Argyres, Nicholas (1996)
Capabilities, technological diversification and divisionalization.
Strategic Management Journal, 17(5): 395-410.
The hypothesis that greater
R&D diversification is associated with less divisionalization
in multidivisional firms is developed. It is argued, using transaction
cost theory, that the extent of divisionalization of a large firm
is indicative of its emphasis on interdivisional coordination,
since fewer divisional boundaries reduce interdivisional bargaining
costs. Also, greater interdivisional coordination is required
to pursue strategies aimed at broadening technological capabilities.
Conversely, less interdivisional coordination is required for
more specialized R&D, that is, for strategies aimed at deepening
existing capabilities. The hypothesis finds support in patent
and organizational data.
Markides, Constantinos
C; Williamson, Peter J. (1996) Corporate diversification and
organizational structure: A resource-based view. Academy
of Management Journal, 39(2): 340-367.
It is argued that related
diversification enhances performance only when it allows a business
to obtain preferential access to strategic assets - those that
are valuable, rare, imperfectly tradable and costly to imitate.
As the advantage this access affords will decay as a result of
asset erosion and imitation by single-business rivals, in the
long run only competences that enable a firm to build new strategic
assets more quickly and efficiently than competitors will allow
it to sustain supernormal profits. Both short- and long-run advantages
are conditional, however, on organizational structures that allow
the firm's divisions to share existing strategic assets and to
transfer the competence to build new ones efficiently.
Lubatkin, Michael H; Lane,
Peter (1996) Psst... The merger mavens still have it wrong!
Academy of Management Executive, 10(1): 21-39.
The 1990s are witnessing a
wave of mergers that rivals the size of those of the 1980s and
1960s. Proponents whisper that these mergers are fundamentally
different from the earlier waves, that managers have learned their
lessons, and that the underlying logic has fundamentally changes.
A discussion contends it is useful to review the misinformed
beliefs that drove mergers in past decades, and as these merger
myths continue to influence managers today. The myths discussed
include: 1. risk reduction through diversification, 2. creating
value through a portfolio perspective, and 3. related mergers
are easier than unrelated. Some guidelines for making mergers
truly strategic include: 1. Keep your eggs in similar baskets
of knowledge. 2. Collaborate to learn. 3. Date before you
marry. 4. There is more to a marriage than a courtship.
Anslinger, Patricia L;
Copeland, Thomas E (1996) Growth through acquisitions: A fresh
look. Harvard Business Review, 74(1): 126-135.
Many companies today find
themselves with a surplus of cash and a shortage of places to
use it. In the past 5 years, more than 1,300 companies have stashed
upwards of $150 billion into their coffers. It is suggested that
companies can pursue nonsynergistic acquisitions profitably.
A diverse group of organizations, including Thermo Electron, Sara
Lee, and Clayton, Dubilier & Rice, have used nonsynergistic
acquisitions to grow dramatically. sustained returns of 18% to
35% per year have been captured by making nonsynergistic acquisitions.
However, making these acquisitions work is not easy. They require
senior managers to ask themselves a difficult set of questions.
Brush, Thomas H. (1996)
Predicted change in operational synergy and post-acquisition
performance of acquired businesses. Strategic Management
Journal, 17(1): 1-24.
The 1980s acquisitions are
widely believed to have unwound that conglomerate boom of the
1960s through horizontal mergers, yet alternative forms of unwinding
have not been examined. A study tests the explanation that changes
in the opportunity to share resources and activities among businesses
of the firm may have contributed to post-acquisition performance
improvements in the recent acquisition wave. After estimating
the sources of competitive performance that are due to these changes
within each of 356 manufacturing industries, the study calculates
predictions of changes in competitive performance for each acquired
business between 1980 and 1984. The predictions are positive
and in turn are positively associated with change in competitive
performance between 1984 and 1986. This finding highlights the
importance of resource sharing and activity in these acquisitions,
and leads to the re-examination of theories for the 2nd acquisition
wave that are supported by the finding of horizontal acquisitions.
Bettis, Richard A; Prahalad,
C.K. (1995) The dominant logic: Retrospective and extension.
Strategic Management Journal, 16(1): 5-14.
A brief review is presented
of the history of dominant logic, then the ways in which this
concept has been further developed in recent years are described.
Discussion focuses on the dominant logic as a filter,
on the dominant logic as a level of strategic analysis, on the
unlearning (forgetting) curve, on the dominant logic as
an emergent property of organizations as complex adaptive systems,
and on the relationship between organizational stability
and the dominant logic. Throughout emphasis is give to the inherent
nonlinear nature of organizations and the mental models that they
create.
Campbell, Andrew; Goold,
Michael; Alexander, Marcus (1995) Corporate strategy: The quest
for parenting advantage. Harvard Business Review,
73 (2): 120-132.
While the core competence concept appealed powerfully to companies disillusioned with diversification, it did not offer any practical guidelines for developing corporate-level strategy. To fill the gap, the parenting framework is proposed. Instead of looking at how businesses relate to one another, a parent
organization should look at
how well its skills fit its businesses' needs and whether owning
them creates or destroys value. Businesses that seem related,
such as minerals and oil, often require completely different skills.
To determine the fit between a parent and its businesses, corporate
strategists should look at 4 areas: 1. the critical success factors
of the business, 2. the parenting opportunities in the business,
3. the characteristics of the parent, and 4. the financial results.
Changing the portfolio to fit the parent organization is usually
easier than trying to change the parent to fits its business.
Ito, Kiyohiko (1995)
Japanese spinoffs: Unexplored survival strategies. Strategic
Management Journal, 16 (6): 431-446.
A study analyzes spinoffs
of Japanese firms and the use of the spinoff as an instrument
to achieve corporate growth objectives. The initial separation
of the organizations and its governance mode are analyzed in the
context of transaction costs theory. Spinoffs may be created
in order to: 1. balance costs associated with managing diversified
businesses, 2. generate growth based on core competencies of
a firm, and 3. pursue an efficient internal labor market. In
a changing environment, the spinoff has been a widely used flexible
organizational arrangement that is suitable to survival and offers
an alternative way of diversification.
Li, Jiatao (1995) Foreign
entry and survival: Effects of strategic choices on performance
in international markets. Strategic Management Journal,
16 (5): 333-351.
A study investigates effective
strategies that can reduce the risk of failure in international
expansion by examining the entry and survival of foreign subsidiaries
in the US computer and pharmaceutical industries over the 1974-1989
period. Using a hazard rate model, the study examines the effects
of diversification strategies, entry strategies, and organizational
learning and experience on the survival probabilities of foreign
subsidiaries. The results show a higher exit rate for foreign
acquisitions and joint ventures than for subsidiaries established
through greenfield investments. The results also indicate a higher
exit rate for subsidiaries that diversify than for those that
stay in the parent firm's main product area.
Markides, Constantinos
C. (1995) Diversification, restructuring and economic performance.
Strategic Management Journal, 16 (2): 101-118.
During the 1980s, many conglomerates
and other diversified firms reduced their diversification by refocusing
on their core businesses. A study provides an economic explanation
for this phenomenon and empirically tests the hypotheses that
emerge from the analysis. Perhaps the most important contribution
of this study is the finding that refocusing in the 1980s by the
over-diversified firms is associated with profitability improvements.
This finding is consistent with the available ex-ante evidence
on refocusing, which shows that refocusing is associated with
market value improvements. The results of this study also lend
support to the claim by Wernerfelt and Montgomery (1988) that
the existence of a negative relationship between diversification
and the firm's average profitability does not necessarily imply
that diversifying firms are not maximizing profits, only that
their marginal returns decrease as they diversify farther afield.
Robins, James; Wiersema,
Margarethe F. (1995) A resource-based approach to the multibusiness
firm: Empirical analysis of portfolio interrelationships and
corporate financial performance. Strategic Management Journal,
16 (4): 277-299.
The resource-based view of
the firm has provided important new insights into corporate strategy
(Barney, 1991, and Peteraf, 1993). However, there has been only
limited empirical research linked to the theory (Farjoun, 1994).
Although a great deal of work has been done on corporate diversification,
the measures and data typically have a weak connection to resource-based
theory. Empirical research on resource-based corporate strategy
has been particularly difficult because key concepts such as tacit
knowledge or capabilities resist direct measurement. A study
attempts to narrow the gap between theory and empirical research
on the multibusiness firm. The study develops a resource-based
approach to modeling interrelationships among businesses and applies
it to the analysis of corporate economic performance. This approach
proves to be significant in explaining the financial performance
of large manufacturing firms, and it promises to be an important
source of insight into corporate strategy.
Taylor, Peter; Lowe, Julian
(1995) A note on corporate strategy and capital structure.
Strategic Management Journal, 16 (5): 411-414.
The relationships between
capital structure and corporate strategy in previous US and Australian
empirical studies, which use different definitions of capital
structure, and hence have different functional relationships,
are considered. A model using the US specification with the Australian
data is estimated, for which previous conclusions relating to
profit are confirmed. The relationship between strategy and capital
structure is thus shown to be less than robust. The conclusion
that debt-equity ratios of highly diversified firms are more strongly
affected by firm-level variables is supported. An explanation
that the capital market rewards focused firms because they are
easier to understand and price is offered.
Wiersema, Margarethe F;
Liebeskind, Julia Porter (1995) The effects of leveraged buyouts
on corporate growth and diversification in large firms. Strategic
Management Journal, 16 (6): 447-460.
A study investigates the effects
of LBOs on corporate growth and diversification in large US firms
which underwent leveraged buyouts during the 1980s. Based on
the analysis, the study found that revenue and employee growth
are significantly lower in LBO firms than in control firms that
remained public. Strategically, it found that LBO firms decreased
the size of both their periphery and core businesses more than
public control firms and that LBO firms divested a significantly
higher volume of periphery and core businesses than control firms.
These postbuyout differences between LBO and public firms are
consistent with the argument that LBO firms provide managers with
incentives to downsize and prune lines of business, resulting
in reduction in overall firm size and diversification.
Buchko, Aaron A. (1994)
Conceptualization and measurement of environmental uncertainty:
An assessment of the Miles and Snow perceived environmental uncertainty
scale. Academy of Management Journal, 37 (2):
410-425.
To measure executives' perceived
environmental uncertainty, the Miles and Snow (1978) perceived
environmental uncertainty questionnaire was incorporated into
a survey examining business strategy among firms that supply parts
and components to the automobile industry. The survey was mailed
to the chief executive officers of 354 supplier firms identified
from the ELM Guide to US Automotive Sourcing. Results supported
the internal consistency of the scale; however, stability as measured
by test-retest correlations was inadequate. The scale did not
correlate with criterion measures of firm diversification. Implications
for measurement of the perceived environmental uncertainty construct
are discussed.
Hall, Ernest H Jr; St John,
Caron H. (1994) A methodological note on diversity measurement.
Strategic Management Journal, 15 (2): 153-168.
Using analysis of variance,
cluster analysis, and discriminant analysis, a study investigates
whether continuous measures (entropy and product count) differentiate
between diversification categories, whether continuous measures
converted to categories and subjectively assigned categories classified
companies similarly, and whether continuous and categorical measures
predicted similar diversity-performance relationships. It is
concluded that the techniques were associated, but did not yield
the same performance predictions. For researchers investigating
diversity-performance relationships, choice of measurement technique
will influence research results. The results suggest that attempts
to combine categorical and continuous techniques as a way to overcome
the limitations of both methods is not appropriate.
Hitt, Michael; Hoskisson,
Robert E; Ireland, R Duane (1994) A mid-range theory of the
interactive effects of international and product diversification
on innovation and performance. Journal of Management,
20 (2): 297-326.
Corporate strategies may include
both product and geographic international diversification components.
