Corporate Parenting

Corporate Parent Strategies

• The best parent companies create more value in their business units
than rivals would
• Corporate parents may add value to the business units by fostering
better strategic decisions than business units as stand-alone entities
• An effective framework for assessing parenting strategies is to capture
both origins of value-creating influences:
• Direct/Vertical: between the corporate parent and the businesses
• Compositional/Horizontal: one among the various business units
Value Creation and the Corporate Parent
 Value Creation and the Corporate Parent
Strategic guidance and support (Vertical - value added)
• Strategic direction:
• Corporate parents may add value to business units by providing them with a superior overall strategic
direction
• Create a specific business vision, formulate top-down objectives, and design a superior development
roadmap to gain competitive advantage
• Strategic expertise:
• Sharing of industry-specific expertise, for example, regarding market trends or strategic success factors
• Support with experience in specific strategic situations and challenges, for example, the
internationalization of businesses or product innovation
• Resource allocation:
• Can create efficient internal capital markets and may add value by distributing available capital more
effectively among SBUs
 Value Creation and the Corporate Parent
Strategic guidance and support (Vertical - value added)
• Performance monitoring:
• Closely monitoring their performance with diligence and at a level of detail that is
not attainable by external investors
• Synergy fostering:
• Actively fostering cooperation between the business units, trying to support the
realization of horizontal synergies
• Business development and growth:
• May leverage their capabilities in order to actively promote merger and
acquisition, develop new organic growth options, or help their business units to
divest non-core or low-performing assets
 Value Creation and the Corporate Parent
Negative influence (vertical – value destroyed)
• Insufficient expertise and skills:
• Overly confident and underestimate industry-specific knowledge and managerial talent at the
business level
• Insufficient understanding at corporate level of the strategic success factors and the specific
market rhythms of the business units
• Managerial entrenchment:
• Using the company’s internal cash flows to keep unfavorable projects alive, to justify past
investment decisions
• Central decision-making processes are driven by political rather than economic considerations
• Risk aversion:
• Fundamental motivation of corporate executives is to reduce their own employment risk by
diversifying the portfolio in order to make operational cash flows less volatile and dependent on
one single industry or market segment
 Value Creation and the Corporate Parent
Central resources and services (Vertical - value added)
• Corporate assets:
• Business units in the corporate portfolio may benefit from central assets provided by the
corporate parent
• Joint marketing across various business units based on a well-known corporate brand or
reputation may increase the growth potential of the individual business units
• Central functions:
• SBUs may benefit from cost advantages by using centrally bundled functions and services,
such as group-wide IT and accounting services, central procurement, legal services, or
human resource management
• Tax optimization:
• Optimizing the overall tax burden of the corporate portfolio by netting losses of one unit
with profits from another
 Value Creation and the Corporate Parent
Overhead costs (Vertical - value destroyed)
• Costly charges:
• Overhead charges are too high for the scope and quality of the services provided by
corporate parent
• Additional resources:
• Business units may suffer from additional personnel expenses for their own staff
who are exclusively involved in meeting and fulfilling redundant requirements of the
corporate parent
• Complex processes:
• Complex planning, budgeting, and controlling structures established by the
corporate parent may reduce the flexibility, quality, and speed of decision-making
within the company
Value Creation and the Corporate Parent
 Value Creation and the Corporate Parent
Sales and managerial synergies (Horizontal - value added)
• Bundling and cross selling:
• Revenue synergies can come from cross-selling products and services to the same
customer base
• Flexible pricing of the bundled products
• Capabilities and experiences:
• SBUs may benefit from sharing capabilities and market-related knowledge
• Mechanisms to achieve include the leveraging of market experiences, internal
benchmarking, or best-practices sharing through knowledge management
• Joint development of strategic assets:
• Jointly develop new strategic assets faster and more cheaply than their stand-alone
competitors will earn superior returns over time
 Value Creation and the Corporate Parent
Resource shortage (Horizontal - value destroyed)
• Insufficient corporate attention:
• SBUs may suffer from insufficient attention by corporate level management – time and concern
• Result in undue delays of important strategic decisions regarding the business unit
• Cross-subsidization:
• It may be of advantage for the corporate parent to provide financial incentives for the specific
unit in order to generate the optimal allocation of resources
• Leads to value destruction for high-performing units
