Creating parenting value (Goold, Campbell and Alexander)

The corporate centre should assess each business as rigorously as an acquirer would in Creating value from mergers, acquisitions and alliances. Net value depends not only on synergies among units, but on fit between the parent’s capabilities and the needs of each business.

When to use it

• Use it to explain why each business belongs in the portfolio, how the parent improves it through distinctive characteristics and where those value-creation insights could be applied next.

Origins

Michael Goold, Andrew Campbell and Marcus Alexander developed parenting advantage at the Ashridge Strategic Management Centre. Their 1994 book Corporate-Level Strategy reframed corporate strategy around a demanding comparison: can this parent create more value for the business than another owner? Their later Harvard Business Review article “Corporate Strategy: The Quest for Parenting Advantage” further distinguished useful intervention from value destruction caused by poor fit or excessive influence.

What it is

Oscar Wilde’s line about losing parents can be inverted in corporate life: losing a corporate parent may release a business from constraints.

The performance of management buy-outs since the mid-1980s supports that possibility. Independence can liberate a unit when headquarters has imposed cost, delay or inappropriate direction.

Ashridge research on multi-business companies reached a sobering conclusion in the authors’ book Corporate-Level Strategy: Creating Value in Multi-Business Companies: headquarters frequently destroyed rather than created value.

Treat the centre as an intermediary between investors and operating businesses. Parenting makes sense only when its synergies exceed recurring dissynergies, including:

Poor central decisions caused by distance from customers and limited understanding of the unit’s market and key success factors.

Reduced motivation when frontline leaders are separated from direct investor accountability.

The often substantial overhead of headquarters.

An excessive acquisition premium where the business was purchased rather than built, as discussed in Creating value from mergers, acquisitions and alliances.

Net value can emerge when the company develops appropriate parenting skills, applies them to matching opportunities and becomes the best available owner.

Even a value-adding parent should consider selling when another owner could add more and will pay for that greater potential. The proceeds can then be invested where the current parent’s own advantage is strongest.

Successful parents know both where to intervene and where to abstain. Three elements matter:

Value-creation insights: a repeatable mechanism that benefits several businesses, such as a shared electronics technology base or Virgin’s brand.

Distinctive parenting characteristics: transferable resources and capabilities that deliver the insight, such as pharmaceutical corporate R&D or Virgin’s central brand promotion, including sponsorship of the London Marathon.

Heartland businesses: units best placed to benefit from those insights and characteristics. Virgin’s consumer-facing mobile and banking activities fit its parent better than a business-to-business engineering company would.

The model combines resource-based and portfolio perspectives. Parenting characteristics resemble transferable resources in The resource and capability strengths/importance matrix (Grant) and Core competences (Hamel and Prahalad). Applying them selectively across businesses reflects Optimising the corporate portfolio.

How to use it

For each business, ask:

Do its improvement opportunities match the parent’s proven insights and distinctive characteristics?

Do its key success factors (KSFs) conflict with how the parent operates?

Plot both answers on the Parenting-Fit Matrix and classify the unit:

Heartland business: strong fit with both improvement opportunities and KSFs.

Edge of heartland business: partial fit and marginal net value; identify what must change to improve performance against KSFs.

Ballast business: little opportunity for this parent to add value but no severe KSF conflict. It may perform better under a more synergistic owner, and too many ballast units can make the corporation a target.

Alien territory business: broad misfit and active value destruction, normally demanding rapid exit.

Value trap business: an enticing improvement opportunity combined with KSF misfit. Do not mistake it for an edge case; the apparent upside can draw the parent into damaging intervention.

The parenting-fit matrix

Strong

Weak

Weak Strong

Fit between parenting characteristics and parenting opportunities

The ideal portfolio concentrates on heartland businesses and edge units with a credible route into the heartland. Compare every classification with the alternative-owner counterfactual before investing or divesting.

Top practical tip

Document the parent’s value-creation mechanism before scoring any unit. Evidence from successful prior interventions is stronger than a synergy story created to justify ownership.

Top pitfall

Do not redefine the parent’s characteristics to make an attractive opportunity appear to fit. An unbuilt capability is an investment hypothesis, not a current parenting advantage.

Further reading

Campbell, A., Goold, M. and Alexander, M. “Corporate strategy: The quest for parenting advantage.” Harvard Business Review.

Goold, M., Campbell, A. and Alexander, M. Corporate-Level Strategy: Creating Value in the Multibusiness Company. New York: Wiley.