9
chapter
Diversifying, Acquiring,
and Restructuring
Part III: Corporate-Level Strategies
Global Strategy
Mike W. Peng
© M. W. Peng (www.mikepeng.com)
Outline
• Product diversification
• Geographic diversification
• Combining product and geographic
diversification
• A comprehensive model of diversification
• Acquisitions
• Restructuring
• Debates and extensions
• The savvy strategist
9–2
Product Related Diversification
• Entry into new product markets and/or business
activities that are related to a firm’s existing markets
and/or activities.
 Emphasis is on operational synergy:
 Common
technologies, marketing, and manufacturing
 Increases
in competitiveness beyond what can be
achieved by engaging in two product markets and/or
business activities separately—2 + 2 = 5.
 Also
known as scale economies or economies of scale.
 GS3E SIA 9.2. HondaJet
9–3
Product Unrelated Diversification
• Entry into industries that have no obvious productrelated connections to the firm’s current lines of
business.
 These firms are also called conglomerates, and their
strategy is known as conglomeration—the intent is to
obtain financial (not operational) synergies.
 The role of corporate headquarters:
 An
internal capital market
 Diversification premium (conglomerate advantage)
 Diversification discount (conglomerate disadvantage)
9–4
Product Diversification and Firm Performance
Source: Adapted from R. E. Hoskisson, M. A. Hitt, & R. D. Ireland, 2004,
Competing for Advantage (p. 228), Cincinnati: Thomson South-Western.
Figure 9.1
9–5
Diversification and Firm Performance
• There are important caveats:
 Not all product related diversifiers outperform
unrelated diversifiers (the GE exception)
 In emerging economies, the conglomeration strategy
seems to be persisting.
 Units affiliated with South Korea’s Samsung Group,
India’s Tata Group, and Turkey’s Koc Group often
outperform stand-alone competitors.
 GS3E OPENING CASE: Corporate diversification
strategy in South Korean business groups
(chaebols)
9–6
Geographic (International) Diversification
Geographic
Diversification
Limited International Scope
Extensive International Scope
(geographically and culturally
adjacent countries)
(beyond geographically and
culturally neighboring countries)
9–7
Geographic Diversification
and Firm Performance
• In this age of globalization, there are frequent
calls for wider geographic diversification:
 All firms need to go “global.”
 Non-international firms need to start venturing
abroad.
 Firms with a little international presence should widen
their geographic scope.
• However, the evidence is not fully supportive of
this popular view.
9–8
Geographic Diversification and Firm Performance
Source: Adapted from F. Contractor, S. K. Kundu, & C.-C. Hsu, 2003, A three stage
theory of international expansion: The link between multinationality and performance
in the service sector (p. 7), Journal of International Business Studies, 34: 5–18.
Figure 9.2
9–9
Combining Product and Geographic Diversification
GS3E SIA 9.1. Evolution of Danisco’s Corporate Strategy
Figure 9.3
9–10
A Comprehensive
Model of
Diversification
Figure 9.4
9–11
Industry-Based Considerations
• Motivations for Diversification:
 Growth opportunities in an industry (e.g., typewriters)
 Structural attractiveness
 Interfirm rivalries based on cost leadership and
differentiation and high entry barriers may not deter
new entrants.
 Bargaining power of suppliers and buyers
 Firms broaden their scope by acquiring suppliers
upstream and/or buyers downstream.
 The threat of substitute products
 Kodak and Fuji threatened by digital camera
makers which produce substitute products
9–12
Resource-Based Considerations
• Value
 Diversification reduces risk—compared with nondiversified, single-business firms
• Rarity
 Leveraging unique core competencies and capabilities.
• Imitability
 GE is enviable, but few firms can imitate it.
• Organization
 Organizational structure and control mechanisms
must support certain diversification strategies
(product-related or -unrelated) (Table 9.1)
9–13
Product-Related and -Unrelated Diversification
Table 9.1
9–14
Institution-Based Considerations
Formal Institutions
Informal Institutions
Promote product unrelated
diversification by banning
intraindustry mergers
Normative pressures to jump on
the diversification “bandwagon”
Enable or constrain geographic
diversification by loosening or
tightening FDI policies
Internalized, cognitive beliefs
guide managerial action (e.g.,
empire building)
9–15
The Evolution of the Scope of the Firm
• The Scope of the Firm
 Determined by a comparison between marginal
economic benefits (MEB) and the marginal
bureaucratic costs (MBC).
