The Nature of the Octopus

September 15, 2021

How many faces (or rather, how many tentacles) does an octopus have?

Business management does not follow the same logics as fashion, but is not immune to fads and aphorisms that come one after another from time to time. Strategic modeling, organizational designs and performance evaluations have been recurrently revisited in the light of new insights and data.

In particular, the multi-business configuration remains a controversial topic in the corporate world. On the one hand, advocates point out countless advantages associated to synergies across businesses, tax efficiency and the managerial capacity of the holding company itself. On the other hand, detractors highlight complexity and agenda conflicts as factors that lower the market value of business units grouped in holdings.

Generally speaking, in the 1960s-1970s, multi-business configurations were highly prized as a strategy to balance portfolios in terms of revenue growth and profitability. In the 1980s-1990s, seeking to optimize operational synergies across their businesses around core competencies, large-sized companies greatly reduced diversification to concentrate on their strategic focus. More recently, yet again revamped, multi-business holdings have drawn investors’ attention as alternatives in the face of the significantly increased volatility in the global capital market.

In the classic microeconomic theory, multi-business holdings play the role of diversifying risks for greater resiliency to macroeconomic fluctuations. In the organizational behavior theory, multi-business holdings strive for optimization between agency costs and transaction costs in contexts that are unfavorable to the specialization of independent assets.

In multi-business holdings, the organizational dynamics involves five key elements: Cultural attributes, Multi-business leaderships, Management model, Management platform and Service center.

• Cultural attributes describe the combination of the collective mindset, and the way social groups operate, influencing decision-making, risk management, group pressure mechanisms, external perspectives, individual aspirations.

• Multi-business leaderships influence the performance of multi-business arrangements, regulating and refining interactions between the holding company and its business units, in addition to ensuring the formation of a crossed pipeline of successors for key roles in middle management and the executive committee.

• The management model sets the business units’ and holding company’s levels of autonomy and accountability from KPI dashboards, governance mechanisms, control systems, structure, operational processes and procedures and decision-making criteria for investments and budgeting.

• The management platform catalyzes the holding company’s total potential for value creation based on the set of areas of expertise in corporate functions, integrated business intelligence, mergers and acquisitions, relationship with stakeholders, value of the institutional brand and access to capital.

• Shared service centers optimize the business units’ organizational design by concentrating administrative processes and procedures in the holding company, raising the bargaining power with vendors, accelerating the learning curve and creating performance evaluation mechanisms for internal activities.

In addition to the relationship across the tacit elements pertaining to multi-business holdings, the elements of connection between the business units themselves also stand out: Vertical Integration, Cost Savings, Bargaining Power, Operational and Commercial Synergies, and Knowledge Management.

• Vertical Integration. Opportunities to reduce transaction costs, installed capacity and need for working capital, combined to the potential increase of bargaining power in the value chain, capture of insights, access to consuming markets, innovation and barriers to new entrants.

• Cost Savings. Economies of scale, economies of scope and learning curves all maximized to reduce marginal costs and the average variable cost at the production, distribution and/or communication stages.

• Bargaining Power. Increased bargaining power and operational efficiency in joint procurement of non-operational products and services, increased strength in negotiations with government agencies, client associations, workers’ unions and non-governmental organizations.

• Commercial and Operational Synergies. Capture of operational synergies in the combination of tangible and intangible assets, combined to maximized commercial synergies in the value drivers for clients and consumers.

• Knowledge Management. Sharing best management practices and human capital in problem-solving, risk mitigation, increased efficiency and acceleration of the innovation pipeline.

The different possible combinations of these connection elements with core and tacit elements influence contexts of value creation or destruction in multi-business configurations compared to peer companies in the same industries.

Still in the 1960s, the classic management theory for financial asset portfolios proposed by Harry Markowitz and William Sharpe inspired countless management models for company portfolios, amongst which Bruce Henderson’s seminal model stands out. Since then, critics and advocates have presented various arguments and data about the multi-business holding’s incapacity or capacity to exceed the combined performance of its business units operating individually.

Multi-business organizations typically present potentials to create and destroy value, conditioning the holding company’s value appraisal to the measurement of more qualitative aspects related to its core elements, as well as to the tacit elements in the strategic execution and to the connection elements across its business units.

Amongst the factors that destroy value, the following stand out: i) Agency costs arising out of bureaucratic complexity and main-agent conflicts; ii) Incapacity to capture connection gains across the business units; iii) Failure managing the holding company’s core elements according to the business units’ needs; iv) Investors’ aversion to the consolidation of separate businesses in a single stock listed in the stock market; v) Lack of alignment of the business units in the Strategic Excellence Matrix.

Amongst the factors that create value, the following stand out: i) The holding company’s financial strategy to optimize indebtedness, raise resources for investment and reduce taxes; ii) Development of human capital specialized in core competencies for success of the business units, also expanding the pipeline of successors for key roles in different businesses; iii) Inorganic growth strategy through mergers and acquisitions, combined to increased strength of the institutional brand and relationships with stakeholders; iv) Incentive to the search for synergies, cost savings and knowledge management by and between the business units; v) Management of complex and integrated projects to optimize the business units’ sales and operations.

