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MGMT 205 International Business
Class Meeting Week 9:
Business Groups(or: Dinosaurs are alive!)
Burkhard Schrage, PhD
Asst. Professor of Management
Singapore Management University
+65 6828 0755
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Today
What are business groups?
ING Asia Pacific
Mr. Tony Nash, Global Director, Customer Research,
Economist Intelligent Unit
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U.S.
Large firms vilified
± Age of conglomerates was 1950s to 1970s
± 1980s, birth of focus
± Strategic mantra
Vertical focus
Product focus
Geographic expansion
Result
± Percentage of conglomerates in U.S. declining year in and year out
Fall of unrelated diversifying firm
Rise of related diversifying firm
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Product expansion and performance
Single Multiple
Product Scope
High
Accountingperformance
(ROA, ROE,
ROS)
Low
Single-
business
firm
Related
Diversifier
Unrelated
Diversifier
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A connected series of companies that have legal
independence but are connected in other ways. Family ties
Historical ties Cross-ownership
Personnel exchanges
Reciprocal trading agreements
Examples Family-centered business groups in India and China
Grupos in Latin America
Chaebol in Korea
Keiretsu in Japan
What is a Business Group?
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Examples
CountryType of Business Group
Examples of Companies
India Family-owned Tata Group of Companies, Aditya Birla Group
Indonesia Business Groups Berdikari Group, PT. Indofood Sukses Makmur
Japan Horizontal keiretsu
Vertical keiretsu
The Mitsubishi Companies, Sumitomo Group,Mitsui & Co. Ltd
Sony Corporation, Hitachi Ltd., Kobe Steel, Ltd.,Toshiba Corporation, Fujitsu Ltd.
Malaysia Business Groups Renong Bhd, Multi-Purpose Holdings Bhd, Pantai Holdings,The Lion Group, Hong Leong Group Malaysia
Philippines Family BusinessGroups
Ayala Corporation, JG Summit Holdings,SM Group of Companies, Benpres Holdings
South Korea Chaebol Hyundai Corp., Samsung Corp., LG Group,
Daewoo International Corp.
Thailand Family-owned Siam Cement Group, Boon Rawd Trading Co, Ltd.,Thonburi Automotive Group.
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Industrial groups of companies
Two forms
Vertical Keiretsu
supplier and distributor networks in same industry 35 groups
Horizontal Keiretsu
group of firms operating in different industries
6 major groups
2 minor groups
Keiretsu
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Keiretsu cross-holding of shares
cross-personnel appointments
intra-group financing by core bank
formation of President¶s councils general trading companies
intra-group company joint ventures
Connections
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Vertical Keiretsu
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Not Just Japan
Vertical Linkages in the Formosa Plastics Group
FormosaPlastics
Corp.
Nan Ya
Corp.
New
Eastern
Corp.
Outputs
PVC resin
Outputs
PVC pipesPVC film
Plastic
leathers
Outputs
Handbags
Luggage
Raincoats
Curtains
Shoes
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Members of Mitsubishi Group
Mitsubishi
Heavy Inds.
Mitsubishi
Corp.
Mitsubishi
BankMitsubishiTrust &
Banking
Meiji MutualLife
Insurance
TokioMarine & Fire
Insurance
MitsubishiWarehouse &
Transportation
MitsubishiMotors
Nippon Yusen
MitsubishiKakoki
MitsubishiRayon
MitsubishiConstruction
MitsubishiEstate
Asahi Glass
Mitsubishi
ResearchInstitute
MitsubishiElectric
NikonMitsubishi
Steel
MitsubishiMaterials
Mitsubishi Aluminum
MitsubishiCable
MitsubishiShindoh
Mitsubishi
Plastic Inds MitsubishiGas Chemical
MitsubishiKasei
MitsubishiPetrochemical
MitsubishiPaper Mills
Kirin Brewery
Mitsubishi
Oil
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The Bank
of
Tokyo
Mitsubishi
Tokio Marine
&
Fire Insurance
Mitsubishi
Corp.
