Corporate Strategizing:
Adding value on the group level
in a multi business firm
Prof. Dr. Günter Müller-Stewens
Singapor, March 28, 2008
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Agenda
1
The initial situation:
What is the problem?
2
The corporate challenge:
How can we realize a parenting advantage?
3
The options:
Generic corporate strategies
4
The dynamics:
Episodes of corporate value creation
5
Take aways:
Corporate management matters!
© Mueller-Stewens
Page 3
Imagine ....
... you are Werner Müller, CEO of
the new german company Evonik
(former Ruhrkohle AG), and you
are planning to go public (IPO)
... you have to convince future
investors that a multi business firm
(MBF) with three divisions makes
sense for them:
> speciality chemicals
> energy
> real estate
15 billion € sales
43.000 people
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... but there a lot of doubts in the capital markets
Sum of the parts:
18-20 bio €
4
9-10
5-6
Corporate discount 17-25% ?
18-20
CEO Werner Müller
wants to create
„an integrated industrial
group with an attractive
portfolio, which
guarantees dividend
certainty and stability as
well as phantasy and
growth.“
Source: Folio 6/2006 and Wirtschaftswoche 24.7.2006
The problem
Debts;
Pension
obligations
10
15
bio €
marketcapitalization
5
Value
after IPO
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Agenda
1
The initial situation:
What is the problem?
2
The corporate challenge:
How can we realize a parenting advantage?
3
The options:
Generic corporate strategies
4
The dynamics:
Episodes of corporate value creation
5
Take aways:
Corporate management matters!
© Mueller-Stewens
Page 7
Corporate surplus
Value added
The challenge of corporate management
"To what extent and how
might the corporate-level add
value to what the businesses
do; or at least how it might
avoid destroying value."
Johnson/Scholes 2002, p.267
Sum of the internal values of
SBU A-C
(„stand-alone-values“)
Costs
of the
corporate
level
Market
capitalization
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Challenges for the top management of MBF‘s (I)
There is increased pressure on the corporate management (in
its role as „corporate parent“) to show that it is able to add
value on the corporate-level to its businesses which is higher
than its costs
> Activity of „corporate parenting“
„Ask not what the businesses can do for the company.
Ask what the corporate-level can do for the businesses.“
But this is not enough! It needs to convince the stakeholders of
the company that the business portfolio is worth more under
the corporation‘s management than under any other ownership
(Goold/Campbell/Alexander 1994)
– „best owner“!
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Richemont: A MBF in the business of luxury goods
1988 founded by the South African Anton Rupert;
Headquarter in Geneva; 4.8 bio € sales; 16 luxury brands
Jewellery 2.435 €
Specialists Watchmakers 1.203 €
Writing Instruments 585 €
Leather & Accesoires 307 €
Other Businesses 297€
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Maisons
City, Country
Founded
Vacheron Constantin
Geneva, Switzerland
1755
253 years
Purdey
London, United Kingdom
1814
194 years
Baume & Mercier
Geneva, Switzerland
1830
178 years
Jaeger-LeCoultre
Le Sentier, Switzerland
1833
175 years
Lange & Söhne
Glashütte, Germany
1845
163 years
Cartier
Paris, France
1847
161 years
Officine Panerai
Florence, Italy
1860
148 years
IWC
Schauffhausen, Switzerland
1868
140 years
Piaget
Geneva, Switzerland
1874
134 years
Lancel
Paris, France
1876
132 years
Dunhill
London, United Kingdom
1893
115 years
Van Cleef & Arpels
Paris, France
1906
102 years
Montblanc
Hamburg, Germany
1906
102 years
Montegrappa
Bassano del Grappa, Italy
1912
96 years
Chloé
Paris, France
1952
56 years
Shanghai Tang
Hong Kong, China
1994
14 years
Source: Richemont
Years of existence
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Are we the better owner?
What means: Add we more value?
Who is the
better owner?
Luxury
Goods
Measuring &
Control Technology
Jewelry
Watches
Etc.
VDO
Pipes
Commun.
Year 2000:
Divestiture of
Jaeger-LeCoultre,
Lange & Söhne
and IWC to
Richemont
for 3.1 bio
CHF.
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Competition on the corporate-level
Are we the „best owner“? What means: Add we most value?
Fashion &
Zenith
IWC
Zenith
Leather Goods
Watches &
Jewelry
Etc.
Jewelry
Watches
Etc.
IWC
18 watch brands
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Challenges for the top management of MBF‘s (II)
To become the best owner means the company must be able to
identify „parenting propositions“ and to realize „parenting
advantages“.
