Corporate Level Strategy - Duluxgroup - Assignment Example

1. Corporate restructuring enables firms to swiftly change their boundaries. The motivation behind demergers or corporate restructuring is to specialize and internationalize (Kirchmaier, 2003). The idea behind demerger of DuluxGroup from Orica was to create even better two companies through restructuring where each would be free to capitalize on its strategic strengths (COR254, 2010). Orica is a global leader in mining consumables and in enhancing mining production volumes. DuluxGroup are the Australasian market leaders in premium branded coatings, home improvement and garden care products. The two companies have fundamentally different market segments, strategy, and geographic focus. Since their areas of operations are entirely different from each other, demerger is justified. This will enable them to focus on their core competencies. As equity and debt market conditions had improved, Orica felt this was the right time for demerger (Sands, 2010). This strategy of demerger would allow Orica to focus on its mining and construction sectors which contribute about 90% of its earnings (Speedy, 2010). Dulux, at the same time would focus on its existing products. In fact, the demerger would enhance the value of its investment in Orica (Industry Search, 2010). The markets react positively to demergers. Demergers usually take place either because the two units have not been able to achieve synergies or extract value from resources (Peppard & Rylander, 2001). As a part of Orica, DuluxGroup was a small part of it but after demerger it was keen to expand its global reach (Sands, 2010a). Its market share in places such as China, Eastern Europe and Africa is relatively low and this demerger would allow them to pursue its market growth. As present, it has a very small start-up operation in China but its powerful consumer brands provided it with competitive advantage (Heraldsun, 2010). Individual businesses are able to perform better and are worth more separately than under the same banner, contend Peppard and Rylander. Dulux enjoys 40% market share in its core markets – Australia and New Zealand and has solid growth in these markets (Bartholomeusz, 2010). As a merged unit, the DuluxGroup represents about 10% of revenue and 13% of earnings before tax and interest. This could adversely impact or dampen the leveraged exposure Orica has to increasing mining production volumes. The demerger makes perfect commercial sense (Freehills, 2010) as it has allowed both the companies to have a cleaner focus on their capital investments and dividend policies. Orica is now free to focus on explosives, chemicals and services to the mining industry. Mining is less volatile and has more growth opportunities (SMH, 2010). Each uunit would be able to focus on their core strengths and have greater scope for growth. DuluxGroup, after demerger, faces stiffer competition from Wattyl, which has been bought by US paints giant Valspar (Wen, 2010). However, competition is good and healthy for markets and this takeover of Wattyl could make the business and market interesting (Chappell, 2010). More ever, even within Australia and New Zealand they have been facing competition. Consolidation in the global paints market continues and this could hinder the growth of DuluxGroup in other markets. They are building on the concept that they can transfer their capabilities. Since both the units have widely different fields of operation, different product range and services, demerger makes sense. Moreover, both would now get a wider exposure and would not be overshadowed by the growth of the other unit. The two businesses have nothing in common with each other and hence the demerger seems logical. 2. Orica has been facing volatility in the global markets but it has a clear strategy of pursuing leadership positions in markets offering long-term sustainable growth (ICIS, 2010). Demerger enables the separated units to focus on their core competencies and maximize shareholder value (Peppard & Rylander). The construction of ammonium nitrate plant in Indonesia, the growth opportunities in Australia and Latin America, and the feasibility of an ammonia plant in New South Wales, provide strategic growth paths for Orica. Storng demand globally for sodium cyanide has added to its growth. They have signed new agreements in Latin America and Africa. Orica’s growth and business activities are guided by strategy, efficiency and culture. Their strategy is to plan for business growth while to attain efficiency they focus on productivity improvements and management control. The organization follows a culture of having common attitudes, behaviors and ethics. The backbone of their overall strategy is organic growth and growth through mergers and acquisitions. Orica has the capability of keeping the total costs under control and reduce the amount of fixed and working capital required. Moreover, it has a performance based culture which is supported by four “Deliver-the-Promise” principles - safety, health and the environment, commercial ownership, creative customer solutions and working together. Their tight