Strategic Advantage Goold and Campbell Term Paper

Pages: 10 (3685 words)  ·  Bibliography Sources: 1+  ·  Level: College Senior  ·  Topic: Business

SAMPLE EXCERPT:

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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.

The essential condition for the creation of stand-alone value is the existence of unfulfilled potential in one of the Units, a particular role for the Parent in bringing about improved performance. For instance, as Goold / Campbell notice, a Unit's incompetent or weak management team is an obvious opportunity for a Parent. Some companies studied by the two researchers, like Dover, BTR and Emerson have a record of improving a business' performance by replacing the previous inadequate management team. The ability to find such companies, run by an inefficient management team has proved to be an important source of profit for some Parents, although one might think that the requirements of the capital market should long have disciplined mangers. However, there are many more opportunities for improvement besides ineffective management teams. There are certain businesses with particularities that make them especially difficult to understand - such us top-level technology, payoffs after long periods of time, unusual risk - and which make it really difficult for their management teams to obtain the capital the business needs. A knowledgeable Parent can play a particularly valuable role in such a situation. In other cases, a senior manager may have interests and objectives that conflict with stakeholders' interests. More luxury and less office hours are not something shareholders will approve of. There are particular temptations to which some managers are sensitive. For instance, "managers in cash-cow businesses are liable to want to reinvest more in their own businesses than may be justified by the opportunities they face." Such investments often destabilize businesses, so this is a good parenting opportunity for a certain category of companies. Rare skills are a very valuable asset if correctly put to use, so that parent companies may influence in a positive manner the business of its Units. Such skills may reside, according to Goold and Campbell, in specialist corporate staff departments, senior line management teams, cost reduction and turnaround strategies financial specialists etc.

There is a real difficulty for Parent organizations to have a completely different attitude towards each business in its portfolio. Sometimes, Parents understand that it is often easier to "change the portfolio to fit the parent organization than to change the parent organization to change the portfolio." The most important benefit that companies get from the analyses provided by Goold and Campbell is the identification of misfits. Focusing on real and profitable parenting activities and the development of parenting skills leads to the creation of additional value. However, learning new skills is a trick that takes a long time to perfect and it is always a dynamic process, as the profitability of a Parent depends on maintaining a good fit. Keeping a constant track of the business environment, the parent organization must review its behavior and portfolio, in order not to lose momentum. A few years of bad financial results could mean the end of a multi-business company that took a lot of time to build. Costing issues are always a problem, as excessive overheads consume profits, and the lack of long-term development is a sure way into the… [END OF PREVIEW]

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