Combining business units is one of the management strategies to maximize a company’s profit. Capable organizations have functioned as holdings to enter the global competition, deal with instability in market environments, grow, increase market share, start new profitable activities, create value and reduce costs, as well as cope with problem [1]. Babaei [2] explained that a holding company is a company that has the major stocks of other corporations so that there is a minimum of one representative member on the board of administrators of these corporations, and has a voting right, and thereby it may manage the business, and gain advantages in return of those businesses.

Effectiveness in various economic sectors is very important for holding companies. Most countries are even known by the names of their holdings and that is why the effectiveness of the activities in the new global economy relies on the effectiveness of the strategies of holding companies. Therefore, capable organizations tend to operate as holdings and utilize capabilities of each other in order to compete at higher levels globally. The structure of holding companies was found to be a miraculous formulation to remove any organizational problem such as the complexity of economic relations, non-economic activities and barriers to growth [3]. 

In this case, an Indonesian steel company named ABC company has the plan to change its corporate structure from an operating company to a holding company. The change is aimed to maintain the financial sustainability of the company which is endangered due to the incapability of the company to solve the debt. To justify the company’s management plan, Analytical Hierarchy Process (“AHP”) method is being conducted. The process is started by determining the criteria and sub-criteria in selecting the suitable corporate structure to maintain its financial sustainability. Two alternatives, which are the operating company structure and holding company structure, are evaluated based on those criteria and sub-criteria.

Research Objectives

• To explore the criteria that should be considered to determine the suitable corporate structure for ABC Company in order to maintain its financial sustainability.
• To determine the degree of importance of each criterion to determine the suitable corporate structure for ABC Company in order to maintain its financial sustainability.
• To determine the preferred option for ABC Company between staying as an operating company or changing to a strategic holding company. 

Research Questions

• What criteria should be considered to determine the suitable corporate structure for ABC Company in order to maintain its financial sustainability?
• How is the degree of importance of each criterion to determine the suitable corporate structure for ABC Company in order to maintain its financial sustainability?
• What is the preferred option for ABC Company between staying as an operating company or changing to a strategic holding company?

AHP is a theory of measurement through pairwise comparisons that uses a scale of an absolute judgment of experts to derive priority scales [4]. T.L Saaty developed this general theory of measurement in 1971 – 1975 at Wharton School, University of Pennsylvania. This technique is the most well-known pairwise comparison technique [5]. There are four strengths of the AHP method [6], which are 

• the stakeholders involved come to rational results due to the logical decomposition of the problem that suppresses personal preferences, 

• subjective qualitative information is transformed into quantitative data which can be used for management decisions, 

• the cost is low compared to the other method e.g. econometrics, cost-benefit, and programming, and 

• the participants of the evaluation process gain insights into the critical areas of the decision process.

AHP has a very wide field application, some of which are project evaluation [7], human capital [8], safety management [9], sustainable energy [10], management consultancy [11], international market expansion [12], manufacturing [13], telecommunication [14], IT service [15], steel industry [16], performance measurement [16], vendor selection [18] and strategic decision [19].

De Souza et al. [7] conducted research to contribute to the discussion of an attempt to systematize the evaluation of project success. In his research, the determination of the criteria for evaluating project success was performed by combining the evaluation criteria of project success from the previous study. However, due to the research in this article being conducted within a certain company, which is ABC Company, the criteria will be determined from interviews that will be conducted with several managerial positions in the company. This approach is done in order to get comprehensive views from the internal parties of ABC Company. 

Poveda [8] tried to utilize AHP with a more intangible aim, which is the role of human capital to meet the goal and objective of sustainability. This research has proved that the AHP method could also be utilized to determine the qualitative goal despite the strong presence of subjective judgment.

Ali [9] used the AHP method to determine the safety elements that need to be implemented in a Safety Management System (“SMS”). To increase the effectiveness of SMS, the elements that need to be implemented in SMS are being ranked based on the priority using the AHP method. This approach could help to reduce the cost and maximize the company’s resources since only the prioritized safety elements will be implemented at a time. 

