CORPORATE STRATEGY

Presented by
Lupitta Adyaksari, Ary Raditya Rucita, Gamma Rizkina

Sabtu, 14 Oktober 2023

ECMS805001
PROSES STRATEGI
A Process Model of Internal Corporate
Venturing in the Diversified Major Firm
Burgelman (1983)

This paper reports findings of a field study of the internal corporate venturing (ICV)
process. The strategic process to create new ventures. Successful ICV efforts are shown to
depend on :
• the availability of autonomous entrepreneurial activity on the part of operational level
participants,
• on the ability of middle-level managers to conceptualize the strategic implications of
these initiatives in more general system terms,
• and on the capacity of top management to allow viable entrepreneurial initiatives to
change the corporate strategy.
Key and Peripheral activities in a process model of ICV

Figure 2 shows the activities involved in ICV onto the process model. It shows how the strategic process in and around ICV is constituted by a set of key
activities (the shaded area) and by a set of more peripheral activities (the nonshaded area).

These activities are situated at the corporate, New Venture Division (NVD), and operational levels of management.
Key and Peripheral activities in a process model of ICV
Definition
Encompasses the conceptualization and pre-venture stages of the development process.
1. Linking processes : assembling of external and/or internal pieces of technological knowledge to
create solutions for technical problems
2. Product-chamrpioning activities : turn a new idea into a concrete new project, set the stage for the
impetus process by creating market interest in the new product. Once such positive results were
available, however, pressure began to build to give a project venture status and to transfer it to the
business development department, De
fin
Impetus itio
when a project was transferred with venture status to the business development department. At this
n
time it acquired its own organization, general manager, and operating budget, thus becoming an
embryonic new business organization in the department.
Im
Strategic context pe
tus
Refers to the political process through which middle-level managers attempt to convince top
management that the current concept of strategy needs to be changed so as to accommodate
successful new ventures. Str
1. Organizational Championing: Linking Impetus and Strategic Context Determination ate
2. Delineating : middle level managers delineating in concrete terms the content of new fields of gic
co
business development for the corporation. nte
3. Retroactive Rationalizing : Top management gave indications of interest in venture activity in certain xt
general fields and expressed concern about the fit of ongoing ICV activities with corporate
Str
resources and strategy. uc
tur
Structural context al
co
Determinate by corporate level, needs clear strategy for directing diversification nte
1. Structuring : what needs to be done to gain corporate support for particular initiatives xt
2. Selecting : internal selection environment, normally it will be selected if the ICV has fast growth
and large size,
IN PURSUIT OF TIME: BUSINESS PLAN SEQUENCING,
DURATION AND INTRAENTRAINMENT EFFECTS ON
NEW VENTURE VIABILITY

Hopp, C and Greene, F (1983)

This paper studied relationship between formal written business plans and the
achievement of new venture viability.

First, we theorize and investigate the effects of plan sequencing; arguing that a
business plan written early on in new venture development increases the
prospects of venture viability. Second, we examine plan duration effects, and
argue that there is a curvilinear relationship between spending time on a plan
and achieving venture viability. Finally, we investigate plan intraentrainment
effects (synchronization with other gestation activities). If plans are
synchronized with other gestation activities, venture viability is more likely.

5
RESEARCH METHODOLOGY
• longitudinal Panel Study of Entrepreneurial Dynamics II (PSED II).
• control for truncation issues that might lead to left or right censoring biases (Yang and Aldrich, 2012).
• control for endogeneity in the plan timing-performance relationship by separating out selection from performance effects.

HYPOTHESIS
Completing a scripted plan early on in the development of the new venture increases the likelihood of new venture viability.

There is a curvilinear (inverse u-shaped) relationship between new venture viability and the length of time spent on a formal plan. Spending time
on a plan increases the likelihood of new venture viability but only up to a point beyond which time spent on a plan does not increase the
likelihood of new venture viability.

There is a curvilinear (inverse u-shaped) relationship between the likelihood of new venture viability and when a formal plan is completed in
relative event time. If a plan is completed alongside other gestation activities it leads to the creation of a new viable venture but not if it is
completed too early or too late in relation to these activities.

6
RESULT
Statistic :
Founders completed their plan, on average, some 14 months into venture development; that the duration of planning was, on average,
around 7 months

H1 accepted. if planners complete plans in the second half of their first year of venture development, they are more likely than non-
planners to achieve venture viability.

