Corporate parenting Corporate parenting

Students Group MemberStudents Group Member

Scarlette Almedia Scarlette Almedia 44 Mihir D Bhammar Mihir D Bhammar 55 Deepa Karappan Deepa Karappan Kunal Doshi .Kunal Doshi . Dipti Gawas.Dipti Gawas. Siddesh K.Siddesh K. Sandeep Pandita Sandeep Pandita

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Corporate ParentingCorporate Parenting Definition :-Definition :- Corporate parenting views the corporation Corporate parenting views the corporation

in terms of resources and capabilities that in terms of resources and capabilities that can be used to build business unit value as can be used to build business unit value as well as generate synergies across business well as generate synergies across business unitsunits    

Corporate parenting should Corporate parenting should involve three analytical stepsinvolve three analytical steps

Examine each business unit (or target firm in the case of Examine each business unit (or target firm in the case of acquisition) in terms of its strategic factors. acquisition) in terms of its strategic factors.

Examine each business unit (or target firm) in terms of Examine each business unit (or target firm) in terms of areas in which performance can be improved. areas in which performance can be improved.

Analyze how well the parent corporation fits with the Analyze how well the parent corporation fits with the business unit (or target firm) business unit (or target firm)

The Parenting FrameworkThe Parenting Framework

The parenting framework perspective sees The parenting framework perspective sees multibusiness companies as creating value by multibusiness companies as creating value by

influencing—or parenting—their businesses influencing—or parenting—their businesses

The best parent companies create more value The best parent companies create more value than any of their rivals do or would if they than any of their rivals do or would if they owned the same businessesowned the same businesses

To add value, a parent must improve its To add value, a parent must improve its businessesbusinesses

The Parenting ‘School’The Parenting ‘School’

The essence of the parenting school is that The essence of the parenting school is that value is createdvalue is created through the use of key through the use of key resources found at the corporate centre resources found at the corporate centre which are properly matched to the types of which are properly matched to the types of SBUs in the organisation portfolioSBUs in the organisation portfolio

Value in this case can mean a number of Value in this case can mean a number of things including: providing opportunities things including: providing opportunities for SBUs to develop; creating linkages for SBUs to develop; creating linkages between SBUs; providing central services to between SBUs; providing central services to SBUs; and protecting the interests of SBUsSBUs; and protecting the interests of SBUs

The Corporate Centre or The Corporate Centre or ParentParent

The corporate centre or The corporate centre or ‘parent‘parent’ is anything ’ is anything that sits above the level of the strategic that sits above the level of the strategic business units (SBUs) of the organisationbusiness units (SBUs) of the organisation

An SBU is a part of the organisation for An SBU is a part of the organisation for which there is a distinct client group. So it which there is a distinct client group. So it usually relates to a collection of related usually relates to a collection of related activities or services, but might not be activities or services, but might not be neatly reflected in the structure of the neatly reflected in the structure of the organisationorganisation

The Functions / Roles of Corporate The Functions / Roles of Corporate ManagementManagement

Decisions over diversification, divestment, and allocating resources between businesses.

--Assisting business strategy formulation

--Monitoring and controlling performance of the businesses

Sharing and transferring resources and capabilities

Managing linkagesbetween

companies

Guidance and control of individual businesses

Managing the Corporate Portfolio

Head office

Central servicesCentral services(e.g. finance)(e.g. finance)

Division ADivision A Division BDivision B Division CDivision C Division DDivision D Division EDivision E

FunctiFunctionsons

FunctionsFunctions FunctionsFunctions Functions FunctionsFunctions

The corporate parent

SBUs

Increasing value for money through Efficiency/leverage Expertise Investment and competence building Fostering innovation - coaching/learning Mitigating risk Image/networks Collaboration/co-ordination/brokerage Standards/performance assessment Intervention (e.g. acquisition, disposal, change agency)

The role of the ‘centre’The role of the ‘centre’

Strategic planning

CENTRE(Master Planner)

DetailedBudget

Establishment

Capitalallocation

Proceduresand

rulebooks

Imposedservices andinfrastructure

Bargaining(item by item)

DIVISION/DEPARTMENT

Financial control

CENTRE(Shareholder/banker)

DIVISION/DEPARTMENT

Targets‘single line’

