Competition does not confine itself in the market alone. There is also this so-called intra-company competition where sister companies or subsidiaries compete with each other, whether directly or indirectly, on certain target markets.
In some sectors, there are several target markets where core businesses, e.g., vertical and horizontal businesses, are vying in. Hence, it is interesting to know how holding firms address competition within its group.
An obvious technique is to form a separate marketing subsidiary. This course of action does not only provide sales advantages; but likewise, promotes a level playing field for competing subsidiaries, thereby, lessening intra-company friction.
In this set-up, the marketing arm would assume the sales function of the operating subsidiaries. In all likelihood, the sales strategy being implemented would be the same for, say, vertical and horizontal businesses, so that the sales force could easily resort to cross-selling activities, often offering all related products and services at the same time to their clients. This is a good idea as it gives clients a variety to choose from among the products in the marketing portfolio.
However, sales people have also their own biases, preferences and expertise. They tend to push sales of products and services that are more beneficial and known to them, neglecting others in their portfolio in the process. In so doing, there is a big possibility that the strategy may work wonder to one business, while spell disaster to the other.
The formation of separate marketing arms for each core business could be the solution in coping up with competition – both internal and external. This will make the current marketing arm to stay focus with its present portfolio, while the newly-established one will take care of the other business.
Here are some of the advantages:
a) Management Focus. Since each subsidiary has its own management team whose focus is confined to the business line or activity it is managing, the creation of a separate marketing strategy enables conceptualization of marketing plans and strategies apart from that of the marketing of other businesses.
b) Financial Leverage. Creation of another subsidiary could provide its parent company an additional borrowing capacity as shares of stocks in the subsidiary are held as assets on the latter's book and can be used as collateral for additional debt financing.
c) Legal Independence. Holding companies and their subsidiaries are considered separate juridical entities. Hence, the assets of the parent firm and the individual subsidiaries are protected against creditors' claims or law suits filed against one of the subsidiaries. Liabilities cannot be passed on to the parent company or sister subsidiaries. In this regard, legal problems arising from, say, horizontal businesses would not hamper or greatly affect the business and sales operations of the vertical subsidiary or vice-versa.
d) Tax Relief. An addition of another marketing subsidiary provides further tax optimization to the group of companies. Tax optimization is made possible by offsetting profits in one part of the business with losses in another, and thereby, reducing the overall taxable corporate income on the consolidated tax return.
e) Lesser Investment Requirement. Establishing a marketing subsidiary is not capital-intensive. Pre-operating expenses normally include corporate registration and notarial fees, documentary stamp taxes, and office rental advances. It is easier to put up and requires no special capital paid-up. Hence, it is very viable for a sizable group to put up and sustain more than one marketing subsidiaries.
f) Corporate Imaging. A marketing subsidiary which had already established a reputation or niche in the horizontal market would find it hard to transform itself to become a vertical marketing arm in an instant. On the other hand, putting up a new subsidiary to deal exclusively in the vertical markets could provide immediate recognition from property buyers.
g) Risk Mitigation. Certain developments in a holding company's life cycle can trigger the need for another subsidiary, such as the launch of a new venture with different risk characteristics than the company's existing core business or the opening of new operations in other jurisdictions. Creating a separate marketing subsidiary for this purpose would shield the parent firm from possible financial fallout from its new project venture or off-shore operations as there will be a dedicated sales force that would ensure sales and promotion of the business.
h) Business Flexibility. An independent marketing subsidiary could also deal with other related products and services to boost revenue. it may use its expertise to render consultancy or technical advisory services to other entities. It may also enter into a marketing deal with dealers and suppliers.
Conclusion
The creation of a group of significant marketing companies centralized around a parent company, but whose management are decentralized in carrying out their respective corporate affairs, provides better sales results, additional sources of revenue, and organizational edge.
Marketing is a numbers game afterall. The larger the marketing organization, the greater the opportunities of booking more sales.
**Paper submitted by Ludwig Ritchel A. Kalambacal to Duraville Marketing Inc.
*See related blogs: ○ Parent-Subsidiary Relationship
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