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Corporate Parenting

Corporate Parenting

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07/07/2013

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What is Corporate Parenting? What are the Advantages and Disadvantages of Corporate Parenting?

A: The complexity of transitional business conditions creates a need for creating value through aggregation of different businesses in complex corporate enterprise, which gives it the character of a multi-business firm. Businesses could be defined as being whatever the enterprise chooses to operate as organizationally separate profit-responsible units. Such business entities are often referred to as Strategic Business Units (SBUs) and they are organized as largely separable businesses with control over the main strategic levers that affect their performance. Besides this organizational definition, the businesses could be defined in economic sense relating to Strategic Business Opportunities (SBOs), which are clusters of product-market transactions able to sustain a successful focused business, with financial independence. Processes of merger, acquisition, divestment, and the other processes of transformation continually create new challenges to corporate management towards providing better performance of aggregated businesses than they would achieve if they were independent, stand-alone entities. It is corporate strategy that should guide key decisions in the businesses and coordinate their business strategies. But, for most corporate enterprises, the corporate strategy is simply the sum of business strategies, with some broad objectives and statement of business mission. Therefore, senior managers who are responsible for defining the overall corporate strategy, often recognize that something in their strategies is wrong. They may conceptually change strategy through offering some financial guidelines, and determine which businesses are "core". This affirms creating advantage through parenting (Parenting Advantage), which, as a principle, should guide decisions about the nature of the businesses in the portfolio and about its structure. Namely, multi-business corporate enterprises consist of businesses and a corporate hierarchy of line managers, functions, and staffs outside these businesses, which refers to as the corporate parent that is responsible for making corporate decisions. Parent could be defined as all those levels of management that are not part of customer-facing, profitresponsible business units, or, simply, whatever is left outside the business units but within the enterprise. The role of parent is multiple and, among other things, includes: making decisions about new businesses to support or acquisitions to make, determining the structure of enterprise, defining budgeting and capital expenditure processes, setting the corporate values and attitudes. The businesses better perform in aggregate under the parent's ownership than they would if they were independent entities. Also, the parent must add more value than cost to the businesses in the portfolio. But, more ambitious aspiration for the parent is its ability to gain parenting advantage - it should aim to be the best possible parent for its businesses. In aggregate, the businesses under its "patronage" should perform not only better than they would as standalone entities but also better than they would under "patronage" of any other parent. Corporate strategy should clarify how and where the enterprise can achieve parenting advantage. The link between parenting advantage and corporate strategy therefore parallels the link between competitive advantage and business strategy. Competitive advantage is in the heart of successful business strategies. It guides strategic analysis and provides a basis for assessing alternative action plans. The concept of parenting advantage plays a similar role at 1|P ag e

the corporate level. It should be the fundamental test for judging corporate strategies and the guiding principle in corporate-level decisions, guiding the decisions towards better market opportunities and higher corporate performance. There are nine propositions for achieving parenting advantage and, consequently, for successful implementation of corporate strategy. PROPOSITION 1. Justifying the parent Many of the businesses in multi-business corporate enterprise could be viable as stand-alone entities. Since the corporate parent has no external customers for its product/services, it can justify itself if it influences businesses collectively to perform better than they would as independent entities. The challenge for the corporate parent to justify itself is important because it focuses attention on whether and how its activities do add value, which leads to the elimination of worthless and bureaucratic routines in the activities of enterprise. PROPOSITION 2. Parenting advantage Corporate parents compete with each other for the ownership of businesses. Therefore, for keeping their stakeholders (especially businesses), the parents must add more value to the businesses in the portfolio than other rival parents would. This objective, which is referred to as achieving parenting advantage, should be one of the most important objectives of corporate strategy. Namely, parenting advantage should be the guiding criterion for corporate-level strategy, rather as competitive advantage is for business-level strategy. PROPOSITION 3. Value destruction All multi-business enterprises have tendencies to destroy value. It is corporate hierarchy, especially senior management, that inevitably destroys some value. Value destruction drivers (so-called information filters) are related to the tendency of business managers to filter the information they provide to corporate management in order to present their businesses in the most favorable light. For avoiding value destruction, corporate parents must be more disciplined, which implies avoiding intervention in businesses unless they have specific reasons for believing that their influence will be positive, or avoiding extension of their portfolio into new businesses unless they are sure that they will be able to add value. So, good corporate strategy should recognize the tendencies of value destruction and be designed to minimize their influence as much as to maximize value creation. PROPOSITION 4. Lateral synergies Since there is existence or potential for lateral linkages between the businesses in corporate enterprise, the main role of parent managers should be to create synergy. It primarily includes their pursuing of real synergy opportunities, and their positive interventions in the lateral relationships between businesses. 2|P ag e

