Corporate Diversification GL Krisnaraga1

8/3/2019 Corporate Diversification GL Krisnaraga1

1/29

Corporate Diversification inthe context of Corporate

Competitive Advantage.

GL-Speaker: Krisnaraga Syarfuan, MMBusiness Owner / Practitioner Vice-Chairman Yayasan Pendidikan Bakrie


2/29

Indonesia hasalmosteverything

Why are we to some extent dobted by internationalcommunities in trading, investing, and selling goods andservices internationally?

Why is Indonesia be dwarfed by some, and not be treatedequally, although we are economically big?


3/29

In the contrary

Kami menggoyahkan langit,menggemparkan darat, dan

menggelorakan samudra. Agartidak jadi bangsa yang hiduphanya dari 2.5 sen perhari.

Bangsa yang kerja keras, bukanbangsa tempe, bukan bangsa

kuli

(Soekarno)


4/29

Indonesia is in loosing move if.

Busy withchange andfights with noclearorientation

Arah dan Rasa

Percaya Diri

Opportunities aredeteriorated, skills lagbehind other nations

Dorongan untuk

berprestasi With no clearachievement,our reputationmay beworsened!

Reputasi dan

kepercayaan


5/29

Agar perut rakyat terisi, kedaulatan perluditegakkan. Rakyat hampir selalu lapar, bukankarena panen buruk atau alam miskin,melainkan karena rakyat tidak berdaya.

(Drs. Moh. Hatta)

We certainly could achieve being achampion nation, by developing ourpeople through attaining bettereducation, supporting welfare of the

society, and health (M. Hatta)


6/29

KADINDA& PEMDA

investor asing

APBN/APBD

Industri besar

UMKM

Industrikeuangan& PEM PUS

The Government, Businesses (dunia usaha, Tokoh Masy.) andAcademician must be hand-in-hand to overcome nations problems.

Economic development can not be achieved only from StateBudget/Local Govt.!


7/29

Indonesia is in need of big achievement

for a betterREPUTATION

Rudy Hartono, Juara All England 8 kali


8/29

Mission Objectives

ExternalAnalysis

InternalAnalysis

Strategic

Choice

Strategy

Implementation

Competitive

Advantage

Analysis:The Strategic Management Process *)

Corporate LevelStrategy

Which Businessesto Enter?

Vertical Integration

Diversification

*) from Barner, J. B, and H.S. Hesterly (2010). Strategic Management and Competitive Advantage. 2nd Ed. Peasron Int.


9/29

Logic of Corporate Level Strategy

Corporate level strategy should create value:

1) such that businesses forming the corporate wholeare worth more than they would be underindependent ownership

2) that equity holders cannot create throughportfolio investing

a corporate level strategy must createsynergies

Therefore,

economies of scope - diversification


10/29

Integration and Diversification

Integration

Diversification

ForwardBackward

CurrentBusinesses

No

Links

Many

Links

Unrelated Related

OtherBusinesses

OtherBusinesses


11/29

Types of Corporate Diversification

Product Diversification:

Geographic Market Diversification:

Product-Market Diversification

operating in multiple industries

operating in multiple geographic markets

operating in multiple industries in multiplegeographic markets

At a general level


12/29

Types of Corporate Diversification

Limited Diversification

Related Diversification

Unrelated Diversification

single business: > 95% of sales in single business

dominant business: 70% to 95% in single business

related-constrained: all businesses related on mostdimensions

related-linked: some businesses related on somedimensions

businesses are not related

At a more specific level


13/29

Product and Geographic Diversification

Possibilities:

single-business in multiple geographic areas

single-business in one geographic area

related-constrained in one or multiple geographic areas

related-linked in one or multiple geographic areas

unrelated in one or multiple geographic areas

Note: relatedness usually refers to products

seemingly unrelated products may be related onother dimensions


14/29

Competitive Advantage

If a diversification strategy meets theVRIO criteria

Is it Valuable?

Is it Rare?

Is it costly to Imitate?

Is the firm Organized to exploit it?

it may create competitive advantage.


