Chapter Thirteen Implementing Strategy in Companies That Compete Across Industries and Countries

Managing Corporate Strategy Through the Multidivisional Structure A company competing across industries and countries confronts a new set of problems and has to make a new series of organizational design decisions for a global and multinational business. The Multidivisional Structure Divisions Responsible for day-to-day operations Self-contained – with a full set of value-chain functions May share value-chain functions with other divisions Corporate headquarters staff Monitor divisional activities Exercise financial control over each division Strategic responsibilities Addresses the problems and economizes the costs of managing the handoffs between value-chain functions across industries. Copyright © Houghton Mifflin Company. All rights reserved.

Multidivisional Structure Figure 13.1 Copyright © Houghton Mifflin Company. All rights reserved.

Advantages of a Multidivisional Structure Research suggests that large companies that adopt a multidivisional structure outperform those that retain the functional structure: Enhanced corporate financial control Profitability of divisions is clearly visible Corporate office acts as the ‘investor’ – channeling funds to high-yield uses Enhanced strategic control Frees corporate managers from business-level responsibilities Corporate managers can deal with the wider strategic issues Growth Overcomes organizational limit to its growth Stronger pursuit of internal efficiency Can compare one division against another In a better position to identify inefficiencies that result in bureaucratic costs Copyright © Houghton Mifflin Company. All rights reserved.

Problems in Implementing a Multidivisional Structure Establishing the divisional-corporate authority relationship How much authority should be centralized to corporate How much should be decentralized to the divisions Distortion of information Short-run ROIC versus investments in the future Competition for resources Divisions actively competing for financial and other resources may reduce interdivisional cooperation Transfer pricing Need to properly design incentive and control systems Short-term R&D focus Must control incentives to assure that both short- and long-term goals are met Duplication of functional resources Determine which functions to centralize and decentralize to minimize duplication Copyright © Houghton Mifflin Company. All rights reserved.

Unrelated Diversification For unrelated diversification, the multibusiness model is based on general managerial capabilities in entrepreneurship, organizational design, or strategy. Operates as a ‘portfolio’ of independent businesses Divisions have considerable autonomy No integration among divisions is necessary Businesses bought & sold as conditions change Idea of ‘corporate culture’ is meaningless No exchanges or linkages among divisions Easiest and cheapest strategy to manage Lowest level of bureaucratic costs Controls to evaluate divisional performance easily and accurately Each division evaluated by output controls, e.g. ROIC Sophisticated accounting controls Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Vertical Integration The vertically integrated company requires the centralized control – in order to achieve the benefits from the sequential flow of resources from one division to the next. Bureaucratic costs are more complex and expensive than unrelated diversification. Multidivisional structure provides necessary controls to achieve benefits from the control of resource transfers. Must strike balance between centralized and decentralized control. Divisions must have input regarding resource transfer. Integration is managed through a combination of corporate and divisional controls. Copyright © Houghton Mifflin Company. All rights reserved.

Related Diversification Principle benefits of related diversification come from transferring, sharing, or leveraging functional resources or skills and some exchange of distinctive competencies across divisions. Gains derived from the transfer, sharing, or leveraging across divisions  R&D knowledge  Industry information  Customer bases Output control difficult as businesses share resources Not easy to measure performance of individual divisions Integration and control at divisional level required Incentives and rewards for cooperation necessary High bureaucratic costs The aim is to design structure and control systems to maximize strategic benefits while economizing on costs. Copyright © Houghton Mifflin Company. All rights reserved.

Corporate Strategy and Structure and Control Table 13.1 Copyright © Houghton Mifflin Company. All rights reserved.

Implementing Strategy Across Countries Localization Strategy Local responsiveness Decentralized control in each country it operates International strategy Centralized R&D and marketing in home country Other value creation functions are decentralized Global standardization strategy Oriented toward cost reductions Centralized functions at optimal global location Transnational strategy Local responsiveness and cost reduction Select best global location to achieve these objectives Need to coordinate and integrate global value-chain activities increases as company moves from a localization  to an international  to a global  to a transnational strategy Copyright © Houghton Mifflin Company. All rights reserved.

