Chapter 11
Managing the Multi-business Firm
Six Tasks of Corporate
Management
Allocate resources across business units
Manage the portfolio of businesses
Organize and manage relationships among businesses
Centralize activities across businesses
Develop top-down initiatives
Develop corporate infrastructure
#1 Resource Allocation
In efficient financial markets, diversified firms with unrelated
businesses typically incur a diversification discount:
The firm’s market value is lower than the aggregate value
of its businesses calculated as if they were independent
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
When is an Internal Capital Market
Superior to External Capital Markets?
The business units receiving capital should be capital
constrained, i.e., have difficulty getting capital from external
sources
Given a capital constraint, the firm may benefit when:
It has proprietary information about the business that
improves investment decisions
The business has trade secrets that the demands of
external funding might expose
The business has an irregular funding pattern that might
be difficult to satisfy in external capital markets
#2 Managing a Portfolio of
Businesses
A portfolio consists of businesses in more or less
attractive industries and with 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.
Boston Consulting Group
Growth-Share Matrix
Figure 11.1
BCG Matrix Assumptions
Cash cows have lower costs than industry competitors,
based on efficiencies based on having progressed
down a learning curve
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
BCG Matrix Assumptions
(cont’d)
The firm has the entrepreneurial capability to grow a
startup to dominance in its market
The firm has the general management talent to sustain
the startup’s superior market position as its industry
matures
New cash cows are sufficiently large to support a new
round of business development
Problems with the BCG model
All of the assumptions must be valid for the model to be
effective
The model applies poorly to firms with value-driven
businesses
The model focuses on transfers of financial resources
not operating resources or capabilities
BUT: The problem of growing the multibusiness firm
through managing its portfolio of businesses remains
very important
Alternatives to the BCG Model
Portfolio analysis tools typically have two dimensions:
Industry factors
Business unit factors
The dimensions are composed of relevant industry and
business unit characteristics
Industry Characteristics
Growth rate in revenues and volume
Rates of change in growth rates
Average profitability
Distribution of profitability
Trends in profitability – average and distribution
Key value and cost drivers across firms
Industry structure/ strategic groups/intensity of competition
Regulatory constraints and trends
Unit Characteristics
Key value drivers
Key cost drivers
Defendability of unit resources and capabilities
Interdependence of the unit with other units in the firm
the industry attractiveness - competitive strength (McKinsey)
Matrix
The Parenting-fit matrix
(Campbell, Goold, & Alexander, 1995)
#3 Organize and Manage
Relationships Among Businesses
Take the perspective of the internal unit on the receiving end of
the transfer
Focus on dimensions of control:
Pricing
Internal supplier investments
Product design
Quality
Service
Other value drivers
Transfer Pricing
Mandated market price
More appropriate when internal buyer competes on
value
Mandated full cost
More appropriate when internal buyer competes on cost
Dual pricing
Combination of market price (for internal supplier) and
full cost (for internal buyer)
#4 Centralized Activities
Centralized activities are typically structured to support one type of
business strategy:
Value-based
Cost-based
As more activities are centralized, the firm moves towards
becoming a single business
This shift may be muted if the centralized activity is designed as a
profit center, selling to external customers
Conflicts arise when the centralized unit’s position in external
markets is inconsistent with the requirements of the internal
businesses
#5 Top-down Initiatives
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
#6 Corporate Infrastructure
Dimensions of corporate infrastructure same as strategy
execution:
Control and coordination, e.g.:
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