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CONTEMPORARY STRATEGY ANALYSIS

tenth edition

Robert M. Grant

John Wiley & Sons Ltd., 2019

Chapter 13

Implementing Corporate Strategy: Managing the Multibusiness Corporation

The Role of Corporate Management

Managing the Corporate Portfolio

Managing Linkages across Businesses

Managing Individual Businesses

Managing Change in the Multibusiness Corporation

Governance of Multibusiness Corporations

Implementing Corporate Strategy:

Managing the Multibusiness Corporation

Copyright © 2019 John Wiley & Sons, Inc.

OUTLINE

37

THE ROLE OF CORPORATE MANAGEMENT

Copyright © 2019 John Wiley & Sons, Inc.

•Managing the corporate portfolio

—including acquisitions, divestments, and

resource allocation

•Managing linkages among businesses

Managing each individual business

•Managing change

How does Corporate Management add Value to its Individual Businesses?

42

Google

Books

Insurance

GEICO

General Re

Manufacturing

Lubrizoil

Main Portfolio Investments

  • Heinz Kraft
  • Apple
  • Coca-Cola
  • Wells Fargo
  • American Express
  • Phillips 66
  • Goldman Sachs
  • Delta Airlines

Energy

Mid American Energy

PacificCorp

BHRG

BH Primary

Media and Services

NV Energy

IMC

NetJets

Store Capital

Fruit of the Loom

Clayton Homes

CTB International

Business Wire

BH Media

Pampered Chef

Retail

Borsheims

See’s Candy

Nebraska Furniture Mart

RC Willey Home Furnishings

Pampered Chef

Home Services of America

Northern Powergrid

BERKSHIRE HATHAWAY INC.

Berkshire Hathaway’s portfolio of businesses

Dairy Queen

© 2019 Robert M. Grant,

www.contemporarystrategyanalysis.com

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  • Allocating resources—indicating both the investment requirements of different businesses and their likely returns
  • Formulating business-unit strategy—offering generic strategy recommendations (e.g.: “build”, “hold”, or “harvest”)
  • Setting performance targets—indicating likely performance outcomes in terms of cash flow and ROI
  • Portfolio balance—guiding business portfolio changes in order to achieve corporate goals such as a balanced cash flow by combining mature and growing businesses.

The Uses of Portfolio Planning Models

in Strategy Formulation

Copyright © 2019 John Wiley & Sons, Inc.

MANAGING THE CORPORATE PORTFOLIO

46

Low

Medium

High

Low

Medium

High

Industry Attractiveness

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

The GE/McKinsey Matrix

Copyright © 2019 John Wiley & Sons, Inc.

MANAGING THE CORPORATE PORTFOLIO

B U I L D

H O L D

H A R V E S T

45

HIGH

LOW

Annual real rate of market growth (%)

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 the

potential to

develop the

business

into a “star”

HIGH

?

The BCG Growth-Share Matrix

Copyright © 2019 John Wiley & Sons, Inc.

LOW

MANAGING THE CORPORATE PORTFOLIO

44

HEARTLAND

–businesses with

high potential

for adding value

EDGE OF

HEARTLAND

— less value adding

potential; more risk is

of value destruction

BALLAST

–typical legacy

business: good

fit high, but limited

potential to add

value

VALUE TRAP

–lack of management fit

limits potential to add

value

ALIEN TERRITORY

–exit: no potential for

value creation

LOW

HIGH

LOW

HIGH

Potential for value destruction from misfit between needs of the business and patent’s corporate management style

Potential for parent to add value to the business

Ashridge Portfolio Display:

The Potential for Patenting Advantage

© 2019 Robert M. Grant,www.contemporarystrategyanalysis.com

MANAGING THE CORPORATE PORTFOLIO

ADVANTAGES

  • Simplicity: Quick and easy to

prepare

  • Big picture: Permits one page

representation of the corporate

portfolio & 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

  • Ambiguity: 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

Do Portfolio Planning Models Help or Hinder Corporate Strategy Formulation?

Copyright © 2019 John Wiley & Sons, Inc.

MANAGING THE CORPORATE PORTFOLIO

48

Shared corporate services: Centralizing services such as IT, HR, purchasing, research, facilities management exploits cost economies and develops capabilities

Transferring skills between businesses: E.g. LVMH transfers brand management capabilities; P&G transfers technologies and product development skills across product sectors and across countries

Sharing resources and activities: E.g. Virgin Group shares its brand across its businesses; Samsung Electronics’ globally dispersed design centers serve all its businesses

BUT, Exploiting synergies is not costless: Transferring skills and sharing resources and activities tends to involve the corporate HQ in managing relationships between the businesses and complicates the appraisal of business performance

MANAGING LINKAGES ACROSS BUSINESSES

Copyright © 2019 John Wiley & Sons, Inc.

Sources of Synergy within

the Multibusiness Corporation

MANAGING LINKAGES ACROSS BUSINESSES

Current

market

value

Maximum raider

opportunity

Current perceptions

gap

Company

value as is

Optimal

restructured

value

Strategic and

operating

opportunities

Potential value

with internal

improvements

Disposal/acquisition

opportunities

Total company

opportunities

1

2

5

RESTRUCTURING

FRAMEWORK

3

4

Potential value

with external

improvements

The McKinsey Restructuring Pentagon

Copyright © 2019 John Wiley & Sons, Inc.

