The Value of the

Parent Company

Andrew Campbell
Michael Goold
Marcus Alexander

M
any corporate parent companies destroy value. Businesses in corpo-
rate portfolios would, often, be better off as independent companies
or as part of other corporate portfolios. This is the disturbing conclu-
sion we have reached after nearly ten years of research and consult-
ing on the subject of corporate-level strategy and the role of the corporate
center.
The main evidence for our conclusion lies in the hundreds of stories and
situations we have come across where the corporate parent's influence over a
business unit has caused the managers in the unit to make the wrong decisions,
or at least to make poorer decisions than they would have made without the
parent's influence.' It is these value destroying interventions that lead to the
groundswell of complaint and resentment that business unit managers express
when talking about their corporate centers. This body of anecdotal evidence is
supported by analyst's reports, as well as by the activities of raiders, which show
that many large companies have a market value lower than their break-up
value. The continuing success of management buy-outs, where business units
blossom when freed from the grasp of some large corporation, also demonstrates
how widespread is value destruction by corporate parents.^
On the other hand, there are some companies where the parent is clearly
creating value, where the business unit managers have high respect for the
corporate center and the infiuence it has over their businesses, and where the
company's tnarket value is greater than the sum of its parts. The stories, the

This research was funded by the Ashridge Strategic Management Centre and has been more fully
wrrtten up in Michael Goold, Andrew Campbell, and Marcus Alexander Corporate-Level Strategy:
Creating Value m the Multjbusmess Company (New York. NY: John Wiley & Sons. 1994).

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 The Value of the Parent Company

atmosphere and the results in these successful corporate parents are completely
different, underlining both the shortcomings in many large companies and the
opportunities for those who get their corporate-level strategies right.
In this article, we shall therefore focus on the role and influence of cor-
porate parents in multi-business companies. The corporate parent consists of all
managers and staff not assigned to a business unit, including not only the corpo-
rate headquarters but also division, group, region and other intermediate levels
of management. Do these parent managers and staff create or destroy value?
This issue lies at the heart of the justification for muhi-business companies.
Unless the parent company is creating value greater than its cost, the business
units would be better-off as independent companies. Our observation that many
parent companies today are actually destroying value adds urgency to the need
to identify the conditions under which value is likely to be created.^

FourWays to Destroy Value

Parent companies affect value in four ways—through stand-alone influ-
ence, through linkage infiuence, through central functions and services, and
through corporate development activities." In each of these areas, it is possible
for parent companies to create value. It is more common, however, for these
areas of influence to result in value destruction.

Stand-Alone Influence
After the 1970s oil crisis, many of the oil majors decided to diversify into
new businesses, which would provide more growth and opportunity than their
core oil businesses. A popular new area was minerals, which was seen as draw-
ing on skills in natural resource exploration and extraction that were related to
their base businesses. However, almost all the oil companies have found that
they destroyed shareholder value through their minerals diversifications. The
root cause of the problem was that parent company managers from the oil
industry did not understand the subtle differences between the oil businesses
and the minerals businesses, and ended up by influencing the strategies of their
minerals businesses in ways that caused them to perform worse, not better. For
example, we were told by a manager who had been part of British Petroleum's
(BP's) minerals business: "The problem was that the BP managing directors
couldn't really get to grips with the minerals business or feel that they under-
stood it. There was always that vestige of suspicion about the business, that in
turn led to a temptation to say no to proposals from the business, or, alterna-
tively, if they said yes, to say yes for the wrong reasons." The impact on perfor-
mance was dramatic. During the mid-1980s, the minerals businesses of Atlantic
Richfield, BP, Exxon, Shell and Standard Oil had an average pre-tax return on
sales of -17%, while the independent minerals companies {i.e., companies not
parented by the oil majors) achieved an average positive return on sales of 10%.

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 The Value of the Parent Company

This is an example of what we call stand-alone infiuence. Stand-alone

influence is about the parent's impact on the strategies and performance of
each business in the parent's ownership, viewed as a stand-alone profit center.
All parents exert considerable stand-alone infiuence on their businesses. At a
minimum, they are involved in agreeing and monitoring performance targets,
in approving major capital expenditures, and in selecting and replacing the
business unit chief executives. These activities, in themselves, are powerful
influences on the businesses. Many parents, however, go further, exercising
influence on a wider range of issues, such as product-market strategies, pricing
decisions, and human resource development.
While corporate parents can create value through stand-alone influence,
they often destroy value instead. By pressing for inappropriate targets, by starv-
ing businesses of resources for worthwhile projects, by encouraging wasteful
investment, and by appointing the wrong managers, the parent can have a seri-
ous adverse effect on its businesses. The potential for value creation must there-
fore always be balanced against the risk of value destruction.