While other previous studies mentioned above are having relatively different topics from the research of this article, Gorener [19] conducted research regarding the strategic decisions in a manufacturing company. He used SWOT as the criteria and each of the SWOT factors as the sub-criteria. By using the AHP method, the most important SWOT factors could be determined and the company could choose the right strategic decision to be performed based on the SWOT factors that are considered the most important. The similarity between Gorener [19] with the research of this article is the determination process of criteria and sub-criteria. Both pieces of research are using internal views from certain companies. Gorener [19] used the SWOT analysis of a company that produces cooker hoods in Istanbul, Turkey, while this article used an internal view of ABC Company through interviews with high-level management of the company.

Set Up Decision Hierarchy: As the initial step to do the AHP method, the first thing to do is to set up the decision hierarchy [20]. The goal or the focus that we want to achieve by applying AHP is the highest degree of hierarchy. Below the goal, the main suited criteria and sub-criteria should be defined and assigned. Sub-criteria is not mandatory for every criterion to support the AHP method. After the main criteria and sub-criteria have been assigned, the alternatives would be the lowest level of the hierarchy. The construction of this hierarchy model was aimed to confine the pairwise comparisons. The flow process of AHP is shown by the hierarchical model in Figure 1 [21].

Figure 1: AHP Decision-Making Model

In this article, the focus or the decision goal is to decide the suitable corporate structure for ABC to maintain financial sustainability. As for the business alternatives, there are two options which are 1) operating company structure and 2) holding company structure. Based on the discussion with the vice president and managers of the Business Development Department, there are five criteria to determine the suitable corporate structure for ABC Company. The criteria are Finance, Operational, Human Resources, Marketing, and Business Development. Fourteen sub-criteria are derived from the five criteria. Therefore, the criteria and sub-criteria are described in table 1.

Table 1: Selected Criteria and Sub-criteria

After defining the criteria and sub-criteria, the AHP Decision-Making Model is generated as shown in Figure 2.

Figure 2: AHP Decision-Making Model Generated from Interviews

Determine the Weighting of the Criteria and Sub-criteria

To make the pairwise comparisons, a scale of number is needed to indicate how many times one element is more important or dominant compared to another element with respect to the criterion. The scale of number is shown in table 2 [21].

Table 2: AHP Questionnaires Scoring Scale

According to Saaty [22], the minimum number of respondents to conduct the pairwise comparisons is based on the formula n(n-1)/2, with n as the number of criteria. With 5 criteria defined in this article, the minimum respondent number is 10. Those 10 respondents varied in their positions in ABC Company. For the calculation of the weighting of criteria and sub-criteria, there will be ratings of the respondents based on their positions in the company. This rating will accommodate the difference between those respondents in terms of experiences and responsibilities. The detail of respondents will be as follows in Table 3.

Table 3: Respondents of Pairwise Comparisons Questionnaires

The weight rating of 2 means that the rating of the particular respondent is twice that of the respondent who has a weight rating of 1 [23]. Therefore, the rating of the Vice President is 4 times the rating of junior staff due to the difference in experience and responsibility between those positions.

Consistency Ratio

After all the comparisons have been made, it is crucial to verify if they are consistent. In AHP, the Consistency Ratio is defined as CR and the Consistency Index is defined as CI, therefore the Random Consistency Index is defined as RI. The formula of the Consistency Ratio could refer to the formula below. [24]

The standard of Consistency Ratio respectively with the number of criteria and sub-criteria is shown in table 4 with N is the number of the criteria or sub-criteria.

Table 4: Random Consistency Index

According to Saaty and Vargas [25], the Consistency Ratio of 0.10 or less is sufficient for the AHP method to be continued. In case the Consistency Ratio is more than 0.10, the update of judgments in order to determine and correct the cause of the inconsistency needs to be done.

