組織多樣化、價值、極大值及組織能力:以巴拿馬蔗糖工業為例

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(1)Corporate Diversification, Value, Maximization and Organizational Capabilities: Sugar Cane Industry in Panama. by Marquelda Ruiz Cortez. A Thesis Submitted to the Graduate Faculty in Partial Fulfillment of the Requirements for the Degree of MASTER OF EDUCATION Major: International Workforce Education and Development. Sieh-Hwa Lin Ph. D. National Taiwan Normal University Taipei, Taiwan June 2009. . .

(2) ACKNOWLEDGEMENT This job is dedicated to my daughter Paola, this strong girl who is waiting for me at home, giving me the chance to proof and develop myself. My love and commitment with her future had represented my claim across this long process. Thanks my lovely little girl for being core of my spirit and strength. To my mother who has faith in any project I take up and who is just there supporting me over all challenges and difficulties. I am thankful for her faith and love, and especially for replacing me temporally on my own motherly role. To my sister, thanks for helping me to find my innermost and real place in life by several inputs. Many thanks to my father, brother and nephew I hope to be an exemplary example of good practice one day. To my family, my grandmother Angela, and all my family members who never had been out of my mind. In different ways, they had been supporting me across this journey. To the Ambassador of Panama in Taiwan: distinguished, Julio Mock my friend, my mentor, an excellent personality who is deeply in my heart.. To my friend Andrea who had been there encouraging. me all the while when I just wanted to give up. Thanks for not letting me down betray the journey.. Many thanks to my and always dear friend Cynthia, whose help across the distant. journey no matter what the efforts she has to put in cannot be forgotten. I never could tell you thanks enough for you kindness and support. Also to my friend Jallow, my study roommate with whom I worked side by side, throughout our intensive working hours. To my entire friends who gave their affection and supportive words. To all people who push me hard to improve myself by using all kinds of positive messages, many thanks to all of you. I would like to thank all my professors, especially those who gave me their support and time. I want to pay a special recognition to my advisor Dr. Lin, who is not only an excellent professor, but also an excellent human being. You always will be in my memory and heart. To ICDF Taiwan; that gave me economical support for my studies in Taiwan. And all the staff of IWED program witch support international student as well. There are so many people to thanks and I am sending them all my respect and affection. Finally I want to thank God, who makes me strong and healthy to carry on my projects.. . .

(3) . ABSTRACT This study applies Matsusaka’s Model which is a dynamic model to the Panama sugar industry. In this model diversification can be a value-maximizing strategy even if specialization is generally efficient. The central idea is that firms are composed of organizational capabilities that can be profitable in multiple businesses and that diversification is a search process by which firms seek businesses that are good matches for their capabilities. Two major sugar cane industries in Panama with their diversified pattern were analyzed to provide concrete and reliable information about their achievements. By the application of the equations content in the model; this study attempt to determinate whether or not this model could explain Sugar Cane industry in Panama. This model would be oriented to determinate diversification pattern on first; following that it would provide corporate and organizational capabilities by mixing internal and external input. Twenty years of production had been provided for those organizations. Diversification patter differs by firm. Two kind of diversification pattern had been showed up. Concentric diversification, where the new business produces products that are technically similar to the company' s current product but that appeal to a new consumer group and Conglomerate diversification, where the new business produces products that are totally unrelated to the company' s current product and that appeal to an entirely new consumer group.. . I.

(4) . TABLE OF CONTENTS ABSTRACT TABLE OF CONTENTS LIST OF FIGURES LIST OF TABLES CHAPTER I. INTRODUCTION Sugar Industry Diversification’s Bases ...........................................................................................1 Current Trends for Panama Sugar Market ......................................................................................4 The Model .........................................................................................................................................9 Time Serial of Top and Middle Managers ......................................................................................9 Statement of the Problem ...............................................................................................................10 Purposes of the Study .....................................................................................................................10 Expected Alternatives.....................................................................................................................12 Significance of the Study ...............................................................................................................13 Delimitations and Limitation of the Study....................................................................................13 Definitions of Terms.......................................................................................................................15 CHAPTER II. LITERATURE REVIEW Organizational Capabilities............................................................................................................19 Diversification Managerial Explanation .......................................................................................22 Dark Side of Corporate Diversification.........................................................................................28 Product Diversification and Profitability ......................................................................................31 Corporate Value..............................................................................................................................33 Overview of Panama Agriculture, GDP and Sugar Cane Crop Product.....................................36 Panama Economic Activities .........................................................................................................36. . II.

(5) . Best Practice....................................................................................................................................37 CHAPTER III. RESEACH METHODOLOGY Research Framework......................................................................................................................42 Research Procedure ........................................................................................................................45 Data Analysis ..................................................................................................................................55 CHAPTER IV. FINDINGS AND DISCUSSIONS Chapter Overview...........................................................................................................................57 Empirical Result .............................................................................................................................57 Company example B overall’s production reflects fluctuations by twenty years of production...................................................................................................................................66 Revenue and indirect values ..........................................................................................................78 CHAPTER V. CONCLUSIONS AND RECOMMENDATIONS Conclusions .....................................................................................................................................82 Discussions......................................................................................................................................83 Recommendations...........................................................................................................................85 REFERENCES APPENDICES

(6) APPENDIX A: Organizational capability collection data format – Marketing ........................91 APPENDIX B: Organizational capability collection data format – Management ....................92 APPENDIX C: Organizational capability collection data format – Production distribution ...93 APPENDIX D: Company A - External input matrix – G1 to G5...............................................94 APPENDIX E: Company B - External input matrix – G1 to G6 ...............................................98 APPENDIX F: Companies productions values .........................................................................103 APPENDIX G: Companies diversificied values .......................................................................104 APPENDIX H: Time distribution values...................................................................................106. . III.

