Value Creation through Incremental Change in Multibusiness Corporation

Multibusiness firms typically use multidivisional structures that comprise separate businesses, which are organized as strategic business units, divisions, or subsidiaries, and are controlled and coordinated by corporate management to create value. These businesses are arranged according to product groups, geographical locations and markets, or different vertically integrated stages. The primary characteristic of a multibusiness firm is that each business is autonomous—responsible for its own strategic and operational decisions, and the corporate headquarters is responsible for corporate strategy and issues, including corporate planning, capital budgeting, and providing centralized services. The corporate management of multibusiness firms can create value for their businesses through several activities, including managing each strategic business unit, managing the linkages across businesses, managing the corporate portfolio, and managing change within the corporation. This article shows how the corporate headquarters of a multibusiness corporation can create value through incremental change for their businesses.

Brief History of Mutibusiness Firms

According to Alfred Chandler, multi-business firms emerged before 1950. These companies were forced to decentralize and adopt divisional structures because they had grown too large and complex over conventional functional structures to be managed. Some companies, such as General Motors, Du Pont, and Standard Oil, were forced to use the divisional structure and therefore became the first divisionalized multibusiness companies. These large firms were overloaded because they had been offering a wider range of products to several different markets. Therefore, they found that to avoid overload at the corporate center, decentralization was needed. Subsequently, the newly created divisional structures first time realized the distinction between business-level decisions (divisional management responsibility) and corporate-level strategy decisions (corporate-level responsibility). Therefore, decentralization became the dominant corporate strategy for the newly created multi-business corporations in the 1950s.

From 1960 to 1980, the corporate goals of multi-business firms shifted to diversification. The basic motive for diversification was driven by two basic objectives: growth and risk reduction. Before the 1980s, diversified firms were well known to build corporate empires and gave less importance to value creation. One advantage of diversification is that it keeps the firm free from operating in a single industry. However, the major disadvantage is that it has destroyed more value than any other strategic initiative in the past. From 1980 to 2000, the diversification trend reversed from growth to restructuring (the 1980s) and then shifted again to refocus on core businesses (1990s) with a commitment to the creation of shareholder value.

By the end of the 1990s, multibusiness firms were highly disappointed with the returns from the shareholder maximization value model and cost-cutting measures. These companies also failed to generate new sources of value, which again resulted in a major shift in the corporate strategies of multibusiness firms. During the first two decades of the 21^st century, the multibusiness firm’s focus shifted to improving responsiveness to external environmental changes and the pace of the firm’s evolution. Therefore, more and more multi-business firms today are incorporating change to add new sources of value creation by identifying new opportunities for innovation, including new product development, new business models, developing new capabilities to compete, and exploiting internal and external linkages.

How Corporate Headquarters Can Create Value Through Incremental Change

A multibusiness firm can change incrementally or step-by-step or in stages over several years, or rapidly over a short period, typically less than two years. It can incrementally change to keep pace with the changing environment when it expects the need for a preemptive change to meet external challenges.

There are two aspects of change: the end result of change and the nature of change. The nature of change has two dimensions: incremental and big-bang or rapid change. There are two types of incremental changes: 1) Adaptation which is part of the realignment, and 2) Evolution which is part of the transformation. Adaption is a less important change, implemented gradually, step-by-step, or through stage-by-stage initiatives. The organization may not be in any financial trouble, but it puts measures in place by spreading them over several years to deliver change and to add value, but is not transformational change. The advantage is that the level of investment required is less compared to evolution and can be spread over several years. Evolution is an important, transformational change implemented gradually step-by-step, or in phases over several years. It is a planned proactive transformation that is undertaken to cause change before to fulfill future needs. However, this requires an extensive commitment to financial and human resources. Here are a few approaches and examples that promote incremental change through corporate adaptation and evolution in multi-business firms:

Evolutionary Transformation  

Before implementing any change program, the organization must assess the scope of change: in terms of breadth (one part or complete organization) and depth (transformation or realignment) of change to determine how much change is needed, and the time to change: how much time does the organization require to delivering change? For example, cultural change is a fundamental transformational change, and therefore cannot be delivered in a short period. In 1988, Jack Welch, CEO of GE, noticed the need for a cultural change at GE and admitted that if a fundamental transformation was to be realized, it could only be delivered through a planned evolution and not through restructuring. As a result, GE’s initial change effort was initiated in 1988 and was extended into the 1990s—in a 10-year program known as “Work-out.” Another recent example is Fiat, which followed an evolution to deliver a fundamental cultural transformation for the company.