H2 accepted. There is curvilinear effect of time spent on completing a plan: the probability of achieving viability is positive at around 12
percentage points if the founder started and completed their plan in a three-month period, but that these advantages dissipate if further
time is devoted to the plan.

H3 accepted. Curvilinear findings are Confirmed. if a plan was finished up to two months after the average event time, there is an increased
probability of early-stage profitability. However, if a plan was completed more than a month before and more than three months after this
average event time, it reduces the chances of viability.

Early-stage profitability is when monthly revenues exceed monthly expenses for six out of 12 months; including salaries for the managers’ as
our dependent variable.
Vertical
Integration
Integration and Diversification Option
Related Diversification
Another form of diversification, and another
direction for corporate strategy, is vertical Horizontal Integration
integration. Vertical integration describes (Diversification)
entering activities where the organization is
its own supplier or customer. Unrelated Diversification

Backward Example: Cooking oil

input activities related to
Corporate Strategy Vertical current business
manufacturer operates oil
palm plantation
Integration

Forward movement into output

Example: Coffee roaster
Vertical activities related to current
operates Coffee Shop chain
business
Integration
Backward Integration
Movement into input activities concerned with the company’s current
business (i.e., further back in the value system).
By owning and managing forests, IKEA can ensure a consistent and
sustainable supply of wood, reducing its dependence on external suppliers
and helping to protect forests from overexploitation.
IKEA, purchases and manages forests through its subsidiary Ingka
Investment (Ingka Group).
Forward Integration
Movement into output activities concerned with the company’s current
business (i.e., further forward in the value system).
Entering Automotive business as early in 1970, Astra International support
its core business by operating supporting business such as that car retail
chains, repairs and servicing, Auto Financing, Auto Insurance as well as Car
Rental just to name a few.
Vertical Integration?
Often appears attractive as it seems to ‘capture’ some of the profits gained by retailers or suppliers in a value systems –
the retailers’ or suppliers’ profits. However, there are two dangers:

Expensive investments in
Vertical lower profit non-core
integration business is not attractive
involves to shareholders as they
reduce rate of return on
investment. investment (ROI)
in 2016. Dell acquired EMC, a leading
provider of data storage, information
security, virtualization, and other
enterprise IT solutions, for a record-
breaking price of $67 billion.

Dangers of
Vertical
Integration
Even with degree of In 2000, AOL announced a merger
with Time Warner in a deal valued at
Require different relatedness through the
approximately $164 billion. The
value system, vertical
resources and integration is likely to
integration aimed to combine AOL's
internet and online services with
capabilities. involve quite different Time Warner's media and
resources and capabilities entertainment assets.
Dell Acquire EMC In 2016 Dell acquire EMC at $67 billion, financed mostly through debt ($48
billion). This made it the largest technology sector acquisition at the time.
Dell aimed to transform itself from a primarily consumer-focused hardware
company into a comprehensive enterprise IT solutions provider. The
acquisition of EMC, with its vast portfolio of enterprise solutions, enabled Dell
to expand its offerings and cater to a broader range of business customers.
EMC's subsidiary, VMware virtualization and cloud computing solutions were
highly valuable, and Dell sought to leverage this technology in its enterprise
solutions.
The acquisition was structured as a combination of cash and stock, with Dell
paying EMC shareholders a significant amount in cash and the rest in shares
of Dell's stake in VMware, a subsidiary of EMC.

In 2021, Dell divest VMware

stake of 81%. In an SEC
filing, Dell said spinning of
VMware shares would boost
its credit rating and help it
achieve an investment grade
rating quickly. Other benefit
would include cash flexibility
and lower debt service ratio.
The value of Dell’s stake in
VMware is worth about $47
billion before the deal, which
is larger than Dell’s entire
$43 billion market cap at the
time.