(7) . LIST OF FIGURES Figure1.1. Availability of product diversification of sugar cane industry........................................3 Figure1.2. Company A - Organizational Structure ...........................................................................6 Figure1.3. Company B - Organizational structure .............................................................................8 Figure1.4. Matsusaka’s diversification model framework .............................................................11 Figure 3.1. Methodology flow chart..................................................................................................46 Figure 4.1. Company A - Production and price behavior ................................................................61 Figure 4.2. Company A - Diversified product (g1, g2,) trends by the last twenty years ...............64 Figure 4.3. Company A - Diversified product (g4, g5,) trends by the last twenty years ...............65 Figure 4.4. Company B - Production and price behavior ................................................................66 Figure 4.5. Diversified product (g1, g2) trends by the last twenty years ........................................69 Figure 4.6. Diversified product (g3, g4) trends by the last twenty years........................................70 Figure 4.7. Diversified product (g5, g6) trends by the last twenty years........................................71 Figure 4.8. Company A - Diversification values..............................................................................72 Figure 4.9. Company A - Diversification values (g1, g2)................................................................73 Figure 4.10. Company A - Diversification values (g4, g5) .............................................................74 Figure 4.11. Company B - Diversification values............................................................................75 Figure 4.12.Company B - Diversification values (g1, g2)...............................................................76 Figure 4.13. Company A - Diversification values (g2, g3) .............................................................77 Figure 4.14. Company A - Diversification values (g5, g6) .............................................................77 Figure 4.15. Diversification values - company A and company B ................................................78 Figure 4.16. Single and multiple business value ..............................................................................79 Figure 4.17. Complemented values of companies examples...........................................................81 Figure 5.1. Organizational values results..........................................................................................84. . IV.

(8) . LIST OF TABLES Table 1.1 Diversification economic results for different sugar product ........................................13 Table 2.1. Crop production, harvest and yield in Panama ...............................................................37 Table 3.1. Time distribution format – Marketing............................................................................48 Table 3.2. Time distribution format - Management ........................................................................49 Table 3.3. Time distribution format – Operation and distribution .................................................49 Table 3.4. Top and middle managers example format (Organizational capabilities examples 1) .....................................................................................................................50 Table 3.5. Top and middle manager target for the study (Organizational capabilities example 2).......................................................................................................................52 Table 3.6. Organizational capabilities matrix (Time ditribution matrix).......................................53 Table 3.7. External input matrix.......................................................................................................54 Table 4.1. Company A - Time distribution of top and middle managers ......................................58 Table 4.2. Company B - Time distribution of top and middle managers ......................................60 Table 4.3. Company A - Production value by twenty year production..........................................63 Table 4.4. Company B - Production behavior by twenty years of production ..............................67 Table 4.5. Company A - General’s values.......................................................................................72 Table 4.6. Company B - General’s values .......................................................................................75 Table 4.7. Company A and B - Complemented values...................................................................80. . V.

(9) . CHAPTER I. INTRODUCTION This chapter provides details and explanation of this research, by the description of the background of the study, the statement of the problem, purpose, significance delimitations and limitation of the research, and finally the definition of the term.. Sugar Industry Diversification’s Bases Decision making about what is the right add value for sugar cane industry is an issue that eventually the sugars industries would have face on. Sugars corporations are analyzing the new challenge for the industry in general term as effect of market fluctuations. Recently Panama was present in the international sugar meeting promoted by International Sugar Organization (ISO), the specific aim was to collect information about behavior and interaction of sugar and ethanol market, while Panamanian government is making national ethanol market law. Diversity and complexity in sugar industry have been identified within a competitive and global market, which redefine business concepts and tendencies in this field. According Simmon Harris, Farmer Director for Corporate Affairs, British Sugar, those are the fundamentals of the world sugar market: 1. Sugar is produced from both sugar beet and sugar cane. 2. Sugar production: a. The farm-gate product is not usable by consumers. b. This creates a symbiotic relationship between growers, processors and millers. c. Sugar production equerries most capital intensive of the all agriculture commodities. 3. Because sugar cane is a perennial grass, 70% of the world’s sugar production comes from cane, sugar supply is unresponsive to low world market price in the short to medium rum. 4. The world sugar market has been characterized by a cycle with price spikes followed by long periods of depressed prices.. . 1.

(10) . 5. Government involved themselves in general agricultural support. 6. Something like 80% of the world’s sugar production stays in its country of origin where, as a generalization, it benefits from a supported domestic market. 7. World market is a residual that has to absorb fluctuations in domestic supply positions that, combined with the sugar cycle, lead to the depressed and volatile conditions that characterize. And then there are many uses to which the byproducts of the sugarcane industry can be put probably more than 150. But many of them, under present technological and marketing conditions would be of negligible economic interest. Figure 1.1, show up alternatives for Sugar cane diversification are multiples. However Panama sugar cane industry had been oriented to develop diversification on agriculture sector mostly. By products business’s design, still young in both Panama company examples. Bunker and ethanol production still as a pilot in Panama sugar industry. New partnership has been discussed in order to develop byproduct items. It should be pointed out that, as a general rule, maximum value upgrading goes with more complex processing characterized by capital intensity, sophisticated technical know-how and competitive markets. However maximization of profits is not automatically linked with process complexity and depends much more often on advantages local conditions or the proximity of a remunerative export market.. . 2.

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(27) . Current Trends for Panama Sugar Market Brazil and Panama are discussing a potential alliance to develop ethanol and sugar production in the Central American country, officials and entrepreneurs from both sides. That is an alarm for Panamanian sugar corporations which historically have developed this noble activity. It is time for diversification in order to be competitive in the new market platform. Panama Government, wants to learn from Brazil’s ethanol and sugar refineries mostly from Sao Paulo state, how he could develop the industry in Panama. Panama was keen to reduce its dependency on imported petrol and to generate jobs by producing the bio-fuel, within the country according to the vice-president of Panama Samuel Lewis. Brazilian producers are eyeing Panama as a potential jumping board to the United States. "Panama could be an import platform to transform alcohol for the North American market." Panama is currently negotiating a free-trade deal with the United States, which would allow Brazil to re-export "transformed" ethanol without the $0.54 per gallon U.S. import duty it currently pays. The agreement would limit Panama' s additional duty-free sugar access to the United States to 7,000 tons on top of an existing quota of around 30,000 tones. Sugar represents about 40 percent of Panama' s farm exports to the United States. According to Panamanian Government the Brazilian companies are mostly interested in the floodgates and are looking at some infrastructure projects parallel to the canal.. Companies examples of the study There is an enormous potential in Panama sugar cane industry. Valuable resources are available in this sector. However byproducts are still not fully developed business across sugar cane industry in Panama. Companies’ examples (A and B) in Panama are producing bunker as integral energy resource to reduce the oil consumption. They have also realized some experimental production of ethanol as a pilot to integrate this potential business. By a foreign investment in 1911, company A appears in the industrial sector taking advantage over climate, land and an existence cane growth. The company production is about the first year quarter mostly, the residual year time, they are focus on technological and structural. . 4.

