encourages focuson profitability.

Efficient allocation of resources through internal capital and labormarkets

Resolves agency problem-- corporate management an interfacebetween shareholders and business-level managers.


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The Divisionalized Firm in Practice

Cons traints upon decentralizat ion.

Difficult to achieve clear division of decision making betweencorporate and divisional levels.

On-going dialogue and conflict between corporate and divisional

managers over both strategic and operational issues. Standardizat ion of divis ional management

Despite potential for divisions to develop distinctive strategies andstructurescorporate systems may impose uniformity.

Managing divis ional inter-relat ions hips

Requires more complex structures, e.g. matrix structures wherefunctional and/or geographical structure is imposed on top of aproduct/market structure.

Added complexity undermines the efficiency advantages of the M-form


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The Functions of Corporate Management

Decisions over diversification, acquisition,divestment

Resource allocation between businesses.

Business strategy formulation

Monitoring and controlling businessperformance

Sharing and transferring resources andcapabilities

Managinglinkagesbetween

businesses

Managing theindividual

businesses

Managing theCorporatePortfolio


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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:

Portfo l io Plannin g Modelsmatrix-based frameworksfor evaluating business unit performance, formulatingbusiness strategies, and allocating resources

Strategic Bus iness UnitsGE reorganized around

SBUs (business comprising a strategically-distinctgroup of closely-related products

PIMSa database which quantifies the impact ofstrategy on performance. Used to appraise SBUperformance and guide business strategy formulation


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Portfolio Planning Models: TheirUses in Strategy Formulation

Al locat ing resou rces-- the analysis indicates both theinvestment requirements of different businesses and theirlikely returns

Formulat ing business -unit strategy-- the analysis yieldssimple strategy recommendations (e.g..: build, hold, or

harvest)

Sett ing performance targets-- the analysis indicates likelyperformance outcomes in terms of cash flow and ROI

Portfo l ios balance-- the analysis can assist in corporategoals such as a balanced cash flow and balance of growingand declining businesses.


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Low

Medium

High

Low Medium HighIndus

tryA

ttrac

tiveness

Portfolio Planning Models:The GE/ McKinsey Matrix

Ind us try Attract iveness Cri ter ia Bu siness Unit Posit ion

- Market size - Market share (domestic,- Market growth global, and relative)- Industry profitability - Competitive position

- Inflation recovery - Relative profitability- Overseas sales ratio

Bu siness Uni t Posi t ion


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HIGHLOW

Annualrealrateofmarketg

rowth(%)

Relative market share

Earnings: high stable

Cash flow: high stable

Strategy: milk

Earnings: low, unstable

Cash flow: neutral or negative

Strategy: divest

Earnings: high stable, growing

Cash flow: neutral

Strategy: invest for growth

Earnings: low, unstable, growing

Cash flow: negative

Strategy: analyze to determine

whether business can

be grown into a

star, orwill degenerate

into a dog

HIGH

?

Portfolio Planning Models: The BCGGrowth-Share Matrix


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Annualrealrateofmarketgrowth(%)

Relative market share

-8

-4

0

4

8

12

Bakery division

Position in 2003 Position in 2000. (Area of circle proportional to $ sales)

Applying the BCG Matrix to Time Warner Inc.

AOL

Filmproduction

Cable

Cable TVNetworks

Music

MagazinePublishing


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Do Portfolio Planning Models Help or Hinder

Corporate Strategy Formulation?

ADVANTAGES

Simplicity: Can be quicklyprepaired

Big picture: Permits one pagerepresentation of the corporateportfolio & the strategicpositioning of each business

Analytically versatile:Applicable to businesses,products, countries,distribution channels.

Can be augmented: A usefulpoint of departure for moresophisticated analysis

DISADVANTAGES

Simplicity: Oversimplifies thefactors determining industry

attractiveness and competitiveadvantage Ambiguous:The positioningof a business dependscritically upon how a market isdefined

Ignores synergy: the analysistakes no account of anyinterdependencies betweenbusinesses


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Corporate Restructuring to Create

Value: The McKinsey PentagonCurrent

market

value

Maximum raider

opportunity

Current perceptions

gap

Company

value as is

Opt imal

restructured

value

Strategic and

operating

opportunities

Potential value

with in ternal

improvements

Disposal/acquisition

opportunities

Total company

opportunities

1

2 5RESTRUCTURING

FRAMEWORK

3 4Potential value

with external

improvements


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Exxons Strategic Planning Process

EconomicReview

Energy Review

BusinessPlans

Discuss--ion withcontact

director

Approvalby

Mgmt.

