What is Corporate Parenting Strategy?

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By: Site Engineer, Staff

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Corporate parenting is a corporation in terms of resources and capabilities that can be used to build business unit value as well as generate synergies across business units.

The company, contend that corporate strategists must address two crucial questions:

  • What businesses should this company own and why?
  • What organizational structure, management processes, and philosophy will foster superior performance from the company’s business units?

Portfolio analysis attempts to answer these questions by examining the attractiveness of various industries and by managing business units for cash flow, that is, by using the cash generated from mature units to build new product lines.

Unfortunately, portfolio analysis fails to deal with the question of what industries a corporation should enter or with how a corporation can attain synergy among its product lines and business units.

As suggested by its name, portfolio analysis tends to primarily view matters financially, regarding business units and product lines as separate and independent investments.

According to some scholars, multi-business companies create value by influencing or parenting the businesses they own. The best parent companies create more value than any of their rivals would if they owned the same businesses. Those companies have what we call parenting advantage.

Corporate parenting generates corporate strategy by focusing on the core competencies of the parent corporation and the value created from the relationship between the parent and its businesses.

In the form of corporate headquarters, the parent has a great deal of power in this relationship. For instance, if there is a good fit between the parent’s skills and resources and the needs and opportunities of the business units the corporation is likely to create value.

If, however, there is not a good fit, the corporation is likely to destroy value. Research indicates that companies that have a good fit between their strategy and their parenting roles are better performers than companies that do not have a good fit.

This approach to corporate strategy is useful not only in deciding what new businesses to acquire corporate strategy is useful not only in deciding what new businesses to acquire but also in choosing how each existing business unit should be best managed.

The primary job of corporate headquarters is, therefore, to obtain synergy among the business units by providing needed resources to units, transferring skills and capabilities among the units, and coordinating the activities of shared unit functions to attain economies of scope (as in centralized purchasing).

This is in agreement with the concept of the learning organization in which the role of a large firm is to facilitate and transfer the knowledge assets and services throughout the corporation. This is especially important given that 75% or more of a modem company’s market value stems from its intangible assets the organization’s knowledge and capabilities.

Developing a Corporate Parenting Strategy

The search for appropriate corporate strategy involves three analytical steps:

Examine each business unit (or target firm, in the case of acquisition) in terms of its strategic factors. People in the business units probably identified strategic factors when they were generating business strategies for their units. One popular approach is to establish centers of excellence throughout a corporation.

By the center of excellence, we mean an organizational unit that embodies a set of capabilities that has been explicitly recognized by the as an important source of value creation, with the intention that these capabilities be leveraged by and/or disseminated to other parts of the firm.

Examine each business unit (or target firm) in terms of areas in which performance can be improved. These are considered to be parenting opportunities. For example, two business units might be able to gain economies of scale by combining their sales forces.

Consider another example, a unit may have good, but not great, manufacturing and logistics skills. A parent company that has world-class expertise in these areas could improve that unit’s performance. The corporate parent could also transfer some people from one business unit who have the desired skills to another unit that needs those skills.

People at corporate headquarters may, because of their experience in many industries spot areas where improvements are possible that even people in the business unit may not have noticed. Unless specific areas are significantly weaker than the competition, people in the business units may not even be aware that these areas could be improved, especially if each business unit monitors only its particular industry.

How well to analyze the parent corporation fits with the business unit (or target firm), the corporate headquarters must be aware of its strengths and weaknesses in terms of resources skills, and capabilities. To do this the corporate parent must ask whether it has the characteristics that fit the parenting opportunities in each business unit. It must also ask whether there is a misfit between the parent’s characteristics and the strategic factors of each business unit.

 

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