Overcoming Organizational Inertia

There are many sources of organizational inertia or resistance to change that generates a slower response to internal and external change. There are also several approaches to counteracting organizational inertia. Some sources of inertia in multi-business firms are cultural inertia, organizational complexity, and poor resource reallocation. One part of the difficulty in resource reallocation is that multibusiness firms tend to keep the same and even equal levels of allocated capital expenditures among their business in response to external change among their businesses. Another aspect of resource reallocation is that corporate management tends to inflate return on investment to maximize shareholder return by reallocating lower levels of resources to projects in response to external change. In both cases, this lowers productivity, demotivates employees, and generates a slower response to the required change. To counteract inertia, research shows that companies that reallocated adequate resources to projects performed better compared to those that did not. Additionally, having product champions to lead the teams can succeed in overcoming resistance to change. Product champions are creative individuals who embed creativity that motivates team members within the organization. Because organizational inertia is part of the corporate culture as described above, it can only be delivered through evolutionary incremental change.

Institutionalizing Incremental Change

The multibusiness’s strategic planning system can be redesigned to sense external changes to pinpoint opportunities and then respond by implementing the plans gradually over the long-range planning period or through staged initiatives to deliver incremental change. IBM has a long history of incorporating incremental change. It successfully evolved from a tabulating company to computers, to information technology, to a cloud computing company. Its pace of evolution also accelerated due to support from its strategy formulation and implementation processes.

Large Scale, Top-Down Initiatives

The term “strategic intent” plays a vital role in shaping the long-run success of an organization. Strategic intent is an expression of high-level long-term goals and objectives which the organization intends to achieve. Samsung Electronics evolved to become the world’s largest electronics company, based on a series of long-term large-scale ambitious corporate initiatives that were driven by a very strong top-down commitment to resources. It successfully completed a few very large ambitious development projects that involved an enormous commitment of financial and human resources.

Adaptation to Changing Circumstances

Adaptation to changing situations sometimes does not require a fundamental transformation but slight gradual changes to the operational systems, processes, and structure. For example, in 2010, Amey, a UK-based infrastructure manufacturing company, implemented a change program to realign the organization through adaptation to sustain its inefficiency and effectiveness in the market, because its organizational structure was overloaded. The company’s fragmented organizational structure required the elimination of many jobs, job titles, and management layers. To address this issue, a change program was designed to deliver more gradual change over several years.

References and Further Reading:

1. M. Grant, Contemporary Strategy Analysis (United Kingdom: John Wiley & Sons, Ltd., 2018), Chapters 6, 8, 9, 12, and 13.
2. Goold, A. Campbell, and M. Alexander, “Corporate-Level Strategy: Creating Value in Multibusiness Company (New York: John Wiley & Sons Ltd., 1994), Chapter 4.
3. Balogun, V. Hope Hailey, and S. Gustafsson, Exploring Strategic Change (United Kingdom: Pearson Education Ltd., 2016), Chapters 2, 4, and 8.
4. Ashok N., Design and Management of The Transition State of Strategic Change, A&N Strategy Consulting (October 29, 2019).
5. Derek F. Abell, Managing with Dual Strategies (N.Y. The Free Press, 1993), Chapter 7, and 16).
6. Romanelli and M. Tushman, Organizational Transformation as Punctuated Equilibrium: An Empirical Test, Academy of Management Journal (October 1994), 37 (5), pp. 1141-66.
7. Ashok N., Organizational Barriers to Transformational Change, A&N Strategy Consulting (March 5, 2019).