(28) . improvements in order to increase quality of product. Currently, they offer to the national and international market raw sugar, brown and white sugar and best quality of refined sugar. Recently they felt into ethanol production. They grow up around 9000 hectare by year generating around 800,000 tons by season. Company A, had closely developing ethanol about one year as a pilot for local consumption. Diversifications for those organizations are base on, agriculture, industry, livestock’s sector. Company A, diversification rest on four different sugar items as well as livestock, and rice. Production of bunker and ethanol it not part of this study. They have been operating for almost hundred years on the traditional sugar industry. However, bunker and ethanol won’t be measure as a part of this study since they have a different business behavior.. According to Barrow. definition of diversification, company A, sugar industry is operating mostly on concentric and conglomerate diversification, where the new business produces products that are technically similar to the company' s current product but that appeal to a new consumer group. Company A, is managing the complete sugar process. That includes cane crop, production and distribution process. That is the essence of the company A business model by time. Their business philosophy and values are leading company business model and structure. Traditionally they attach company values and belief to their business goals and strategies. Company A market segmentation of business, is driven by new customers requirements as well as current customers desires. The relationship with customer is base on loyalty and years of experience working together; almost as a partner claimed into strong relationship. Company A structure, take in count current activities. They are forecasting the energy division on September 2010. However basic structure seems static in term of the improvement and complex changes to advancement the future. Company A, projection for future energy business would be concentrate in international setting mostly. They are focus on take advantages of this volatile sector benefits and goods and also in the alternative negotiation with Brazil indicatives.. . 5.

(29) . Figure1.2. Company A - Organizational Structure. In others hands Company B, has been diversifying amount agro industry sector’s items. They operate in more than fifteen different products. The basic business is base on raw sugar; refine sugar, brown sugar, special sugar.. Diversified product aims in several categories;. livestock, animal feed production, shim growth, rice crop, machinery and agriculture’s supplies. Company B started in 1918. It is the most important company in the agriculture sector in the Republic of Panama. Their managerial model, constrain production, commercialization and products processing. Company B, has 1900 employees. This number increase during production season at 3000 employees. The basic activities have been developed for more than ninety years. Some others activities such as animal feed productions, distribution of agriculture supplies and livestock were started about fifty years. Company B, has huge experience on all those products. Bunker production is part of the normal activities, since they have internal consumption with not distribution. Bunker . 6.

(30) . is used as energy to support sugar processing products as an attempt for reduces oil consumption. Eventually some alternatives to develop energy systems could be consider as a business in a not short term. Apparently they rather are focus on agriculture business keeping the basic sugar cane business. Some partnership has been discussed in order to see the availability of byproducts production, but still not a target for Company B. Company B, has outsourcers with a huge number of farmer who have been providing their sugar crops as raw material. They are not part of the crop product activities they rather be concentrated on new business. One disadvantage for basic sugar business within company B, is the sugar cane availability over high season, where the crop product is demanding by several companies. Price and government incentive for farmer is driving sugar’s internal market. Company B, business model, constraint the increasing profitability and activities responsibility base on the current organizational structure. According Barrow definition of diversification, company B is allocated also in conglomerate diversification, where the new business produces products that are totally unrelated to the company' s current product and that appeal to an entirely new consumer group. In this company example, market segmentation is essential to achieve company’s goals. Long term relationships with customer reinforce current activities amount customers. Variety of customer is observed in Company B, because of different items. As a traditional company’s business they claim in sugar production and livestock. Nevertheless, animal feed, shrimp, rice crop and agriculture supplies distribution, are consider not traditional items.. . . 7.

(31) . Figure1.3. Company B - Organizational structure. In both examples administrative, financial, operative division is supporting their diversified business model. This study captures the idea that, organizational capabilities could be use in uncounted activities within the organization. By using Matsusaka’s Model, the research would go through that distribution. This study will point out organizational capabilities are an important role in diversification success.. . 8.

(32) . The Model The model shows how diversification can be a value-maximizing dynamic strategy even if there are specialization efficiencies, as the empirical literature suggests. By using price and production and organizational capabilities values, the model shows that firms with the worst matches for their organizational capabilities will be able to make decision about liquidation; because only the firms whose matches are not too bad will hold on to their existing businesses and diversify. Another model’s suggestion is diversification announcement can be good news by signaling that existing businesses are profitable enough to avoid the liquidation option. Market reaction to diversification announcement can be positive or negative depending on the characteristics of the announcing company and further identifies some testable hypotheses.. Time Serial of Top and Middle Managers Teece at all, Hamillton and Feestra have suggested also authority and leadership are driving skill, knowledge and abilities of employees.. As a consequence there are able to create. competitive advantages in term of employee’s performance. According to Matsusaka model, firms consist of organizational capabilities especially, the skills and abilities of top and abilities of top and middle management that are to some degree transferable across products and industries. The idea of organizational capabilities plays a central role in Chandler’s (1990) history of the modern corporation. The later ideas of top and middle manager abilities and skills, successful managing employee’s capabilities, perhaps can be accurate represented by time-series information on corporate evolution might be useful in understanding corporate diversification. Organizations and managers are being to realize how they manage their people may be the way to achieving a substantial competitive advantage (PFeffer 1994). Swee C. Goh, Ph.D. University of Ottawa (2002) as suggested organizational factors can also impact on firm performance. In his paper those factors were described as, Organization size, structure and formalization. Formalization is the extent to which rules and procedures are followed in an organization. This element varies greatly across organizations. However in some organizations arrival and departure times to and from work are specified to the minute, with time. . 9.

