To accompany contemprory strategy analysis concepts techiniques application chapter16slides

Managing Managing the the Multibusiness Multibusiness Corporation 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 TheMultidivisional MultidivisionalStructure: Structure: Theory Theoryof ofthe the M-Form 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 The Divisionalized Divisionalized Firm Firm in in Practice 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 Mform The The Functions Functions of of Corporate Corporate Management Management Managing the Corporate Portfolio —Decisions over diversification, acquisition, Managing the individual businesses — Business strategy formulation —Monitoring and controlling business Managing linkages between businesses divestment —Resource allocation between businesses performance —Sharing and transferring resources and capabilities The The Development Developmentof of Strategic Strategic Planning PlanningTechniques: Techniques: General GeneralElectric Electricin inthe the1970’s 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 Portfolio Planning Planning Models: Models: Their Their Uses Uses in in Strategy Strategy Formulation 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 Industry Attractiveness Portfolio Portfolio Planning Planning Models: Models: The The GE/ GE/ McKinsey McKinsey Matrix Matrix B High H Medium H A R Low Low V E S O L U I L D D T Medium High Business Unit Position Industry Attractiveness Criteria Business Unit Position - Market size - Market growth - Industry profitability - Inflation recovery - Overseas sales ratio - Market share (domestic, global, and relative) - Competitive position - Relative profitability Portfolio Portfolio Planning Planning Models: Models: The The BCG BCG Growth-Share Growth-Share Matrix Matrix HIGH low, unstable, growing Cash flow: negative Earnings: high stable, growing Strategy: Cash flow: neutral Strategy: invest for growth analyze to determine whether business can be grown into a star, or will degenerate into a dog Earnings: LOW Annual real rate of market growth (%) Earnings: low, unstable ? Earnings: high stable Cash flow: neutral or negative Cash flow: high stable Strategy: divest Strategy: milk LOW Relative market share HIGH Annual real rate of market growth (%) -2 10 Portfolio Portfolio Planning Planning Models: Models:Applying Applying the the BCG BCG Matrix Matrix to to BM BM Foods Foods Inc Inc Frozen food division Health foods division Fruit juices division 0.1 0.5 1.5 Relative market shareposition Previous Current position Area of circle proportional to $ sales Bakery division 2.0 Do Do Portfolio Portfolio Planning Planning Models Models Help Help or or Hinder Hinder Corporate Corporate Strategy Strategy Formulation? 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 Corporate Restructuring Restructuring to to Create Create Value: Value: The The McKinsey McKinsey Pentagon Pentagon Current market value Current perceptions gap Company value as is Strategic and operating opportunities Maximum raider opportunity RESTRUCTURING FRAMEWORK Potential value with internal improvements Disposal/acquisition opportunities Optimal restructured value Total company opportunities Potential value with external improvements Exxon’s Exxon’s Strategic Strategic Planning Planning Process Process Economic Review Energy Review Stewardship Review Business Plans Stewardship Basis Investment Reappraisals Discuss-ion with contact director Financial Forecast Annual Budget Approval by Mgmt Committee Corporate Plan Corporate Corporate Control Control over over the the Businesses Businesses 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 Goold Goold & & Campbell’s Campbell’s Corporate Corporate Management Management Styles: Styles: Financial Financial and and Strategic Strategic Control Control High CORPORATE INFLUENCE Centralized Strategic planning Strategic control Low Financial control Holding company Flexible strategic Tight strategic CONTROL INFLUENCE Tight financial Corporate Corporate Management Management Applications Applications of of PIMS PIMSAnalysis 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 Managing Linkages Linkages between between Businesses 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 What Corporate CorporateManagement Management Activities Activities are are Implied Implied by by Porter’s Porter’s“Concepts “Conceptsof ofCorporate Corporate Strategy” 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 Rethinkingthe theManagement Managementof of Multibusiness Multibusiness Corporations: Corporations: Lessons Lessonsfrom from General GeneralElectric Electric Jack Welch’s transformation of GE’s structure and management systems: •Delayering - from or 10 layers of hierarchy to or •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 Rethinkingthe the Management Managementof ofMultibusiness Multibusiness Corporations: Corporations: Lessons Lessonsfrom fromABB ABB Key features of ABB’s corporate management system: Matrix organization—both product and country / regional coordination, but reporting requirements flexible •Radical decentralization—ABB’s corporate HQ is tiny (