Long Range Planning, Vol. 24, No. 1, pp. 115 to 117, 1991 0024--6301/91 83.00 + .

OO 115
Printed in Great Britain Pergamon Press plc

Brief Case: From Corporate

Strategy to Parenting Advantage
Michael Goold and Andrew Campbell

During the 1980s there has been a sea-change in failure of so many diversifications is that corporate
attitudes to corporate strategy. The fashion for managers ignore the better-off test or ‘deal with it
diversification and ‘portfolio management” that through arm waving or trumped up logic rather
prevailed in the 1960s and 197Os, has been replaced than hard strategic analysis’.
by a philosophy of ‘sticking to the knitting’.’
Mindful of the dangers of too much diversity, many We believe that the criticisms of corporate strategy
companies have been refocusing their portfolios on that Porter makes, and the evidence of diversifica-
core business areas. For the same reasons, acqui- tion failures that he has shown, are powerful. There
sitions that take a company into new businesses are are far too many examples of companies which lack
now viewed with considerable suspicion. Unfor- a clear corporate strategy and where the contribu-
tunately, however, a clear view on how much tion of the corporate level is to make the individual
diversity is manageable and on what sorts of businesses in their portfolio worse off, not better off.
acquisitions are justifiable has not yet emerged to Furthermore, a poor track record in acquisitions is
guide managers who are responsible for corporate frequently a result of lacking a sound corporate
strategy. In this Brief Case, we would like to strategy based on the better-off test.
comment on Michael Porter’s recent contribution
to the continuing debate on corporate strategy, and But Porter’s account of corporate strategy leaves
point the way towards some new research directions two vital questions open:
which we believe will be fruitful.
* how can a company tell whether it will be able to
make a given subsidiary better off? What ‘hard
strategic analysis’ can be done, or what exper-
From Competitive Advantage to ience can be drawn on, to give a reliable
prediction of a company’s ability to add value to
Corporate Strategy a potential new business?
In his frequently cited article ‘From Competitive
* how much better off must the business be to
Advantage to Corporate Strategy’,3 Michael Porter
justify a diversification move? Is any improve-
claims that corporate strategy for diversified,
ment enough, or can the better-off test be made
multi-business companies is intimately linked to
more precise?
competitive advantage at the business unit level.
‘Competition occurs at the business unit level.
Diversified companies do not compete; only their
business units do. . . . Successful corporate strategy
must grow out of and reinforce competitive
Deciding Whether a Given
strategy.’ This leads him on to the ‘better-off test’ as Subsidiary will be Better Off
the crucial criterion for assessing diversification
How can we distinguish between real opportunities
moves. ‘Either the new unit must gain competitive
to make a new unit better off and apparently
advantage from its link with the corporation or vice
attractive moves that in the event fail? Many of the
versa.’ Porter believes that the major reason for the
oil companies would no doubt now wish that they
had been more cautious in their acquisitions of
Brief Case is a portfolio of commentary, opinion, research and minerals and other natural resources businesses. BP,
experience. The editors welcome contributions, comments and ideas
for example, found that they were not able to add
from readers. These should be sent to Andrew Campbell and Michael
Goold at Ashridge Strategic Management Centre, 17 Portland Place, much to Selection Trust, which they acquired in
London Wl N 3AF. 1980, and have now divested to RTZ. This is very
116 Long Range Planning Vol. 24 February 1991

