Diversified Business Diversified Business Groups and Refocusing in Groups and Refocusing in

Emerging Economies Emerging Economies

Robert E. HoskissonRobert E. Hoskisson

Distinguishing Business Groups Distinguishing Business Groups from Networks from Networks

Samsung Group

Central Office

•Strategic Planning•Human Resources•Public Relation•Financial Controls

Electronics subgroup•Samsung Electronics•Samsung Electron Devices•Samsung Electronic Mechanics

Machinery subgroup•Samsung Heavy Industry•Samsung Aerospace•Samsung Motor•Samsung Watch

Independent Businesses subgroup•Hotel Shilla•Korea First Advertising•Cheil Wool Textile•JoongAng Daily News

Financial subgroup•Samsung Life Insurance•Samsung Marine Insurance•Samsung Securities•Samsung Credit Card

Chemical subgroup•Samsung Petrochemical•Samsung General Chemicals•Samsung Specialty Chemical

•Shinsegae Department Store•Samsung Corporation•Cheil Sugar•Samsung Engineering•Everland

Business Groups: Business Groups: Costs and Diversification Costs and Diversification

Costs

Diversification

Transaction Costs

Organization Costs

Business Groups: Reduced Overall Business Groups: Reduced Overall Transaction CostsTransaction Costs

Costs

Diversification

Transaction Costs

Organization Costs

Issues that Influence RefocusingIssues that Influence Refocusing

External shocks such as a currency crisisExternal shocks such as a currency crisisMore active takeover market More active takeover market Mass privatization policies Mass privatization policies Business groups may be protected from competition Business groups may be protected from competition because of market power in key industriesbecause of market power in key industriesBusiness groups operating within countries which Business groups operating within countries which emphasize relational norms emphasize relational norms Business groups exhibiting poor performance Business groups exhibiting poor performance Business groups with higher top management team Business groups with higher top management team turnover turnover Business groups that exhibit lower levels of affiliate firm Business groups that exhibit lower levels of affiliate firm trust trust

Mismatch between diversification strategy and structure

Diversification

Headquarters Influence

unrelated

related

decentralized centralized

Unrelated Firm Chaebols

Related Firm

Korean ChaebolsKorean Chaebols

Relationship between Divisions and Relationship between Divisions and Organization CostsOrganization Costs

Organization Costs and Organization Costs and DiversificationDiversification

Costs

Diversification

Transaction Costs

Organization Costs

Ownership Type Related Restructuring Unrelated Restructuring

Family

Other Financial Institutions

Foreign

Bank

Government

Ownership Incentives for Refocusing Toward Ownership Incentives for Refocusing Toward More Related Versus Unrelated DiversificationMore Related Versus Unrelated Diversification

Business Group ConfigurationsBusiness Group Configurations

How will Business Groups Evolve?How will Business Groups Evolve?

Will groups move toward horizontally Will groups move toward horizontally connected networks?connected networks?

Will groups move toward centrally controlled Will groups move toward centrally controlled multidivisional structures (M-forms)?multidivisional structures (M-forms)?

What will be the trade offs in regard to What will be the trade offs in regard to corporate entrepreneurship?corporate entrepreneurship?

With whom will they be competing?With whom will they be competing?– Developed economy firmsDeveloped economy firms– Other emerging economy firmsOther emerging economy firms

Refocusing and InternationalizationRefocusing and Internationalization

As groups reduce diversification, will they substitute As groups reduce diversification, will they substitute product diversification for international diversification?product diversification for international diversification?Group sharing of resources Group sharing of resources – Group membership may facilitate economies of Group membership may facilitate economies of

capital sharing in pursuing international diversification capital sharing in pursuing international diversification due to internal market operations due to internal market operations

Group knowledge sharingGroup knowledge sharing– Benefit from the experience of other group members Benefit from the experience of other group members

compared to independent firmscompared to independent firmsGroup-affiliated firms in the same foreign region are Group-affiliated firms in the same foreign region are natural candidates for foreign business alliances that natural candidates for foreign business alliances that may be necessary for critical massmay be necessary for critical mass

Model of Institutional ChangeModel of Institutional Change

1515

The Effect of Business Group Affiliation Governance on International Diversification and Market to Book Value

Pre-Financial Crisis Period Post-Financial Crisis Period

0.00

0.20

0.40

0.60

0.80

1.00

1.20

Low High

0.85

0.90

0.95

1.00

1.05

1.10

Low High

International Diversification International Diversification

MBV MBV

Independent Firms

Business Group-Affiliated Firms

Kim, Kim & Hoskisson 2010 JIBS