Global Strategy/Structure Relationships Table 13.2 Copyright © Houghton Mifflin Company. All rights reserved.

Implementing a Localization Strategy A company pursuing a localization strategy generally operates with a global area structure, establishing overseas divisions in regions or countries: Value creation activities duplicated in every region or country of operation Decentralized authority in each overseas division Managers at global headquarters evaluate performance of overseas divisions No integrating mechanisms needed No global organizational culture Duplication of specialist activities raises costs Companies using a localization strategy lose many of the benefits of operating globally. Copyright © Houghton Mifflin Company. All rights reserved.

Global-Area Structure Figure 13.2 Copyright © Houghton Mifflin Company. All rights reserved.

Implementing an International Strategy A company shifts to an international strategy when it decides to sell domestically made products in markets abroad. Foreign sales organizations added to existing structure using the same control system Product customization is minimal Subsidiary handles local sales and distribution System of behavior controls set up to keep the home office informed Global divisions coordinate the flow of different products across different countries This arrangement of tasks and roles reduces the transaction of managing handoffs across countries and world regions. Copyright © Houghton Mifflin Company. All rights reserved.

Global Division Structure Figure 13.3 Copyright © Houghton Mifflin Company. All rights reserved.

Implementing a Global Standardization Strategy Company locates its manufacturing and other value-chain activities at the global location that will allow it to increase efficiency, quality, and innovation using a global product-group structure. Product-group headquarters created to coordinate the activities of home and overseas operations Product-group structure allows managers to decide how to best pursue global standardization strategy Problems of coordinating and integrating global activities across product divisions Structure must lower bureaucratic costs and provide central control Focus is on centralized control by product group. This makes it difficult for different product divisions to trade information an knowledge. Copyright © Houghton Mifflin Company. All rights reserved.

Global Product-Group Structure Figure 13.4 Copyright © Houghton Mifflin Company. All rights reserved.

Implementing a Transnational Strategy Many companies implemented a global-matrix structure to simultaneously lower their global cost structures and differentiate their activities. Decentralized control provides flexibility for local issues. Product and corporate managers at headquarters have centralized control to coordinate company activities on global level. Knowledge and experience can be transferred to create value with the ‘matrix-in-the-mind’. Global corporate culture is created. IT integration mechanisms provide coordination. The task of integrating and controlling a global-matrix structure can be a difficult task. Copyright © Houghton Mifflin Company. All rights reserved.

Global-Matrix Structure Figure 13.5 Copyright © Houghton Mifflin Company. All rights reserved.

Entry Mode and Implementation Altering business models and strategies by finding new ways to use resources and capabilities to create value. Internal new venturing The internal venturing process needs to give new-venture manages the autonomy and motivation they need to develop new products. Joint venturing Allocating authority and responsibility is the first major implementation issue when companies share resources to collaborate on the development of a new business model to compete in a new market or industry. Mergers and acquisitions The profitability of mergers and acquisitions depends on the structure and control systems that companies adopt to integrate and manage them. Copyright © Houghton Mifflin Company. All rights reserved.

The Role of Information Technology IT is having increasingly important effects on the way multibusiness companies implement their strategies: IT provides a common software platform that can make it less problematic for divisions to share information. IT facilitates output and financial controls. IT helps corporate managers react more quickly because of higher-quality, more timely information. IT makes it easier to decentralize control to divisional managers, but react quickly if necessary. IT makes it difficult to distort information because of standardized information. IT eases the transfer pricing problem. Copyright © Houghton Mifflin Company. All rights reserved.

IT, the Internet, and Outsourcing IT and strategy implementation Knowledge leveraging through IT to achieve low costs and differentiation Flattening the organization - moving toward decentralization and integration through IT Virtual organization Knowledge management system Strategic outsourcing and network structure IT increases the efficiency of interorganizational relationships Business-to-business (B2B) networks Network structure The implications of IT for strategy implementation are still evolving - as new hardware and software reshape companies’ business models and strategies. Copyright © Houghton Mifflin Company. All rights reserved.