Linkage Influence
Linkage influence can be just as destructive. Through linkage influence,
the corporate parent seeks to create value by fostering cooperation and synergy
between its businesses. But the search for linkages and synergies so often leads
to problems that Guy Jillings, Head of Strategic Planning of Shell International
Petroleum, has coined the term "anergy." He believes that avoiding anergy is
often a more essential goal than pursuing synergy.*^
The problem of anergy is illustrated by a global consulting company that
had made acquisitions in two new areas of consulting services to add to its tradi-
tional core. Senior managers believed that synergy could be created in a number
of ways. First, economies of scale could be achieved by sharing back-office sys-
tems such as client billing and data processing. Second, a more powerful identity
could be established by sharing a brand name. Third, more business could be
generated by appointing client managers for the company as a whole who could
deepen client relationships, coordinate approaches, and cross-sell a broad range
of consulting services.
In reality, the pressure for linkages nearly destroyed one of the acquisi-
tions, and hampered the efforts of all the other businesses. The shared billing
system was complicated by the different needs of each business; after several
million dollars of development cost, a compromise solution was reached which
most units felt was inferior to their original systems, and which was no cheaper
to run. Attempts at joint branding were abandoned because the individual
brands were each strong and associated with particular services, whereas the
atnalgam brand was hard for clients to relate to and was rejected by staff who
felt loyal to the brand values of the specific organization they had joined. Cross-
selling was not increased by the new layer of client managers, who were insuf-
ficiently familiar with the full range of services available. Worse still, clients

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 The Value o f the Parent Company

resented the imposition of a gate-keeper between them and the specialist service
providers they were used to dealing with, and few valued the supposed advan-
tages of one-stop shopping. Eventually, poor performance forced the company
to drop many of its linkage initiatives and to reaffirm clearly distinct lines of
business.
In many companies, the problems associated with linkage initiatives have
made business managers so cynical about the efforts of their parent that they
deliberately conceal linkage opportunities. To avoid the risk of parental interven-
tion, managers in these companies prefer to do business with outsiders rather
than with insiders. • ,

Central Functions and Services

Parents can also destroy value through establishing central functions
and services that undermine, rather than support, business effectiveness. This
is not simply a matter of excessive overhead costs. It is also about delayed deci-
sions and sub-standard or unresponsive support. ABB's chief executive, Percy
Barnevik, has acquired many companies where these problems had been rife.
His dramatic response in cutting headquarters staff has led to an ABB rule of
thumb: by taking out 90% of the center, you can usually improve business per-
formance as well as save cost. This rule has been applied to Brown Boveri's
headquarters, and to acquisitions such as Combustion Engineering in ihe U.S.
and Stromberg in Finland. Typically, Barnevik removes 30% of the central func-
tions and staff on the grounds that they are adding little except cost. A further
30% are set up as service units that must compete directly with outside suppli-
ers. If they are cost effective, their services are purchased. Otherwise, they
rapidly shrink or are disbanded. Another 30% of the central staff are put under
the direct control of the individual businesses. If they fulfill a valid role in the
business, they stay. If not, they are replaced or fired.
This approach addresses one of the main problems of central functions
and services: that their privileged status protects them from the rigors of the
market. By treating the divisions as clients whose business must be won, service
levels are sharpened and improved. Unless this sort of relationship exists, the
hoped-for economies of scale in central functions often prove illusory, and their
influence can hamper rather than help the businesses.

Corporate Development
The final way in which parents destroy value is through corporate devel-
opment activities—acquisitions, divestments, alliances, business redefinitions
and new ventures. Many corporate parents believe that they create substantial
value in their corporate development activities, for example by spotting oppor-
tunities to buy businesses cheaply, by creating new ventures that provide profit-
able future growth opportunities, or by redefining businesses in ways that lead
them to be more competitive in their market places. We have found, however,
that such initiatives frequently misfire. Parents overpay for acquisitions, support

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losing ventures and redefine businesses in the wrong way. The weight of
research evidence indicates that the majority of corporately sponsored acquisi-
tions, alliances, new ventures, and business redefinitions fail to create value.*
In particular, corporate histories are littered with stories of acquired businesses
which turned out to be worth much less than expected, and so were sold subse-
quently for a fraction of the purchase price.
An extreme case concerns Ferranti, a medium-sized electronics company.
During the 1980s, Ferranti performed well, developing a variety of sound busi-
nesses in defense electronics and other areas. However, in 1987, Ferranti paid
$670 million to acquire the U.S. International Signal and Communication (ISC)
Group, with a view to becoming a major player in international defense mar-
kets. In 1989, it was discovered that ISC had entered into various fraudulent
comracts, which led to losses of around $500 million for Ferranti. As a result,
Ferranti was severely weakened and eventually forced into receivership after
GEC had offered to buy the company for only one penny a share. A single
acquisition brought Ferranti to its knees and wiped out all of the value created
during the previous decades.

Why Value Destruction Is So Common

While corporate managers recognize that mistakes can be made at the
headquarters in the same way as they can be made at other levels of manage-
ment, few would accept our proposition that many corporate centers are sys-
tematically destroying value. They point to economies of scale in financial
reporting, fund raising, liaising with the shareholders, tax and other areas. They
identify the lower cost of debt that large companies can provide. They talk ahout
the value of providing an informed challenge and second opinion to the narrow
perspective of business unit managers. They refer to the task of allocating
resources across the portfolio. Clearly, they argue, the corporate center has
a valid role and can contribute to performance.
We agree. There are economies of scale. The cost of debt can be lowered.
An informed second opinion and a wise allocation of capital can add value.
However, for reasons we wiil explain, the net influence of the parent in many
companies is stili negative. Inappropriate interference on linkage issues can out-
weigh the economies of scale in financial reporting. Wise resource allocation
decisions can be fewer than foolish ones. Damage from over-amhitious or under-
ambitious performance targets can be more significant than the benefits of lower
interest on debt. Value-destroying influences can be greater than value-creating
ones. Why is this so?
The reason why value destruction occurs is that it is hard for parent orga-
nizations to influence their businesses in ways that improve on the decisions of
the managers running the businesses. As can be seen from examining each of
the four ways parent organizations aflect value, it is not as surprising as it might
seem that the parent's influence will make decisions worse, not better. In fact, it

