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But analysis cannot replace judgment. Parent managers must be honest with themselves about their own strengths and weaknesses. Most companies will find they have a good fit with some portfolio businesses and a poor one with others. The challenge for the corporate strategist is to decide which changes in parenting are appropriate. A good fit reduces the danger of destroying value in a business.
Each portfolio business can be located on the matrix. The matrix in our illustration plots the businesses of the diversified food company described in the table of critical success factors. Heartland businesses have opportunities to improve that the parent knows how to address, and they have critical success factors the parent understands well.
In the case of the two restaurant businesses in the graph, the parent provides high-quality services in property development, food purchasing, menu management, and staff scheduling. The parent also has skills in formula branding, in setting performance targets that generate above-average restaurant margins, and in designing flat structures for chain operations that keep overheads per unit to a minimum.
For some businesses, making clear judgments is difficult. Some parenting characteristics fit; others do not. We call those businesses, such as the retail business in the food-company example, edge of heartland. However, the added value is partly offset by critical success factors that fit less well with the parent. For example, the retail business requires skills in site selection and property development that are different from those required for the restaurants.
With edge-of-heartland businesses, the parent both creates and destroys value. The net contribution is not clear-cut. Many edge-of-heartland businesses move into the heartland when the parent learns enough about the critical success factors to avoid destroying value. Calvin Klein, for instance, does not use market research to launch its upmarket perfumes in the same way Unilever does to launch mass-market products. Unilever treated Calvin Klein as a global business, while its own personal-products businesses are national or regional.
To accommodate the differences between Calvin Klein and its other businesses, Unilever changed or neutralized many of its usual parenting influences and channeled most contact between the two companies through a single person. Most portfolios contain a number of ballast businesses, in which the potential for further value creation is low but the business fits comfortably with the parenting approach.
That situation often occurs when the parent understands the business extremely well because it has owned it for many years or because some of the parent managers previously worked in it. The parent may have added value in the past but can find no further parenting opportunities. In the food-company example, the property business fits that category. The business owns a large number of sites that are leased to third parties. The company has little potential for adding value to the business operation because it has identified no parenting opportunities.
It also has little potential for destroying value because the parent managers are so familiar with the property-business issues. Most managers instinctively choose to hold on to familiar businesses. Sometimes that is the right decision, but it should always be examined. Ballast businesses can be important sources of stability, providing steady cash flow and reliable earnings. But ballast businesses can also be a drag on the company, slowing growth in value creation and distracting parent managers from more productive activities.
Moreover, there is a danger that changes in the business environment can turn ballast businesses into what we call alien territory. Managers should search their ballast businesses for new parenting opportunities that might move them into heartland or edge-of-heartland territory. Not surprisingly, that advice is difficult for most managers to take. Profitable businesses requiring little parent attention seem ideal. However, the risks of holding on to them may be substantial.
Companies with too many ballast businesses can easily become targets for a takeover. Most corporate portfolios contain at least a smattering of businesses in which the parent sees little potential for value creation and some possibility of value destruction. Those businesses are alien territory for that parent. Frequently, they are small and few in a portfolio—the remnants of past experiments with diversifications, pet projects of senior managers, businesses acquired as part of a larger purchase, or attempts to find new growth opportunities.
The industry has become international, so the national business has become less competitive. Their influence is more likely to destroy than to create value in the business. The reality, however, is that the relationship between such businesses and the parent organization is likely to be destroying value.
They should be divested sooner rather than later. The company in our example should sell its food-products business to an international food company. Companies need to be clear about their heartland before they can recognize alien territory. They also need to be clear about their alien territory in order to recognize their heartland.
Hence, as companies describe their heartland businesses, they will give as many negative criteria—which are alien-territory criteria—as they do positive ones.
The criteria help Cooper strategists sort among heartland, edge-of-heartland, and alien-territory businesses and improve their acquisition and divestment decisions. Cooper has exited a number of businesses that did not fit its criteria.
