chapter  5
29 Pages

The scale configuration

Organisations within the scale configuration have corporate centres that directly intervene in the operations of their underlying businesses. This direct intervention is aimed at reducing the total costs of the group by exploiting economies of scale that would not be available to the individual business units within the group.This manager style of corporate centre will therefore have identified some common support activities, core processes or even complete functions where significant savings across the group can be generated by centralisation. Any such centralisation inevitably results in some loss of indepen-

dence by the individual business units as they become more integrated within the group. However, the level of this integration varies considerably across this configuration depending on the nature of the centralisation. At one extreme, the low level of direct intervention is restricted to a few common support activities, like legal services and public relations.This means that the group can still comprise a relatively diverse range of business units and these business units should maintain a high level of autonomy. Such scale configuration groups do not look dramatically different to the low indirect involvement controls configuration groups where the shareholder centres have regular interaction with the business units, as was discussed in Chapter 4. Equally the sustainable value added by these corporate centres may not be sufficient to ensure the long-term viability of the group, and the group could even fall into the problem‘zone of intolerable confusion’. As the level of centralisation by the corporate centre increases

to include some core processes of the divisions, there is a much greater need for cohesiveness across the group’s portfolio of businesses.

Centralisation clearly only reduces costs if the centralised activities have common features that generate economies of scale. This can increase the value created by the corporate centre’s interventions but it may also act as a constraint on the future growth potential of the group.The centre ideally needs to find (either through organic growth or acquisition) other businesses that can add to the total cost savings from centralisation of these common core processes. The corporate centre in the scale configuration creates value by

reducing costs for the group as a whole, but this does not mean that this has to be the basis for the competitive strategies of all, or any of, the business units within the group. Indeed they can pursue their own independent and potentially very differing competitive strategies that may include core competences in branding, customer service, technology, innovation, research and development, etc. The only economic rationale required for their continued group membership is that they can contribute to and benefit from the lower cost levels that are achieved in the group’s centralised activities. This centralisation frequently leads to the standardisation of the

common activities in order to maximise the cost savings. Any adverse impacts of this standardisation on the business units must be taken into account so that the ‘net’ value added by the interventions of the corporate centre can be assessed. In the extreme cases, some business units may ‘opt out’of the centralisation due to the perceived adverse impact of the required standardisation on their individual competitive strategies, despite the negative effect that this can have on the group’s cost levels. Another important potential impact on the divisions can be caused by the decrease in independence and loss of control that results from an increasing level of centralisation. The impact can be positive if it enables business unit managers to

focus on the key elements of their individual competitive strategies. Thus the business units can effectively delegate to the corporate centre the provision of many essential, but non-value adding activities, but they should be provided with these activities at a lower cost than they could achieve by doing it themselves. This is often the argument used when non-core support activities are centralised. A more negative impact can arise if business unit managers become demotivated through a perceived loss of control over ‘their’ business. This happens most frequently when centralisation incorporates any of the perceived critical, value-adding core processes of the business unit.The corporate centre needs to ensure a high level of buy-in to the centralisation by the keybusiness unitmanagerswho aremost affectedby this centralisation. It should also take great care in designing the service level agreements

and transfer pricing arrangements between the centralised provider and its internal customers, i.e. the business units. These customers need to trust the corporate centre to provide the centralised goods and services at lower prices than they could achieve themselves. In many large groups, there is a strong feeling within the business units that any centralised activity is much more expensive than it would be if they provided it for themselves. Also the business units should be able to rely on the fact that these corporate centre provided goods and services will properly meet their requirements. This will enable them to concentrate on their remaining controllable areas of activity. To achieve this, the manager style corporate centre not only requires a high level of operational management expertise in each of the centralised processes but also needs excellent supply chain management skills whatever processes are centralised, as is shown in Figure 5.1. This supply chain expertise is needed to identify those activities and processes where economies of scale can be achieved through corporate centre intervention. It will also allow the centre to avoid any damaging demotivational consequences from centralisation through the implementation of appropriate service level agreements and transfer pricing mechanisms. The scale configuration corporate centre has an increasingly impor-

tant leadership rolewithinthe groupasmore core processes are centralised. As discussed at the end of Chapter 1, if all the key value adding activities are centralised the corporate centre’s role dominates to the extent that the group has really reverted to a single business. However, below that level of centralisation, the corporate centre should be focusing on its transactional leadership role. It is not trying to change how

the business units interact with their own customers, it is simply trying to reduce the total costs that are incurred in doing what the group is already doing.Thus the corporate centre ideally wants to achieve overall volume leadership in the centralised processes so that it becomes the lowest cost supplier possible to all its business units.