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is only under particular conditions that we can expect the parent's influence to
be positive.
With stand-alone influence, the assumption is that parent managers
know better what is right for a business than the unit's own managers. Is this a
realistic assumption? In a multi-business organization, managers in the parent
can devote only a small percentage of their attention to the affairs of each busi-
ness, while the managers in the businesses are fully engaged in their own units.
Why should the parent managers, in 10% of their time, be able to improve on
the decisions being made by competent managers who are giving 1007o of their
efforts to the business? The idea that part-time managers at one remove (or
more) will be able to enhance the performance of the business's own dedicated
management is, in some sense, paradoxical. We refer to this as the "107o versus
100%" paradox.
The 10%-vs.-100% paradox is compounded by principal/agent problems
arising from placing a parent organization between the business managers and
the providers of capital.^ In a hierarchy, the business level managers are not
motivated primarily by the objective of maximizing the performance of their
businesses. They are motivated primarily by the objeaive of gaining favor,
rewards, and career opportunities from their parent bosses. Unless the parent
can mimic the influence of the providers of capital, the ownership relationship
will result in different motivations and different objectives. Altering the motiva-
tions and objectives of business-level managers is one of the ways the parent can
add value, but it can also result in value destruction as the business managers
play a game of cat and mouse, hiding information and disguising outcomes, to
persuade parent managers that they are high quality individuals.
With linkage infiuence, the assumption is that the parent managers
can identify benefits of linkages between businesses that would not be perceived
or implemented by the businesses' own managers. But, given the business man-
agers' much greater understanding of their businesses, it is likely that they will
have more knowledge about linkage opportunities and how to realize them
than parent managers do. The difficulty of value creation from linkage influence
therefore stems from another paradox. Why should the parent managers be
able to perceive linkage opportunities if they have not already been perceived
as a result of mutual self-interest on the part of energetic business unit man-
agers? We call this the "enlightened self-interest" paradox. The existence of
this paradox explains why corporately inspired synergy initiatives often prove
unsatisfactory.
With central functions and services influence, the assumption is that
central staffs can provide better functional guidance, or better vaiue-for-money
services, than are available from businesses' own staff or from outside suppliers.
But the trend in many large companies is now to decentralize or outsource cen-
tral functions and services. This trend brings out another paradox. A specialist,
external supplier stands or falls by its ability to provide the most responsive
and cost-effective expertise in its chosen field, whether it be tnarket research.

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manufacturing advice, or strategic planning. Why should an in-house staff

department be able to create more value than specialist competitors who under-
take similar tasks and services on a third-party basis? It is this "beating the spe-
cialists" paradox that has led many companies to disband large pans of their
corporate functions and services.
Finally, with corporate development activities, the assumption is that the
parent can buy businesses for less than they are worth, sell businesses for more
than they are worth, and launch new ventures or redefined businesses in ways
that increase value. Yet the odds are against this happening. Given that the mar-
ket for buying and selling businesses is sophisticated, and the competition to
develop businesses in new areas is usually fierce, why should the parent expect
to be able to create value through corporate development? We refer to this as
the "beating the odds" paradox.

Successful Parent Companies

These four paradoxes—10% vs. 100%, enlightened self-interest, beating
the specialists, and beating the odds—explain why it is hard to create value from
the corporate center. Nevertheless, the best corporate parents do create substan-
tial value. What conditions must exist to overcome the paradoxes?
What conditions lead to value creation?
The first condition is that the businesses in the company's portfolio
must have some opportunity to improve performance with which the parent
company can help. If the businesses are performing at their optimum, there is
no opportunity to add value. The parent can only add something if the business
offers a "parenting opportunity."
Second, the parent must possess some special capabilities or resources
that will enable it to improve performance and exploit the parenting opportu-
nity. These parenting characteristics are the engine of value creation.
Third, the parent must have a sufficient understanding of the critical
success factors in the business to make sure that it does not influence the busi-
ness in inappropriate ways. Managers often refer to this understanding as having
a "feel for the business." We have observed that it can take a parent manager a
number of years, typically including experience of a business over a complete
economic cycle, before a sufficient feel develops.
With these three conditions, we can see some analogy between the
roles of the corporate parent and of medical experts. Medical specialists can only
make a contribution if there are people whose health could be improved. With-
out this "opportunity," their expertise is not valuable. To make a contribution,
the medical expert must have skills and resources that match the patient's needs.
An ear, nose, and throat specialist is unlikely to contribute much to a patient
with depression. Moreover, a specialist on depression must possess sufficient
understanding about the overall health of this patient to be sure that the drugs

