Corporate parenting styles

Part of "strategy into action" (the third stage in the strategic planning process) involves changing the organisational structure.

Many businesses end up with a corporate structure that comprises a head office and various strategic business units (SBUs), although the legal nature of these can vary - some may be set up as divisions while others may be subsidiaries within a group structure.

Corporate parenting looks at the relationship between head office and these SBUs and in particular at how to add value to the individual business units. These questions are particularly relevant if the firm has grown through acquisition rather than organic growth.

Goold and Campbell

Goold and Campbell (1991) identified three broad approaches or 'parenting' styles reflecting the degree to which staff at corporate headquarters become involved in the process of business strategy development. The approach will have a significant impact on the role of central departments such as the accounting function.

The different styles are:

• strategic planning
• financial control
• strategic control.

Strategic planning companies

In strategic planning companies such as Cadbury Schweppes and BP.

• 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

In financial control companies such as Marconi (GEC).

• 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

In strategic control companies such as ICI.

• 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.

Adding value

Corporate parents do not generally have direct contact with customers or suppliers but instead their main function is to manage the business units within the organisation. The issue for corporate parents is whether they:

• add value to the organisation and give business units advantages that they would not otherwise have
• add cost and so destroy the value that the business units have created.

Ways of adding value

There are a number of ways in which the corporate parent can add value.

• By providing resources which the business units would not otherwise have access to, such as investment and expertise in different markets.
• By providing access to central services such as information technology and human resources that can be made available more cheaply on an organisation-wide basis due to economies of scale.
• By providing access to markets, suppliers and sources of finance that would not be available to individual units.
• By improving performance through monitoring performance against targets and taking corrective action.
• Sharing expertise, knowledge and training across business units.
• Facilitating co-operation and collaboration between business units.
• Providing strategic direction to the business and clarity of purpose to business units and external stakeholders such as shareholders.
• By helping business units to develop either through assisting with specific strategic developments or by enhancing the management expertise.

Destroying value

It is not uncommon for corporate parents to be criticised for destroying value such that business units would fare better on their own. There are a number of ways in which this can happen.

• The high administrative cost of the centre may exceed the benefits provided to business units.
• The added bureaucracy resulting from the organisational structure may slow decision making and limit the organisation's flexibility and speed of response to customers and environmental changes.
• If organisations become very complex, this can prevent clarity and make it difficult for managers within the organisation and external stakeholders to understand the strategic direction.

Rationales for adding value

A well-managed corporate parent should be able to add value. In their book, Exploring Corporate Strategy, Johnson, Scholes and Whittington identify three corporate rationales or roles adopted by parents in order to do this:

• portfolio managers
• synergy managers
• parental developers.

The portfolio manager

Portfolio managers:

• are corporate parents effectively acting as agents for financial markets and shareholders to enhance the value from individual businesses more effectively than the financial markets could
• identify and acquire under-valued businesses and improve them, perhaps by divesting low-performance businesses or improving the performance of others
• keep the costs of the centre low by minimising the provision of central services and allowing business units autonomy whilst using targets and incentives to encourage high performance
• may manage a large number of businesses, which may be unrelated.

The synergy manager

Synergy managers:

• enhance value by sharing resources and activity, such as distribution systems offices or brand names
• may however bring substantial costs as managing integration across businesses can be expensive
• may have difficulty in bringing synergy as cultures and systems in different business units may not be compatible
• may need to be very hands-on and intervene at the business unit level to ensure that synergy is actually achieved.

The parental developer

Parental developers:

• use their own central competences to add value to the businesses by applying specific skills required by business units for a particular purpose, such as financial management or research and development
• need to have a clear understanding of the value-adding capabilities of the parent and the needs of the business units in order to identify how these can be used to add value to business units
• need to ensure that they are able to add value to all businesses or be prepared to divest those to which they can offer no advantages.

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