Ch16-Slidesdsf324efrr4wewf324tt4r44f4.ppt

managing the multibusines corporation

1. Managing the Multibusiness
Corporation
•Structure of the Multidivisional Company
oTheory of the M-form
oThe divisionalized firm in practice
•The Role of Corporate Management
•Managing the Corporate Portfolio
oPortfolio planning techniques
oValue-creation through corporate
restructuring
•Managing Individual Businesses
•Managing Internal Linkages
•Recent Trends
OUTLINE

2. 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.

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
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

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

5. 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

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. H

A

R
V
E
S


T
H
O
L
D
B
U
I L
D
Low
Medium
High
Low Medium High
I
n
d
u
s
t
r
y

A
t
t
r
a
c
t
i
v
e
n
e
s
s
Portfolio Planning Models:
The GE/ McKinsey Matrix
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
Business Unit Position

8. HIGH

L
O
W
LOW
A
n
n
u
a
l

r
e
a
l

r
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e

o
f

m
a
r
k
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t

g
r
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w
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h

(
%
)
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, or
will degenerate
into a dog
H
I
G
H
?
Portfolio Planning Models: The BCG
Growth-Share Matrix

9. A
n
n
u
a
l

r
e
a
l

r
a
t
e

o
f

m
a
r
k
e
t

g
r
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w
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h

(
%
)
Relative market share
-
8







-
4







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1
2
Bakery division
Position in 2003 Position in 2000. (Area of circle proportional to $ sales)
Applying the BCG Matrix to Time Warner Inc.
AOL
Film
production
Cable
Cable TV
Networks
Music
Magazine
Publishing

10. 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

11. Corporate Restructuring to Create
Value: The McKinsey Pentagon
Current
market
value
Maximum raider
opportunity
Current perceptions
gap
Company
value as is
Optimal
restructured
value
Strategic and
operating
opportunities
Potential value
with internal
improvements
Disposal/acquisition
opportunities
Total company
opportunities
1
2 5
RESTRUCTURING
FRAMEWORK
3 4
Potential value
with external
improvements

12. Exxon’s Strategic Planning Process
Economic
Review
Energy Review
Business
Plans
Discuss-
-ion with
contact
director
Approval
by
Mgmt.
Committee
Stewardship
Review
Stewardship
Basis
Financial
Forecast
Corporate
Plan
Investment
Reappraisals
Annual
Budget

13. Corporate Control over the Businesses
2 basic approaches
Input
control
Monitoring & approving
business level decisions
Output (or performance)
control
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 & Campbell’s Corporate Management
Styles: Financial and Strategic Control
High
Low
CONTROL INFLUENCE
Strategic
planning
Centralized
Strategic
control
Holding
company
Financial
control
C
O
R
P
O
R
A
T
E

I
N
F
L
U
E
N
C
E
Flexible strategicTight strategic Tight financial

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

16. 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

17. 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)Common corporate services (e.g. 3M)
——Sharing Sharing operational resources and functions (e.g. sales and distribution,
manufacturing facilities).

18. 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 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”).
Jack Welch’s transformation of GE’s structure and management systems:

19. Rethinking the Management of Multibusiness
Corporations: Lessons from ABB
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.
Key features of ABB’s corporate management system:
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

20. Rethinking the Management of Multibusiness
Corporations: Bartlett & Ghoshal’s Analysis
of Key Management Processes
Managing the tension
between short-term
ambition
Managing operational
interdependencies and
personal networks
Creating and pursuing
opportunities
Creating and maintaining
organizational trust
Linking skills, knowledge,
and resources
Reviewing, developing, and
supporting initiatives
Shaping and embedding
corporate purpose
Developing and
nurturing organizational
values
Establishing
strategic mission &
performance standards
Front-line Management Middle Management Top Management
RENEWAL PROCESS
INTEGRATION PROCESS
ENTREPRENEURIAL PROCESS