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 The Value of the Parent Company

he prescribed will not have side effects that will make the patient worse off. For
the medical expert to succeed, the same three conditions must exist: There must
be an opportunity, the expert must have skills and resources that fit the oppor-
tunity, and the expert must understand the patient well enough to avoid nega-
tive side-effects that outweigh the beneficial influences.
Successful parent companies not only meet these basic conditions for
value to be created, they are particularly good at creating value. The best parents
have unusual insights about certain kinds of parenting opportunities and focus
their influence and activities on creating value from these insights. They have
what we call "value creation insights." The best parents also have special skills
and resources that fit particularly well with their value creation insights. These
skills and resources are normally superior to those of other similar parents. They
have what we call "distinctive parenting characteristics." Finally, the best parents
limit their ponfolios to businesses where their parenting will create a substantial
amount of value. They are more effective at doing this because they have clear
criteria defining which businesses fit well with the parent and which do not.
They have what we call "heartland" criteria.
ABB, Canon, and Emerson are good illustrations of these concepts. They
represent a cross-section of the successful diversified companies in our research
sample. All three are recognized as world leaders and exemplars of their par-
ticular management styles. All three also have excellent performance records
(Exhibit 1). We will, therefore, illustrate our concepts by explaining the value
creation insights these companies have, the distinctive parenting characteristics
that support their insights, and the heartland criteria these companies use to
limit their portfolios.
One value creation insight at ABB involves linking nationally focused
businesses into a global network: rationalizing production across countries,
cross-selling products, sharing technical developments and transferring best
practice. ABB focuses much of its parental influence on getting previously iso-
lated national managers to work together across borders.
A second value creation insight at ABB concerns raising the commercial
skills and orientation of managers. In large, engineering-dominated companies,
managers can become more interested in their engineering prowess and in being
involved in prestigious projects than they are in profit. Such companies often do
not calculate profit except at high levels of aggregation. Most units are cost cen-
ters. The ABB parent has discovered that commercial performance can be trans-
formed if the profit ethic can be driven into the hearts of the managers and
engineers in the local businesses. Many of ABB's parenting activities are,
therefore, focused on achieving this value creating objective.
A third value creation insight at ABB concerns overheads. Proud, previ-
ously rich, and nationally prominent companies have a tendency to build large
central overheads that can cost as much as 20% or more of profit. Much of
ABB's parent activity, in the first year or two following an acquisition, is

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EXHIBIT I
ABB Canon Emerson

Corporate HQ Switzerland Japan USA

Origins Merger of ASEA Research laboratory Electrical manu-

(Sweden) and Brown focusing on precision facturing (1890)
Boveri (Switzerland) optics (1933)
(1988)
Industries Power plants, powei- Business machines. Electrical-electronic
transmission, power cameras, other optical products and systems
distribution, trans- equipment such as motors.
portation, general process control
industrial instruments, appliance
components, etc.
Size
• sales {$bn) 30 15 8
• employees (000) 210 67 69
Performance (1 Oyrs)
• sales growth NA* 250% 200%
• earnings growth 200%»- 150% 20096
• share price growth 300%"* 150% 300%

•ASEA arid Brawn Boven merged in 1988 "'Based on ASEA (ASEA owns 50X of ABB)

designed to reduce these overheads and release the value they have trapped. In
later years, the parent maintains the pressure on overheads ensuring that exces-
sive costs do not build up again.
In Canon, one value creation insight is about developing new products.
Technologists and product developers normally see themselves within the
confines of a particular technology or product type. This puts bounds on their
thinking defined by the accepted wisdom of the areas they are working in.
Canon managers, however, discovered that it is possible to develop more cre-
ative products by blending and mixing technologies in, for example, fine optics
and precision mechanics, and by challenging product development teams to
produce customer solutions well beyond the scope of existing products.
Canon's second value creation insight is based on another parenting
opportunity resulting from the bounded thinking of managers. In companies
with traditional business unit structures, managers are influenced by the com-
petitors and critical success factors of the industry they see themselves compet-
ing in. They are influenced by the accepted industry logic and, therefore, play
into the hands of the industry leaders. Canon managers discovered that it is
possible to break out of the accepted logic and develop winning strategies by
avoiding traditional business unit structures and challenging managers to find
new ways of competing.

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 The Value of the Parent Company

Emerson's value creation insights are based on sharpening the strategic

thinking of sound and profitable businesses. Emerson has found that, in certain
electrical and electronic businesses, it can often push profit margins up from
5-10% to in excess of 15% at the same time as gaining market share. These
improvements stem from reassessments of competitive positions and growth
opportunities, detailed analysis of the components of cost and revenue in the
businesses, and Emerson's special focus on manufacturing cost reductions.
Emerson drives these improvements through business strategy reviews, which
have been gradually refined to focus on the issues of greatest potential. Emerson
is by no means unusual in conducting strategy reviews with its businesses: what
is unusual is the way in which the process zeroes in on opportunities to itrtprove
performance, rather than simply being a routine re-examination of the busi-
nesses' plans.
ABB, Canon, and Emerson have value creation insights that provide a
focus for the parent's activities. All three companies have a specific understand-
ing of how the parent can create value. This understanding is built on insights
they have gained both about opportunities to build or improve businesses and
also about how the parent can contribute. The insights affect the focus of parent-
ing activities, the design of the parent organization and the type of businesses
in the company's portfolio. Moreover, successful companies frequently have
insights that are unique, giving them an advantage over other parent companies.
(See Exhibit 2 on value creation insights).
The second feature of successful diversified companies is their distinctive
parenting. Emerson's distinctive parenting characteristics start with its planning
process. At the heart of the process is the "planning conference," an annual
meeting between parent managers and businesses that is unusually combative
and challenging. The degree of preparation done by both sides is unusual; the
40 required charts and analyses are unusual; and the expertise of Chuck Knight,
Emerson's CEO, based on 20 years' experience with running these meetings and
monitoring Emerson's kind of businesses, is unusual. It is through the planning
conference that Knight tests the thinking and the goals of the businesses, press-
ing for improvements and helping to identify ways of achieving them. By design,
the atmosphere is confrontational. "Emerson is a contact sport," commented one
manager. "Knight invites people to punch back. He takes positions to provoke a
response and expects one." The debates are often heated, but the parent man-
agers have the skills to make them open and constructive.
Canon has many distinctive parenting characteristics. Probably most
important is Canon's uncompromising corporate commitment to developing its
core technologies that goes back to its roots as a research laboratory. Professor
Yamanouchi, previously a Canon employee, explained, "R&D drives Canon's
strategic thinking and is central to Canon's behavior. As an example, the
medium range plan of each product group is drawn up by the development
center of the product group. Canon's R&D staff, therefore, believe that their
work is essential for the growth of Canon."^ This commitment is linked to