• Portfolio role:
• SBUs being assigned to a specific role within the corporate portfolio
• Forced to generate and deliver operating cash flows to finance growth options for other
business units
• Pursue activities with a low risk profile in order to help balance the overall corporate risk
 Value Creation and the Corporate Parent
Operating and investment synergies (Horizontal - value added)
• Economies of scope:
• Cooperative operations within an integrated value chain - costs of a shared distribution system
and advertising channels
• Economies of scale:
• Able to spread overhead, production and research and development activities over larger
production volumes or from better functional specialization compared to stand-alone
competitors
• Facility utilization:
• Value realized through the ability to plan and manage production capacity more effectively
across different business units and thereby avoid the high cost of underutilized assets
• Purchasing power:
• Synergetic effects for the involved business units may be achieved by setting up a purchasing
coordination committee
 Value Creation and the Corporate Parent
Cost of complexity (Horizontal - value destroyed)
• Additional internal coordination:
• Wasted time and managerial resources on internal business-to-business administrative
work
• Tactical manoeuvres:
• Waste resources and time on tactical manoeuvres for influencing central decision-making
• Time, effort, and creativity spent by business units’ management on attracting the
attention of the corporate parent in such a way that they can gain a personal advantage
• Internal power struggles:
• Wasting time and resources on internal power struggles with other units in the corporate
portfolio
• May lead to wrong corporate decisions for individual business units due to the
influencing activities of their peers
Value Creation and the Corporate Parent
 Types of Corporate Parenting Role
Portfolio Manager

Synergy Manager

Parental Developer
 Portfolio Manager
• PM is acting as an agent on behalf of financial markets and shareholders with a view to
extracting more value from the various businesses than they could achieve themselves
• Role is to identify and acquire undervalued assets or businesses and improve them
• May not be much concerned about the relatedness of the business units in their
portfolio, typically adopting a conglomerate strategy
• Role is not to get closely involved in the routine management of the businesses
• They seek to keep the cost of the centre low, for example by having a small corporate
staff with few central services
• SBU chief executives have a high degree of autonomy
• They set clear financial targets for those chief executives, offering high rewards if they
achieve them and likely loss of position if they do not
• Manage quite a large number of such businesses because they are not directly
managing the everyday strategies of SBUs
 Synergy Manager
• Obtaining synergy is often seen as the prime motive of the parent
• Main emphasis is facilitating cooperation across SBUs
• May have a larger corporate office
• Examples:
• GE facilitates cooperation by investing heavily in its management training
activities, making it easier for managers to pass value creating knowledge
between businesses
• A metals company diversified into both steel and aluminium might centralise
its energy procurement - increased bargaining power over suppliers
 Parental Developer
• Seeks to employ its own capabilities as a parent to add value to its businesses
• Parental developers focus on the resources or capabilities they have as parents which
they can transfer downwards to enhance the potential of business units
• If a parent has a valuable brand, a corporate managers then need to identify a parenting
opportunity - a business which is not fulfilling its potential but which could be improved
by applying the parenting capability (lending the brand name)
• This roles are more common in the case of related business and are likely to involve
exchanges of managers and other resources across the businesses
• Examples:
• 3M is concerned with inculcating a focus on innovation in its businesses - set clear innovation
targets for its businesses and elevate the standing of technical personnel concerned with innovation
• Unilever focus on developing its core expertise in global branding and marketing in the fast-moving
consumer goods market with state-of-the-art R&D facilities at backend
 The Parenting Matrix
• The parenting matrix introduces parental fit as an important criterion for
including businesses in the portfolio
• If the parent cannot add value, then the parent ought to be cautious about
acquiring or retaining them
• Two key dimensions of fit in the parenting matrix:
• Feel - This is a measure of the fit between each SBUs critical success factors and the
resources of the corporate parent
• Does the corporate parent have the understanding for the businesses it will nurture?
• Benefit - This measures the fit between the parenting opportunities (or needs) of
business units and the capabilities of the parent
• Parenting opportunities are about the upside, areas in which good parenting can
benefit the SBU
The Parenting Matrix
 The Parenting Matrix
• Heartland business units are ones which the parent understands well and
can continue to add value to. They should be at the core of future strategy
• Ballast business units are ones the parent understands well but can do little
for.
