PowerPoint Presentation by Charlie Cook Gordon Walker McGraw-Hill/Irwin Copyright © 2004 McGraw Hill Companies, Inc. All rights reserved. Chapter 10 Managing the Multibusiness Firm

10–2 Tasks of Corporate Management Allocate resources across business units Allocate resources across business units Manage portfolio of businesses Manage portfolio of businesses Organize and manage relationships among businesses Organize and manage relationships among businesses Centralize activities across businesses Centralize activities across businesses Develop top-down initiatives Develop top-down initiatives Develop corporate infrastructure Develop corporate infrastructure

10–3 Resource Allocation In efficient financial markets, diversified firms with unrelated businesses typically incur a diversification discount: In efficient financial markets, diversified firms with unrelated businesses typically incur a diversification discount: –The firm’s stock price is lower than the combined value of its businesses. How can the firm mitigate (but not overcome) this effect? How can the firm mitigate (but not overcome) this effect? –The development of corporate management expertise (e.g., Hanson Trust) –The allocation of financial resources to financially constrained businesses in high growth markets

10–4 Managing A Portfolio of Businesses A portfolio typically consists of businesses, in high and low growth industries, that possess varying degrees of competitive strength in their markets. A portfolio typically consists of businesses, in high and low growth industries, that possess varying degrees of competitive strength in their markets. –Resources provided by strong firms in mature industries are used to fund development of new ventures in growing industries. –When startups become dominant and survive the competitive shakeout, they become the new sources of funding for new businesses.

10–5 Boston Consulting Group Growth-Share Matrix Figure 10.1

10–6 BCG Matrix Assumptions Cash cows have lower costs than industry competitors, based on their superior position on their industry’s learning curve. Cash cows have lower costs than industry competitors, based on their superior position on their industry’s learning curve. Cash cows generate higher cash flows but have fewer investment opportunities than other businesses in the portfolio. Cash cows generate higher cash flows but have fewer investment opportunities than other businesses in the portfolio. The excess funds of cash cows are allocated into investments in new businesses to promote their growth. The excess funds of cash cows are allocated into investments in new businesses to promote their growth.

10–7 BCG Matrix Assumptions (cont’d) The firm has the entrepreneurial capability to grow the startup to dominance in its market. The firm has the entrepreneurial capability to grow the startup to dominance in its market. The firm has the general management talent to retain the value of the dominant startup as its industry matures. The firm has the general management talent to retain the value of the dominant startup as its industry matures. New cash cows are sufficiently successful to support a new round of new business development. New cash cows are sufficiently successful to support a new round of new business development.

10–8 Problems with the BCG model All of the assumptions must be valid for the model to be effective. All of the assumptions must be valid for the model to be effective. –The model applies poorly to firms whose businesses are primarily value-driven. –The model focuses on transfers of financial resources not operating resources or capabilities. –The model’s primary focus is short-term, does not incorporate long-term considerations. The problem of growing the multibusiness firm through managing its portfolio of businesses remains very important. The problem of growing the multibusiness firm through managing its portfolio of businesses remains very important.

10–9 Alternatives to the BCG Model Portfolio analysis tools typically consider two dimensions defined by multiple factors: Portfolio analysis tools typically consider two dimensions defined by multiple factors: –Industry factors –Business unit factors The dimensions must incorporate relevant industry and business unit characteristics The dimensions must incorporate relevant industry and business unit characteristics –The metrics must map the competitive capabilities of the business units and reflect the long-run aspects of industries in which the units compete.

10–10 Segment Annual Revenues and Contributions to IBM Corporate Revenue Figure 10.2a

10–11 Segment Annual Gross Profits and Contributions to IBM Gross Profit Figure 10.2b

10–12 Segment Annual Gross Margins and Contributions to IBM Corporate Gross Margin Figure 10.2c

10–13 Organize and Manage Interunit Relationships Take the perspective of the unit on the receiving end of the transfer Take the perspective of the unit on the receiving end of the transfer Focus on dimensions of control: Focus on dimensions of control: –Pricing –Internal supplier investments in resources and capabilities

10–14 Transfer Pricing Mandated market price Mandated market price –More appropriate when internal buyer competes on value Mandated full cost Mandated full cost –More appropriate when internal buyer competes on cost Dual pricing Dual pricing –Combination of market price (for internal supplier) and full cost (for internal buyer) –Typically unstable Exchange autonomy Exchange autonomy –No policy of vertical integration

10–15 Rumelt’s Categories of Multibusiness Firms Specialization ratio Specialization ratio –Percentage of revenues coming from one business unit Relatedness ratio Relatedness ratio –Percentage of revenues coming from group of related businesses –Related means sharing markets or value chain activities. Vertical ratio Vertical ratio –Percentage of revenues coming from by-products and intermediate products of sequence of processing activities

10–16 Rumelt’s Categories of Multibusiness Firms SpecializationRelatedness Vertical Relationships Single business Highn/aHigh Dominant vertical Moderaten/aHigh Dominant constrained ModerateHighLow Dominant linked ModerateLowLow Dominant unrelated Moderate Very low Low

10–17 Rumelt’s Categories of Multibusiness Firms (cont’d) SpecializationRelatedness Vertical Relationships Related constrained LowHighLow Related linked LowModerateLow Acquisitive conglomerate LowLowLow Passive unrelated LowLowlow Key result: Dominant constrained and related constrained firms had higher performance Therefore: sharing resources and capabilities adds value

10–18 Centralized Activities Centralized activities are typically structured to support one type of business strategy: Centralized activities are typically structured to support one type of business strategy: –Value-based –Cost-based As more activities are centralized, the firm moves from a multiple businesses to a single business. As more activities are centralized, the firm moves from a multiple businesses to a single business. –This shift may be muted if the centralized activities act as profit centers.

10–19 Top-down Initiatives Jack Welch’s nine initiatives at GE: Jack Welch’s nine initiatives at GE: –Reduce bureaucratic behavior –Define markets globally –Develop managers as leaders –Promote sharing across business units –Set very aggressive goals –Build service businesses –Implement six sigma quality programs –Identify and remove underperforming managers –Force all businesses to implement e-commerce strategies

10–20 The Common Business Template Figure 10.3 Source: Adapted from Steven Kerr, personal communication, March, 2000.

10–21 Quality Matrix Figure 10.4 Source: Adapted from Steven Kerr, personal communication, March, 2000.

10–22 Corporate Infrastructure Dimensions of strategy execution Dimensions of strategy execution –Control and coordination »Business unit definition: strategic business units »Global organization: worldwide product structure –Compensation and incentives »Promote sharing of innovation »Reduce conflict in transfers »Improve acceptance of centralized activities –Culture »Promote risk taking and openness to learning