Module 13: External Growth Strategies and Implementation – Discussion Question

13
Implementing Corporate
Strategy: Managing the
Multibusiness Firm
Some have argued t hat single-prod uct businesses have a focus that gives them an
advantage over multibu siness companies like our own- and perhaps they would
have, but on ly if we neglect our own overrid ing advantage: the ability to share the
ideas that are the result of wide and rich input from a multitude of g lobal sources.
GE businesses share technology, design, compensation and personnel eval uation syst ems, manufacturing practices, and customer and country knowledge.
-JACK WELCH, CHAIRMAN AND CEO, GENERAL ELECTRIC COMPANY, 1981-2001
We are confident that position ing GE Healthcare and BHGE outside of GE’s current
structure is best not on ly for GE and its owners, but also for these businesses, which
w ill strengt hen their market-leading positions and enhance their ability to invest for
the future.
-JOHN FLANNERY, CHAIRMAN AND CEO, GENERAL ELECTRIC COMPANY, 2017-2018
OUTLINE
•
Introduction and Objectives
•
Performance Management and Financial Control
The Role of Corporate Management
•
Strategic Planning and Performance Control:
Alternative Approaches to Corporate Management
Managing the Corporate Portfolio
Managing Change in the Multibusiness Corporation
•
Managing Linkages Across Businesses
Governance of Multibusiness Corporations
•
•
•
Comm o n Corporate Services
•
The Rights of Shareholders
Tran sferring and Sharing Resources and Capability
among Bu sinesses
•
The Responsibilities of Boards of Directors
Implications for the Corporate Headquarters
•
Governance Implications of Mult ibusiness Structures
Managing Individual Businesses
Summary
•
Self-Study Questions
•
Direct Corporate Involvement in Business-Level
Management
The Strategic Planning System
Notes
296
PART IV CORPORATE STRATEGY
Introduction and Objectives
A multibusiness firm- whether organized as business units, divisions, or subsidiaries- comprises a
number of separate businesses t hat are controlled by a corporate headquarters. These businesses may
be defined on the basis of products (e.g., Samsung Electronics), geographical markets (e.g., McDona ld’s),
or vertical stages (e.g., Royal Dutch Shell). While the individual businesses are responsible for most
strategic and operational business decisions, headquarters is respons ible for corporate strategy and
decisions that affect the company as a whole.
The three previous chapters have addressed the three key dimensions of corporate scope: vertical
integration, internationalization, and diversification. In relation to all three, th e critical issue is the potential to create value by operating across mu ltiple businesses. Value is only rea lized if the benefits from
exploiting these linkages exceed the additional costs of managing them. This ra ises several issues.
How should corporate strategy be formu lated and linked to resource allocation 7 How should the corporate headquarters coordinate and control the businesses? What roles and leadership styles should
corporate managers adopt? Under what kind of governance stru cture should corporate managers
operate?To answer these questions, we must look closely at the activities of the corporate headquarters
and it s relationships wit h the businesses.
By the time you have completed t his chapter, you w ill be able to:
•
Comprehend th e primary strategic role of corporate managers: creating value w ithin the
businesses owned by the company.
•
Apply the techniques of portfolio analysis t o corporate strategy deci sions.
•
Underst and how the corporat e headquarters manages the linkages among t he diffe rent
business units w it hin the company.
Appreciate t he tools and processes by w hich t he corporate headquarters inf1 uences t he
performance of its individual businesses.
Understand how corporate managers can stimulate and guide strategic change.
•
Recog nize the governance issues that impact th e operation of the multibusiness
corporation.
CHAPrER 13 IMPLEMENTING CORPORATE STRATEGY: MANAGING THE MULTIBUSINESS FIRM
The Role of Corporate Management
Common to decisions over vertical integration, international expansion, and diversification is the requirement that the benefits from extending the scope of the firm should
exceed the administrative costs of a larger, more complex corporate entity. This implies
that the formulation and implementation of corporate strategy are inseparable. Both the
benefits and the costs of extending (or reducing) corporate scope depend upon how
corporate strategy is implemented. To investigate these benefits and costs, we need
to direct our attention to the mechanisms through which multibusiness corporations
create value for the businesses they own.
We shall focus on four activities through which corporate management adds value
to its businesses:
•
•
•
•
managing the corporate portfolio
managing linkages across businesses
managing individual businesses
managing change in the multibusiness corporation.
