Diversified Corporations and the search for synergy

1. Diversified Corporations and the search for synergy Synergy = 2 + 2 = 5 How can we achieve this ? Several approaches.

2. CORPORATE LEVEL STRATEGYCorporate Coordination Mechanisms Centre Control Control Coordination Coordination BU1 BU2 BU3 Business 1 Business 2 Business 3 De Wit & Meyer, Strategy - Process, Content, Context: An International Perspective, Chapter 6

3. Approaches to Synergy • Portfolio Approaches – financial synergies and cash flow optimisation • Growth Share and other Matrices • Life Cycle Approaches • The Linkage Approach • Value Chains and the creation of ‘Strategic Cement that can be leveraged • Core Competence Approach • Collective learning • The idea that direction and method may be extensive but the notion of the core product is key

4. Portfolio Approach • Growth Share Matrix • Cash Flow Optimisation • Classic Strategies • Build • Hold • Harvest • Quit • Portfolio Balance – although we can have ‘unbalanced portfolios’. • Little in the way of strategic cement between SBUs.

5. The Linkage Approach Firm Infrastructure Human Resource Management Support Activities Profit Margin Technology Development Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Profit Margin (Porter 1985) Primary Activities

6. The Value System Organisation’s Value Chain Supplier Value Chain Distributor Value Chain Customer Value Chain (Porter 1985

7. Synergy through Linkages

8. Resource Utilisation and Competitive Advantage • Identify value activities - assign costs and added value - identify critical activities • Identify cost or value drivers - factors which determine cost or value of each activity • Identify linkages - which reduce cost or added value - which discourage imitation • Identify linkages between SBUs to create linked advantages and ‘strategic cement’

9. Core Competence Through Managing Linkages (Johnson & Scholes 1997)

10. Core Competence Approach

11. CORPORATE LEVEL STRATEGYThe Paradox of Responsiveness and Synergy PORTFOLIO PERSPECTIVECORE COMPETENCE Emphasis on Responsiveness over synergy Synergy over responsiveness Firm composition Potentially unrelated Shared competence-base Synergy through Cash flow optimization Joint competence building Task of head office Allocate capital to SBUs Competence management Central control style Setting financial objectives Joint strategy development Position of SBUs Highly autonomous Highly integrated Coordination Low, incidental High, structural Acquisitions Simple to accommodate Difficult to integrate De Wit & Meyer, Strategy - Process, Content, Context: An International Perspective, Chapter 6

12. The Work of Goold and Campbell Goold and Campbell’s Management Styles and Parenting Theory Approach to Creating Value

13. Synergy and the link to Management Style • Goold and Campbell’s work on style types in the mid 1980s. • 3- Style types and • Two key variables • The Planning Influence • The Control Influence • Link with the search for synergy.

14. Goold & Campbell Style Types Goold & Campbell managerial style types emerged from their research into management in British companies. • Financial Control Style • Strategic Control Style • Strategic Planning Style

15. Financial Control Style • Low level of influence of planning but very tight financial controls from the centre • Short-term demanding profit targets • Control by budgets • High degree of central control over SBUs

16. Strategic Control Style • Active involvement in SBU level planning • Flexibility in allowing SBUs to devise their own strategy • The role of the centre is to appraise SBU plans concerning internal logic etc • Tight control of results

17. Strategic Planning Style • Characterized by strong central management involvement in business level strategy • Extensive planning review processes • High co-ordination across SBUs • A co-operative process • Flexibility in planning

18. Influences on strategic management Style Nature of the Business Resources in the Organization - Shape of the portfolio - Senior management skills - Size and payback of investments - CEO personality - Stability of the competitive - Financial condition environment Strategic Management Style - Strategic planning - Strategic Control - Financial Control

19. Influences on Strategic Style • External Influences: • Degree of linkage between the business unit and other SBUs in the portfolio • The size and nature of the payback of major investments • The nature of the competitive environment facing the SBU or the firm.

20. Influences on Strategic Style • Internal Factors • The personality of the chief executive • Senior management skill • The financial condition of the organization as a whole.

21. Management Styles Goold & Campbell’s style types are seen as different ways in which to divide responsibility between corporate HQ and the individual business units or SBUs in a diversified company. It is a balance between: • Planning Influence • Control Influence

22. Influences on Style Types • Planning Influence: The extent to which the centre influences individual SBU strategy • Control Influence: The way in which the firm expresses the type of budgetary control imposed by central managers to the SBUs against results achieved.

