Viacom
...ers. The large organization was not successful in implementing a strategic plan that resulted in increased profits and the accompanying shareholder confidence. Redstone envisioned a significant cost savings though the development of internal synergies between the numerous operating divisions. The various divisions were managed independently, with careful planning, tight financial controls, quick decision making, and performance based rewards for upper management. Despite their good intentions, Redstone and his managers made two fundamental errors that fostered on each other. First of all, the firm used debt to finance the majority of their expansion. After the Paramount acquisition, Viacom had $12 billion in debt. The firm purchased Blockbuster at the peak of their success. The high levels of debt put internal strain on the organization, making it tough to grow the business and invest in the tools necessary to improve the synergies. The lack of fluid capital was a barrier to globalization, as the global markets thrive on aggressive, high quality organizations. The financial strain led the management team to provide the next significant obstacle to Redstone’s goals of synergy and economies of scale. Viacom measured performance tightly and used incentive compensation to align the goals of management with those of the organization. The stringent compensation rules and lack of free cash flow created a disincentive for strategic business unit managers to cooperate horizontally across the firm. There was not enough capacity in the compensation structure for the managers to forgo business unit objects for the benefit of the entire corporation. This resulted in cases where individual business units negotiated in their best interest, not in the best interest of the organization as a whole. To remedy this situation, Redstone took over as Chief Executive Officer in 1996. He directly intervened, choosing to negotiate for the entire corporation rather than one of its pieces. This was an effective move that despite numerous shortcomings, led to an important message being delivered. Managers now knew that they must keep the best interests of the entire firm as a number one priority, or they would lose the right to bargain on behalf of their strategic business unit. Redstone’s move was bold and he stepped on numerous toes. This was a necessary step, up until this point little or no progress was being made developing firm wide synergies. Viacom needed to develop a strategic plan that managers had an incentive ...