(33) . clocks used to control deviant behavior. In other organizations it is understood that employees will spend sufficient time on the job to get the work done. Because formalization is an organizational factor, Matsusaka model has picked time serial of top and middle managers as a (leadership and authority bases) representation of organizational factor affecting organization performance.. Statement of the Problem Diversified Sugar cane industry is defined as a flexible system capable to hold maximal profitability by increasing new product category. An important antecedent in sugar cane industry diversification was a project called “Diversification of sugar cane industry in Latin American and Caribbean” (GEPLACEA/PNUD/RLA/886/011), which reinforce diversification is fundamentally, a development strategy for sugar cane sector. Panama experience on traditional sugar business let us identify and predict new possibilities by diversification. Fluctuation in sugar cane industry shows necessity to be diversified by implementation of alternatives systems for energy, electricity, animal feed and derived product’s productions. This point it up commercial and strategic advantages which most to be evaluated in different macroeconomic context. Diversification is an available growth strategy to increase organization value and profit in Panama sugar cane industry. As a consequence it needs to be studied by applying existing measure and theories to explain Panama sugar cane diversification behaviors. This time it would investigate whether or not sugar cane industry diversification in Panama can be understood instead as a dynamic value-maximizing strategy revolving around the notion of organizational capabilities.. Purposes of the Study This study would attempt to apply Matsusaka’s diversification model in two sugar cane Panama companies, because it seems as a fundamentally dynamic. By applying this model on companies’ data research would determinate, whether or not this model describe Panama sugar. . 10.

(34) . cane industry’s diversification. This model suggests that time-series information on corporate evolution might be useful in understanding corporate diversification. If diversification is a matching/search process, then diversifiers should eventually exit their original home businesses or increase the number of business when they find a good match. According to Matsusaka’s Model organizational capabilities can be modeled as firm-specific inputs to a firm’s production function. They must be firm-specific (owned by the firm/shareholders), or the revenue they generate will be distributed as factor payments and not accrue to the shareholders. Companies selected were analyzed to identify their pattern in term of organizational structure. In both cases the organizational structure suggest organizational capabilities, marketing skill, distribution skill, production skills and management skills are holding new business as well as company requirements to full fill business adventures.. Diversification. Organizational Capabilities

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(40) . Figure1.4. Matsusaka’s diversification model framework. Basically, this study tries to achieve the following purposes: •. Analyze organization’s diversification trend, about twenty years of diversification history of two examples: Company example A and Company example B.. . 11.

(41) . •. Analyze capability to maintain the all businesses while searching for better business opportunities. Measuring organizational match, company diversification value, and company value as well.. Problem Questions How is the “t” (time distribution of Top and middle managers); in both examples, in term of the diversified product? How is the Production “x” and price fluctuation “ω” by 20 years production of achievement? What are the diversification values after the last 20 year of diversification achievement? What are the effects, of revenue and indirect value, on diversified Panama Sugar Cane Industry?. Expected Alternatives The original model shown by Matsusaka, suggests failed business attempt does not reflect failed strategy. Diversified firms may trade at discounts relative to specialized firms. Firms enter in diversification strategies when they deal with poorly performance or when they are not aware to their organizational capabilities potential.. Probably, companies start in one industry. but they end up exclusively in another. That could happen because when firm finds the good match they drop out unrelated business with inferior matches. Panama sugar cane industry has been diversified in agriculture and industrial sector mostly, that is giving a sense of consistency in term of production. The failed strategies could be found in some item within a function of product. The diversification strategy in Panama sugar industry is base on resources recycled coming from the basic product. company value had been a target all the time.. However maximization of. As in the original model, this study will point. that diversification strategies come from organization desire of increase performance and add value to the organization. The expectation of drop original business is very low in this particular case, because those are very traditional industries.. The good match between values and. organizational capabilities in Panama sugar cane industry could be infer by using Masusaka model.. . 12.

(42) . Significance of the Study This study would explain the current diversification pattern by using two sugar cane companies’ examples from the Republic of Panama. Thus, this study would allow detection of diversification’s opportunities base on value maximization and organizational capabilities. An additional value of this study is that, the optimization process could be viewed as a closed-loop control system. In which, under projection and feedback from output response, decision making won’t be an issue any more.. In addition, a platform of making decision regarding to. diversification strategies could be a treasure within Panama sugar cane companies. Such as a natural patter animal food and alcohol seems a primary alternative for diversification.. Table 1.1 Diversification economic results for different sugar product Animals Food. Sugar and Molasses. Alcohol. Production Cost, US$/tc. 12, 49. 21, 24. 19, 46. Gross Income US$/tc. 13, 04. 24, 72. 20, 23. 0, 55. 3, 48. 0, 77. Net Income US$/tc. The net income for animal’s food and alcohol are insignificant comparing with sugar and molasses net income. Diversification alternative in sugar industry promote considerable net income increasing. According to Brazilian economic experience, diversification is economically justified and could duplicate the net income in a basic sugar industry model.. Delimitations and Limitation of the Study Conceptual research model This is a quantitative study by analyzing available data for two companies’ examples. Arithmetic function and statistic tools would be used on the analytical process.. This. fundamentally dynamic model would be applied to the selected organization to suggest that time-. . 13.

(43) . series information on corporate evolution might be useful for understanding corporate diversification. Two mayor sugar cane producers in Panama going to be analyze by Matsusaka Model. Production and price behavior is a relevant part of this study. It would be also, important time distribution of top and middle managers around different business. Internal company data regarding their industry has been collected for this study. This data include, top and middle managers works hours by business, prices, production by products.. Quantitative result On the second phases, by using the equations this study will establish the match level between time distribution by activities and external input (production and price) to come up whether or not diversification of business is an alternative within specialization of top and middle manager skills.. In addition, this study attempts to determinate the value of the. organization under different alternatives. The quantitative metrics used in this study tap into five constructs: 1. Product Diversification 2. Marketing Skills 3. Distribution Skills 4. Product Developed Skills 5. Organizational Skills The main objective of this research is analysis sugar cane industry behavior base on Matsusaka’s Model, establish the match between the variables according the model, and suggest a platform for decision making to increase profitability by diversification of business in sugar cane industry. Organizational capabilities, time distribution for top and middle managers production and price would be considering the core value for this study.. . 14.

