The pitfalls of Parenting Mature Companies

Group#2

Mehul Mandge

Mayank Chandola

Apurva Kulkarni

Samarth Anand

Kunwar Nag

Deavanjan Ranjan

The pitfalls of Parenting Mature Companies

This case study, presented to us, is of a diversified company Sargon Corporation. Jack Marlowe, President Sargon Corporation, is grappling with the most intractable problem he has ever dealt while in the company. The problems he is facing are as below;

1. What to do about Arcell Corporation, its household-appliances unit?2. What to do about Charlie Crescent, Arcell’s president?

Sargon is counting on Arcell to provide a lion’s share of the money for the company’s investment in future. Marlowe has made it clear that company wants Arcell to run lean and mean and every time Crescent has said that he understands. He keeps wanting to plow his profits back into Arcell.

Sargon’s Members of top echelon;

i. Hal Hestnes Chairman & CEO Sargonii. Jack Marlowe President Sargoniii. Charlie Crescent President Arcell

Some facts about the company;

a) Sargon Corporation is a diversified manufacturer of brake systems, components for telecommunications equipment and voice recognition systems, and its recent acquisition; manufacturer of routers and hubs for corporate network.

b) Sargon was formerly a small defense contractor but due to contraction of profits in the said business, it diversified into household appliances (early 1970s)to break systems to components for telecommunications equipment( Hestnes launched in 1983)to voice recognition systems for the security industry ( a 1989 acquisition).

c) Charlie Crescent took over the Appliances unit two years earlier and soon after the takeover started a major consolidation and cost cutting drive that raised the operating margins from 2% to 7%.

d) Sargon recently acquired Cyberam, a maker of routers and hubs for corporate networks. The deal met with virtually no applauds outside Sargon headquarters.

Michael Goold says that Marlowe should stop playing the balanced-portfolio game. He should stop expecting all of Sargon’s mature businesses to act simply as cash generators and all of its new businesses to grow quickly. When Crescent wants to invest more into new products, new facilities and new markets, Marlowe and Hestnes should not turn down the proposal just because their other businesses need cash. Rather, they should encourage and support the

investment if the proposals are sound. Also, the parent company has diversified extensively in order to move away from the defense sector but Michael doubts their competency in managing their newer businesses. Their recent acquisition shows a lack of thinking about what sorts of business they want to enter into. Further diversification in the view of Michael is unlikely to pay off and this is what Wall Street has also spotted already.

What should Marlowe do? Since the main task of a parent company is to ensure that a lean and mean approach is taken and over ambitious projects can be removed from the investment list. Now if Marlowe is convinced that the new investments will lead to greater margins there is no reason why Sargon should not invest in Arcell. But on the other hand if Marlowe decides that Crescent is over optimistic about what can be achieved, he should clearly explain to the Arcell management why they will not be getting the funding they want. Right now Marlowe is probably unsure about the quality of Arcell’s investment proposals. If so, he needs to invest some time with the business in order to form an opinion. Also, Marlowe must persuade Hestnes to reconsider Sargon’s corporate level strategy.

Orit Gandish has somewhat similar view on the issue at hand. But he has a different approach to the above problem. He wants to Marlowe with the answering 5 critical question:

i. What is the mission of Sargon?ii. What are the specific goals of the company?iii. How do we achieve profitable growth?iv. How should we at Sargon, the parent, be managing our different

businesses to achieve our overall corporate goals?v. What kind of people do we need to enable Sargon to succeed its mission?

As soon as Marlowe has answers to the above questions they will have answers to all other questions.

David Collis has rightly pointed out that there are two fundamental mistakes Sargon’s senior managers appear to be making with regard to corporate strategy. First, they believe that the value can be created in a corporate portfolio by transferring capital from one business to another. The second mistake is with the diversification plans. The Cyberam acquisition is one of those examples of weakness in the strategy. What do household appliances, break systems, a telecommunications components, voice recognition systems and routers have in common? Other than nondefense and high technology they seem to share nothing.

Jane Warner suspects that Hestnes’s judgement is clouded by his preference for high-tech products and by the fact that Arcell was established before his appointment as chairman of Sargon. Right now Marlowe and Hestnes are considering Crescent as the problem rather than considering Sargon functions vis-à-vis its business sectors’ roles and goals.

ConclusionMarlowe should take one step at a time while coming to a conclusion of keeping Crescent as the head of their Arcell business. Following would be the steps Marlowe should take.

First, he needs to decide what type of company he wants to see Sargon to be moulding into? Does he want to mould it into a pure portfolio company, whose primary purpose is generating cash by buying and selling businesses? In that case they need to remove themselves from managerial issues at the division. Or do they want Sargon to be a value added parent, making whole greater than the sum of its parts by managing the organization’s core competencies and creating synergies among its various divisions?

What do they want to extract out of Arcell? Are they planning to drain Arcell quickly and sell it later or invest in it and milk it over time? They need to decide that even if Arcell is a cash cow for Sargon why can’t they invest in the cash cow and make it an engine for growth? For this to happen they need to give Crescent more than 10 minutes in the meeting to understand completely the investment proposals and if they find those good enough to meet the company’s investment criteria they why not churn the requisite growth from here and not invest more time and money finding new businesses that not even fit their current portfolio of companies. This would also help in reducing the current tension between the two. And even after the discussions if it turns out that Arcell really should be managed as a no-growth, low-cost operation then if Crescent then refuses to recognize that this is the best strategy for the unit – and he must be given every opportunity to argue that growth is the correct option – replacing him becomes a possibility. Having said that, after seeing the track record of Crescent, replacing him would be to sacrifice to a misguided corporate strategy someone who might be a great manager.