EXECUTIVE JULY 2008

IPMI Graduate School of Business

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CORPORATE STRATEGY

Mustafa I. Yatim

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Corporate Strategy Module

Session 5-6 Corporate Strategy FrameworkSession 7-8 Corporate Strategy In ActionSession 9-10 Related and Unrelated Diversification

Session 11-12 Vertical IntegrationSession 13-14 Merger and AcquisitionSession 15-16 DivestitureSession 17-18 Strategic Alliance

Session 19-20 Group Presentation (Final Exam)

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BS CS

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What What is is d difference ifference between between B Bususiness iness & & CorpCorporateorate StratStrategy egy ??Simple draw single bus and multi-busSimple draw single bus and multi-bus

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Corporate Strategy Corporate Strategy FrameworkFramework

BUSINESS MIX(industry, biz strategy, ownership)

CORP HQ ROLE (organization,

control, process)

RESOURCES(assets, skill, competence)

VISION

OBJECTIVE

SKILL TRANSFER SHARING ASSETS

PORTFOLIO STRATEGY

SHARED ACTIVITIES TIGHT CONTROL

CORPORATE ADVANTAGE

• __________

• __________

OBJECTIVES ALTERNATIVES CHOICES

IMPLEMENTATION RESULTS

FEEDBACK

PREDICTIVE MODEL

REWARDS SYSTEM

FACTORS INFLUENCEDBY:GOVERNMENTCOMPETITORSCUSTOMERS

CORPORATE STRATEGY MODULE

THE STRATEGY CONTROL FRAMEWORK (1)

Source: Janek Ratnatungga

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Internal Appraisal

Continous Review

PreliminaryObjectives

Internal/ExternalEvents

External Appraisal

Major - SWOT -STRENGTHS, WEAKNESSES, THREATS, AND OPPORTUNITIES ( Core Skills)

MODIFIED OBJECTIVES STRATEG

YPROD/MKTPORTFOLIO PLANS

DEV of New Biz Ideas (NBA)

EVALUATION of NBA

INTERNAL GROWTH orACQUISITION

DEV. ORG. STRUCTURES

DESIGN CONTROL PROC and FUNCTIONAL PLANS

EVALUATION of STRATEGY

CORPORATE STRATEGY MODULE

THE STRATEGY CONTROL FRAMEWORK (2)

<- - - - - - PERCEPTION OF PROBLEM- - - - - - - > < - - - - - - - - - - - - - - - - -- - - - - - - - APPRAISAL - - - - - - - - - - - - - - - - - - - ->

< - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - C H O I C E S - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - >

< -- -FOCUS ON NEW BUSINESS AREA- - - - - - >

< - - - - - - - - - - IMPLEMENTATION - - - - - - - - - - - - - - - - - - - - - - - - - >

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Sessions 11 + 12: Vertical IntegrationSessions 13 + 14: Mergers & AcquisitionsSessions 15 + 16: DivestitureSessions 17 + 18: Strategic Alliance 8

Corporate StrategyCONTINUED

Sessions 11 + 12

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VERTICAL INTEGRATION

Corporate Strategy Where to Compete

• Product ScopeCoca-Cola ; chinese-food restaurant ; contractors ; packaging

• Geographic ScopeAutomobile ; cement ; ceramic products ; padang-food restaurant

• Vertical ScopeCigarette ; automobile ; dairy produces ; textile

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Strategy In Action

• Concentric Diversification

• Conglomerate Diversification

• Horizontal Integration

• Vertical Integration

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Vertical & Horizontal Integration

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Vertical Integration: Acquisition of supplier / Customer

Horizontal Integration: Acquisition of competing biz

Textile Producer

Shirt Mfc

Clothing Store

Textile Producer

Shirt Mfc

Clothing Store

Vertical Integration

The extent of vertical integration is indicated by the ratio of the firm’s value added to it’s sales revenue .

Full integration exists when all of the 1st stage’s production is transfered to 2nd stage with no sales or purchase from third parties.

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Why Integrate Vertically ?

The administrative cost factor :• Optimal scale difference,• Managing different businesses,• developing distictive capabilities,• the incentive / agency problem,• competitive effects of vertical integration,• Flexibility• Compounding risk

The administrative cost of organizing within the firm involves all the cost of production + the divided attention of management.14

Evaluating Diversification Strategy:Horizontal and Vertical Diversification

Better-off test:Does parent improve competitive advantage of businesses

above what they can do themselves?Does it lead to reduce costs : C[y1,y2]<C[y1,0]+C[0,y2])?Does it lead to increased revenue : R[y1,y2]>R[y1,0]+R[0,y2])?

Ownership test:Does parent ownership produce greater competitive advantage

than an alternative contractual arrangement?Depends on legal environment (contract enforcement)

Do ownership costs outweigh the economic benefits?

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Characteristics of VI

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How many firms in the vertically related activity ?Do transaction-specific investments need to be made by either

party ?How well distributed is information between the vertical stages ?Are market transactions in intermediate products subject to tax

regulations ?Are two stages similar in terms of the optimal scale of operations?How great is the need for continual investment in upgrading

capabilities within individual activities ?How uncertain is market demand ?

Cost - Benefitof Vertical Integration?

17 Buzzell, “Is Vertical Integration Profitable” (1983)

Case: ARAUCO

• Explain about ARAUCO

• Appoint 2 groups to make separate presentations:• First Group : Perception of Problem

(internal + external events , SWOT)

• Second Group : What is/are Objective(s) and Strategy

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Case: AraucoVertical Integration

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Paper

• None

Pulp

• Cellulosa Arauco

Forestry

• Forestal• Bioforest

Plywood/ Panel

SawmillForestry

• Paneles Arauco

• Aserraderos Arauco

• Forestal• Bioforest

Case: AraucoWhat to Do with USD 1 billion?

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Forestry

Pulp Paper Sawmill Panel

Pro

Cons

A more comprehensive

thinking, including impact among value chain, is

required to develop a good

strategy for vertically integrated business

• Reason for vertical integration should be clear, and really bring benefits

• Comprehensive consideration of existing businesses in the value chain is mandatory. Benefits of vertical integration varies by industry

• Market and competitive situation, and competitive advantage should also be considered.

• VI is a tempting growth engine, but it should be evaluated carefully

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Case: AraucoLessons Learned

Individual Assignment:

• Task : In your own words, explain the FOURdiversification strategic actions that you’velearned in this course subject.

Give an example of each, from Indonesian companies that you know, that are practicing these strategies. Explain and elaborate !

one-and-half pages minimum, maximum 3.

Submit via email, latest : Fri – 16 July 2010.22