(44) . Limitation of the study The model defines company’s values amount time of top and middle management mostly. Thus, discipline of mangers could be a limitation in term of productivity. Individual incentive could drive diversification strategy as a personal managerial goal, instead of maximization organizational value. There are particular cases where not only organization capabilities and production and market price, density production are directly associate with success or failed business, nevertheless they are consider no conclusive irregularities. Internal company problem associate with culture, not satisfaction, not motivations or poor manager’s initiative could affect manager’s performance thus that would affect the result.. Definitions of Terms Organizational capabilities Chandler (1990) describes a firm’s organizational capabilities as the collective physical facilities and skills of employees, especially the abilities of the top and middle management. More specifically, organizational capabilities can be thought of as marketing skills, distribution skills, product development skills, organizational skills, and so on. They are general capabilities that potentially are applicable to different industries. A Skill: It is the learnt capacity or talent to carry out pre-determined results often with the minimum outlay of time, energy, or both. Marketing Skills: For this study marketing skill, some abilities would be caught out such as think well, make decisions, marketing knowledge, research, communication, effectively use of business technology, passionately persistent, team work and report; in order to determinate marketing skills. Distribution Skills: As a distribution skill, some abilities would be catch out such as, make decisions, customer services and communication, quality, consistency, persistent, team work, report and continuous personal grow up;. . 15.

(45) . Product development Skills: As a Product development skill, some abilities would be catch out such as; make decisions, planning and budgeting, negotiation, motivation, problem solving, consistency and quality, team work, report and continuous personal grow up; in order to determinate marketing skills. Corporate Diversification: Diversification should be defined as a maximization value within the organization.. It is a dynamic strategy even if they are efficient in a single business.. Corporate diversification them, could be understood as the increasing number of business within the organization by using the current organizational capabilities. In this study, diversification would be understand as firms repeatedly entry to new business whether or not they exit old ones in search of good matches for their organizational capabilities. It is understood instead as a dynamic value-maximizing strategy revolving around the notion of organizational capabilities. Product Diversification “g”: Products “g” is equal of the number of business items within the. organization. The function “g” is convex in t, concave in x. It is ≥ 0, giving the idea of there are an uncounted numbers of products within the organization. In this study, products within the firms would be identified from g1 to g6. However not all the products are immerse in both companies. •. “g1” = Sugar Items ( Raw, Brown, Refine and Special Sugar). •. “g2” = Molasses. •. “g3”= Animal Feed. •. “g4”= Livestock. •. “g5”= Rice. •. “g6”= Shrimp. Corporate Value: Corporate value is directly associated with the matching/search process between organizational capabilities and external input in a new business adventure. The value of organizations differs from specialization efficiencies (single business) to diversified firms pattern. Strategic organizational capabilities management can reduce the uncertainties in a new business while plays an important role in corporate value. The main idea is there is certain. . 16.

(46) . amount of a big numbers of uncertainties that comes along with a new adventure.. Those. depended and independent variables unquestionable give a different value to the organization. In term of this model organization most choose one of three courses of actions: specialization, diversification or liquidation these decision would be represented by a specific value where “0” is the optimal value for decision making.. . 17.

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(48) . CHAPTER II. LITERATURE REVIEW This chapter presents the relevant literature regarding to diversification strategies and organizational capabilities. The researcher went through different topics: Organizational Capabilities, Maximization Values and Diversification theories related to business success. Overview of Panama Growth Developed Product, Agriculture and Industry. This chapter also provides information about best practices within sugar cane industry.. Organizational Capabilities Theoretical background While examples or organizational capabilities (Thomas, 1989a, 1989b; Baldwin and Clark, 1994; Henderson and Cockburn, 1994), there are almost as many definitions of organizational capabilities as there are authors on the subject, Broadly speaking prior definitions can be classified into three categories, each of which is subsumed in the larger set of all resources (which includes physical and intangible assets) that are recognized as possible sources of durable firm heterogeneity. The first category of capabilities are those that reflect and ability to perform the basic functional activities of the firm, such as plant layout, distribution logistics, and marketing campaigns, more efficiently than competitors. Amit and Schoemaker, for example, define capabilities as developed in functional areas, e.g., brand management (Amit and Schoemaker, 1993: 35); Grant observes that capabilities can be identified and appraised using a standard functional classification of the firm’s activities (Grant, 1191 a: 120); and Treacy and Wiersema define them as one of three value disciplines operational excellence, customer intimacy, or product leadership (Treacy and Wiersema, 1993: 84). The second category of capabilities shares the common them of dynamic improvement to the activities of the firm. Amit and Schoemaker, for example, also identify capabilities as repeated process or product innovations, manufacturing flexibility, responsiveness to market trends, and short development cycles’ (Amit and Schocmaker, 1993,35); Teece et al. as dynamic routines that govern ‘the or organization to learn, adapt, change and renown over time (Teeceet al., 1994:20); and Hayes and Pisano as enabling a firm to switch gears-from, for example, rapid. . 19.

(49) . product development to low cost-relatively quickly and with minimal resources’ (Hayes and Pisano, 1994:78). The third category of capabilities, although closely related to dynamic improvements, comprises the more metaphysical strategic insights that enable firms to recognize the intrinsic value of other resources or to develop novel strategies before competitors. Barney, for example, refers to capabilities an those organizational characteristic that enable an organization to conceive, choose and implement strategies’ (Barney, 1992,44), while Henderson and Cockburn refer to them as “the organizational abilities to deploy the firm’s resources and to develop new ones’ (Henderson and Cockburn, 1994:3) According this definition there are certainly elements imply in it, organizational capabilities enhance with daily routines and transformation of physical input in output. Chandler (1990) Describe firm’s organizational capabilities as the collective physical facilities and skills of employees, especially the abilities of the top and meddle management.. Marketing Skills,. Distribution Skills, Production Skills, Organizational Skills. By strategically and systematical management of people and resources using police, rules and procedures, top and middle managers create organizational leadership and style. Thus, they are able to generate collective advantages in term of employee’s capabilities. Firms, in the competence or resource- based view, develop unique capabilities that enable them to compete effectively through establishing collective routines and learning processes. (Teece et al., 2000). Develop and improve competitive capabilities involve integration of employee’s skills, abilities and knowledge though out the organization. This normally depends on authority and leadership. As Hamilton and Feenstra (1997:56) have emphasized, firms, and economic organizations in general, are “above all authoritative organizations that structure relationships according to established rules of conduct “in which participants recognize that they are bound to the authoritative norms of the organization, and there are coercive means to enforce the collective rules. Organizational capabilities play in important role within organizations. The basic functional activities and improvement as dynamic improvement depend on organizational capabilities. Thus, firm’s success so on. Develop the right strategy to abridge organization’s goals in term of the employees and resources still a not easy task for managers, nevertheless manager still in . 20.

