2. However, there are still relatively few companies to forget that parenting advantage should be in centre
whose corporate strategies are based on powerful and stage and, hence, to take decisions that have nothing
convincing sources of value creation. to do with added value. Parenting advantage should
be the guiding criterion for corporate-level strategy,
W h y it Matters rather as competitive advantage is for business level
The challenge to corporate parents to justify them- strategy.
selves is important because it concentrates attention
PROPOSITION: Parent companies compete with each
on whether and how the activities of the parent do
other for the ownership of businesses: The objective
add value. Rather than assuming the existence of a
of corporate strategy should be to add more value to
corporate parent, and then asking what the businesses
the businesses in the portfolio than other rival parent
can do for it, it places the onus in precisely the
organisations would.
opposite direction. Now the key question is what the
parent can do for the businesses, and whether it can
positively demonstrate that its u n d o u b t e d costs are
more than offset by tangible benefits for the busi-
nesses. For m a n y corporate parents, this has been a
Value Destruction
new perspective, and has led to the elimination of What We Have Learned
worthless, bureaucratic routines and a sharper con- Corporate hierarchies inevitably destroy some value.
centration on those things that genuinely add value. Apart from the obvious issue of corporate overheads,
the main problems relate to ill-judged influence from
PROPOSITION: Many of the business units in mul-
senior managers and to information filters.
tibusiness companies could be viable as stand-alone
Since senior corporate managers must divide their
entities: To justify its existence, the corporate parent
time between a number of businesses in the portfolio,
must influence the businesses collectively to perform
they will always be less close to the affairs of each
better than they would as stand-alone entities.
business than its own management team. Inevitably,
there is a danger that their influence will be less soun-
dly-based than the views of the managers running the
businesses.
Parenting Advantage Corporate hierarchies encourage business man-
What We Have Learned agers to compete with each other for investment funds
Since corporate parents exist in a competitive world, and for personal promotion. Business managers there-
in which ownership of businesses is transferable, fore tend to filter the information they provide to div-
adding some value is not a sufficient justification for isional and corporate management, in order to present
the corporate parent. Ideally, the parent must add their businesses in the most favourable light. The
more value than other rival parents would: otherwise information on which corporate managers must base
all stakeholders could be made better off through a their influence and decisions tends to be sys-
change in ownership of the businesses to a superior tematically biased.
parent. The corporate centre also tends to be insulated from
The force of this objective is evident when com- the sort of critical examination of cost effectiveness
panies face the possibility of a hostile acquisition. that other parts of a company routinely receive. Pro-
But, even if there is no i m m i n e n t threat of a take-over, cesses to assess net corporate value added are seldom
the aspiration to add as m u c h value as possible to well-developed, and power relationships in the cor-
all the businesses in the portfolio should remain the porate hierarchy mean that it is hard for the busi-
ultimate goal. Businesses whose competitors have nesses to express their views openly. Central costs
parents that add more value are at a disadvantage, have a tendency to creep upwards and unproductive
which will eventually be reflected in their results. central interference goes unchecked.
Extra costs and negative influence are therefore per-
W h y it Matters vasive features in all multibnsiness organisational
The objective of adding more value than other rival hierarchies and can only be offset by substantial value
parents, w h i c h we refer to as achieving "parenting creation in targeted areas (see proposition 5).
advantage", is important because it provides a sound Research with a wide cross-section of companies in
and powerful guiding objective for corporate strategy. the US, Europe and Asia-Pacific has provided many
All too often other objectives, such as achieving a specific examples of the phenomenon.
faster rate of growth, balancing the portfolio between
sectors or geographies, spreading risk, or simply sur- W h y it Matters
vival, take precedence aver parenting advantage, and This observation is important because it should lead
lead to poor decisions. These other objectives are not corporate parents to be more disciplined. They should
in themselves wrong, but can lead corporate parents avoid intervening in businesses unless they have
Long Range Planning Vol. 31 April 1998
3. specific reasons for believing that their influence will W h y it M a t t e r s
be positive. They should avoid extending their port- This observation is important because it should
folios into new businesses unless they have good change the mindset of corporate centre managers.
grounds for believing that they will be able to add Instead of "desperately seeking synergies", centre
value to them. They should seriously consider managers should be focusing their efforts only on
demerging or spinning off businesses that do not fit those synergies that need central intervention.