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E X H I B I T 2. Value Creation Insights

Value creation insights are at the root of all successful corporate level strategies.
They typically involve understandings by parent managers about how to improve the
performance of businesses. Insights are based on unique knowledge or experience of:
• reasons why certain kinds of businesses have performance problems or fail to
maximtze their potential
• ways in which a parent organization can influence the businesses so as to raise
performance
Value creation insights are extraordinarily diverse. Each of the successful companies
we researched had its own, different value creation insights.
Value creation insights are about major areas of improvement: raising performance by
50% or 100%. not just 10%; doubling the value of a business, not just making marginal
differences. Value creation insights are not. therefore, about providing a wise second
opinion, gaining economies of scale in managing shareholder relationships or raising
debt 10% cheaper Value creation insights are about taking retum on sales from below
10% to above 15% (Emerson and BTR), doubling sales volumes through linkages into
an international network (Unilever and ABB), creating new businesses out of lever-
aging technologies (Canon and 3M), doubling shareholder value by buying mixed
portfolios and unbundling them (Hanson and KKR).

Value creation insights are linked to specific sorts of businesses that have under-
performance opportunities and critical success factors which the parent managers
understand. They are, therefore, expressed in terms such as: "In businesses that make
higher added value, safety critical engineering components and systems, a parent can
create value by putting together international businesses out of previously separate
national entities"; or"ln long-term, technically complex natural resource businesses.
a parent can create value by transferring technical and functional expertise around
the world." Thus the genera! form of a value creation insight is: "In certain sorts of
businesses, a parent can create value by ...." The value creation insight identifies both
the businesses in which the parent can create value, and the means by whtch it
does so.

Value creation insights are not always explicit. 5ometimes they are embedded in the
parent organization's culture and way of working. What is important is that they
describe how the parent's corporate strategy leads to major value creation.
The final point about value creation insights is that they often take years of
experience to develop and refine. Sometimes they appear to have sprung newly
formed from the mind of a visionary chief executive or from a strategic planning
process. However more normally, they emerge from a long process of learning and
experience,

Canon's very large corporate staff which includes over 1,000 central research
staff. Commitment to technology is also revealed in Canon frequently being
among the top three companies registering new U.S. patents.
Another distinctive parenting characteristic is Canon's ability to reduce
rigidity in organizational boundaries hy encouraging networking and cross-
company linkages. The organization operates as a "hub and spoke" system, with
matrix tines that bind the spokes together. At the center there is a 22-man cor-
porate executive committee which meets weekly, bringing together the central
managers, the heads of product divisions, the heads of sales organizations and
the heads of functions. This level of contact is unusual and greatly helps the

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effective management of the matrix. Canon also has many other mechanisms,
such as heavyweight task forces, product development teams and career man-
agement processes, designed to bring people together and move them across
functional and organizational boundaries.
ABB, our third example, also has distinctive parenting characteristics.
Percy Barnevik, ABB's chief executive, developed his parenting approach by
turning round ASEA in the late 1970s and early 1980s. ABB's "lean matrix" of
business areas and country managers topped by a corporate center with around
100 staff has been written about frequently.^ It is designed to break previously
monolithic, national companies into small, focused business units linked to simi-
lar units in other countries, but still benefiting from a strong national presence.
Business area managers are part of the parent organization. They make decisions
about rationalizing production across countries and spend their lives visiting
business units to persuade unit managers to share technical developments,
cross-sell products and pick up on best practice.
Supporting this highly decentralized structure is a central monitoring and
control system. Abacus, that provides profit statements and balance sheet infor-
mation for every business unit and profit center (5,000 in total). Units can com-
pare themselves, and senior managers can rapidly identify anomalies or problem
areas. This profit focused information system combined with the small size of
most business units, often less than 200 people and sometimes as few as 50,
helps drive a commercial, profit focused attitude into the culture of the lowest
level engineer or manager. ABB's parenting systems and structures are distinc-
tive and are linked to the value creation insights that provide a focus for all of
ABB's parenting activities.
Successful parent companies, therefore, have a clear focus for their
parenting activities, based on value creation insights. They also have distinctive
parenting characteristics that enable them to create the value they focus on. In
addition, successful companies have a portfolio of businesses that fit with their
parenting. They are clear about the criteria that define what we call their "heart-
land businesses," the businesses that will benefit most from the center's parent-
ing influence, and they focus their portfolios on such businesses. In these
businesses, they are able to create high value and to avoid value destruction.
Emerson's heartland is businesses that manufacture electrical, electro-
mechanical or electronic products of medium technology and capital intensity
where there is potential to raise performance. Emerson avoids consumer mar-
kets: "Our ability to strategize in consumer products is less good. We like a
slower rhythm. We don't like advertising and short product cycles." Canon's
heartland includes businesses where precision mechanics, fine optics, and micro-
electronics are important technologies, where technical innovation and creative
market positioning are important sources of advantage, and where there is a
sufficiently large market to justify intensive technical development. ABB's heart-
land includes engineering intensive, electro-technical businesses where there is