The Weighting of the Criteria

Using Goepel’s software tool [23], the weighting of the criteria and sub-criteria are obtained. It can be concluded that Finance is the most important criterion to determine the suitable corporate structure, followed by Business Development, Marketing, Operational, and Human Resources. The value of CR is also satisfied the standard, which is less than 0,1. (Table 5)

Table 5: Weighting of Criteria

The Weighting of the Sub-criteria

The result of the weightings of the sub-criteria is shown in the column Local Weight in Table 6. 

Table 6: Global Weight of Sub-criteria

The weightings of sub-criteria are considered as the local weight of the sub-criteria. To get the global weight of the sub-criteria, the value of the criteria should be multiplied by the value of the local weight of the sub-criteria. 

After obtaining the global weight of the sub-criteria, the ranking of the weighting of the sub-criteria can be determined as in Figure 3.

Figure 3: Final Ranking of Global Weight of Sub-criteria

Determine the Rating of Business Alternatives 

In this section, each sub-criterion are being assessed by the rating of business alternatives, which are the operating company structure and holding company structure. The respondents rate which corporate structure that is better than the other using pairwise comparisons from the AHP method. The calculation was also conducted using Goepel’s software tool [23]. Due to the rating has only two alternatives, the CR of all the rating of business alternatives are 0. The summary of the rating of business alternatives is shown in table 7.

Table7: Rating of Business Alternatives

The result is shown in Table 7 as almost all of th respondents are rating that Holding Corporate Structure will perform better than Operating Corporate Structure in each sub-criterion. Only one sub-criterion, which is Market Share that the respondents rate the other way around. However, the rating difference in Market Share is relatively close. Therefore it can be concluded that most of the respondents rate that Holding Corporate Structure will perform better than Operating Corporate Structure. However, to find out the final result of the AHP method, the rating of business alternatives should be multiplied first by the global weight of the sub-criteria

Compute the Final Calculation

The final rating of the Operating Corporate Structure and Holding Corporate Structure is shown in the rightmost column of Table 8.

Table 8: Final Rating of Business Alternatives

To determine the suitable corporate structure for ABC Company, the final rating of the Operating Corporate Structure and Holding Corporate Structure from each sub-criterion should be summed up. Therefore the final calculation of the AHP method will be as shown in Table 9.

From the above analysis using the AHP method, it can be determined that Finance is the most important criterion to determine the suitable corporate structure to maintain financial sustainability with a score of 0,3851. Business Development was perceived as the second most important criterion with a score of 0,2986, followed by Marketing (0,1338), Operational (0,0964) and Human Resources (0,0861). This result is in line with the problem faced by ABC Company, which is the incapability of the company to solve the debt. With Finance being the most important criterion, the change of ABC Company’s corporate structure from an operating company to a holding company could be justified due to the financial problems of the company. As for the sub-criteria, it is obtained that the order of degree of importance is Ability to Pay the Debt (0,2884 – ranked 1^st), Business Size Growth (0,1477 – ranked 2^nd), Business Portfolio Development (0,1141 – ranked 3^rd), Financial Performance (0,0967 – ranked 4^th), Market Share (0,0767 – ranked 5^th), Efficiency (0,0483 – ranked 6^th), Organization Productivity (0,0415 – ranked 7^th), Subsidiaries’ Synergy (0,0379 – ranked 8^th), Product Development (0,0368 – ranked 9^th), Talent Development (0,0368 – ranked 10^th), Brand Image (0,0303 – ranked 11^th), Integrated Marketing (0,0268 – ranked 12^th), Operational Complexity (0,0102) – ranked 13^th) and Organization Size (0,0097) – ranked 14^th). The criteria and sub-criteria, as well as their weightings, can be varied in different companies depending on the companies’ recent condition and the companies’ goal.

The result of the final calculation is Holding Corporate Structure (0,7799) outscores the rating of Operating Corporate Structure (0,2201) as shown in Table 9. 

Table 9: Final Calculation of the AHP Method

This result concluded that the aim of this article, which is determining the suitable corporate structure for ABC Company, has been achieved with Holding Corporate Structure becoming the corporate structure that is being recommended. The difference in score of both business alternatives also shows that Holding Corporate Structure is strongly recommended to become the suitable corporate structure for ABC Company in order to maintain its financial sustainability.