well with their skills. And they should be willing Instead of actively fostering a "one enterprise" or
to downsize or eliminate corporate functions unless "one family" philosophy, centre managers should
they have a clear added-value role. usually be encouraging "market place" relationships
This perspective provides a counterweight to ill- between business units. Instead of supporting "cor-
focused and over-ambitious corporate strategies. Pre- porate centre creep", in which activities graduate to
viously, it was too easy for corporate parents to feel the centre in the name of synergy, centre managers
that simply going through the budget or capital expen- should be vigilant in avoiding interventions unless
diture review process " m u s t be good for the busi- they are clearly beneficial. This change in mindset
nesses" or that diversifying into more glamorous or will focus central management time on those syno
more rapidly growing sectors " m u s t be good for inves- ergies where the parent has a real role to play. It
tors". Now we know better, since we can see that good may also free time for value creating influence on
corporate strategy is as m u c h about avoiding value businesses as stand-alone entities.
destruction as it is about maximising value creation. The change in mindset will also reduce the amount
of value destroyed from "contamination". Con-
PROPOSITION: All multibusiness organisations have tamination occurs w h e n two businesses with dif-
inherent and pervasive tendencies to destroy value: ferent critical success factors are encouraged to work
Corporate strategies should recognise these tend- closely together in the name of synergy, and pollute
encies and be designed to minimise value destruction each other's thinking and strategies. The loss of focus
as m u c h as to m a x i m i s e value creation. and m u d d l e d thinking that results can end up hurting
both businesses.
PROPOSITION: The importance of lateral synergies
in creating value in multibusiness companies has
been systematically overrated: Corporate parents
Lateral Synergies should p a y relatively more attention to other sources
of value creation, in particular their ability to improve
What We Have Learned
performance in each individual business as a stand-
Since Ansoff's pioneering work on synergy, most
alone entity.
businessmen and management thinkers have justified
multibusiness companies because of the existence or
potential for lateral linkages between their busi-
nesses. Managers at the centre have believed that their
main role is the creation of synergy. Value Creation
Our research, in contrast, has shown that parent What We Have Learned
managers are often pursuing mirages rather than real Value creation only occurs under three conditions:
synergy opportunities, and that their interventions in
• the parent sees an opportunity for a business to
the lateral relationships between businesses are often
improve performance and a role for the parent in
net negative rather than net positive. Furthermore,
helping to grasp the opportunity
most "synergies" are available between i n d e p e n d e n t
• the parent has the skills, resources and other charac-
businesses. A c o m m o n parent is not necessary for two
teristics needed to fulfil the required role
or more businesses to trade with each other, form
• the parent has sufficient understanding of the busi-
alliances or joint ventures, licence technology, share
ness and sufficient discipline to avoid other value-
benchmarks and best practice, pool negotiating
destroying interventions.
power, share services, coordinate strategies or com-
bine to create new businesses. Only a few synergies The most successful parents concentrate their atten-
require a c o m m o n parent to be effectively tion on a few large areas of opportunity rather than
implemented. We have also observed that, for many attempting to intervene more broadly: in this way
multibusiness companies, the main source of added they can both develop distinctive skills that are spe-
value stems from the relationship between the centre cially suitable for the opportunities they are targeting
and each business as a stand-alone entity. We have, and avoid dissipating their energies on issues where
therefore, concluded that the value potential of their contribution will have low or negative value.
synergies has been systematically over-rated by Although competitive pressures should weed out
managers, academics and consultants. businesses that persistently underperform, oppor-
Brief Case--Corporate Strategy and Parenting Theory
4. tunities for a corporate parent to add value are not
uncommon. They arise w h e n
Corporate Centres and Management
Processes
• weaknesses in business managers are causing
underperformance W h a t We Have Learned
• the business managers face opportunities that even The desire to follow 'best practice' in corporate pro-
a competent management team will find difficult to cesses (such as planning, capital sanctioning, per-
seize without help from the parent formance targeting and monitoring, etc.) has resulted
• the parent possesses some special resources that in several popular but ephemeral trends. Similarly, a
open up n e w opportunities for the businesses. focus on the appropriate size of the corporate centre
has, at different stages, encouraged managers to
Our emphasis is on the skills or competences of the increase centralisation and the staffing of functions
parent and the extent to which they fit with the oppor- such as corporate planning and corporate HR, or,
tunities in the businesses. It is parenting competences more recently, to reduce dramatically the numbers
or resources, what the parent can do to make a differ- employed in such functions.
