Parenting Styles

You are the CEO of a conglomerate with many businesses in many industries in many geographic regions.

a) Discuss what Goold and Campbell Style you are likely to adopt( justify your selection)

b) How do you manage synergies in the portfolio

c) How do you ensure companies you acquire fit into your 'Heartland' in the Goold, Campbell, Alexander Parenting- Fix matrix? Specifically outline how you intend to add value to the acquisition you make.

(A)

Conglomerates face the challenges involved in managing multiple activities in multiple markets. One such challenge involves determining the best corporate style to manage these units in order to add value, and potentially more value than other parents could add and prevent these businesses being handicapped by the centre. Essentially, 'putting one's eggs in different baskets" may reduce the risk in the overall portfolio but requires that the firms management possess the strong capabilities necessary to successfully execute this strategy. This in mind, the Goold and Campbell style that I would adopt is the strategic control style based on....

Because the company has many unrelated businesses, in many industries and in many geographic regions, it is quite unlikely that corporate centre management would be adept at the capabilities required to manage these businesses. Most corporate managers have experience in only one industry (or a few) and none realistically can be an expert in the wide variety of unrelated industries represented in a conglomerate. The business units' management is close to the markets in the different regions, familiar with the different cultures that exists in those markets, and is more likely to have intimate specialist knowledge of their particular businesses. They also need to be flexible and nimble at business-level decision making. As such at the centre we will focus on financial control, which does not require a lot of rich, industry-specific knowledge. Therefore the centre will impose a strict financial discipline of the sort GE's former chairman and CEO, Jack Welch imposed on all divisions- "Either become the world's top one or two in your industry, or expect your unit to be sold". Otherwise our corporate managers will experience information overload. The organizational structure will therefore be decentralized with substantial divisional autonomy. We will have little influence in developing strategies and there will not be a formal review of long term plans. We will only agree and monitor short-term financial targets for the businesses and provide support to the businesses in helping them to grow. Inconsistency in using this type of style resulted in the rise and fall of the US conglomerate "Beatrice". Beatrice was a leading diary firm that embarked on unrelated product diversification. By 1975 only 21% of its earnings were in diary. Its acquisition targets were private family-run businesses whose owners (turned division managers) were largely left alone as long as financial results were satisfactory. Sales grew from $235 million in 1952 to $5.6 billion in 1976. By 1976 it operated in 27 countries. With two new CEOs between 1976 and 1985 Beatrice moved toward more centralization by organizing the firm into six groups in search of "synergies". Headquarters staff increased by 400% over the period and the second CEO had a tendency to get involved in operational details. Between 1976 and 1985 every acquisition was met with a reduction in market value and in 1985 the CEO was forced to resign. Later that year Beatrice was taken over in the then largest LBO in history. Starting in 1986, Beatrice began to sell off certain divisions and in 1990 Beatrice sold itself to ConAgra.

To keep divisional mangers focused on financial performance, their compensation is directly linked with quantifiable unit performance. Thus, the relationship among various divisions is competitive, each trying to attract a larger share of the corporate investments.

Unless corporate conglomerate managers are willing to impose the GE strategy, they may tolerate poor performance of some units, which can be subsidized by better units. By robbing the better units to aid the poor ones, corporate managers in essence practice "socialism". Over time, better units may lose their incentive to do well. Eventually, corporate performance suffers.

(B)

Because the businesses of a conglomerate are unrelated, operational synergies are absent as the firms cannot benefit from declining unit costs i.e. economies of scale, by leveraging product relatedness. The linkages are ideally few. Therefore, the focus will be on financial synergy, also known as economies of scope. The centre will set out to increase the competitiveness for each individual unit that is financially controlled by the corporate headquarters beyond what can be achieved by each unit competing independently as stand-alone firms. The mechanism we will use to obtain synergy is through our key role of identifying and funding profitable investment opportunities. Therefore a corporate treasury management unit will be created through which financial resources will be channeled to high-potential, high-growth areas. In essence, value is created by acquiring companies at favourable prices, closely monitoring their financial performance and operating an internal capital market. It will be appreciated that