Corporate Diversification GL Krisnaraga1
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Transcript of Corporate Diversification GL Krisnaraga1
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Corporate Diversification inthe context of Corporate
Competitive Advantage.
GL-Speaker: Krisnaraga Syarfuan, MMBusiness Owner / Practitioner Vice-Chairman Yayasan Pendidikan Bakrie
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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?
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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)
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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
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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)
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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.!
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Indonesia is in need of big achievement
for a betterREPUTATION
Rudy Hartono, Juara All England 8 kali
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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.
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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
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Integration and Diversification
Integration
Diversification
ForwardBackward
CurrentBusinesses
No
Links
Many
Links
Unrelated Related
OtherBusinesses
OtherBusinesses
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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
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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
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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
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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.
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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
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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
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Economies of Scope
Four Types
Operational
Financial
Anticompetitive
Managerialism
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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
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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
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Economies of Scope
Financial 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,
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Economies of Scope
Financial 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
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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
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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
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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
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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
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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
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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
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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
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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!