Parenting advantages are competitive advantages
located on the corporate-level and realized in the
corporate-level-competition.
Success depends therefore not only on the appropriate scope
of a firm, it depends just so on the ability of the parent to
manage the choosen scope.
> Corporate management matters!
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Agenda
1
The initial situation:
What is the problem?
2
The corporate challenge:
How can we realize a parenting advantage?
3
The options:
Generic corporate strategies
4
The dynamics:
Episodes of corporate value creation
5
Take aways:
Corporate management matters!
© Mueller-Stewens
Page 15
Three generic options
The portfolio
optimizer
The vertical
optimizer
The horizontal
optimizer
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Option 1: The portfolio optimizer
Optimization of a portfolio of
high autonomous businesses
Berkshire
Hathaway
Corporate capabilities:
> Portfolio management
> Deal-flow management
(M&A, divestitures)
> Corporate financial control
> Staffing of the top positions in the businesses
Portfolio optimizer „plus“:
> Managerial relatedness
between the businesses
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The strategic rationale of Richemont
„The Group is managed with the objective of growing
value for shareholders over the long-term, recognising
that the most important assets of the Group - its brands have almost all been in existence for over a century.
Each of the Maisons has its own distinct identity that
stems from its heritage and culture and it is critical that
each brand has the correct strategies and resources to
be able to enhance that identity.
The independence of the Maisons within the Group is
fundamental to the Group's strategy for future growth.“
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Corporate strategy of the group
Reinforce leadership in prestige
jewellery and watches,
accessories and gifts
“Trading up” strategy
Priority given to organic growth
Continue improvement in the
geographical, product and
distribution channel balance
Focus on Asia-Pacific and the
USA
Source: Richemont
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Corporate portfolio Philosophy
„
Long-term value creation
Strategic vision
„
Luxury / Market leadership
Portfolio management
„
Icon products
Maisons “supervision” and guidance
„
DNA
Shared support services
„
In-house production
and craftmanship
„
Hyper selective distribution
„
Role of Richemont HQ
Accounting and finance
Logistics
After sales service
IT
Legal & intellectual property
Real estate management
Human resources
Marketing services
Improved processes
ERP implementation
Simplification & standardisation of processes
Integrated IT and logistic structures
European platform
> Build integrated regional support functions
> Optimise shared services performance
and cost efficiency
Source: Richemont
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Richemont Centres as „enablers“ of the daughters
Moscow
London
Tokyo
Paris
Geneva
New York
Miami
Milan
Shanghai
Madrid
Dubai
Hong Kong
Johannesburg
Quelle: IWC
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Three generic options
The portfolio
optimizer
The vertical
optimizer
The horizontal
optimizer
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Option 2: The vertical optimizer
Active and intervening role of the corporate
management to improve the performance of the
businesses.
Corporate capabilities:
> Portfolio management
> Know how on sustainable value creation
in the business units
> Realization of non-operative synergies
(e.g. management synergies)
Vertical optimizer „plus“:
> Running corporate initiatives
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Value-adding by corporate initiatives
Shared values
Corporate Initiatives
„Be number one or number two“
„Set aggressive goals“
„Elimination of all non-value-adding costs“; „Work-out“
„Hate bureaucracy“
„Speed, simplicity, self-confidence“
„Reduce costs, speed up,
be self-confident, energetic“
„Boundless company“
„Be open for other ideas“
„No type 4 manager“
„Create a vision and communicate it“
„Globalization“
„Think globally“
„6 Sigma quality improvement“
„Live quality“
„Aftermarket and services“
„Destroy your business“
„Beat the dot-com with their own weapons“
„Imagination breakthrough“
„Imagine“
“ecomagination”
82
84
86
88
Source: GE, BCG
90
92
94
96
98
00
02
04
06
08
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Three generic options
The portfolio
optimizer
The vertical
optimizer
The horizontal
optimizer
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Option 3: The horizontal optimizer
Functional integration of the businesses to
realize operative synergies
(costs and growth synergies)
Corporate Capabilities:
> Identification of realistic synergies potentials
> Managing synergetic growth initiatives
> Know how on the horizontal units
(e.g. shared customer segments)
> Managerial integration competence
Horizontal optimizer „plus“:
> „One-firm approach“
> Integrated corporate business model
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Pathways to growth synergies
Create new markets by combining competencies across units
Philips created a new market „mobile defibrillators“ by combining
competencies from its „medical unit“ with competencies from its
„consumer electronics unit“.