ence, that explain successful corporate strategies. The But managers adopting the general trends and sup-
broader notion of core competences, though useful, posed best practice of the day have frequently been
fails to highlight the role to be played by the parent. disappointed by the results. Furthermore, parents
w h o appear to be successful in adding value to their
businesses have processes and corporate staffing lev-
W h y it Matters els that are both widely different from each other and,
The conditions for value creation are important, in many cases, that are out of tune with accepted best
because they force corporate parents to think through practice at the time.
what major opportunities for added value lie behind These observations have taught us that personal
the corporate strategy. If no such opportunities have skills and cultural fit are the key issues; that the skills
been identified, the strategy is b o u n d to be fatally of the individuals involved and the organisational
flawed. heritage in which they operate can make essentially
They also help corporate parents to focus their the 'same' process either effective or ineffective. We
activities. By giving prominence to a few major oppor- have also learned that the opportunities to add value
tunities, corporate priorities can be clarified, irrel- with a given process or level of centralisation differ
evant or value destroying activities can be eliminated, depending on the specific needs of the businesses in
and time and attention can be devoted to building up question. A 'one size fits all' approach to designing
the competences that the parent needs most. By not the nature and composition of the parent is inap-
trying to do everything, the parent can become spe- propriate.
cially good at doing the things that really matter.
The objective of building parenting competences W h y it Matters
that fit well with particular opportunities also gives The importance of the size, staffing and design of
a sharper and more practical basis for competence the corporate office is not in question, and managers
development at the parent level. The often fruitless devote considerable attention to it. But if corporate
quest for nebulous core competences can be replaced functions and processes are not developed as an inte-
with a m u c h more targeted agenda for the skills, gral part of the overall value adding corporate strat-
resources and processes that the corporate parent egy, they may be in line with general good practice,
needs most. but lead to little or no improvement in performance.
Lastly, an emphasis on the distinctive insights and Equally, it is far more important for parent managers
skills possessed by the parent is valuable because it to possess idiosyncratic skills that are suitable for the
underlines h o w much the success of any corporate parenting opportunities they are targeting than for
strategy depends on the experience, capabilities and them to be abreast of all the currently fashionable
attitudes of the CEO and his team. The personal views general management trends. Worse still, changing
and qualities of the CEO need to be a primary criterion from existing arrangements to make them fit better
in selecting the corporate strategy. with general good practice may undermine value cre-
ation that is currently being achieved due to the spe-
PROPOSITION: Value creation seldom occurs unless
cial circumstances of the portfolio and the managers
the corporate parent perceives a f e w large oppor-
running it. Without a clear focus on selected par-
tunities for business performance enhancement, and
enting opportunities, simply going through the
develops distinctive skills, resources and influencing
motions, however professionally, is as likely to
processes that address these opportunities: Corporate
destroy value as create it.
parents should focus their efforts on building special
competences that fit the particular opportunities they PROPOSITION: Corporate centres, functions, and
are targeting. processes designed to achieve general best practice
Long Range Planning Vol. 31 April 1998
5. lack sufficient focus to achieve outstanding results: are easy to appreciate in terms of parenting oppor-
They should be designed more idiosyncratically to fit tunities and fit, but incomprehensible in terms of
with the specific opportunities targeted by the cor- relatedness as conventionally defined.
porate-level strategy.
W h y it Matters
A valid means of measuring diversity provides vital
guidance to corporate parents who may have been
Diversity impressed by the current vogue for "focusing on core
W h a t We Have L e a r n e d businesses", but are unsure how to determine which
For m a n y years, it has been felt that highly diverse businesses should be included in the core. Now we
multibusiness companies must be more difficult to can see that corporate parents should aim to focus
manage than less diverse companies. An extensive their portfolios around businesses with similar par-
stream of academic research has sought to examine enting needs and opportunities, for which the parent
the comparative performance of "related" and "unre- either has or can build suitable parenting skills and
lated" diversification strategies, where "relatedness" resources. These are the businesses in which the par-
was measured in terms of technologies, markets and ent is likely to be able to add the most value; we refer
customers. to them as " h e a r t l a n d " businesses. To avoid excessive
Yet the evidence has not provided conclusive sup- diversity, corporate parents should focus their port-
port for the intuitively appealing idea that related folios on heartland businesses.
corporate strategies should outperform unrelated
PROPOSITION: Past measures of diversity based on
ones. And the performance of companies such as Han-
conventional concepts of relatedness have proved
son, BTR and KKR in the 1980s and of Virgin and
unsatisfactory: To avoid excessive diversity, cor-
GE in the 1990s provide specific counter-examples.
porate parents should build their portfolios around
"Relatedness" seems to be neither a necessary nor
businesses with similarities in terms of parenting
a sufficient condition of a successful multibusiness
needs and opportunities.
strategy.
