MA in Management – Strategic Analysis Module
Creating Value in Multi-business Organisations
A.
INTRODUCTION TO SESSION
The last Session outlined the methods and directions by which multi-business
organisations seek to develop. As organisations become involved in more activities,
frequently in disparate business areas, so the complexity of the organisation increases. The
aim of this Session is to examine the approaches that organisations can take to try to
manage this diversity of scope in order that they can create synergy between their
activities, so that the whole is greater than the sum of its parts.
Your Objectives
By the end of this session you should be able to:

Assess the different approaches to the creation of synergy within multi-business
corporations and understand how various tools and models can be used to identify and
manage potential synergies.

Outline the key features of the different management styles used within multi-business
corporations and understand the implications of these styles for organisational scope.

Appreciate the connections between the approaches to synergy and management styles
of multi-business corporations.

Outline an integrative model of corporate strategy and understand the implications of this
model for organisational scope and the development of strategies.

Understand the concept of corporate parenting and apply relevant tools to identify the
opportunities to create a parenting advantage.
B.
THE SEARCH FOR SYNERGY
Synergy is often described by the phrase “2 + 2 = 5”. In a business or organisational
context, this translates into attempting to ensure that the organisation as a whole creates
greater value (however defined) than that possible from the sum of the constituent
activities of which it is comprised.
The search for synergy started to become an important management issue during the
1950s, particularly within the dominant economic/organisational structure of the day - the
American divisionalised corporation. As these corporations had become larger, expanding
their operations into many different products and markets, so the complexity increased and
managers at the corporate centre began to search for means to control the organisation as a
whole.
During the 1960s, a series of portfolio approaches emerged which allowed the centre to
judge the plans of their different divisions on the basis of their contribution to the corporation
as a whole. In these approaches corporations sought to create and manage financial
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synergies between strategic business units. Despite their weaknesses, many of these
approaches are still used today.
By the 1980s, the problems associated with many of these portfolio approaches led to
different approaches to the search for synergy. The linkages approach suggested that
corporations should seek to create synergy through shared activities and/or transferred
skills between the business units.
The core competences approach moves away from viewing the organisation as a series of
strategic business units, suggesting that synergy is created through the development of core
competences across the organisation as a whole.
These three different approaches to the search for synergy are explored in greater detail in
the following sections.
 Portfolio Approaches
The portfolio approaches concentrate upon where to invest the resources of the
corporation in order to get the best return for the corporation as a whole. Whilst, in theory,
this may extend into all the resources available to the organisation, including management
expertise, in practice most corporations concentrate upon finance, and particularly capital
investment projects. Hence, the portfolio approaches assist corporations to manage
financial synergies across the organisation.
The question facing corporations in the 1950s, and still today, was how the centre could
judge where to invest or divest and what targets to set in order to ensure the best returns for
the corporation as a whole in the long term. As diversity increased with new products and
markets, so the centre’s detailed knowledge of the activities of particular divisions
decreased, particularly as day-to-day management was necessarily devolved down to a
divisional level.
In many organisations, the strategic planning process presented the centre with a range of
potential investment proposals from the divisions as well as opportunities to develop new
business areas, but which were the projects to get the cash? Relying on the projections of
the different divisions presented obvious problems of reliability. In addition, any proposal to
switch resources from one division to another in order to maximise corporate returns was
hardly likely to be supported by the “donor”.
To help answer these issues a range of frameworks emerged, mainly from management
consultants, during the 1960s and 1970s. In essence, each of these tools allowed the centre
to independently assess the position and attractiveness of their different business
activities, now defined as strategic business units, and so take decisions on which to
build, hold, harvest or divest.