However, little theoretical work has linked the interaction of
these 2 strategies to innovation and performance. Theoretical
arguments depicting the interactive effects of international and
product diversification are presented. The theory presented suggests
that international diversification is positively related to both
innovation and firm performance, and positively moderates the
relationship between product diversification and innovation and
performance. The central concept is that innovation is generally
facilitated by international diversification, while the general
relationship between product diversification and innovation is
negative. Given appropriate firm capabilities and country circumstance,
international diversification facilitates innovation and performance.
Ingham, Hilary; Thompson,
Steve (1994) Wholly-owned vs. collaborative ventures for diversifying
financial services. Strategic Management Journal,
15 (4): 325-334.
Recent empirical work has
supported the Penrose-Teece view that firms diversify to exploit
fully specific assets or capabilities. Where transactions costs
permit, these economies of scope may be realized via input supply
contracts among producers. However, asset specificities frequently
create transaction costs which discourage market contracting and
leave firms with a choice between collaborative ventures and wholly-owned
new entry. This research uses the natural experiment of financial
services deregulation to explore the collaborative-own entry choice
for 292 new entries in 13 financial product markets. The results
generally support the maintained hypotheses that specificity encourages
full ownership while collaboration is used to ease a resource
constraint.
Ito, Kiyohiko; Rose, Elizabeth
L . (1994) The genealogical structure of Japanese firms: Parent-subsidiary
relationships. Strategic Management Journal,
15 (Summer): 35-51.
A study analyzes the genealogical
structure of large Japanese firms, with particular emphasis on
the relationship between parent firms and spinoff subsidiaries.
The wide use of spinoffs and subsidiaries in japan provides for
flexible organizational mutations that appear to facilitate increased
competitiveness and offer the opportunity to obtain beenfits through
a deliberate separation of core competencies. The study discusses
a conceptual framework for the spinoff arrangement, the results
of an exploratory empirical analsyis of the relationship between
parent and subsidiary organizations, and implications of the use
of this organizational structure. The importance of considering
the genealogical aspects of large Japanese firms in strategy research
is emphasized.
Kashlak, Roger J; Joshi,
Maheshkumar P. (1994) Core business regulation and dual diversification
patterns in the telecommunications industry. Strategic
Management Journal, 15 (8): 603-611.
Ameritech is one of the Regional
Bell Operating Companies (RBOC) and was confronted with the separate
decisions of product and international diversification. It is
suggested that these postures are linked to external contingencies
in firms who face core business regulation. A technique is developed
to explain dual diversification patterns using evidence obtained
from the new industry comprised of the RBOCs. The proposed framework
appears to satisfactorily explain RBOC diversification patterns.
Only one RBOC deviated from both predicted patterns. It is believed
that the technique should be considered exploratory and more statistically
sound work is needed before any universal claims are made.
Koch, James V; Cebula,
Richard J. (1994) In search of excellent management. Journal
of Management Studies, 31 (5): 681-699.
A study examines the determinants
of managerial excellence as perceived by corporate CEOs, directors,
and financial analysts in Fortune magazine's annual survey of
the best-managed American firms in 33 industries. While the firms
perceived to be best managed are more profitable and less risky,
and grow faster and reward their stockholders more than less well-managed
firms, these variables explain only about 30% of the variance
in management ratings. The firms perceived to be best management
have more involvement in international markets and research and
development, while large firm size and firm diversification reflect
negatively upon perceived managerial quality. The relative inability
of conventional financial measures of firm performance to explain
perceptions of managerial excellence underlines the complex nature
both of these perceptions and strategic behavior.
Markides, Constantinos
C; Williamson, Peter J. (1994) Related diversification, core
competences and corporate performance. Strategic Management
Journal, 15 (Summer): 149-165.
There is still considerable
disagreement about precisely how and when diversification can
be used to build long-run competitive advantage. The disagreement
exists for 2 main reasons. First, the traditional way of measuring
relatedness between 2 businesses is incomplete because it ignores
the strategic importance and similarity of the underlying assets
residing in these businesses. Second, the way researchers have
traditionally thought of relatedness is limited, primarily because
it has tended to equate the benefits of relatedness with the static
exploitation of economies of scope, thus ignoring the main contribution
of related diversification to long-run, competitive advangtage;
namely, the potential for the firm to expand its stock of strategic
assets and create new ones more rapidly and at a lower cost than
rivals that are not diversifed across related businesses. An
empirical test supports the view that strategic relatedness is
superior to market relatedness in predicting when related diversifiers
outperform unrelated ones.
Mitchell, Will; Shaver,
J Myles; Yeung, Bernard (1994) Foreign entrant survival and
foreign market share: Canadian companies' experience in United
States medical sector markets. Strategic Management Journal,
15 (7): 555-567.
A study shows that successful
foreign market entry is related to the extent of foreign presence
in an industry at the time of entry. Survival of 31 Canadian-based
businesses that entered 24 US medical sector markets between 1968
and 1989 tended to be somewhat longer in product markets in which
foreign-based businesses held a moderate market share when the
Canadian businesses entered than in low and high foreign share
product markets. The result controls several other industry and
business-level factors, including industry concentration, entry
year, corporate size, related diversification, entry mode, and
service sector status.
Lamont, Bruce T; Williams,
Robert J; Hoffman, James J. (1994) Performance during 'M-form'
reorganization and recovery time: The effects of prior strategy
and implementation speed. Academy of Management Journal,
37 (1): 153-166.
The long-term performance
benefits of companies' reorganizing to an 'M-form' or multidivisional
structure, in which strategic decisions are centralized and operating
decisions are decentralized, are well documented. In the short
term, however, such a major restructuring may be quite disruptive.
Taking a different tack from previous work on the performance
effects of 'M-form' adoption, a study examined performance deterioration
during reorganization periods and the subsequent time required
for performance to recover to prereorganization levels. Seventy-six
firms were studied. These firms were pursuing 3 diversification
strategies: vertical, related and unrelated. Prior strategy and
implementation speed were found to affect both transition performance
and recovery time.
Lubatkin, Michael; Chatterjee,
Sayan (1994) Extending modern portfolio theory into the domain
of corporate diversification: Does it apply? Academy of
Management Journal, 37 (1): 109-136.
Executives frequently justify
a diversification move by claiming that it reduces a firm's exposure
to cyclical and secular uncertainties or risk. However, very
little is known about the relationship between corporate diversification
and risk. Much of what is known is borrowed from modern portfolio
theory. A study offers evidence that the evolving theory of strategic
management better explains the risk outcomes of corporate diversification
than modern portfolio theory. The notions that diversification
lowers a firm's unsystematic risk but does not affect its systematic
risk were tested while controlling for other factors that influence
risk. The findings show that the relationship between corporate
diversification and both forms of stock return risk generates
a U-shaped graph. Thus, an important way for corporations to
minimize risk is to diversify into similar businesses rather than
into identical or very different businesses.
Ollinger, Michael (1994)
The limits of growth of the multidivisional firm: A case study
of the U.S. oil industry from 1930-90. Strategic Management
Journal, 15 (7): 503-520.
Some scholars, including Chandler (1977) and Penrose (1959), believe that firms grow by transferring inimitable marketing, production, and research skills from one line of business to another. Extending this view and emphasizing the role of the central office of a multidivisional firm to transfer administrative skills, Williamson (1975) argues that competition among business units within the firm mimics a competitive capital market and leads to an efficient allocation of resources. Coase (1937), however, argues that firm size is limited by the costs of organizing diverse transactions and Chandler (1991) claims that growth is constrained by the technical and marketing expertise of the top managers. This
study demonstrates that the
scope of the multidivisional firm is limited by the transferability
of firm-specific skills and the efficiency of capital markets.
Support comes from a case study of 19 oil companies over the
1930-1990 period.
Harrison, Jeffrey S; Hall,
Ernest H Jr; Nargundkar, Rajendra (1993) Resource allocation
as an outcropping of strategic consistency: Performance implications.
Academy of Management Journal, 36 (5): 1026-1051.
Theory and empirical evidence
are presented to support a resource-based view of the relationship
between diversification and performance. Similarities in financial
resource allocations across the lines of business of diversified
firms may indicate corporate strategic consistency, which may
lead to superior corporate performance. In support of this argument,
the variance in R&D intensity across the lines of business
of 96 diversified firms was found to be inversely related to industry-adjusted
return on assets. However, no relationship was found for capital
intensity. A consistently high emphasis on R&D across closely
related lines of business can provide strategic advantages that
are unavailable to diversified firms that do no display such consistency.
These results provide partial support for the usefulness of a
resource-based approach to the study of diversification strategy.
Hoskisson, Robert E; Hill,
Charles W L; Kim, Hicheon (1993) The multidivisional structure:
Organizational fossil or source of value? Journal of Management,
19 (2): 269-298.
The multidivisional (M-form)
structure has been variously characterized as the most significant
organizational innovation in the 20th century and as an organizational
fossil that is increasingly irrelevant in the modern world. A
consideration of research on the M-form is done to: 1. evaluate
3 perspectives (transaction cost, strategic management, and sociological)
relating to the M-form, 2. examine what the empirical evidence
finds about relationships proposed by these perspectives, and
3. develop a model that summarizes the relationships proposed
among these perspectives and make suggestions about future theory
building and areas where further empirical work is needed. The
cumulative evidence on M-form structures is that corporate form
does make a difference in organizational performance. However,
the accumulated body of research evidence on diversification suggests
that diversification does little to create economic value.
Hoskisson, Robert E; Hitt,
Michael A; Johnson, Richard A; Moesel, Douglas D. (1993) Construct
validity of an objective (entropy) categorical measure of diversification
strategy. Strategic Management Journal, 14
(3): 215-235.
A study measures the construct
validity of an objective (entropy) approach to the measurement
of diversification strategy. The results indicate strong convergent,
discriminant, and criterion-related validity for the entropy measure
of diversification. In particular, support for the entropy measure
of diversification strategy was demonstrated through associations
with: 1. the Rumelt subjective measure of diversification (convergent
validity), 2. size, debt, and R&D intensity (discriminant
validity), and 3. accounting and market-based performance (criterion-related
validity). It may be more appropriate to use the diversification
factor with both the entropy and Rumelt subjective measures for
maximum accuracy. However, using either alone would also be acceptable.
In addition, the standard industrial classification (SIC) measure
may be appropriate in more limited circumstances.
Kim, W Chan; Hwang, Peter;
Burgers, Willem P. (1993) Multinationals' diversification and
the risk-return trade-off. Strategic Management Journal,
14 (4): 275-286.
A study advances a theoretical
rationale to explain Bowman's paradox (1980) that firms with high
returns can have low risk. Drawing on the large body of international
management research, it is argued that global market diversification,
which provides firms with 3 distinct options and opportunities
over domestic firms, can explain the high return-low risk profile.
There exists no strong theoretical rational in support of either
related or unrelated product diversification generating such a
favorable risk-return profile. The results of the study, which
are based on the diversification experiences of 125 multinational
corporations, reveal the important role that global market diversification
plays in the joint management of corporate risk and return.
Lubatkin, Michael; Merchant,
Hemant; Srinivasan, Narasimhan (1993) Construct validity of
some unweighted product-count diversification measures. Strategic
Management Journal, 14 (6): 433-449.
In a study, current (1980-1987)
diversification and corporate risk return data were used to compare
Rumelt's (1974) classification measure and several unweighted
product-count measures as to their ability to demonstrate construct
validity. Convergent and predictive validity assessments were
conducted of 3 unweighted product-count measures and the 2-dimensional
unweighted product-count measure which Varadarajan and Ramanujam
(1987) recently proposed. The discriminatory power of the different
diversification measures and their internal consistency were also
assessed. All empirical tests were conducted with 3 lists of
firms, each drawn over an 8-year time frame, and with 2 types
of SIC diversification data. Two of the 3 continuous measures
were found to correspond strongly to Rumelt's categorial measures,
suggesting that these 2 objective and easy-to-calculate measures
are better suited for large sample, strategy research than has
previous been assumed. No support was found for the 2-dimensional
measure.
Miles, Grant; Snow, Charles
C; Sharfman, Mark P. (1993) Industry variety and performance.