23. Strategic Management Styles (Goold & Campbell (1987) Strategic Planning High Planning Influence Strategic Control Financial Control Holding Company Control Influence Low Flexible Tight Strategic Tight Financial

24. The selection of a particular style involves important choices Strategic Strategic Financial Planning Control Control (SP) (SC) (FC) Long-term Strategic Centrally led strategy Co-ordination & Co-operation Full analysis and discussion Flexible strategies Short-term financial Locally created strategy Autonomy & accountability Entrepreneurial quick decisions Tight controls SP SC FC SP SC FC SP SC FC SP SC FC SP SC FC Goold & Campbell (1987)

25. Portfolio Approach Financial synergies by portfolio balancing Linkages Approach Linkages synergies through transferring skills and sharing activities Core Competence Approach Core competence synergies across SBUs Financial Control Style Strategic Control Style Strategic Planning Style Combining Approaches and Styles

26. The Parent Organisation Centre 9 THE CORPORATE PARENT Divisions Businesses Value from parent to business

27. The Parenting Approach • Parenting Opportunity • Parenting Characteristics • The Feel for the Business • Distinctive Parenting Characteristics • At the heart of this approach is the ‘better off test’

28. Conditions for Value Creation • Value is created under the following three conditions • Business units are not fulfilling their potential – Parenting Opportunity • The centre has the relevant resources and capabilities – Parenting Skills • Centre managers understand the business units well enough to avoid destroying value – Sufficient Feel

29. The Parenting Matrix • Heartland Businesses • Edge of Heartland • Ballast • Alien Territory • Value Trap Look for fit between SBU and parent – skills and resources and ability to leverage them The degree of fit and opportunities to grow the business

30. What each means 1 • Heartland: businesses for which parenting advantage exists and are likely to be at the heart of any future strategy. • Edge of Heartland: businesses where the parent may be able to develop an advantage, so are also likely to be part of a future strategy.

31. What they mean 2 • Ballast:businesses where there is a fit between their critical success factors and the parent’s skills and resources but value creation logic is weak. The business unit requires little help from the parent so can be sold if a better parent exists or moved to heartland if a new value creation logic can be developed for them • Alien Territory: businesses that do not fit on either dimension and need to be sold as soon as convenient

32. What they mean 3 • Value Trap: businesses in which there is a value creation logic, the business unit needs help, but the parent’s strengths and weaknesses do not fit well with the critical success factors. These businesses need to be sold unless the parent is able to change its skills and resources to reduce the misfit. Parenting Matrix

33. The Parenting Matrix

34. CORPORATE PARENT AS MIDDLEMAN Shareholders/Investors Parent Organisation Parenting skills Businesses 10

35. Summary 1 • The portfolio approaches - which seek financial synergies through a balanced portfolio of business units. • The linkages approach - which aims to create synergies through shared activities and/or transferred skills between business units. The core competences approach - in which the organisation seeks to create and exploit synergies through its core competences and core products.

36. Summary 2 • Together the approach to synergy and the management style form a series of underlying logics. The decisions managers take about the development of their organisations and thescope of the organisation are governed largely by the views they hold about the logic of synergy and management style. An integrative framework links the directions and methods of development to these logics.

37. Summary 2 The work by Michael Goold and Andrew Campbell has identified three broad management styles that organisations may follow to address the challenges of corporate strategy: Financial control - the shareholder or investment banker approach.  Strategic control - the strategic shaper approach. Strategic planning - the master planner approach.

38. Conclusions 1 Together the approach to synergy and the management style form a series of underlying logics. The decisions managers take about the development of their organisations and thescope of the organisation are governed largely by the views they hold about the logic of synergy and management style. An integrative framework links the directionsand methodsof development to these logics. No one style is superior over any other.

39. Conclusions 2 • Finally, the concept of parenting advantage suggests that the corporate centre needs to be able to add more value to the business units than any other parent. Based on this concept the parenting matrix allows decisions to be taken as to which business units fit into the scope of the group as a whole. Positions within the parenting matrix are affected by the choice of logic made by the centre and this may change over time.