CORPORATE PARENTING

Corporate Parenting Strategy

The complexity of transitional business conditions creates a need for creating value through
aggregation of different businesses in complex corporate enterprise, which gives it the
character of a multi-business firm. Businesses could be defined as being whatever the
enterprise chooses to operate as organizationally separate profit-responsible units. Such
business entities are often referred to as Strategic Business Units (SBUs) and they are
organised as largely separable businesses with control over the main strategic levers that
affect their performance. Besides this organisational definition, the businesses could be
defined in economic sense relating to Strategic Business Opportunities (SBOs), which are
clusters of product-market transactions able to sustain a successful focused business, with
financial independence. Processes of merger, acquisition, divestment, and the other processes
of transformation continually create new challenges to corporate management towards
providing better performance of aggregated businesses than they would achieve if they were
independent, stand-alone entities. It is a corporate strategy that should guide key decisions in
the businesses and coordinate their business strategies. But, for most corporate enterprises,
the corporate strategy is simply the sum of business strategies, with some broad objectives
and statement of business mission. Therefore, senior managers who are responsible for
defining the overall corporate strategy, often recognize that something in their strategies is
wrong. They may conceptually change strategy through offering some financial guidelines,
and determine which businesses are “core”. This affirms creating advantage through
parenting (Parenting Advantage), which, as a principle, should guide decisions about the
nature of the businesses in the portfolio and about its structure. Namely, multi-business
corporate enterprises consist of businesses and a corporate hierarchy of line managers,
functions, and staff outside these businesses, which is referred to as the corporate parent that
is responsible for making corporate decisions. Parents could be defined as all those levels of
management that are not part of customer-facing, profit-responsible business units, or,
simply, whatever is left outside the business units but within the enterprise. The role of parent
is multiple and, among other things, includes making decisions about new businesses to
support or acquisitions to make, determining the structure of enterprise, defining budgeting
and capital expenditure processes, setting the corporate values and attitudes. The businesses
better perform in aggregate under the parent’s ownership than they would if they were
independent entities. Also, the parent must add more value than cost to the businesses in the
portfolio.

There are basically three styles of corporate parenting as follows;

1. Financial control- Under this style the role of the corporate parent is to monitor and
evaluate the financial performance of the investment portfolio of the respective
business units. The corporate managers act as agents on behalf of shareholders and
financial markets to identify and acquire viable assets and businesses. The
business unit managers are given the autonomy to carry out business activities and
make decisions at their level. However the corporate parent sets performance
standards for control purposes.
 2. Strategic planning- Under this style the role of the corporate parent is to enhance
synergies across the business units. This may be achieved through: envisioning to
build a common purpose, facilitating cooperation across businesses and providing
central services and resources.
3. Strategic control- Under this style the corporate parent leverages its resources and
competences to build value for its businesses. For example a corporation could
have a valuable brand or a specialist skill. The corporate parent uses its parenting
capabilities to seize opportunities for growth.

But, a more ambitious aspiration for the parent is its ability to gain parenting advantage – it
should aim to be the best possible parent for its businesses. In aggregate, the businesses under
its “patronage” should perform not only better than they would as standalone entities but also
better than they would under “patronage” of any other parent. Corporate strategy should
clarify how and where the enterprise can achieve parenting advantage. The link between
parenting advantage and corporate strategy therefore parallels the link between competitive
advantage and business strategy. Competitive advantage is in the heart of successful business
strategies. It guides strategic analysis and provides a basis for assessing alternative action
plans. The concept of parenting advantage plays a similar role at the corporate level. It should
be the fundamental test for judging corporate strategies and the guiding principle in
corporate-level decisions, guiding the decisions towards better market opportunities and
higher corporate performance.

There are nine propositions for achieving parenting advantage and, consequently, for
successful implementation of corporate parenting strategy.