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 The Value of the Parent Company

potential to create linkages across national borders and which involve selling
complex systems to large industrial companies or to governments.

Developing Successful Corporate Strategies

ABB, Canon and Emerson are successful parent companies with value-
creating corporate strategies. They have value creation insights and distinctive
parenting characteristics, and by focusing on a clearly defined heartland they
avoid the value destroying pitfalls thai afflict many companies. But how can
other companies that are currently less successful develop similarly powerful
corporate strategies? We will end this article by proposing a criterion, parenting
advantage, that should guide companies, and a framework that can be used to
structure their search for successful corporate strategies.
We have argued that success is dependent on the value created or
destroyed by the parent organization. By doing so we are identifying the parent
as an organization that is separate from the business units, and that stands
between the business units and the investors. This separate organization needs
to justify its existence as an intermediary. Moreover, the parent organization is
in competition with other parent organizations and other intermediaries for the
ownership of businesses. To succeed, a parent organization needs to create value
and it needs to be better at creating value than rivals—it needs to have what we
call "parenting advantage."
Parenting advantage is a criterion for guiding corporate strategy devel-
opment, in the same way that competitive advantage is a criterion for guiding
business strategy development. In business strategy, the key objective is to out-
perform competitors, and the concept of competitive advantage has proved
immensely useful in assessing and developing business strategies. In corporate
strategy, the key objective is to outperform rivals and other intermediaries, and
the concept of parenting advantage has similar power to help assess and develop
corporate strategies.
In the increasingly active market for corporate control that exists in
Anglo-Saxon economies, parenting advantage is the only robust logic for a par-
ent company to own a business. Without parenting advantage, a company is
potentially exposed to the hostile attentions of other, superior rivals, and can
often enhance shareholder vahie simply by selling businesses to other owners.
Parenting advantage is the goal and criterion that should guide both the selec-
tion of businesses to include in the portfolio and the design of the parent
organization.
As companies search for parenting advantage, they need to analyze and
assess a number of inputs. They need to understand the strengths and weak-
nesses of the existing parent organization: What are the current characteristics
of the parent? They need to understand the nature of the businesses currently
owned by the parent: What are the parenting opportunities in these businesses?

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 The Value of the Parent Company

E X H I B I T 3, Corporate Strategy Framework

Characteristics Characteristics
Fit?
of the parent of the businesses

Rival Trends and

parents scenarios

Decisions about Decisions about

Fit
the parent the portfolio

They need to know enough about rival parents to be able to assess which par-
ents might be better owners of any of the currem businesses. Finally, they need
to understand the trends and possible scenarios for the future that might affect
the other three inputs. Developing corporate strategy, therefore, involves four
inputs (Exhibit 3).
These inputs do not provide answers. Rather they provide understandings
that are useful in the search for value creation insights. This search is an essen-
tially creative process guided by the objective of parenting advantage: the strate-
gist is searching for a strategy that will give the company parenting advantage.
The outputs of this strategy development process are decisions about which busi-
nesses to include in the portfolio and decisions about how the parent organiza-
tion should be designed.
A useful first step in developing a new corporate strategy is to identify
areas where the parent is currently destroying value. By divesting businesses or
changing the parent's behavior these situations can be avoided. For many com-
panies this first step greatly enhances shareholder value.

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 The Value of the Parent Company

E X H I B I T 4 . Typical Reasons For Parenting Opportunities

Wrongly The managers in the business have a wrong conception of what the business should
Defined be and, therefore, have too narrow or too broad a product market scope, and too
Business much or too little vertical integration.The trend to outsourcing and alliances is
changing the definitions of many businesses, creating new parenting opportunities.

Size and Age Old, large, successful businesses often build up bureaucracies and overheads that are
hard to eliminate from the inside. Small, young businesses may have insufficient
functional skills, managerial succession problems and lack of financial resources to ride
a recession. In both cases parenting opportunities exist.

Temptations Some businesses tempt their managers to make mistakes. Mature businesses often
lead managers into over-diversifytng. Businesses with long product cycles cause
managers to rely too much on old products. Cyclical businesses cause managers to
over-invest in the upswing. In all cases there are opportunities for a parent to provide
corrective influence.

Linkages Where businesses can create value through linking with other businesses, blockages
often exist preventing this from happening between independent companies. Parent
organizations can remove these blockages.

Major Industries undergoing change, for example from local to international or from single
Changes product to system, require managers with real expertise at making tfiese changes. A
parent organization that develops this expertise can provide important assistance to
businesses it owns.

