Strategic advantage in competitive business environments

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 often "the remnants of past experiments of diversification, pet projects of senior managers, businesses acquired as parts of a larger purchase or attempts to find new growth opportunities."

In order to better understand the Parent, Goold/Campbell propose a "systematic review of its characteristics in five categories." First, the authors take into consideration the mental maps of the Parent (i.e. values, aspirations, rules of thumb, biases and success formulas). These aspects embody the Parent's understanding of the business environment, the types of businesses and the way the Parent is probably going to behave. These are usually based on managers' personal experience in certain businesses. Second, the Parent creates value by using a number of structures, systems and processes. The way a company handles the layers of hierarchy, the appointment processes, human resources, budgeting, planning, supply, production etc. processes are important aspects of parenting. Still, the most important thing are not the processes themselves, but how the managers interact with each of them. Third, there is a controversy about the size and role of the corporate staff departments and central resources. Some companies, like BTR have small, highly efficient corporate staff and resources. Some other, like BP, have bulky, bureaucratic central departments, but that does not seem to affect a company's performance as much as the behavior a Parent has toward its Units (i.e. Strategic Planning, Strategic Control, Financial Control). Fourth, people with unique skills and competencies are highly valued. The most important thing, however, is if the human resources match the parenting opportunities. If a Parent has a highly skilled manager who is not able to interact with a particular Unit, than a parenting opportunity is lost. Therefore, the personality and skills of a manger have to address certain items in a Parent's portfolio. Fifth, the decentralization contract executed by the Parent and the Unit defines the relationship between the two (i.e. how much the Parent influences the Unit's business). A Parent has to be aware of the types of business it has the capacity to influence in a positive manner, and which are not suitable for the Parent's attention.

According to an article published by Goold and Campbell in 1998 in the "Harvard Business Review, "Desperately Seeking Synergy," "synergy initiatives often fall short of management expectations." Some initiatives do not make it pass brainstorming meetings, while others generate burst of activity, just to fade down a bit later. The pursuit of synergy also implies opportunity costs, as it distracts managers from concentrating on the true problem, i.e. "the nuts and bolts of their business." Sometimes, as the two researchers prove, synergy programs damage customer relationships, brands and employee moral. In order not to destroy value, managers should have a more skeptical view. Such an approach should lead to avoiding the waste of precious resources and to a better understanding on where synergy opportunities really are. According to Goold and Campbell, there are four biases for which the synergy programs fail and which, in combination, make synergy seem more attractive than it truly is: the synergy bias, which implies overestimating the benefits while underestimating the costs of synergy implementation, the parenting bias, which implies that the Units have to be coerced in order to fully cooperate, the skills bias, which is a quite common assumption that the necessary competencies needed in order to achieve synergy are to be found in the Parent's organization, and the upside bias which makes the managers overlook the downsides while concentrating on the benefits of synergy.

Goold and Campbell found in their study that there are three different approaches, or styles, that a Parent may use in order to maximize the profit of its Units. These styles have two dimensions: a planning dimension, which implies long-term strategic thinking, done in a centralized manner, and control influence, which "shows the importance companies attach to short-term financial targets." Goold / Campbell found no Parents to combine both dimensions in a highly successful manner. However, while some companies are more inclined to pursue short-term goals, by imposing certain financial results to Unit managers, and other are more likely to make long-term plans, notwithstanding current results, there is a third category that tries to gain as much as possible from both perspectives. Each one of these approaches has its advantages and disadvantages. For instance, financial control (i.e. short-term oriented policy) imposes a discipline tougher than even the one imposed by the capital market. However, long-term development plans, which require a high degree of risk-taking are not even considered, which affects in a severe manner the future situation of the company. On the other hand, focusing on long-term strategic planning causes the Unit managers to pay less attention to short-term results or to neglect them totally.

Parenting opportunities have to be looked for, according to Goold / Campbell in areas where the Parent has some understanding of a Unit's business. However, there are many factors that need to be analyzed prior to buying a company. Old businesses with a successful track record manage to accumulate large overheads and costly bureaucracies. On the other hand, young companies have insufficient managerial and functional skills, and often not enough cash. Some companies employ top managers, some don't. Some business mangers have a right perspective on a business' future, others don't, and it's likely that this defective vision will eventually lead to bankruptcy. Some businesses have high linkage potential. Synergy, if applied correctly, may lead to cost reduction and improved efficiency. Some companies have common capabilities that may be shared, while others have special expertise, which can benefit the whole group. Finally, there are areas where some businesses lack experience, while others may have of lot of knowledge in a particular area. A Parent has to consider all these aspects in order to evaluate whether the "fit" it will provide will add value, rather than destroy it, and will have a greater impact on a Unit than any of its competitors.