Corporate Level Structure

1. Corporate Level Structure Shareholders Board of Directors Corporate Management Business Units

2. Corporate Structure Corporate Headquarters SBU1 SBU2 SBU3 SBU4 Corporate Portfolio The objective of the corporate structure is to operate the business units to create synergy.

3. Corporate Structure • Bureaucratic Costs – the costs of maintaining the corporate structure • Synergy – the business units create greater value operating under corporate control than they would operating separately The corporation is justified only if the synergy created is greater than the bureaucratic costs. ? Synergy Bureaucratic Cost >

4. Corporate Management Corporate management has two principle functions • Manage the corporate portfolio – determine what industries to compete in and what businesses to own • Manage the business units – establish vertical and horizontal relationships to create synergy The corporation uses unique resources to allow business units to • Reduce costs • Improve resources and competencies • Create competitive advantage

5. Advantages • Economies of Scope – leveraging core competencies and sharing related activities • Market Power – increase negotiating power • Vertical Integration – allows control over key supplier and distribution networks • Financial Economies - allocate resources effectively • Parenting – provide management expertise • Restructuring – improvements in business resources • Risk Reduction – ?

6. Disadvantages • Bureaucratic Costs • Price premium • Information and Communication Limits • Cultural and Strategic Incompatibility • Agency Problem • Management assumes diversification decisions that should be left to shareholders

7. Related Diversification Business units have commonalities in competencies or value chain activities • Creates horizontal relationships between SBUs • Allows economies of scope • leveraging core competencies • sharing facilities and pooled negotiations • Creates market power • pooled negotiation • Vertical integration • Requires active management to integrate and coordinate SBU activities, so bureaucratic costs are high

8. Unrelated Diversification Conglomerates or Holding Companies: little or no commonality between SBUs • Creates vertical relationships between SBUs and corporate headquarters • Creates opportunities for parenting and restructuring • Allows portfolio management to allocate resources • Little need for coordination between units, administrative costs can be low.

9. Portfolio Analysis Assist corporations to balance portfolio • Balance present and future returns • Balance profits and growth • Balance cash flow and investments BCG Matrix • Stars • Question Marks • Cash cows • Dogs

10. Means of Diversifying • Mergers and Acquisitions • Obtain resources to expand market opportunities • Allows rapid actions • Serious risk of failure • Strategic Alliances and Joint Ventures • Share resources to reduce costs or improve technology • Still significant risk of failure • Internal Development • Develop resources to create new products and technology • Less cost and risk; more time consuming