The change to Holding Corporate Structure will help solve the incapability of the company to solve its debt. First, ABC Company will transfer its asset to one of its subsidiaries. Since the company has no assets or facilities to be operated, ABC Company can have free cash from its existing working capital. ABC Company also can deeply manage and monitor the performance of its sub-holding companies, as well as integrates them to be more efficient and enhance their revenue. With the deeper involvement of ABC Company in the monitoring of sub-holding companies’ performance, it is expected that the net profit of ABC Company sub-holding companies will increase and ABC Company could gain profit from dividends. 

Changing corporate structure to holding corporate structure is a common strategy for companies. The change mostly aims to obtain optimized liability, optimized capital cost, a synergic effect of economized size, better negotiating position, etc. [26]. In this case, ABC Company has a plan to change to a holding corporate structure in order to optimize the liability of the company. Hence, to ensure ABC Company’s decision is the right one, a study using the AHP method is applied. The criteria and sub-criteria to determine the suitable corporate structure for ABC Company are selected through interviews with the management. From pairwise comparisons in AHP method to determine the weights of the criteria and sub-criteria, it is obtained that Finance become the most important criteria while Ability to Pay Debt become the most important sub-criteria. The final calculation of AHP method shown that Holding Corporate Structure is the preferred corporate structure for ABC Company to maintain its financial sustainability. This study can be used as reference for the company that has a plan to change its corporate structure. However, the criteria and sub-criteria can be varied depending on the company’s condition and the company’s goal of such corporate structure change.

1. Dastmalchi, S., et al. “Adopting a Suitable Strategy to Enhance Synergy Management in Holding Synergy Organizations and Interaction between Staff and Subset Companies in Holding Companies.” First Conference in Holding Organizations, 2011.

2. Babaei, M.E. “Study of Specifications and Performance of Holding Companies in Iran.” Second International Management Conference: Strategic Processes in Holding Organizations, Tadbir Magazine, no. 182, 2004.

3. Gold, M., et al. Strategy of Parent Institute in Creation of Value in Multi-Business Companies. Translated by Esmaeil Sadeghi and Nahid Safayi, Ariana Ghalam Publications, 2010.

4. Saaty, T.L. “Decision Making with the Analytic Hierarchy Process.” International Journal of Services Sciences, vol. 1, no. 1, 2008, pp. 83–98.

5. Podvezko, V. “Application of AHP Technique.” Journal of Business Economics and Management, vol. 10, no. 2, 2009, pp. 181–189. https://doi.org/10.3846/1611-1699.2009.10.181-189.

6. Hartwich, F. “Weighting of Agricultural Research Results: Strength and Limitation of the Analytical Hierarchy Process (AHP).” Universität Hohenheim, 1999. https://entwicklungspolitik.uni-hohenheim.de/uploads/mediap/DP_09_1999_Hartwich.pdf. Accessed February 2023.

7. De Souza, L.A., et al. “Prioritizing Criteria to Evaluate Project Success: Modelling with the Analytic Hierarchy Process (AHP): Empirical Study in a Brazilian Health Organization.” International Journal of the Analytic Hierarchy Process, vol. 14, no. 1, 2022. https://doi.org/10.13033/ijahp.v14i1.913.

8. Poveda, C.A. “Using Multi-Criteria Decision-Making to Assess the Importance of Human Capital in Meeting the Goals and Objectives of Sustainable Development: An Application of the Analytic Hierarchy Process.” International Journal of the Analytic Hierarchy Process, vol. 15, no. 1, 2023. https://doi.org/10.13033/ijahp.v15i1.1067.

9. Ali, S.M. “An Analytical Hierarchical Process for Prioritising the Safety Management Elements for a Manufacturing Organization in Bangladesh.” International Journal of the Analytic Hierarchy Process, vol. 4, no. 2, 2012. https://doi.org/10.13033/ijahp.v4i2.78.