The Growth Rate/Market Share Matrix
The growth rate/market share matrix developed by the Boston Consulting Group, often
called the Boston Box, is the best known of these frameworks. Each of the strategic
business units is measured in terms of its market position, based on relative market share
within its particular sector, and attractiveness, based on the market sector’s growth rate.
Each business unit is then be plotted on a grid, usually with a circle proportional to its cashgenerating value, that classifies the nature of the business as a:
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



Star – an attractive business unit with a strong position within a high growth rate
sector. Returns may be high, but maintaining position in such a sector also
demands resources for future growth.
Question mark (or problem child) – a business within a high growth sector, but
not a market leader. With lower returns but strong needs to support growth, such
a business is likely to require support from the centre, particularly if it is to
improve its position to become a star in the future.
Cash cow – a business unit with high returns thanks to its dominant position
within an established market sector. However, there are likely to be few
opportunities to increase returns further within this area.
Dog – a business unit with a poor market position within a less attractive market
sector. Overall returns may be low, but not necessarily negative, with low
investment requirements but poor returns.
The Boston Box grid is illustrated in Figure 7:1.
Figure 7:1 - The Growth Rate/Market Share Matrix
Once all the business units have been plotted on the grid, decisions on the particular
investment projects proposed by the business units are taken on the basis of what is likely to
create a balanced portfolio. Over time, the centre takes decisions that are consistent this
aim by deciding which businesses to build, hold, harvest or divest. The centre will support
investment projects in those areas that provide the best long-term opportunities – projects
focused on the stars, in order to hold their positions, and those question marks offering the
best opportunities to build their competitive position and turn them into stars. Other question
mark business units are likely to be divested in the longer-term if the centre feels that the
resources needed may be too great. The resources for investment are harvested from the
cash cows - which are cash rich but unlikely to provide the best long-term opportunities.
Usually, the centre will seek to divest the unattractive dogs.
As well as allowing the centre to make decisions on investment projects, the Boston Box
allows it to set appropriate targets and reward structures for each business unit: cash cows
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are expected to make high returns; with lower expectations for the stars and question marks.
This also creates a mechanism for appropriation of returns to the centre, particularly from the
cash cows, in order to support its overall investment priorities.
Potential acquisitions can also be plotted and evaluated using the same framework.
Companies frequently aim to acquire business units that the current owners regard as
question marks and are willing to divest, but which the acquiring company believes can be
turned into stars. Acquisitions of stars and cash cows are also possible, but the price paid
often reflects their position – in the same way that increased transfer fee valuations are
placed on the top football players or those expected to become stars.
Some corporations use the portfolio approach to develop by buying up other multi-business
groups and restructuring them. After acquisition the company may sell off some business
units to recoup acquisition costs. In other business units they might put in new managers
and control systems to achieve a turnaround, then sell them off at a later date to realise
their increased value or hold them into the longer-term as part of the new group.
Whilst the Boston Box provides a very useful tool for corporations, there are problems with
some the assumptions on which it is based. Whilst market dominance can lead to
competitive advantage if there is a significant experience curve effect this is not always the
case. Some companies successfully follow focus strategies, concentrating on only one or
two market segments. Consequently, relative market share might be both difficult to
measure in a meaningful sense and not be a relevant measure of success in itself. Similarly,
the measure of market attractiveness depends upon assumptions about product life
cycles that may be too simplistic in practice, particularly in declining markets.

Other Portfolio Frameworks
Recognising the problems with the Boston Box, a number of alternative portfolio tools have
been developed over the years, frequently attempting to use more sophisticated measures in
order to try to evaluate the strategic significance of each business unit. The market
attractiveness/SBU strength matrix (as used by General Electric) is also known as the
directional policy matrix (courtesy of McKinsey), to these can be added the
product/market evolution matrix and its variant the life-cycle portfolio matrix (associated
with A D Little).
What all these frameworks have in common is the assumption that business units pursue
individual competitive strategies within different product/market sectors. The role of the
corporate centre is to manage financial synergy by setting appropriate targets and
financing particular competitive strategies consistent with achieving a balance of business
units within the corporate portfolio. As the position of each business unit depends upon
relatively simple measures, there is no requirement for the centre to have a detailed
knowledge of each competitive strategy. Consequently, the centre is able to cope with
business units across a broad scope of product/market sectors. Finally, the devolution of
competitive strategies to the management within each business unit is likely increase
motivation at this level.
 Linkages Approach
By the 1980s a number of critiques of the portfolio approaches had emerged. Along with
others, Michael Porter argued that many diversification through acquisition strategies had
not worked, with companies eventually divesting more acquisitions than they kept. Further,
individual investors were capable of building a portfolio of shares to address their own
risk/return profile, rather than rely on the diversified corporation to do it for them.
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Porter went on to argue that financial synergy was often not enough. Instead, the corporate
centre should help create and sustain competitive advantage within its strategic business
units by developing tangible value adding linkages between them that help to lower cost or
increase differentiation. For Porter, synergy is created by this transfer of skills and/or the
sharing of activities between the value chains of the separate business units. These are
illustrated in Figure 7:2.
Figure 7:2 – The Linkages Approach
The role of linkages between value chains within a corporation was described briefly in Unit
4 and illustrated by the example of Brasseries Kronenbourg who could call on the packaging
and marketing skills of other parts of the Danone Group in order to develop the
differentiation of its beer brands. Further, given that beer was increasingly sold through
supermarkets there may have been opportunities to share sales and distribution activities
between the food and beer businesses within the Danone Group in order to lower costs.
The linkages approach requires a much closer knowledge of the activities of each business
unit in order that the sources of synergy can be identified and exploited. One implication of
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this is that the scope of the organisation tends to be narrower than that of the typical
portfolio approach corporation. Similarly, the decisions on the methods and directions
used to develop new business will also depend on the opportunities to share activities or
transfer skills. In this approach it is not enough that an acquisition target can be classified
as an attractive star or question mark, there need to be opportunities to create linkages
between its activities and those of other parts of the corporation.
 Core Competences Approach
The third approach to the creation of synergy within a multi-business organisation arises
from one of the resource-based approaches to competitive strategy. In 1990, Prahalad and
Hamel argued that concentrating on the creation of competitive advantage at the strategic
business unit level, inherent in both portfolio and linkages approaches, was likely to give a
false picture - referring to the “tyranny of the SBU”. According to them, the roots of
competitiveness lie not with the business units, but within the corporation as a whole. In
essence, synergy is created through the development of core competences, as illustrated
in Figure 7:3.
Figure 7:3 – The Core Competences Approach
Using the metaphor of a tree, Prahalad and Hamel argued that core competences, core
products and end products are linked:
 Core competences are the collective learning of the organisation, acting as the root
system to nourish and sustain and provide stability.
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

Core products are the physical embodiments of one or more competences, acting
like a tree trunk, the link between core competences and end products. These core
products can be exploited by the business units, which are the smaller branches of the
tree.
End products are like leaves because there are many of them and they are the most
visible aspects of the corporation, being sold through the business units.
They went on to argue that as individual business units both use and contribute to core
competences they need to be brought more closely together than in the linkages
approach. Core competences extend across organisational boundaries, involving many
people and functions, so the traditional strategic business unit structure tends to hinder their
development. Individual business units tend to focus too narrowly on innovation
opportunities close at hand. They may also be unwilling to allow other business units to
exploit competences they have developed, particularly if this might mean transferring key
staff. Hence the need for the corporate centre to directly manage core competences,
taking decisions to benefit the corporation as a whole.
As with the other approaches, the understanding of how synergy is created and managed
will have implications for the scope of the corporation, as well as the methods and
directions of development. Whilst the range of end products can be extensive, the
number of core products, and the core competences on which they are based, is likely to
be limited, with strong relationships between them. The consideration of internal
developments, potential acquisitions or strategic alliances is likely to focus upon
opportunities to acquire new core competences, or enhance or exploit the existing core
competences of the corporation.
Whilst the approaches described above have developed as a progressive critique, in
practice many organisations face a choice between them: should they seek to exploit
financial synergies or synergies in linkages or core competences? These choices are
explored in the illustration featuring the Burmah Castrol Chemicals Group.
Illustration
THREE VIEWS ON THE ROLE OF THE CENTRE AT BURMAH CASTROL CHEMICALS
GROUP
In January 1996, the senior executives of Burmah Castrol Chemicals Group met to consider
the future development of the organisation. At the heart of their discussions was the debate
about the future role of the centre.
The group was formed in 1981 and grew through a series of acquisitions. Whilst loosely
based on speciality chemicals, the businesses included industrial waxes; printing inks;
timber treatments; adhesives; refractory products for the steel, aluminium and foundry
industries and cement products for the mining and construction industries.
At the executive meeting, three alternative views emerged on the future role of the group
centre.
View One
“Whatever the criteria for the acquisitions of the businesses in the group, the fact is that
there are very few linkages between them. It is not enough to say that they are all chemicals
businesses. They use chemicals as raw materials, but that is all. There are really no
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linkages technologically between many of the businesses. There are not many market
linkages either...”
“My recommendation is that we should regard the businesses as a set of discrete units, each
with their own technology and their own markets, and each perfectly capable of making good
returns for the group. But they should be left alone to get on with it... The centre should
recognise that it is at real risk of simply adding costs without value, and should therefore
seek to reduce cost to a minimum and simply exercise financial control. It should set clear
targets about what returns are expected, provide investment if returns are being met, change
the management if they are not or, at the extreme, dispose of the business. If we follow this
route, we can manage the portfolio we have more efficiently and cost effectively than we are
doing currently. We could probably get rid of some of the intermediate divisional structures
because we would not require the degree of co-ordination that we currently try to achieve.”
View Two
“I think we should start by asking what Burmah Castrol wants of these businesses, not just
what these businesses happen to be doing now. The fact is that a main aspiration of
Burmah Castrol is to become a much more global organisation than currently; in particular,
to grow in the developing economies of the East. We should therefore be aiming to create a
chemicals business which is much more global than it is now...”
“The role of the centre should be to develop a global strategy for chemicals. First, we should
identify which businesses are, or can be, more global. They are businesses in which we
should invest, and the centre should take a proactive line in developing them. If businesses
cannot be developed in this way, then we should review whether they should be part of the
portfolio.”
“Second, we cannot leave it to the individual businesses to develop global strategies in a
haphazard way... The centre should be identifying the market opportunities, the product
requirements and the market entry strategies.”
“The centre also has a role to play in implementing this strategy. Suppose we see China as
a major opportunity - and we do. We should have a co-ordinated, planned entry into China
across the group...”
“If we truly intend to be a global firm, then the centre has a role in planning it and developing
it. Of course, this might mean a slimmer portfolio than we have currently...”
View Three
“... The interesting conclusion the workshop report comes to is the businesses themselves
think they need help. They may not always think that we do it that well; but they do think that
they need help.”
“... We are not a chemicals business in the sense ICI is. We don’t make profits out of selling
chemicals. We make profits out of mixing and blending basic materials in ways which are
useful to customers. We are particularly successful where those formulated products
account for a low percentage cost to customers, but are really important to them...”
“... It’s knowing our customers intimately that matters; not being good as chemists... It is not
technologies as such, but application skills which give us real advantages. It isn’t a question
of market or technology linkages; it’s about know-how, teamwork and applying that to the
benefit of customers by knowing their businesses intimately.”
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“We should also recognise that we are most successful at managing certain sorts of
businesses. They are businesses which have relatively low capital intensity; they are not
based on rocket science R & D; and they are where service requirements are high, so
people matter.”
“What we should be doing is focusing on such businesses; businesses where marketing
expertise can be leveraged and where we can add value to customers’ processes. In
particular, businesses where the cost of our products to the customer is low, but where there
is high potential risk for the customers.”
“... The role of the centre is therefore to build a portfolio of such businesses and make sure
they learn from one another.”
Source: based on the “Burmah Castrol Chemicals Group” case study by Gerry Johnson in G Johnson & K
Scholes, Exploring Corporate Strategy, 5th Edition 1999.
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SAA 1
Read the illustration Three Views on the Role of the Centre at Burmah Castrol Chemicals
Group. Attempt to identify the approaches to synergy implied by the three views outlined
and note the reasons for your classification.
View 1
View 2
View 3
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C.
DEFINING MANAGEMENT STYLES
Implicit in the discussion about synergy is the contest that frequently takes place in
diversified organisations between the individual business units and the corporate
headquarters. Andrew Campbell and Michael Goold have researched the relationships
between the corporate centre and the business units across a range of British companies
since the late 1980s. Their focus has been upon the ways and extent to which management
is centralised or devolved in order that value can be created across the organisation as a
whole.
Campbell and Goold found that there were two dimensions that could describe a
continuum of ways in which the centre could influence the business units, which are:
•
The extent of the planning influence exerted by the centre on the strategic planning
processes of the organisation, that defined the extent to which the strategy was
centralised.
•
The type of control influence exerted by the centre on the businesses within the group
in order to meet plans, ranging from tight short-term financial controls through to more
broadly defined and longer-term strategic controls.
Using these dimensions they identified three management styles, or stereotypes, which
companies tend to follow which range along the continuum from financial control, though
strategic control to strategic planning as illustrated in Figure 7:4.
High Strategic
Planning
Planning
Influence
Strategic
Control
Low
Flexible
Tight Strategic
Financial
Control
Tight Financial
Control Influence
Figure 7:4 – Management Styles
Each style is different in its approach and offers different advantages, but each has different
strengths and weaknesses. For example, the financial control style can encourage great
innovation within the business units. However, other situations call for more
interdependencies between business units and hence a greater involvement for the
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corporate centre in co-ordinating activities. Here the top-down approach of strategic
planning, or the middle approach of strategic control may be appropriate. The key is in
understanding the benefits and drawbacks of each style and being able to match it to the
needs of the business.
The next three sections explore each of the management styles in greater depth, identifying
the key features, assessing their strengths and weaknesses, and discussing the contexts in
which each style may be appropriate.
 Financial Control
In the financial control style the corporate centre exerts tight financial control through
demanding short-term targets but with low planning influence concentrating a budgetary
process. The centre can be characterised as acting largely like a corporate shareholder or
investment banker within a group of largely autonomous business units.
In practice, the centre negotiates capital bids with the business units, so exerting little
planning influence on the details of plans beyond their financial implications. The autonomy
of the business units is stressed in terms of determining the details of the individual
competitive strategies. In contrast, the centre sets clear “single line” targets for each
business unit and exerts strong financial control through regular performance appraisals.
The financial control style can be particularly appropriate for corporations specialising in
growth by acquisition, often aiming to turnaround under-performing businesses and then
dispose of them. The scope of business units within groups using this style can also be
quite wide. However, there are also problems associated with this style. There is little
coordination between the business units so opportunities to exploit synergies might be
missed and the centre may be able to offer very little help beyond finance. The emphasis
upon the short-term may mean that some strategic issues might not be fully confronted and,
although the business units are responsible for developing their own strategies, tight controls
can limit flexibility and creativity.
In the original research conducted by Campbell and Goold, companies like Hanson and BTR
were seen as examples of this style. In recent years, both Hanson and BTR have changed
tack and moved towards a strategic control approach. However, a small number of
merchant banks seem to be adopting a financial control approach as a result of acquisitions
strategies – for example, Nomura is now a major player in the UK public house sector
amongst other activities.
 Strategic Control
The strategic control style fits between the other two, with tight strategic controls set by
the corporate headquarters, but with a two-way planning process characterised by a
dialogue between the business units and the centre. Here the role of the centre can be
described as being the strategic shaper concerned with shaping the behaviour of the
business units and the context in which they operate.
In practice, the centre exerts moderate planning influence, setting the overall balance of the
strategy but agreeing the final business plan jointly with the business units. In contrast to the
financial control style there is less emphasis on short-term financial targets, but the centre is
still likely to exert tight control of broader measures through performance assessment and
short-term constraints on issues like employment levels. The centre may also provide
expertise to the business units on a service basis.
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The strategic control style seems to require some homogeneity between the business units
in terms of their strategic characteristics so that the centre can have a good feel and
understanding for each. Whilst there does not seem to be a need to concentrate upon just
one business or industry, or a closely related set of core businesses, the extent of the
diversity cannot be too great. The demerger of ICI, one of Goold and Campbell’s original
examples of the strategic control style, into the separate companies of ICI (bulk chemicals)
and Zeneca (pharmaceuticals), highlighted this need to reduce diversity. Strategic control
lies at the middle of the continuum between the other styles. Whilst this can help companies
to realise the benefits of the other two styles it can also mean that they suffer from their
weaknesses: lack of coordination, ambiguous objectives and risk aversion are all potential
problems.
 Strategic Planning
The strategic planning style places the emphasis upon strategy and longer-term objectives
within a cooperative and flexible management approach. The centre exerts an extensive
planning influence within strategy formation process but the control influence is flexible
with less on short-term targets and a wider range of measures. The style has been labelled
the master planner approach, which highlights the way in which the centre controls the
strategy process, whilst the business units are responsible for implementation of the topdown plan.
In practice, the centre exerts a strong leadership role within the extensive strategic planning
process. The organisational structure is likely to be complex, with coordinating committees
and other processes designed to draw a wide range of views into the planning process. The
aim is often to achieve synergies across a variety of businesses through integration. The
centre can also draw on strong central staff functions to advise and provide economies of
scope in central services. Whilst the businesses are involved in the planning process, even
detailed budgets are likely to be set by the centre after consultation. In contrast, the range of
controls used to monitor performance is likely to stress strategic as well as financial targets.
The strategic planning style is best suited to organisations that have opportunities to share
significant activities between business units, often in markets requiring large, risky decisions
and facing tough international competition. This often means concentrating on one or two
core businesses and divesting peripheral activities. In particular, the fit between the
business units is critical. The downside of this style is that there can be less freedom of
action for the businesses, slower decision making and reaction to adversity, less objectivity
and more subjective assessment. Paradoxically, although more people are involved in
strategy formulation this is a top-down approach so motivation and “ownership” of the final
strategy can be low.
Goold and Campbell identified Cadbury Schweppes, BOC, Lex and STC as examples of
strategic planning companies.
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SAA 2
Return to the illustration Three Views on the Role of the Centre at Burmah Castrol
Chemicals Group. Attempt to classify the three views outlined into the management styles
outlined above, giving reasons for your assessment.
View 1
View 2
View 3
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D.
COMBINING APPROACHES AND
MANAGEMENT STYLES
The last two sections have outlined the different approaches to synergy and management
styles within multi-business organisations. I would argue that these approaches and styles
are merely the flip sides of the same coin. One side shows what the corporation intends to
achieve in terms of the underlying logic of value creation, whilst the other side shows how it
will achieve it in terms of management controls and structures.
The analyses of the Burmah Castrol Chemicals Group in SAAs 1 and 2 suggest that each
the three views about the future of the group can be accurately described by both a
particular approach and a management style. In more general terms, Figure 7:5 indicates
each of the approaches to synergy can be closely linked with one of the management styles
identified by Goold and Campbell. Each approach to synergy suggests a particular style of
management in terms of the way in which strategy is developed and controlled.
Approach
Portfolio Approach
 financial synergies
by balancing
portfolio
Management Style
Financial Control
Linkages Approach
 linkages synergies
through transferring
skills & sharing
activities
Strategic Control
Core Competences
Approach
 core competence
synergies across
business units
Strategic Planning
Comments
SBUs manage strategy against tight
financial targets set by centre.
Centre aims to provide a better
investment performance.
Portfolios can be very diverse.
SBUs largely develop strategy but
centre aims to co-ordinate plans and
set fairly tight financial & strategic
targets.
Attempt to create links between
businesses to create competitive
advantage.
Group likely to consist of 3 or 4 core
businesses.
Centre drives strategy around a
theme (core competences).
Businesses concentrate on
implementation with centre strongly
co-ordinating actions and creating
linkages between units.
Emphasis is on a small range of
core products and competences.
Figure 7:5 – Comparing Approaches to Synergy and Management Styles
The table shows how the devolved management style of financial control is best suited to a
corporation seeking financial synergy through a portfolio approach. In contrast, the topdown “master planner” style of strategic planning will assist in the development of
synergies through core competences that cross traditional business unit boundaries. The
“strategic shaper” style of strategic control encourages co-operation between business
units, and between the centre and the business units, which is consistent with the creation of
linkages and the recognition that competition still rests at an SBU level.
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E.
AN INTEGRATIVE MODEL OF CORPORATE
STRATEGY
So far, this Session has focused upon the approaches to synergy and management styles
adopted by multi-business organisations. The view taken by corporate managers on the
most appropriate management style is underpinned by an associated approach to
synergy. In effect, managers have an underlying logic of how their corporate world
operates, in terms of the way to both create and manage synergy.
Not only can it be argued that these approaches and styles are linked, but it is also clear
from the preceding discussion that future corporate developments and the scope of the
organisation are likely be influenced by this underlying logic. In effect, the underlying logic
will govern their reasons for developing in particular directions, using particular methods,
and the overall extent of the corporation.
Bringing together the framework developed at the end of the last Session in Figure 6:6 with
the framework outlined above in Figure 7:5, the three key dimensions of corporate strategy
can be illustrated, as in Figure 7:6.
acquisitions
core competences/
strategic planning
alliances
linkages/strategic control
Logic/style
internal
portfolio/financial control
withdraw
existing
related
unrelated
Directions
Products/markets/processes
Figure 7:6 – An Integrative Model of Corporate Strategy
Taking each underlying logic separately, some of the implications can be outlined:
•
A Portfolio/Financial Control organisation is likely to develop into unrelated
products/markets/processes in order to diversify risk and build a balanced portfolio.
Consequently, the scope of their business is likely to be large. Frequently growth will be
by acquisition, with the decision likely to rest on whether managers believe that they can
turn the acquired business into a star.
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•
A Linkages/Strategic Control organisation is likely to develop into the same or related
products/markets/processes, with questions about acquisition targets or opportunities to
enter strategic alliances related to the opportunities to share activities and skills with
other parts of the organisation. The corporation is likely to concentrate upon no more
than three or four core businesses, allowing the centre to gain enough understanding of
the businesses to spot the opportunities for linkages.
•
A Core Competences/Strategic Planning organisation will favour moves into areas
involving the same or related business processes, where there are opportunities to build
upon or exploit core competences. Such organisations may well favour alliances over
acquisitions, as means of accessing new sources of competences. The scope of the
organisation is likely to be restricted to two or three core products and their related core
competences.
SAA 3
Return to your classifications of approaches to synergy and management styles of the Three
Views on the Role of the Centre at Burmah Castrol Chemicals Group. What are the
implications for the future directions and methods of development of the Group as a result of
adopting each of the views?
View 1
View 2
View 3
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F.
CREATING A PARENTING ADVANTAGE
The integrative framework outlined in the previous section is very helpful in exploring the
links between the underlying logic and the directions and methods of development the issue
of scope is only partly addressed. Some general points can be made about the overall
range of businesses likely to be acceptable depending upon the logic adopted, but which
specific businesses should be bought, kept or disposed of?
Further work by Michael Goold and Andrew Campbell, along with Marcus Alexander,
explores the key concept of parenting that can address this issue and provides a further
framework for analysis. They argue that the parent company should not only add value to its
business units, but also add more value than any other potential parent - they call this
parenting advantage. They go on to outline the parenting matrix that can be used to
highlight where opportunities for parenting advantage exist and where the problems may lie
– so identifying the specific decisions related to scope.
In defining the concept of parenting advantage, Goold, Campbell and Alexander identify the
characteristics that lead to value creation:

There must be a parenting opportunity – the parent (corporate centre) must have some
opportunity to help businesses in its portfolio to improve performance.

The parent must possess some parenting characteristics – special capabilities or
resources that will enable it to improve performance.

The parent must have a “feel for the business” – sufficient understanding of critical
success factors to ensure it does not influence the business unit in inappropriate ways.

The best parents also have “distinctive parenting characteristics” – special skills and
resources that fit particularly well with the other characteristics and their portfolio of
businesses.
Together, these characteristics will allow the parent to meet the “better off test” that is at the
heart of the parenting advantage.
Using these principles the parenting matrix can be defined that allows the different
business units to be catagorised according to their relationship with the parent and benefits
that the parent can provide. There are five classifications into which the portfolio of existing
(or potential new) business units can be placed:

Heartland – businesses for which parenting advantage exists and are likely to be at the
heart of any future strategy.

Edge of Heartland – businesses where the parent may be able to develop an
advantage, so are also likely to be part of a future strategy.

Ballast – businesses where there is a fit between their critical success factors and the
parent’s skills and resources but value creation logic is weak. The business unit requires
little help from the parent so can be sold if a better parent exists or moved to heartland if
a new value creation logic can be developed for them.

Alien Territory – businesses that do not fit on either dimension and need to be sold as
soon as convenient.
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
Value Trap – businesses in which there is a value creation logic, the business unit
needs help, but the parent’s strengths and weaknesses do not fit well with the critical
success factors. These businesses need to be sold unless the parent is able to change
its skills and resources to reduce the misfit.
All these categories are highlighted in the parenting matrix illustrated in Figure 7:7.
High
Heartland
Ballast
Edge of
Heartland
Fit between SBU
critical success
factors and
parent’s skills
and resources
Alien
Territory
Value Trap
Low
Low
High
Fit between SBU parenting opportunities
and parent’s skills and resources
Figure 7:7 – The Parenting Matrix
Source: A Campbell & M Goold, “Corporate Level Strategy” in V Ambrosini et al., Exploring Techniques of
Analysis and Evaluation in Strategic Management, Prentice Hall, 1998
The implications of this parenting approach are that decisions on which business units to
keep within the group depend not only on what the business units contributes to the group,
but also on what the corporate headquarters can contribute to the business units. Even a
“good” SBU may be divested if it is thought a better parent can be found for it.
Finally, it is worth exploring the link between the parenting matrix and the integrative model
of corporate strategy outlined in the previous section. The underlying logic (approach to
synergy and management style) adopted by the parent will affect its skills and resources,
which are the key determinants of the particular parenting opportunities and parenting
characteristics.
The implication of this point is that the choice of underlying logic affects the positioning
of business units on the parenting matrix. What might be a heartland business if the
centre adopts the portfolio/financial control logic, may well move to alien territory (or any of
the other categories) if the centre adopts either the linkages/strategic control logic or the
core competences/strategic planning logic. To illustrate this point, the future of the Dussek
Campbell general waxes business within the Burmah Castrol Chemicals Group is explored
below.
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Illustration
DUSSEK CAMPBELL – HEARTLAND OR ALIEN BUSINESS?
Dussek Campbell is a supplier of waxes for a wide range of applications including
packaging, candles and adhesives. The future of this business as part of the Burmah Castrol
Chemicals Group depended upon which view about the role of the corporate parent was
adopted.
Whilst the packaging industry was highly concentrated, the candles market was very
fragmented. Overall, Dussek Campbell’s general waxes provided low margins, but
knowledge of customer applications was important. There was also some evidence that the
business may be becoming more global.
If Burmah Castrol Chemicals Group adopted a portfolio/financial control logic (view 1), then
Dussek Campbell’s low margins might well suggest the business was placed in alien
territory. If a linkages/strategic control logic (view 3) was taken then Dussek Campbell
moves to the heartland because knowledge of customer needs becomes the central theme
of the Group. The possible globalisation potential of Dussek Campbell suggests an edge of
heartland position if the Group adopts a core competences/strategic planning logic focusing
on global development.
Source: based on the “Burmah Castrol Chemicals Group” case study by Gerry Johnson in G Johnson & K
Scholes, Exploring Corporate Strategy, 5th Edition 1999.
G. SUMMARY
This Session has explored the nature of the relationship between the corporate
headquarters and business units within diversified corporations. At the heart of corporate
strategy is the way in which a multi-business organisation attempts to manage diversity.
This involves consideration of synergy, management styles and parenting. Together,
these factors influence the scope of the organisation and the developments it undertakes.
Three different approaches have been developed to allow organisations to identify and
create synergy between their different activities:
•
The portfolio approaches - which seek financial synergies through a balanced
portfolio of business units.
•
The linkages approach - which aims to create synergies through shared activities
and/or transferred skills between business units.
•
The core competences approach - in which the organisation seeks to create and
exploit synergies through its core competences and core products.
Empirical work by Andrew Campbell and Michael Goold has identified three broad
management styles that organisations may follow to address the challenges of corporate
strategy:
•
Financial control - the shareholder or investment banker approach.
•
Strategic control - the strategic shaper approach.
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•
Strategic planning - the master planner approach.
The conclusion reached by Goold and Campbell is that no one style is better than another
but that the corporation should choose a style which is appropriate.
It can be argued that the various approaches to synergy and management styles were
individually closely related, with each approach being matched by a particular style:
•
The portfolio approach and financial control
•
The linkages approach and strategic control
•
The core competences approach and strategic planning
Together the approach to synergy and the management style form a series of underlying
logics. The decisions managers take about the development of their organisations and the
scope of the organisation are governed largely by the views they hold about the logic of
synergy and management style. An integrative framework links the directions and
methods of development to these logics.
Finally, the concept of parenting advantage suggests that the corporate centre needs to be
able to add more value to the business units than any other parent. Based on this concept
the parenting matrix allows decisions to be taken as to which business units fit into the
scope of the group as a whole. Positions within the parenting matrix are affected by the
choice of logic made by the centre.
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