100% 100% 81%

AOL-Time Warner merge
In 2000, AOL announced a merger with Time Warner in a deal valued at $164 billion,
creating a company with combine value of $360 billion. The idea was to create a media
and technology powerhouse that could leverage the internet for content delivery.
The merger brought together two companies with vastly different corporate cultures. AOL
was a tech-focused, fast-moving internet company, while Time Warner had a more
traditional media and entertainment culture. This cultural clash made it difficult to align
priorities and strategies.
The integration faced challenges in integrating and leveraging the companies' diverse
assets effectively. The promise of synergies between content and distribution did not
materialize as expected.
The merger resulted in
substantial value erosion
for shareholders. The stock
price of AOL Time Warner
declined significantly,
erasing billions of dollars in
market capitalization.
In 2003 AOL Time Warner
became Time Warner and
in 2009 AOL LLC became a
subdivision of Time Warner.
In 2015 Time Warner sold
AOL LLC to Verizon at $4.4
billion.
 Outsourcing
The process by which value chain activities previously carried out
internally are subcontracted to external suppliers.
Nobel prize-winning economist Oliver Williamson has argued that the
decision to integrate or outsource involves more than just superior
capabilities. His transaction cost framework helps analyze the relative
costs and benefits of managing (‘transacting’) activities internally or
externally,
Williamson, O.E., 1979. Transaction-cost economics: the governance of contractual relations. Journal of Law and
Economics 22 (2), 233–261.
Divestment
Divestment occurs when the organization decides to pull out of one or
more of its businesses, often occurs with unrelated diversified
businesses, SBUs with poor operating or stock market performance
and the arrival of a new CEO.
The decision to divest may occur if the SBU in question is not adding
value to the firm and the price obtained through sell-off is more than its
standalone value. But before divestment happens it is important to
consider whether the business might be restructured in such a way that
its contribution to the group could be improved.
Source: Adapted from P. Puranam and B. Vanneste (2016) Corporate Strategy. Cambridge University Press.
Integration and Diversification Option

value chain activities

Vertical dis- previously carried out
Outsourcing internally are
Integration subcontracted to
The process where value external suppliers
chain activities previously
carried out internally are
Corporate subcontracted to external
Strategy suppliers
SBU is sold to another
Sell-off company

Divestment
Occurs when the
organization decides to pull SBU shares distributed
out of one or more of its Spin-off shareholders
businesses
 Nike’s approach to outsourcing

There are six major footwear manufacturers across the world, namely Nike, Adidas,
Reebok, Fila, New Balance and Converse. If one were to look at their market share, one
company stands out – Nike. It has a 47% market share, while its closest competitor,
Reebok, has only 16%.
Part of the answer to its success lies in the efficiencies of its manufacturing model. Nike
has no manufacturing plants of its own but chooses to outsource the work to contractors
in the Philippines, Vietnam, China, Indonesia, and Taiwan. There are 500,000 people
worldwide involved in the production of Nike footwear. The company’s employees
maintain stringent quality checks on these factories and Nike reaps considerable cost
savings in the process.

In 2019, Nike’s footwear components were supplied by 112 different factories in 12

countries, with no factory accounting for more than 9% of branded footwear.
Not being overly reliant on any one site means Nike is less vulnerable to unpredictable
occurrences, such as accidents and extreme weather events.

https://www.outsourceaccelerator.com/articles/nikes-approach-to-outsourcing/
https://marketplace.adec-innovations.com/blogs/how-does-nikes-supply-chain-work/
Minnesota Mining and Manufacturing Company
3M was founded in 1902, in Two Harbors, Minnesota. Initially, the
company's focus was on mining, primarily to mine a valuable mineral
called corundum.
In 1905 shifted its focus from mining to manufacturing sandpaper, initially
as an abrasive for the automotive industry.
In the 1920s, 3M introduced waterproof sandpaper, a significant
innovation that contributed to its growth and reputation for product quality.
The company expanded into the tape business with the introduction of
masking tape in 1925, followed by Scotch-brand cellophane tape in 1930.
The 1960s saw the introduction of the Post-it Note, one of 3M's most
iconic and successful products.
Today, 3M operates in numerous industries, including healthcare,
transportation, consumer goods, electronics, and safety, offering a wide
range of products and solutions.

• A S&P 100 company

• 3M has paid dividends to its shareholders without
interruption for more than 100 years and increased the
annual dividend for 64 consecutive years.
• 3M named as one of the World's Most Ethical Companies
by Ethisphere Institute for 10th consecutive year
 In 2022 3M split-off its Food
3M Split-off Food Safety Division and merge it
with food testing and animal
Safety Division healthcare products maker
Neogen Corp in a tax-free
transaction.
The deal is being structured as a
Reverse Morris Trust, a strategic
way to divest a division tax-free
under US law. 3M shareholder will
receive new company shares equal
to 51% stake of the new company.
3M Company will receive $1 billion
proceeds from the transaction.

Does SBU add value to the organization?

