Corporate parenting Students Group Member Scarlette Almedia 4 Scarlette Almedia 4 Mihir D Bhammar 5 Mihir D Bhammar 5 Deepa Karappan Deepa Karappan Kunal Doshi. Kunal Doshi. Dipti Gawas. Dipti Gawas. Siddesh K. Siddesh K. Sandeep Pandita 39 Sandeep Pandita 39

Corporate Parenting Definition :- Corporate parenting views the corporation in terms of resources and capabilities that can be used to build business unit value as well as generate synergies across business units Corporate parenting views the corporation in terms of resources and capabilities that can be used to build business unit value as well as generate synergies across business units

Corporate parenting should involve three analytical steps Corporate parenting should involve three analytical steps Examine each business unit (or target firm in the case of acquisition) in terms of its strategic factors. Examine each business unit (or target firm in the case of acquisition) in terms of its strategic factors. Examine each business unit (or target firm) in terms of areas in which performance can be improved. Examine each business unit (or target firm) in terms of areas in which performance can be improved. Analyze how well the parent corporation fits with the business unit (or target firm) Analyze how well the parent corporation fits with the business unit (or target firm)

The Parenting Framework The parenting framework perspective sees multibusiness companies as creating value by The parenting framework perspective sees multibusiness companies as creating value by influencing—or parenting—their businesses The best parent companies create more value than any of their rivals do or would if they owned the same businesses The best parent companies create more value than any of their rivals do or would if they owned the same businesses To add value, a parent must improve its businesses To add value, a parent must improve its businesses

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 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 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

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 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 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

The Functions / Roles of Corporate Management 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 linkages between companies Guidance and control of individual businesses Managing the Corporate Portfolio

Head office Central services (e.g. finance) Division A Division B Division C Division D Division E Functi ons Functions Functions Functions 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’

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

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

Value Creation Efficiency gains from applying existing resources/capabilities to new markets/products Efficiency gains from applying existing resources/capabilities to new markets/products Economies of scope Economies of scope Benefits of synergy Benefits of synergy Applying corporate managerial capabilities to new markets/products/services Applying corporate managerial capabilities to new markets/products/services Dominant logic Dominant logic Increased market power from diverse product/service range Increased market power from diverse product/service range Cross subsidy Cross subsidy Possible monopoly in long-run Possible monopoly in long-run

Less obvious value creation In response to environmental change In response to environmental change To defend existing value To defend existing value Or straying too far from dominant logic? Or straying too far from dominant logic? To spread risk across range of businesses To 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 stakeholders In response to expectations of powerful stakeholders Pressure from financial analysts to produce constant growth Pressure from financial analysts to produce constant growth

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

Ways to create Value There are four ways that a corporate parent can create value for their businesses: There are four ways that a corporate parent can create value for their businesses: Stand-alone influence Stand-alone influence Linkage Influence Linkage Influence Functional and Services Influence Functional and Services Influence Corporate Development Activities Corporate Development Activities

VALUE-DESTROYING ACTIVITIES Cost VS Benefits: Very large financial cost is rarely offset by the large financial cost benefits Cost VS Benefits: Very large financial cost is rarely offset by the large financial cost benefits Delays in decisions: Several levels of corporate parent above the business unit, each with executives who have a decision-making influence over the business units Delays in decisions: Several levels of corporate parent above the business unit, each with executives who have a decision-making influence over the business units Buffer from Reality: Corporate parents may buffer the executives in businesses from the realities of financial markets by providing a financial ‘safety net’ Buffer from Reality: Corporate parents may buffer the executives in businesses from the realities of financial markets by providing a financial ‘safety net’ Reputation & Performance : Underperformance of members and ill reputation affects the entire business group Reputation & Performance : Underperformance of members and ill reputation affects the entire business group

VALUE-DESTROYING ACTIVITIES Cooperation for Resources : Stuck with ageing and inefficient resource, Costly managerial skills Tunnelling funds / resources Cooperation for Resources : Stuck with ageing and inefficient resource, Costly managerial skills Tunnelling funds / resources Opportunity Identification : Excessive diversification, dilution of investment across multiple projects. Opportunity Identification : Excessive diversification, dilution of investment across multiple projects. Centralized Services : Costs of Coordinating diversity Centralized Services : Costs of Coordinating diversity Managing a Portfolio Business : Unnoticed underperforming portfolio, Too large a portfolio to manage justifiably Managing a Portfolio Business : Unnoticed underperforming portfolio, Too large a portfolio to manage justifiably

Reinventing GE Reinventing GE Organisational 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”).