Bayer’s Diversification Strategy Prior to the Monsanto Transaction
Organizations adopt diversification strategies in order to access new markets with products designed for such markets. Diversification is one of the major growth strategies available for organization. The strategy achieves growth by enabling an organization to expand its market share by introducing new products for completely new markets. Although the strategy is effective, it is more risky compared to product development. This is because an organization may have little or no experience in the new market. Moreover, an organization may need to invest heavily in terms of skill development among employees in areas such as marketing and operations. Bayer’s primary industry is the manufacture of pharmaceuticals. However, Bayer has adopted various diversification strategies over the years. There are some strategies that Bayer had prior to Monsanto acquisition. Bayer diversified its business into consumer health and material science.
Pharmaceutical Segment
The pharmaceutical segment is Bayer’s primary segment which is the largest in terms of sales. Bayer pharmaceuticals segment focuses on the manufacture and marketing of specialty focused medicines that are not only innovative but also provide significant clinical value. The pharmaceutical products are meant primarily for the therapeutic areas of gynecology, cardiology, hematology, oncology and ophthalmology. As such, Bayer addresses the growing requirements of patients, healthcare players, physicians as well as regulatory agencies.
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Consumer Health Segment
The consumer health segment of Bayer aims to address the global healthcare needs. The public healthcare systems around the world are dealing with a significant challenge posed a growing population. Additionally, the aged people account for a significant proportion of the world’s population. As a result, the issue of self-care has gained significance for consumers, governments, healthcare payers and healthcare system. The consumer health segment focuses on the production of non-prescription medicines to treat and prevent diseases and prevent diseases and improve the wellbeing of consumers.
The Material Science Segment
The material science segment of Bayer was the world’s leading manufacturer and supplier of sustainable, innovative and diverse high tech polymer materials. The segment’s close proximity to the market as well as global presence led to its popularity as a partner of choice for a significant number of industries around the globe. The above segments represent Bayer’s diversification strategy prior to the acquisition of Monsanto. The diversification focused on three segments namely pharmaceuticals, consumer health and material science.
To What Extent Does Monsanto Deal Change Bayer’s Corporate Strategy?
The benefits of acquisitions to organizations are considerable. Organizations can benefit from economies of scale, revenue growth, increased market share, and tax advantages hence generating cost efficiencies. Acquisitions also have the effect of changing the acquiring organization’s corporate strategy. For instance, the Bayer and Monsanto deal has significantly changed Bayer’s corporate strategy. Bayer’s acquisition of Monsanto will place it in a better position to create a global leader in agriculture (Bayer News, 2016). This will serve to increase its market share on a global scale. The two companies are highly complementary based on the nature of their business activities. The transaction brings together Monsanto’s competence in Seeds and Traits and Bayer’s competence in broad crop protection products that have helped provide solutions to farmers around the world. Therefore, the deal has changed Bayer’s corporate strategy by aligning the organization with life science businesses. Bayer implemented a separation of Covestro from its segments. This would allow Bayer to successfully establish itself as a Life Science company. Since the acquisition, the crop science has taken center stage in the company hence shaping the corporate strategy.
Bayer business will therefore focus on three businesses: pharmaceuticals, consumer health and crop science. The strong Bayer brand will also be responsible for the management of all the business. Initially, the businesses were managed by a strategic management holding company. The new structure coupled with the acquisition of Monsanto will help to catapult Bayer’s strategy of becoming the leading life science company. This will help Bayer gain a competitive advantage over its global competitors. The transaction will help to improve Bayer’s innovative strength, sharpen their customer concentration and strengthen their business process improvement. The move will see Bayer concentrate exclusively on life science businesses. It is therefore clear that the acquisition of Monsanto has not only led to a change in Bayer’s corporate strategy but also its organization structure. As such, Bayer’s corporate strategy will focus on making it a pure life science company. The company will now focus on accelerating research and development and offering value added products and solutions that will meet present and future needs of consumers.
With improved sourcing and increased convenience to higher yield made possible by the acquisition, Bayer will be able to effectively address the challenges facing the global agriculture industry in an environmentally sustainable way. The new approach will integrate various innovative and effective services and products that will significantly provide solutions to customers, hence promoting efficiency. Therefore, it is clear that the acquisition of Monsanto will modify Bayer’s corporate strategy into one that is focused purely on life science businesses. As a result, Bayer will diversify into three life science businesses namely pharmaceuticals, Consumer Health and Crop science.
Which Expansion Mode did Bayer Use in the Monsanto Transaction?
In order to facilitate growth, firms identify and implement appropriate expansion modes. Bayer used a complementation expansion mode in the Monsanto transaction. The Bayer Monsanto transaction is touted as one of the latest series of mega-acquisitions in the agricultural industry. Bayer pursued a complementation expansion mode in the transaction because the products and services provided by Bayer and Monsanto are significantly complementary. For instance, Monsanto’s market share was 26 percent in 2011 while that of Bayer was only 3 percent. On the other hand, Bayer dominates the agrochemical market; selling 17 percent of the world’s total while Monsanto sells only 7 percent. Therefore, a combination of Bayer and Monsanto will significantly rival the competitors in the global market.
Bayer is a global player with competencies in the field of Life Science, particularly in the areas of agriculture and healthcare. The products and services offered by Bayer are designed to benefit consumers and improve the quality of their lives. Through innovation, growth and earning power, Bayer strives to create value for consumers. Therefore, Bayer focuses on improving the wellbeing of consumers as well as improving their livelihoods through production of effective agricultural products. On the other hand, Monsanto endeavors to provide a wide range of solutions aimed at nourishing the growing world. The firm produces seeds for vegetable, fruits as well as significant crops such as soy beans, cotton and corn. This serves to assist farmers increase their output through sustainable practices. The company is also committed to finding solutions for soil health that are sustaionable, helping farmers to effectively use data to improve to conserve natural resources while farming. The solutions provided by the firm seek to provide protection of crops from pests and diseases.
