How can the corporate center best steer its business units?
Firms often organize themselves into business units when they serve different markets and need to be responsive to the differing customer requirements and competitive dynamics encountered in each market. Each business unit will develop its own specific business strategy, while the firm as a whole will formulate a corporate strategy.
The business units will typically report to a headquarters, called a corporate center, that in turn will steer the business units in a particular way, which is called corporate management. There are different approaches to steering that the corporate center can take, referred to as styles.
The Corporate Management Styles framework outlines five different approaches to steering the business units, along a continuum from a high level of corporate control to a high level of business unit empowerment. The styles higher up the continuum are used when the corporate center needs to take the lead and integrate the business strategies to ensure that the important synergies are realized. The styles lower down the continuum are used when the business units need to take the lead and differentiate their business strategy to ensure responsiveness to their specific challenges.
The five corporate management styles are the following:
- Integrated Organization Style. In this style the corporate center runs the firm as if it was almost a single business unit. One integrated corporate strategy is set, that needs to be implemented at the business unit level, with only minimal wiggle room for specific adaptations.?Many primary activities are centralized or highly coordinated, as are almost all of the support activities, in order to maximize cross-business synergies.
- Strategic Direction Style. In this approach the business units have a more distinct identity as separate vessels, but the corporate center keeps the fleet closely together to ensure that the significant cross-business synergies are realized. These synergistic activities tend to be centralized and/or coordinated, as are support activities, while on other activities the units have more room to maneuver as long as they stick to the overall strategic direction.
- Strategic Control Style. Using this style, the corporate center strives to balance between steering the business units towards specific synergies and empowering them to take the initiative and respond to the demands in their own market. Therefore, the strategy will be a co-production, with the corporate center setting a general direction, challenging BU ideas, and giving final approval. Centralization and coordination of activities will be more selective.
- Strategic Guidance Style. In this approach the business units are clearly in the lead, giving them the autonomy to flexibly respond to developments in their own market. The corporate center will give them some strategic guidelines (e.g., grow or hold) and financial targets, while challenging and ultimately approving their plans. Cross-business synergies will be limited and often not mandatory for the business units.
- Financial Control Style. Finally, in this style the corporate center behaves more like a holding company, running a portfolio of financial investments, with little more than financial synergy between the business units. There might be some strategic discussions between the corporate center and the BU teams, but the performance targets set and monitored will be financial. Meeting these targets will ensure that the business units remain empowered.
- Corporate centers have a management style. In model 14 (7I Corporate Center Model) it was outlined that every corporate center can play 7 roles, but it wasn’t described how differently these roles can be played. The specific approach taken by a corporate center to playing these roles, and thereby steer the firm, is their corporate management style.
- Corporate centers balance control and empowerment. One the one hand, corporate centers want to exert control over their business units, actively influencing what they do, to increase corporate value creation (see model 35). On the other hand, they want to empower their units, to be responsive to market conditions and create business value.
- Corporate centers can select from 5 styles. There are 5 corporate management styles on a continuum from corporate control to business unit empowerment. In the first two (integrated organization style and strategic direction style) the corporate center is in the lead, with the business units following and adjusting. In the last two styles (strategic guidance style and financial control style) the business units are in the lead, with the corporate center placing guardrails. The middle style (strategic control) is balanced.
- Corporate centers can easily overdo control. Control needs to add value, by facilitating synergies and challenging BU management. But corporate centers easily descend into knowing everything better, crushing BU initiatives, pursuing useless synergies, and imposing one-size-fits-all solutions. Without reflection, corporate center domination lurks.
- Corporate centers can easily overdo empowerment. Empowerment also needs to add value, by allowing business units to be entrepreneurial and responsive. But corporate centers easily allow stubborn BUs to undermine synergy efforts and act like cowboys, as long as the targets are met. Without reflection, corporate centers can steer too little.
Do you know anybody suffering from too much corporate center control? Or someone in a business unit that is so empowered they are neglected and have to figure everything out themselves? Then please forward this framework to them. You would be doing them, and me, a great service!
Next month's edition will be about the REASONING ROUTINES framework, that outlines the five most important ways of thinking needed by every manager and consultant. You can find all previously published models at?https://www.c4sl.eu/publications/, where you can also download the blog as a pdf, download the model as a PowerPoint and subscribe to the blog.
