Globalization and Concentration Process and Implications

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Globalization and Concentration Process and
Implications

• David Sparling
• Dept. of Agricultural Economics and Business
• University of Guelph

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Why do we spend so much time talking, meeting or
even protesting about Globalization and
Concentration?

• Survival!

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Survival of our

• Right to choose
• Farms, Businesses and Industries
• Provincial or National Economies
• Culture/Way of Life

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Individuals react to regain a measure of control
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So Do Politicians

• do something about antitrust, the
  concentration that is clogging the free market
• Wellstone amendment in U.S. Senate
• Moratorium on large agribusiness mergers

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Business Try To Maintain Control

• New Strategic Directions
• New products, new markets, new relationships
• Not always well thought out
• New directions may mean abandoning old businesses
  or old locations

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Press Release Wed. April 25, 2001

• Virtek Vision International Inc. acquires
• biotechnology business of FONA Technologies

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Outline

• Globalization and Concentration Processes
• Implications for managers
• Two Canadian Life Science Cases Studies

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Globalization and Concentration
Drivers
Globalization and Concentration
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Globalization and Concentration
Drivers
Markets Customers Products Production
Financial Markets
Facilitators
Globalization and Concentration
Implications
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Markets and Customers

• Customer Expectations
• Agrifood
• Safety
• Quality
• Convenience
• Variety new and different products
• Value price, convenience, innovation
• Year-round availability

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Global Sourcing U.S. Tomato Supply 1999
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Global Customers Need Global Suppliers

• Advantages to companies who can meet needs of
  global clients
• Global sourcing of new products and ideas
• New markets may require a local presence or
  partner
• Distribution relationships frequently lead to
  acquisitions

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Products and Production

• Economies of scale
• New product opportunities
• Capture new technologies
• product or process
• Product synergies

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Economies of Scale

• Principal reason for mergers and acquisitions
• Limits continue to expand
• Technology is a major contributing factor

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New Products Opportunities

• New Products lifeblood of many Canadian
  companies
• Help differentiate products and company from
  competition
• New product ideas frequently come from other
  countries and other companies

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The Search For Synergies

• Product/Market Synergies
• Agro-chemicals and Seed
• Technology Synergies
• Agricultural and pharmaceutical biotechnology -
  Life Science Strategy

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Financial Markets

• Survival at two levels influences behavior
• Corporate
• CEO
• Expectations for revenue growth
• Profit expectations industry dependent
• Agrifood more immediate
• Life Sciences future profits

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Financial Markets

• Sustainable (internally financed) growth too slow
  to meet corporate objectives and market
  expectations
• Market funded growth
• Must go to the market to fund growth
• Must grow to go to the market

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Financial Markets

• Mergers and acquisitions become part of market
  psyche
• late 1990s
• Bluefish phenomena
• Industry players dont want to be left out

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Globalization and Concentration
Drivers
WTO and trade regs. Information/communication
technologies Management skills and tools
Facilitators
Globalization and Concentration
Implications
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WTO and Trade Regulations

• Sets rules/environment for global operations
• Major factor in the increase in trade and
  globalization
• Increasing opposition to latest round
• Continued move toward free trade

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Information/CommunicationTechnologies

• Collect information and control operations from
  anywhere
• Supports new inter-organizational relationships
• changing the way companies do business.
• Facilitates collaborative research and product
  development

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Management Skills and Tools

• Global management capabilities are increasing
• Development of local management
• Multi-functional, flexible managers
• Using new technologies to improve skills

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Globalization and Concentration
Drivers
Facilitators
Mergers/Acquisitions Transnational corporations
Transnational alliances
Globalization Concentration
Impacts
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Five Reasons for MA Activity

• Overcapacity
• Geographic Rollup
• Product or Market Extension
• MA as RD
• Industry Convergence
• Not All MAs are the same and that Matters!
  Bower HBR March 2001

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Globalization/Concentration Activity

• Transnational Corporations
• 1970 - 7000
• 1998 - 53,600 with 449,000 foreign subsidiaries
• Mergers in 1999 More than 28,000 worldwide
  worth more than 3.2 trillion
• Up 33 from 1998
• Almost 6 times the value of 1994

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Retailers Are Bigger More Global
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Convergence

• Blurring of traditional lines
• Retail in particular is branching out WalMarts
  expansion strategy
• Competition will come from unexpected sources

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Globalization and Concentration

• - Increased Trade
• Improved standard of living
• Dislocation in some sectors and regions
• Companies, industries and even nations reeling
  from increased competition

Drivers
Facilitators
Globalization and Concentration
Implications
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Implications Depend On What You Produce and How
You Compete

• COMMODITIES
• DIFFERENTIATION

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If You Produce CommoditiesHow Do You Survive?

