Strategy and the parenting advantage

Monday, July 18th, 2011 at 3:59 pm

The only way an MBA is worth the price is if you apply the teaching to your professional life. I had a superb lecturer for strategy II, Dr Paul Raspin, he created a lot of value with his teaching and I captured that value by charging my clients to put that knowledge into action.

A recent consultancy project required me to analyse my client’s business portfolio. So I applied the corporate parenting framework i.e. which business should you own and why. Corporate parenting is much like parenting children you need to add value, provide support, create resources and make sure you have the right environment to help the business grow.

What is the parenting advantage?

The parenting advantage is creating more value than your competitors would with the same businesses. For example would eBay (previous owner of Skype) or Microsoft (current owner of Skype) create more value owning Skype. Chances are Microsoft will create more value so they would have the parenting advantage over eBay in this case.

It is also about asking following questions:

  1. Which businesses should we own rather than our competition and why?
  2. What is the best configuration, processes or structure to foster superior performance?
  3. Is there a good fit between the skills of the parent and the needs of the business?

The last question is the most important, if you do not have skills or resources that the acquired business needs then there is little point owning it and you are actually more likely to destroy value.

So how does a corporate parent assess which businesses to own?

Step 1: Understand the critical success factors (CSF) of the business, what really makes a successful business. For example in the hotels market one CSF might be product branding or site selection.

Step 2: Assess the parenting opportunities i.e. is there any upside? An inefficient business might have a lot of upside but some businesses will be so well run and financed that there is little opportunity.

Step 3: Understand the characteristics of the corporate parent. Describe theirs skills, experience, structure, processes, and employees.

Step 4: Map these onto the parenting grid.

Understanding the parenting grid

You should focus your attention on businesses in the heartland and possibly those on the edge of the heartland. Edge of heartland business can be moved into the heartland when the parent learns the new CSF over time. The ballast businesses have little upside but can be a reliable source of earnings (cash cow). Those businesses in the alien territory and value trap should be avoided at all costs, as they will be a drain on resources and very distracting!

Remember it is much easier to change the portfolio to match the parent, changing the parent to match the portfolio is much, much harder.

 

Reference: Campbell, A.; Goold, M.; Alexander, M.(1995) Corporate Strategy: The Quest for Parenting Advantage.
Harvard Business Review, Mar/Apr95, Vol. 73 Issue 2, p120-132, 13p

 

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This entry was posted on Monday, July 18th, 2011 at 3:59 pm and is filed under General.
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