Special Special expertise can be created by exposing managers to a number of businesses

Expertise either facing similar strategic issues, such as declining sales or the need to
professionalize management, or involved in similar praducts and markets, but in
different countries. A parent organization owning these similar businesses can build the
expertise.

The second step is to start searching for "parenting opportunities." These

are opportunities to improve performance through the involvement of a parent
company. For example, a business may have low levels of manufacturing skills
because it is dominated by marketing managers. A parent company with a man-
ufacturing capability can, therefore, help redress the balance. Or a business may
be too small, causing its costs to be too high. By combining it with another busi-
ness, a parent company can cure the scale prublem. Exhibit 4 describes some of
the common reasons why businesses under-perform in ways that provide par-
enting opportunities.
The third step is to assess whether and how the company can grasp the
parenting opportunities. This involves creating groupings of businesses with
similar parenting opportunities. Each grouping is then assessed for its fit with
the parent organization. Could the capabilities and resources in the parent fit
with ihe parenting opportunitit-s in the group of businesses? If fit does not
currently exist, the question is what changes would be necessary in the parent
organization to create a fit. Achieving a good fit may take a number of years of

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 The Value of the Parent Company

E X H I B I T 5. Parenting Advantage Statement

Value Most companies make direct trade-offs between centralization and decentralization,
Creation or scale and focus.There are opportunities for a parent that can combine the
Insights various benefits in new ways.
Many European engineering businesses have been relatively fragmented in global
terms. Consolidation can reduce costs whiie increasing coverage and global muscle.
Many engineering businesses do not have a strong commercial focus, and are prone
to increase sales volume and product range at the expense of margin, A parent can
help redress the balance.

Distinctive Ability to combine decentralized small business units into a global network through
Parenting the ABB matrix structure
Characteristics Systems and corporate initiatives that focus on profitability, customer needs, and
simplification of operations,
Ability to integrate acquisitions and improve their performance rapidly
Ruthless approach to cutting of overhead costs

Heartland Engineering-intensive, electro-technical businesses, usually involving complex

Businesses integration into systems. Customers are large industrial or governmental institutions.

searching for parenting opportunities and developing capabilities and resources

to match.
Once a concept of parenting advantage has been developed and the basis
for a corporate strategy agreed, we have found it useful to capture this in a par-
enting advantage statetnent (see statement for ABB, Exhibit 5). This statement
identifies the value creation insights and distinctive parenting characteristics on
which the strategy will be built, and the heartland businesses within which par-
enting advantage will be sought. The parenting advantage statement captures
the essence of a value-creating corporate strategy and provides a succincl view
of how and why parenting advantage will be achieved.
The chosen strategy can then be converted into an action plan, involving
decisions about the parent organization and decisions about the portfolio of
businesses. The implementation of these decisions will, in turn, feed back into
changes in the parenting characteristics and the business characteristics. The
ongoing corporate strategy development process thus requires continuous
adjustment of the parent company and the portfolio of businesses to bring about
a closer fit, and to adjust to unplanned changes in any of the important faaors.
For companies whose corporate-level plan has traditionally been little
more than an aggregation of the plans of the businesses, together with a page
or two describing the company's overall ambitions and objectives, the corporate
strategy development process we are suggesting is radically differem. It puts the
role of the parent in creating, and destroying, value at center stage; it insists that
decisions that impact the capabilities and resources of the parent are just as
essential components of corporate strategy as portfolio choices; and it derives

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choices about the corporate strategy from assessment of their likely impact on
net value creation and parenting advantage. As such, it forces companies to face
up to the fact that they are likely to be destroying value in many of their busi-
nesses, and to search for ways in which they can become better parents for all
of their businesses.
The parenting advantage framework can also lead to very different con-
clusions from other, more conventional theories of corporate strategy. For exam-
ple, objectives such as portfolio balance, spread of risk, and growth take second
place to parenting advantage. Decisions that improve balance, or increase spread
of risk, or raise the rate of corporate growth cannot, in our view, be justified if
they at the same time damage parenting advantage. Many of the large chemical
companies that diversified away from bulk chemicals into specialty chemicals,
in search of faster growth, more spread and greater balance, have subsequently
regretted their decisions. They have found that they were not able to parent the
specialty businesses well, and thai their results have therefore been disappoint-
ing. A focus on parenting advantage in corporate strategy development would
have prevented many of these decisions.
Parenting advantage thinking has more in common with core compe-
tences thinking.'" But there are important differences. The parenting advantage
framework puts the emphasis on the capabilities and resources of the piarent
(parenting competences), and the impact of these on the businesses. The core
competences logic does not distinguish so clearly between parent competences
and business competences, and simply encourages companies to base their cor-
porate strategies on competences that are or could become common across the
portfolio. As a result, the development of core competences can sometimes con-
flict with the pursuit of parenting advantage. Texas Instruments, for example,
attempted to exploit technical competences it had developed in its semi-
conductor businesses in areas such as calculators, watches, and home comput-
ers. It failed in these new areas not because it did not possess the requisite
technical skills, but because senior managers in the parent company lacked
experience and skills in parenting such consumer-oriented businesses. Similarly,
Minebea, the Japanese leader in miniature ball bearings, attempted to move into
semi-conductors, on the basis of its skills in precision manufacturing o! minia-
ture components. It has found, however, that this undoubted competence has
not proved sufficient to allow it to become successful in the semi-conductor
business, and in 1991 it reported a loss of ¥5 billion from its semi-conductor
subsidiary. In both cases, although the diversifications drew on common techni-
cal competences, they were not successful because the corporate center lacked
the appropriate parenting competences to avoid the mistakes that were made."
Conversely, corporate strategies that build on powerful capabilities and
resources in the parent company, but do not involve the sharing of operating
competences between the businesses, can be less easy to understand from a core
competences perspective. BTR, the highly successful British-based industrial
manufacturing company, voted best-managed company in Britain in 1993, has