During the 1980s, a new approach to measuring
diversity began to emerge. Prahalad and Bettis sug-
gested that the mindsets and skills of the corporate
Stretch and Fit
team provided the constraint on how m u c h diversity W h a t We Have Learned
was manageable. There was a " d o m i n a n t logic" that Some critics regard Ashridge Strategic Management
tended to be applied across the whole portfolio, irres- Centre's approach to corporate strategy as too
pective of the strategic characteristics of each busi- cautious. Our emphasis on the pervasiveness of value
ness. The Ashridge Strategic Management Centre destruction, the need for a close fit between parenting
notion of "management styles" also suggested that capabilities and business needs, and the dangers of
each corporate team had a well-defined approach that excessive diversification, they claim, prevents com-
it brought to bear on all the businesses in the portfolio. panies from seeing the potential of radical new stra-
More recently, we have pushed these ideas further, tegies with stretching goals. And, without stretching
arguing that diversity is best measured in terms of ambitions, companies become slow moving, flabby
the differences in parenting needs and opportunities and lacking in motivation.
between businesses in the portfolio. Businesses with We accept the need for "stretch" as well as "fit".
different critical success factors require parenting that Our research supports the desirability of a continuous
is sympathetic to these differences, and businesses search for new opportunities and a commitment to
with different opportunities for parental value cre- refining and extending parenting skills. We recognise
ation require different parenting skills and resources both the excitement of flesh challenges that cannot
that are suitable for realising the opportunities in easily be met and the stultifying effects of an unwill-
question. Our research has shown that successful cor- ingness to alter the status quo.
porate parents have portfolios of businesses that are But we are also realists. We have observed how
relatively homogenous in terms of parenting needs frequently corporate strategies fail because parents
and opportunities, and that m a n y corporate strategy are overoptimistic about their ability to build new
disasters can be explained in terms of straying into skills and understand new types of businesses. We
businesses that turned out not to be responsive to the have researched numerous diversification attempts in
dominant parenting approach of the company. which there were gross underestimates of how much
These findings show w h y conventional measures time and attention it w o u l d take for the parent to get
of relatedness have proved imperfect predictors of to grips with the new business. As a result, we believe
corporate performance, since they do not focus on that m u c h of the advice that companies receive about
the fit between the businesses and the parent. The rejuvenation, growth ambitions, and long term sur-
successes of the Hansons, the KKRs and the Virgins vival causes managers to launch initiatives that are
Brief Case--Corporate Strategy and Parenting Theory
6. foolhardy rather than bold. At the least, stretch should will be aggregated together for performance
be tempered with realism when corporate strategies measurement and reporting purposes
are being developed, and a balance should be main- • determine what entities will report to the corporate
tained between stretch for new opportunities and fit parent and, conversely, what entities the corporate
with the parent's existing skills. parent will need to add value to
• establish the scope for lateral synergies by deter-
W h y it Matters mining what activities fall within each unit, and
A recognition that stretch should be balanced by hence what the opportunities are for units to link
realism is valuable. It should prevent complacency with each other.
and encourage innovative ideas, while at the same Business unit definitions can either protect activities
time helping to eliminate m a n y of the more extreme from the corporate parent's attention or expose them
disasters of excessive corporate ambition (Sony in to it--thereby inhibiting or opening up the possi-
Hollywood, Exxon in office equipment, Daimler-Benz bilities for the parent either to create or destroy value.
in white goods, Saatchi and Saatchi in management Business unit definitions have a profound impact on
consulting . . . . ). the behaviour and aims of business managers and
A c o m p a n y with low growth or declining core busi- on the size and nature of parenting opportunities.
nesses faces three options. It can aggressively seek a Inappropriate business definitions lead to compro-
new " h e a r t l a n d " with "platform" initiatives (invest- mised business strategies and missed opportunities
ments in new or different businesses designed to for parental value creation.
