MGT510:module12- Strategic Recommendations

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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 es
Managing Individual es
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 es?

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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
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

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Low
Medium
High
Low
Medium
High
Industry Attractiveness
Industry Attractiveness Criteria Unit Position
– Market size – Market share (domestic,
– Market growth global, and relative)
– Industry profitability – Competitive position
– Inflation recovery – Relative profitability
– Overseas sales ratio
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

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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

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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

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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
Plans
Discussion with contact director
MANAGING INDIVIDUAL BUSINESSES

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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

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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

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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

strategy formulation Strategy formulated by businesses; corporate
HQ 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 unit autonomy conducive to initiative, responsiveness, and efficiency

Disadvantages Loss of divisional autonomy and initiative
Unitary strategic view
Tendency to persist with failing strategies Short-term focus discourages innovation and long-term development
Limited sharing of resources and capabilities

Style suited to Companies with few closely related businesses
Capital and technology-intensive sectors with large, long term investment projects Highly diversified companies with low relatedness among businesses
Mature, 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

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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.

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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