2005 has been a year of change for Orkla. In the past year, as a result of acquisitions, Orkla has grown strongly and has significantly changed the composition of its business portfolio. This development is in many ways in line with Orkla’s historical development and does not entail any fundamental change in the Group’s strategic focus.
In the early 1980s, towards the end of 333 years of continuous mining operations, Orkla began its transition from mining to industrial activities. Its current structure and main strategic direction were determined by the merger with Borregaard in 1986. Since then, Orkla has had a dual structure, divided between the Industry division, which covers Branded Consumer Goods and Chemicals/Speciality Materials, and the Financial Investments division. Within this framework, the Group has grown through a combination of organic development and improvement combined with major structural moves.
The figure on the left illustrates this by showing the development of operating revenues and operating profit since 1982. As illustrated in the figure, Orkla’s growth has been strong and profitable.
Orkla’s structure has provided, and still provides, a broad frontier of opportunity for both structural changes in and the organic growth of existing operations. Capital is allocated pragmatically to the projects with the best growth potential, regardless of where in the Group’s core areas they occur. In the 1980s and 1990s the opportunities for profitable, acquisition-based growth were greater in the Branded Consumer Goods area than in Speciality Materials. Consequently, Branded Consumer Goods’ share of Orkla’s total turnover grew strongly. The great opportunities for value creation provided by the sale of Orkla’s interest in Carlsberg Breweries in 2004 and the acquisition of Elkem and Sapa in 2005 have changed this picture in a short period of time. As in 1986, Speciality Materials and Branded Consumer Goods now account for almost equal proportions of Orkla’s sales.
Also in the future Orkla will continue to exploit the frontier of opportunity provided by the Group’s structure and market positions to allocate capital and management capacity pragmatically and commercially to those parts of the organisation that are considered to offer the best opportunities.
Acquisitions made in 2005 show in practice how this scope of possibilities contributes to development. For a fairly long time, Orkla has had a major shareholding in Elkem and has held the position of Chairman of the Board. During this time, Elkem’s operations have improved significantly, while the company has pursued a clear strategy of specialisation. When an opportunity arose to take over control of Elkem and at the same time create substantial value by combining the management capacity, operational strength and financial resources of Elkem and Orkla, this was a natural step in Orkla’s history of ownership in the company.
Most of Orkla’s acquisitions take place in familiar
sectors, partly in existing markets (such as the acquisition of the Martin Nordby bakery chain in Norway) and partly in new markets (such as the acquisition of the confectionery companies Panda and SladCo). In such cases there will be competence
synergies in the fields of purchasing, production,
product development, sales and marketing. 
Depending on the geographical overlap, there will also be cost synergies, which often will affect other categories as well. Orkla will also undertake acquisitions
that create new categories or expand existing
ones in order to position itself in relation to changes in customer preferences. The acquisition of Collett Pharma is an example of a strong increase in the breadth of the Group’s exposure in the field of dietary supplements and health-related products.
Orkla has substantial financial strength for further structural growth. The figure below shows the value of Orkla’s investment portfolio, net liabilities and operating profit before interest, taxes, depreciation and amortisation (EBITDA). By deducting the value of the portfolio from net interest-bearing debt it is possible to gain an indication of normal borrowing capacity. The company’s financial strength is therefore equivalent to its normal borrowing capacity in relation to EBITDA (roughly 3x EBITDA).
Orkla’s strategic focus is based on the Group’s primary goal of long-term value creation. Orkla wishes to create more value than its competitors. This is a very demanding challenge.
Orkla believes that the winning strategy over time is to adopt a proactive approach to the fact that the competitive picture and the frontier of opportunity are constantly changing. The Group’s development is affected by many trends and patterns of change. It is critical for Orkla to understand and recognise them. Examples of such trends are consumers’ increasing focus on health and nutrition, the growing use of private labels on the Nordic retail market and a more professional market for the acquisition and sale of companies. The ability to adapt on the basis of an understanding of trends and market developments is a minimum requirement. If Orkla is to achieve above-average value creation, it must anticipate market changes in terms of its knowledge of the markets, its understanding of consumers, its product development, marketing, sales, cost-efficiency, and other factors.
