Corporate structure is the overall makeup of how a company structures its divisions, departments, and people. While corporate structure by itself generally won’t ensure success, it is often a key enabler in order to execute a given strategy. With that, we will look at some ideas for corporate structure that may align with executing overall strategy.
Vertical integration is owning or controlling multiple points along the supply chain. The reasons for vertical integration include control of over quality, control over delivery time, control over supply and cost considerations.
Examples: Producing components in-house. Owning raw material sources such as timber or a mine.
Horizontal integration is the combination of businesses at the same point in the value chain. They generally have similar products and services. Horizontal integration allows for increases in market share and economies of scale.
Example: Merger of two manufacturers of hydraulic components.
Two or more companies hold ownership of a new entity. The new entity may exist for a finite time period or continue indefinitely.
If a company lacks a competency or resources it may consider finding outside help through a strategic alliance. A new entity is not formed, but two or more entities agree to work together to achieve a specific objective.
Business Process Structure
Business process structure is how company business processes and support assets such as enterprise resource planning software are structured.
Integrated business processes
A company with integrated business processes attempts to standardize business processes across all divisions.
Integrated businesses generally share the same IT systems, accounting systems, and business processes in general.
The advantages of integrated business processes include easier data mining and analysis, better information sharing across divisions, economies of scale in information technology assets, and easier transfer of employees among divisions since they know many of the business processes.
Disadvantages of integration include difficulty implementing changes across the entire company and the high cost of failed policies implemented throughout the company. Another disadvantage of integration is the assimilation of acquired companies in terms of IT infrastructure, processes, and culture.
Collection of businesses
The collection of small businesses strategy is to create a large company through a collection of relatively independent divisions that act as a small business. Virgin is an example of this type of management structure. Berkshire Hathaway has a similar strategy, except many of its divisions are large companies in their own right.
Each division has autonomy and its management is concerned with operating as if it were an independent company.
The advantage of this management style is the ability to act as a nimble small business. The disadvantages are fewer synergies among divisions, redundancies, and information silos where information is not shared among divisions.
Restructuring can take on many forms. The goal of restructuring is generally to improve a business in some manner or during a crisis to keep the business a going concern.
Change of legal entity
Generally a change in legal entity is done to reduce the tax liability of the company. For a sole proprietor, changing to a different legal entity can shield the owner from personal liability.
Always consult with an attorney and tax advisor regarding a change in legal entity.
Refinancing may be part of an overall restructuring effort. Refer to Chapter 4 for more on financial structure.
Reorganization of functional areas
Reorganization of functional areas to improve operations.
A reduction in headcount may necessitate a restructuring of functional areas to accommodate the change.
Sale of assets
A divestiture of assets can entail selling patents, capital equipment, inventory, or entire divisions of the company.
Merging with another company.
A private company acquires a public company to bypass the complex process of going public.
Spinning off a portion of the company into a separate entity.
Change in business model
A fundamental change in how the company generates revenue. This could be a change in products, or a change in how the products are sourced, manufactured, and sold.