Most recently, it proposed divesting its original business—oil tools. Parent managers make their biggest mistakes with value-trap businesses. They are businesses with a fit in parenting opportunities but a misfit in critical success factors. The potential for upside gain often blinds managers to the misfit—that is, downside risks. Managers make their biggest mistakes with businesses that fit in parenting opportunities but not in critical success factors.
In the food-company example, the hotel business is a value trap. The parent believed its restaurant and retail skills would bring success in the hotel business.
Management initially saw it as an edge-of-heartland experiment, with parenting opportunities in food purchasing, property-development costs, and performance benchmarking. But value was destroyed in other vital areas. Hotel businesses require selling skills, referrals from other businesses, and specialized site selection.
The logic of core competence can push parent managers into value traps as they strive for growth through diversification. In Europe, many privatized utility companies have created engineering consultancies and construction companies on the basis of their competence in engineering and managing large construction projects.
The parents burdened their businesses with unreasonable overheads, restrained them from paying appropriate salaries, encouraged them to overspend on balance-sheet items, and prevented them from grasping market opportunities in a timely manner.
What sounded like a synergistic core competence has led the parents into a value trap. Faced with a spread of businesses across the parenting-fit matrix, as in the graph, managers might assume that they should change the skills and resources of the parent organization in order to move all their businesses into the top right corner.
Our research suggests, however, that parenting characteristics are built on deeply held values and beliefs, making changes hard to implement. Good parents constantly modify and fine-tune their parenting, but fundamental changes in parenting seldom occur, usually only when the chief executive and senior-management team are replaced.
While good parents are always fine-tuning their parenting, they rarely change in any fundamental ways. It is also difficult for parent organizations to behave in fundamentally different ways toward different businesses in their portfolios. The interlocking nature of parenting characteristics, pressures for fair and equal treatment of all businesses, and deeply held attitudes all mean that a parent tends to exert similar influences on all its businesses.
Companies are coming to understand that it is often easier to change the portfolio to fit the parent organization than to change the parent organization to fit the businesses. That realization accounts for the rise in demergers and corporate-level breakups. ICI, for example, chose to divide into two portfolios rather than attempt to be a good parent to businesses with widely different parenting needs. The process we have described is a structured means of creating corporate-level strategy.
Parenting-opportunity analysis focuses attention on the upside potential. The parenting-fit matrix ranks the businesses, exposing those with lower levels of fit. The most immediate benefit that companies receive from such analyses is identifying misfits.
With that knowledge, they start to reduce the impact of bad parenting techniques and exit alien-territory businesses. Additional value creation comes from focusing on the best parenting opportunities and developing the parenting skills to match.
But it is a long-term challenge requiring the parent to learn new skills. Moreover, maintaining fit is a dynamic process. As the needs of the businesses change, the parent organization must continually review its behavior and its portfolio of businesses. Companies without sound corporate-level strategies gradually lose strength and fall prey to hostile predators or become emaciated from periodic downsizing and cost cutting.
Excessive overhead consumes profits, businesses that do not fit lose ground to competitors, and decisions are guided by the wrong criteria. Management fads, cash availability, or business-level performance—rather than parenting fit—influence acquisition decisions.
Bureaucratic tidiness, arbitrary cost targets, or organizational politics—rather than value creation—influence changes in the parent. The best companies, however, do more. They strive to be the best parents for the businesses they own—to create more value than rivals would. They are on a quest for parenting advantage.
Just as the concept of competitive advantage has been one of the greatest contributors to clearer thinking about business-level strategy, we believe the concept of parenting advantage can achieve the same for corporate-level strategy. Parenting advantage not only drives planning; it also helps executives make decisions. Will an acquisition, divestment, corporate function, coordination committee, reporting relationship, or planning process enhance parenting advantage?
If not, it should be reexamined and new ideas generated. You have 1 free article s left this month. You are reading your last free article for this month.
Subscribe for unlimited access. Create an account to read 2 more. Organizational restructuring. The best parent companies create more value in their businesses than rivals would. Whether a parent and its businesses fit is a tough question that few managers address.
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