Strategic Management Journal, 14 (3): 163-177.
A study advances a nascent
perspective in the strategic management literature through a focus
on the beneficial effects of competition among firms in an industry.
The overall purpose of the study is to provide a theoretical
foundation for the study of the mutual gains associated with industry
competition. Because of its importance to several different organizational
theories, the concept of variety is examined as a potential source
of interfirm benefits. The influence of variety is observed in
12 industries, 4 each from the growth, mature, and decline stages
of the life cycle. Study results show that industry variety and
performance are positively related, suggesting that interfirm
benefits are most feasible in industries characterized by diversity
among firms' competitive strategies. As industries move through
the life cycle, variety decreases, implying that both strategists
and policymakers need to consider the impact on aggregate variety
when evaluating prescriptions for the revitalization of declining
industries.
Nayyar, Praveen R. (1993)
Stock market reactions to related diversification moves by service
firms seeking benefits from information asymmetry and economies
of scope. Strategic Management Journal, 14
(8): 569-591.
In the US, services account
for nearly 75% of employment, 65% of gross national product (GNP),
and nearly 90% of new jobs. Service firms may seek benefits from
information asymmetry and economies of scope by diversifying.
Each source of benefit is based on different underlying mechanisms
and each is affected differently by implementation difficulties
and service characteristics. Previous research, however, has
not analyzed the relative performance effects of these 2 very
different sources of benefits for related diversified service
firms. An integrative framework is used including these aspects
to examine the relative performance effects of benefits from information
asymmetry and economies of scope in service firms.
Nayyar, Praveen R; Kazanjian,
Robert K. (1993) Organizing to attain potential benefits from
information asymmetries and economies of scope in related diversified
firms. Academy of Management Review, 18 (4):
735-759.
Diversified firms can obtain benefits from information asymmetries and economies of scope. Each source of benefits is based on different underlying mechanisms. Attaining benefits relies on the adoption of appropriate organization structures and processes, which should be designed on the basis of the organizational requirements of each source of benefits. The contingency theory linking diversification strategy to organization design is extended by proposing that the particular source of benefits being pursued by related diversified firms causes variations in the multidivisional form of organization. Propositions derived from a consideration of the structure and processes required to successfully realize potential benefits are presented. Consistent with Govindarajan (1986), Hoskisson (1987), and Kazanjian and Drazin (1987), the importance of strategy as a critical contingency for organization
design is emphasized.
Seth, Anju; Easterwood,
John (1993) Strategic redirection in large management buyouts:
The evidence from post-buyout restructuring activity. Strategic
Management Journal, 14 (4): 251-273.
A study examines the nature
of post-transaction restructuring activities for 32 large US corporations
that underwent management buyouts (MBO) between 1983 and 1989.
Evidence is provided on the extent and type of divestment and
acquisition activities under private ownership, and outcomes associated
with MBOs and the longevity of the buyout organization are documented.
The study also investigates the claim that buyouts are primarily
mechanisms for breaking up public corporations and selling the
pieces to related acquirers. The balance of the evidence indicates
that restoring strategic focus is an essential function of the
buyout for these large firms. However, the evidence also indicates
that the buyout organization does continue to operate significant
parts of the prebuyout firm.
Amburgey, Terry L; Miner,
Anne S. (1992) Strategic Momentum: The Effects of Repetitive,
Positional, and Contextual Momentum on Merger Activity. Strategic
Management Journal, 13 (5): 335-348.
Three types of strategic momentum
are repetitive, positional, and contextual. Repetitive momentum
occurs when organizations repeat their previous strategic actions.
Positional momentum occurs when organizations take actions that
sustain or extend existing strategic positions. Contextual momentum
occurs when general traits, such as organizational structure,
shape strategic action in a consistent fashion. An event-history
analysis of 262 large firms over a period of 29 years indicates
that: 1. the occurrence of mergers tends to increase the rate
of mergers of the same type (repetitive momentum), and 2. organizational
decentralization increases the rate of diversifying mergers (contextual
momentum). Product market diversification was found to increase
the probability of product extension mergers, but not conglomerate
mergers, only partly confirming positional momentum. The findings
indicate that internal momentum can affect merger activity.
Chatterjee, Sayan; Blocher,
James D. (1992) Measurement of Firm Diversification: Is it Robust?
Academy of Management Journal, 35 (4): 874-888.
Analysis is presented of the
convergent validity of Rumelt's categorical classification of
types of business diversification across different data sources
and variations from Rumelt's method. The convergent and predictive
validity of Rumelt's classification and continuous measures of
diversification are also assessed. Also investigated is the ability
of continuous measures to discriminate between Rumelt's categories.
The results suggest weak convergent validity for Rumelt's measures
but good discriminating power of continuous measures to discriminate
between Rumelt's measures. The lack of strong convergent validity
in Rumelt's classifications affects the dominant and single-business
categories more than the related and unrelated categories, which
lessens any problems in testing the relatedness principle. Finally,
the measures demonstrate predictive validity with specific performance
criteria.
Davis, Peter S; Robinson,
Richard B., Jr; Pearce, John A., II; Park, Seung Ho (1992)
Business Unit Relatedness and Performance: A Look at the Pulp
and Paper Industry. Strategic Management Journal,
13 (5): 349-361.
A study examined the perspectives
of business unit managers to assess how the relationship between
the 2 primary types of relatedness - production and marketing
- are emphasized at the business unit level and how these types
of relatedness affect business unit performance. The data were
collected by questionnaires from key informants who manage 362
business units in the US pulp and paper industry. The results
show that a high level of marketing relatedness is associated
with high sales growth and a high level of production relatedness
with high return on assets. When sales growth is the primary
goal, a high emphasis on market relatedness produces high sales
growth coupled with respectable profitability. When profitability
is the primary goal, high production relatedness produces the
best results. Contrary to expectations, the single businesses
had higher growth than the related businesses, although the differences
were not statistically significant. Only business unit size had
a significant relationship to sales growth.
Davis, Rachel; Duhaime,
Irene M. (1992) Diversification, Vertical Integration, and Industry
Analysis: New Perspectives and Measurement. Strategic Management
Journal, 13 (7): 511-524.
The use of industry segment
and establishment data are considered for 3 issues of significant
interest to strategic management practitioners and researchers:
1. assessment of strategic diversity, 2. analysis of industry
trends, and 3. evaluation of the presence of vertical integration.
An extensive analysis of the COMPUSTAT II database and the TRINET
database was conducted in all 3 research contexts. With proper
use of COMPUSTAT II data, researchers can detect forward and backward
vertical integration within firms and within segments of firms.
The database can be used quite effectively to calculate Herfindahl,
entropy, and other measures. COMPUSTAT II industry segment data
is quite satisfactory for the study of industry trends. The TRINET
database lends itself to use in the calculation of diversification
indexes as well as in the calculation of industry benchmarks.
However, TRINET's limitations include years of coverage (1981,
1983, 1985, 1987, and 1989 only) and likely termination of publication.
Gomez-Mejia, Luis R. (1992)
Structure and Process of Diversification, Compensation Strategy,
and Firm Performance. Strategic Management Journal.
13 (5): 381-397.
A study tests 6 hypotheses on the extent to which a match between compensation and diversification strategies affects the performance of a firm. The sample consists of 867 firms used in a larger study on chief executive compensation, with 243 usable questionnaires returned. Both archival and survey data are used. The results generally support the notion that firm performance is a positive function of the degree to which compensation strategies reinforce or match corporate strategies. An algorithmic compensation pattern tends to make a greater contribution to firm performance among dominant and related product firms and companies that grow internally. An experiential compensation pattern tends to make a greater contribution to firm performance among single-product firms and corporations whose diversification process is evolutionary in nature. The proportion of explained variance in firm performance attributed to compensation-diversification strategy fit is modest but
not trivial.
Hoskisson, Robert O; Johnson,
Richard A. (1992) Corporate Restructuring and Strategic Change:
The Effect on Diversification Strategy and R&D Intensitu.
Strategic Management Journal, 13 (8): 625-634.
In the 1980s, a number of
large firms restructured their diversified business through divestitures.
It is hypothesized that restructuring activity focused on firms
at intermediate levels of diversification that have a mixture
of related and unrelated business units. The results confirm
this hypothesis, which explains that such mixed corporate strategies
create organizational and control inefficiencies in managing both
related and unrelated types of business units. Restructured firms
are also found to move toward 2 types of different internal capital
markets (related and unrelated). Most restructuring firms moved
toward lower levels of diversification, although some moved toward
higher levels of diversification. The results also show that
restructuring firms that changed their corporate strategy by reducing
diversified scope increased their research and development (R&D)
intensity. Firms that resturctured and increased their diversified
scope decreased their R&D intensity. This result suggests
a partial substitution between diversification and R&D activity.
Judge, William Q., Jr;
Zeithaml, Carl P. (1992) Institutional and Strategic Choice
Perspectives on Board Involvement in the Strategic Decision Process.
Academy of Management Journal, 35 (4): 766-794.
The level of a board of directors'
involvement in strategic decisions can be viewed as an institutional
response or as a strategic adaptation to external pressures for
greater board involvement. The antecedents and effects of board
involvement were examined from both the institutional and strategic
choice perspectives. Data obtained from personal interviews with
114 board members and archival records indicated that board size
and levels of diversification and insider representation were
negatively related to board involvement, and organizational age
was positively related to it. Furthermore, board involvement
was found to be positively related to financial performance after
controlling for industry and size effects. Overall, the results
suggest that both theoretical perspectives are necessary for a
comprehensive description of the strategic role of boards.
Lundquist, Jerrold T.
(1992) Shrinking Fast and Smart in the Defense Industry. Harvard
Business Review, 70 (6): 74-85.
By the late 1990s, US defense
spending will drop $80 billion from its present level due to cuts
that will be deeper and longer than any in US history. As the
Cold War ends and demand from the Department of efense dwindles,
the defense industry faces its most profound shift since the end
of World War II. Boom-bust patterns have always driven the industry.
But in 1992, in addition to a cyclical drop in procurement, defense
contractors are reeling from reforms of the past decade that decreased
their profits and increased the risk of bidding on new programs.
Although the conventional strategies of commercialization, globalization,
and diversification helped contractors survive the downturns after
World War II, Korea, and Vietnam, defense contractors can no longer
seek to grow faster than their industry. They must shrink fast
and smart, investing in businesses where the company can be preeminent,
and shutting down or selling off everything else.
Nayyar, Praveen R. (1992)
On the Measurement of Corporate Diversification Strategy: Evidence
from Large U.S. Service Firms. Strategic Management Journal,
13 (3): 219-235.
Actual, not potential, relatedness
determines the results of diversification strategies. An external
examination of a firm's businesses, products, markets, and technologies
allows the assessment of potential relatedness among its various
businesses. Potential relatedness is often not realized, however.
In addition, relatedness may be externally invisible. Thus,
actual relatedness may diverge from externally measured potential
relatedness. Evidence is provided which suggests that measures
of corporate diversification strategy based on internal data differ
significantly from those based on externally avaliable data.
Difficulties in implementing related diversification strategies
may force firms to forego the benefits of relatedness among their
businesses. Consequently, externally observed similarities in
products, markets, or technologies may not reveal actual relatedness
among businesses in diversified firms.
Russo, Michael V. (1992)
Power Plays: Regulation, Diversification, and Backward Integration
in the Electric Utility Industry. Strategic Management
Journal, 13 (1): 13-27.
The influence of regulatory
oversight on strategic management is examined. Predictions of
the extent to which a firm diversifies and integrates upstream
based on transaction-cost economics are developed and then tested
among 49 US electric utilities from 1974 through 1986, a period
that witnessed increasingly hostile regulatory relations. The
results confirm the influence of regulation in both diversification
and backward integration, supporting the transaction-cost view
of these phenomena. The threat associated with increases in regulatory
monitoring led to decreases in integration. The response of firms,
then, to greater increases in monitoring was to remove their presence
in the threatened domain. Thus, externalization takes place when
transaction costs are higher under unified governance.