There are several approaches to value creation in the business areas in which Orkla operates. Orkla’s experience, historical positions and geographical centre of gravity indicate that, if it is to succeed, Orkla must create long-term competitive advantages other than cost advantages alone. In the Industry division, they will comprise at least three elements:
In order to be a moving target for our competitors, effort is made throughout the Group to achieve:
Orkla must be a dynamic industrial owner of its subsidaries. This role will be fulfilled by:
To enable Orkla to fulfil the role described above, a highly direct line of contact has been established between Orkla ASA and the Group’s business areas.
In its efforts to strengthen the organisation, Orkla focuses on three mutually reinforcing areas. The Group’s work in the fields of management development, culture and human resource development has high priority and is one of the most important leadership tasks at all levels.
It has become increasingly important to support Group companies by developing and sharing best practices. Individual companies continuously develop knowledge and experience. Orkla has a history of codifying and sharing such experience, primarily by establishing normative tools and arranging courses. Examples are the Orkla Brand Academy and the Orkla Production Academy, which play a crucial role in disseminating knowledge of “best practices” in their respective areas.
It is appropriate to think of industrial competence along two dimensions: facilitating and functional:
Specialised expertise in the field of acquisitions and transactions has long been located in Orkla ASA. This is because individual companies in the Group normally have too uneven and too little exposure to acquisitions to maintain a high level of expertise internally.
As a result of the realisation that it is important to strengthen facilitating and functional skills in Orkla companies, several specialist groups have now been incorporated into the parent company. These groups, which cover marketing/innovation for the consumer market, production/logistics and procurement, will work throughout Orkla ASA, supporting improvement efforts, helping to transfer best practices, and acting as a training and recruitment channel for talented young staff.
The Financial Investments division has created substantial value for Orkla and has always played an active role in the industrial development of the Group. The Financial Investments division has also contributed financial flexibility and strength to the Group, partly by generating substantial value and partly by providing a liquid reserve that can rapidly be made available for major industrial projects.
The Financial Investments division will be an important contributor to Orkla’s future value creation. At the same time, to a somewhat greater extent than before, Orkla will use the Financial Investments division to actively contribute to the Group’s industrial development without reducing the return of the portfolio. The division will further exploit the opportunities afforded by its proximity to Orkla’s industrial activities:
Orkla companies operate in different competitive climates and achieve varying growth in their respective markets. The overall strategy therefore defines different strategic priorities for the various companies.
In the case of Orkla Foods and Orkla Brands, Orkla has strong and developable positions. The challenge for these companies is to continue to grow profitably through innovation and acquisitions in new and existing categories. The geographical focus of expansion is the Nordic region, Central and Eastern Europe and the CIS countries (the former Soviet republics).
Orkla Media has very strong national positions in the field of printed media. The next strategic steps will be determined on the basis of the development process that is currently being carried out.
For Elkem, hydropower and solar energy are candidates for further growth and investment. Due to its ownership structure, the aluminium business has limited opportunities for growth, but its earning performance is good. In the future, aluminium will therefore primarily contribute with high and stable cash flow. The silicon-related business is subject to strong competitive pressure and will be consolidated and restructured to improve its cost position.
In the past, Sapa has generated good earnings compared with its main competitors, but its profit has been too low in recent years. For this reason, the focus for Sapa’s operations in the field of profiles and building systems will be on operational improvements. The heat transfer business is experiencing growing demand and is a prioritised growth area.
The profitability of Borregaard’s industrial activities is limited due to an unfavourable currency situation and high oil-related costs. Priority will therefore be given to regaining an acceptable level of profitability, while opportunities for structural development will also be considered.
Orkla’s broad frontier of opportunity will provide openings of which the full scope is not apparent today. This means that in future the Group will continue to make structural and organic moves that will change the size and composition of its business portfolio. Orkla has surprised people before and will surprise people again.
Orkla’s structure and main strategic direction have largely remained unchanged since 1986 but the Group has been actively developed. Over time, this has resulted in a very good return for shareholders. In recognition of the fact that the competitive situation is becoming increasingly demanding, Orkla is working purposefully to strengthen its competitive advantages. The Group is in a strong position and has demonstrated its ability to create value. Orkla has therefore never had greater opportunities than it does today. Orkla will exploit these opportunities in order to be able to continue to realise its goal of long-term value creation in the future.