In the four sections that follow, I shall consider each of these activities, establish the
conditions under which they create value, and specify what this implies for the role of
the corporate headquarters.
Managing the Corporate Portfolio
The simplest form of multibusiness company is one that assembles independent businesses under common ownership and neither intervenes in their management nor
exploits linkages between them. The corporate executives in this type of company
are engaged in portfolio management: buying and selling businesses and managing
the allocation of capital among them. Can such portfolio management add value to
a set of businesses in excess of the cost of the corporate headquarters and transaction costs of acquiring and disposing of businesses? Ask Warren Buffett, the foremost
exponent of portfolio management who has built Berkshire Hathaway out of 65 mostly
unrelated acquisitions (see Strategy Capsule 13.1).
For portfolio planning to create value, the essential requirement is for corporate
management to be adept at spotting undervalued companies (that is, to be better than
the stock market in recognizing the long-term profit potential of certain companies)
and to be better than capital markets in allocating capital among them. The more efficient are the financial markets, the less scop e there is for portfolio management wizards
such as Warren Buffett.
Even if it is not their primary source of value creation, portfolio managementdetermining which businesses the company should be in and managing resource
allocation among them- is an essential corporate management function for all multibusiness companies. Hence, the usefulness of portfolio planning matrices as a corporate strategy tool. By depicting the strategic positioning of a firm’s different businesses,
these matrices can be used to analyze their value-creating prospects (see Strategy
Capsule 13.2).
297
298
PART IV CORPORATE STRATEGY
Berkshire Hathaway, Inc.
Berkshire Hathaway comprises 63 operating subsid-
with sound long-term prospects, and whose stock
iaries (some of wh ich are shown in Figure 13.1) and
market valuation is sufficiently low to permit a siz-
a headquarters in Omaha, NE, that comprises j ust
able upside potential. Buffett’s stock-picking abilit y is
25 employees. It is America’s third biggest company by
reinforced by rigorous capital allocation:”We move huge
revenue w ith profits second only to Apple. It follows a
sums from businesses that have limited opportunities
simple portfolio management strategy that has been
for incremental investment to other sectors with greater
executed since 1970 by its 90-year-old chairman and
promise. Moreover, we are free of historical biases cre-
CEO, Warren Buffett. That strategy involves selecting
ated by lifelong association with a given industry and
companies that possess a “wide moat” (=sustainable
are not subject to pressures from colleagues having a
competitive advantages), that compete in industries
vested interest in maintaining the status quo:’
FIGURE 13.1
The Warren Buffett portfolio: Some of Berkshire Hathaway’s businesses
Insurance
GEICO
Energy
General Re
MidAmerican Energy
Northern Powergrid
BHRG
Manufacturing
Lubrizol
CTB International
Fruit of the Loom
Retail
Clayton Homes
Nebraska Furniture Mart
RC Willey Home Furnishings
Pampered Chef
Borsheims
BERKSHIRE
HATHAWAY
INC.
Dairy Queen
See’s Candy
Services
Home Services of America
Store Capital
BH Media
Business Wire
Main Portfolio
Investments
• Heinz Kraft
•Apple
•Coca-Cola
• Wells Fargo
• American Express
• Bank of America
CHAPTER 13 IMPLEMENTING CORPORATE STRATEGY: MANAGING THE MULTIBUSINESS FIRM
Managing Linkages across Businesses
In relation to vertical integration, international strategy, and diversification (Chapters 10, 11,
and 12), we established that the main opportunities to create value arise from exploiting the linkages between businesses. These include the benefits from sharing and
transferring resources and capabilities and avoiding the transaction costs of markets.
Multibusiness firms exploit resource and capability linkages in two main areas: first,
centralizing common services at the corporate level and, second, managing direct linkages among the businesses.
Common Corporate Services
Cost economies arise from the centralized provision of corporate management functions
(strategic planning, financial control, treasury, risk management, taxation, government
relations, and shareholder relations) and business services such as research , engineering, human resources management, legal services, management development,
purchasing, and any other administrative services subject to economies of scale or
learning.1
In practice, the benefits of the centralized provision of common services and
functions may be disappointingly small. Cost savings from eliminating duplications
may be offset, first, by the propensity for corporate staffs to grow under their own
momentum and, second, by the weak incentives for corporate staffs to meet the needs
of the businesses. Part of the problem is that the corporate headquarters serves two distinct purposes: providing the businesses with leadership and control and offering them
support services. Hence, a growing trend has been for companies to separate their
corporate headquarters into a corporate management unit- responsible for supporting top management in strategic planning, financial control, and communication-and
a shared services organization- responsible for supplying common services such as
research, recruitment, training, and information technology to the businesses.