Medical
Systems
Consumer
Electronics
+
Market for Mobile
Defibrillators
New market
created
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Siemens: A typical multi-business-firm
Diversified in three divisions/sectors
Industry
ƒ Automation
and Drives (A&D)
ƒ Industrial Solutions
and Services (I&S)
ƒ Siemens Building
Technologies (SBT)
ƒ Transportation
Systems (TS)
ƒ OSRAM
Energy
ƒ Power Generation (PG)
ƒ Power Transmission
and Distribution (PTD)
Healthcare
ƒ Medical Solutions
(Med)
Cross-Sector
activities
ƒ IT Solutions
and Services (SIS)
ƒ Siemens Financial
Services (SFS)
Siemens One:
Horizontal focus on cross-divisional sectors like
airports, hospitals etc.
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Healthcare: Electronic workflow in the digital hospital
Siemens One:
The horizontal view helps to explore new businesses:
What is missing for an integrated customer solution?
Source: Siemens
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Organizing for Cross-Business Growth
Siemens One Growth Initiative
At Siemens, different divisions work together to cross-sell, bundle
and integrate products (z.B. light-bulbs, genrators, communication
equipment, conveyor belts) for specific industries such as airports.
Synergistic Growth & Innovation Benefits:
ƒ Higher portfolio and cusomer
penetration through cross-selling,
bundling and integrated solutions
ƒ Better customer focus through industry
focus and cross-divisional customer view
ƒ Exploration of new, industry specific and
cross-divisional business models
ƒ Focused corporate entrepreneurship
ƒ Gradual transformation and strategic renewal of
company
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„…70-80% of the changes required [for the
„Towards One Philips“ cross-divisional growth
program] will come about by shifting managers‘
attitudes´, the rest from putting in place incentives,
not all of them monetary…“
Gerard Ruizendaal,
Head of Corporate Strategy, Philips
2006
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Success and failure of cross-divisional growth
Top 5 Factors of Success
62%
Commitment of top management
52%
Trust between divisions
48%
Early involvement of divisions in synergy initiatives
43%
Internal communication
39%
Relentless monitoring & controlling
0%
10%
20%
30%
40%
50%
60%
70%
Top 5 Factors of Failure
58%
Conflicts of Interest / conflicting goals
53%
Operative overload of divisions
45%
Lack of trust
38%
Inadequate incentives
32%
Lack of top management commitment
17%
Lack of integration into existing structures/processes
0%
10%
20%
Source: Müller-Stewens/Knoll (2006)
30%
40%
50%
60%
70%
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Agenda
1
The initial situation:
What is the problem?
2
The corporate challenge:
How can we realize a parenting advantage?
3
The options:
Generic corporate strategies
4
The dynamics:
Episodes of corporate value creation
5
Take aways:
Corporate management matters!
© Mueller-Stewens
Page 39
Horizontal optimizer
Vertical optimizer
> More efficient
capital markets
> Better owners
> No more additional
potential for vertical
value creation
> Loss of corporate
advantage of mgt.
synergies
Portfolio optimizer
Costs of coordination
Potential for value adding
Escalating corporate value creation
Degree of integration
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From vertical to horizontal integration
„Soft“ synergies:
> „Best-Practice-comparisons“ for processes and
operations, for carrying out projects and for implementing
investments.
Interview with Jeff Immelt, CEO GE
NZZ, 3.11.06, pp. 29
> Continuous efficiency gains through the use of „Six Sigma“
and „Lean Production“ methods
> Trend-Shop for all division managers at the start of the corporate strategy process
> Financial synergies
„Hard“ synergies:
> Use of functional connections between the businesses
> E.g. businesses dealing in engines, airplanes, energy, medical technology and
financial services are bundled under the common denominator “Infrastructure
in developing countries”.
> “Green” products and services are pushed under the heading „Ecomagination“.
> Search for innovative growth with the help of the “imagination breakthroughs” initiative
under the personal leadership of the CEO.
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Agenda
1
The initial situation:
What is the problem?
2
The corporate challenge:
How can we realize a parenting advantage?
3
The options:
Generic corporate strategies
4
The dynamics:
Episodes of corporate value creation
5
Take aways:
Corporate management matters!
© Mueller-Stewens
Page 42
Take aways: Corporate management matters!
We see corporate management/parenting as a
specific capability of a MBF, which can be a source
of competitive advantage.
The main task of corportage management is to add
value to the businesses and to realize a corporate
advantage.
Corporate parenting starts with thinking about a
realistic corporate rationale.
There are three generic corporate rationales:
Portfolio, vertical and horizontal optimizer.
Most challenging is the „one firm aproach“:
Crossing business cultures to cooperate.
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