The complexity of transitional business conditions creates a need for creating value through aggregation of different businesses in complex corporate enterprise, which gives it the character of a multi-business firm. Businesses could be defined as being whatever the enterprise chooses to operate as organizationally separate profit-responsible units. Such business entities are often referred to as Strategic Business Units (SBUs) and they are organized as largely separable businesses with control over the main strategic levers that affect their performance. Besides this organizational definition, the businesses could be defined in economic sense relating to Strategic Business Opportunities (SBOs), which are clusters of product-market transactions able to sustain a successful focused business, with financial independence. Processes of merger, acquisition, divestment, and the other processes of transformation continually create new challenges to corporate management towards providing better performance of aggregated businesses than they would achieve if they were independent, stand-alone entities. It is corporate strategy that should guide key decisions in the businesses and coordinate their business strategies. But, for most corporate enterprises, the corporate strategy is simply the sum of business strategies, with some broad objectives and statement of business mission. Therefore, senior managers who are responsible for defining the overall corporate strategy, often recognize that something in their strategies is wrong. They may conceptually change strategy through offering some financial guidelines, and determine which businesses are “core”. This affirms creating advantage through parenting (Parenting Advantage), which, as a principle, should guide decisions about the nature of the businesses in the portfolio and about its structure. Namely, multi-business corporate enterprises consist of businesses and a corporate hierarchy of line managers, functions, and staffs outside these businesses, which refers to as the corporate parent that is responsible for making corporate decisions. Parent could be defined as all those levels of management that are not part of customer-facing, profit-responsible business units, or, simply, whatever is left outside the business units but within the enterprise. The role of parent is multiple and, among other things, includes making decisions about new businesses to support or acquisitions to make, determining the structure of enterprise, defining budgeting and capital expenditure processes, setting the corporate values and attitudes. The businesses better perform in aggregate under the parent’s ownership than they would if they were independent entities. Also, the parent must add more value than cost to the businesses in the portfolio.
There are basically three styles of corporate parenting as follows;
- Financial control. Under this style the role of the corporate parent is to monitor and evaluate the financial performance of investment portfolio of the respective business units. The corporate managers act as agents on behalf of shareholders and financial markets to identify and acquire viable assets and businesses. The business unit managers are given the autonomy to carry out business activities and make decisions at their level. However, the corporate parent sets performance standards for control purposes.
- Strategic planning. Under this style the role of the corporate parent is to enhance synergies across the business units. This may be achieved through: envisioning to build a common purpose, facilitating cooperation across businesses and providing central services and resources.
- Strategic control. Under this style the corporate parent leverages its resources and competences to build value for its businesses. For example, a corporate could have a valuable brand or a specialist skill. The corporate parent uses its parenting capabilities to seize opportunities for growth.
But, more ambitious aspiration for the parent is its ability to gain parenting advantage it should aim to be the best possible parent for its businesses. In aggregate, the businesses under its “patronage” should perform not only better than they would as standalone entities but also better than they would under “patronage” of any other parent. Corporate strategy should clarify how and where the enterprise can achieve parenting advantage. The link between parenting advantage and corporate strategy therefore parallels the link between competitive advantage and business strategy. Competitive advantage is in the heart of successful business strategies. It guides strategic analysis and provides a basis for assessing alternative action plans. The concept of parenting advantage plays a similar role at the corporate level. It should be the fundamental test for judging corporate strategies and the guiding principle in corporate-level decisions, guiding the decisions towards better market opportunities and higher corporate performance.
Parenting Advantage: Corporate parents compete with each other for the ownership of businesses. Therefore, for keeping their stakeholders (especially businesses), the parents must add more value to the businesses in the portfolio than other rival parents would. This objective, which is referred to as achieving parenting advantage, should be one of the most important objectives of corporate strategy. Namely, parenting advantage should be the guiding criterion for corporate-level strategy, rather as competitive advantage is for business-level strategy.
Justifying the Parent: Many of the businesses in multi-business corporate enterprise could be viable as stand-alone entities. Since the corporate parent has no external customers for its product/services, it can justify itself if it influences businesses collectively to perform better than they would as independent entities. The challenge for the corporate parent to justify itself is important because it focuses attention on whether and how its activities do add value, which leads to the elimination of worthless and bureaucratic routines in the activities of enterprise.
Value Destruction: All multi-business enterprises have tendencies to destroy value. It is corporate hierarchy, especially senior management, that inevitably destroys some value. Value destruction drivers (so-called information filters) are related to the tendency of business managers to filter the information they provide to corporate management in order to present their businesses in the most favorable light. For avoiding value destruction, corporate parents must be more disciplined, which implies avoiding intervention in businesses unless they have specific reasons for believing that their influence will be positive, or avoiding extension of their portfolio into new businesses unless they are sure that they will be able to add value. So, good corporate strategy should recognize the tendencies of value destruction and be designed to minimize their influence as much as to maximize value creation.