The parent managers should also focus their efforts only on those synergies that need central intervention as well as encourage so-called market place relationships between business units. So, the importance of lateral synergies in creating value in corporate enterprise requires from corporate parents to pay relatively more attention to other sources of value creation, in particular their ability to improve performance in each individual business as an independent entity. PROPOSITION 5. Value creation Value creation primarily occurs when the parent sees an opportunity for a business to improve performance and has the skills, resources and other characteristics for helping the business to seize the opportunity. This means that the parent enhances both the individual performance of the business and the value of linkages between the businesses, and creates value by altering the composition of the business portfolio performing its corporate development activities. The conditions for value creation are important because they force corporate parent to think about major opportunities for added value through the corporate strategy and also help corporate parent to focus its efforts on building special competences or skills that fit the particular opportunities targeted by the businesses. PROPOSITION 6. Corporate office and management processes The importance of the size, staffing and design of the corporate office as well as managing corporate processes (such as planning, performance targeting and monitoring, etc.) are not in question, and managers devote considerable attention to them. But if corporate functions and processes are not developed as an integral part of the overall value adding corporate strategy, they may lead to little or no improvement in performance. For parent managers it is far more important to possess the skills that are suitable for the parenting opportunities targeted by the corporate-level strategy PROPOSITION 7. Diversity It is a fact that highly diverse corporate enterprises are more difficult to manage than less diverse ones. So a vital managerial guidance for corporate parent is provided by creating valid measures of diversity. In that sense, diversity is best measured in terms of the differences in parenting needs and opportunities between businesses in portfolio. To avoid excessive diversity, corporate parent should build its portfolio around businesses with similarities in terms of parenting needs and opportunities. PROPOSITION 8. Stretch and fit Corporate parent must realistically consider the speed with which it can build new skills and understand new types of businesses. It is supposed to search for new opportunities continuously and refine and extend parenting skills, which encourage innovative ideas and help eliminate many disasters of excessive corporate ambition. Therefore, enterprises that do push forward into new businesses will prosper more if they choose those businesses that are compatible with parenting skills that they can develop. It is better to choose a narrower range of businesses where greater fit can be created. Good 3|P ag e

corporate strategy should maintain a balance between the stretch for new opportunities and fit with the parent's existing skills. PROPOSITION 9. Business unit definition and corporate structure Business units (businesses) represent the basic "building blocks" in any multi-business corporate enterprise. Business unit definition and, consequently, corporate structure have a profound impact on both the value creation opportunities and the value destruction risks for the corporate parent. They impact the behavior and aims of business managers and the size and nature of parenting opportunities. Inappropriate business definitions lead to compromised business strategies and missed opportunities for parenting value creation. Therefore, decisions on unit definitions and corporate structure should be determined by careful analysis of their likely impact on value creation. Getting the unit definitions and corporate structure right is an important precondition for a successful corporate strategy. Naturally, these propositions are not obligatory for corporate managers in their managerial activities. They are recommended as elements of successful corporate strategy and ways for achieving parenting advantage in multi-business corporate enterprises as the factor of their higher competitive advantage. The process of transition results in a discontinuity of business activities, growth and development of enterprises, which requires flexible and adaptive forms of organizational structure and management system. This implies making complex corporate business arrangements. At the same time, there is the process of creating dynamic and unpredictable markets, immanent to developed market economy. These markets always change opportunities and capabilities for creating competitive and corporate advantage and business success of enterprise. Adjustment to market possibilities for performing efficient business activities changes the corporate "repertoire" of corporate strategy. The new corporate strategy focuses on corporate strategic processes of restructuring or "remapping" business portfolio as well as on coevolving its elements, on the basis of simple rules for its application. These are a guarantee for performing business activities in a more efficient way. Complexity of transitional business conditions creates a need for creating value through aggregation of different businesses into a corporate enterprise. Processes of transformation create some challenges towards affirming advantage through parenting, or providing better performance of aggregated businesses than they would achieve as independent entities. The concept of parenting advantage makes a test for proposed corporate strategies, guiding them towards better market opportunities and higher corporate performance.