speed the learning of new parenting skills). It can In companies with intermediate parenting levels,
experiment with "edge of heartland" investments, in such as divisions, the grouping of businesses into
the hope of evolving towards a broader heartland divisions is also important. Lack of clarity on the
which offers more potential. Or it can decide to focus added value role of different levels, groups and indi-
on its mature core and be the best in a limited field. viduals within the parent leads to redundant cost,
Whereas m a n y advisers and managers rule out the last confusion, and reductions in net value creation.
option as defeatist, we believe it is often a reasonable Where the parenting tasks are shared between dif-
choice. In a dynamic economy, new rising organ- ferent individuals, their respective responsibilities
isations will always be balanced with others that also need to be clearly defined and complementary.
decline. Helping some businesses decline gracefully, Getting the unit definitions and corporate structure
without too m a n y development attempts, may be as right is an important precondition for a successful
important as helping other businesses to broaden corporate strategy.
their portfolios and set ambitions for the next century.
Moreover, companies that do push forward into W h y it Matters
new businesses will prosper more if they choose those No-one doubts that business unit definition and cor-
that are compatible with parenting skills that they porate structure are important topics. Typically, they
have or can develop. Many parent organisations are are high on chief executives' agendas. But a per-
"stretching" their skills too far in pursuit of new spective on these issues that stresses value creation
opportunities, w h e n they w o u l d do better to choose and the role of the parent is m u c h less common;
a narrower range of businesses where greater "fit" can history, personal ambition and corporate politics
be created. often seem to be the major considerations. Instead,
careful analysis of the advantages of breadth versus
PROPOSITION: Many corporate parents are over- focus in business definition and of the impact of dif-
ambitious about the speed with which they can build ferent structures on corporate value creation should
n e w skills and understand n e w types of businesses: underpin these organisational choices.
Good corporate strategies should maintain a balance
PROPOSITION: Business unit boundaries and cor-
between "stretch" for new opportunities and "fit"
porate reporting structures have a profound impact
with the parent's existing skills.
on both the value creation opportunities and the
value destruction risks for the corporate parent:
Decisions on unit definitions and corporate structures
Business Unit Definition and should be determined by careful analysis of their
Corporate Structure likely impact on net value creation, not by history,
ambition and politics.
W h a t We H a v e L e a r n e d
Business units represent the basic building blocks in
any multibusiness company. The boundaries around Future Research Challenges
the business units We see four priority areas for future research:
• establish what groups of activities will receive the 1. How companies can build the parenting skills that
focused attention of a single management team, and enable them to grow into new businesses.
Long Range Planning Vol. 31 April 1998
7. O By what means have corporate parents that have ture versus alliance versus relational long-term
presided successfully over radical changes in their contracts?
portfolios learnt new competencies? 3. Better understanding of the organisation structures
O How m u c h time, investment and change (e.g. peo- and capabilities needed to implement corporate
ple change) is needed to develop a portfolio into strategies successfully.
new business areas? [] What are the best ways to divide up tasks between
[] ls it possible to distinguish in advance those new different levels, groups and individuals in com-
business growth ambitions that will be achievable plex parent organisations?
from those that will be a bridge too far? [] How should corporate headquarters be designed
[] What are the chances of success with n e w b u s i n e s s to support the corporate strategy and to avoid
initiatives, and how can the odds be improved? Is being driven by empire-building or bureaucratic
it possible to identify those companies that would expansion?
be better off trimming their development [3 How can the skills needed to implement a given
ambitions, breaking up or focusing more tightly? corporate strategy be defined as fully and clearly
as possible? What is the best way to develop these
O Which development paths are most successful?
skills?
Are there lessons to be learned from successful
developers? O What career paths best prepare a manager for a role
as corporate parent? From what pools of managers
2. How to manage the internal and external bound- should parent managers be selected and how can
aries of the corporation to create value, and in par- the quality of these pools be enhanced?
ticular how to create value without full ownership.
4. More precise means of measuring the net value
[] How can the boundaries between business units, added by the corporate parent.
and between the company and third party organ-
isations, be managed most effectively? [] What techniques are being used or can be
developed to identify and quantify more precisely
[] What effect do different ways of defining business the ways in which the parent adds and subtracts
units have on corporate value creation? value?
O What is the impact of ownership versus joint ven- O What are the best measures of value to use?
Brief Case--Corporate Strategy and Parenting Theory
