multi business company
TRANSCRIPT
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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