Wiersema, Margarethe F;
Bantel, Karen A. (1992) Top Management Team Demography and Corporate
Strategic Change. Academy of Management Journal,
35 (1): 91-121.
The relationship between the
demography of top management teams and corporate strategic change,
measured as absolute change in diversification level, was examined
via a sample of Fortune 500 companies. Controlling for prior
firm performance, organizational size, top team size, and industry
structure, it was found that the firms most likely to undergo
changes in corporate strategy had top management teams characterized
by lower average age, shorter organizational tenure, higher team
tenure, higher educational level, higher educational specialization
heterogeneity, and higher academic training in the sciences than
other teams. The results suggested that top managers' cognitive
perspectives, as reflected in a team's demographic characteristics,
are linked to the team's propensity to change corporate strategy.
Rumelt, Richard P. (1991)
How Much Does Industry Matter? Strategic Management Journal,
12(3): 167-185.
Because competition acts to
direct resources toward uses offering the highest returns, persistently
unequal returns mark the presence of either natural or contrived
impediments to resource flows. The implicit assumption has been
that the most important market imperfections rise out of the
collective circumstances and behavior of firms. However, the
field of business strategy holds that the most important
impediments are not the common property of collections of firms,
but arise instead from the unique endowments and actions of individual
corporations or business units. A study partitions the total
variance in rate of return among Federal Trade Commission
(FTC) Line of Business reporting units into industry factors,
time factors, factors associated with corporate parent,
and business-specific factors. The data reveal negligible
corporate effects, small stable industry effects, and very large
stable business-unit effects. These results imply that the most
important sources of economic rents are business-specific;
industry membership and corporate parentage are less important.
Chatterjee, Sayan; Wernerfelt,
Birger, (1991) The Link Between Resources and Type of Diversification:
Theory and Evidence. Strategic Management Journal,
12 (1): 33-48.
The research question that
may have attracted the most attention in strategic management
discipline is the possible association between firm diversification
and performance. A study investigated the idea that firms diversify
in part to utilize productive resources that are surplus to current
operations. The data were obtained from 2 primary sources: the
Trinet Establishment database and the COMPUSTAT Industrial Annual
database. The results suggest that excess physical resources,
most knowledge-based resources, and external financial resources
are associated with more related diversification, while internal
financial resources are associated with more unrelated diversification.
The findings showed a strong association between intangible assets
and more related diversification. However, there was no association
between ability to raise equity capital and the type of entered
market. Higher performing firms were found to support the model
better than lower performing firms.
Datta, Deepak K; Rajagopalan,
Nandini; Rasheed, Abdul M. (1991) Diversification and Performance:
Critical Review and Future Directions. Journal of Management
Studies, 28 (5): 529-558.
While diversification remains
a very important strategic option, it is not a panacea for lagging
corporate performance. There are considerable risks associated
with diversification; consequently, it is an option that should
be considered ony after a careful examination of all relevant
factors. A better understanding of such factors and the complexities
surrounding diversification and its relationship to performance
is critical to maximize the probabilities of success. An integrative
theoretical framework is developed and used to review the existing
empirical research on the diversification-performance relationship
along the 3 research streams that have studied this relationship.
The analysis highlights the considerable diversity in findings
across studies in each stream and identifies certain theoretical
and methodological issues that might explain this diversity.
Also discussed is a contingency-based perspective.
Hill, Charles W. L; Hansen,
Gary S. (1991) A Longitudinal Study of the Cause and Consequences
of Changes in Diversification in the U.S. Pharmaceutical. Strategic
Management Journal, 12 (3): 187-199.
While the relationship between
diversification strategy and performance has been the focus of
extensive research in the strategic management literature, results
remain inconclusive. A study examined the causes and consequences
of changes in diversification by firms based in the US pharmaceutical
industry during the period 1977-1986. The basic proposition was
that the high risks of doing business in the pharmaceutical industry
resulted in risk-averse senior managers favoring diversification
over strategic concentration during this time period. A pooled
time-series methodology was used to analyze the data. The results
supported the proposition's line of reasoning. Change in diversity
was found to be a negative function of research and development
intensity, advertising intensity, market to book value, management
holdings, and opening diversification and a positive function
of current liquidity, institutional holdings, and firm risk.
Hoskisson, Robert E; Harrison,
Jeffrey S; Dubofsky, David A. (1991) Capital Market Evaluation
of M-Form Implementation and Diversification Strategy. Strategic
Management Journal, 12 (4): 271-279.
Firm announcements of adoption of the multidivisional structure fare assessed using stock market data and event methodology. The sample is composed of 22 firms identified as having undergone the transition to the M-form from one of a number of sources. The results suggest that, in general, the market reacts positively to M-form reorganization announcements. However, caution must be used in interpreting these results. One issue is whether firms having different diversification strategies are affected equally by M-form implementation. To test this notion, the event study data are broken into 2 portfolios, one consisting of vertically integrated and unrelated firms and the other consisting of related
diversified firms. The results
seem to support the idea that, in the immediate term, structural
consequences are important for the vertically integrated and unrelated
firm portfolio. The event period cumulative abnormal return is
not significantly different from zero for firms diversified along
related lines.
Lubatkin, Michael; Chatterjee,
Sayan (1991) The Strategy-Shareholder Value Relationship: Testing
Temporal Stability Across Market Cycles. Strategic Management
Journal, 12 (4): 251-270.
Multivariate analyses are
used to examine the stability of the relationship between diversification
and shareholder value across 9 contiguous time periods, organized
so as to highlight 3 distinct market cycles. The use of multiple
periods facilitated a rigorous examination of the independent
and moderating effects of cycle, while controlling for a concurrent
economic phenomenon, trend. Shareholder value is measured as
a 2-dimensional construct - systematic risk and excess return.
The research implies that it may not be meaningful to investigate
the association of strategy and performance without explicitly
considering the corresponding economic environment. It is suggested
that firms that diversify by emphasizing common core technologies
show on average lower levels of systematic risk, regardless of
market conditions. Cycle does appear to moderate the ability
of the 2 strategy types to generate excess returns. The systematic
risk findings suggest that corporations can achieve a reduction
in risk that stockholders cannot achieve on their own.
Russo, Michael V. (1991)
The Multidivisional Structure as an Enabling Device: A Longitudinal
Study of Discretionary Cash as a Strategic Resource. Academy
of Management Journal: 34 (3): 718-733.
The role of discretionary
cash in the adoption of a multidivisional, or M-form, organizational
structure was examined. It was argued that the adoption of the
M-form structure is linked to increases in a firm's levels of
discretionary cash. This proposition was developed by assessing
the advantages of M-form as an instrument for directing cash,
a fully fungible corporate resource, to alternative uses. Event
history analysis was used to model the diffusion of the M-form
through a group of privately owned US electric utilities. The
results showed that the hypothesized relationship holds, even
when the effects of firm size, levels of diversification and vertical
integration, and possible imitation effects are controlled.
Schleifer, Andrei; Vishny,
Robert W. (1991) Takeovers in the '60s and the '80s: Evidence
and Implications. Strategic Management Journal,
12 (Winter): 51-59.
The US economy has experienced 2 large takeover waves in the postwar period: one in the 1960s and one in the 1980s. A typical 1960s transaction was a friendly acquisition, usually for stock, by a large corporation of a smaller public or private firms outside the acquirer's main line of business. Takeovers in the 1980s were very different in that: 1. the size of the average target has increased enormously from the modest level of the 1960s, 2. many transactions, especially the large ones, were hostile, and 3. the medium of exchange in takeovers became cash rather than stock. The takeover wave of the 1980s could be interpreted as a reversal of the unrelated diversification of the 1960s. This experience indicates that: 1. takeovers can be as much a manifestation of agency problems as a route to correcting them, 2. using the stock market as a guage of profitability of corporate actions can lead one seriously astray, and
3. aggressive government
action, in this case antitrust policy, can have large unintended
effects.
Chatterjee, Sayan; Lubatkin,
Michael (1990) Corporate Mergers, Stockholder Diversification,
and Changes in Systematic Risk. Strategic Management Journal,
11 (4): 255-268.
Strategic management literature
indicates that a relationship exists between systematic risk and
the relatedness of merging firms. A recent study demonstrates
empirically how the underlying paradigms of strategic management
in the context of corporate mergers can make an important contribution
toward building a unified theory of systematic risk. A conceptual
framework to predict changes in systematic risk is developed that
incorporates arguments from the strategic management literature
and a relaxed set of capital asset pricing assumptions. A sample
of 120 large mergers was tested, controlling for the systematic
risk of the target firm, correcting for possible problems of heteroskedasticity,
and estimating shifts in risk over daily as well as monthly time
horizons. The results highlight a performance distinction between
corporate diversification and stockholder diversification in cases
of related and unrelated mergers.
Dess, Gregory G; Ireland,
R. Duane; Hitt, Michael A. (1990) Industry Effects and Strategic
Management Research. Journal of Management,
16 (1): 7-27.
An examination is made of
the issue of industry effects in the conduct of strategic management
research. Forty of the most frequently cited empirical strategy
studies published between 1980 and 1988 are identified and analyzed.
Multiple industry controls were used in 11 of 40 studies. The
largest percentage used some form of quasi-industry controls.
No explicit controls for industry effects were used in 1/4 of
the research, suggesting that industry context was not treated
adequately in some studies. Others used surrogate environmental
measures or focused on a single industry. However, few of those
researchers provided the types of detailed descriptions of the
industry environments that could be useful for comparisons by
future researchers. Methods that can be used to control for potential
industry effects include: 1. single industry studies, 2. multiple
industry control variables and environmental dimensions, and 3.
stratified samples by industry.
Fombrun, Charles J; Ginsberg,
Ari (1990) Shifting Gears: Enabling Change in Corporate Aggressiveness.
Strategic Management Journal, 11 (4): 297-308.
The corporate strategies of
multibusiness firms are interpreted as patterns in their aggregate
deployment of resources to functional uses across businesses.
By integrating business and corporate levels in the study of
strategy-making, such a perspective facilitates evaluating aggressiveness
in corporate posture as a concept distinct from, but complementary
to, competitive strategy and diversification. It is argued that
changes in aggressiveness result from the interplay of 2 sets
of forces: 1. inhibitors that create inertia, and 2. inductors
that stimulate redeployments. Specific hypotheses are tested
using data taken from a random sample of 352 companies in 10 economic
sectors between 1977 and 1984. The results support the view that
prior performance and sector volatility have a curvilinear impact
on the propensity of firms to change their corporate aggressiveness.
Change in corporate posture is inhibited significantly by size
and prior resource deployments. However, the inductive forces
of prior performance and volatility serve to stimulate change.
Fryxell, Gerald E; Barton,
Sidney L. (1990) Temporal and Contextual Change in the Measurement
Structure of Financial Performance: Implications for Strategy
Research. Journal of Management, 16 (3): 553-569.
The study of the influence
of strategy on firm performance is central to strategic management
research. An empirical analysis is presented of the extent to
which the measurement structure of accounting- and market-based
indicators converges on a financial performance construct by time
period and by diversification strategy. In a longitudinal, single-factor
model of financial performance, it is found that the relationship
of these 2 types of financial performance measures changes in
periods of stability versus instability and for related diversifiers
versus unrelated diversifiers. It is suggested that meta-analytic
studies in strategy research may be able to incorporate situational
factors to obtain more valid findings. A latent variable approach
to financial performance has the potential of making direct comparisons
of underlying constructs possible.
Ginsberg, Ari (1990)
Connecting Diversification to Performance: A Sociocognitive Approach.
Academy of Management Review, 15 (3): 514-535.
