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Charoen Pokphand Group

Charoen Pokphand Group. Whether Asian conglomerates should spin off their non-core businesses or continue on their “growth by diversification” path ?. Outline of the presentation. Background information of the CP group Advantages of diversification Disadvantages of diversification

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Charoen Pokphand Group

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  1. Charoen Pokphand Group

  2. Whether Asian conglomerates should spin off their non-core businesses or continue on their “growth by diversification” path ?

  3. Outline of the presentation • Background information of the CP group • Advantages of diversification • Disadvantages of diversification • Why CP group succeeded with diversification in the past • Economic factors • Recommendation and summary • Q and A

  4. History • Established 76 years ago in 1921 in Thailand • Started from vegetable seeds, animal feed, poultry breeding and broiler farming business

  5. 9 business lines • Agro-industry Business • Agri-industry Business • Aqua-culture Business • International Trading • Marketing and Distribution • Petrochemicals • Real Estate and Land Development • Automotive and Industrial Products • Telecommunication

  6. Geographic markets • Thailand • China • Indonesia • Malaysia • India • Vietnam • Cambodia • Myanmar • Turkey …

  7. Charoen Pokphand Group • 250 individual companies in the CP group • 15 are listed on stock exchange • 80000 employees  • Main philosophy • “ Any Business should always benefit the country, the farmer, the consumer, the society and the company.”

  8. 3 return on net assets (%) 2 1 1 2 3 4 5 6 index of product diversity Relationship between Diversity and Profitability

  9. Advantagesof diversification • Big global market player • diversify into different businesses • capture market share => significant place in global market

  10. Advantages of diversification • Brand identity • attract more customers •  Establish and develop other businesses • gain global advantages from the reputation of the group name •  Attract talented staff • provide good services and products to customers

  11. Advantages of diversification • Risk spreading • spreads the risk over several businesses • even though one part of the business fails, long term company survival is ensured

  12. Advantages of diversification • Big is bountiful • improvement in both profitability and productivity • gain enormous return

  13. Advantages of diversification • Economies of scope • share of tangible and intangible resources • cost reduction

  14. 3 return on net assets (%) 2 1 1 2 3 4 5 6 index of product diversity Relationship between Diversity and Profitability

  15. Disadvantage of diversification • Lack of competitive advantage • core competence in key industries do not apply to other unrelated industries • difficult to achieve top role in every industry • Management difficulty • too big for management

  16. Disadvantage of diversification • Conflicts of interest • Internal conflict • competition of common resources: tangible, intangible and human resources • External conflict • competition external resources without internal discussion and cooperation • agency problem • increase total cost of the group as a whole

  17. Diversification - Good or Bad? • Depends on : • environmental factors • economic growth • Why CP group successful? • past environmental factors • Asian developing countries • growth stage of the industry cycle • i.e. China, Thailand, India

  18. Past Asian Environmental Factors • Weak competition • low entry barriers • low competition between established competitors • Low wages • Blooming economy • raising income, women workforce

  19. Past Asian Environmental Factors • Government support • protected market • Cheap currencies • low investment cost

  20. Recent Events • Economic environment changes • strengths changed to weaknesses • Asian Financial Crisis • economic recession • reduced consumption and purchasing power • fading out of weak competitors => recent failure of CP group’s diversification

  21. Main Issue Should Asian conglomerates spin off their non-core businesses or should they continue on their “growth by diversification” path?

  22. Asian Business Groups • Diversified because the advantages in Asia Now, the environment has changed!

  23. Recommendation • Asian conglomerates should focus on core business and spin off unrelated businesses • Two aspects • Scope of core business • Corporate transformation

  24. Focus on Core Business • Expand the scope by developing businesses with synergies • e.g. vertical integration

  25. Corporate Transformation • Old core or New core? • Factors to consider: • prospect of existing core business • resources and capabilities

  26. Summary • Background of CP group • Advantages and Disadvantages • How environmental and economics factors affect the success of diversification • Asian conglomerates should focus on their core business

  27. Questions and Answers

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