Guide Answers to Recap Questions and Assignments

Strategy: Analysis and Practice

McGee, Thomas and Wilson

Chapter 8

1:

Having read Chapter 8, you will realise that there are two key concepts which help characterise the centre-division relationship in M from organizations – design of the overall organizational structure and control of the structure by the centre.In terms of design, you need to assess the different structural forms that the M form can take.You could begin with Chandler’s pioneering work in the 1960s showing the relationships between strategy an structure, culminating in a nostrum that successful companies which were growing all adopted a multi divisional (M form) structure.Section 8.1 gives details of this argument and the organizations Chandler used to illustrate his argument.You will need a working definition of structure to address this question fully.You could use the one given below:

Organizational structure is....”the established pattern of relationships between the component parts of an organization, outlining both communication, control and authority patterns.Structure distinguishes the parts of an organization and delineates the relationship between them”(Rosenfeld and Wilson, 1999:254)

Bear in mind that Chandler (1962) had examined the structures of successful companies over time in order to see which factors influenced structure. He concluded that growth and success were accompanied by structural adaptation, usually from a functional, centralised structure to a multi-divisionalised structure. These were common patterns amongst companies such as DuPont, Standard Oil and Sears.Chandler concluded that the structure of an organization was related to its strategy and that, over time, structure adapts to ‘fit’ the strategy of the organization.Therefore, over time, structure follows strategy.There is also a counter-perspective on this seemingly immutableadoption of the M form structure.It is also likely that the adoption of an M form structure shapes and influences the strategies it pursues and, hence, one can argue that strategy follows structure rather than the other way around.There is, as yet, no definitive answer to this conundrum, but remember that many writers on the M form structure assume (often implicitly) that structure follows strategy (and not the other way round).Pay attention to the different forms the M form can take.These are depicted in Figure 8.7 and shows how different forms of value creation can be associated with different forms of M form structure.

Moving on from the design of the M form, you can begin to consider the different modes of control that the centre tries to impose (or allow) on its divisions.The ideal-type of M form organization is depicted in Figure 8.2 with three levels of strategy associated with the structure: corporate at HQ; competitive at the level of each division and functional within each division.This ideal-type can become confounded by (for example) the centre (HQ) trying to impose all three levels of strategy and not allowing divisions any autonomy to make strategic decisions.Section 8.3.3 gives examples of parenting styles adopted by HQs which range widely across variables such as the degree of planning influence over strategic and financial strategies at the divisional levels.Another way to think of these parenting relationships is to ask the question of your chosen company – what value does the centre (HQ) add to the divisions?This can be as revealing as trying to ascertain the degree of control exercised by the centre.

2:

There will be plenty of accounts of ongoing mergers or acquisitions in the press.Choose one where there are explicit statements about added value as a rationale for the merger or acquisition and about the continued development of value of the soon to be unitary organization.Something like the vignette below would be useful:

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The Takeover of Cadbury by Kraft Foods

Kraft Foods sealed a deal for Cadbury as the famed British chocolate maker accepted a sweetened bidworth some US$19 billion creating a world leader in confections. Ending a bruising months-long hostiletakeover battle, Cadbury's board agreed to an improved offer valuing the British group at 11.5 billionpounds (US$18.9 billion), or 840 pence per share, the companies said in a statement. Under theagreement, Cadbury shareholders will also receive 10 pence per share via a special dividend, liftingKraft's offer to 11.9 billion pounds (US$19.5 billion). The deal would make US-based Kraft, the world'ssecond-biggest food company, one of the biggest global players in chocolate and confections, giving theUS group the brands of Dairy Milk and Creme Egg to go along with Kraft's Toblerone, Milka, Suchardand Cote d'Or, among others. Investors welcomed Tuesday's news, sending Cadbury's US-listed shares up6.14 per cent to US$55.09. Kraft shares fell 0.57 per cent to US$29.41

Commenting on the Offer, Irene Rosenfeld, Chairman and CEO of KraftFoods said:“We have great respect for Cadbury’s brands, heritage and people. We believe they will thrive aspart of Kraft Foods. This recommended offer represents a compelling opportunity for CadburyShareholders, providing both immediate value certainty and upside potential in the combinedcompany. For Kraft Foods Shareholders it transforms the portfolio, accelerates long-term growth anddelivers highly attractive returns, while maintaining financial discipline”.

