A parent company is as its own name indicates a company that adopts an organizational form where the companies that form it are usually 100% owned, so that they act as group divisions. The central office is called “Matrix” and assumes the design of the group strategy.
It usually corresponds to a company that has been developed through internal growth and there comes a time when the large size as well as the diversification of its activities, advises disaggregating them into independent companies although highly controlled by the parent company or company originating in the group.
The relationship model between the central office and the companies of the group is usually that of strategic planning, that is, with a high participation of the parent in the definition of the competitive strategies of the subsidiaries.
The functions of the central office
The functions assigned to the central office in a diversified company are the following:
- Plan and allocate resources:Definition of general orientations of the global strategy. Evaluation and review of business strategies and the evaluation and allocation of the resource needs of different businesses.
- Control and audit the results: Monitoring of strategic business plans.
- Provide central services: such as finance, legal services, personnel management, research, etc. In this way, the generation of economies of scale would be sought by sharing valuable resources that generate significant fixed costs .
The matrix advantage
The central core of the corporate strategy is the definition of the field of activity and its possible modifications or development strategies. The role of the central office is basic for the creation of value in diversified companies. The necessary condition for a central office to create value by running a diversified company is that it has a parent advantage.
The concept of matrix advantage would be the equivalent of competitive advantage but applied to the central office at the corporate level, rather than the business level. It is not enough that the head office of a diversified company creates more value than separately, but that it must create the maximum possible value to be able to say that it has a matrix advantage.
The matrix advantage represents the ability to create more value than rival matrices.
Normally, groups of companies or business conglomerates of this type follow a related diversification strategy. The diversification strategy is to add new products and new markets to existing ones. It makes the company operate in new competitive environments.
One of the main reasons for this business strategy is the generation of synergies between different businesses, that is, when there are similarities between the resources used by businesses, distribution channels, markets, technology, etc., or any other element that allows complementing business with each other. It is the basis by which companies carry a related diversification strategy.
Synergies appear when the joint development of two businesses offers a better result than the sum of the development of each of them separately. In the event that the new businesses are related to the previous ones, it must be possible to take advantage of the new activities, resources and capacities developed in the traditional activities, predictably, it will generate additional returns.
The areas in which it is more common to share resources or knowledge transfer are usually:
- Productive synergies: Research and development (R&D) activities, by use of similar technology.
- Productive synergies:Supply and manufacturing activities.
- Commercial synergies:Marketing activities, brand, logo, distribution and promotion channel.
- Management synergies: Managementactivities and administrative support.
- Financial synergies:Activities to allocate financial resources.