Leader Development Program Pupuk Indonesia

SWOT Matrix Strengths – S Weaknesses – W List Strengths List Weaknesses Opportunities – O SO Strategies WO Strategies List Opportunities Use strengths to take Overcoming weaknesses by advantage of opportunities taking advantage of Threats – T opportunities ST Strategies WT Strategies List Threats Use strengths to avoid Minimize weaknesses and threats avoid threats 334

SPACE Matrix Two External Dimensions ƒEnvironmental Stability (ES) ƒIndustry Strength (IS) SPACE Factors Internal Strategic Position External Strategic Position Financial Strength (FS) Environmental Stability (ES) Return on investment Technological changes Leverage Rate of inflation Liquidity Demand variability Working capital Price range of competing products Cash flow Barriers to entry Inventory turnover Competitive pressure Earnings per share Price elasticity of demand Price earnings ratio Ease of exit from market Risk involved in business 335

SPACE Factors Internal Strategic Position External Strategic Position Competitive Advantage (CA) Industry Strength (IS) Market share Growth potential Product quality Profit potential Product life cycle Financial stability Customer loyalty Technological know-how Competition’s capacity utilization Resource utilization Technological know-how Ease of entry into market Control over suppliers & distributors Productivity, capacity utilization 336

WHERE IS ALSTOM’s POSITION IN SPACE MATRIX? Q1, Q2, Q3, OR Q4? 337

WHERE ARE ALSTOM’s BUSINESS UNITS POSITION IN BCG MATRIX? STAR? 338

WHERE ARE ALSTOM’s BUSINESS UNITS POSITION IN IE MATRIX? GROW AND BUILD? Grand Strategy Matrix ƒ Tool for formulating alternative strategies ƒ Based on two dimensions ƒ Competitive position ƒ Market growth 339

RAPID MARKET GROWTH 1. Quadrant II Quadrant I STRONG 2. Market development 1. Market development COMPETITIVE 3. Market penetration 2. Market penetration 4. Product development 3. Product development POSITION 5. Horizontal integration 4. Forward integration 6. Divestiture 5. Backward integration Liquidation 6. Horizontal integration WEAK 7. Concentric diversification COMPETITIVE Quadrant III Retrenchment Quadrant IV POSITION Concentric diversification 1. Concentric diversification Horizontal diversification 2. Horizontal diversification 1. Conglomerate diversification 3. Conglomerate diversification 2. Liquidation 4. Joint ventures 3. 4. 5. SLOW MARKET GROWTH WHERE ARE ALSTOM’s BUSINESS UNITS POSITION IN GRAND STRATEGY MATRIX? Q II? 340

QSPM Weight Strategic Alternatives Key External Factors Strategy 1 Strategy 2 Strategy 3 Economy Political/Legal/Governmental Social/Cultural/Demographic/En vironmental Technological Competitive Key Internal Factors Management Marketing Finance/Accounting Production/Operations Research and Development Computer Information Systems WHAT IS ALSTOM’s THE BEST STRATEGY ???? 341

Management Issues Management Annual Objectives Issues Policies Resources Organizational Structure Restructuring Rewards/Incentives Management Issues (cont’d) Management Resistance to Change Issues Natural Environment Supportive Culture Production/Operations Human Resources 342

Management Issues Four Types of Resources 1. Financial resources 2. Physical resources 3. Human resources 4. Technological resources Marketing Issues Centrally important to Implementation 1. Market segmentation 2. Product positioning 343

WHAT IS ALSTOM’s TARGET AND POSITIONING? Finance/Accounting Issues • Capital Acquisition to Implement Strategies – Debt – Equity 344

Capital Acquisition to Implement Strategies • Debt • Equity Finance/Accounting Issues • Projected Financial Statements • Financial Budget – Cash budgets – Operating budgets – Sales budgets – Profit budgets – Factory budgets – Expense budgets – Divisional budgets – Variable budgets – Flexible budgets – Fixed budgets 345