Commenting on the Offer, Roger Carr, Chairman of Cadbury, said:"We believe the offer represents good value for Cadbury shareholders and are pleased with the commitment that Kraft Foods has made to our heritage, values and people throughout the world. Wewill now work with the Kraft Foods' management to ensure the continued success and growth of thebusiness for the benefit of our customers, consumers and employees”.

The value proposition (examples)

1) Kraft Foods believes a combination represents a strong and complementary strategic fit,creating a global confectionery leader with a portfolio of more than 40 confectionery brands each with annual sales in excess of USD 100 million.

2) Kraft Foods and Cadbury have a highly complementary geographic footprint, providing the Combined Group with a leading presence in attractive global markets.

3) The Combined Group will have a leading position in developing markets, including in Brazil,Russia, India, China, and Mexico.

4) The Combined Group will benefit from important additional scale in the consolidatingconfectionery segments

5) The Combined Group will have best-in-class infrastructure in both traditional and instantconsumption routes to market

6) The combination of Kraft Foods and Cadbury creates a global powerhouse in snacks, confectionery and quick meals. With annual revenues of approximately $50 billion, the combined company is the world's second largest food company, making delicious products for billions of consumers in more than 160 countries.

7) The combined company's portfolio includes 11 iconic brands with revenues exceeding $1 billion - Oreo, Nabisco and LU biscuits; Milka and Cadbury chocolates; Trident gums; Jacobs and Maxwell House coffees; Philadelphia cream cheeses; Kraft cheeses, dinners and dressings; and Oscar Mayer meats. Another 70+ brands generate annual revenues of more than $100 million. Kraft Foods is a member of the Dow Jones Industrial Average, Standard & Poor's 500, Dow Jones Sustainability Index and Ethical Sustainability Index.

(Source:

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All the above looks like a convincing value proposition, but now you need to think about how this can be realised (in this case between two very different organizations culturally, nationally and with very different structures and processes).How can they successfully work as one unit?How should Kraft manage the parenting role, especially toward what were previously Cadbury owned divisions?Use the concepts outlined in the Chapter to assess this acquisition or one of your own choosing.

3:

You can take the same case (or one of your own choosing) and begin to assess the case for the merger or acquisition.At the time of writing, the full outcomes of the Kraft/Cadbury takeover are not known but already (only weeks after the acquisition) there are tensions between the former two companies, with Cadbury employees complaining about a remote and formalistic management style being imposed as well as factory closures being announced (when in the early stages of the acquisition, they had been deemed to be safe from closure).Assess what these outcomes might mean for the longer-term future of the acquisition.

4:

The drive to M&As is very strong despite their high failure rate.In many ways you could consider the problems associated with strategic planning (unworkable in practice; often badly informed and, ultimately, not how key decisions are made, nor value created) and M&As.They are almost exclusively based upon (seemingly) cast iron cases of good (and plausible) strategic planning. Secondly, you could consider to what extent M&As are context driven rather than strategically planned (for example by the strong move toward a single European or even global market) and perhaps that is why senior managers often complain that failure of an M&A is because there was no strong strategic plan.Thirdly you could consider the impact of the recession and the general macro-economic climate in encouraging (or not) M&As.

References

Chandler, A.D. Jr. (1962)Strategy and Structure: Chapters in the History of the American Enterprise,MIT Press, Cambridge, Mass.

Rosenfeld, R. and Wilson D.C.(1999)Managing Organizations: Text, Readings and Cases, (2nd Ed) McGraw-Hill, Maidenhead.

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