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Copyright © 2005 South-Western. PowerPoint Presentation by David Ahlstrom, Chinese University of Hong KongAll rights reserved. and Charlie Cook, The University of West AlabamaCopyright © 2005 South-Western. PowerPoint Presentation by David Ahlstrom, Chinese University of Hong KongAll rights reserved. and Charlie Cook, The University of West Alabama

Diversifying, Diversifying, Acquiring, and Acquiring, and RestructuringRestructuring

Part III: Corporate-Level StrategiesPart III: Corporate-Level Strategies

Copyright © 2005 South-Western. All rights reserved. 9–2

Product Related Diversification

• Entry into new product markets and/or business activities that are related to a firm’s existing markets and/or activities.Emphasis is on operational synergy:

Common technologies, marketing, and manufacturing

Increases in competitiveness beyond what can be achieved by engaging in two product markets and/or business activities separately—2 + 2 = 5.– Also known as scale economies or economies of scale.


Product Unrelated Diversification

• Entry into industries that have no obvious product-related connections to the firm’s current lines of business.These firms are also called conglomerates, and

their strategy is known as conglomeration—the intent is to obtain financial (not operational) synergies.

The role of corporate headquarters: An internal capital market

Diversification premium (conglomerate advantage)Diversification discount (conglomerate

disadvantage)


Product Diversification and Firm Performance

Figure 9.1Source: Adapted from R. E. Hoskisson, M. A. Hitt, & R. D. Ireland, 2004, Competing for Advantage (p. 228), Cincinnati: Thomson South-Western.


Diversification and Firm Performance

• There are important caveats:Not all product related diversifiers outperform

unrelated diversifiers (the GE exception)

In emerging economies, the conglomeration strategy seems to be persisting.

Units affiliated with South Korea’s Samsung Group, India’s Tata Group, and Turkey’s Koc Group often outperform stand-alone competitors.


Geographic (International) Diversification

Geographic Geographic DiversificationDiversification

Geographic Geographic DiversificationDiversification

Limited International ScopeLimited International Scope(geographically and culturally (geographically and culturally

adjacent countries)adjacent countries)

Limited International ScopeLimited International Scope(geographically and culturally (geographically and culturally

adjacent countries)adjacent countries)

Extensive International ScopeExtensive International Scope(beyond geographically and (beyond geographically and

culturally neighboring countries)culturally neighboring countries)

Extensive International ScopeExtensive International Scope(beyond geographically and (beyond geographically and

culturally neighboring countries)culturally neighboring countries)


Geographic Diversification and Firm Performance

• In this age of globalization, there are frequent calls for wider geographic diversification:All firms need to go “global.”Non-international firms need to start venturing

abroad.Firms with a little international presence

should widen their geographic scope.

• However, the evidence is not fully supportive of this popular view.



Figure 9.2

Source: Adapted from F. Contractor, S. K. Kundu, & C.-C. Hsu, 2003, A three stage theory of international expansion: The link between multinationality and performance in the service sector (p. 7), Journal of International Business Studies, 34: 5–18.



• Not all firms have been sufficiently involved overseas to experience the ups and downs.

Studies reported a U-shaped relationship because they only sampled firms in the early to intermediate stages of internationalization.

Other studies document an inverted-U shape, because their samples are biased for larger firms with moderate to high levels of diversification.

Given the complexity, it is hardly surprising that there is a large debate about geographic diversification.


A Comprehensive Model of Diversification

Figure 9.4


Industry-Based Considerations

• Motivations for Diversification:Overseas growth opportunities in an industry

(e.g., typewriters)Structural attractiveness

Interfirm rivalries based on cost leadership and differentiation and high entry barriers may not deter new entrants.

Bargaining power of suppliers and buyersFirms broaden their scope by acquiring suppliers

upstream and/or buyers downstream.The threat of substitute products

Kodak and Fuji threatened by digital camera makers which produce substitute products


Resource-Based Considerations• Value

Diversification reduces risk—compared with non-diversified, single-business firms

• RarityLeveraging unique core competencies and

capabilities.

• ImitabilityGE is enviable, but few firms can imitate it.

• OrganizationOrganizational structure and control

mechanisms must support certain diversification strategies (product-related (strategic control) or –unrelated (finanicial control))


Formal InstitutionsFormal InstitutionsFormal InstitutionsFormal Institutions

Promote product unrelated diversification by banning

intraindustry mergers

Promote product unrelated diversification by banning

intraindustry mergers

Enable or constrain geographic diversification by loosening or

tightening FDI policies

Enable or constrain geographic diversification by loosening or

tightening FDI policies

Internalized, cognitive beliefs guide managerial action (e.g.,

empire building)

Internalized, cognitive beliefs guide managerial action (e.g.,

empire building)

Normative pressures to jump on the diversification “bandwagon”

Normative pressures to jump on the diversification “bandwagon”

Informal InstitutionsInformal InstitutionsInformal InstitutionsInformal Institutions

Institution-Based Considerations


The Evolution of the Scope of the Firm

• The Scope of the Firm Determined by a comparison between

marginal economic benefits (MEB) and the marginal bureaucratic costs (MBC).MEB are the various forms of synergy (operational

or financial) gained from the last unit of growth— e.g., the last acquisition.

