The parenting matrix

Parenting Fit Matrix

Normally multi-business companies comprise two elements: business units, which could theoretically
be independent companies, relating directly to the capital markets; and one or more layers of
other line and staff managers above or outside the businesses, which we refer to collectively as “the
parent”. The businesses are directly involved in value creation: they produce goods and services and
attempt to sell them for more than their cost. But the parent is involved much less directly. Its ability
to create value depends largely on its influence on the businesses and the way it supports them.

The parent acts as an intermediary between the businesses and outside investors. It clearly incurs
costs, both direct and indirect. It is therefore justified only if, through its influence, it creates more
value than these costs. If it does not, businesses and shareholders would be better off without it. This
bottom-up view challenges the very existence of the parent: the parent has no automatic right to
exist. To justify its existence, the parent should be able to demonstrate that its businesses perform
better in aggregate than they would as a series of individual, stand-alone entities.

The essence of successful parenting is therefore to create a fit between the way the parent operates
– the parent’s characteristics – and significant improvement opportunities that exist in its particular
businesses. Parenting Fit Matrix summarizes the various judgements regarding corporate/business
unit fit for the corporation as a whole. This matrix emphasizes their fit with the corporate parent Fit.

Parenting Fit Matrix composes of 2 dimensions: Positive contributions that the parent can make and
the negative effects the parent can make. The combination of these two dimensions create 5
different positions:

1. Heartland Businesses
2. Edge-of-Heartland Businesses
3. Ballast Businesses
4. Alien Territory Businesses
5. Value Trap Businesses

 Heartland Businesses: Heartland Businesses should be at the heart of the

corporation’s future. These Heartland Businesses have opportunities for improvement by the
 parent, and the parent understands their critical success factors well. These businesses should
have priority for all corporate activities.
 Ballast Businesses: Ballast Businesses fit very comfortably with the parent
corporation but contain very few opportunities to be improved by the parent. Like cash
cows may be important sources of stability and earnings. But if environmental changes,
ballast could move to alien territory. Therefore corporate decision makers should consider
divesting this unit as soon as they can get a price that exceeds the expected value of future
cash flows. E.g.: IBM’s mainframe business.
 Alien Territory Businesses: Alien Territory Businesses have little opportunities to be
improved by the corporate parent, and a misfit exists between the parenting characteristics
and the units strategic factors. There is little potential for value creation but high potential for
value destruction on the part of the parent. The corporation must divest this unit while it still
has value.
 Value Trap Businesses: Value Trap Businesses fit well with parenting opportunities,
but they are a misfit with the parent’s understanding of the units. This is where the corporate
headquarters can make its biggest error. It mistakes what it sees as opportunities for ways to
improve the business units profitability or competitive position. E.g.: To make the unit a
world-class manufacturer (because the parent has world-class manufacturing skills) it may not
notice that the unit is primarily successful because of its unique product development and
niche marketing expertise.