Advantages of Corporate Parenting: y Envisioning strategic Intent o Focus o Clarity to external stakeholders o Clarity to business units
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y Central Services and Resources o Investment o Scale Advantage o Transferable management capabilities y Intervention at Business Level o Monitor performance o Action to improve performance o Challenge/develop strategic ambitions o Coaching/training o Develop strategic capabilities o Achieve synergies y Expertise o Provide expertise/services o Knowledge creation/sharing o Leverage o Brokering linkages/accessing external networks Disadvantages of Corporate Parenting: y Bureaucracy o Adds cost o Hinders responsiveness y Buffer from reality o Financial safety net y Diversity and size o Lack of clarity on overall vision y Managerial ambition o Empire building

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Q2)

What are the different roles played by corporate parent? How do they add or destroy value?

Ans)

Basic rules of Corporate Parent:
y Increasing value for money through o Efficiency/leverage o Expertise o Investment and competence building o Fostering innovation - coaching/learning o Mitigating risk o Image/networks o Collaboration/co-ordination/brokerage o Standards/performance assessment o Intervention (e.g. acquisition, disposal, change agency) The essence of the parenting school is that value is created through the use of key resources found at the corporate centre which are properly matched to the types of SBUs in the organisation portfolio. Value in this case can mean a number of things including: providing opportunities for SBUs to develop; creating linkages between SBUs; providing central services to SBUs; and protecting the interests of SBUs These core parenting resource of corporate headquarters can offer: y y y y Central functions and services, e.g. international treasury management Corporate development initiatives, e.g. centralised R&D or new acquisitions Additional finance for growth areas: principle of product portfolio/ growth share matrix Formal linkages between businesses, e.g. the transfer of key resources such as technology or employees

Synergy:
Synergy can occur in situations where two or more activities/processes complement each other to the extent that their combined effect is greater than the sum of their parts. This can be achieved via: y Through sharing resources y Transferring skills y Related products/services
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y Related customers/clients y Related by competence

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Managing linkages between companies

Parenting School:
The essence of the parenting school is that value is created through the use of key resources found at the corporate centre which are properly matched to the types of SBUs in the organisation portfolio. Value in this case can mean a number of things including: providing opportunities for SBUs to develop; creating linkages between SBUs; providing central services to SBUs; and protecting the interests of SBUs

Value Creation by corporate Parent:
For parenting to add value, the role of headquarters needs careful scrutiny. Specifically, the parent needs two skills: y Understanding of the key factors for success in all industries of its subsidiaries y Ability to contribute something extra, perhaps in one or more of the basic parenting areas such as Finance, HRM or R&D.

Conditions of value creation in corporate Parent:
Value is only created under three conditions y Business units are not fulfilling their potential o parenting opportunity y Centre has relevant resources or capabilities o parenting skills y Centre managers understand the business units well enough to avoid destroying value o sufficient feel
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Corporate parents have the potential to add value to their businesses through their influence on the stand-alone performance of the businesses. These are that (1) there should be a genuine parenting opportunity to improve the performance of the business, (2) the parent should have skills, management processes, and other characteristics that are suitable for realising "the opportunity", and (3) the parent should have sufficient feel for the critical success factors in the business avoid inadvertently destroying value through inappropriate influences. How can the corporate centre add value to the businesses in the group? This fundamental issue lies at the heart of corporate strategy for all multibusiness companies. With a sound corporate strategy, the corporate parent creates high value through its influence on the businesses, whereas with a weak corporate strategy the corporate parent frequently destroys value. There are four ways that a corporate parent can create value for their businesses: Stand-alone influence: This concerns the parent company s impact upon the strategies and performance of each business the parent owns. It is things such as setting performance targets and deciding capital expenditure direction. This can create value as long as the targets and strategies are realistic and recognises the need of the organisation. Linkage Influence: This works on increasing value through synergy, which is transfer of capabilities and knowledge between the parent and the business units. Tata- Corus deal is an example, Corus s abilities to produce high quality speciality products is used to enhance Tata s product portfolio. Functional and Services Influence: The parent can provide functional leadership and cost effectiveness for the businesses. Let s consider, Tata-Corus again, Tata s know-how of producing lost cost steel helps Corus to reduce costs. Corporate Development Activities: Value is created by changing the portfolio of the parent business. This involves actively investing, acquiring or divesting businesses. For example, Coke actively invests in bottling plants and also sells them off according to the situation. However, Porter has said that in reality, the parent company often destroys value through its acquisitions by paying a premium which it fails to recover. Research that have been carried out at the Ashridge Strategic Management Centre (1) suggests that the most important role of the corporate parent lies in influencing the performance of the businesses as standalone entities, not the realisation of "synergies" between business units, on
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which so many commentators concentrate. Indeed, most of the main management processes, such as budgeting, strategic planning and capital expenditure reviews, focus primarily on exercising what we call stand-alone parenting influence. Too often, criticism of corporate parents focuses exclusively on the level of corporate overhead costs. Certainly, these costs must be paid for out of the profits of the operating businesses and are, in many companies, excessive. But the real sources of value destruction typically lie much more in mistakes that the parent causes through its influence on the businesses than in the corporate overhead as such. Poor appointments, invalid objectives, inappropriate strategies, and unsuitable, slow and costly review processes damage performance much 1more than the corporate overhead charge.

