Designing World Class Corporate Strategies

Keith Ward, Andrew Kakabadse, Cliff Bowman

• Publisher: Routledge
• Year: 2005
• Print ISBN:
  9780750663687
• eBook ISBN:
  9781136411236
• Topic: Business
• Subtopic: Business General
• Index: Business

Designing World Class Corporate Strategies considers the key role of corporate centres within very large, primarily multi-business organisations. At present, these corporate centres are under attack as not creating and value and merely adding cost to their groups.

The authors have developed a corporate configurations model which demonstrates four ways in which corporate centres can add significant value. However this requires the centre to act in specific ways depending on the external environment in which the group is operating.

Designing World Class Corporate Strategies is highly readable, with a large number of illustrative examples included in the text. Academic references and theoretical underpinnings are placed in the final chapter of the book, so that the book is focused on the professional market for strategy and creating value.

PART I

A corporate configurations framework

Chapter 1

Value-adding corporate centres

Introduction

Multi-business groups are under attack. In the major developed markets of the world not only is the truly diversified conglomerate seen as a dinosaur from a bygone corporate era, but also the corporate centres of very many other large corporations are seen as endangered species, facing ever increasing demands and challenges to justify their continued existence.

Corporate centres are seen as adding costs, not creating value. If this is true, the next logical argument is that these corporate centres actually destroy part of the value created by the underlying businesses within the group. Hence, if the group was to be broken apart, this destruction of value could be stopped by closing the corporate centre. Shareholders in the resulting separately constituted companies would be financially better off.

This helps to explain the recent trends towards refocusing initiatives, demergers, partial public listings, i.e. flotations, management buy-outs, private equity funded take-overs of parts of large groups, etc. At the opposite end of the spectrum, mergers and acquisition activity has been at an all-time record level within many global industries. Interestingly the impact on the corporate centres involved is remarkably similar: severe cost-cutting exercises and dramatic head-count reductions.

This shareholder value focused argument has been actively reinforced by the work of many of the major strategic consultancies and much of the academic research into the role and effectiveness of corporate centres. Consequently this theme is also frequently reflected in the media, which normally seems much more concerned with a small reduction in employment at any operating site within such a group than with the complete closure of a major corporate head office.

It is our contention in this book that value destruction is not the inevitable result of having a corporate centre. We do not disagree with the conclusions of much of the academic research that this is often the actual result, but we believe that this is caused by a lack of clarity about the role of the corporate centre in most large groups.

The corporate centre must first really understand its corporate philosophy, i.e. its reason for existing, and then adopt the consequently appropriate corporate configuration, of which, we argue, there are only four, if it is to add significant value to the various businesses making up the group.

Corporate philosophy is the combination of the nature of the relationship adopted by the centre with its divisions and the source of the corporate advantage developed by the group. These combinations represent the causal relationship that dictates the most appropriate corporate configuration for this group. Each of the resulting four possible corporate configurations has dramatic implications for the size, style, skills and expertise, culture, application of performance measures, etc. of the required corporate centre for the group, if that centre is to add significant value rather than adding cost and destroying value.

This may seem a bold claim with which to start this book, but each of our configurations is underpinned by a well-established economic rationale, which enables these combinations of corporate advantage and method of corporate centre involvement to add value sustainably over time. As is explained later, this does not mean that any group will need the same corporate configuration for ever. As the corporate philosophy should adjust to a changing external environment, so should the configuration of the corporate centre also change appropriately.

These underpinning economic rationales are explained in some detail at the end of this chapter, but first it is essential to develop these four value-adding corporate configurations. The model itself is deceptively simple but each configuration has significant consequences for the structure and culture of the group, the types of businesses it should contain, the way these businesses must be managed, and the types of managers required at the corporate centre.