• SBUs are more successful as independent companies.
• SBUs must be spared of corporate bureaucracy.
• The parent may have added value in the past but can find no further parenting
opportunities
• SBUs can be important sources of stability, providing steady cash flow and reliable
earnings
• But can also be a drag because of slowing growth in value creation and distracting
parent managers from more productive activities
 The Parenting Matrix
• Value trap business units appear attractive because there are opportunities to
add value (e.g. marketing could be improved), but they are deceptively
attractive, because the parent’s lack of feel will result in more harm than good
(the parent lacks the right marketing skills)
• Parent will need to acquire new capabilities to help move value trap businesses into the
heartland
• They are businesses with a fit in parenting opportunities but a misfit in critical success
factors.
• Alien business units offer little opportunity to add value and the parent does not
understand them anyway
• Parent managers may not divest them for various reasons - business is currently profitable,
in the process of a turnaround, business has growth potential, there are few ready buyers
Corporate Parenting Strategy
at Bayer
 Bayer prior to 2002
• Bayer was essentially a chemicals company with a broad portfolio of
chemicals, polymers, and pharmaceuticals businesses.
• These businesses were organized in 16 divisions with a hands-on
corporate center
• Management board of eight members was actively involved in
resource allocation, operative steering, and the fostering of synergies
among the businesses
 Bayer from 2003
• Bayer created four legally independent subgroups each with full
operational and strategic responsibility for its businesses (holding
company structure)
• HealthCare, Crop Science, Polymers, and Chemicals
• Also three service companies were created
• This major portfolio transformation led to the divestiture of the
chemicals businesses (independent company: Lanxess)
• Major acquisitions happened in consumer care and pharmaceuticals
• Bayer refocused on three segments: HealthCare, Crop Science, and
Material Science.
Bayer from 2003
 Bayer from 2003
• Bayer Group separated the Strategic Group management from the
operational business
• Responsibilities of the management holding company:
• Long-term strategy for the entire Group as well as the subgroups
• Establishes guidelines and principles (for SBUs) in alignment with corporate
policies
• It is responsible for the financial management.
• The Corporate Center of Bayer AG supports the Group Management
Board in the management of the Group.
 Bayer from 2003
• Bayer Technology Services provides services in the field of
engineering.
• Bayer Business Services provides services in the field of information
management, accounting, consulting and administration.
• Bayer Industry Services operates major chemical sites of Bayer in
Germany and provides location specific services.
 Parenting Strategy from 2003
• As a result of this shift in corporate strategy, the parenting strategy
changed from hands-on management to being a strategic guide
• Bayer now had a non-operational management board with only four
members who focused on steering the group strategically and on
managing the corporate portfolio
• This parenting strategy paid off handsomely: Bayer’s share price rose
from €10 in 2003 to about €130 in 2015.
 Bayer in 2015
• Bayer spun off Material Science as an independent company under
the name Covestro
• Bayer will focus on Pharmaceuticals, Consumer Health and Crop
Science and thus become a pure life-sciences company.
• Corporate Purpose - Bayer: Science for a better life
• Corporate Level Functions:
• Finance, treasury, tax, audit, and compliance
• Executive leadership development - develop managers and leaders with
diverse backgrounds to lead the company in the future
 Bayer from 2015
Corporate values: represented by the acronym LIFE (Leadership, Integrity, Flexibility and Efficiency)
 Management Systems in 2018
• Board of Management uses targets and performance indicators to steer the company’s
sustainable alignment.
• Operational management indicators
• Growth is measured primarily in terms of the change in sales
• EBITDA serves as a relative indicator for operational earning power
• Core earnings per share
• Strategic value-based indicator
• This indicator of value-based performance (ROCE) replaces the cash value added (CVA) and cash flow return on
investment (CFROI)
• This supports the management in evaluating long-term business development.
• Comparing ROCE between business areas is a process that aids portfolio analysis.
• With these corporate level initiatives Bayer Group tries to achieve profit improvement
potential of 2% to 5%
• Some expert believe that the corporate level initiative should raise profitability of the
whole group by at least 10%