Research & Development Issues – New products and improvement of existing products that allow for effective strategy implementation Management Information Systems (MIS) Issues – Information is the basis for understanding the firm. It’s one of the most important factors differentiating successful from unsuccessful firms. 346

Strategy Review, Evaluation, and Control Appraisal of Strategic Performance • Have assets increased? • Increase in profitability? • Increase in sales? • Increase in productivity? • Profit margins, ROI, and EPS ratios increased? Strategy Review, Evaluation, and Control Review Effectiveness of Strategy – 1. Competitors’ reaction to strategy 2. Competitors’ change in strategy 3. Competitors’ changes in strengths & weaknesses 4. Reasons for competitors’ strategic change 5. Reasons for competitors’ successful strategies 6. Competitors’ present market positions & profitability 7. Potential for competitor retaliation 8. Potential for cooperation with competitors 347

Strategy Review, Evaluation, and Control Monitor Strengths & Weaknesses; Opportunities & Threats • Are strengths still strengths? • Have we added additional strengths? • Are weaknesses still weaknesses? • Have we developed other weaknesses? Strategy Review, Evaluation, and Control Monitor Strengths & Weaknesses; Opportunities & Threats • Are opportunities still opportunities? • Other opportunities develop? • Are threats still threats? • Other threats emerged? • Are we vulnerable to hostile takeover? 348

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Strategy Review, Evaluation, and Control Measuring Organizational Performance • Compare expected to actual results • Investigate deviations from plan • Evaluate individual performance • Progress toward stated objectives Strategy-Evaluation Assessment Matrix Have major Have major Has the firm progressed Result changes occurred changes occurred satisfactorily toward achieving its stated Corrective actions in the firm’s in the firm’s objectives? internal strategic external strategic Corrective actions No position? position? Corrective actions Yes Corrective actions No No Corrective actions No Corrective actions Yes Yes Yes Corrective actions No Continue course Yes Yes Yes No Yes Yes No No Yes No Yes No Yes No No 350



WHAT NEXT? ....... International Takeovers and Restructuring through Merger and Acquisition Dr. Harris Turino 351

Agenda • International Takeovers and Restructuring Phenomena • The New M&A Playbook Merger and Acquisition • One of strategic decisions a corporate undertake is merger & acquisition (M&A). 352

M&A as Growth Source • M&A is one of growth sources, beside market share gain and portfolio momentum (McKinsey & Co, 2008). 10% 5% 1.8% PM MA MS 1999-2006 = 16.8% Categorization of Integration Industry A Industry B sub sub Upstream Midstream Downstream Horizontal Conglo- Vertical 353 Integration meration Integration

M&A Phenomena There are two interesting phenomena about M&A: o Reoccurrence of M&A Wave (M&A is increasing and decreasing sharply) o The failing of most M&A activities (most of them fail to grow value) Part I: M&A Phenomena 354

M&A Wave • M&A activities occur along the time. • Within certain period, those activities increase significantly, and then drop sharply. • The phenomenon reoccur along the 20th century until now, and it is called M&A Wave. • Both increasing or decreasing of M&A activities triggered by environmental changes. • Literatures identified that there are 6 M&A waves. MA Waves: The 1st – 4th Wave 1968-1970s 1916-1929 1981- 1989 1887-1904 355

MA Waves: The 4th – 5th Wave The Fourth Wave The Fifth Wave 1981 - 1989 1992-2000 Number of MA Transactions in US Economy (Gaughan, 2001) MA Waves: The 4th – 5th Wave The Fourth Wave The Fifth Wave Dollar Value of US Acquisition of Foreign Company (Gaughan, 2001) 356