1. Justifying the Parent: Many of the businesses in multi-business corporate enterprise

could be viable as stand-alone entities. Since the corporate parent has no external
customers for its product/services, it can justify itself if it influences businesses
collectively to perform better than they would as independent entities. The challenge
for the corporate parent to justify itself is important because it focuses attention on
whether and how its activities do add value, which leads to the elimination of
worthless and bureaucratic routines in the activities of enterprise.
2. Parenting Advantage: Corporate parents compete with each other for the ownership
of businesses. Therefore, for keeping their stakeholders (especially businesses), the
parents must add more value to the businesses in the portfolio than other rival parents
would. This objective, which is referred to as achieving parenting advantage, should
be one of the most important objectives of corporate strategy. Namely, parenting
advantage should be the guiding criterion for corporate-level strategy, rather as
competitive advantage is for business-level strategy.
3. Value Destruction: All multi-business enterprises have tendencies to destroy value.
It is corporate hierarchy, especially senior management, that inevitably destroys some
value. Value destruction drivers (so-called information filters) are related to the
tendency of business managers to filter the information they provide to corporate
management in order to present their businesses in the most favourable light. To avoid
value destruction, corporate parents must be more disciplined, which implies avoiding
intervention in businesses unless they have specific reasons for believing that their
influence will be positive, or avoiding extension of their portfolio into new businesses
unless they are sure that they will be able to add value. So, good corporate strategy
 should recognize the tendencies of value destruction and be designed to minimise
their influence as much as to maximise value creation.
4. Lateral Synergies: Since there is existence or potential for lateral linkages between
the businesses in corporate enterprise, the main role of parent managers should be to
create synergy. It primarily includes their pursuing of real synergy opportunities, and
their positive interventions in the lateral relationships between businesses. The parent
managers should also focus their efforts only on those synergies that need central
intervention as well as encourage so-called marketplace relationships between
business units. So, the importance of lateral synergies in creating value in corporate
enterprise requires corporate parents to pay relatively more attention to other sources
of value creation, in particular their ability to improve performance in each individual
business as an independent entity.
5. Value Creation: Value creation primarily occurs when the parent sees an
opportunity for a business to improve performance and has the skills, resources and
other characteristics for helping the business to seize the opportunity. This means that
the parent enhances both the individual performance of the business and the value of
linkages between the businesses, and creates value by altering the composition of the
business portfolio performing its corporate development activities. The conditions for
value creation are important because they force corporate parents to think about major
opportunities for added value through the corporate strategy and also help corporate
parents to focus their efforts on building special competences or skills that fit the
particular opportunities targeted by the businesses.
6. Corporate Office and Management Processes: The importance of the size, staffing
and design of the corporate office as well as managing corporate processes (such as
planning, performance targeting and monitoring, etc.) are not in question, and
managers devote considerable attention to them. But if corporate functions and
processes are not developed as an integral part of the overall value adding corporate
strategy, they may lead to little or no improvement in performance. For parent
managers it is far more important to possess the skills that are suitable for the
parenting opportunities targeted by the corporate-level strategy
7. Diversity: It is a fact that highly diverse corporate enterprises are more difficult to
manage than less diverse ones. So vital managerial guidance for corporate parents is
provided by creating valid measures of diversity. In that sense, diversity is best
measured in terms of the differences in parenting needs and opportunities between
businesses in portfolio. To avoid excessive diversity, corporate parent should build its
portfolio around businesses with similarities in terms of parenting needs and
opportunities.
8. Stretch and Fit: Corporate parents must realistically consider the speed with which
they can build new skills and understand new types of businesses. It is supposed to
search for new opportunities continuously and refine and extend parenting skills,
which encourage innovative ideas and help eliminate many disasters of excessive
corporate ambition. Therefore, enterprises that do push forward into new businesses
will prosper more if they choose those businesses that are compatible with parenting
skills that they can develop. It is better to choose a narrower range of businesses
where greater fit can be created. Good corporate strategy should maintain a balance
between the stretch for new opportunities and fit with the parent’s existing skills.
9. Business Unit Definition and Corporate Structure: Business units (businesses)
represent the basic “building blocks” in any multi-business corporate enterprise.
Business unit definition and, consequently, corporate structure have a profound
impact on both the value creation opportunities and the value destruction risks for the
 corporate parent. They impact the behaviour and aims of business managers and the
size and nature of parenting opportunities. Inappropriate business definitions lead to
compromised business strategies and missed opportunities for parenting value
creation. Therefore, decisions on unit definitions and corporate structure should be
determined by careful analysis of their likely impact on value creation. Getting the
unit definitions and corporate structure right is an important precondition for a
successful corporate strategy.

Naturally, these propositions are not obligatory for corporate managers in their managerial
activities. They are recommended as elements of successful corporate strategy and ways for
achieving parenting advantage in multi-business corporate enterprises as the factor of their
higher competitive advantage.

The process of transition results in a discontinuity of business activities, growth and

development of enterprises, which requires flexible and adaptive forms of organisational
structure and management system. This implies making complex corporate business
arrangements. At the same time, there is the process of creating dynamic and unpredictable
markets, immanent to a developed market economy. These markets always change
opportunities and capabilities for creating competitive and corporate advantage and business
success of enterprise. Adjustment to market possibilities for performing efficient business
activities changes the corporate “repertoire” of corporate strategy. The new corporate strategy
focuses on corporate strategic processes of restructuring or “remapping” business portfolio as
well as on co-evolving its elements, on the basis of simple rules for its application. These are
a guarantee for performing business activities in a more efficient way.

Complexity of transitional business conditions creates a need for creating value through
aggregation of different businesses into a corporate enterprise. Processes of transformation
create some challenges towards affirming advantage through parenting, or providing better
performance of aggregated businesses than they would achieve as independent entities. The
concept of parenting advantage makes a test for proposed corporate strategies, guiding them
towards better market opportunities and higher corporate performance.