A sociocognitive model of
diversification is developed that bases the role of top managers'
belief systems in the cognitive and behavioral attributes of corporate
strategy. In contrast to more traditional approaches that emphasize
the economies generated by diversity and relatedness, this approach
emphasizes the creativity and flexibility associated with corporate-level
decision-making processes. The sociocognitive perspective of
strategy proposed makes 3 important contributions: 1. It allows
the examination of the ways in which managers' cognitive structures
reflect the systemic properties of strategic position. 2. It
allows the examination of the ways in which shared cognitive structures
reflect the behavioral dynamics of strategic decision-making processes.
3. It allows the development of specific predictions and prescriptions
regarding the influence of top management teams' sociocognitive
capacities on processes of diversification and their economic
outcomes.
Hitt, Michael A; Hoskisson,
Robert E; Ireland, R. Duane (1990) Mergers and Acquisitions
and Managerial Commitment to Innovation in M-Form Firms. Strategic
Management Journal, 11 (Summer): 29-47.
Acquisitive growth has become
a highly popular strategy in recent years, and more attention
has been focused on its outcomes. A theory is presented that
suggests a trade-off between growth by acquisition and managerial
commitment to innovation. A model is developed that proposes
that the acquisition process and the resulting conditions after
it is consummated affect managerial commitment to innovation.
The extent to which acquisitions serve as a substitute for innovation,
energy, and attention required during negotiations, increased
use of leverage, increased size, and greater diversification may
have an effect on managers' time and risk orientations. Because
of these effects, managers may reduce their commitment to innovation.
Recent research appears to support the proposed model. The results
of the studies suggest that firms engaging in acquisition activity
may reduce their commitment to innovation as measured by research
and development intensity.
Hoskisson, Robert E; Hitt,
Michael A. (1990) Antecedents and Performance Outcomes of Diversification:
A Review and Critique of Theoretical Perspectives. Journal
of Management, 16 (2): 461-509.
The antecedents of diversification
are: 1. markets, 2. resources, 3. incentives, and 4. managerial
motives. There are 3 theoretical viewpoints that summarize diversification
antecedents and performance outcomes. The first perspective examines
diversification under the assumption of relative market perfection
where firms and products are homogeneous within industries. The
2nd perspective examines diversification where both market and
firm imperfections are assumed to exist. The 3rd perspective
assumes market and firm imperfections and assumes imperfect governance
structures such that managerial motives for diversification are
influential. These perspectives provide different explanations
of antecedent resources and incentives that encourage or discourage
diversification.
Hoskisson, Robert E; Turk,
Thomas A. (1990) Corporate Restructuring: Governance and Control
Limits of the Internal Capital Market. Academy of Management
Review, 15 (3): 459-477.
Corporate restructuring that
is initiated by the threat of a takeover provides evidence that
corporate governance limits of large diversified firms may exist.
Poor corporate monitoring, which is caused by atomistic ownership
patterns and inadequate board of director governance, an emphasis
on incentive compensation, and free cash flows, may lead to higher
levels of diversification. If diversification results in loss
of strategic control and poor performance, the threat of a takeover
is probably related to the incidence of corporate restructuring.
Corporate restructuring, in turn, is likely to: 1. result in
the correction of inadequate governance patterns, 2. create a
more focused diversification strategy, 3. increase strategic
control, 4. reduce the reliance on bureaucratic control through
reduced corporate staff, 5. increase the performance of the firm,
and 6. increase shareholder wealth.
Keats, Barbara W. (1990)
Diversification and Business Economic Performance: Issues
of Measurement and Causality. Journal of Management,
16 (1): 61-72.
Past research on the relationship
between diversification and firm performance has been plagued
by a number of problems. Three such problems are addressed.
Relationships between diversification and multiple performance
dimensions are reframed in the context of a time-ordered causal
model. Firms included in the study are Fortune 500 firms taken
from Rumelt's (1978) strategy and structure databank. Of 263
firms listed, 110 meet all criteria. Firm classifications are
grouped in 4 broad categories - single, dominant, related, and
unrelated business. The results suggest that diversification
and performance are multidimensional constructs and that identification
of appropriate criteria for performance assessment depends upon
the strategy pursued. However, the unrelated-business diversification
category exhibits a strong positive relationship with subsequent
market-based performance, suggesting that investors value this
strategy as well. Thus, criteria used to assess firm performance
when unrelated diversified firms are included as subjects of study
ought to include market-based measures.
Nayyar, Praveen R. (1990)
Information Asymmetries: A Source of Competitive Advantage for
Diversified Service Firms. Strategic Management Journal,
11 (7): 513-519.
Information asymmetries are
generally considered as leading to costs for both parties in an
exchange transaction. However, they can also be a source of competitive
advantage. Potential buyers are faced with information asymmetries
in their evaluation of services prior to purchase. Since these
asymmetries impose costs on buyers, there is an incentive to lower
the costs. This incentive may be exploited by service firms that
diversify into other services that meet the needs of their existing
customers. If reputation can be transferred, diversification
into services high on experience or credence, or both, will reduce
information acquisition costs for potential buyers. Diversification
into services high on search qualities will not reduce those costs.
Service firms will gain a competitive advantage by serving multiple
needs of their clients for services high on experience or credence
or both qualities but not for services high on search qualities.
Nguyen, The Hiep; Seror,
Ann; Devinney, Timothy M. (1990) Diversification Strategy and
Performance in Canadian Manufacturing Firms. Strategic
Management Journal, 11 (5): 411-418.
In a study of the interrelationships
between firm diversification, market power, and performance, Montgomery
(1985) presented empirical evidence to support the hypotheses
that highly diversified firms will have lower market shares in
their respective markets than less diversified firms and that
the strategy of diversification does not contribute to firm profitability.
These results are reexamined using a sample of Canadian manufacturing
firms. Multiple regression analysis is used to test the hypothesis
that diversification in technologically related activities results
in economies of scope and greater firm performance. The results
support the hypothesis that degree of technologically related
diversification is positively associated with firm performance.
The extent of technologically related diversification, including
all strategies, is positively related to firm profitability, contrary
to Montgomery's finding of no effect when controls are introduced
for market share and primary industry concentration.
Seth, Anju (1990) Sources
of Value Creation in Acquisitions: An Empirical Investigation.
Strategic Management Journal, 11 (6): 431-446.
A conceptual framework and
an empirical methodology to assess the relative importance of
different sources of value creation in acquisitions are described.
The sample, which consisted of 102 tender offers for control
that took place between 1962 and 1979, was taken from a comprehensive
listing of tender offers obtained from Bradley, Desai, and Kim
(1988). The empirical results indicate that value creation in
related acquisitions is associated with economic efficiencies,
hypothesized to arise both from economies of scale and scope and
from operating efficiencies, and with market power. In unrelated
acquisitions, where such efficiencies are not expected to be present,
value creation occurs nevertheless and is linked to the coinsurance
effect. It is shown that financial diversification effects do
not play a part in value creation in either type of acquisition.
Simmonds, Paul G. (1990)
The Combined Diversification Breadth and Mode Dimensions and
the Performance of Large Diversified Firms. Strategic Management
Journal, 11 (5): 399-410.
The impact of the symbiotic
relationship between diversification breadth and mode on firm
performance was investigated. A total of 73 Fortune 500 firms
were classified by diversification breadth (related-unrelated)
and mode (internal-external). Their performance during the period
1975-1984 was analyzed using 4 financial performance measures:
1. return on assets, 2. return on equity, 3. return on invested
capital, and 4. compound sales growth. The 2 related categories
(related-internal/related-external) generally were higher performers
than were the 2 unrelated categories (unrelated-internal/unrelated-external).
However, the differences were not significant on most performance
measures. The unrelated-external category appears to be the worst
performer, which presents a dilemma because this strategy has
dominated the conglomerate movement.
Varadarajan, P. Rajan;
Ramanujam, Vasudevan (1990) The Corporate Performance Conundrum:
A Synthesis of Contemporary Views and an Extension. Journal
of Management Studies, 27 (5): 463-483.
Articles on 74 companies rated
by Business Month as being one of the 5 best-managed firms during
each of the 15 years in the period 1972-1986 were content analyzed
in an effort to isolate the key strategic and organizational factors
associated with superior corporate performance. The results indicate
that superior performance is associated with: 1. a broad product
line accompanied by geographic diversity, 2. an emphasis on planning
coupled with sound financial controls and reporting systems, 3.
a high level of commitment to product and process innovation,
4. investments in modernization of manufacturing facilities,
5. a reputation for superior quality and customer service, and
6. progressive human resource management practices. These findings
are compared to the conclusions of other recent studies. Far
from being the result of applying any particular formula, superior
performance is found to require a diverse mix of competencies
and values.
Baysinger, Barry; Hoskisson,
Robert E. (1989) Diversification Strategy and R&D Intensity
in Multiproduct Firms. Academy of Management Journal,
32 (2): 310-332.
A study explored the relationship
between corporate diversification strategy and research and development
(R&D) spending decisions in large multiproduct firms. The
data were collected from 971 companies included in Standard &
Poor's COMPUSTAT Services database. The results provide empirical
evidence that the choice of diversification strategy systematically
affects R&D intensity in large multiproduct companies. R&D
intensity in dominant-business firms was shown to be significantly
higher than in related- and unrelated-business firms. It was
also higher in related-business firms than in unrelated-business
firms. The results suggest the need to examine the implications
of different types of corporate diversification strategy on the
management of corporate-strategic-business-unit relations in large
multiproduct corporations.
Chang, Yegmin; Thomas,
Howard (1989) The Impact of Diversification Strategy on Risk-Return
Performance. Strategic Management Journal,
10 (3): 271-284.
A study examined the impact
of diversification strategy on risk and return in 64 diversified
firms. Data were drawn from Standard & Poor's COMPUSTAT I
and COMPUSTAT II and the Census of Manufacturing for 1977-1981.
Relationships between risk, return, and diversification are hypothesized.
Results from regression analysis show that differences in risk-return
performance among diversified firms were more closely associated
with markets and businesses than with the particular diversification
strategy chosen. Returns also influenced the choice of diversification
strategies, which, in turn, did not get rewarded with higher profits.
A curvilinear risk-return relationship was observed that is consistent
with previous theoretical suggestions. However, there was no
evidence supporting the risk premium forms of hypotheses.
Geringer, J. Michael; Beamish,
Paul W; daCosta, Richard C. (1989) Diversification Strategy
and Internationalization: Implications for MNE Performance.
Srategic Management Journal, 10 (2): 109-119.
The concept of competitive
advantage is used to examine performance variations among multinational
enterprises (MNE). Research variables were diversification strategy
and degree of internationalization. These involve basic components
of the companies' strategy - range and relatedness of products
and relative emphasis on foreign versus domestic operations.
The sample of 200 MNEs included 100 of the largest firms in the
US and Europe. Using Rumelt's (1974) classification scheme, each
of the MNEs was classified according to diversification strategy.
Degree of internationalization was measured by the ratio of a
company's foreign subsidiaries' sales to its total global sales
for 1977-1981. Ratio of net annual profits-to-sales was obtained
for each firm, calculated as the mean aftertax profits-to-sales
during 1977-1981. The results show that both diversification
strategy and degree of internationalization were significantly
related to MNE performance.
Ginsberg, Ari (1989)
Construing the Business Portfolio: A Cognitive Model of Diversification.
Journal of Management Studies, 26 (4): 417-438.
Researchers investigating
the relationship between diversification and performance have
been generally inattentive to the dominant general management
logics that corporate-level managers use to understand and manage
strategy diversity. In response to this, the use of the repertory
grid is proposed. The grid is a methodology adapted from the
work of Kelly (1955) and other personal construct theorists.
As an approach to operationalizing the mental maps that direct
the management of strategic diversity, the business repertory
grid appears to have several important advantages. It is particularly
useful in assessing the ways in which top managers construe the
corporate portfolio and manage strategic diversity. Grid technique
is flexible, efficient, and systematic. It is also highly reproducible,
thus allowing researchers to validate or challenge the results
of previous studies. A main goal of the application of the repertory
grid to the study of strategic diversity is to measure the way
in which top managers perceive relationships among businesses
in their firms.
Kim, W. Chan; Hwang, Peter;
Burgers, William P. (1989) Global Diversification Strategy and
Corporate Profit Performance. Strategic Management Journal,
10 (1): 45-57.
The influence of global diversification
strategy on corporate profit performance was examined by studying
62 multinational companies randomly selected from Dun and Bradstreet's
'America's Corporate Families and International Affiliates.' The
product and the international market dimensions of diversification
were integrated, and 4 distinct strategic modes of global diversification
were identified. Results suggest that the corporate profit performance
impact of related and unrelated diversification may vary depending
on the extent of a firm's international market diversification.
One important implication of the study is that both managers
and business strategy researchers should review corporate diversification
as having distinct but interactive strategic dimensions -- product
and international markets -- and they should recognize both the
different and the joint effect of these dimensions on corporate
profit performance.
Lubatkin, Michael; Rogers,
Ronald C. (1989) Diversification, Systematic Risk, and Shareholder
Return: A Capital Market Extension of Rumelt's 1974 Study. Academy
of Management Journal, 32 (2): 454-465.
A study reexamined the performance outcome of diversification strategies by combining the advantages of security-market-based measures and Rumelt's (1974) classification scheme. A multivariate analysis of variance design was employed to simultaneously account for the effects of corporate diversification
on risk and on return. The
results underscore the popular, but weakly supported, belief that
controlled diversity is associated with the highest performance.
Firms that diversified in a constrained manner demonstrated significantly
lower levels of systematic risk and significantly higher levels
of shareholder returns than firms employing other strategies.
The systematic risk findings suggest that constrained strategies
can achieve a reduction in risk that stockholders cannot achieve
on their own, underscoring the distinction between managing a
portfolio of securities and managing a portfolio of businesses.
Nayyar, Praveen; McGee,
John; Thomas, Howard (1989) Research Notes and Communications
Strategic Groups: A Comment; A Further Comment. Strategic
Management Journal, 10 (1): 101-107.
A review of recent studies (McGee, Thomas, 1986) on strategic groups that notes limitations with previous studies was found to have some weaknesses, including: 1. the omission of the fact that different bases of diversification could lead to differences in economic performance, 2. the tendency to view firms
as following 'pure' diversification
strategies, and 3. the use of performance or firm output measures
as dimensions to identify strategic groups. In reply, McGee and
Thomas acknowledge that very little is known empirically and that
extensive testing is required. The proposition remains valid
that systematic similarities and differences exist among firms
as a result of strategic resource choices. An example is the
decision to invest in assets that are often difficult and costly
to imitate.
Ramanujam, Vasudevan; Varadarajan,
P. (1989) Research on Corporate Diversification: A Synthesis.
Strategic Management Journal, 10 (6): 523-551.
Diversification has emerged
as a central research topic in strategic management. Although
the topic has been widely and intensively studied by scholars
from a variety of different areas, a synthesis of these diverse
streams of research is lacking. Such a synthesis is presented
with a view to fostering further strategic management research
in this area by taking a multidisciplinary perspective on diversification.
A wide-ranging literature search led to the development of an
overarching research framework that facilitates the classification
of a vast body of literature. Proceeding from this framework,
a critique of the literature is performed that emphasizes studies
by strategic management researchers. Five key conceptual and
methodological problems are identified and discussed.
Reed, Richard; Reed, Margaret
(1989) CEO Experience and Diversification Strategy Fit. Journal
of Management Studies, 26 (3): 251-270.
An examination was made of
the impact of chief executive officer (CEO) experience upon strategy
adoption and corporate performance in the post-implementation
strategy phase. A sample of 52 companies was identified and chosen
to analyze the relationship between CEO experience and the separate
strategies of internal and acquisitive diversification. No evidence
was found of an observable relationship between CEO experience
and selected strategy, expressed in terms of the manner in which
companies choose to diversify. It was shown that the interaction
effect between CEO experience and the selected means of diversification
affects performance. Companies with a fit between CEO experience
and the chosen means of diversification exhibit significantly
different features of performance compared to companies where
there is no fit. An experience-strategy fit suggests astute segmentation
and high commitment to the strategy.
Amit, Raphael; Livnat,
Joshua (1988) Diversification Strategies, Business Cycles and
Economic Performance. Strategic Management Journal,
9 (2): 99-110.
Two major diversification
strategies of firms are investigated: 1. diversification into
related business, and 2. diversification into unrelated businesses.
The first strategy tries to exploit operating synergies. In
the 2nd, the firm tries to gain financial benefits from its ability
to increase financial leverage due to a greater stability of cash
flows. A large sample of firms is utilized to assess empirically
the benefits and costs of the 2 diversification strategies using
a new measure of diversification across business cycles and economic
sectors. This measure is compared with Berry-Herfindahl-type
measures of total diversification and recent measures of diversification
into related businesses. The results indicate that pure financial
diversification is associated with: 1. more stable cash flows,
2. increased leverage levels, and 3. lower profitability. However,
firms that diversify into related business do seem to have higher
profits than their nondiversified counterparts.
Balakrishnan, Srinivasan
(1988) The Prognostics of Diversifying Acquisitions. Strategic
Management Journal, 9 (2): 185-196.
A possible explanation is
offered for the discrepancy between the observed increase in the
number of diversified firms in the US and the evidence from finance
studies that at best offers weak support for value creation in
diversifying acquisitions. It is argued that the acquisition
could be the culmination of a series of related strategic moves
by the acquiring company to enter a new industry, and therefore,
a significant fraction of the gains from synergy could have been
anticipated by the capital market well ahead of the acquisition.
The results of an event study of the 1984 acquisition of Rolm
Corp., the world's 2nd-largest manufacturer of PBXs in the US,
by IBM Corp., the world's largest computer manufacturer, and the
stock market's reaction support this explanation. The Rolm acquisition
came at the end of a series of moves by IBM aimed at entering
the US PBX market. Having anticipated the move, the stock market
reacted weakly to IBM's acquisition of all of Rolm's stock.
Capon, Noel; Hulbert, James
M; Farley, John U; Martin, L. Elizabeth (1988) Corporate Diversity
and Economic Performance: The Impact of Market Specialization.
Strategic Management Journal, 9 (1): 61-74.
A market-based typology of corporate strategy is introduced, which builds on typologies by Rumelt (1974, 1982). The new typology is based on critical values of a series of 3 ratios: 1. Rumelt's specialization ratio, the proportion of a firm's revenues attributable to its largest single business, 2. a category ratio, the proportion of revenues attributable to the largest market category, and 3. a product ratio, the proportion of a company's revenues attributable to its largest product group. It is proposed that, because different markets require varying skills for success, firms that focus in one market area (consumer or industrial), at
given diversification levels,
should obtain superior performance. The sample consisted of 112
corporations. Subjective estimates of firm's sales revenue are
collected through interviews with corporate planning executives.
Performance measures are return-on-capital and sales growth for
1978-1980, based on Value Line data. Empirical tests support
the proposed relationship between diversification strategy and
financial performance.
Grant, Robert M. (1988)
On 'Dominant Logic', Relatedness and the Link Between Diversity
and Performance. Strategic Management Journal,
9 (6): 639-642.
Prahalad and Bettis (1986)
proposed a new concept, dominant general management logic, which
they contend is central to understanding the connection between
diversification strategy and firm performance. The importance
of dominant logic is in emphasizing business relatedness at the
strategic instead of the operational level. The problem of dominant
logic is that it is a cognitive concept, and this limits its applicability
in academic research and management practice. It is contended
that the key features of dominant logic are shown in the corporate-level
functions of the company and are reflected in the systems through
which the diversified corporation coordinates and controls its
business units. Operationalizing the idea of dominant logic in
this manner can assist in distinguishing corporate-level relatedness
(based upon dominant logic) from operational relatedness and can
enable the identification of the features of strategic similarity
across business that are conducive to high levels of corporate-level
relatedness.
Grant, Robert M; Jammine,
Azar P; Thomas, Howard (1988) Diversity, Diversification, and
Profitability Among British Manufacturing Companies, 1972-84.
Academy of Management Journal, 31 (4): 771-801.
The causal relationships between
diversity, diversification, and profitability were investigated
for 304 large UK manufacturing companies that differed both in
multinational diversity and product. Data were gathered by eliminating
nonmanufacturing, unlisted, and foreign-owned firms from the Times
1,000 compilation of the largest UK firms in 1974. The primary
measure of firm profitability was pretax return on net assets;
variables likely to have an important impact on profitability
were controlled. The effects of diversity were distinguished
from the effects on profitability of other variables by the use
of multiple regression analysis. The results were not clear with
respect to the underlying causal relationships. Profitability
was not increased by product diversification, and there was limited
evidence that diversification was promoted by profitability.
However, for multinational diversification, it was found that
profitability in the home market encouraged overseas expansion,
which, in turn, increased profitability.
Grant, Robert M; Jammine,
Azar P. (1988) Performance Differences Between the Wrigley/Rumelt
Strategic Categories. Strategic Management Journal,
9 (4): 333-346.
Differences in profit and
sales performance between the various Wrigley (1970) and Rumelt
(1974) categories of diversification strategy are investigated.
A sample of 305 large UK manufacturing firms covering 1972-1984
is reduced to 186 companies by the elimination of firms that moved
between strategic categories. The analysis shows only weak relationships
between diversification strategy and firm and industry characteristics.
Between strategic categories, only company size is significantly
different. The more diversified related business and unrelated
business strategies are more profitable than the more specialized
single-business and dominant-business strategies. There is little
evidence that closely related diversification is more profitable
than unrelated diversification. The related business strategy
is not superior to the unrelated strategy on the Wrigley classification,
and the constrained diversification categories failed to outperform
the linked diversification categories on the Rumelt classification.
Grinyer, Peter H; McKiernan,
Peter; Yasai-Ardekani, Masoud (1988) Market, Organizational
and Managerial Correlates of Economic Performance in the U.K.
Electrical Engineering Industry. Strategic Management Journal,
9 (4): 297-318.
The strategic, market, planning,
and organizational contingencies that bear on economic performance
are considered conjointly. Hypotheses concerning market, organizational,
and managerial determinants of profitability and growth are developed
and tested with data collected by structured interviews in 45
randomly chosen firms in the UK electrical engineering industry.
Multiple regression analysis suggests that market share and barriers
to entry are the main determinants of profit margins. Tightness
of control of working capital and aggressive management style
also have a significant impact. Centralization of decision taking
among smaller firms is linked to greater profitability, while
more extensive budgetary control and planning of acquisitions
or diversification are correlated negatively with the latter.
The most important predictor of the rate of company growth of
sales is profitability. However, constraints from organized labor
and financial sources, conservative management styles, the product
change rate, research and development intensity, and decentralization
all entered significantly.
Hill, Charles W. L; Snell,
Scott A. (1988) External Control, Corporate Strategy, and Firm
Performance in Research-Intensive Industries. Strategic
Management Journal, 9 (6): 577-590.
The proposition that the divergence of interest between managers and stockholders has implications for corporate strategy and company profitability is investigated. Stockholders prefer strategies that maximize their wealth while managers prefer strategies that maximize their utility. In research-intensive industries, it is theorized that innovation strategies are favored when stockholders dominate and that, when managers dominate, diversification strategies are favored. Innovation is contended to be linked with greater company profitability than diversification. The theory is tested on 94 Fortune 500 firms from the listing for 1980. The firms are from 5 industries with research and development expenditures of more than 2% as a proportion of sales and with at least 10 firms in the Fortune 500. The results largely confirm the
theoretical predictions and
provide evidence in support of the contention that management
stockholdings can align management and stockholder interests by
way of their influence upon diversification strategy.
Hoskisson, Robert E; Hitt,
Michael A. (1988) Strategic Control Systems and Relative R&D
Investment in Large Multiproduct Firms. Strategic Management
Journal, 9 (6): 605-621.
