Corporate Strategy Group 2

Bahrudin Yusuf T Ika Sekartaji

MM UGM AP 14 YOGYA

Structure of the Multidivisional Companyo Theory of the M-formo The divisionalized firm in practice

The Role of Corporate Management Managing the Corporate Portfolio

o Portfolio planning techniqueso Value-creation through corporate restructuring

Managing Individual Businesses Managing Internal Linkages Recent Trends

OUTLINE

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.

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

—Decisions over diversification, acquisition, divestment

—Resource allocation between businesses.

— Business strategy formulation

—Monitoring and controlling business

performance

—Sharing and transferring resources and capabilities

Managing linkagesbetween

businesses

Managing theindividual businesses

Managing the Corporate Portfolio

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

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.

H A R V E S T

H O L D

B U I L D

Low

Medium

High

Low Medium High

Ind

ust

ry A

ttra

ctiv

enes

s

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

HIGH

LO

W

LOW

An

nu

al r

eal r

ate

of

mar

ket

gro

wth

(%

)

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

HIG

H

?

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

Currentmarketvalue

Maximum raideropportunity

Current perceptions gap

Companyvalue as is

Optimalrestructured

value

Strategic andoperating

opportunities

Potential valuewith internal

improvements

Disposal/acquisitionopportunities

Total companyopportunities

1

2 5RESTRUCTURING

FRAMEWORK

3 4 Potential valuewith externalimprovements

2 basic approaches

Inputcontrol

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

• 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

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

(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).

•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: