Strategic Advantage Term Paper

  • Length: 10 pages
  • Subject: Business
  • Type: Term Paper
  • Paper: #5777883

Excerpt from Term Paper :

Strategic Advantage

Goold and Campbell's comprehensive study sheds a new light on the ways a company uses to improve its financial results, whether from a quantitative point-of-view (i.e. through acquisitions) or a qualitative one (i.e. through the improvement of ratios) It would seem, according to the two researchers, that multi-business company management proves to be a difficult problem, considering that, according to their study, most "parent" companies tend to destroy value rather than add value to the businesses it parents.

The two authors conduct a short analysis of the previous strategies used by multi-business corporations, and find that the growth / share matrix, which was implemented on a large scale in the United States in the 70's and 80's lead to disillusionment, as the performance of companies was quite poor. In regard to the core-competence concept, although its appeal is quite powerful, it failed to provide practical guidelines for its application, so definition of a company's core competences is quite difficult, when lacking some analytical tools. The model Goold and Campbell propose is intended to fill the deficiencies of the core competence concept and also to provide the tools for an effective planning analysis. In respect to the relation between the core-competence and the parenting concepts, it seems that there isn't any for some companies, particularly Japanese ones. However, the authors found that British conglomerates do not have any technical or operating competencies that are common across all their business. The parent can justify its presence and influence only if the overall performance achieved by its business units surpasses the one obtained as stand-alone entities. A parent must "either carry out functions that the businesses would be unable to perform as cost-effectively for themselves or it must influence the businesses to make better decisions than they would have made on their own."

There is a significant number of factors that need to be taken into consideration when analyzing the chances a parent company has to increase the value of a company under its supervision. According to the Goold and Campbell, these factors may be grouped into three categories: 1 the existence of a genuine parenting opportunity to improve the performance of a business; 2. The availability of the skills, management processes and other characteristics that are suitable for realizing the opportunity and 3. A certain degree of understanding of the critical success factors in the business to avoid inadvertently destroying value through inappropriate influences.

However, in most cases, for a variety of reasons, parents more often destroy value, rather than creating it. Most criticism focused on the high level of corporate overhead costs, which must with certainty be paid in order to get any expected profits. Still, the true source of value destruction has to be searched for in the mistakes the parents made when exercising their influence on the business. A week appointment policy, objectives that are highly inappropriate or invalid, slow and costly review processes manage to damage performance much more that corporate overhead bills.

Before analyzing the nature and importance of the parenting technique, it is important to establish a terminological platform, in order to determine the exact meaning of the words used by Goold and Campbell. In their article "Corporate Strategy: The Quest for Parenting Advantage," published in "Harvard Business Review," March-April 1995, the authors state that "Multi-business companies create value by influencing - or parenting - the businesses they own. The best companies create more value than any of their rivals would if they owned the same businesses. Those companies have what we call a parenting advantage." The parent organizations act like an intermediary between investors and businesses, and its competition includes investment trust and mutual funds. Although Goold and Campbell affirm that they do not object to the use of the term "parenting," they "prefer to reserve the term for activities that involve influencing businesses, particularly when those activities include appointing the head of the business." If the parent company (hereinafter referred to as "the Parent") does not create sufficient value in order to compete with other middlemen, then its whole purpose is jeopardized. The essence of what Goold/Campbell have to say is that "Fit between a parent and its businesses is a two-edged sword: a good fit can create value, a bad one can destroy it." What do the authors mean by a good or a bad fit? Well, the initial explanation is a bit ambiguous: "If there is a fit, the parent is likely to create value. If there is not a fit, the parent is likely to destroy value." Bad fits (i.e. bad parenting) causes the business unit managers to take worse decision then they normally would have, because of the influence of the Parent. For instance, analyzing the involvement of oil-companies in the mineral business, Goold / Campbell found that it had caused loses that took several years to remedy. Why did that happen? Because the assessment of the fit between the Parent and the business-unit (hereinafter referred to as "the Unit") is quite a difficult task for most corporate level managers. The fact is, this particular issue rarely comes to their mind. In regard to parenting opportunities (i.e. The potential for improvement within a business), it really depends on the Parent to consider the opportunity and to decide whether some advantage should be taken of it or not. For example, as Goold / Campbell state, excessive overhead or sales force inadequacy may present themselves as parenting opportunities for the right company. However, if the managers find it hard to overcome the animosities, concerns about control or other technical difficulties, the "fit" is compromised and loses emerge.

Goold and Campbell investigate the situation of 16 British companies involved in all areas of business and find different "methods" some Parents manage to find to destroy value. For example, corporate objectives of growth proved damaging for a cash cow company that should have instead focused on maintaining profitability. The growth objectives distracted the management team from its initial task and led to a waste of valuable time and resources that eventually led to nothing good. Some oil companies decided to acquire some minerals businesses, because, at first glance, the oil and minerals business were fairly similar. Both involved long-term planning, extraction equipment, international and political connections, large investments etc., so it seemed like the perfect acquisition. The oil company Parent suggested new approaches to exploration based on industry oil practices, and the minerals managers felt compelled to try. The losses were severe and it took a few years to recover. In an industrial services company, corporate management tried to impose an extensive and sophisticated strategic planning process that involved reviewing by the center of each Unit's strategy. This proved to be inadequate, as most businesses competed with low overhead local entrepreneurs, and their main concern should have been driving down costs and improving customer relationships. "Many corporate parents believe that they create substantial value in their corporate development activities, for example by spotting opportunities to buy businesses cheaply, by creating new ventures that provide profitable growth opportunities, or by redefining businesses in ways that lead them to be more competitive in their market places. We have found, however, that such initiatives frequently misfire. Parents overpay for acquisitions, support losing ventures and redefine businesses the wrong way. The weight of research evidence indicates that the majority of corporately sponsored acquisitions, alliances, new ventures and business redefinitions fail to create value."

Goold and Campbell divide businesses into four categories, depending on the quality of the fit that exists between them and the parent. The first category, "Heartland businesses have improvement opportunities that the Parent knows how to address, and they have critical success factors that the Parent understands well." The Parent should have the necessary skills to generate above-average margins and to minimize costs. None of the Parents characteristics conflict with the ones of its Unit, so no value is destroyed. Heartland businesses should have priority in a Parent's portfolio. In the case of Edge-of-Heartland businesses, some parenting characteristics fit, while others don't. The added value is partially offset by critical success factors that do not fit with the Unit. The net contribution is not clear-cut, so the Parent has to focus its attention on that particular Unit in order to try to transform it into heartland business. In some cases, the Parent should not impose all its rules because of the inadequate fit between it and the Unit (Unilever-Calvin Klein is a good example). Better understanding of a Unit's business may lead to closer involvement, but until then, some parenting influences need to be neutralized. Most Parents have "ballast businesses" in their portfolios. The Parent is not able to find any new ways to add value. Managers tend to keep the ballast companies as they are often sources of stability, but changes in the business environment may turn ballast businesses in what Goold and Campbell call "alien territory." Alien territory businesses are those companies with a high probability of value destruction that are…

Cite This Term Paper:

"Strategic Advantage" (2004, August 03) Retrieved February 19, 2017, from
http://www.paperdue.com/essay/strategic-advantage-176185

"Strategic Advantage" 03 August 2004. Web.19 February. 2017. <
http://www.paperdue.com/essay/strategic-advantage-176185>

"Strategic Advantage", 03 August 2004, Accessed.19 February. 2017,
http://www.paperdue.com/essay/strategic-advantage-176185