15/29

Value of Diversification

Two Criteria

1) There must be some economy of scope

2) The focal firm must have a cost advantage overoutside equity holders in exploiting anyeconomies of scope


16/29

Value of Diversification

B-Tel Bumi BSP

Independent: equity holder could buy shares of each firm

Value

B Tel

Bumi

BSP

Focal Firm

Value

+ +

Economies

OfScope

Combined: equity holder buys shares in one firm


17/29

Economies of Scope

Four Types

Operational

Financial

Anticompetitive

Managerialism


18/29

Economies of Scope

Operational Economies of Scope

Sharing Activities

exploiting efficiencies of sharing business

activities

Example: Bakrie Land: Construction + Toll-road

Spreading Core Competencies

exploiting core competencies in other businesses

Example: Wi-Mode + Phone Banking of B-Tel

competency must be strategically relevant


19/29

Economies of Scope

Financial Economies of Scope

Internal Capital Market

premise: insiders can allocate capital across

divisions more efficiently than the external capitalmarket

works only if managers have better information

may protect proprietary information

may suffer from escalating commitment

Example: Hanson Trust, PLC


20/29

Economies of Scope


Risk Reduction

counter cyclical businesses may provide

decreased overall risk

Example: Snow Skiis & Water Skiis

individual investors can usually do this more

efficiently than a firm

however,


21/29

Economies of Scope


Tax Advantages

transfer pricing policy allows profits in onedivision to be offset by losses in another division

this is especially true internationally

Example: Ireland

can be used to smooth income


22/29

Economies of Scope

Anticompetitive Economies of ScopeMultipoint Competition

mutual forbearance

a firm chooses not to compete aggressivelyin one market to avoid competition in anothermarket

Example: American Airlines & Delta: Dallas & Atlanta

Market Power using profits from one business to compete in

another business

using buying power in one businessto obtain advantage in another business


23/29

Economies of Scope

Managerialism an economy of scope that accrues to managers

at the expense of equity holders

managers of larger firms receive more compensation(larger scope = more compensation)

therefore, managers have an incentive toacquire other firms and become ever larger

even though the incentive is there, it is difficultto know if managerialism is the reason for anacquisition


24/29

Equity Holders and Economies of Scope

Most economies of scope cannot be capturedby equity holders

risk reduction can be captured by equity holders

Managers should consider whether corporatediversification will generate economies of scopethat equity holders can capture

if a corporate diversification move is unlikelyto generate valuable economies of scope,managers should avoid it


25/29

Rareness of Diversification

Diversification per seis not rare

Underlying economies of scope maybe rare

relationships that allow an economy of scopeto be exploited may be rare

an economy of scope may be rare becauseit is naturally or economically limited

a soft drink bottler buys the only source ofspring water available

a hotel in a resort town creates a large water park,there are only enough customers to support one park


26/29

Imitability of Diversification

Duplication of Economies of Scope

Less Costly-to-Duplicate Costly-to-Duplicate

Employee Compensation

Tax Advantages

Risk Reduction

Shared Activities*

Core Competencies

Internal Capital Allocation

Multipoint Competition

Exploiting Market Power(codified/tangible) (tacit/intangible)

*may be costly depending on relationships


27/29

Imitability of Diversification

Substitution of Economies of Scope

Internal Development Strategic Alliances

start a new business under

the corporate whole

find a partner with the

desired complementaryassets

Competitors may use these strategies to arrive at aposition of diversification without buying another firm

avoids potential cross-firm integration issues less costly than

acquiring a firm


28/29

Summary

Corporate Strategy: In what businesses shouldthe firm operate?

an understanding of diversification helps managers

answer that question

Two Criteria:

1) economies of scope must exist

2) must create value that outside equity holderscannot create on their own


29/29

Summary

Economies of Scope

a case of synergycombined activities generategreater value than independent activities

may generate competitive advantage if theymeet the VRIO criteria

Firms should pursue diversification only if carefulanalysis shows that competitive advantage is likely!

Corporate Diversification GL Krisnaraga1

Documents

Transcript of Corporate Diversification GL Krisnaraga1