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The Hare and the Tortoise: The race is not to speedy (XX). Corporate Parenting.

… “The tortoise meanwhile kept going slowly but steadily”…

The hare and the tortoise, a fable by Aesop

Sorry for those who are subscribed and received the post from last friday and today. I am uploading again the publication and send it accordingly. Thank you for your comprehension. Let´s begin. Today we will continue with our outline. We will cover the theme “Corporate Parenting”. Please do not lose sight, we are at the moment here:

Our outline updated today.

Corporate Parenting. This term was coined around the year 1994, by Andrew Campbell, Michael Goold, and Marcus Alexander. These fellows were directors of the Ashridge Strategic Management Center in London England, and they published the theory behind this framework at the Harvard Business Review magazine (March/April 1995). These authors remarked that one of the most delicate and difficult things for Board of Directors agents is to do “corporate strategy” because at that time the “core competence” concept flooded the business and management aspects at the corporate level and multi-businesses entities (those with multiple SBUs).

Corporate parenting defines the Corporate Headquarter´s office as the umbrella, as the parent of each and all SBUs. In the form of Corporate headquarters, the parent has a great deal by influencing, or in the authors’ buzzword, by parenting the businesses they own.

The whole purpose of corporate parenting is based on how to create value from the relationship between the Board of Directors and Corporate Directors, and each of the SBUs managers.  Thus, the primary role of corporate headquarters is, to obtain synergies among the SBUs by providing needed resources to each SBU, transferring skills and capabilities among SBUs, and coordinating the activities of shared SBU functions to attain economies of scope (as centralizing several activities like accounting, technologies, purchasing, marketing, public relations, logistics, etc). For Campbell, Goold, and Alexander, companies that attain parenting advantages are those which have focused with detail on each of the SBUs, and have examined how they relate to one another. If there is a good fit between the parent´s (Corporate Headquarters people) skills, resources, needs, and opportunities of the SBUs, and each of the SBUs, the corporation is likely to create value. If, however, there is not a good fit, the corporation is likely to destroy value.

The Hare and the Tortoise by Cindy Waldron.

Understanding the characteristics of the Parent organization (Board of Directors and Corporate Directors) of a multi SBUs entity:

To understand the parent organization, we recommend a systematic review of its characteristics in 5 categories:

  1. The parent´s mental maps: values, aspirations, rules of thumb, biases, success formulas, and experiences of each director and member of the BoD.
  2. The parenting structures, systems, and processes: Mechanisms through which the parent creates value. For example number of layers in the hierarchy, if a matrix structure of multiple report lines is in place, the appointment processes, human resources systems style, budgeting priorities, strategic planning style character and design, capital-approval methods, decision-making methodologies, transfer-pricing practices, and other linkage mechanisms are all crucial. But what matters the most, is how each director and top manager interacts within each of these factors.
  3. Corporate Central Staff and Resources should support line management´s efforts to create value. Otherwise, they block and damage the collaboration between SBUs.
  4. Directors with unique skills (not replicable by anyone else in the whole world). Parents Headquarters’ people must have personalities and skills that make a critical difference. That is why a broad range of backgrounds and styles should be esteemed and treasured at the top of the organizations.
  5. The decentralization contract between parent and business defines which issues the parent normally influences and which it delegates to each SBU manager. The set of boundaries has to be established. It contains the authorization limits, the specific job descriptions, and formal statements of due process. And these must be respected explicitly.

These five categories are lenses through which one can view the influences of the parent. And we define them as the parent´s characteristics. These categories are utilized and measured in the horizontal axis of the corporate parenting fit matrix.

Parenting Opportunities. There are at least 10 places to look for parenting opportunities.

