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

2. Mustafa I. Yatim Mobile 0816 - 880 - 686
SMS / TEXT MESSAGING

3. Corporate Strategy Module
Session 5-6 Corporate Strategy Framework
Session 7-8 Corporate Strategy In Action
Session Related and Unrelated Diversification
Session Vertical Integration
Session Merger and Acquisition
Session Divestiture
Session Strategic Alliance
Session Group Presentation (Final Exam)

4. 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

5. 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
__________

6. 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

7. 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

8. Corporate Strategy CONTINUED
Sessions : Vertical Integration
Sessions : Mergers & Acquisitions
Sessions : Divestiture
Sessions : Strategic Alliance

9. VERTICAL INTEGRATION
Sessions

10. 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

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

12. 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

13. 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.

14. 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.

15. 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

16. 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 ?

17. 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)

18. 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

19. Case: Arauco Vertical Integration19
Forestry
Pulp
Paper
Forestal
Bioforest
Cellulosa Arauco
None
Forestry
Sawmill
Plywood/
Panel
Forestal
Bioforest
Aserraderos Arauco
Paneles Arauco

20. 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

21. 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

22. 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 , latest : Fri – 16 July 2010.