 MEB are the various forms of synergy (operational
or financial) gained from the last unit of growth—
e.g., the last acquisition.
 MBC are additional costs associated with a larger,
more diversified organization—e.g., more
headcounts, more expensive information systems.
9–16
What Determines the Scope of the Firm?
Source: Adapted from G. Jones & C. Hill, 1988, Transaction cost
analysis of strategy-structure choices (p. 166), Strategic Management
Journal, 9: 159–172.
Figure 9.5
9–17
The Evolution of the Scope of the Firm in the
United States: 1950–1970 and 1970–1990
Source: M. W. Peng, S. H. Lee, & D. Wang, 2005, What determines the
scope of the firm over time? A focus on institutional relatedness (p. 627),
Academy of Management Review, 30: 622-633.
Figure 9.6
9–18
The Optimal Scope of the Firm: Developed versus
Emerging Economies at the Same Time
Source: M. W. Peng, S.-H. Lee, & D. Wang, 2005, What determines the
scope of the firm over time? A focus on institutional relatedness (p. 628),
Academy of Management Review, 30: 622-633.
Figure 9.7
9–19
Conglomeration in Emerging Economies
• Why does conglomeration add value in
emerging economies?
 This analysis relies on two critical and reasonable
assumptions (Figure 9.7):
 At a given level of diversification,
MEBEmergingEcon > MEBDevelopedEcon
 At
a given level of diversification,
MBCEmergingEcon < MBCDevelopedEcon
 Overall, industry dynamics, resource repertoires, and
institutional conditions are not static, nor are
diversification strategies.
9–20
Acquisitions: Setting the Terms Straight
• Although the term “mergers and acquisitions”
(M&As) is often used, in reality, acquisitions
dominate the scene.
 Acquisition: transfer of the control of assets, operations,
and management from one firm (target) to another
(acquirer), the former becoming a unit of the latter.
 PeopleSoft
is now a unit of Oracle
 Merger: the combination of assets, operations, and
management of two firms to establish a new legal entity.
 South
African Brewery and Miller Beer  SABMiller
9–21
The Variety of Mergers and Aquisitions
© 2010 Cengage Learning.
All rights reserved.
VRIO behind Acquisitions
Do acquisitions
create value?
Firms involved
must supply
rarity to the
acquisition.
Successful postacquisition
integration is
hard to imitate.
How are the
firms organized
to benefit from
acquisition?
23
Motives Behind Mergers and Acquisitions
Table 9.2
9–24
The Performance of M&As
• The performance record is rather sobering.
 As many as 70% of M&As reportedly fail.
 On average, acquiring firms’ performance does not
improve and is often negatively affected.
 Acquisitions are the largest capital expenditures most
firms ever make, yet they are often the worst planned
and executed business activities of all.
 Competitors often launch aggressive attacks to take
advantage of the M&A chaos.
 Airbus increased market share during the
Boeing/McDonnell Douglas merger
 Dell invaded the printer market when HP was
distracted in its merger with Compaq
9–25
SYMPTONS OF ACQUISITION
FAILURES
26
Stakeholders’ Concerns During Mergers and Acquisitions
Figure 9.9
9–27
Improving Acquisition Performance
 Do not pay too much for targets.
 Avoid a bidding war—be willing to walk out when
premiums are too high.
 Screen for both strategic and organizational fit to
avoid surprises after the acquisition.
 Address the concerns of multiple stakeholders.
 Try to keep the best talents.
 Be prepared to deal with road blocks thrown out by
people whose jobs and power may be jeopardized.
9–28
Two Leading Debates
Product Relatedness Versus
Other Forms of Relatedness
Acquisitions Versus Alliances
9–29
The Savvy Strategist
• Understand the nature of your industry that may
call for diversification, acquisitions, and
restructuring
• Develop capabilities that facilitate successful
acquisitions and restructuring
• Master the rules of the game governing
acquisitions and restructuring around the world
• GS3E CLOSING CASE: Emerging acquirers
from China and India
9–30