(50) . charge of the organizing and action plans development by the creation of rules, procedures and police. Meanwhile organization style and leadership keep impress by the application all those rules, procedures and police. Employees respond to authority usually and manager appeal to the authority in order to obtain compliance. As some have noted (e.g. Bogaert et al., 1994), what distinguishes resources from capabilities is based on the difference between “having” (i.e. what the firm has or owns) and “doing” (i.e. what the firm can do), and between tangible and intangible assets. Capabilities clearly fall under the latter two categories because they refer to the capacity of the firm to deploy existing resources to perform some task or activity (Grant, 1991), and at the same time are invisible, knowledge-based phenomena (Stalk et al., 1992). Moreover, they are developed over time and nurtured through complex interactions among organizational members (Amit and Schoemaker, 1993). As noted above, knowledge and human actors are the basic “building blocks” of organizational capabilities. Although early strategy literature has stressed the importance of firm specific skills and competencies in selecting and implementing an appropriate strategy, it has failed to recognize that capabilities fundamentally encapsulate knowledge created and accumulated by the firm (Lei et al., 1996). The link between knowledge and capabilities has been established in the more recent work of Fiol (1991), Hamel (1991), and Reed and de Fillips (1990), among others. John G. Matsusaka’s model develops the idea that it is fruitful to think of ongoing diversification as a search process by which firms try to find good matches for their organizational capabilities. Firms consist of organizational capabilities in particular, the skills and abilities of top and middle management that are to some degree transferable across products and industries. Because these capabilities are valuable, it may not be optimal for a firm to go slowly out of business as sales of its products decline. Rather it may be better to try to find a new product or industry. The process of searching for a business that is a good match for organizational capabilities is fraught with uncertainty, and in an industry and observing the outcome that is, by diversifying.( Matsusaka 2001). John G. Matsusaka, develop a model to explore the view of diversification as a matching/search process. Organizational capabilities are formalized as a firm-specific. . 21.

(51) . asset/resource that is productive in many different industries. The productivity in any given industry is uncertain ex ante. The model shows how diversification can be a value-maximizing dynamic strategy even if there are specialization efficiencies, as the empirical literature suggests. Intuitively, if a firm’s existing businesses are down but not yet out, it is safer to maintain the old businesses while searching for a better opportunity instead of liquidating and throwing all resources into a new venture with uncertain prospects. The model is consistent with the seemingly contradictory evidence of discounts for diversified company stocks and positive returns form diversification announcements. Diversified firms trade at discounts because they do not have a good match for their organizational capabilities. The model is fundamentally dynamic and suggests that time-series information on corporate evolution might be useful in understanding corporate diversification. Organizational capabilities go through knowledge, abilities skill and even resources, manage by rule, procedures and policies. Firms consist of people, resources, police and procedures by which firms develop their leadership style, culture and environment. Build organizational capabilities it is a complex process of synthesis, integration and combination of organizational qualities, employee’s knowledge, and organizational environment. Management has a huge issue face to. Top a middle managers constrain a big responsibility, thus they have to commit with organizational capability development in order to abridge organization’s goals.. Diversification Managerial Explanation Another class of theories used to explain diversification is based on managerialism. Marris (1966) have made important contributions. In Marris’s growth maximizing managerial enterprise, managers not only bring the existing supply of resources and the demands upon them into line, but also their future rates of growth. Thus the equating of the growth of supply of resources and growth of demand upon them is an equilibrium condition. Marris recognizes they are usually multiproduct and that diversification into new products is the main engine of corporate growth. Thus in order to grow any faster than the rate of shared experience in the past, experiences that. . 22.

(52) . have established the extremely detailed and specific communication system that underlies routine performance (Nelson and Winter 1982. p.105) . Diversification strategies are used to expand firms'operations by adding markets, products, services, or stages of production to the existing business. The purpose of diversification is to allow the company to enter lines of business that are different from current operations. When the new venture is strategically related to the existing lines of business, it is called concentric diversification.. Conglomerate diversification occurs when there is no common thread of. strategic fit or relationship between the new and old lines of business; the new and old businesses are unrelated.. Diversification in the context of growth strategies Diversification is a form of growth strategy. Growth strategies involve a significant increase in performance objectives (usually sales or market share) beyond past levels of performance. Many organizations pursue one or more types of growth strategies. One of the primary reasons is the view held by many investors and executives that "bigger is better." Growth in sales is often used as a measure of performance. Even if profits remain stable or decline, an increase in sales satisfies many people. The assumption is often made that if sales increase, profits will eventually follow. Growth may also improve the effectiveness of the organization. Larger companies have a number of advantages over smaller firms operating in more limited markets. Large size or large market share can lead to economies of scale. Marketing or production synergies may result from more efficient use of sales calls, reduced travel time, reduced changeover time, and longer production runs. Learning and experience curve effects may produce lower costs as the firm gains experience in producing and distributing its product or service. Experience and large size may also lead to improved layout, gains in labor efficiency, redesign of products or production processes, or larger and more qualified staff departments (e.g., marketing research or research and development).. . 23.

(53) . Lower average unit costs may result from a firm' s ability to spread administrative expenses and other overhead costs over a larger unit volume. The more capital intensive a business is, the more important its ability to spread costs across a large volume becomes. Concentric Diversification: Concentric diversification occurs when a firm adds related products or markets. The goal of such diversification is to achieve strategic fit. Strategic fit allows an organization to achieve synergy. In essence, synergy is the ability of two or more parts of an organization to achieve greater total effectiveness together than would be experienced if the efforts of the independent parts were summed. Synergy may be achieved by combining firms with complementary marketing, financial, operating, or management efforts. Breweries have been able to achieve marketing synergy through national advertising and distribution. By combining a number of regional breweries into a national network, beer producers have been able to produce and sell more beer than had independent regional breweries. Strategic fit in operations could result in synergy by the combination of operating units to improve overall efficiency. Combining two units so that duplicate equipment or research and development are eliminated would improve overall efficiency. Quantity discounts through combined ordering would be another possible way to achieve operating synergy. Yet another way to improve efficiency is to diversify into an area that can use by-products from existing operations. For example, breweries have been able to convert grain, a by-product of the fermentation process, into feed for livestock. Management synergy can be achieved when management experience and expertise is applied to different situations. Perhaps a manager' s experience in working with unions in one company could be applied to labor management problems in another company. Caution must be exercised, however, in assuming that management experience is universally transferable. Conglomerate Diversification: Conglomerate diversification occurs when a firm diversifies into areas that are unrelated to its current line of business. Synergy may result through the application of management expertise or financial resources, but the primary purpose of conglomerate diversification is improved profitability of the acquiring firm. Little, if any, concern is given to achieving marketing or production synergy with conglomerate diversification. One of the most common reasons for pursuing a conglomerate growth strategy is that opportunities in a firm' s current line of business are limited. Finding an attractive investment . 24.