By 2021, the majority of large multibusiness corporations in North America and
Europe had established shared service organizations. These typically comprised
information technology, human resource management, real estate and facilities
management, and legal services. Increasingly, shared service organizations offer services that span national borders and are located away from the corporate head office. 2
Procter & Gamble’s Global Business Services organization employs 7,000 people
in six “global hubs”: Cincinnati (US), San Jose (Puerto Rico), Newcastle (UK), Brussels
(Belgium), Singapore, and Manila (Philippines). Through scale economies and standardizing systems, it has reduced the cost of business services by over $800 million.3
Transferring and Sharing Resources and Capabilities
among Businesses
For most multibusiness companies, the main source of synergy is from sharing resources
and transferring capabilities between businesses. To identify the potential for sharing
and resources and capabilities, Michael Porter advocates comparing the value chains
for different businesses to identify similarities both between individual activities and
299
300 PART IV CORPORATE STRATEGY
Portfolio Planning Matrices
Portfolio planni ng techniques were developed by t he
cash flow patterns and indicate strategies to be
Boston Consulting Group, McKinsey & Company, and
adopted (Figure 13.3).b
Arthur D. Little to meet the cha llenges faced by General
The Ashridge Portfolio Display is based upon the
Electric at the end of the 1960s in manag ing its 46 divi-
concept of parenting advantage.’ It recognizes t hat value-
sions and 190 businesses.
creating potentia l depends upon the characteristics of the
Portfolio plann ing matrices position graphically t he
parent, as well as the elements of t he business. Hence,
different businesses of a multibu siness company in rela-
the focus is on the fit between a business and its parent.
tion to the key strategic variables that determine their
The positioning of a business along the horizontal axis of
profit potential.
Figure 13.4 depends upon the parent’s potential to cre-
The GE/McKinsey Matrix uses the two primary
ate profit for the business by applying its corporate-level
drivers of profitability that we identified in Chapter 1
management capabilities, sharing resources and capabil-
(see Figure 1.5): market att ractiveness and competitive
ities with other businesses, or economizing on transaction
advantage. Industry attractiveness combines market
costs. The vertical axis measures the parent’s potentia l
size, market growth rate, retu rn on sales, margin growth,
for value destruction by the costs of corporate overhead
and international potential. A business unit’s competi-
or a mismatch between the management needs of the
tive advantage combines market share, return on sales
business and t he systems and style of the parent.
relative to compet itors, and relative position on quality,
These different portfolio planning matrices each have
techno logy, and cost.’ Figure 13.2 shows the capital
their advantages and disadvantages as well as generic
investment implications of t he matrix.
limitations:
The Boston Consulting Group Growth-Share
Matrix is a simplified version of the GE/McKinsey
The McKinsey and BCG matrices are both intended
matrix. It uses a rate of market growth as a proxy for
to indicate the future profit potential for the business,
industry attractiveness and relative market share (the
yet they utilize data drawn from t he past.
business unit’s market share relative to that of its largest
The McKinsey and BCG matrices ignore synergies
competitor) as an indicator of competitive advantage.
between businesses that are major sources of corpo-
The four quadrants of the matrix predict profits and
rate value creation.
FIGURE 13.2
The GE/McKinsey portfolio planning matrix
High
..,
C:
..,
V,
V,
·E
v
i Medium
£
-0
.s
Low
Low
Medium
Business Unit Competitive Advantage
Hig h
CHAPTER 13 IMPLEMENTING CORPORATE STRATEGY: MANAGING THE MULTIBUSINESS FIRM
FIGURE 13.3
The BCG growth-share matrix
, , . ro.,U
Earnings:
low, unstable, growing
Earnings:
Cash flow:
negative
Cash flow:
Strategy:
analyze potential
Strategy:
Earnings:
low, unstable
Earnings:
high, stable
!’;
Cash flow:
neutral or negative
Cash flow:
high, stable
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