Value Creation: Value creation primarily occurs when the parent sees an opportunity for a business to improve performance and has the skills, resources and other characteristics for helping the business to seize the opportunity. This means that the parent enhances both the individual performance of the business and the value of linkages between the businesses, and creates value by altering the composition of the business portfolio performing its corporate development activities. The conditions for value creation are important because they force corporate parent to think about major opportunities for added value through the corporate strategy and also help corporate parent to focus its efforts on building special competences or skills that fit the particular opportunities targeted by the businesses.
Lateral Synergies: Since there is existence or potential for lateral linkages between the businesses in corporate enterprise, the main role of parent managers should be to create synergy. It primarily includes their pursuing of real synergy opportunities, and their positive interventions in the lateral relationships between businesses. The parent managers should also focus their efforts only on those synergies that need central intervention as well as encourage so-called market place relationships between business units. So, the importance of lateral synergies in creating value in corporate enterprise requires from corporate parents to pay relatively more attention to other sources of value creation, in particular their ability to improve performance in each individual business as an independent entity.
Corporate Office and Management Processes: The importance of the size, staffing and design of the corporate office as well as managing corporate processes (such as planning, performance targeting and monitoring, etc.) are not in question, and managers devote considerable attention to them. But if corporate functions and processes are not developed as an integral part of the overall value adding corporate strategy, they may lead to little or no improvement in performance. For parent managers it is far more important to possess the skills that are suitable for the parenting opportunities targeted by the corporate-level strategy.
Stretch and Fit: Corporate parent must realistically consider the speed with which it can build new skills and understand new types of businesses. It is supposed to search for new opportunities continuously and refine and extend parenting skills, which encourage innovative ideas and help eliminate many disasters of excessive corporate ambition. Therefore, enterprises that do push forward into new businesses will prosper more if they choose those businesses that are compatible with parenting skills that they can develop. It is better to choose a narrower range of businesses where greater fit can be created. Good corporate strategy should maintain a balance between the stretch for new opportunities and fit with the parent’s existing skills.
Diversity: It is a fact that highly diverse corporate enterprises are more difficult to manage than less diverse ones. So, a vital managerial guidance for corporate parent is provided by creating valid measures of diversity. In that sense, diversity is best measured in terms of the differences in parenting needs and opportunities between businesses in portfolio. To avoid excessive diversity, corporate parent should build its portfolio around businesses with similarities in terms of parenting needs and opportunities.
Business Unit Definition and Corporate Structure: Business units (businesses) represent the basic “building blocks” in any multi-business corporate enterprise. Business unit definition and, consequently, corporate structure have a profound impact on both the value creation opportunities and the value destruction risks for the corporate parent. They impact the behavior and aims of business managers and the size and nature of parenting opportunities. Inappropriate business definitions lead to compromised business strategies and missed opportunities for parenting value creation. Therefore, decisions on unit definitions and corporate structure should be determined by careful analysis of their likely impact on value creation. Getting the unit definitions and corporate structure right is an important precondition for a successful corporate strategy.
Strategic planning companies
- There is a focus on a limited number of businesses where significant synergies exist leading to a concentration on a few core areas where it is possible to have a degree of expertise.
- Corporate management play a major role in setting the strategies for each of the sbus.
- The approach is based on the belief that strategic decisions occur relatively infrequently and that when they do, it is important for corporate headquarters to frame and control the strategic planning and decision-making process.
- There is good integration across the units, which is particularly useful when resources such as distribution may be shared.
- Decisions are made at a senior level and hence there is less likelihood of short-term views predominating.
- There may be a number of disadvantages:
- Difficulties in communication and co-ordination may slow down development
- There may be less ‘ownership’ of the strategies by the operating unit managers. There is strong empirical evidence that there are fewer low-risk strategies pursued, which might otherwise be the case if strategy was centred on the unit managers
- There is also a likelihood that this strategy formulation from the centre might result in getting ‘locked into’ failing businesses. There may be a resistance to the closing down of poorly performing units if the strategies have been sanctioned at the centre.
Financial control companies
- Planning timescales tend to be shorter.
- The head office takes a ‘hands-off’ approach but sets stringent short-term financial targets that have to be met to ensure continued funding of capital investment plans.
- Failure to meet financial targets will lead to the possibility of divestment.
- This type of strategy allows for diversity and companies generally have a wide corporate portfolio with limited links between divisions and acquisition/divestment is a continuing process as opposed to an exceptional event.
- Empirical evidence suggests that lower risk strategies are pursued but with resultant higher profitability ratios.
- Much of the growth in this scenario comes from acquisition as distinct from internal growth.
- There may be a number of disadvantages:
- there is a propensity to be risk averse and possibly to ‘milk’ the business
- this type of decentralisation may make it difficult to exploit any potential synergies
- the control framework set up by the head office might constrain flexibility.
Strategic control companies
- Corporate management take a middle course, accepting that subsidiaries must develop and be responsible for their own strategies, while being able to draw on headquarters’ expertise.
- Evaluation of performance extends beyond short-term financial targets to embrace strategic objectives such as growth in market share and technology development, that are seen to support long-term financial and operational effectiveness.
- Diversity is coped with more readily than the ‘strategic planning’ style.
- There is also a danger of greater ambiguity.