Corporate Strategy - The Quest for Parenting Advantage

Corporate Strategy : The Quest for Parenting Advantage Andrew Campbell, Michael Goold, and Marcus Alexander

Parenting advantage is the parent company that can create more value than any of rivals would if it owned the same same businesses. Core Competence Concept - Build portfolios of businesses around shared technical and operating competencies - Develop structures and processes to enhance their core competence - Focused on the businesses in the portfolio and searched for a logic by examining how they are relate to one another

The Parenting Framework - Fills in deficiencies of the core competence concept - It provide a rigorous ri gorous conceptual model model as well as the tools needed for an effective corporate-level planning process - Focused on the competencies of the parent organization and on the value create from the relationship between the parent and its businesses

Structured analytical approach 1. 2. 3. 4.

Examine the critical success success factors factors of each business business Document areas in the businesses in which performance performance can be improved Review the characteristics characteristics of the parent, group in a number of categories Test the judgements judgements against the results results that the businesses businesses achieve under the influence of the parent

Parenting Opportunity : Parent must improve its businesses. For that to be possible, there must be room for improvement (potential for improvement within business) Parent ’s characteristics : 1. The parent ’s mental maps : the values, aspirations, rules of thumb, biases, and success formulas that guide parent managers as they t hey deal with the businesses (shape the parent s perception of opportunities to improve business performance). ’

2. The parenting structures, systems, and processes : The mechanisms through which the parent creates value. How managers interact within the structure or process 3. Corporate staff departments and central resources : The potential for central staffs and resources to create value depends on the circumstances in each business 4. Parents often create value because they have people with unique skills . Skilled division head or technical director can also be the parent s greatest source of value 5. Decentralization contract between parent and business : Which issues the parent normally influences and which it delegates to business managers ’

Impact and results 1. Success and failure analysis : examining the company s track record with different sort of businesses. Useful way of summarizing a parent s track record by listing important decision and classifying each as a success, a failure, or neutral. 2. Performance analysis : reviewing the performance of each business in comparison with its competitors. PIMS provide par performance statistics for a business. Profitability that is much higher or lower than par level is a strong indication that the parent has had an impact. ’

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Parenting-Fit Matrix for a Diversified Company

Heartland Businesses Businesses that fall in the top right corner should be at the heart of the company s future. Heartland businesses have opportunities to improve that parent knows how to address, and they have critical success factors the parent understand well ’

Edge-of-Heartland Businessess Some parenting characteristic fit, others do not. The parent both creates and destroys value. Many edge-of-heartland businesses move into the heartland when the parent learns enough about the critical success factors to avoid destroying value by :

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Changing the parent s behavior or the business s strategy Often the solution is for the parent to learn when not to intervene and when to be sensitive to special pleas from the business ’

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Ballast Businesses The potential for further value creation is low but the business fit comfortably with t he parenting approach. The parent understands the business extremely well. The parent may have added value in the past but can find no further parenting opportunities. The company has little potential for adding value. It also has little potential for destroying the value. There is a danger that changes in the business environment can turn ballast businesses into alien territory. Managers should search their ballast businesses for new parenting opportunities that might move them into heartland or edge-of-heartland territory. If that effort fail or if the parenting opportunities that are discovered fit better with a rival s characteristics, company should divest the ballast businesses as soon as they can get a price exceeds the expected value of future cash flows. ’

Alien-Territory Businesses The parent sees little potential for value creation and some possibility of value destruction. Frequently they are small and few in a portfolio. Businesses acquired as part of a larger purchase, or attempts to find new growth opportunities. The reason not divested : -

The business is currently profitable or in the process of a turnaround The business has growth potential, and the parent is learning how to improve the fit There are few ready buyers The parent has a made commitments to the business s managers The business is a special favorite of the chairman ’

The reality, however, is that the relationship between such businesses and the parent organization is likely to be destroying value. They should be divested sooner rather than later Value  –Trap Businesses They are businesses with a fit in parenting opportunities but a misfit in critical success factors. The potential for upside gain often blinds managers to the misfit (downside risks). The logic of core competence can push parent managers into value traps as they strive for growth through diversification