Lecture Session

6
Corporate Strategy

Dr K. Sankaran Director Justice KS Hegde Management Institute Nitte, Karnataka

But what about Corporate Strategy?

Multi-Business Organization

(Johnson, Scholes and Whittington, 2008)

Corporate Strategy Issues

Rationale for the Portfolio What businesses to be in and their characteristics? Portfolio Rationalization (Matrix / Core Competency) Growth - M&As, Greenfield - Means of getting there Managing the Businesses - Parenting

CORPORATE STRATEGY PARENTING

Applies to Multi-businesses consists of several businesses with a parent corporate consisting of its own hierarchy line and staff functions. Eg. Tata Industries is a corporate parents for many Tata organizations Corporate Strategy guides corporate level decisions and addresses two basic questions: 1)Investments in what buz. (through ownership, minority holdings, joint ventures or alliances?) 2)What is the nature of influence exerted by the corporate on the individual businesses Four Generic types of Corporate Control (Source: Corporate Strategy: Creating Value in the Multi-business Company Goold, M. Campbell, A. and Alexander, M. Pub: Wiley) I. Stand Alone Influence II. Linkage Influence

III. Central Functions and Services

I. Corporate Development

Stand Alone Influence Corporates will be involved in agreeing and monitoring performance, approving major corporate expenditure and in selection and replacement of business-unit chiefs/ MDs. Some may exercise greater Influence in product-market strategies, pricing decisions, overall HRD policies etc. The downside: pressing for wrong targets, starving businesses of resources for worthwhile projects, wasteful investments, appointing wrong managers etc. Example 1: Dover Corporation Size: $ 2.5 bil $ company, 50 different businesses such as elevators, pumps, valves and heat exchangers Profile of businesses: Small to medium tech. Niche manufacturing businesses, industrial businesses. Key Corporate Function: Managing through heads of the 50 businesses, appointment of the head a very serious matter, attracts entrepreneurial managers; very supportive corporate office (nearly hand-holding Initially). High sense of accountability later. Corporate Growth Strategy: Natural business growth of businesses and diversification by takeovers. Usually attracts entrepreneurs who wish to exit businesses after having built them up initially.

Example 2: BTR Size: US $ 12 billion UK company involved in aerospace, transmission towers, electric motors, material handling, diesel engines, control systems, construction, packaging equipment, Key Corporate Function: Intensive profit planning (not budgeting), close monitoring thru BTR profit planning process and periodic stretching of targets, imposes high personal responsibility for performance and high motivation to deliver Corporate Strategy: Skills in Identifying and integrating acquisitions

Linkage Influence Through linkages such as transfer pricing mechanisms, personal pressure, lateral appointments etc., relationships are fostered or mandated which would not occur if the businesses were independent companies. In other words create synergy. But note that this has often been elusive for Western companies. Example 1: Banc One Size: One of the largest in the US with dominance in the mid-west, Over hundred mergers during early 1970 to mid 1990s. It had over eighty entities under the Banc One umbrella in 1993.Each entity has its own Board of Directors, but operates under the Banc One banner. Business Vision: Serve local markets. While following strict adherence to financial prudence three main measures are customer retention rate, proportion of highly satisfied customers, response time for customer requests. Pursuit of Synergy: through a highly structured compliance reporting on a dynamic best banking practice, a unique computerised MICS system to track performance (a total of forty performance variables are tracked on a continuous manner. A unique combination of locally developed products and centrally suggested products.

Example 2: Unilever Groupings: Based mainly on Four Global groups of businesses (Food, Detergents, Personal Products and Speciality Chemicals. Also linkages across groupings in the same country/ region. Linkages: Mobile managerial talents; a high proportion of common R&D spending; sharing info on marketing successes and failures and sales and logistics systems; and common advertising in the case of international brands, common formats for business reporting and strategic plans.

Functional and Services Influence The parent provides functional (or services) leadership and cost effective services for business units. Generally it is found that this is more a stepping stone to either towards Stand-alone Influence or Linkage Influence with respect to functions of marketing, finance etc. But you would find some other functions such as R&D may be centralised while certain specialist functions such as Projects are deployed on a time bound basis to specific businesses. Example 1:3M Size: $ 14 billion sales from 41 product divisions Mainly to automotive and office products and metals working sectors. Key Business Philosophy: Innovative new products and whole new businesses can be created by effective parenting of the innovation and technical function and thereby internal development of the new businesses. A culture of cooperation, internal promotion, long tenure and innovative spirit. Technical function is the first among equals Corporate Influence through: Facilitation of high quality laboratory and innovation management. For example, 3M has a large number of high tech. laboratories that are subject to assessment by the corporate through a lab audit process that involves evaluation by other lab directors.