• YES, 3M Food Safety Division is a leader of innovative
solutions that help the food and beverage industries
optimize the quality of their products to enable consumer
protection. It provides solutions that help mitigate risk,
improve operational efficiencies and impact the bottom
line. 3M Food Safety contribute ~1% of 3M revenue in
2022.
Is there a better parent?
• YES, Neogen Corporation provides a comprehensive
range of solutions and services for the food processing,
animal protein and agriculture industries. As a combined
company, Neogen and Food Safety will have an
enhanced geographic footprint, more innovative product
offerings, greater digitization capabilities, and increased
financial flexibility to capitalize on robust growth trends in
sustainability, food safety and supply chain integrity
 3M Spin-off Healthcare
Business
By end of 2023 3M is planning to spin-off its multi billion dollars
Healthcare Business operation and create a stand-alone and listed
Healthcare company. The official spin-off will happen in 2024 and 3M
shareholder will receive a share in the new Healthcare company while the
U.S. industrial giant would retain a 19.9% stake intended to be a tax free
for US federal income tax purpose.

Does SBU add value to the organization?

• YES, 3M Health Care, with approximately $8.4 billion in sales in 2022,
is a growing business, grounded in its strong track record of profitability
and a robust cash flow generation. Health Care will be well positioned
to pursue its strategic objectives is a diversified healthcare technology
leader with a deep and diverse portfolio of trusted brands, global
capabilities, and leadership in attractive end market segments such as
wound care, oral care, healthcare IT, and biopharma filtration.
Is there a better parent?
• NO, The standalone Health Care business have what it takes to be a
leading global technology company focused on wound care, oral care,
healthcare IT, and biopharma filtration. 3M Board & Management did
not foresee any company considered to be better parent for the
Healthcare operation and thus decide it to spun-off the operation.
Portfolio
Metrices
BCG matrix
One of the most common and longstanding ways of conceiving
of the balance of a portfolio of businesses is the Boston
Consulting Group (BCG) matrix. The BCG matrix uses market
share and market growth criteria for determining the
attractiveness and balance of a business portfolio

A star is a business unit A question mark (or problem

within a portfolio that has child) is a business unit within a
a high market share in a portfolio that is in a growing
growing market market, but does not yet have
high market share
A cash cow is a Dogs are business units within a
business unit within a portfolio that have low share in
At least there are four potential problems with the BCG matrix:
portfolio that has a high static or declining markets and qDefinitional vagueness. It can be hard to decide what high and low
market share in a mature are thus the worst of all growth or share mean in a particular situation.
market combinations qCapital market assumptions. The notion that a corporate parent
needs a balanced portfolio to finance investment from internal
BCG matrix is a good way of visualizing different needs and sources (cash cows) assumes that capital cannot be raised in
external markets.
potentials of all the diverse businesses within the corporate
qUnkind to animals. Both cash cows and dogs receive ungenerous
portfolio. It warns corporate parents of the financial demands treatment, the first being simply milked, the second terminated or
of what might otherwise look like a desirable portfolio of high- cast out of the corporate home. This treatment can cause motivation
growth businesses. problems.
qIgnores commercial linkages. The matrix assumes there are no
commercial ties to other business units in the portfolio.
The directional policy
(GE–McKinsey) matrix
The directional policy matrix positions business units according
to (i) how attractive the relevant market is in which they are
operating, and (ii) the competitive strength of the SBU in that
market.
• Attractiveness can be identified by PESTEL or five forces
analyses;
• Business unit strength can be defined by competitor
analysis, for instance, the strategy canvas.

BCG matrix can have two advantages.

1. Unlike the simpler four-box BCG matrix, the nine cells of
the directional policy matrix acknowledge the possibility
of a difficult middle ground. Here, managers had to be
carefully selective. In this sense, the directional policy
matrix is less mechanistic than the BCG matrix,
encouraging open debate on less clear-cut cases.
2. The two axes of the directional policy matrix are not
based on single measures (i.e., market share, such as
brand and reputation, customer loyalty, relative cost
position and market growth).
The matrix also offers strategy guidelines given the positioning
of the business units.
• It suggests that the businesses with the highest growth
potential and the greatest strength are those in which to
invest for growth.
• Those that are the weakest and in the least attractive
markets should be divested or ‘harvested’ (i.e., used to yield
as much cash as possible before divesting).
A. Hax and N. Majluf (1990) ‘The use of the industry attractiveness business strength matrix in strategic
planning’, in R. Dyson (ed.) Strategic Planning: Models and Analytical Techniques, Wiley.
Parenting Matrix
The parenting matrix focuses upon synergy creation from
parenting and introduces parental fit as an important criterion
for including businesses in the portfolio. it is important to
assess the fit between each SBU’s critical success factors and
the capabilities (in terms of competences and resources) of the
corporate parent.

