Corporate strategy: parenting advantage

In a multi-business company, corporate strategy decides which businesses belong in the portfolio and how the centre will improve their performance. Parenting advantage evaluates whether this particular corporate parent creates more net value for each unit than another owner could.

When to use it

• Use it to understand how the businesses inside one corporation fit together.
• Apply it to test specific opportunities for sharing resources or knowledge.
• Use it to identify units that should be divested, spun off or placed under a different parent.

Origins

The distinction between business-unit and corporate-level strategy has a long history. General Motors was an early adopter of separate divisions beneath one corporate structure in the 1930s. Strategy research in the 1980s concentrated largely on business-level competition, influenced by Michael Porter, but work later in that decade also examined how a parent adds value. Andrew Campbell, Michael Goold and colleagues at the Ashridge Strategic Management Centre developed parenting advantage in an influential stream of research. David Collis and Cynthia Montgomery also advanced thinking about how a corporation can become worth more than its independent parts.

What it is

Executives in each individual business choose markets and competitive positions. Executives at the corporate centre choose the portfolio and the interventions the parent will make. Related diversifiers such as Unilever operate businesses with overlapping markets or capabilities. Unrelated diversifiers such as General Electric span very different sectors. Holding companies such as Berkshire Hathaway may own unrelated businesses without pursuing operational synergy.

Campbell, Goold and Marcus Alexander define parenting advantage as the distinctive net value a parent brings to its units. Benefits may include cheaper finance, a corporate brand, shared resources or transferred knowledge. Costs arise through headquarters overhead, delay, inappropriate standards or interference. Advantage exists only when value added minus value destroyed exceeds what another parent—or independence—would provide. Microsoft’s acquisition of Skype, for example, was a bet that integration with Microsoft’s communication products would create more value than ownership by Google, Facebook or another alternative.