MANAGING INDIVIDUAL BUSINESSES

50

Stewardship Review

Investment Reappraisals

Annual Budget

Exxon’s Strategic Planning Process

Copyright © 2019 John Wiley & Sons, Inc.

Economic Review

Energy Review

Stewardship Basis

Approval by Mgmt. Committee

Financial Forecast

Corporate Plan

Business Plans

Discussion with contact director

MANAGING INDIVIDUAL BUSINESSES

18

Critiques of strategic planning:

  • Strategic planning systems don't make strategy—strategic planning a ritualistic process, but most strategic decisions are made outside the system
  • Weak execution—procedures for converting plans into actions are weak. Proposals for improving execution include:
  • Strategic milestones
  • Strategy maps
  • Replacing strategic planning units by “offices of strategy management”

Rethinking Strategic Planning

Copyright © 2019 John Wiley & Sons, Inc.

MANAGING INDIVIDUAL BUSINESSES

46

  • Multibusiness companies have a dual planning process:
  • Strategic planning: medium and long term
  • Financial planning : short-term
  • The two are closely linked. Strategic plan is a basis for:
  • Operating budget
  • Capital expenditure budget
  • Annual performance plans
  • Strategic milestones
  • Balance between strategic and financial control:
  • Varies by firm and sector
  • There’s a trade-off between the two—more of one means less of the other

Performance Management and Financial Control

8

Copyright © 2019 John Wiley & Sons, Inc.

MANAGING INDIVIDUAL BUSINESSES

46

Input

control

Monitoring and approving

business level decisions

Output

control

Setting performance targets

and monitoring

their achievement

Primarily through strategic

planning system and capital

expenditure approval system

Primarily through performance

management system, including

operating budgets, scorecards,

milestones, and HR appraisals

Strategic Planning and Financial Control as Alternative Modes of Corporate Control

Copyright © 2019 John Wiley & Sons, Inc.

Two basic approaches

MANAGING INDIVIDUAL BUSINESSES

Alternative Corporate Management Styles

MANAGING INDIVIDUAL BUSINESSES

Copyright © 2019 John Wiley & Sons, Inc.

  Strategic planning Financial control
Business strategy formulation Strategy formulated by businesses; corporateHQ guides and coordinates Strategy formulated at business unit level;HQ exerts financial control
Controlling performance Primarily strategic goals with medium- to long-term horizon Financial budgets set annual targets—monitored quarterly
Advantages Exploits (a) linkages among businesses, (b) innovation, (c) long-term development Business unit autonomy conducive to initiative, responsiveness, and efficiency
Disadvantages Loss of divisional autonomy and initiativeUnitary strategic viewTendency to persist with failing strategies Short-term focus discourages innovation and long-term developmentLimited sharing of resources and capabilities
Style suited to Companies with few closely related businessesCapital and technology-intensive sectors with large, long term investment projects Highly diversified companies with low relatedness among businessesMature, low-tech sectors where investment projects small and short term

The Problem: Counteracting Inertia

  • The bigger and more complex the company—the greater the forces of inertia

Facilitating change:

  • Adaptive tension Imposing high performance expectation on individual and departments can create not just stress, but dynamism and responsiveness that counteracts complacency (e.g. Jack Welch at GE)
  • Institutionalizing change Shift focus of strategic planning from resource allocation to sensing and responding to external change (e.g. IBM)
  • New business development Incubating the new businesses that will ultimately replace the old (Amazon, Netflix, Nokia)
  • Top-down, large-scale development initiatives—the CEO as change leader e.g. Samsung Electronics; Haier

The Challenge of Leading Change

Copyright © 2019 John Wiley & Sons, Inc.

MANAGING`CHANGE IN THE MULTBUSINESS CORPORATION

41

  • What are the rights of shareholders?
  • To transfer shares, access company information, elect directors, share in the profits of the firm, vote on key strategic decisions
  • Despite potential for divisions to develop distinctive strategies and structures—corporate systems may impose uniformity.
  • What’s gone wrong?
  • Failure by boards to prevent managers pursuing their interests rather than those of shareholders (e.g. excessive compensation)
  • Failure board to take account of social/national interest
  • What other problems do multidivisional corporations face?
  • Lack of decentralization of decision making to divisional managers
  • Standardization of management systems across divisions

The Challenge of Corporate Governance

Copyright © 2019 John Wiley & Sons, Inc.

GOVERNANCE OF MULTBUSINESS CORPORATIONS

  • What are the responsibilities of Company Boards?
  • To act in the best interests of the company and its shareholders
  • To oversee strategy, budgets, management performance, etc.

41

Highest Earning CEOs of US Companies 2016

GOVERNANCE OF MULTBUSINESS CORPORATIONS

Copyright © 2019 John Wiley & Sons, Inc.

Rank CEO Company Direct compensation ($m)
1 Thomas Rutledge Charter Communications 98
2 Leslie Moonves CBS 69
3 Robert A. Iger Walt Disney 41
4 David Zaslav Discovery Communications 37
5 Robert Kotick Activision Blizzard 33
6 Brian Roberts Comcast Corp. 33
7 Jeffrey L. Bewkes Time Warner 33
8 Virginia Rometty IBM 32
9 Leonard Schleifer Regeneron Pharmaceuticals 28
10 Stephen Wynn Wynn Resorts Ltd. 28

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