Based on the nature of operations of the two companies, they can complement their businesses more effectively. The weaknesses of one company will be strengthened by the other hence making Bayer a force to reckon in the agrochemical industry. The transaction will bring together two companies whose businesses are highly complementary. As such, the companies will combine their strengths and come up with solutions that will provide sustainable solutions to consumers. As a result, farmers will be able to benefit from the effective solutions that will include digital agriculture, seeds and traits technology and crop protection. It is therefore clear that the expansion mode adopted by Bayer is basically complementary.
Bayer’s Business Level Strategies
The company has several business divisions which include the pharmaceutical segment, the consumer health segment and the crop science segment (Bayer, 2016). Improving quality of life through prevention and treatment of diseases informs the strategies of the business. Based on the company’s competencies, it is able to address the demanding challenges in the society. The company pursues several strategies at a business level in order to achieve the overall goals of the organization. The company’s tagline, science for a better life resonates across all the businesses.
Pharmaceutical Division
The pharmaceutical segment is the largest in the company. The segment focuses on development of medical solutions that are innovative, particularly in the areas of oncology, cardiology, gynecology, ophthalmology and hematology. As such, the business strives to address the growing requirements of physicians, patients, and healthcare players. Research is emphasized in the business with a significant concentration on cardiovascular and other related diseases as well as gynecological and oncological therapies. The business concentrates on the development of IT applications in the area of radiology.
The business also complements its own research competencies with strategic alliances with external partners in industry and academia, and collaborations in order to offer effective solutions in the industry. The collaborative models adopted include research and development co-operations, license agreements, regional collaborations, acquisitions and co-marketing arrangements. The segment also operates its innovation and science centers. In its social commitment, the segment helps in the fight against neglected tropical diseases by providing leading organizations with active ingredients for free. It also supports family planning programs. The social support programs are aimed at gaining public acceptance and goodwill.
Consumer Health Segment
The growing and aging world population presents a unique challenge to healthcare systems. This has led to an increasing significance of self-care for millions of people and healthcare systems. The consumer health segment has responded to the change by focusing on the manufacture of nonprescription brand products for treating and preventing diseases and improving the wellbeing of people by providing corresponding self-care solutions. The strategy of the business is to build on its strong position in the market for nonprescription medicines, nutritional supplements, and other selected self-care products. Therefore, the business maintains a stronger focus on brand building, consumer centric innovations and key markets.
The Crop Science Segment
The main goal of the segment is to be able assist in the production of adequate food and raw materials to meet the increasing needs of a growing global population. In order to be effective in the industry, the segment is aligned to the dynamic needs of the agricultural industry in the long term. The crop Science strategy is to be the leader in innovation, increasing customer centricity and promotion of sustainable farming practices in the industry. The business aims to provide consumers with improved and innovative solutions tailored to specific local requirements designed to meet the specific geographical requirements. As such, the business employs innovative technologies in research and development in order to enhance its product portfolio. The business also maintains customer focus through development of digital sales platforms and effective data models in the area of digital farming.
Does the Monsanto Deal Make Sense?
The Monsanto deal makes sense because the potential gains from the transaction are significant. For instance, Monsanto maintained a 26 percent market share of all seeds sold in 2011 while Bayer held a mere 3 percent of the market share. On the other hand, Bayer dominates the agrochemical market; selling 17 percent of the world’s total while Monsanto sells only 7 percent. Therefore, a combination of Bayer and Monsanto will significantly rival the competitors in the global market.
Based on the nature of operations of the two companies, they can complement their businesses more effectively. The weaknesses of one company will be strengthened by the other hence making Bayer a force to reckon in the agrochemical industry. The transaction will bring together two companies whose businesses are highly complementary hence strengthening the position of Bayer in the market. As such, the combined business will benefit from Monsanto’s unrivalled competencies in seeds and traits and Bayer’s vast competencies in production of agrochemical designed for effective crop protection. The deal will increase the profitability of Bayer and increase its market share significantly.
To What Extent Do the Benefits of the Transaction Justify the $57 Billion Purchase Price?
Based on the potential gains of the deal, the benefits significantly justify the $57 billion purchase price. The company will be able to leverage its position in the market with the strengths that Monsanto will bring along (Christopher, 2016). There are major acquisitions of the nature that have succeeded in the recent pasts such as the acquisition of Syngenta by the Chinese firm, ChemChina. The cost of the transaction will not be a major cause for concern by Bayer given the financial gains it is set to earn. A combination of Bayer and Monsanto would significantly rival its global competitors. It will definitely become the largest agrochemical company in the world with annual revenue of more than $67 billion. Therefore, the payback back period for the initial investment of $57 billion may be shortened by such a prospect. It is demonstrable that the deal is justified given the potential benefits.
References
Christopher, A. (2016 October, 26). Bayer CEO defends planned acquisition of Monsanto- 2nd update. Dow Jones Newswires.
Bayer News, (2016 September, 14). Bayer and Monsanto to create a global leader in agriculture. Retrieved from https://www.press.bayer.com/baynews/baynews.nsf/id/ADSF8F
Bayer Website: https://www.bayer.com/en/profile-and-organization.aspx accessed on 4/22/2016