10. Sapkota, P., et al. “Identifying the Most Suitable Sustainable Energy System for Nepal Using Analytic Hierarchy Process.” International Journal of the Analytic Hierarchy Process, vol. 8, no. 2, 2016. https://doi.org/10.13033/ijahp.v8i2.411.

11. Tsai, C., et al. “An Analytical Framework with Sensitivity Analysis to Quantify Management Consultancy Selection.” International Journal of the Analytic Hierarchy Process, vol. 5, no. 1, 2013. https://doi.org/10.13033/ijahp.v5i1.167.

12. Volinchak, C., et al. “Analyzing Corporate Expansion to International Markets: The Case of Germany, United Kingdom, Canada, Mexico and China.” International Journal of the Analytic Hierarchy Process, vol. 10, no. 1, 2018. https://doi.org/10.13033/ijahp.v10i1.574.

13. Ocampo, L., and E. Clark. “An Analytic Hierarchy Process (AHP) Approach in the Selection of Sustainable Manufacturing Initiatives: A Case in a Semiconductor Manufacturing Firm in the Philippines.” International Journal of the Analytic Hierarchy Process, vol. 7, no. 1, 2015. https://doi.org/10.13033/ijahp.v7i1.223.

14. Oyatoye, E.O., et al. “Evaluating Subscribers’ Preference for Service Attributes of Mobile Telecommunications in Nigeria Using Analytic Hierarchy Process (AHP).” International Journal of the Analytic Hierarchy Process, vol. 7, no. 2, 2015. https://doi.org/10.13033/ijahp.v7i2.299.

15. Jantscher, M., et al. “Decision Support in IT Service Management: Applying AHP Methodology to the ITIL Incident Management Process.” International Journal of the Analytic Hierarchy Process, vol. 7, no. 1, 2015. https://doi.org/10.13033/ijahp.v7i1.284.

16. Sabiruddin, K., et al. . “Selection of Appropriate Process Parameters for Gas Metal Arc Welding of Medium Carbon Steel Specimens.” International Journal of the Analytic Hierarchy Process, vol. 5, no. 2, 2014. https://doi.org/10.13033/ijahp.v5i2.184.

17. Vachnadze, R. “Prioritization of Performance Measures Using Analytic Hierarchy Process.” International Journal of the Analytic Hierarchy Process, vol. 8, no. 3, 2016. https://doi.org/10.13033/ijahp.v8i3.442.

18. Kamath, G., et al. . “A Vendor’s Evaluation: Using AHP for an Indian Steel Pipe Manufacturing Company.” International Journal of the Analytic Hierarchy Process, vol. 8, no. 3, 2016. https://doi.org/10.13033/ijahp.v8i3.460.

19. Gorener, A. “Comparing AHP and ANP: An Application of Strategic Decision Making in a Manufacturing Company.” International Journal of Business and Social Science, vol. 3, no. 11, 2012.

20. Mu, E., and M. Pereyra-Rojas. Practical Decision Making. Springer-Verlag, 2016.

21. Saaty, T.L. The Analytic Hierarchy Process. McGraw-Hill International, 1980.

22. Saaty, R.W. “The Analytic Hierarchy Process—What It Is and How It Is Used.” Mathematical Modelling, vol. 9, nos. 3–5, 1987, pp. 161–176. https://doi.org/10.1016/0270-0255(87)90473-8.

23. Goepel, K.D. “Implementation of an Online Software Tool for the Analytic Hierarchy Process (AHP-OS).” International Journal of the Analytic Hierarchy Process, vol. 10, no. 3, 2018, pp. 469–487. https://doi.org/10.13033/ijahp.v10i3.590.

24. Saaty, T.L. Theory and Applications of the Analytic Network Process: Decision Making with Benefits, Opportunities, Costs, and Risks. RWS Publications, 2005.

25. Saaty, T.L., and L.G. Vargas. Models, Methods, Concepts & Application of the Analytic Hierarchy Process. Springer, 2012.

26. Ficbauer, D., and M. Reznakova. “Holding Company and Its Performance.” Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, vol. 62, no. 2, 2014. https://doi.org/10.11118/actaun201462020329.

27.