• A corporate parent should avoid running ‘Alien’

businesses that it has no feel for and can’t benefit from.
• ‘Ballast’ businesses for which a corporate parent has high
feel but can add little benefit should either be run with a
very light touch or be divested.
• ‘Heartland’ businesses, which are those the parent
understands well and can continue to add value to, should
be at the core of future strategy.
• ‘Value trap’ businesses are dangerous as there are
opportunities to add value, but the parent’s lack of feel
may do more harm than good.

For maximum synergies, parents should concentrate on

actual or potential businesses, where there is both high feel Adapted from M. Goold, A. Campbell and M. Alexander, Corporate Level Strategy, Wiley,
and high benefit. 1994.
Dynamic Capabilities – definition & assumption
• Dynamic capability is “the firm’s ability to integrate, build, and
reconfigure internal and external competences to address rapidly
changing environments” (David J. Teece, Gary Pisano, and Amy
Shuen).
• Dynamic capabilities can be distinguished from operational or
“ordinary” capabilities, which pertain to the current operations of an
organization. Dynamic capabilities, by contrast, refer to “the capacity
of an organization to purposefully create, extend, or modify its
resource base” (Helfat et al., 2007).
• The basic assumption of the dynamic capabilities framework is that
core competencies should be used to modify short-term competitive
positions that can be used to build longer-term competitive
advantage
Dynamic Capabilities - continued
• Three dynamic capabilities are required to meet new challenges:
1. Organizations and their employees need the capability to learn quickly and
to build strategic assets;
2. New strategic assets such as capability, technology, and customer feedback
have to be integrated within the company;
3. Existing strategic assets have to be transformed or reconfigured.
• Teece’s concept of dynamic capabilities essentially says that what
matters for business is corporate agility - which is the capacity to:
1. sense and shape opportunities and threats;
2. seize opportunities, and
3. maintain competitiveness through enhancing, combining, protecting, and,
when necessary, reconfiguring the business enterprise’s intangible and
tangible assets.
Research Summary
• The Researcher develop a multi-level theory of dynamic capabilities (DCs) that
explains resource dynamics by giving a central role to persons and interpersonal
interactions rather than to abstract, firm-level entities. Integrating the contrasting
approaches to DCs in individual-, interpersonal-, and organization-level
scholarship.
• Existing organization-level approaches portray DCs as collective endeavors but do
not specify how they emerge and operate within organizations, while micro-
foundational approaches illuminate actors’ contributions but reduce a firm’s DCs
to the cognitions and actions of a few top managers.
• This integrated theory instead explains DCs as effortful social accomplishments
emerging from individual employees’ capacity to leverage interpersonal
relationships conducive to productive dialogue.
• The framework we propose offers new ground for understanding how DCs can be
sources of sustainable competitive advantage.
Background
• A central question in strategic management is why some firms are
systematically capable of keeping their resources and activities
aligned with changing environmental dynamics while others are not
(Helfat and Winter, 2011)
• One explanation focuses on dynamic capabilities (DCs), that
emphasizes a firm’s capacity to sense new opportunities in its
environment and then seize those opportunities by adapting,
integrating, and reconfiguring its key assets and activities (Helfat et
al., 2007; Teece, 2007; Teece, Pisano, and Shuen, 1997)
• DCs underpin key firm functions such as strategic planning,
acquisitions, alliances, outlet proliferation, R&D, and product
development (Eisenhardt and Martin, 2000; Helfat and Winter, 2011).
• Where exactly this capacity is located, however, and how it operates,
has been a source of ongoing debate.
Theoretical Background
• On the one hand, a macro, organizational-level view conceptualizes
DCs as higher-level organizational routines (Schilke, 2014; Teece,
2007; Zollo and Winter, 2002) or decisionmaking rules and algorithms
(Eisenhardt and Martin, 2000).
• On the other hand, a micro, individual-level approach interprets DCs
as decision-making activities premised on the skills of one or a few
entrepreneurial top executives (Adner and Helfat, 2003; Helfat and
Peteraf, 2015; Teece, 2007).
• These contrasting interpretations make DCs paradoxical entities
(Peteraf, Di Stefano, and Verona, 2013) that simultaneously involve
stability and change (Feldman and Pentland, 2003).
• We address these questions by developing a new, multi-level theory
of DCs.
Theoretical Proposition
• At the individual level, we suggest that the micro-foundations of the
individual actions on which DCs are premised are not a product of
cognition, habit, or emotion in isolation, as existing contributions
suggest; instead, they are an integration of the three.
• At the meso level, we propose that relationships between employees,
created through productive dialogue, are the missing aggregation
principle in explaining how individual actions congeal into firm-level
DCs (Felin and Hesterly, 2007); their addition allows us to build a
coherent theory of DCs and thereby explain their paradoxical nature.
• Finally, at the firm level, our theory offers a novel perspective for
understanding if and how DCs determine sustainable competitive
advantage.
Prepositions
• Proposition 1: When an employee’s level of integration is higher, he or she will be more likely to
systematically recognize and act upon the need for change in dynamic environments.
• Proposition 2: Employee interactions characterized by more candor, inclusion, confirmation, and
present-ness will result in higher levels of relational engagement than interactions that lack these
qualities.
• Proposition 3: Relative to employee interactions characterized by calculative engagement,
interactions characterized by relational engagement will be more conducive to productive
dialogue in contexts with conflicting viewpoints about, and motivations toward, resource change.
• Proposition 4: Greater levels of productive dialogue will improve the rates of relational
cooperation, mutual learning, and cohesion among employees engaged in change initiatives.
• Proposition 5: Higher levels of relational cooperation, mutual learning, and cohesion from
productive dialogue will result in behaviors high in solidarity and constructive opposition, while
lower levels of cooperation, learning, and cohesion will result in conformism and non-
involvement.
• Proposition 6. Resource dynamization emerging from productive dialogue gives firms greater
flexibility to adapt to new sources of dynamism or to instigate change autonomously.
• Proposition 7. Processes of resource dynamization emerging from intensive productive dialogue
will be more difficult to imitate or substitute.
Managerial Summary
• How can firms navigate the transformations that relentlessly raise new threats
and opportunities in dynamic environments? We suggest that firms develop
dynamic capabilities to navigate change when their employees are connected
through high-quality relationships, empowering their innovative potential.
• Strategic adaptation is possible when people are given the opportunity to act,
think, and feel creatively while performing tasks, thus envisioning opportunities
to improve how the firm operates.
• This ability supports sustainable, firm-level innovation when employees are
connected through interpersonal relationships founded on constructive dialogue.
• Dialogue allows participants to advance and accept proposals for change even in
the presence of conflicting interests and viewpoints.
• Managers may therefore enhance their firm’s capacity for change by fostering
individual integration and developing contexts that facilitate dialogue and
constructive opposition.
Value creation and the corporate parent

