Corporate Management of Diversified Companies - Information Demand and Information Processing

Diplomarbeit von Nicolas Rabener

Abstract:

The ultimate management challenge is said to be the management of a conglomerate. Diversified companies, especially conglomerates, are complex organisations that in the larger cases resemble full-blown economies, rather than firms. They develop internal capital markets with billion dollar budgets, enormous internal labour markets, and often a decent amount of bureaucracy.

The International Telephone and Telegraph Corporation (ITT) owned more than 150 businesses in the 1960s, ranging from electronics to insurance companies, with operations across the globe. The architect of ITT, Harold Greneen, once acquired 20 unrelated business in a single month and was strongly convinced that sound management principles could be applied to any type of business. He believed that information was key to good management. During his reign earnings increased a 100 consecutive quarters and seemed to support this management belief. In the late 1960s, earnings did not increase any longer and the stock price lost significantly in value. By the early 1980s the company was already heavily involved in deconglomeration and had divested more than a 100 businesses.

ITT was not the only diversified company in the 1980s that was on the search for focus. The conglomerate strategy went out of fashion with investors, due to poor performance associated with this strategy. The result was a conglomerate discount of an average 15 percent on the stock market that persists until today. Despite this investor aversion, some companies continued the conglomerate path and managed to be highly successful at the same time. General Electric has a broad product portfolio, which contains electronics and insurance businesses, too, and is currently the most valuable company in the world in terms of market capitalisation. Warren Buffet’s Berkshire Hathaway, Citigroup or Virgin are diversified as well and have created substantial value for their owners. These and other successful diversifiers have mastered managing the diversified company.

Diversification has been studied in strategic management, finance, economics, organisations theory and other subjects. Each of these subjects views the duties of corporate management of a diversified company slightly different. Combining the views yields an integrated approach for managing a diversified company.

First is the management of the corporate portfolio that includes a selection of businesses that are desired and a continuous reassessment of the portfolio. The second duty comprises the management of synergies, which encloses the identification and promotion of synergies between the businesses.

Third is the management of the businesses, which is greatly influenced by formulated and implemented business-level strategies. Business or corporate management, depending on the management style of corporate management, define these business-level strategies. For the completion of these duties management requires information.

The objective of this thesis is to describe the integrated approach for managing a diversified company. The emphasis lies on the success factors and on the role of information demand and information processing within a diversified company.

Section two explains diversification as a strategy. All relevant terms and concepts such as strategy and diversification are defined and outlined. Diversification motives, vehicles, and the relationship with internationalisation strategies are explained. Requirements for success and empirical evidence on the success of diversification strategies conclude this section.

Section three focuses on the corporate management of a diversified company. Corporate management and its roles in a diversified company are defined. Information, information demand and processing are explained in the context of a diversified company.

Section four describes the three duties of corporate management in a diversified company: portfolio, synergy and business management. The conclusion summarizes all important results of the thesis and gives suggestions for future research.

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