(54) . opportunity requires the firm to consider alternatives in other types of business. Philip Morris' s acquisition of Miller Brewing was a conglomerate move. Products, markets, and production technologies of the brewery were quite different from those required to produce cigarettes. Probably the biggest disadvantage of a conglomerate diversification strategy is the increase in administrative problems associated with operating unrelated businesses. Managers from different divisions may have different backgrounds and may be unable to work together effectively. Competition between strategic business units for resources may entail shifting resources away from one division to another. Such a move may create rivalry and administrative problems between the units. Without some form of strategic fit, the combined performance of the individual units will probably not exceed the performance of the units operating independently. In fact, combined performance may deteriorate because of controls placed on the individual units by the parent conglomerate. Decision-making may become slower due to longer review periods and complicated reporting systems. Internal Diversification: One form of internal diversification is to market existing products in new markets. A firm may elect to broaden its geographic base to include new customers, either within its home country or in international markets. A business could also pursue an internal diversification strategy by finding new users for its current product. Another form of internal diversification is to market new products in existing markets. Generally this strategy involves using existing channels of distribution to market new products. It is also possible to have conglomerate growth through internal diversification. This strategy would entail marketing new and unrelated products to new markets. This strategy is the least used among the internal diversification strategies, as it is the most risky. External Diversification: External diversification occurs when a firm looks outside of its current operations and buys access to new products or markets. Mergers are one common form of external diversification. Mergers occur when two or more firms combine operations to form one corporation, perhaps with a new name. These firms are usually of similar size. One goal of a merger is to achieve management synergy by creating a stronger management team. This can be achieved in a merger by combining the management teams from the merged firms.. . 25.

(55) . Acquisitions, a second form of external growth, occur when the purchased corporation loses its identity. The acquiring company absorbs it. The acquired company and its assets may be absorbed into an existing business unit or remain intact as an independent subsidiary within the parent company. Acquisitions usually occur when a larger firm purchases a smaller company. Acquisitions are called friendly if the firm being purchased is receptive to the acquisition. (Mergers are usually "friendly.") Unfriendly mergers or hostile takeovers occur when the management of the firm targeted for acquisition resists being purchased.. Diversification: vertical or horizontal? Diversification strategies can also be classified by the direction of the diversification. Vertical integration occurs when firms undertake operations at different stages of production. Involvement in the different stages of production can be developed inside the company (internal diversification) or by acquiring another firm (external diversification). Horizontal integration or diversification involves the firm moving into operations at the same stage of production. Vertical integration is usually related to existing operations and would be considered concentric diversification. Horizontal integration can be either a concentric or a conglomerate form of diversification. Vertical Integration: The steps that a product goes through in being transformed from raw materials to a finished product in the possession of the customer constitute the various stages of production. When a firm diversifies closer to the sources of raw materials in the stages of production, it is following a backward vertical integration strategy. Avon' s primary line of business has been the selling of cosmetics door-to-door. Avon pursued a backward form of vertical integration by entering into the production of some of its cosmetics. Forward diversification occurs when firms move closer to the consumer in terms of the production stages. Levi Strauss & Co., traditionally a manufacturer of clothing, has diversified forward by opening retail stores to market its textile products rather than producing them and selling them to another firm to retail. Some firms employ vertical integration strategies to eliminate the "profits of the middleman." Firms are sometimes able to efficiently execute the tasks being performed by the middleman (wholesalers, retailers) and receive additional profits. . 26.

(56) . Vertical integration strategies have one major disadvantage. A vertically integrated firm places "all of its eggs in one basket." If demand for the product falls, essential supplies are not available, or a substitute product displaces the product in the marketplace, the earnings of the entire organization may suffer. Horizontal Diversification: Horizontal integration occurs when a firm enters a new business (either related or unrelated) at the same stage of production as its current operations. For example, Avon' s move to market jewelry through its door-to-door sales force involved marketing new products through existing channels of distribution. An alternative form of horizontal integration that Avon has also undertaken is selling its products by mail order (e.g., clothing, plastic products) and through retail stores (e.g., Tiffany' s). In both cases, Avon is still at the retail stage of the production process.. Diversification strategy and managements As documented in a study by Marlin, Lamont, and Geiger, ensuring a firm' s diversification strategy is well matched to the strengths of its top management team members factored into the success of that strategy. For example, the success of a merger may depend not only on how integrated the joining firms become, but also on how well suited top executives are to manage that effort. The study also suggests that different diversification strategies (concentric vs. conglomerate) require different skills on the part of a company' s top managers, and that the factors should be taken into consideration before firms are joined. There are many reasons for pursuing a diversification strategy, but most pertain to management' s desire for the organization to grow. Companies must decide whether they want to diversify by going into related or unrelated businesses. They must then decide whether they want to expand by developing the new business or by buying an ongoing business. Finally, management must decide at what stage in the production process they wish to diversify. As an increasing number of firms have perused global diversification, the corporate profit performance impact of global diversification strategy has become an important issue. There are two major streams of research examining the profit performance impact of corporate diversification. One stream of research focuses on the product dimension of corporate. . 27.

