COMPANY MUST ADD VALUE TO SUBSIDIARIES THROUGH EXPLICIT ‘PARENTING’

1st November 2010, ECONOMIC TIMES

The word ‘parenting’ conjures visions of nurturing and inspiring; it does not connote involvement with and intrusion into any and everything that the child does.

1st November 2010, ECONOMIC TIMES

The word ‘parenting’ conjures visions of nurturing and inspiring; it does not connote involvement with and intrusion into any and everything that the child does. Parenting varies with the age, health and capabilities of the child. Especially with healthy, well-performing wards, the parent learns how to remain interested without getting involved, how to be there when needed without being overbearing. The child has obligations to the parent as much as enjoying privileges.

These ideas can be applied to the relationship between a company and its subsidiaries.

India’s aggregate economic growth has been impressive, though issues of the unequal prosperity and lagging social development cry out for attention. The private sector is leading the growth effort and is dynamic with activities in acquisition and consolidation in both the domestic and overseas markets.

When companies develop rapidly, the organization structure gets stressed and the inter-relationship among its constituents begins to inhibit growth. If there is a corporate centre, how will it interact with the constituents without becoming overbearing or intrusive? How will the corporate centre add value to the constituents and avoid becoming a stumbling block?

Companies in other nations have faced these issues and there are lessons to be remembered. I will cover two perspectives: historical and intellectual.

Historical Perspective

The concept of operating divisions/companies and their relationship with the corporate centre developed before the Second World War when some American corporations had grown too big to be run on a functional basis. Alfred Sloan is considered an early practitioner of the concept by implementing the multi-division, multi-business concept in GM with great success. The experiences of Du Pont and Standard Oil added to the understanding of these ideas.

Thus for the first time, a conceptual separation occurred between business-level issues and corporate-level issues. There was a rapid proliferation of divisionalized companies after the war. In his book Strategy, Structure and Performance, Richard Rumelt (1974, HBS Press) reported that among the Fortune 500 companies, the percentage of divisionalized companies rose from a low 24% in 1949 to a stunning 80% in 1969. May be it had become a fashion statement to have a divisionalized structure!

Peter Drucker wrote The Practice of Management in 1955 in which he had put forth the idea of the ‘general manager’ as one who had mastered the general principles of management. These could be applied in any business setting. The thinking was that the human and conceptual skills of a general manager could more than make up for a lack of domain or technical skills. These ideas gave a further fillip to the management concept of diversification.

When I began my career, I was in awe of successful conglomerates like Litton Industries, led by Roy Ash, and ITT, led by tycoon Harold Geneen. The American experience drew great admiration in Europe as well. The magazine Management Today carried an adulatory article by British writer, Robert Heller, “Today Litton Industries is a household word; ‘doing a Litton’ is becoming accepted shorthand for what Britain as a nation and British companies as private enterprises require—harnessing of new technology to practical application and dynamic business growth.”

By the early 1970s, a large number of the Fortune 500 companies had diversified, some into related areas and some into unrelated areas. As the stable economic climate of the 1950s and 1960s gave way to the turbulence of the 1970s, huge challenges arose from volatile exchange regimes and oil-driven inflation.

Diversified companies came under pressure and portfolio models like the BCG model evolved to address the challenges. Raiders like Carl Icahn and T Boone Pickens demonstrated that they could break up large, diversified companies and demonstrated that the sum of the packages exceeded the whole. The management world was ready for the ‘core competence era’; being very recent, I will not delve into its evolution.

Thus the subject of corporate organization structure has not stood still; over the last half century, there have been waves of thinking about divisions and conglomerates. The search for a sound and lasting basis continues.

But the more subtle point is that there may not be any sound and lasting model in the first place. How to organize a conglomerate is an evergreen subject, worth reviewing every so often as the economic climate changes with increasing rapidness.

Intellectual Perspective

When I use the expression ‘division or business’, for the purpose of this article, I include all three types of structures in which a sub-group of a larger management group is engaged in serving customers of a defined kind and operating commercially within an identified market space. The legal status may be of an internal division in a multi-business legal entity, as within GE; or a separate legal entity with 100 percent ownership by the parent; or a separate legal entity with part ownership by the parent. Admittedly there are differences, but for this brief article, all of them are regarded as children of a parent.

The concept of the individual business strategy is well understood by India Inc after liberalization. Business strategy becomes explicit by answering three questions:

  • Who are our customer segments?
  • How will we service them with a distinctive proposition?
  • How will we earn a value surplus?

The concept of the corporate strategy emanates from answering three different questions:

  • In what businesses should the company invest its resources, either through ownership, minority holdings, JVCs or alliances?
  • What distinctive and beneficial influence will the parent offer its subsidiary?
  • How will this parent add more value than any other parent?

Thus corporate strategy is at the corporate level, what business strategy is at the business level. Through its distinctive competitive advantage, the business unit must deliver value surplus to the parent. Likewise a company must deliver to the subsidiary a distinctive parenting advantage.

Corporate strategy tends to be too general, for example, to allocate resources, to offer challenge and to give a second opinion. So how do you make the corporate strategy specific? You do this by making the strategy explicit and almost contractual.

Nurturing, inspiring and defining the heartland

Three characteristics constitute good corporate strategy.

The first feature of good corporate strategy is the company’s distinctive parenting value, which is equivalent of a parent nurturing the child. For example, when Tata Motors, as a parent, helped its fledgling automotive software business, Tata Technologies, to go global through the acquisition of INCAT; or when the Tata Global Beverages agreed to explore with PepsiCo their shared vision of an emerging segment for healthy beverages.

The second feature is the parent’s value creation insights which are about inspiring the child, example: identifying opportunities that the business management has not perceived or unlocking of value that can be beneficial. So when the parent encouraged Tata Steel to unlock value by selling its power generation assets to Tata Power, a mutual win-win situation was created.

The third feature of corporate strategy is defining the heartland business of the company. Unilever did it by stating that it “seeks to serve the everyday needs of everyone, everywhere.” Conglomerates tend to be broad as Tata has defined its seven segments of business. More importantly, a parent may define what it will not do as a business, like entertainment or liquor or cigarettes.

In the years ahead, business leaders will spend more time agonizing about the parenting value of the corporate centre to the operating companies/businesses.

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