Chapter 2: The Management Of Diversified Enterprises

Question 1

Value creation through diversification will depend on:

Answer 1

• Realizing potential for synergies
• Effective and efficient integration
• Sound strategic logic

Question 2

Corporate parent definition

Answer 2

Refers to the levels of management above that of the business units, and therefore without direct interaction with buyers or competitors

Question 3

Corporate parent implications

Answer 3

• Management of the differet SBUs
• Diversification
• Value adding or value destroying activities

Question 4

Value-adding activities

Answer 4

• Envisioning
• Facilitating synergies
• Coaching
• Providing central services and resources
• Intervening

Question 5

Value-destroying activities

Answer 5

• Adding management costs
• Adding bureaucratic complexity
• Cultural incompatibility
• Obscuring financial performance
• Milking of financial resources
• Weak core competencies

Question 6

Corporate rationales

Answer 6

• Portfolio manager: operates as an active investor
• Synergy manager: seeks to enhance value for SBUs
• Parental developer: seeks to employ its own central capabilities to add value to its business

Question 7

Strategic Business Units definition

Answer 7

Where similar products or markets are grouped into units

Question 8

SBUs characteristics

Answer 8

• HQ - Corporate/ SBUs - competitive
• Similar divisions grouped into homogenous units
• Synergies achieved through related diversification
• Each SBU operates as a profit center, with its own CEO

Question 9

SBUs advantages

Answer 9

• Planning & control by the corporate office
• Decentralization of authority
• Quicker response to changes

Question 10

SBUs disadvantages

Answer 10

• Possible difficulty in achieving synergies
• Increased personnel & overhead expenses
• Corporate office further removed from the divisions
• Corporate unaware of key changes in market conditions

Question 11

Basic management models in diversified companies

Answer 11

• Strategic planning
• Strategic control
• Financial control

Question 12

Strategic planning model characteristics

Answer 12

• Strong planning influence from HQ but relatively relaxed performance accountability from the business units
• HQ allocates all the resources to business units
• HQ exercises a high degree of control on how strategy is implemented
• HQ size relatively big
• Bad financial results allowed
• SBUs not accountable financially

Question 13

Strategic control model characteristics

Answer 13

• Moderate levels of business unit accountability
• The corporate centre acts as a coach to managers in business units and is supportive
• HQ size - medium
• Bad financial results only allowed in the short term
• This style fits with the synergy manager view of the corporate centre

Question 14

Financial control model characteristics

Answer 14

• The business units each set their own strategic plans
• Business units are strictly accountable for their performance and financial results
• HQ size - small
• Managers typically have a lot of autonomy and receive high levels of bonus for success but are likely to be dismissed for poor results
• The style fits with the portfolio manager and parental developer views of the corporate centre