MBC are additional costs associated with a larger, more diversified organization—e.g., more headcounts, more expensive information systems.


What Determines the Scope of the Firm?

Figure 9.5Source: Adapted from G. Jones & C. Hill, 1988, Transaction cost analysis of strategy-structure choices (p. 166), Strategic Management Journal, 9: 159–172.


The Evolution of the Scope of the Firm in the United States: 1950–1970 and 1970–1990

Figure 9.6Source: M. W. Peng, S. H. Lee, & D. Wang, 2005, What determines the scope of the firm over time? A focus on institutional relatedness, Academy of Management Review (in press).


The Optimal Scope of the Firm: Developed versus Emerging Economies at the Same Time

Figure 9.7Source: M. W. Peng, S.-H. Lee, & D. Wang, 2005, What determines the scope of the firm over time? A focus on institutional relatedness, Academy of Management Review (in press).


Conglomeration in Emerging Economies

• Why does conglomeration add value in emerging economies?This analysis relies on two critical and

reasonable assumptions (Figure 9.7):

That at a given level of diversification, MEBEmergingEcon > MEBDevelopedEcon

That at a given level of diversification, MBCEmergingEcon < MBCDevelopedEcon

Overall, industry dynamics, resource repertoires, and institutional conditions are not static, nor are diversification strategies.


Acquisitions: Setting the Terms Straight

• Although the term “mergers and acquisitions” (M&As) is often used, in reality, acquisitions dominate the scene.Acquisition: transfer of the control of assets,

operations, and management from one firm (target) to another (acquirer), the former becoming a unit of the latter.PeopleSoft is now a unit of Oracle

Merger: the combination of assets, operations, and management of two firms to establish a new legal entity.South African Brewery & Miller Beer SABMiller


Types of Cross-Border Mergers and Acquisitions

Figure 9.8Source: Adapted from United Nations, 2000, World Investment Report 2000 (p. 100), New York: UN


Types of M&As

• Primary categories of M&As Horizontal: deals involving competing firms in the same

industry—BP/Amoco.

Vertical: deals which allow the focal firms to acquire suppliers upstream and/or buyers downstream—Sony/Columbia Pictures.

Conglomerate: transactions undertaken by product unrelated diversifiers involving firms in product unrelated industries and markets—Vivendi/Universal.

• Terms of M&As Friendly: the board and management of a target firm

agrees to the transaction (although they may initially resist).

Hostile (or hostile takeovers): undertaken against the wishes of the target firm’s board and management, who reject M&A offers


Motives for Mergers and Acquisitions

• Industry-based perspective Enhance and consolidate market power in an industry.

• Resource-based perspective Leverage superior managerial resources. Access needed resources

• Institution-based perspective Often a response to formal institutional constraints. Also often a reflection of informal norms and cognitions Hubris motives: Managerial over-confidence Managerial motives: Self-interested empire building in

search of more power, prestige, and income

• These motives may coexist simultaneously


The Performance of M&As

• The performance record is rather sobering. As many as 70% of M&As reportedly fail. On average, acquiring firms’ performance does not

improve and is often negatively affected. Acquisitions are the largest capital expenditures most

firms ever make, yet they are often the worst planned and executed business activities of all.

Competitors often launch aggressive attacks to take advantage of the M&A chaos. Airbus increased market share during the Boeing/McDonnell

Douglas merger Dell invaded the printer market when HP was distracted in its

merger with Compaq


Symptoms of Merger and Acquisition Failures

Table 9.3


Stakeholders’ Concerns During Mergers and Acquisitions

Figure 9.9


Improving Acquisition Performance

• Managers should:Not pay too much for targets.Avoid a bidding war—be willing to walk out

when premiums are too high.Screen for both strategic and organizational fit

to avoid surprises after the acquisition.Address the concerns of multiple stakeholders.Try to keep the best talents.Be prepared to deal with road blocks thrown

out by people whose jobs and power may be jeopardized.


Restructuring: Setting the Terms Straight

• RestructuringA reduction in either firm size and scope or

both.

• Primary meansDownsizing

Reducing the number of employees through lay-offs, early retirements, and out-sourcing.

DownscopingReducing the scope of the firm through divestitures

and spin-offs.


Motives for Restructuring

• Industry-based Perspective Restructuring is often triggered by a rising level of

competition within an industry (e.g., auto, telecom)

• Resource-based Perspective While restructuring may bring benefits, there are also

significant costs—organizational chaos, anxiety, frustration, and low morale—which often fail the VRIO test.

• Institution-based Perspective Firms and managers in developed economies increasingly

feel institutional pressures from capital markets to restructure.

Also, strong institutional pressures against restructuring around the world (e.g., Germany, CEE, Asia)


Improving Restructuring Performance

• Given the high risks and high stakes involved, firms will do better if they:Use restructuring as a last—not first—resort.Manage survivors more effectively—treating

departing employees fairly and decently, which sends a positive signal to surviving employees.

Are careful in restructuring knowledge-intensive units, whose organizational memory and capabilities are largely embedded in employees.

global strategy mike w. peng c h a p t e r 99 copyright © 2005 south-western.powerpoint...

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noninternational firms

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high levels of diversification

product related diversifiers

geographic scope

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