much the sort of diversification failure that Porter As an example, consider the acquisition by a U.K.
criticises, yet it was by no means obvious at the time foods group of a particular U.K. snack business.
of the acquisition that BP would not make Selection Provided the new parent can bring a benefit such as
Trust better off. How could BP have determined improved marketing skills or better joint distribu-
before the event that they were not likely to make tion, the acquisition will pass the better-off test.
the minerals business better off? However, other potential parents might be able to
bring much greater benefits. An international snacks
Porter’s suggested approach for applying the better company, such as PepsiCo, might bring the poten-
off test is to undertake a value chain analysis of the tial for shared costs in research, product develop-
company’s existing and new businesses, as a basis for ment and marketing. A global food company, such
deciding where opportunities for improved per- as Unilever, might open up a wider range of new
formance lie. But this approach is by no means markets. The U.K. foods company is not the best
always sufficient. At the time of BP’s acquisition of parent for the acquisition in question, unless it adds
Selection Trust it seemed plausible to claim that more value than other possible parents.
BP’s skills in extractive industries would allow it to
add value to Selection Trust. A value chain analysis, Moreover, we take issue with Porter’s claim that
of the sort suggested by Porter, would probably ‘diversified companies do not compete; only their
have identified common activities or skills between, business units do’. An increasingly active market for
for example, oil exploration and minerals explo- corporate control means that there is constant
ration, that could provide the basis for shared implicit competition between diversified companies
activities or skill transfer, and would therefore make for the right to own and manage businesses, which
Selection Trust better off. from time to time breaks out openly in disputed
acquisitions, mergers, break-ups and management
In the event, less value was created through these buy-outs.
relationships than had been expected. The differ-
cnccs between the oil and minerals businesses To justify their continuing stewardship of the
proved greater than anticipated. Further, and more businesses in their portfolios, corporate parents must
importantly, the nature of competition and the key be able to show that their businesses perform better
sources of competitive advantage (the ‘dominant under their ownership than they would under
logic’) proved to be substantially different between different ownership. In stock market terms, they
oil and minerals.” This meant that senior manage- must prevent ‘value gaps’5 from opening up
mcnt reactions and decision making processes were between the price investors will pay for the
not appropriate for the new minerals business, thus businesses under the existing ownership, and the
offsetting the limited benefits that were available price other owners would be willing to pay for
from the acquisition. them. In corporate strategy terms, the parenting
team must possess specialist skills or assets that allow
A value chain analysis is liable to miss the crucial them to add more value to their businesses than any
differences in specific skills between businesses, and other parent company could (i.e. to make them
is a poor tool for quantifying benefits that may be better-off to a greater extent than any other parent
available. More importantly, it is not suitable for company). We call their skills and assets ‘parenting
unearthing essential differences in ‘dominant logic’ advantage’, and we believe that parenting advan-
between businesses. We need new concepts and new tage is the basis of sound corporate strategy in the
approaches for identifying and quantifying the same way that competitive advantage is the basis of
specialist skills of parent organizations, and for sound business unit strategy.
determining how far differences in ‘dominant logic’
may offset benefits that would otherwise be avail- Porter has done us a service in drawing out the link
able. from competitive advantage to corporate strategy.
We propose that it is now time to move on from
The bcttcr off test is conceptually useful, but, as yet, corporate strategy to parenting advantage.h This
it is not easy to apply in practice Further rcscarch is will be the subject of a major new research project
needed to give it a much sharper and more usable on which the Ashridge Strategic Management
cutting edge. Centrc is currently embarking.

* * * *

Parenting Advantage
Plainly, where a new business is not better off as part
of the portfolio, the company’s corporate strategy
International Summer Seminar
has destroyed rather than created value. But we
believe that corporate strategy must ultimately pass The European Centre for Future Studies is holding a
a stiffer test than Porter proposes. The real goal for seminar on Sustainable Development and the
the corporation is that it adds more value to its Future of Cities, at the Bauhaus Dcssau, Germany,
businesses than any other potential parent. from 7 to 14 September 1991. The seminar is
 Brief Case 117

especially but not exclusively addressed to all those Hill (1965); Malcolm S. Salter and Wolf A. Weinhold, Diversifica-
tion through Acquisition, Free Press (1979); Philippe Haspes-
in formerly socialist countries who are profession- lagh, Portfolio planning: uses and limits, Harvard Business
ally concerned with urban planning and develop- Review, Januan//February (1982).
ment. Under discussion will be the most recent (2) See Thomas J. Peters and Robert H. Waterman, ln Search of
development in urban theory and planning as they Excellence. Harper & Row (1982).
are influenced by de-industrialization phenomena, (3) Michael E. Porter, From competitive advantage to corporate
new information and communication technologies, strategy, Harvard Business Review, May/June (1987).
disarmament, and environmental necessities. (4) The ‘dominant logic’ terminology is derived from C. K. Prahalad
and R. A. Bettis, The dominant logic: a new linkage between
For further information please contact European diversity and performance, Strategic Management Journal,
November/December (1986).
Centre for Future Studies, Prof Dr Bernd Hanm,
Dept of Social Sciences, University of Trier, POB (5) See David Young and Brigid Sutcliffe, Value gaps: the raiders, the
market or the managers, long Range Planning, 23, August
3825, D5500 Trier, Germany, fax (49) 651 23498. (1990).

(6) The concept of parenting advantage was initially developed in

joint work between McKinsey and Co and the Ashridge Strategic
References Management Centre. See Sigurd Reinton and Nathaniel Foote,
Why parents must be more particular, Financial Times, 17 June
(1) See, for example, H. lgor Ansoff, Corporate Strategy, McGraw- (1988).