The Fifth and Sixth Wave The Sixth Wave 2003 - 2009 The Fifth Wave The 1st – 3rd M&A Wave Wave Trigger Description Ending 1st Wave • The growing of • Between • Economy slowdown (1887-1904) economy after civil monopolists in (panic in 1903) Monopoly war heavy industry • Stock market crash • Pacific railroad • Horizontal (1904) 2nd Wave • Economic boom • Between • Sherman act (1916-1929) after WW-1. Oligopolies (oil, • Stock market crash • Technological food, metal etc) Consolidati development (1929) on (e.g. Ford) • Vertical integrate • Great depression • Bank facilities 3rd Wave • Stock price boom • Conglomeration (1932) (1968-1970s) • Low interest rate • Financed by • New inventions • Poor performance of Conglomer (laser, DNA, equities conglomeration 357 ation computer, etc). • Small acquired • Hart-Scott-Rodino bigger company Antitrust Act • Suez channel crisis

The 4th – 6th M&A Wave Wave Trigger Description Ending 4th Wave • Antitrust relaxation • Acquired • Anti-takeover law (1981-1989) • Deregulation company much • Junk bond crisis • Increase value and larger size • Financial institution Hostile efficiency to Takeover compete in global • Foreign takeover reform market was spreading • Gulf war 5th Wave • Globalization • Hostile takeover • The burst of stock (1992-2000) • Technology change • Banking & telco market bubble Deregulation • Financed by (millennium and Mega Deal • Stock market boom dot.com) • equities • Impose resources in • Long-term profit • Revolution of corp. global market governance motive 6th Wave • Abundant liquidity • Premium price • Subprime mortgage (2003-2009) • Stock market boom • Buying less crisis • Low interest rate undervalued firm • Government encouragement The End of Sixth Wave? 358 Source: Capital Logix

The Big Questions • Why M&A Activities Fail? • How M&A Failures are Interpreted? • Why Companies are Convinced and Try Again? The Failing of M&A Activities 359 • The failing of M&A activities is defined as the destroying of acquirer firm’s value post-M&A. • Large volume of studies stated that: o Around the announcement date, the shareholder value slightly tend to be positive (some studies indicate negative) o Post-M&A (2 years or up to 5 years), the result is consistent, i.e. significant negative performance (in term of shareholder return, stock price, profitability). • Ruback (1988) said,” Reluctantly, I think we have to accept this result as a fact”. • Christensen et al. (2011) stated 70-90% of M&A activities fail to grow firm value.

Why M&A Activities Fail? • Incorrectly match candidate to strategic purpose of the deal. • Fail to differentiate between deal for H1 and H2/H3. Why M&A Activities Fail? 360 • Incorrectly match candidate to strategic purpose of the deal. • Fail to differentiate between deal for H1 and H2/ H3. • Too expensive (premium price). • Overoptimistic about the target of success, and tend to neglect the negative aspects. • Fail to integrate culture, process, system effectively as the complexity task increase.

M&A is a Complex Transaction How M&A Failures are Interpreted? 361 • Internal and external attribution o Internal attribution for failure is rare (e.g. lack of preparation, lack of planning effort, lack of capabilities). o Most managers blame external factors to justify the failure (economic slowdown, competitors’ reaction, choice of wrong consultant, changing market, new technology invention, etc). • Failures as near win o Managers act as a gambler who believe they will win next time. • Conceptual development o The failure of M&A is sometimes perceived as lack of supported concept (theory). o Failures of M&A is a source of academic research to develop new concept. o Consultants continue to offer the updated development, and influence managers to try in the next deal

Why Companies are Convinced and Try Again? • Pressure to grow o M&A is often seen as only viable option to grow. o With failure experiences in the past, manager is more confidence to reach success. • New concepts and Herd Behavior • Divert from past M&A failure o The successful M&A is easier to remember than the failure one o Closing attention to failure M&A • Overemphasize the positive deals and aspects o Company employs managers that have much experience in M&A transactions o The manager have the success story in the past (even tough most of the stories are about the failure). • Fill the gap with serial M&As Thank You 362