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The Value of the parent company. Dwi Joko Pramudito Song Young Kang. Many corporate parent companies destroy value. Business in corporate portfolios would often be better off as independent companies or as part of other corporate portfolios

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the value of the parent company

The Value of the parent company

Dwi Joko Pramudito

Song Young Kang

slide2

Many corporate parent companies destroy value. Business in corporate portfolios would often be better off as independent companies or as part of other corporate portfolios

  • On the other hand, some companies where the parent is clearly creating value, where the business unit managers have high respect for the corporate center and the influence it has over their business, and where the company’s market value is greater than the sum of its parts
4 ways to destroy value
4 Ways to Destroy Value
  • Stand-Alone Influence
  • Linkage Influence
  • Central Functions and Services
  • Corporate Development
stand alone influence
Stand-Alone Influence
  • E.g. Diversification of oil company into mineral business
  • Stand alone influence is about the parent’s impact on strategies and performance of each business in the parent ownership, viewed as a stand alone profit center
  • Corporate parents often destroy value by pressing for inappropriate target
linkage influence
Linkage Influence
  • Through linkage influence, the corporate parent seeks to create value by fostering cooperation and synergy between its business, but the search for linkages and synergy often leads to problem that called “anergy”
central functions and services
Central Functions and Services
  • Parents can also destroy value through establishing central functions and services that undermine, rather than support, business effectiveness. It is also about delayed decisions and sub-standard or unresponsive support
corporate development
Corporate Development
  • Corporate development activities such as: acquisitions, divestment, alliances, business redefinitions and new ventures, can destroy value, since such initiatives frequently misfire
  • Parent overpay for acquisitions, losing ventures, and redefine business in the wrong way
why value destruction is so common
Why Value Destruction is so Common?
  • It is hard for parent organizations to influence their businesses in ways that improve on the decisions of the managers running the business
  • It is only under particular conditions that we can expect the parent’s influence to be positive
    • 10% vs 100% paradox
    • Enlightened self interest paradox
    • Beating the specialists paradox
    • Beating the odds paradox
successful parent companies
Successful Parent Companies
  • What condition lead to value creation?
    • The company’s portfolios have some opportunity to improve performance
    • The parent must posses some special capabilities or resources that will enable it to improve performance and exploit the parenting opportunity
    • The parent must have a sufficient understanding of the critical success factors in the business to make sure that it doesn’t influence the business in inappropriate ways
slide10
ABB
  • Linking nationally focused business into a global network: rationalizing production across countries, cross selling product, sharing technical development and transferring best practice
  • Raising the commercial skill and orientation managers
  • Reduce overhead
canon
Canon
  • Developing new product technologists and product developers normally see themselves within the confines of a particular technology or product type
  • Avoiding traditional business unit structures and challenging managers to find new ways of competing
emerson
Emerson
  • Sharpening the strategic thinking of sound and profitable businesses
  • Push profit margin from 5%-10% up to 15%
  • Emerson drives improvement through business strategy reviews, which gradually refined to focus on the issues of greatest potential
feature of successful diversified company
Feature of Successful Diversified Company
  • Focus for the parent activities
  • Distinctive parenting
    • Emerson  planning process
    • Canon  uncompromising corporate commitment to developing its core technologies
    • ABB  ABB lean matrix
  • Portfolios of business that fit with parent company  heartland business
developing successful corporate strategies1
Developing Successful Corporate Strategies
  • Identify areas where the parent is currently destroying value
  • Start searching for parenting opportunities
  • Assess whether and how the company can grasp the parenting opportunities
  • Once the concept of parenting advantage has been developed and the basis of corporate strategy agreed, it is useful to capture this in a parenting advantage statement
  • The chosen strategy can then be converted into action plan, involving decisions about the parent organization and the portfolios of businesses