  1. Size and Age: Old, large successful businesses often accumulate bureaucracies and overheads that are hard to change. Small and young companies may have insufficient functional skills, managerial succession problems, and insufficient financial resources in case of recession.
  2. Enterprise Definition: Are the corporate parents aware of the scope of action when it comes to embracing all SBUs under an ample definition? Is each SBU in the portfolio of the parent defined to maximize its competitive advantage?
  3. Management. Does the parent entity employ top-quality managers compared with its competitors? Is each SBU manager focused on the right objectives?
  4. Predictable Errors: Do the nature of the parent organization and its situation lead the SBU managers to make predictable mistakes?
  5. Linkages: Could the parent organization link more effectively with other SBUs businesses to improve efficiency or market position?
  6. Common Capabilities: Does the parent Headquarters´ have capabilities that could be shared among other SBUs
  7. Special Expertise: Could the parent entity benefit from specialized or rare expertise that the parent possesses?
  8. External Relations: Does the parent enterprise have external stakeholders, government support, unions, suppliers, that the parent company could manage better than it does?
  9. Major decisions: Does the parent company face difficult decisions in areas in which it lacks expertise?
  10. Major changes: Does the parent company need to make major changes in areas with which its management has little experience?

Understanding the SBUs Critical success factors. The concept of critical success factors is simply the activities or issues which are critical to performance and for the creation of competitive advantage. Each SBU has critical success factors, which are different; depending on the industry. To list these success factors is extremely revealing, and it is a pre-requisite for a parenting-opportunity analysis. Why? Because these are utilized in the vertical axis of the corporate parenting fit matrix.

Corporate Parenting Fit Matrix

Corporate Parenting Fit Matrix. Let me share what is the meaning of each of the positions of Ashridge´s Corporate parenting Fit Matrix:

The horizontal axis of the matrix records how well the parent’s characteristics fit the business’s parenting opportunities—the first set of judgments made in the “fit assessment”. The vertical axis records the extent of any misfit between the parent’s characteristics and the business’s critical success factors—the second set of judgments made in the “fit assessment”. A good fit reduces the danger of destroying value in a business.

Alien Territory: This quadrant at your left bottom side relates to an SBU which is 100% outside of the core business or the main industry is well known by the parent. Usually, these SBUs are small and few in their SBUs portfolio. Additionally, these are remnants of past experiments with diversifications, or pet projects of senior managers, businesses acquired as part of a larger purchase or attempts to find new growth opportunities. Each of these SBUs is kept, regardless if it does not fit with the company´s parenting approach, and would never perform better with another parent. Why? Either because the Alien SBU  has growth potential, or the parent is learning how to improve the fit, or the parent has made previous commitments to preserve it, just in case of a pandemic; or simply because the Alien SBU seems to be a favorite idea for the chairman of the board. Whatever the reason, the SBU located in the Alien Territory has to be small enough to don´t harm or destroy value to the whole corporation.

Value Trap Business: Parent corporate directors make their biggest mistakes with value-trap SBUs. These are SBU with fantastic and out-of-the-world super fit in parenting characteristics, but they lack any type of relation in critical success factors. The misfit in critical factors is the risk that many corporate headquarters´ offices are not able to foresee.

Ballast Business: These are SBUs located at the top left quadrant, are those in which the potential for further value creation is low, but the business fits comfortably with the parenting approach characteristics. That situation often occurs when the parent understands the business extremely well because it has owned it for many years or because some of the parent managers previously worked in it. The parent may have added value in the past but can find no further parenting opportunities.

Heartland Business: Businesses that fall in the top right corner should be at the heart of the company’s future. Heartland businesses have opportunities to improve, that the parent knows how to address, and they have critical success factors the parent understands well. This is the case of SBUs, in which the parent does not have any characteristics that will destroy value, none of its characteristics conflict with the businesses critical success factors.

Edge of Heartland Businesses: For some businesses, making clear judgments is difficult. Some parenting characteristics fit; others do not. We call those businesses, as in the middle of everything and anything.

Once Corporate headquarters´ people have a map of their SBUs and can position each of them in the corporate parenting fit matrix, then and only then, they will be able to examine each SBU in terms of critical success factors, in terms of parenting characteristics, in terms of parenting opportunities, and find the fit and misfits of the parent corporation and the SBUs.

This is it for today. Please remember that the example to clarify this theory is coming, and you will understand all the bits and pieces of the theory then. Have a lovely week, and see you again this coming Friday.  Blessings.

Slow and steady wins the race.

Bibliography utilized today:

Disclaimer: Illustrations in Watercolor are painted by Eleonora Escalante. Other types of illustrations or videos (which are not mine) are used for educational purposes ONLY. Nevertheless, the majority of the pictures, images, or videos shown on this blog are not mine. I do not own any of the lovely photos or images posted unless otherwise stated.

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