Managing Business Portfolios Effectively

Research on corporate strategy includes four primary fields (Grant, 2010; Johnson, Scholes, and Whittington, 2008; Mueller-Stewens and Brauer, 2009): (1) diversification strategies (scope and relatedness of goods and markets, economic value of diversification), (2) internationalization strategies (market-entry strategies, international alliances), (3) strategies of composing and managing different businesses under one corporation (corporate portfolio management), and (4) strategies of how to maximize the value of the corporate headquarters (the role of the center, functions, responsibilities).

The concept of parenting advantage offers a clear framework and guiding principle for corporate-level decision-making, including corporate portfolio management and corporate organization. After its introduction in the mid-1990s, the concept was quickly adopted by many standard textbooks on strategic management and became an integral element of the curriculum at most business schools. In this paper, we examine the reverberation of the parenting advantage concept by performing a systematic analysis of the existing literature, including a classification of the relevant publications and a detailed discussion of the key contributions in noted strategic management journals. Our analysis reveals that the concept was well received and was broadly applied to corporate functions, corporate tasks, specific industries, and business environments in qualitative studies.

We empirically analyze the parenting advantage concept’s relevance for corporate strategy, identify different types of parenting approaches, and investigate the actual application of parenting advantage in corporate portfolio management. We find that parenting advantage is considered highly relevant for corporate strategy and portfolio management; that there are distinct types of parenting approaches in corporate practice; that portfolio structure and cultural differences strongly affect a company’s choice of parenting approach; and that the main deterrent to more effectively applying the parenting advantage concept for corporate-level management is a lack of operationalization that specifies sources of parenting advantage, and which evaluates the effectiveness of different parenting approaches.

After its introduction in the mid-1990s, the concept of parenting advantage was quickly adopted by many standard textbooks on strategic management. Empirical studies revealed that the concept is considered highly relevant for strategy formulation and portfolio management at corporate level; however, its broader application has not lived up to expectations. This paper assumes that this is due to two major limitations of the original concept: firstly, it neglects the indirect compositional effects of the portfolio that are not due to active involvement of the corporate parent, and secondly, the concept has not been sufficiently operationalized to the level of specific value-added activities.

Most conceptual and empirical research on corporate diversification has largely focused on analyzing the influence of the degree of diversification and business unit relatedness (structure) on performance. Attempts to specify the link between the applied parenting approaches of corporate headquarters (strategy) and performance have been rare. Building on the concept of parenting advantage and a unique, hand-collected data sample of 150 global multi-business companies, we aim to improve the current understanding of the strategy-performance-link. First, we empirically ascertain a distinct set of value-adding and value-destroying drivers in multi-business companies. Second, we identify and specify observable, consistent, and effective parenting strategies in corporate practice. Third, we evaluate how these parenting strategies are associated with overall company performance.

This paper theoretically and empirically investigates the idea that private equity (PE) firms are not an economically superior organizational arrangement to public corporations but may profit from applying forms of parenting activities beyond governance measures. Using a unique sample of 143 global PE firms, evidence that PE firms that actively engage in managing their portfolio companies rather than purely relying on arbitrage and financial leverage add superior value to their shareholders was found. However, while results prove a strong positive association between the engagement of PE firms in actively developing business strategies for the portfolio companies and their overall performance they also show that PE firms underperform if they try to exploit synergies. Beyond providing empirical evidence of the explanatory power of the parenting advantage concept for the PE industry, this paper contributes to theory development in the field of strategic management.

This study fundamentally investigates the ability and explanatory power of the parenting advantage concept to effectively manage business portfolios. It contributes to a largely ignored field of corporate strategy research: namely, the parenting role and value-added strategies of corporate parents (e.g., Bowman and Helfat, 2001; Collis et al., 2007; Foss, 1997; Goold et al., 1994; Hill, 1988; Markides, 2002; Porter, 1987; Roquebert et al., 1996; Rumelt et al., 1994). The concept of parenting advantage introduced by Goold et al. (1994) offers clear guidance on approaching this relevant area of corporate-level management.