• Price
• Economies of Scale
• Adoption of Technology
• Market dominance

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GET BIGGER OR GET OUT!

• Grow by expanding market share
• Grow by expanding markets
• MAs are an easy way to expand quickly
• Options include alliances and co-operatives
• What should we expect in commodity businesses?

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More Concentration!
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Meat Packing Concentration is Increasing
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Food Industry MA Increasing
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Differentiation Strategy

• Business trends are away from commodities
• Be Different
• Innovation
• New Products
• New Processes
• Flexibility

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New Product Ideas Food Processing

• Little or No Intellectual Property Protection
• Large multi-nationals survive through
• Economies of scale
• Branding
• Market dominance
• Small to medium sized survive through
• Innovation
• Flexibility product and process

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What Can We Expect In Markets Where Innovation
Counts?

• Ideas are the currency of the industry
• Start-ups to bring new ideas
• Biotechnology
• Further processing prepared meals
• Strategies to develop new ideas
• Acquisitions to capture those new ideas

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Number of Biotech Deals
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Is It All Bad News For Small Companies

• Is concentration really that pervasive?
• Study by Ghemawat and Ghadar examined
  concentration in oil, auto and aluminum
• Concentration was decreasing
• Mergers arent a one-way street
• Small companies may find opportunities
• Spun off units from mergers
• Markets too small for the major players

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Size and Profitability

• Studies in Canada and U.S. have found the same
  pattern
• Larger firms have lower costs of production
• Smaller firms are relatively more profitable

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Whats Ahead

• Financial markets still expect growth
• Commodity markets
• increasing concentration to capture economies of
  scale
• no force to counteract economies of scale
• Less emphasis on commodities

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Pace of Globalization and Mergers and Acquisitions

• Rate of change is disconcerting to managers
• Not likely to slow - more likely to speed up
• Why?

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Differentiation

• Value is in ideas
• Need new ideas to capture value pressure to
  innovate Start-ups
• New ideas make old ones obsolete
• Leads to shorter product life cycles
• Internal development to slow and limited
• Search in other markets and other companies for
  new ideas
• Acquisitions to capture new ideas

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What Does This Mean To Co-operatives?

• Understand your markets and your business
• Where it is going?
• Pressures for globalization or concentration?
• Recognize that globalization and mergers and
  acquisitions are
• Strategic options for both you and your
  competition
• Used in both Commodity and Differentiation
  strategies

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Two Biotechnology Case Studies1. FONA
Technologies Inc.

• Began in 1998
• Research and Development
• Fibre-optic DNA Identification Technology

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FONA Biosensor DNA matching
Sample DNA
Fluorescent Probe
Target DNA
Optical Fibre
Fluorescent Probe Attaching to Hybridized DNA
Hybridised DNA
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Corporate Objectives

• Develop the technology through proof of concept
  turn idea into reality
• Find partner(s) with manufacturing and
  distribution capabilities
• Secure sufficient funding to take it to market

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Markets

• Distinction between potential partners was not
  geographic it was by market
• Clinical/Agrifood/Environmental
• Potential customers are global
• Potential partners also global
• Acquisition resulted from search for equipment
  design and manufacturing capabilities

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Was FONA a victim of Concentration and
Globalization?

• Achieved objective of attracting partner with
  manufacturing and distribution capabilities and
  resources to take the technology to market
• Fit in capabilities
• Virtek had instrumentation design, manufacturing
  and distribution
• FONA had RD

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Case 2 Virtek Vision

• Spinout of U. of Waterloo
• Jim Crocker became CEO of a company in trouble in
  1997
• Refocused on laser core competency
• Operated in aerospace and pre-fab construction
  markets

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Objectives

• Growth
• Profitability
• Focus on Core Competencies
• Expand using core competency

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Global Market Attitude

• Dont view markets as domestic or export
• 3 years ago Winner of Fed Ex International
  Business Award
• 100 of Sales outside Canada

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Move Into Biotechnology

• Close competitor from US abandoning business line
  group spun out to Virtek
• Developed a Microarray Reader
• Built design and manufacturing capabilities in
  Waterloo

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Recent Acquisitions

• Financial Markets secured 20M to fund growth
• Laser Technic Belgium market access
• GSI overcapacity purchased 6M aerospace
  business from General Scanning, a former
  competitor
• ESIs Biotechnology Group R D
• Access to new and complementary products

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Acquisitions - FONA

• RD acquisition
• Fit with core competency
• Looking ahead
• Partnerships essential for reaching market
• Application development
• Proof of product in different markets
• May ultimately be target for larger equipment
  firm
• These steps may be necessary to go from idea to
  full potential

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Globalization and Concentration are part of
Business today

• Recognize that they are forces in the environment
  but they are also tools for achieving strategic
  objectives