Divested

2015 2017
$4.4 bn $4.5 bn
2021
Acquired
$5 bn
Value adding activities
Types Objectives
Envisioning • Provide clear overall vision
• Motivate business unit managers to maximise corporate-wide performance through
commitment / common purpose
• Discipline (Stop inappropriate activities / unnecessary cost)

Facilitating synergies • Sharing across business units

• Improving synegies and networks
• Cost efficiency
Coaching • Develop capabilities
• Internal training across units
• Learning skills to one direction and objectives
Providing central services & • Provide capital for investment
resources • Sufficient scale to be efficient and can build up expertise
• Increase bargaining power (bigger trust)

Intervening • Ensure appropriate performance

• Challenge and develop the strategic ambitions of business units
Value destroying activities
Sometimes, the parent company inadvertently destroy value….
Value destroying activities

Adding management cost Adding bureaucratic complexity Obscuring financial performance

Corporate Managers Facility

Weak business might be

However, if corporate “Bureaucratic fog” cross-subsidized by
centre costs are greater created by an additional stronger ones. Possibility
than the value they layer of management & of hiding weak
create, then corporate the need to coordinate performance. Unseen
staff are net value- with sister business. It potential fraud may
destroying.. slow down managers obscure financial
response to issues performance
Corporate Parents, can both add and destroy value,
So you can consider 3 parenting approach

Parenting Focus Value-Creating Ex.

