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.

How to use it

Assess each business on two dimensions. The first is fit between its improvement opportunities and the parent’s genuine value-creation insight. General Electric has sought to transfer management knowledge and leaders across businesses; 3M combines technologies held across the firm into multiple products. The second is fit between the business’s critical success factors and the parent’s characteristics. Poor understanding or incompatible systems increase the risk of destruction. High Fit of business’s critical success factors with parenting characteristics

Low

Low High Fit of business improvement opportunities with parent’s value-creation insights

Plot units using improvement fit horizontally and critical-success-factor fit vertically. Heartland businesses offer clear parenting opportunities in domains the centre understands; edge-of-heartland units are close but contain a material uncertainty. Alien territory is poorly understood and highly exposed to neglect or mismanagement, normally supporting divestment. Ballast is familiar but offers little additional value creation. IBM’s mature mainframe activities, while the company moved towards software and services, illustrate how a profitable core can add stability yet slow renewal; IBM later sold its PC business.

Value traps appear attractive because the parent sees an improvement opportunity, but a critical misfit threatens to overwhelm it. GE’s acquisition of investment bank Kidder Peabody promised banking capability and cheap capital, yet its bonus-driven culture conflicted with GE’s. A rogue-trading loss of hundreds of millions of dollars contributed to the decision to sell. Unless the parent can resolve the mismatch credibly, divestment is safer than pursuing an imagined synergy.

Top practical tip

For every proposed corporate intervention, estimate both value creation and value destruction relative to the best alternative owner. This makes the matrix more decision-relevant than a portfolio view based only on market attractiveness and unit performance.

Top pitfall

Do not assume that every apparent synergy should be pursued. Transfer costs, incompatible incentives and managerial distraction often make the benefit a mirage; a good parent intervenes selectively.

Further reading

• Goold, M., Campbell, A. and Alexander, M. (nineteen ninety-four). Corporate-Level Strategy: Creating Value in the Multibusiness Company. Wiley.
• Campbell, A., Goold, M. and Alexander, M. (nineteen ninety-five). “Corporate Strategy: The Quest for Parenting Advantage.” Harvard Business Review.