It is hypothesized that tight
financial controls linked with large diversified multidivisional
(M-form) companies lead to a short-term, low-risk orientation
and thereby lower relative investment in research and development
(R&D). Also, it is hypothesized that increasing levels of
diversification necessitate different control systems that have
substantial implications for investing in R&D. Data about
type of structure and diversification strategy are obtained from
249 surveys received from Fortune 1,000 industrial firms. Data
on R&D intensity is available on 124 of these companies --
81 M-form and 43 more centralized functional (U-form). Data are
analyzed through analysis of variance and covariance and correlation
analysis. Results suggest that less diversified U-form firms
invest more heavily in R&D than more diversified M-form firms
after controlling for size and industry effects. Dominant business
firms invested more in R&D than either related or unrelated
business firms. The link between R&D intensity and market
performance is negative for related and unrelated firms.
Jones, Gareth R; Hill,
Charles W. L. (1988) Transaction Cost Analysis of Strategy-Structure
Choice. Strategic Management Journal, 9 (2):
159-172.
Using a transaction cost approach,
the relationship between corporate strategy, structure, and organizational
performance is analyzed. Three main strategies for realizing
economic benefits are vertical integration, related diversification,
and unrelated diversification. Firms must trade off the economic
gains from the different strategies against the bureaucratic costs
associated with the realization of those gains. In this study,
3 related issues are addressed: 1. What determines the limit
to growth via internalization for a firm pursuing a particular
strategy? 2. Why does a firm pursue different strategies for
achieving growth? 3. What determines changes in the strategy
and structure used by the organization over time? Strategy and
structure need to be separated longitudinally for the issues to
have relevance. Whether related diversification is more profitable
than unrelated diversification depends upon the interaction of
intrinsic and exogenous factors in any given situation.
Keats, Barbara W; Hitt,
Michael A. (1988) A Causal Model of Linkages Among Environmental
Dimensions, Macro Organizational Characteristics, and Performance.
Academy of Management Journal, 31 (3): 570-598.
In response to suggestions
from previous research regarding linkages among environmental
conditions, organization size, strategy, and economic performance,
a study developed and tested an initial integrative general system
model which integrates key variables from 3 models. Identified
by Romanelli and Tushman (1986), these are: an external control
model, a strategic management model, and an inertial model. Data
were taken from 110 firms representing a broad range of industries.
After initial analysis using LISREL VI, which allowed simultaneous
analysis of a set of complex interrelationships, the model was
reformulated by deleting those parameters which were nonsignificant.
Final results provide support for all 3 models. Specifically,
it was indicated that: 1. environmental instability had a negative
effect on levels of divisionalization and diversification, 2.
strategy was related to structure, and 3. the strategy-structure
relationship was not mediated by size.
Smith, Clayton G; Cooper,
Arnold C. (1988) Established Companies Diversifying into Young
Industries: A Comparison of Firms with Different Levels of Performance.
Strategic Management Journal, 9 (2): 111-121.
Differences in performance
among established firms diversifying into young industries are
analyzed, and hypotheses concerning 11 corporate-level strategic
and organizational variables are examined. The analysis relies
on both multi-industry data and single-industry data. Multi-industry
data are from: 1. the US microwave oven industry, 2. the US
color television set industry, 3. the US pocket calculator industry,
4. the US transistor industry, and 5. the US computer tomography
(CT) scanner industry. The single-industry data apply to the
US microwave oven industry. Performance is found to be associated
with firm size and financial strength, time of entry, and the
maturity of the firm's markets. The importance of several of
the variables appears to change as the industry evolves. For
example, in the microwave oven industry, for product-market maturity,
the negative association with performance is found to be more
significant for the earlier growth period (1972-1977) than for
the later growth stage (1978-1983).
Williams, Jeffrey R; Paez,
Betty Lynn; Sanders, Leonard (1988) Conglomerates Revisited.
Strategic Management Journal, 9 (5): 403-414.
Recent research on corporate
restructuring has drawn conclusions that are contradictory when
applied to conglomerates. An overview of recent literature on
conglomerates is presented. Based on the annual Forbes lists
of conglomerates from 1975 through 1984, a database of 389 acquisitions
and 357 divestitures is constructed for the period. The sample
is examined for changes in conglomerate behavior as manifested
in acquisition and divestiture decisions. Results indicate that,
through the sample period, conglomerate managers were actively
redefining the scope of the conglomerate enterprise by reducing
the number of businesses managed and by increasing the average
degree of business relatedness within the overall enterprise.
However, the findings are not conclusive because the field is
too large and, at least theoretically, too complex to lend itself
to definitive analysis.
Buhner, Rolf (1987) Assessing
International Diversification of West German Corporations. Strategic
Management Journal, 8 (1): 25-37.
An attempt is made to analyze
the effects of international diversification of firms in Germany
on market performance. The analysis is based on a sample comprising
40 large German corporations among the top 300 firms in the country,
and the period examined is 1966-1981. Diversification is measured
quantitatively and categorically. A number of variables are
modeled in a multiple regression approach, including: 1. size
and growth, 2. ownership structure and internal multidivisional
M-form structure, and 3. financial leverage. The results suggest
that international corporate diversification may be perceived
by shareholders as a wealth-increasing measure. Specifically,
the results suggest that internationalization and domestic product
expansion are 2 alternative diversification options in view of
shareholders' wealth. Domestic product diversity seems to be
motivated by internal push stimuli, while internationalization
seems to be pulled by external stimuli.
Dubofsky, Paulette; Varadarajan,
P. Rajan (1987) Diversification and Measures of Performance:
Additional Empirical Evidence. Academy of Management Journal,
30 (3): 597-608.
The findings of Michel and
Shaked (1984) are reexamined and their work extended by examining
the relationship between diversification strategy and performance
using both an accounting measure and market measures of performance.
The same firms (51 firms from the Fortune 250 list) and the same
time period (1975-1981) are used. However, 3 of the firms are
excluded because use of Rumelt's (1974) rules for categorization
leads the firms to be classified as either dominant-business or
single-business firms. Three main findings emerge: 1. There
is a high degree of interrater agreement between the computations
of Michel-Shaked (MS) and the present computations. 2. The characteristics
of 4 firms with fairly high performance and mid-range relatedness
ratios and their group assignments appear to have influenced the
significant differences in performance between diversification
groups reported by MS. 3. The type of performance measure used
seems to lead to conflicting inferences about the relationship
between diversification strategy and a firm's performance.
Hopkins, H. Donald (1987)
Acquisition Strategy and the Market Position of Acquiring Firms.
Strategic Management Journal, 8 (6): 535-547.
Three acquisition strategies
are employed to hypothesize differences in the market position
of acquisitive firms. The strategies are: 1. conglomerate (acquisition
of companies in areas unrelated to the acquiring firms's main
business), 2. technology-related (acquisition of firms with the
same or similar production techniques or product technology),
and 3. marketing-related (acquisition of firms with markets homogeneous
to those of the acquiring firm). The sample used consists of
64 firms from the 1965 Fortune 1,000 that were active acquirers
during the 1965-1979 period. The data are analyzed by comparing
the mean values associated with each strategy on 4 market position
variables, measures of: 1. market share, 2. market concentration,
3. market growth, and 4. market profitability. The results
show that, while acquisitive growth generally is associated with
a decline in market position, the marketing-related strategy is
associated with a distinctly superior position. Firms using this
strategy are found to be in more profitable industries and to
have higher market shares in these industries.
Hopkins, H. Donald, (1987)
Long-Term Acquisition Strategies in the U.S. Economy. Journal
of Management, 13 (3): 557-572.
Despite research suggesting
that the use of consistent long-term acquisition strategies should
be beneficial, there is evidence that acquisitive firms do not
use such strategies. A study was conducted to determine whether
acquisitive firms show, by their externally observable patterns
of behavior, evidence of pursuing consistent long-term strategies.
If so, an attempt was made to determine the nature of these strategies
and whether they are associated with superior performance. Using
a sample of 103 Fortune 1,000 companies for the period 1965-1979,
the results show that the majority of the firms did appear to
follow acquisition strategies that were consistent over time.
About half of the companies followed one of 2 highly consistent
strategies -- a marketing-related strategy or a technology-related
one. While the consistency of a firm's acquisition strategy was
found not to be associated with better performance, strategies
that exhibited 'strategic fit' did show superior profitability.
Johnson, Gerry; Thomas,
Howard (1987) The Industry Context of Strategy, Structure and
Performance: The U.K. Brewing Industry. Strategic Management
Journal, 8 (4): 343-361.
An attempt is made to identify influences on the competitive performance of companies involved in the UK brewing industry. The influencing factors examined include: 1. the characteristics of the industry environment, 2. the strategies pursued by companies within the industry, and 3. the performance
achieved by companies adopting
different competitive strategies. A sample of 21 companies is
studied. It is shown that more focused, limited diversification,
and regional brewing strategies may be preferable in the UK brewing
industry -- in contrast to prior research findings. Thus, support
is provided for the hypothesis that an optimum level of diversification
exists within an industry that balances economies of scope and
diseconomies of organizational scale. In the UK industry, the
traditional single or dominant business brewers seem to have found
the strategy that matches firms effectively with the important
characteristics of industry structure.
Napier, Nancy Knox; Smith,
Mark (1987) Product Diversification, Performance Criteria and
Compensation at the Corporate Manager Level. Strategic
Management Journal, 8 (2): 195-201.
A study was conducted to examine
the potential relationship between product diversification strategy
and 3 human resources management practices affecting corporate
managers, namely: 1. performance criteria, 2. bonus size, and
3. bonus distribution method. The study tested empirically the
idea embedded in a model proposed by Galbraith and Nathanson (1978),
which suggests that organizational characteristics vary by level
of product diversification. The sample firms were 46 manufacturing
firms on the 1982 Fortune 1,000 list. The hypothesis that higher
diversified firms use more objective criteria in evaluating corporate
managers was not supported. However, support was provided for
the hypothesis that the proportion of executive pay received as
a bonus would increase as a firm diversifies. A 3rd hypothesis,
that bonus allocation would be made on a formula basis as firms
diversified, although not supported statistically, does reflect
the general predictions of the model, i.e., that the use of a
formula is more likely in diverse firms.
Porter, Michael E. (1987)
From Competitive Advantage to Corporate Strategy. Harvard
Business Review, 65 (3): 43-59.
There are 2 levels of strategy
in a diversified company: 1. business unit or competitive, and
2. corporate or companywide. The diversification records of
33 US companies from 1950-1986 show that, on average, firms divested
more than half their acquisitions in new industries and more than
60% of their acquisitions in entirely new fields. Each corporation
went into an average of 80 new industries and 27 new fields, with
just over 70% of the new entries being acquisitions, 22% being
start-ups, and 8% being joint ventures. The 3 tests for successful
diversification which set the standards that any corporate strategy
must meet are: 1. the attractiveness test, 2. the cost-of-entry
test, and 3. the better-off test. Concepts of corporate strategy
identified from the diversification records studied include: 1.
portfolio management, 2. restructuring, 3. transferring skills,
and 4. sharing activities. All 4 ideas of strategy have succeeded
under the right circumstances.
Prahalad, C. K; Bettis,
Richard A. (1986) The Dominant Logic: A New Linkage Between
Diversity and Performance. Strategic Management Journal,
7 (6): 485-501.
A linkage between diversification
and performance is proposed and examined. The proposed conceptual
framework linking diversity and performance is based on 4 premises:
1. Top management is a collection of key individuals who significantly
influence the way the company is managed. 2. The strategic characteristics
of the firm's businesses vary according to their underlying structures,
technologies, and customers. 3. Strategically similar businesses
can be managed using a dominant general management logic. 4.
The top management group's ability to manage is limited by the
logic(s) to which they are accustomed. The implications of including
the concept of dominant general management logic in researching
diversification and performance involve the way the logic limits
diversity and the manner in which it affects managers' ability
to react. The process of changing or adding dominant logic is
discussed briefly.