Mitsubishi
Heavy
Industries
Unit: % of
paid-up
capital
as of
March
1996
1.4
4.5
4.1
3.0
6.1
3.1
3.6
1.6
2.31.8
2.0
4.6
Crossholdings of Shares
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Rationale for
Business Groups
Rationale?
± Hubris?
± Economic factors?
For answer:
± Look to outcomes of business group affiliations.
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Outcome 1
Profit Sharing
Affiliation can be a means to harmonize profits among member firms
Provide a stabilization effect
Permits a focus on long-term growth strategies
Risk is that it permits pursuit of unprofitable strategies
± Limits role of market discipline
± Can lead to excessive diversification
e.g. Korean Chaebol
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Outcome 2
Profit Maximization
Basic idea
± Business group affiliated firms outperform non-affiliated firms.
Have static efficiencies
Move in-house what markets fail to do
± Labour market imperfections
± Capital market imperfections
± Intermediate product markets ± Contractual markets
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Market Imperfections
Institutional
FeatureUnited States Japan India
Market for Finance Equity-focused
Disclosure rules
Mkt for corp. control
Bank-focused
Interlocking Investments
Illiquid equity markets
Weak monitoring bybureaucrats
Market for Labor Business Schools
Consulting Firms
Certifications
Few Business Schools
In-house training
Few Business Schools
Little in-house training
Market for Products Enforced liability laws
Activist consumers
Efficient information
dissemination
Enforced liability laws
Less-Activist consumers
Efficient information
dissemination
Limited enforcement of liabilitylaws
No activist consumers Little
info dissemination
GovernmentRegulation
Low regulation
Low corruption
Moderate regulation
Low corruption
High regulation
High corruption
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Result
Firms internalize these markets
Lack of institutions lead to market imperfections
± Hierarchical structure of firm substitutes for these
Why do this?
± It is a source of advantage
± It leads to higher levels of profitability
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Group Affiliation in India
Performance Indicator Group AffiliatesNon-group
Firms
Sales (rupees millions) 848 209
Assets (rupees millions) 1,036 281
Age (years) 24 15
ROA (mean) 8.68% 8.38%
ROA (median) 9.05% 8.90%
Tobin¶s Q (mean) 1.40 1.38
Tobin¶s Q (median) 1.14 1.07
Numbers are from 1990s, since 2000s, little
difference between group and non-group firms.
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Features of Business Groups
Business groups are present in many countries in Asia.
Individual business groups have a long history.
Business groups create barriers to entry
± Groups protect the interests of member firms.
Business groups provide competitive advantages
± cost reductions from replacing external markets with internal markets.
± Umbrella branding of group companies
Economies of scope
Business groups are under threat
± changes in institutional environments in countries in Asia.
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Strategic Implications
Develop new competencies ± part 1.
Declining economic rationale for business groups with changes in institutionaldevelopment.
Business groups have declining source of value creation.
Must develop new competencies.
± Brands
Develop new competencies ± part 2.
Liberalization weakens protectionism.
More open competition
Barriers to entry lowered as markets are deregulated.
More severe competence-based competition will emerge.
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Strategic Implications
Competitive barriers. Partner with a business group affiliate to enable entry.
± Seagrams, Anheuser Busch and Heineken entered Japan by JV with an affiliate of the Kirin BreweryGroup.
Easier market entry. Industrial organization changes in many Asian countries as institutions develop.
Business groups are being disbanded. Released affiliates serve as potential acquisition targets.
International expansion. Business groups face a conundrum.
Advantage comes from domestic market ± But restricted to domestic market.
What advantages support regional expansion?
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Summary
Few markets in Asia truly competitive ± No focus on limiting product scope
± Limited focus on reducing vertical integration
Political and economic environments support large size
Growth not stimulated by transferable competencies ± Competition localized
± Firm¶s advantages are localized
± MNCs bring in a different set of competitive strengths
Situation changing ± Institutional environments changes
± Policy changes Direction of more competition
Likely to be competence-based
