The role of the corporate parent

The Functions of Corporate Management Decisions over diversification, divestment, and allocating resources between businesses. Managing the Corporate Portfolio --Assisting business strategy formulation --Monitoring and controlling performance of the businesses Guidance and control of individual businesses Sharing and transferring resources and capabilities Managing linkages between companies 42

The corporate centre or ‘parent’ The corporate centre or ‘parent’ is anything that sits above the level of the strategic business units (SBUs) of the organisation An SBU is a part of the organisation for which there is a distinct client group. So it usually relates to a collection of related activities or services, but might not be neatly reflected in the structure of the organisation

SBUs The corporate parent Head office Central services (e.g. finance) Division A Division B Division C Division D Division E Functions Functions Functions Functions Functions 12

The role of the ‘centre’ 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 parenting ‘school’ The essence of the parenting school is that value is created through the use of key resources found at the corporate centre which are properly matched to the types of SBUs in the organisation portfolio. Value in this case can mean a number of things including: providing opportunities for SBUs to develop; creating linkages between SBUs; providing central services to SBUs; and protecting the interests of SBUs

Corporate parenting These core ‘parenting’ resource of corporate headquarters can offer: Central functions and services, e.g. international treasury management Corporate development initiatives, e.g. centralised R&D or new acquisitions Additional finance for growth areas: principle of product portfolio/ growth share matrix Formal linkages between businesses, e.g. the transfer of key resources such as technology or employees

Corporate parenting For parenting to add value, the role of headquarters needs careful scrutiny. Specifically, the parent needs two skills: Understanding of the key factors for success in all industries of its subsidiaries Ability to contribute something extra, perhaps in one or more of the basic parenting areas such as Finance, HRM or R&D.

Conditions for value creation Value is only created under three conditions Business units are not fulfilling their potential parenting opportunity Centre has relevant resources or capabilities parenting skills Centre managers understand the business units well enough to avoid destroying value sufficient feel

The Synergy School Synergy can occur in situations where two or more activities/processes complement each other to the extent that their combined effect is greater than the sum of their parts. This can be achieved via: Through sharing resources Transferring skills Related products/services Related customers/clients Related by competence

The corporate parent: adding value through synergy Centre Arenas Services 4

Corporate parent as middleman Government department, funding Agency, sponsor, or shareholders Parent Organisation Parenting skills SBUs 10

Managing Linkages between Businesses BASIC ISSUE How does the corporate centre add value to the business? ---Depends on nature and extent of linkages between the businesses SIMPLEST FORM OF LINKAGE Common corporate services (e.g. finance, legal, taxation, R&D, public relations, investor relations) PORTER’S CLASSIFICATION OF BUSINESS LINKAGES AND CORPORATE STRATEGY TYPES Portfolio management Parent creates value by operating an internal capital market between independent businesses Restructuring Parent create value by acquiring and restructuring inefficiently managed businesses Transferring skills Parent builds competitive advantage by transferring capabilities Sharing activities Parent shares common resources/capabilities NEED FOR A COMMON “DOMINANT LOGIC” Close integration between the business portfolio, the nature of linkages between the businesses, and the management systems of the corporation

Parenting ‘Styles’ Strategic Planning (controller) Financial control (orchestrator) Strategic control (coach)

Parenting ‘Styles’ Strategic Planning (controller):Parents closely involved with their SBUs in the formulation of their business plans. Parents provide a clear overall sense of direction within which their SBUs develop their strategies and take the lead on selected corporate development initiatives. Financial control (orchestrator):Parents strongly committed to the decentralisation of planning to their SBUs which are structured as stand-alone units with as much autonomy as possible.The parents primary roles are to insist that all decisions are ‘owned’ by the SBU’s, and that proposals met agreed financial criteria. Strategic control (coach):planning is decentralised to the parents SBUs, but the parents retain a role in measuring and assessing their SBU plans. SBUs expected to take responsibility for developing strategies, plans, and proposals in a ‘bottom-up’ manner.

Procedures and rulebooks CENTRE (Masterplanner) Detailed budget Establishment Imposed services and infrastructure Capital allocation Procedures and rulebooks Bargaining (item by item) DIVISION/DEPARTMENT Strategic planning

(Shareholder/banker) CENTRE (Shareholder/banker) Targets ‘single line’ Capital bids Performance appraisal DIVISION/DEPARTMENT Financial control

CENTRE DIVISION/DEPARTMENT (Strategic shaper) Strategic control Policies Agreed business plan Optional services and infrastructure Overall strategy, balance Capital allocations Performance assessment Short-term constraints (e.g. establishment) DIVISION/DEPARTMENT Strategic control

Recent Trends: Reinventing GE Organisational initiatives of Jack Welch: Delayering --- from 9 or 10 layers of hierarchy to 4 or 5, simultaneously 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”). 53