Role Activities

Portfolio Set clear financial Intervening Berkshire

Manager targets; identify & acquire (ensure Hathaway
under-valued business; appropriate
not closely involved to performance; Pershing Square
routine; conglomerate challenge strategic Capital
strategy ambitions)

Synergy Enhance value by Facilitating

Manager managing synergies synergies;
across business units providing central Garuda Indonesia
services and
resources MNC Group

Parental Transfer capabilities Providing of

Developer downwards; leveraging central services McDonald-Chipotle
resources to enhance the and resources
potential of business Indika Energy-
units EmiTS (EBT)
Toward a Dynamic Notion of Value Creation and Appropriation in Firms :
The Concept and Measurement of Economic Gain

(June, 2015)

Marvin B. Liebermann
UCLA

Natarajan Balasubramanian
Whitman School of Mgt.

Roberto Garcia-Castro
IESE Business School
Background :
There is often a lack of clarity on the precise meaning of the concept. ”Value
creation” has been used incorrectly when the intended meaning has really
been “value capture” as noted by Makadok & Coff (2022).

Confusion : Value creation can be reasonably defined in two different ways

1. Total Economic Value created by a firm within specific interval of time
2. The change in this value over longer periods of time

Definition(before cont.)
Shareholder value, represent the benefit/loss of shareholder based on profitability ratios, or stock market capitalization.
Total Economic Value, the gap between customer’s willingness to pay and the supplier’s opportunity cost.
Static Value Creation, value created in a single time period
Dynamic Value Creation, change in value from one period to the next, or we call it Economic Gain
We illustrate this graphically in Figure 1.
Consider firm 1 in a competitive market.
Initially, in Period 0, it is identical to all
its competitors, with say a unit cost of C0,
with an output of Y0. The industry price is
set at p0=C0. Hence, all the economic
value created, equal to the area between
the demand and supply curves, is
appropriated by the customers. The firm
and its stakeholders receive their
opportunity costs

In Period 1, Firm 1 innovates and reduces

costs to C1. Thus, the firm has created
additional value by freeing up resources
that can be used elsewhere in the economy
(Bowman & Ambrosini, 2000)
Static value creation vs Dynamic value creation (Economic Gain)
South West Airlines (SWA) vs American Airlines (AA)

1971 1980 2010

SWA start SWA roll out

Grown to 60% AA
operating across US/ 7%
size
in Texas RPM of AA

Airlines Performance Standard

RPM (Revenue passenger miles) : jumlah total mil yang
ditempuh penumpang yang membayar dalam 1 tahun
kalender
South West Airlines (SWA) vs American Airlines (AA)

What is the secret

sauce of SWA ??
South West Airlines (SWA) vs American Airlines (AA)
South West Airlines (SWA) vs American Airlines (AA)

1980-1990 1990-2000 2000-2010 1980-2010

SWA AA SWA AA SWA AA SWA AA
Innovation Gain 2.2% -9.8% 4.0% 9.6% 11.9% 4.5% 16.3% 5.1%
Gains to customers 26.4% 27.1% 8.0% 12.4% 7.4% 21.4% 41.8% 60.9%
Gains to fuel -11.3% -12.4% -3.0% -3.5% 19.0% 16.5% 6.7% 2.6%
suppliers

Innovation & 5.6% 12.7% 17.5% 21.3% 26.7% 31.1% 52.1% 68.5%
Replication Gain

South West Airlines (SWA) vs American Airlines (AA)

Dynamic measures of economic gain in 3 decades
Game of Cards

Player 1 Player 2 Player 3

Customer Supplier 1/ Lowrie Supplier 2/

26 Vendors
Games of Cards

$100/pair

Customer Supplier 1/ Lowrie Supplier 2/

26 Vendors
Games of Cards

26 cards 26 cards

$100/pair

Customer Supplier 1/ Lowrie Supplier 2/

26 Vendors
Games of Cards

26 pairs
OK

50/50?

Supplier 1/ Lowrie Supplier 2/

26 Vendors
Game of Cards

26 pairs= $2600

Customer Supplier 1/ Lowrie Supplier 2/

26 Vendors
Game of Cards

26 pairs= $2600
Total Value

Customer Supplier 1/ Lowrie Supplier 2/

26 Vendors
Value captured
$1300 Value captured
$50 each
Games of Cards

26 pairs
NO

60/40?Take
it or leave it

Supplier 1/ Lowrie 1 of vendors

Games of Cards

26 pairs
Hmm.
OK

60/40?
or i burn
the cards

Supplier 1/ Lowrie 25/26 of vendors

CORPORATE STRATEGY

THANK YOU