Example 2: Cooper Restructuring: Until recently performing in a lack lustre fashion, Cooper was on the rebound by consolidating five North American production centres to two. Key Function: Manufacturing, concentrates on mature industrial businesses of spark plug, ignition systems and other automotive and aircraft components. Corporate Philosophy: Many independent businesses serving similar markets can derive synergy benefits in manufacturing and distribution, if brought under parental domain.

Corporate Development A pure portfolio approach is adopted. The corporate parent buys and sells (or juggles) businesses like as if they are liquid properties. It may, by design, hold businesses for short durations of time, as low as 1-2 years. With timely acquisitions is the key, this strategy also envisages timely selling of businesses to buyers for whom the worth of the properties is more than to the portfolio manager. High focus on types of businesses that the company would deal with, astute deal making skills, quick responses, hardnosed short-term cash generation, break-up of assets to fully realise true aset values etc.mark this strategy. Example 1:Hanson Method: First Hanson developed a small highly competent team for identification, screening and deal making. It actively sought acquisitions and selected from hundreds about 12 businesses. It developed an efficient and speed way to figure out which businesses and managers to keep and managing culture change that most acquisitions needed. Philosophy: Companies that seek growth from mature businesses tend to destabilise competitive conditions, indulge in unnecessary investments and take on excessive costs. This gives opportunity to a parent that stresses tight profitability controls. Willingness to sell ny business that is worth more to others than we think its worth to us. Example: In 1986 Hanson acquired Imperial Group for $ 2.6 billion and within 3 years sold off a portion of the compamy to others for $ 2.3 billion. The company was let with ownership of Imperials main tobacco business with an estimated net wroth of 1.3 billion $. Total returns from the deal in three years = 1 billion $.

There could also be combinations of Generic Control I. Stand Alone Influence II. Linkage Influence

III. Central Functions and Services

I. Corporate Development

DuPont* Structure before reorganization - Departments Fibres Chemicals, Polymers etc. - Each independent with the own finance, engineering, HR - Corporate Support function - Mainly a Linkage Influence from the corporate towards departments - Within each department (which acted like a business), the various products (Lycra) were provided Functional or Service support DuPont After reorganization -Move towards the standalone structure with some characteristics of linkage Strategic Business Unit -* based on Streamlining the over-managed company, Carey & von Weiches

How did the new structure help?

Speed: - Delayering, closer to the customer - Independence of the functional units at the SBU level

Accountability - SBU head has direct responsibility (with of course freedoms too)
Specificity - New Measurement system introduced - Business head in change - Blue Book Metrics for each unit revenue, fixed costs, productivity, commitments for the year

Culture - Step Change eg: Waste Management (Improvements in the Production Process) - Measurement bound (Blue book) - Targets not to be altered midway through - Communication (Fixity of targets, accessibility of CEO, simplicity of communication, rationale for acquisitions and divestments

Blue Ocean Strategy

Create uncontested markets and make competition irrelevant by: Looking Across Alternate Industries: Netjets: Combining Commercial Airlines and Aircraft ownership Looking Across Strategic Groups within Industries: Champion Pre-fabricated homes (Quick installation + Comfort) Looking Across Chain of Buyers: Intel (Assemblers to Users) Looking Across Complementary Products/ services: Auto companies offering car financing Looking across industrys functional or emotional orientation: Swatch watches (Functional combining with emotional appeal) Looking across time: Apples itunes saw the future while observing illegal music downloads through Napster, Kazaa, Limewire
(Kim and Mauborgne, 2005)

Evolution of Organizational Forms & Strategy Issues

1 Idealized Firm 2
Vertically Integrated Firms Horz. Integrated Firms

High

Capital Linkages

Conglomerates 1950-70 3
SBUs 70s-80s 4

5 Core Competency 80s-90s

Towards InterOrganizational Systems

Low

Low Linkage: Oper/Competence/Customer Need

High

(Adapted from Hinterhuber, Long Range Planning, 1994)

Thank you