A parent company is, as its name suggests, a company that adopts an organizational form where the companies that form it are usually 100% owned, so that they act as divisions of the group. The central office is called the “parent” and assumes the design of the group's strategy.
The parent company usually develops through internal growth and there comes a time when the large size, as well as the diversification of its activities, advises breaking them down into independent companies, although highly controlled by the parent or original company of the group.
The relationship model between the head office and the group companies is usually that of strategic planning. This, with a high participation of the parent company in defining the competitive strategies of the subsidiaries.
The functions of the central office
The functions that are assigned to the head office in a diversified company are as follows:
- Planning and allocating resources: Defining general guidelines for the global strategy. Evaluation and review of business strategies, and the evaluation and allocation of the resource needs of the different businesses.
- Control and audit the results: Follow-up of the strategic plans of the business.
- Provide central services: Provide financial, legal, personnel management, research, etc. services. In this way, the generation of economies of scale would be sought by sharing valuable resources that generate significant fixed costs.
The related diversification
Typically groups of companies or business conglomerates with a parent follow a related diversification strategy. This consists of adding new products and new markets, but related to those that had been previously developed.
One of the main reasons for this business strategy is the generation of synergies, that is, when there are similarities between the resources used by the different businesses, such as distribution channels, markets, technology, etc. These elements make it possible to complement each other's activities and are the basis for companies to carry out a related diversification strategy.
Synergies appear when the joint development of two businesses offers a better result than the sum of each of them separately. Assuming that the new businesses are related to the old ones, it should be possible to take advantage of existing resources and capacities to deploy the new activities. In this way, additional returns will be generated.
The areas in which it is most common to share resources or transfer knowledge are usually:
- Productive synergies: Research and development (R&D) activities, due to the use of similar technology.
- Productive synergies: Supply and manufacturing activities.
- Commercial synergies: Marketing activities, brand, logo, distribution channel and promotion.
- Management synergies: Management and administrative support activities.
- Financial synergies: Activities for the allocation of financial resources.
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