Fahey, Liam; Christensen,
H. Kurt (1986) Evaluating the Research on Strategy Content.
Journal of Management, 12 (2): 167-183.
Strategy content research
examines the content of decisions regarding the goals, scope,
or competitive strategies of corporations. The major strategy
content research streams are: 1. goals and performance, 2. diversification,
3. strategic groups, 4. market share and profitability, 5.
taxonomic approaches, and 6. stages of industry evolution. Each
of these is discussed in terms of the research questions asked,
the key findings, and the concerns arising from the research.
Finally, 4 implications for managers are given: 1. Haphazard
diversification is not likely to generate above-average long-term
earnings. 2. Performance is greatly influenced by how a firm
positions itself within a given industry. 3. Managers should
consider the benefits, costs, and opportunities before seeking
to increase market share. 4. Business leaders should anticipate
stage changes and modify strategy accordingly.
McGee, John; Thomas, Howard
(1986) Strategic Groups: Theory, Research and Taxonomy. Strategic
Management Journal, 7 (2): 141-160.
Since most large firms are
multiproduct, sell in more than one market, and have grown by
diversification, it is very difficult to determine where the boundaries
of the industry should be drawn. This issue is reexamined by
using a supply-side concept of classification that seeks to identify
groupings or structures within industries but is based on the
observed similarity of behavior of firms. These groups are called
strategic groups. A comprehensive literature review of recent
studies led to several conclusions. Certain theoretical concepts
such as mobility barriers, isolating mechanisms, and controllable
variables provide much firmer bases for identifying strategic
groups within industries than does using substitute elements to
determine a firm's strategic direction. Therefore, taxonomies
for understanding the nature of strategic group formulation can
be developed.
Montgomery, Cynthia A;
Wilson, Vicki A. (1986) Mergers That Last: A Predictable Pattern?
Strategic Management Journal, 7 (1): 91-96.
The mergers of the 1960s have
recently come to be seen as the divestitures of the 1970s and
1980s. To examine this view, the current ownership of 434 large
acquisitions made by publicly traded US firms in 1967-1969 are
analyzed. Results show that the majority are still held by the
acquiring firms. Previous diversification and merger research
appears to capture some of the positive wealth effects of relatedness,
but results of this study show that unrelated acquisitions were
resold at a moderately higher, but not significantly different,
rate than related acquisitions. Both unrelated and related acquisitions
may possibly be used as strategic planning tools, with some unrelated
firms representing the acquiring firm's attempt to refocus defensively.
However, the small difference in rate of resale also suggests
that related acquisitions may be less successful than previously
thought. While potential gains may be greater, the efforts needed
to realize them are also likely to be greater.
Reed, Richard; Luffman,
George A. (1986) Diversification: The Growing Confusion. Strategic
Management Journal, 7 (1): 29-35.
Simplifications and generalizations
have caused misguided interpretation of the terminology used to
describe the various forms of diversification. Strategic fashion
has dictated how the strategy should be adopted, to what extent,
and in what form, losing sight of the fundamental principles involved.
A strategy should be selected based on clear identification of
its benefits, which should be used to help solve specific problems.
This requires less emphasis on shorthand methods of describing
diversification and more emphasis on the potential of the strategy
and the circumstances under which benefits can be of meaningful
value. Research and reporting of the facts surrounding diversifications
within industries require integrity; there is also a need for
self-honesty and realization of the lack of instant solutions
in the form of fashionable actions. Since most problems are specific,
they are only relevant to individual companies and, therefore,
require individual solutions.
Silhan, Peter A; Thomas,
Howard (1986) Using Simulated Mergers to Evaluate Corporate
Diversification Strategies. Strategic Management Journal,
7 (6): 523-534.
It is proposed that simulated
mergers of actual firms can be useful in the evaluation of the
effects of diversification on corporate performance. Risk and
return were examined for 60 autonomous firms that were aggregated
to form 9 sets of conglomerates. Mean absolute percentage error
(MAPE) and return on equity (ROE) measured risk and return, with
MAPEs and ROEs evaluated for a 3-year holding period. The results
supported the proposition that conglomeration can lead to increased
market value if risk can be reduced while return is held at the
same level. Among the implications of the study's results are:
1. Under conditions of no synergy, conglomeration can be an effective
cost-reduction strategy. 2. Conglomerates with more segments
apparently improve their risk-return performance. 3. Mergers
formed from large units have better performance than those formed
from small units.
Bettis, Richard A.; Mahajan,
Vijay (1985) Risk/Return Performance of Diversified Firms.
Management Science, 31(7): 785-799.
Trade-offs involving risk
and expected profit in corporate financial performance are examined
at the level of accounting profits for 80 large, related
and unrelated diversified firms. The sample used by Bettis
and Hall (1982) for the years 1973-1977 is reanalyzed. The
return measure is a 5-year average of the return on assets
(ROA); risk is measured by the standard deviation of ROA
across the same period. Results indicate that, on average, related
diversified firms outperform unrelated ones, but this is no
guarantee of a favorable risk/return performance. In fact,
different diversification strategies may result in a similar
risk/return performance. However, it is extremely difficult to
achieve favorable risk/return performance with unrelated diversification.
Successfully diversified firms differ from others on some
managerial dimensions, which include high levels of research
and development and advertising expenditures.
Palepu, Krishna (1985)
Diversification Strategy, Profit Performance and the Entropy
Measure. Strategic Management Journal. 6(3):
239-255.
The diversification-performance
relationship is reexamined using a diversification index
that distinguishes between related and unrelated diversification.
The Jacquemin-Berry (1979) entropy measure of diversification
and the line-of-business data are employed. The statistical
analysis is based on 30 firms from the food products industry
group, and data were analyzed by the t-test, the media test,
and the Mann-Whitney U-test. The results and analysis show
that: 1. the notion that high total diversification is
cross-sectionally associated with higher profitability is not
supported by the evidence, 2. the evidence is not sufficient
to conclude that the profitability of firms with high related
diversification is greater than the profitability of firms with
high unrelated diversification, and 3. although failing to achieve
significance at the conventional level, the results are
generally in the direction expected by the hypothesis that, if
related diversification leads to superior growth in profitability,
it should eventually lead to a higher profitability level
itself.
Montgomery, Cynthia A. (1985) Product-Market Diversification and Market Power
Academy of Management
Journal,
28(4): 789-798.
An examination is made of
the relationships among diversification, market structure, and
firm performance. It is contended that the traditional economic
theory of market power overemphasizes collusive or general
market power and underemphasizes the role of specific skills and
specific market power that give companies advantages in individual
market settings. Univariate differences between highly diversified
and less diversified companies are examined with t-tests,
the sample including 128 Fortune 500 companies ranging in level
of diversification from single-line businesses to unrelated
diversifiers. It is shown that, contrary to the widely
held view that diversified firms wield unfair market advantages,
highly diversified firms do not have strong market positions.
On average, they compete in less attractive markets than companies
with relatively low levels of diversification. However, diversification
may have advantages that come from cost efficiencies rather
than market power.
Bettis, Richard A.; Hall,
William K. (1982) Diversification Strategy, Accounting Determined
Risk, and Accounting Determined Return. Academy of Management
Journal, 25(2): 254-264.
This study examines the
validity of some conclusions previously drawn from research
by Rumelt (1974, 1977) on related and unrelated diversification
strategies, in view of risk considerations. Accounting measures
of risk and return have been used, rather than market
measures. The 4 hypotheses studied are: 1. Related diversification
strategies are more successful than unrelated diversification
strategies; related-constrained diversification strategies
outperform related-linked diversification strategies.
2. Unrelated diversification strategies have less accounting
risk than related diversification strategies. 3. Accounting-determined
return will be strongly correlated with accounting-determined
risk in firms following unrelated diversification strategies.
4. Accounting-determined return will be minimally correlated
with accounting-determined risk in organizations pursuing related
diversification. The results of the study indicate that the accuracy
of the hypotheses may be limited to the pharmaceuticals industry.
Evidence is provided that related firms do not outperform
unrelated firms and that unrelated firms do not have superior
risk pooling traits. The results also suggest that the trade-off
between accounting-determined risk and return varies among unrelated,
related-constrained, and related-linked firms.
Montgomery, Cynthia A.
(1982) The Measurement of Firm Diversification: Some New Empirical
Evidence. Academy of Management Journal, 25(2):
299-307.
In this research, 2 approaches
to the measurement of firm diversification are compared.
Continuous Standard Industrial Classification (SIC)-based product
count measures are structured on the SIC system developed by
the federal government for classifying all types of economic
activity. The system is based on establishment classifications
which classify each plant of a firm according to its primary
activity. The categorical measure of diversification was
developed after the weaknesses of the SIC system became apparent;
its focus is on the individual firm and its pattern
of diversification. What is diversification for the economy
as a whole is not necessarily descriptive of diversification
in any one firm. The results indicate a high degree of
correspondence between the 2 measures. The problems of validity
and reliability do not appear to be as serious as has
been suggested. Although one measure may be more appropriate
than the other in a given situation, neither is plainly superior
to the other for all uses.
Rumelt, Richard P. (1982)
Diversification Strategy and Profitability. Strategic
Management Journal, 3(4): 359-369.
Between 1949 and 1974, the
proportion of Fortune 500 firms that were substantially diversified
more than doubled, rising to 63%. Rumelt (1974) showed that
firms that diversified into areas that drew on a common core skill
or resource were more profitable than those that were vertically
integrated or those that diversified into unrelated businesses.
This earlier study is extended with a larger sample and
with more recent data. A theory of product diversity is developed
based on economies of scope, idiosyncratic investment, and uncertain
imitability. The earlier results are replicated. Tests verify
that an association remains once the effects of varying industry
profitability are removed. The tests also permit discrimination
between the effects of industry and diversification strategy
on profitability.
Bettis, Richard A. (1981)
Performance Differences in Related and Unrelated Diversified
Firms. Strategic Management Journal, 2(4):
379-393.
In 1974, Rumelt studied
the relationships among diversification strategy, organizational
structure, and economic performance. In 1979, Montgomery
examined performance differences in diversified firms by using
the market structure variables of industrial organization economics.
With these 2 studies as a backdrop, this study examined performance
differences between related and unrelated diversified firms. As
a dependent return variable, return on assets (ROA) was selected
because it represents a return more directly under the control
of management. Two separate regression models were used in
the study. Data were taken from these samples: 1. 31 related-constrained
firms, 2. 24 related-linked firms, and 3. 25 unrelated firms.
It was found that related diversified firms outperform unrelated
diversified firms by 1 to 3 percentage points. There were also
differences between related and unrelated firms in the following
3 areas: 1. advertising, 2. capital intensity, and 3. research
and development. The results suggest, where barriers to entry
exist, there is a degree of monopoly power, since the firm can
price above the competitive level. The higher the barriers, the
larger the profits for the industry.
Christensen, H. Kurt; Montgomery,
Cynthia A. (1981) Corporate Economic Performance: Diversification
Strategy Versus Market Structure. Strategic Management
Journal, 2(4): 327-343.
A sample, which included 128
businesses from Rumelt's 1974 study, was updated and used to
examine corporate economic performance using 2 variables: 1.
diversification strategy, and 2. market structure. Performance
differences were found to exist among some, but not all,
of Rumelt's categories. The differences appeared to be associated
with characteristics of the markets in which the firms exist.
Two separate profiles emerge from the study: 1. related-constrained
firms, and 2. unrelated portfolio diversifiers. It is argued
the firms in markets which constrain their growth or profitability
are the best candidates for diversification. However,
businesses in ''low opportunity'' markets are more likely to
pursue unrelated diversification. The study suggests 2 implications:
1. High earnings are not assured by constrained diversification.
2. Inattention to market structure in entry decisions for
unrelated-portfolio firms can result in poor performance.
Moreover, unrelated-portfolio firms may lack the needed skills
and resources to survive in a faster growing and more concentrated
market.