The focus of the book

The research initiative that led to the development of the corporate configurations model that is at the heart of this book set out to consider the specific value-adding role of the corporate centre. Most existing publications on business strategy have focused on the underlying businesses (i.e. they have looked at the firm, the operating divisions or strategic business units) and their capacity to create value. In some cases, these studies have talked about the overall ‘organisation’ but without explicitly considering the role of the corporate centre. Yet, much research discusses the importance of the ‘leadership role’ of the top management team at the centre of the organisation. Our objective was to focus on the specific nature of the corporate centre in multi-business groups and to seek to identify ways in which this corporate centre could add sustainable value to its underlying businesses.

In many large groups, the corporate centres carry out a wide range of activities and often get involved in quite diverse business processes. However, it is now well accepted that the totality of business activities and processes can be separated into a few that actually contribute to value creation, the majority that need to be done but which do not in themselves create value (often referred to as hygiene factors), and possibly some that actually destroy value. Identifying the key value-adding processes of corporate centres is the focus of the book. These are called different things by different people (e.g. core competences, dynamic capabilities, critical resources or, as we shall normally be referring to them, sources of sustainable advantage). We shall also discuss whether, by carrying out other non value-adding activities that could be done outside the corporate centre, these centres risk reducing or totally destroying any potential value added by creating confusion among the underlying business units.

Given the varied backgrounds of the collaborators on this project, the most logical start point for the research was to try to synthesise, and then develop, the differing approaches to this issue from several academic and business disciplines. Thus the resulting model draws on corporate and competitive strategy; leadership, organisational development, and cultural issues; financial planning and control, performance measurement, and management information requirements.

Another key element in our approach was a desire to start from first principles to develop an overall framework as to how corporate centres can add value. This can be contrasted with the recently popular process of examining several successful companies and then drawing conclusions about the causes of their success. A major benefit of this alternative research methodology is that it should automatically generate some in-depth case studies that illustrate clearly the identified success criteria. The downsides are that it can be difficult to establish the essential cause and effect relationship or to draw predictive generalisations that can subsequently be applied by other companies. Our ambitious aim was to come up with a fairly prescriptive set of frameworks that could be applied by top management teams at the centre of complex organisations.

The basis of our framework was to use the well-tried and tested configurational approach, particularly building on Mintzberg's notion of configurations as is discussed in more detail in Chapter 10. The reason for adopting this configurational approach is rooted in our belief that corporate strategy and organisational structure should not be treated as separate phenomena. Any strategy will have distinct and particular organisational requirements if it is to be successfully implemented. Thus, realised strategies and structures should be viewed as inextricably connected. If our research was able to establish feasible links between our four corporate strategies and their required organisational structures and processes, this would lend considerable weight to the argument that these strategies are not merely theoretical concepts.

The methodology used was therefore an iterative process of framework and model development, testing against specific companies and with‘in-situ'management teams, review and modification of the framework and model, comparison with other published material in the area, and then more testing and development. Thus each element of the model has been subjected to rigorous analysis and scrutiny by a large number of practising managers. However, as the model was initially developed from the first principles of value creation, rather than by directly observing corporate practice, we cannot give neatly packaged, classic examples of companies that exactly comply with every nuance of the corporate configurations model. This means that we strongly believe that even the very good examples of the application of the model that we do include in the book can add even more value to their groups if they comply more fully with the recommendations of the model!

Relevance to ‘single’ business ‘groups’

Although the initial focus of our research was on corporate centres in multi-business groups (e.g. diversified multinationals), we rapidly realised that this was an unnecessary restriction on the applicability of the corporate configurations model. The resulting model has direct relevance to any group that has a corporate centre that is separately structured from its underlying business units, whether those business units are selling the same or highly diverse goods and services to similar or very different groups of customers.