Committee

StewardshipReview

StewardshipBasis

FinancialForecast

CorporatePlan

InvestmentReappraisals

AnnualBudget


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Corporate Control over the Businesses

2 basic approaches

Input

control

Monitoring & approvingbusiness level decisions

Output (or performance)

control

Setting & monitoringthe achievement of

performance targets

Primarily through strategicplanning system & capital

expenditure approval

system

Primarily through performancemanagement system,

including operating budgets

and HR appraisals


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Goold & Campbells Corporate Management

Styles: Financial and Strategic Control

High

Low

CONTROL INFLUENCE

Strategicplanning

Centralized

Strategiccontrol

Holdingcompan

y

Financialcontrol

Flexible strategic Tight strategic Tight financial


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Corporate Management

Applications of PIMS Analysis

Sett ing performance targetsfeeding business unit strategic and industry data into the PIMS

regression model gives performance norms for the business(PAR ROI).

Formulating b usiness uni t s trategy PIMS model can simulate the impact of changing strategic

variables.

Al locat ing investment funds between businesses PIMS Strategic Attract iveness Scancomparison different

business unitsstrategic attract ivenessand their cash flowcharacteristics


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Managing Linkages between Businesses

KEY ISSUEHow does the corpo rate center add value to th e 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 CORPORATESTRATEGY TYPES Port fo l io management Parent creates value by operating an internalcapital market

Restructur ingParent create value by acquiring and restructuringInefficiently-managed businesses

Transferr ing sk i l lsParent creates value by transferring capabilitiesbetween businesses

Shar ing act iv i t iesParent creates value by sharing resources betweenbusinesses

ROLE OF DOMINANT LOGICimportance of corporate managersperception of linkages


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What Corporate Management Activities are Implied byPorters Concepts of Corporate Strategy

(1) Port fo l io 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) Restructur ing: Intervening to cut costs and divest under performing assets (e.g.

Hanson during 1980s & early 1990s)

(3) Transferr ing ski l ls:

Transferring best practices (e.g. Hewlett-Packard)

Transferring innovations (e.g. Sharp)

Transferring key personnel between businesses (e.g. Sony)

(4) Sharing activi t ies:

Common corporate services (e.g. 3M)

Sharing operational resources and functions (e.g. sales and distribution,

manufacturing facilities).


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Rethinking the Management of Multibusiness

Corporations: Lessons from General Electric

Delayering --- from 9 or 10 layers of hierarchy to 4 or 5

Decentralizing decisions.Reformulating strategic planningfrom formal, document-intensiveanalysis to direct face-to-face discussion of key issues.

Redefining the role of HQfrom checker, inqu isi tor, and author i tytofaci l i tator, helper, and suppor ter.

Coordinating role of HQ corporate HQ to lead in creating theboundaryless 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 continualorganizational change (e.g. workout, six-sigma).

Jack Welchs transformation of GEs structure and management systems:


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Rethinking the Management of MultibusinessCorporations: Lessons from ABB

Matrix organizationboth product and country / regionalcoordination; flexible reporting requirements

Radical decentralizationABBs corporate HQ was tiny (


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Rethinking the Management of MultibusinessCorporations: Bartlett & Ghoshals Analysis

of Key Management Processes

Managing the tensionbetween short-term

ambition

Managing operationalinterdependencies and

personal networks

Creating and pursuingopportunities

Creating and maintainingorganizational trust

Linking skills, knowledge,and resources

Reviewing, developing, andsupporting initiatives

Shaping and embeddingcorporate purpose

Developing and

nurturing organizationalvalues

Establishingstrategic mission &performance standards

Front- l ine Management Middle Management Top Management

RENEWAL PROCESS

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