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 The Value of the Parent Company

a corporate strategy based on clear sources of parenting advantage, but it does

not go in for sharing marketing, technical, or engineering skills across its busi-
nesses. BTR's success with a portfolio of more than 1,000 business units in more
than 50 countries is not based on core competences. Like Emerson, it is based on
the influence the parent organization exerts to raise performance in its
businesses.
The parenting advantage framework that we propose therefore represents
a new approach to the familiar issues of corporate strategy. Our conviction is
that its use will help many corporate parents avoid destroying value through
their corporate strategies, and move them towards the objective of becoming
the best parent for the businesses they own.

References
1. Much of our research was aimed at finding situations where value is being created
by the influence of the parent. We would ask business unit managers: "What
value are you getting from being part of the group and more specifically from
your relationship with the corporate center," More often that noi, they would
start by saying: "That's a hard question to answer. I can tell you about the disad-
vantages, costs, and constraints. But value received, well..."
2. See, for example, Sebastian Green and Dean F. Berry, Cultural, Structural and
Strategic Change in Management Buyouts (New York, NY: Macmillan, 1991); Michael
Jensen, "Corporate Control and The Politics of Finance," Journal of Applied Corpo-
rate Finance. 4/2 (Summer 1991): 13-33; David Young and Brigid Stncliffe, "Value
Gaps—Who is Right?—The Raiders, the Market or the Managers?" Long Range
Planning. 23/4 (1990): 20-34.
3. See Michael Goold, Andrew Campbell, and Marcus Alexander, Corporate-Level
Strategy: Creating Value in the Mu hi-Business Company (New York, NY: John Wiley,
1994) for a fuller description of our conclusions and the research on which they
are based.
4. This categorization of the ways in which parents affect value is collectively
exhaustive but not mutually exclusive: particular actions can fall into one or
more categories. The categorization has, however, proved practically useful. It is
similar to categorizations developed by David Collis, "Managing ihe Multi-Busi-
ness Company," teaching note. Harvard Business School; McKinsey & Co, "Corpo-
rate Center Design,' McKinsey Quarterly. 3 (1991); Bain & Co., internal corporate
strategy practice document on "The Role of the Center."
5. Mosl authors on ihe topic of synergy have commented that it frequently fails to
occur in praaice. For example, Michael Porier, Competiiive Advantage: Creating and
Sustaining Superior Performance (New York, NY: Free Press, 1985); Rosabeth Moss
Kanter, When Giants Learn to Dance (London: Simon and Schuster, 1989); John
Wells, "In Search of Synergy," doctoral dissertation. Harvard University, No.
8502578.
6. There is a large literature on ihe poor record oi acquisitions, alliances, and new
ventures. See for example, Michael Porter, "From Competitive Advantage to
Corporate Strategy," Harvard Business Review (May/June 1987); Julian Franks
and Robert Harris, "Wealth Effects of Takeovers in the UK," Journal of Financial
Economics (K\i%us\ 1989).
7. See M.C. Jensen and W.H. Meckling, "Theory of the Firm: Management Behavior,
Agency Costs and Ownership Structure," Journal of Financial Economics, 3 (1976);

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 The Value of the Parent Company

S, Baiman, "Agency Research in Managerial Accountancy; A Survey," Journal of

Accouniini} Literature, I (1982).
8. See Teruo Yamanouchi, "Breakthrough; The Development of the Canon Personal
Copier," Long Range Planning 22/5 (1989): 11-21.
9. See William Taylor, "The Logic of Global Business: An Interview with ABB's Percy
Barnevik," Harvard Business Review {March/April 1991}, pp. 90-105, See also Carol
Kennedy. "ABB: Model Manager for the New Europe," Long Range Planning,
24/15 (1992): 10-17.
10. See C.K. Prahalad and Gary Hamel, "The Core Competence of the Corporation,"
Harvard Business Review 3 (May/June 1990); 79-93.
11. Similar arguments help to show why "relatedness" is not a sufficient basis for
corporate strategy. Different businesses may be related in terms of technologies,
markets, or customers, but the real issue is whether the corporate parent has the
ability to add any value to the businesses. Relatedness does not necessarily mean
that there are any parenting opportunities, or that the corporate parent has the
skills or resources lo realize any parenting opportunities there may be. We believe
that it is for this reason that research to demonstrate that related corporate strate-
gies lead to better performance than unrelated corporate strategies has proved
somewhat inconclusive. See Richard P. Rumelt, Strategy. Structure and Economic
Performance (Boston, MA: Division of Research, Harvard Business School, 1974)
for a basic statement of the "relatedness" thesis, and "Research and Corporate
Diversification: A Synthesis," Strategic Management Journal. 7 (November/Decem-
ber 1989): 523 - 551, fora summary of the large body of subsequent research.

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