Should Corporate Parents Interfere in the Strategies of Diversified Groups of Companies - Essay Example

?Should Corporate Parents Interfere in the Strategies of Diversified Groups of Companies? John Jones Introduction In this modern time of the twenty-first century, the tiny mom and pop local company is going the way of the manual typewriter. It is being replaced by the multinational corporations who in turn own several different companies, often with numerous dissimilar interests. Maybe the child company does the same type of product or service as the parent but more than often not. Some corporate strategies involve micro-managing the interests of the subordinate while others believe that letting the child manage its own affairs will result in a profitable win-win for both. So the question remains then, how much control should the parent exercise over the child? Discussion In the perfect corporate parent and child relationship the parent corporation is simply there to guide as it were. As in the physical parent and child relationship, the parent hopes the child will grow and prosper. No parent would ever expect his four year old child to stagnate there and on the same token the company that prospered in1998 to keep the same strategies as then. Times change, peoples’ needs change, and companies should be flexible enough to keep abreast of those changes. If not, the “cash cow” of 1998 might have turned into the dog of 2012. Therefore, the parent company should train and coach, while helping the child prepare for the future, only intervening when absolutely necessary for both of their continued successes. A good example of a company that failed to envision the future and failed to intervene was the now defunct Packard car company. From the early days of the automobile, the Packard name stood beside Cadillac and Lincoln as the symbol of luxury American cars. Yet the company made a fatal mistake when it acquired Studebaker in 1953, in response to decreased sales because of cutthroat competition by the Big Three. Even though it was financially solvent, Packard executives failed to see how troubled Studebaker actually was. A short five years later the last Packard was made and the Company tried to continue on as its child. By 1966, the entire company was bankrupt. Speaking of car companies, in 2008 General Motors found itself in financial trouble and received a Government loan. As part of its restructuring activities, and under pressure from Congress, the conglomerate agreed to divest itself of three divisions, one of which was Hummer. Although fairly profitable, Hummer was seen as a ballast company that would eventually be driven out by its gas-guzzling SUV’s. So GM tried to sell the division but the deal fell through and Hummer was retired in 2010. The above were car companies though that owned other car companies. What about when the child’s core business is totally different from the parent’s? Back to GM, they owned appliance giant Frigidaire for sixty years. Yet their meddling in company affairs and trying to adapt the car model to home appliances, as well as foreign competition, caused Frigidaire to lose a whopping forty million dollars in1978. So GM saw them as an underperforming dog and sold the company to White Consolidated Industries in 1979. White likewise interfered with company business in such a manner that research and new product development was retarded for over a decade, almost a fatal blow to the ever volatile appliance business. Fortunately, White was likewise acquired by the Swedish firm Electrolux in the late eighties. Applying the European model to Frigidaire and making the brand visible helped them dramatically by the middle 1990’s and although behind industry leader Whirlpool in overall sales revenue, Frigidaire is still around and fairly healthy (Frigidaire). PepsiCo is a good example of a global corporation that leads its subsidiaries properly and makes just enough interference to ensure that profitability is obtained by both parent and child. True, most if not all of the conglomerate’s secondary companies deal with some segment of the food industry (i.e. Quaker Oats, Frito Lay), it is diverse in there are “junk” foods (Lay’s Potato Chips) sold alongside more healthy alternatives, such as rice cakes and orange juice. PepsiCo previously owned such fast food giants as KFC and Taco Bell, as well as truly diverse companies like Wilson Sporting Goods so that it could concentrate on its snack food segments. As such, it is able to keep abreast, and often surpass, the other snack giants like Coca Cola and Kraft Foods. The theory should be that the parent company should not interfere in their child’s business except to guide and teach, especially when the parent has little or no idea of the concept of the child’s business (GM and Frigidaire is a good example of that). A good example of that theory is Warren Buffett and his Berkshire Hathaway holding company, which is the parent to such diverse companies as GEICO, Dairy Queen, and Sherwin Williams. Buffett may be called the “Oracle of Omaha” but the financial genius would probably be the first to tell you that he knows little if nothing about what the next best-selling Blizzard would be, or which paint colors are going to be the in thing in 2013. Therefore, he allows those companies a certain amount of independence; although you can be assured the COO’s of those companies have to report their profit margins and other factors to Buffett. Yet the one thing he knows better than all else is insurance. So the Gecko and his bosses have stricter control and more influence than say John Gainor and his associates at Dairy Queen. So based upon Berkshire Hathaway’s financial success the theory is true. Exercise enough control over the child to keep the profit margin flowing well but let them do what they do best, manufacture X or provide service Y. Conclusion/Recommendation To keep an edge on their corporate competitors, the parent company should interfere enough so that their child remains solvent and doesn’t pull the financially healthy corporation down. Likewise, the parent should be more than willing to divest or kill the child when it becomes evident that the child has become an underperforming dog whose time has come and gone. Also, when it pertains to legal and environmental issues, as has been seen in recent years, the “I didn’t know” defense doesn’t hold up legally. Yet the parent should never intervene too much either, especially if the child is an entirely diverse industry such as GM’s Frigidaire. There should always be a happy medium. References Frigidaire Home Products viewed April 17, 2012, http://www.fundinguniverse.com/company-histories/Frigidaire-Home-Products-company-History.html Read More