Capital bidsPerformance

appraisal

Value CreationValue Creation

Efficiency gains from applying existingEfficiency gains from applying existing resources/capabilities to new markets/productsresources/capabilities to new markets/products

Economies of scopeEconomies of scope Benefits of synergyBenefits of synergy

Applying corporate managerial capabilitiesApplying corporate managerial capabilities to to new markets/products/servicesnew markets/products/services

Dominant logicDominant logic

Increased market power from diverse Increased market power from diverse product/service rangeproduct/service range

Cross subsidyCross subsidy Possible monopoly in long-runPossible monopoly in long-run

Less obvious value creationLess obvious value creation

In response to environmental changeIn response to environmental change To defend existing valueTo defend existing value Or straying too far from dominant logic?Or straying too far from dominant logic?

To spread risk across range of businessesTo spread risk across range of businesses Investors can diversify more effectively?Investors can diversify more effectively? Important for private businesses Important for private businesses

In response to expectations of powerful In response to expectations of powerful stakeholdersstakeholders

Pressure from financial analysts to produce Pressure from financial analysts to produce constant growthconstant growth

Conditions for value creationConditions for value creation

Value is only created under three Value is only created under three conditionsconditions

• Business units are not fulfilling their potentialBusiness units are not fulfilling their potential parenting opportunityparenting opportunity

• Centre has relevant resources or capabilitiesCentre has relevant resources or capabilities parenting skillsparenting skills

• Centre managers understand the business Centre managers understand the business units well enough to avoid destroying valueunits well enough to avoid destroying value

sufficient feelsufficient feel

Ways to create ValueWays to create Value

There are four ways that a corporate There are four ways that a corporate parent can create value for their parent can create value for their businesses:businesses:

Stand-alone influenceStand-alone influence

Linkage InfluenceLinkage Influence

Functional and Services InfluenceFunctional and Services Influence

Corporate Development ActivitiesCorporate Development Activities

VALUE-DESTROYING VALUE-DESTROYING ACTIVITIESACTIVITIES

Cost VS Benefits:Cost VS Benefits: Very large financial cost is Very large financial cost is rarely offset by the large financial cost benefitsrarely offset by the large financial cost benefits

Delays in decisions: Delays in decisions: Several levels of corporate Several levels of corporate parent above the business unit, each with parent above the business unit, each with executives who have a decision-making influence executives who have a decision-making influence over the business unitsover the business units

Buffer from Reality: Buffer from Reality: Corporate parents may Corporate parents may buffer the executives in businesses from the buffer the executives in businesses from the realities of financial markets by providing a realities of financial markets by providing a financial ‘safety net’ financial ‘safety net’

Reputation & Performance Reputation & Performance : Underperformance : Underperformance of members and ill reputation affects the entire of members and ill reputation affects the entire business groupbusiness group

VALUE-DESTROYING ACTIVITIESVALUE-DESTROYING ACTIVITIES

Cooperation for Resources Cooperation for Resources : Stuck with : Stuck with ageing and inefficient resource , Costly ageing and inefficient resource , Costly managerial skills Tunnelling funds / resourcesmanagerial skills Tunnelling funds / resources

Opportunity Identification Opportunity Identification : Excessive : Excessive diversification, dilution of investment across diversification, dilution of investment across multiple projects.multiple projects.

Centralized Services Centralized Services : Costs of Coordinating : Costs of Coordinating diversitydiversity

Managing a Portfolio Business Managing a Portfolio Business : Unnoticed : Unnoticed underperforming portfolio, Too large a portfolio underperforming portfolio, Too large a portfolio to manage justifiablyto manage justifiably

Reinventing GEReinventing GEOrganisational initiatives of Jack Welch:

•Delaying --- from 9 or 10 layers of hierarchy to 4 decentralising decisions.

•Reformulating strategic planning --- from formal, document-intensive analysis to direct face-to-face discussion of key issues.

•Redefining the role of HQ --- from checker, inquisitor, and authority to facilitator, helper, and supporter.

•Co-ordinating role of HQ --- corporate HQ to lead in creating the “boundaryless corporation” where innovations and ideas flow and where horizontal co-ordination occurs to respond to new opportunities.

•HQ as change agent --- corporate HQ driving force for continual organisational change (e.g. “workout”).