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-creation through corporate restructuring
• Managing Individual Businesses
• Managing Internal Linkages
• Recent Trends

2
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.

3
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 M-form

4
The Functions of Corporate Management
Decisions over diversification,
acquisition, divestment Resource
allocation between businesses.
Managing the Corporate Portfolio
Business strategy formulation Monitoring
and controlling business performance
Managing the individual businesses
Sharing and transferring resources
and capabilities
Managing linkages between businesses
5
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

6
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.

7
Portfolio Planning Models The GE/ McKinsey
Matrix

High
B U I L D
Industry Attractiveness
H O L D
Medium
H A R V E S T
Low
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
8
Portfolio Planning Models The BCG Growth-Share
Matrix
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
?
HIGH
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
9
Applying the BCG Matrix to Time Warner Inc.
Cable TV Networks
Film production
-8 -4 0 4 8 12
Cable
Magazine Publishing
Annual real rate of market growth ()
Bakery division
Music
AOL
Relative market share
Position in 2003 Position in 2000. (Area of
circle proportional to sales)
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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

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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
12
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
13
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 strategic planning system
capital expenditure approval system
Primarily through performance management
system, including operating budgets and HR
appraisals
14
Goold Campbells Corporate Management Styles
Financial and Strategic Control
High
Centralized
Strategic planning
CORPORATE INFLUENCE
Strategic control
Financial control
Holding company
Low
Flexible strategic
Tight strategic
Tight financial
CONTROL INFLUENCE
15
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

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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
17
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).
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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).

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Rethinking the Management of Multibusiness
Corporations Lessons from ABB
Key features of ABBs corporate management system

• Matrix organizationboth product and country /
  regional coordination flexible reporting
  requirements
• Radical decentralizationABBs corporate HQ was
  tiny (lt100 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 ABBs 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
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Rethinking the Management of Multibusiness
Corporations Bartlett Ghoshals Analysis of
Key Management Processes
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