(57) . diversification (e.g. Rumelt, 1974, 1982, Montgomery, 1979; Chirstensen and Montgomery, 1981; Palupe, 1985), the other on the international market dimension (e.g. Rugman, 1979; Wolf, 1975, Leftwich, 1974; Severn and Laurecne, 1974).. Dark Side of Corporate Diversification Corporate diversification is widely believed to be inefficient. It runs against one of the oldest ideas in economics, that specialization is productive.. A popular explanation for its. prevalence is that firms are plagued with agency problems that allow managers to enter new businesses (from which they privately benefit) at the expense of shareholders. However, the empirical evidence suggests that diversification is not entirely an agency phenomenon; although diversified firms trade at a discount relative to single-business firms, investors often bid stock prices when firms announce diversification programs. Assessing the relationship between diversification and firm performance has proven quite difficult. For starters, simply defining diversification and measuring its associated returns is anything but straightforward. Research in the management field and fair proportion of the work in industrial organization has searched for relationships between a firm’s total amount of diversification and its overall profitability. In contrast, work in the agency-theoretic tradition has focused almost exclusively on mergers and acquisitions changes at the margin, rather than an evaluation of a firm’s diversification as a whole. Each of these approaches has its merits drawbacks. Diversification has been included in a number of standard industrial organization studies which examine the relationship between firm performance and host of industry structure variables: industry growth, scale, and so on.. In this study, performance has generally been. measured by accounting indices, such as return on equity or return on invested capital. Diversification has generally been operational zed as a continuous variable analogous to the Herfindahl index, for example, one minus the sum of the squared percentages of a firm’s total revenues ( or total employment) in each of its markets. These studies nearly always find a neutral or negative, not a positive, relationship between diversification and firm performance (Rhoades, 1974; Utton, 1977; Montgomery, 1985; Palepu, 1985). Montgomery and Wernerfelt (1988) performed a similar analysis using Tobin’s q (the capital market value of the firm divided . 28.

(58) . by the replacement value of its assets) to measure performance. They also found that firm profitability decreased as a continuous measure of diversification increased. Wernerffelt and Montgomery (1988) estimated the relative importance of industry structure, diversification, and market share effects in determining firm performance. As did Schmalensee (1985), they found that direct industry effects accounted for the majority of the explained variance. The combination of widespread diversification and a negative average relationship between diversification and performance can be explained in two ways. Cynthia A. Montgomery in her paper express the agency view which suggests that diversification is undertaken for reasons other than performance maximization. The other is the resource view which suggests that the average relationship reflects an underlying heterogeneity of firm’s resources. Specifically, the evidence is consistent with the view that firms with more specific and valuable resources find it optimal to diversity less than firms with less specific and less valuable resources.. Three different point of view of corporate diversification Cynthia A. Montgomery (1994) describes three different diversification points of View. Market Power View has said traditionally, economists’ interest in diversification stemmed for a concert its potentially anti-competitive effects. This view argues that diversified firms will “thrive at the expense of no diversified firms not because they are any more efficient, but because they have access to what is termed conglomerate power” (Hill, 1985, p.828). This approach was perhaps first expounded by Corwin Edward (1955) in Conglomerate Bigness as a Source of Market Power. First, a manager might direct a firm’s diversification in a way that increases the firm’s demands for his or her particular skills. Shleifer and Vishny (1989, p.137) term this behavior managerial entrenchment, and argue that in pursuing such interests, “managerial entrenchment, and argue that in pursuing such interests, managers often invest beyond the value-maximizing level.” The second rationale is based on the idea that although shareholders can efficiently diversify their own portfolios, managers cannot so efficiently expansion as a means of reducing total firm risk, thus improving their personal positions while not benefiting the firm’s. . 29.

(59) . stockholders. The contrast to the market power view of diversification which emphasizes the benefits a firm may reap at the expense of its competitors and customers; the agency view emphasizes the benefits a firm’s managers may reap at the expense of its shareholders. Accordingly, the agency view would predict a negative relationship between diversification and firm value. The Resources View argues that rent-seeking firms diversity in response to excess capacity in productive factors, here called resources. These include factors the firm has purchased in the market, services the firm has created from those factors, and special knowledge the firm has accumulated through time. According to Penrose ( 1959, p. 68 ), the attainment of a “state of rest” (equilibrium position) is precluded by three significant obstacles: “ those arising from the familiar difficulties posed by the invisibility of resources; those arising from the fact that the same resources can be differently under different circumstances, and particular, in a “specialized” manner; and those arising because in the ordinary processes of operation and expansion new productive services are continually being created.” In this view, so long as expansion provides a way of more profitably employing its underused resources, a firm has an incentive to expand. Perhaps Cynthia a. Montgomery by Corporate Diversification Journal of Economic Perspectives is showing different angle of diversification. Researches also provide evidence of some adverse implications. Those are element to be analyze as an alternatives risk at the time companies decide to run a new business adventure.. According to Montgomery theorists are. likely to agree that, other things equals, firms maximizing growth o r managerial prerogative will often do it in the way the resource view suggests. The critical question is: does diversification stop when its net present value equals zero, or does it go from there?. Whether or not. diversification promote efficiency, is guided by managerial motives or both is likely to differ within firms, across firms and across time. Firms go into diversification by managerial decisions. The impact is frequently not well identified; some firms keep business even thought they are not adding value to the shareholders. Somehow, diversification is a nature tendency for organization, after many years of good practices on specialization business model.. Overall it is important to measure the effect of. getting in a new business. To determinate the organizational value after at least one year of. . 30.

(60) . experience running a new adventure, seem crucial to days. Organizations hold diversification strategies over uncertain numbers of new business.. Management performance as well as. decisions making, still an outward factor affecting perhaps diversification outcomes. The dark side of diversification has been identified by several researchers, but they also conclude that there are positives aspect going thought by diversification and still a practice amount the organization as an increasing profit strategy mostly. Besides some negative implication Masusaka (2001) infer that diversification in some cases can be understood instead as a dynamic value-maximizing strategy revolving around the notion of organizational capabilities. Because these capabilities are valuable, it may not be optimal for a firm to go slowly out of business as sales of its products or industry. The process of searching for a business that is a good match for organizational capabilities is fraught with uncertainty, and in some cases the uncertainty can only be resolved by experimentation entering an industry and observing the outcome that is, by diversifying. In other hands, it is poor performance (the lack of good uses of organizational capabilities in existing businesses) that causes diversification, not the other way around. The explanation for positive event returns is more subtle. The model shows that firms with the worst matches for their organizational capabilities will liquidate; only firms whose matches are not too bad will hold on to their existing businesses and diversify. Therefore, a diversification announcement can be good news by signaling that existing businesses are profitable enough to avoid the liquidation option. More generally, the model suggests that the market reaction to a diversification announcement can be positive or negative depending on the characteristic of the announcing company and further identifies some testable hypotheses.. Product Diversification and Profitability Two streams of literature, one in industrial organization and the other in strategic management, have sought to determine the impact of product diversification strategy on profitability. These two research traditions differ both in their theoretical development of hypotheses and reported findings.. . 31.