Sunday, October 14, 2007

Corporate Strategist, Plan Thyself (Part 2)

Earlier this year, McKinsey conducted a survey with a large number of business people regarding strategic planning. They not only surveyed people at the corporate headquarters, but also executives at the division level.

To me, the most interesting part of the results had to do with the idea of collaboration. The survey asked these business executives about how much collaboration there was at their company between headquarters and the divisions on strategy formulation.

The study found that the executives at corporate tended to think that there was a lot more collaboration going on than executives at the division level. Whereas corporate saw their conversations with the divisions as collaboration, it would appear that the divisions were more likely to see those same conversations as something else, like commands or meddling. I guess collaboration, like love, is in the eyes of the beholder.

As this survey seems to point out, not everyone perceives the value of corporate in the same way. In the last blog (see “Corporate Strategist, Plan Thyself (Part 1)”), we saw that it should not be automatically assumed that a large corporation running many divisions is the ideal way to run your business. If the corporation is not adding sufficient value, it should be drastically cut back, or perhaps even eliminated/outsourced.

In this blog we will look at ways in which a corporation can add value.

We will briefly describe six ways in which a corporate headquarters can add value to its divisions. We will start with the simplest and least involving forms of value and work our way up. In general, as we move up the ladder, there is greater potential for the headquarters to add value. Also, in most cases the process builds, in that each succeeding level also tends to incorporate the prior levels as well.

1) Protective Parent, Protected Child

In this version, the corporation protects and shields the divisions from having to deal with all the messy details of being a corporation, so that the divisions can focus on their particular businesses. The headquarters handles (a) communicating with shareholders and analysts, (b) managing shareholder regulatory authorities, (c) defining the corporate governance system, and (d) preparing and filing external financial reports.

By dealing with the messy issues and distractions like Sarbanes Oxley compliance and public relations, the headquarters unburdens the divisions so that they can focus more on trying to make money. Although this is adding value, it is not a whole lot of value and does not require a very large corporate infrastructure.

2) Coach, Team

In this scenario, the corporation helps the divisions become better than they would be on their own by using its expertise to coach the divisions on how to be professional business organizations. This involves tasks like (a) setting expectations (performance targets and goals), (b) challenging and setting cultural norms, values and behaviors (how to act), (c) showing how to protect corporate assets (brand names, cash), (d) defining operating rules and policies.

In other words, the coaching headquarters shows the divisions what role they are playing, what is expected, and how to do it in an efficient, professional manner. Usually, the coaching headquarters also acts like the parent in option #1. This adds more value than option #1 alone, but still not a lot. If the division were a stand-alone business, it might be able to get this same value cheaper through using consultants.

3) Banker, Borrower

In this scenario, the corporation adds value by taking the excess cash out of each of the divisions and then reallocating it based on where it can get the best return. In this manner, the corporation acts as the bank. If the division wants money, it must make a compelling case before getting it.

The corporation adds value as a banker because (a) it typically has a lower cost of capital than a stand-alone division, (b) it has more options for sources and uses of capital, thereby allowing it to make better investments than a stand-alone business whose options are more limited, (c) it can typically add more rigor to how things get financed, creating better decisions.

This level increases the value added, but as we saw in the last blog, capital is not particularly scarce and good stand-alone divisions would still have lots of options for gaining capital without a corporate headquarters.

4) Builder, Legos

In this scenario, the corporation takes a more holistic look at their portfolio. Individual businesses are not seen independently, but rather as role players in the larger portfolio. The role of the corporation is to envision the ideal portfolio for a given corporate strategy and they use their power to design and build that portfolio. In this fashion, the corporation is a strategy builder, snapping together divisions as if they were Legos.

As such, the corporation (a) determines the larger strategy and what competencies are needed in the portfolio to make it happen, (b) manages the acquisition and divestiture process to get those competencies, (c) initiates new ventures, (d) acquires/divests/organizes divisions and their structure, (e) places expectations on the divisions as to how they contribute to the larger strategy. This is starting to get more sophisticated in terms of corporate value add. It not only looks for ways to make the individual businesses better, but looks for ways they can contribute to something which goes beyond their individual business.

5) Specialist, Clients

In this version, a larger percentage of the tasks of business become centralized at the corporate level. The logic is that by centralizing these functions, the corporation can become better at delivering the services than if each division did them separately. This would be a result of economies of scale, the ability to hire more qualified individuals, and a more steady stream of work, so that expertise can become more specialized. This could involve what companies typically call “shared services.” It could include things like Legal, Finance, Human Resource benefit administration, Foreign exchange, and so on.

Although this creates even greater opportunities for corporate to create value, it can also create greater opportunities for corporate to destroy value if they do the centralization improperly (see the blog “Sometimes It’s not nice to share”). This is the double edged sword of value creation. The more corporate gets involved, the more it can help as well as the greater the likelihood it can hurt. As we move up the ladder of involvement, the rewards may be greater, but so are the risks.

6) Synergist/Alchemist, Resources

This is the highest level of corporate involvement into the divisions. At this point the divisions have very little independence. The corporation is actively working to get the most out of what it owns. People, resources, patents, and competencies are frequently moved from division to division for the greater good. All potential synergies in cross-divisional activity are looked for. Even if a decision serves to destroy some value at a particular division, it may demanded by corporate if it is for the greater good of the overall portfolio.

At this point, not only have many key functionalities been moved to corporate, but also a greater percentage of the overall business decisions. As mentioned earlier, if done well, this can add great value, but if done poorly can destroy value.

There are many ways in which a corporation can position its headquarters to add value. Depending on the level of value added, one will get different sizes and structures of headquarters (as well as different levels of risk). Since there is no one-size-fits-all headquarters approach, you have to make a choice. You must determine which option is right for you. It is important to proactively plan the strategic role of the corporation in advance in order to ensure that (a) you are building the headquarter structure properly, and (b) you are truly adding the most value.

If you ask the divisions what kind of corporate structure they would like for a headquarters, they would probably not pick one of the higher levels. Of course, this is like asking young children what type of discipline they want from their parents. This is a decision that cannot be left to the children.

1 comment:

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