management of costs and cash is evident from their achievement of $101m in productivity and synergy benefits. DuluxGroup’s strategy after demerger is to focus on core strengths, and drive both market and share growth in premium segments (Investor Presentation, 2010). Through continued advertising and market spend they want to enhance their brand portfolio. Through investment in research and development, they want innovative new products to be launched. They want to maintain and grow broad distribution capability across both retail and trade channels. The Group wants to have organic growth through re-entry into refinish automotive coatings. They are also looking at growth through acquisitions. Cost management, cost control and productivity gains are their capabilities. DuluxGroup has the capability to pursue it strategy and growth both through acquisition and organic growth. It has the financial capability and the Group feels that its investment in Orica would enhance its value. Dulux enjoys excellent customer relationships, has leading distribution channels and an experienced management team, which is evident from their disciplined management of cash, costs and margins (COR254, 2010). They have ongoing investments in research and development of new products. This provides the independent company an excellent base to launch independent activities. The group has achieved excellent operational and financial performance and has been financially independent. The Group enjoys intensive management focus and transparency in all its dealings (Heraldsun, 2010). They would be able to attain broad distribution capability across retail and trade channels because of their excellent customer relationships. DuluxGroup would need to support their activities with a dedicated board and a tailored capital structure (COR254, 2010). Thus, both the units have their own areas of business, different customer segments, expertise and both management and technical capabilities, to achieve growth and pursue their own paths. The demerger has in fact, provided both the units with independence to pursue and grow based on their core capabilities and strengths. Demerger has provided strategic and financial clarity to both the units. References: Bartholomeusz, S. (2010). Orica's paint stripper. Retrieved October 5, 2010 from http://www.businessspectator.com.au/bs.nsf/Article/Orica-Dulux-China-mining-resources-pd20100503-543E2?OpenDocument&src=spb Chappell, T. (2010). Dulux doesn't fear competition: Kirby. Retrieved October 5, 2010 from http://news.theage.com.au/breaking-news-business/dulux-doesnt-fear-competition-kirby-20100708-101t0.html COR254. (2010). Orica to demerge DuluxGroup. Retrieved October 5, 2010 from http://www.orica.com.au/BUSINESS/COR/orica/COR00254.nsf/Page/News_Orica_to_demerge_DuluxGroup Freehills. (2010). Freehills advises Orica and DuluxGroup on first demerger and largest listing of the year. Retrieved October 5, 2010 from http://www.freehills.com.au/6527.aspx Heraldsun. (2010). Orica demerger gets tick. Retrieved October 5, 2010 from http://www.heraldsun.com.au/business/orica-demerger-gets-tick/story-e6frfh4f-1225873633117 ICIS. (2010). Orica | Strategy and Financial Highlights Information from ICIS. Retrieved October 5, 2010 from http://www.icis.com/v2/companies/9146092/orica/financial.html Industry Search. (2010). DuluxGroup Ltd is in process of demerging from Orica. Retrieved October 5, 2010 from http://www.industrysearch.com.au/News/DuluxGroup-Ltd-is-in-process-of-demerging-from-Orica-45559 Investor Presentation. (2010). DuluxGroup. Retrieved October 5, 2010 from http://www.orica.com/BUSINESS/COR/orica/rwpattach.nsf/PublicbySrc/Demerger+-+Investor+Presentation.pdf/$file/Demerger+-+Investor+Presentation.pdf Kirchmaeir, T. (2003). Corporate Restructuring of British and German Non-financial Firms in the Late 1990s. European Management Journal. 21 (4), 409-420 Pepperad, J., & Rylander, A. (2001). Using an Intellectual Capital Perspective to Design and Implement a Growth Strategy: The Case of APiON. European Management Journal. 19 (5), 510-525 Sands, N. (2010). Orica to float Dulux paints division. Dow Jones Newswires. Retrieved October 5, 2010 from http://www.theaustralian.com.au/business/industry-sectors/orica-to-float-dulux-paints-division/story-e6frg98x-1225861450956 Sands, N. (2010a). Orica shareholders OK Dulux demerger/ Dow Jones Newswires. Retrieved October 5, 2010 from http://www.theaustralian.com.au/business/city-beat/orica-proxies-vote-for-dulux-demerger/story-fn4xq4cj-1225889324938 SMH. (2010). DuluxGroup demerger lets Orica focus on mining. Retrieved October 5, 2010 from http://www.smh.com.au/business/duluxgroup-demerger-lets-orica-focus-on-mining-20100711-105lp.html Speedy, B. (2010). Orica resurrects Dulux paints division spin-off. The Australian. Retrieved October 5, 2010 from http://www.theaustralian.com.au/business/orica-resurrects-dulux-spin-off/story-e6frg8zx-1225861783217 Wen, P. (2010). Orica poised to let Dulux go it alone from next week. Retrieved October 5, 2010 from http://www.smh.com.au/business/orica-poised-to-let-dulux-go-it-alone-from-next-week-20100707-100nu.html Read More