• 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 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.

• 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

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

The Development of Strategic Planning Techniques:
General Electric in the 1970’s
Late 196 0’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.

High
Medium
Low
Low Medium
Business Unit Position
High
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

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
?
Earnings: low, unstable
Cash flow: neutral or negative
Strategy: divest
Earnings: high stable, growing
Cash flow: neutral
Strategy: invest for growth
Earnings: high stable
Cash flow: high stable
Strategy: milk
LOW
Relative market share
HIGH

Cable
Position in 2003
Cable TV
Networks
Film production
Magazine
Publishing
Bakery division
Music
AOL
Relative market share
Position in 2000. (Area of circle proportional to $ sales)

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

Current market value
1
Current perceptions gap
Maximum raider opportunity
Company value as is
2
RESTRUCTURING
FRAMEWORK
Strategic and operating opportunities
Potential value with internal improvements
3
Disposal/acquisition opportunities
4
5
Optimal restructured value
Total company opportunities
Potential value with external improvements

Economic
Review
Energy Review
Stewardship
Review
Business
Plans
Stewardship
Basis
Discuss-
-ion with contact director
Financial
Forecast
Approval by
Mgmt.
Committee
Corporate
Plan
Investment
Reappraisals
Annual
Budget

Input control
2 basic approaches
Output (or performance) control
Monitoring & approving business level decisions
Primarily through strategic planning system & capital expenditure approval system
Setting & monitoring the achievement of performance targets
Primarily through performance management system, including operating budgets and HR appraisals

Hig h
Centralized
Strategi c planning
Strategic control
Low
Holding compan y
Flexible strategic
Financial control
Tight strategic
CONTROL INFLUENCE
Tight financial

• 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

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)
—Sharing operational resources and functions (e.g. sales and distribution, manufacturing facilities).

Rethinking the Management of Multibusiness
Corporations: Lessons from General Electric
Jack Welch ’s transformation of GE’s structure and management systems:
• 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”).

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

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