Alcoa's Corporate Disaggregation

June 24, 2016

 

Alcoa (Aluminum Corporation of America) is a global leader in lightweight metals, engineering & manufacturing, Alcoa innovates multi-material solutions, and its technologies enhance transportation, from automotive and commercial transport to air and space travel, and improve industrial and consumer electronics products. Alcoa’s products enable smart buildings, sustainable food and beverage packaging, high-performance defense vehicles across air, land and sea, deeper oil and gas drilling and more efficient power generation. Alcoa pioneered the aluminum industry over 125 years ago, and it employs 60,000 people in 30 countries delivering value-adding products made from titanium, nickel and aluminum, and produce best-in-class bauxite, alumina and primary aluminum products. In 2015 Alcoa’s sales revenue was about $22 billion.  

 

Early 2016 Alcoa’s management announced that its Board of Directors has unanimously approved a plan to separate Alcoa into two independent, publicly-traded companies, culminating Alcoa’s successful multi-year transformation. The separation will launch two industry-leading, Fortune 500 companies. The globally competitive Upstream Company will comprise five strong business units that today make up Global Primary Products - Bauxite, Alumina, Aluminum, Casting and Energy. The innovation and technology-driven Value-Add Company will include Global Rolled Products, Engineered Products and Solutions, and Transportation and Construction Solutions. 

 

The completion of split is expected to be completed in the second half of 2016. At that point Alcoa shareholders will own all of the outstanding shares of both the Upstream and Value-Add Companies. The separation is intended to qualify as a tax-free transaction to Alcoa shareholders for U.S. federal income tax purposes. Both autonomous businesses will attract an investor base best suited to their unique value proposition, management, operational and financial traits. After the separation, the Upstream Company, with its strong history in the aluminum and alumina markets, will operate under the Alcoa name. The Value-Add Company will be named differently prior to completion of separation. 

 

According to press release, Klaus Kleinfeld CEO of Alcoa states “In the last few years, management has successfully transformed Alcoa to create two strong value engines that are now ready to pursue their own distinctive strategic directions.” “After steering the Company through the deep downturn of 2008, we immediately went to work reshaping the portfolio. We have re-positioned the upstream business; we have an enviable bauxite position and are unrivaled in Alumina, we have optimized Aluminum, flexed our energy assets, and turned our cast-houses into a commercial success story. The upstream business is now built to win throughout the cycle. Our multi-material value-add business is a leader in attractive growth markets. We have intensified innovation, made successful acquisitions, shed businesses without product differentiation, invested in smart organic growth, expanded our multi-materials profile and brought key technologies to market; all while significantly increasing profitability.”  Mr. Kleinfeld concluded, “Inventing and reinventing has defined our Company throughout its 126-year history. With the unanimous support of Alcoa’s Board we now take the next step; launching two leading-edge companies, each with distinct and compelling opportunities, and each ready to seize the future.”

When companies usually go for mergers, acquisitions and complete integration of acquired portfolios for achieving growth, Why did Alcoa’s management decide to split the organization. What benefits would result in for management, shareholders and customers? Can the firm continue to sustain economies of scale and synergy after the split? What economic and management rationale would substantiate this decision? 

 

In the context of the knowledge economy and complex industry environments, the dis-aggregation or shoaling approach is considered quite significant in the configuration of manufacturing, R&D, marketing, or service delivery systems. As firms are witnessing uncertain business conditions and more thrust is being given to agility, speed, and market responsiveness rather than scale and size, operating in a disaggregated form is becoming a desired strategy across many industries. Disaggregation enables modularization, mass customization, employee empowerment, and proximity to customers or critical raw material sources. A disaggregated strategy for managing the value chain will not only enhance dynamic capabilities, but also will spur more innovations and growth.

 

Shoaling design can be practiced at corporate governance, product or business unit level, production organization or alliance and franchise management. School-of-Fish Strategy not only eliminates opportunity cost of losing emerging markets, but also reduces investment risk associated with large-scale integration. School-of-Fish formation enables multi-pronged competitive strategies permitting a firm to develop unique or optimal strategy for each rival it encounters in the respective market or region. School of Fish Strategy is not only lean, but can enhance quality, customization, product variety, quality of work life (QWL), quality of life, and overall sustainability of enterprise. 

 

Alcoa’s recent transformation and separation into two leading public companies is an excellent business case for Shoaling or School of fish strategy. How this transformation at the corporate governance level and operating in a shoaling form of two different companies is helping the giant industrial company to achieve innovation, growth, quality and value creation will be an important strategy lesson for similar large corporations.

 

Alcoa’ new decision and resulting operational consequences will reveal how this new structure enables reducing bureaucratic cost, transfer pricing practices to achieve value maximization, providing autonomy to businesses (units) to achieve organic growth through market and product innovation, and repositioning. The decision to split the corporation to launch two strong standalone companies is Providing Shareholders with Two Distinct, Value-Creating Investment Opportunities. The Upstream Company to be a highly competitive global leader in bauxite, alumina and aluminum, with a unique portfolio of value-adding business units, and substantial energy assets. The Value-Add Company will be a premier innovator of high performance multi-material products and solutions in attractive growth markets.

 

For full case study, please visit 

http://www.schooloffishstrategy.com/#!alcoa-dis-aggregation-case-study-3/ba9jj

 

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