Indeed, the more closely related nature of the underlying businesses places even greater pressure on any ‘separated’ corporate centre to justify its existence. In practice, the development of such a corporate centre is the almost inevitable result of the success of the initial single business division. As the business becomes geographically more spread out, particularly if the terms ‘international'or ‘global’ become relevant to the business, there is an increasing need for some co-ordination of the business'activities and critically of the resource allocation priorities within this single business. Many large single businesses have created very complex regional and area structures and/or utilise significant separately constituted centralised support functions. These separate support areas have often been given their own strategic objectives and their own performance measurements, and they report against these, not to the regional sub-businesses that they support, but to the centre of the organisation. A corporate centre has been created.

Thus the corporate centres of large-scale retailers, financial services groups, and ‘single’ product manufacturers and service providers can all be analysed using the model. It is also possible to apply this analytical framework to the ‘not-for-profit’ sector. This is achieved by considering the true value-adding role of the corporate centre of, for example, government controlled entities such as the Health Service, rather than restricting the definition of value adding to the normal commercially orientated view of shareholder value. Indeed, as will become clear as the model is developed, a broad view of how corporate centres add value is critical to applying the model. Some of the issues involved in applying the model in these areas are considered in Chapter 3.

The what and how of the model

Many large groups have spent considerable time and money in seeking to justify their continued existence by developing group-wide vision or mission statements. Unfortunately many of these do not indicate how remaining as a ‘group’ will create more value than can be generated by the component businesses comprising the group. Any such difference in value creation (whether positive or negative) is attributable to the influence of the corporate centre.

Corporate centres differ both in what they try to do and how they try to do it. The ‘how'dimension refers to the nature of the involvement of the centre and the type and degree of intervention that the corporate centre makes in the operations of the group's businesses. At its very simplest, the corporate centre can intervene directly by doing things for the businesses within the group, or it develops an indirect method of involvement by influencing how these businesses behave, i.e. more ‘showing and telling’ than actually ‘doing’.

Figure 1.1 Causal relationship of the model– the what and how.

Similarly, a corporate centre can only justify its own central cost levels in one of two ways: either it somehow reduces the total costs of the group or it does something that adds more value to the group than the centre itself costs.

As shown in Figure 1.1, combining these alternative types of involvement with these two ways of adding value generates four potentially value-adding roles for any corporate centre. Our research indicates that these four combinations really do represent the only ways in which corporate centres can consistently and sustainably create value, as opposed to adding costs.

However, in order to realise this potential added value, each corporate centre has to ensure that it is operating within the appropriate configuration for its group. The appropriate configuration depends on the specific external environment that the group is facing and the mix of businesses in the group. The issues of transitioning from one configuration to another are initially discussed in Chapter 3, once each dimension has been fully explained and refined into the complete model.

Sources of corporate advantage

In many multi-business groups, the different businesses comprising the group have developed their individual, appropriately tailored sources of sustainable competitive advantage, or areas of core competence. These should be tailored to suit the specific environment that they face in the markets where they operate. As no other businesses within the group may operate in these markets or face these specific circumstances, there is no certainty that any of these competitive advantages will be common across the group. This of itself does not, however, destroy the economic rationale for the businesses staying together as a group.

Our interest is at the corporate centre of the group, and how this corporate centre can develop its own, equally appropriately tailored, sustainable core competence, which will allow it to enhance the overall value of the businesses within the group.

One potential approach is for the corporate centre to find a way in which it can reduce the total costs of the group, even after allowing for its own costs. This requires the centre to generate some form of scale economy for the group, either directly by doing things centrally, or, more indirectly, by ‘showing’ the constituent businesses how to reduce their costs.

The only other alternative is, as already stated, for the centre to add more value to the businesses in the group than the centre itself costs to run. To do this, the corporate centre must have some particular skills or knowledge that are relevant and applicable to all of the businesses within the group. This relevance and applicability may, for any specific business, be current or may be expected to occur in the foreseeable future; but, if it is already in the past, there is no extra value created by retaining that specific business within the group.

These skill...

Table of contents

• Front Cover
• Half Title
• Title Page
• Copyright
• Contents
• Preface
• Part I A corporate configurations framework
• Part II The individual configurations
• Part III Working with the model
• Index