EXECUTIVE JULY 2008 IPMI Graduate School of Business CORPORATE STRATEGY EXECUTIVE JULY 2008 IPMI Graduate School of Business

Mustafa I. Yatim Mobile 0816 - 880 - 686 SMS / TEXT MESSAGING Email yatim.mustafa1@gmail.com

Corporate Strategy Module Session 5-6 Corporate Strategy Framework Session 7-8 Corporate Strategy In Action Session 9-10 Related and Unrelated Diversification Session 11-12 Vertical Integration Session 13-14 Merger and Acquisition Session 15-16 Divestiture Session 17-18 Strategic Alliance Session 19-20 Group Presentation (Final Exam)

What is difference between Business & Corporate Strategy What is difference between Business & Corporate Strategy ? Simple draw single bus and multi-bus BS CS Strategy Execution: Balanced Scorecard Single business strategy: Industry analysis, Positioning, Competitive Advantage Multi-business strategy: Corporate Strategy, Corporate Advantage Diversification, Vertical Integration, Merger & Acquisition, Divestiture, Strategic Alliance

Corporate Strategy Framework SKILL TRANSFER SHARING ASSETS PORTFOLIO STRATEGY RESOURCES (assets, skill, competence) BUSINESS MIX (industry, biz strategy, ownership) VISION OBJECTIVE CORP HQ ROLE (organization, control, process) CORPORATE ADVANTAGE SHARED ACTIVITIES TIGHT CONTROL __________

THE STRATEGY CONTROL FRAMEWORK (1) CORPORATE STRATEGY MODULE THE STRATEGY CONTROL FRAMEWORK (1) Source: Janek Ratnatungga OBJECTIVES ALTERNATIVES CHOICES IMPLEMENTATION RESULTS FEEDBACK PREDICTIVE MODEL FACTORS INFLUENCED BY: GOVERNMENT COMPETITORS CUSTOMERS REWARDS SYSTEM

THE STRATEGY CONTROL FRAMEWORK (2) CORPORATE STRATEGY MODULE THE STRATEGY CONTROL FRAMEWORK (2) <- - - - - - PERCEPTION OF PROBLEM- - - - - - - > < - - - - - - - - - - - - - - - - -- - - - - - - - APPRAISAL - - - - - - - - - - - - - - - - - - - -> Internal/External Events Major - SWOT - STRENGTHS, WEAKNESSES, THREATS, AND OPPORTUNITIES ( Core Skills) Internal Appraisal Preliminary Objectives External Appraisal Continous Review < - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - C H O I C E S - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - > < -- -FOCUS ON NEW BUSINESS AREA- - - - - - > MODIFIED OBJECTIVES STRATEGY PROD/MKT PORTFOLIO PLANS DEV of New Biz Ideas (NBA) EVALUATION of NBA INTERNAL GROWTH or ACQUISITION < - - - - - - - - - - IMPLEMENTATION - - - - - - - - - - - - - - - - - - - - - - - - - > DESIGN CONTROL PROC and FUNCTIONAL PLANS EVALUATION of STRATEGY DEV. ORG. STRUCTURES

Corporate Strategy CONTINUED Sessions 11 + 12: Vertical Integration Sessions 13 + 14: Mergers & Acquisitions Sessions 15 + 16: Divestiture Sessions 17 + 18: Strategic Alliance

VERTICAL INTEGRATION Sessions 11 + 12

Corporate Strategy Where to Compete Product Scope Coca-Cola ; chinese-food restaurant ; contractors ; packaging Geographic Scope Automobile ; cement ; ceramic products ; padang-food restaurant Vertical Scope Cigarette ; automobile ; dairy produces ; textile

Strategy In Action Conglomerate Diversification Horizontal Integration Concentric Diversification Conglomerate Diversification Horizontal Integration Vertical Integration

Vertical & Horizontal Integration Vertical Integration: Acquisition of supplier / Customer Horizontal Integration: Acquisition of competing biz Textile Producer Textile Producer Shirt Mfc Shirt Mfc Clothing Store 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.

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.

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? 15

Characteristics of VI 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 - Benefit of Vertical Integration? Benefits Ensure supply of critical materials Utilize technological capabilities Raise entry barrier Improve coordination Lower transaction cost Drawback Unbalanced throughput, usually upstream is higher Loss of specialization Reduced flexibility High capital requirement, hence exit barrier 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

Case: Arauco Vertical Integration 19 Forestry Pulp Paper Forestal Bioforest Cellulosa Arauco None Forestry Sawmill Plywood/ Panel Forestal Bioforest Aserraderos Arauco Paneles Arauco

Case: Arauco What to Do with USD 1 billion? 20 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

Case: Arauco Lessons Learned 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 21

Individual Assignment: Task : In your own words, explain the FOUR diversification strategic actions that you’ve learned 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.