Examples of Value Destruction
Some examples will illustrate how value can be destroyed by ineffective stand-alone parenting. A major business in a large diversified group picked up signals that the corporate team was looking for at least 10% per annum profit growth from all the businesses in the group. The business in question was a mature and profitable cash cow, whose first priority should have been to maintain its profitability and cash generation, not to search for growth options. The corporate growth objectives distracted the business's management from this priority task, and led only to a waste of time and resource on investigating and pursuing ultimately fruitless growth initiatives. An oil company decided that it would help its newly acquired minerals business to perform better by suggesting some new approaches to exploration. Unfortunately, these approaches, which were based on ail industry practices, were quite inappropriate for the minerals business. However, the minerals management term felt compelled to try some of the suggestions from its corporate parent and took several years to recover from the losses that resulted. Group management in an industrial services company devised an extensive and sophisticated strategic planning process, through which the businesses in the company were expected to review their strategies with the centre. Most of the businesses, however, were facing their main competition from low overhead, local entrepreneurs, and needed to focus their attention on driving down costs and improving customer relationships. By insisting on the strategic planning process, which led simply to sterile and inconclusive debates about issues that the business managers felt were not of immediate importance, the parent not only

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imposed extra costs and delayed decisions, but also encouraged the wrong sorts of decisions and priorities. The damage caused by stand-alone influence is often seen most clearly in the experience of management buy-outs. A buy-out removes the influence of the parent, for good or ill, and forces the business to stand on its own feet and make its own decisions. Again and again, buyout teams seem able to improve their performance and can clearly identify the ways in which their previous parents inhibited their development.

Underlying Reasons for Value Destruction
There is a basic and unavoidable reason for the difficulty that corporate parents find in creating value through stand-alone influence. The chief executive and the parenting team have a variety of objectives, interests and concerns. Each business can receive only a fraction of their attention, and must be reviewed along with all the other businesses in the portfolio. But, to improve performance, stand-alone influence must result in different and better decisions than the team dedicated to running the business should have reached. Why should the-chief executive in 10% of his time be able to perceive better strategies for a business than energetic managers devoting 100% of their time to the business? Why should top-down corporate objectives draw more performance out of a business than objectives built on a detailed understanding of what the business is capable of? Why should common corporate review processes imposed across all the businesses bring out issues that would not be surfaced by the management process built for each business by its own team? Intrinsically, the parent must almost always be less informed and less close to each business's needs than the businesses own management. Unless one assumes omniscience on the part of the parent, or incompetence on the part of the business team, the difficulty of the task facing the parent is evident. We refer to this basic problem for corporate parents as the "10% versus 100% paradox". Reinforcing the 10% versus 100%paradox, it can be argued that the nature of stand-alone parenting in many multi-business companies systematically perverts business decisions. If each business feels that it must complete with every other business in the portfolio for corporate attention and resources, an incentive exists to bias information and proposals to win the competition with the other businesses. This does not lead to open and productive discussion of plans and strategies for the business.

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