Typologies are always limited in the analysis of the infinite real-world possibilities; but are useful to systematize the rationale of simplified categories. I propose the classification of multi-business configurations into five clusters:

• Portfolio Management. The holding company focuses specifically on managing the invested companies’ portfolios typically with an approach of optimizing the risk-return relationship, focused on the arbitration between the purchase and sale of assets. Alongside, the holding company also seeks to optimize access to investment capital, while minimizing corporate platforms to prevent any interventions In the companies. There are no connections between business units, either. There is no concern about a single culture, nor about the development of multi-business leaderships. Eventually, the pressure for delivering short-term results might compromise the invested companies’ long-term value creation. Private equity funds and pension funds are examples of this model.

• Strategic Design. The holding company plays a more central role in its business units’ strategic design, particularly in mergers and acquisitions and the optimization of commercial and operational synergies across companies. The holding company also strengthens its management platform with a focus on integrated business intelligence, talent management, relationship with stakeholders, value of the institutional brand and access to capital. Business units retain their managerial autonomy, with low level of operational intervention by the holding company. Eventual value destruction may occur due to agency costs resulting from the holding company’s still incipient bureaucratic complexity. Large eastern conglomerates, such as Tata and Samsung, are examples of this multi-business configuration.

• Operational Check & Balance. The holding company bolsters the management platform further, based on the set of areas of expertise in corporate functions, integrated business intelligence, mergers and acquisitions, relationship with stakeholders, value of the institutional brand and access to capital. Cultural attributes and multi-business leaderships then strengthen as references of an integrated company between the holding company and its business units. Business units have managerial autonomy in sales and production; but follow strategic guidelines set jointly with the holding company. In addition to the operational and commercial synergies, the holding company encourages the search for cost savings, increased bargaining power and knowledge management. The holding company may also partially concentrate the management model and shared service center, with no need for complex corporate centers. The potential for value creation lies precisely in the holding company’s capacity to add value to the business units based on an advanced set of areas of expertise aligned to the companies’ strategic, operational and financial needs. Large conglomerates with diversified portfolios are examples of this multi-business configuration. Ultrapar has adopted this approach.

• Functional Alignment. The holding company strengthens its management platform across all corporate functions, and business units concentrate in sales and production. Cultural attributes and multi-business leaderships are supporting pillars of the greater centralization in the management model and the consolidation of a shared service center. Processes, policies and systems are standardized, with strong action of corporate functions in the various business units. Technology, Finances, Human Capital, Innovation, Projects and Strategy are typical examples of the functions the holding company centralizes. Matrix designs enable those crossed reports between holding company and business units. Commercial and operational synergies, cost savings, bargaining power, vertical integration and knowledge management are maximized across business units, with direct coordination by the holding company. Large global integrated conglomerates are examples of this approach.

• Corporate Engagement. The holding company defines the whole management model, with complete intervention in the business units, further strengthening the management platform and the shared service center. Cultural attributes and multi-business leaderships are maximized with a focus on the business units’ cohesion around single strategic guidelines and operational processes for all companies. The holding company directly coordinates the opportunities for synergies, cost savings and knowledge management. Bargaining power is maximized by the active role the shared service center plays for all companies. The companies’ vertical integration is seen as an opportunity for operational efficiency gains and increased strength of the centralized management of the businesses. The potential value creation depends greatly on the efficiency of the holding company in managing companies with the same profile in the Strategic Excellence Matrix, while the potential value destruction is associated to the bureaucratic complexity inherent to the increased strength of the corporate functions in charge of managing many business units. Large global conglomerates in mature markets are examples of this multi-business configuration.

An octopus’s organizational design is far from being something trivial. As such, creating economic value becomes even more challenging.


Daniel Augusto Motta é Managing Partner e CEO da BMI Blue Management Institute. Doutor em Economia pela USP, Mestre em Economia pela FGV-EAESP e Bacharel em Economia pela USP. É Alumni OPM Harvard Business School. Atua também como Managing Partner da corporate venture capital WhiteFox sediada em San Francisco (EUA) e como Senior Tupinambá Maverick na content tech Bossa.etc. Também atua como Diretor de Planejamento Estratégico da UNIBES e Membro do Conselho Deliberativo do MASP. Foi Membro-Fundador da Sociedade Brasileira de Finanças. Foi Professor nos MBAs da Fundação Dom Cabral, Insper, FGV, ESPM e PUC-SP. É autor de diversos artigos publicados por Valor Econômico, EXAME, VocêSA e Folha de São Paulo, e também tem três artigos publicados pela Harvard Business Review Brasil. É autor dos livros best-sellers A Liderança Essencial e Anthesis.