Chapter 9 Diversifying, Acquiring, and Restructuring

Global Strategy 1e Michael Peng Global Strategy Mike W Peng c h a p t e r 9 © M W Peng (www mikepeng com) Diversifying, Acquiring, and Restructuring Part III Corporate Level Strategies © M W Peng (www.

Part III: Corporate-Level Strategies

Outline

• Product diversification

• Geographic diversification

• Combining product and geographic diversification

• A comprehensive model of diversification

• Acquisitions

• Restructuring

• Debates and extensions

• The savvy strategist

Product Related Diversification

• Entry into new product markets and/or business activities that are related to a firm’s existing markets and/or activities.

Emphasis is on operational synergy:

Common technologies, marketing, and manufacturing

Increases in competitiveness beyond what can be

achieved by engaging in two product markets and/or business activities separately—2 + 2 = 5

Also known as scale economies or economies of scale.

Product Unrelated Diversification

• Entry into industries that have no obvious product-related

connections to the firm’s current lines of business.

These firms are also called conglomerates, and

their strategy is known as conglomeration—the

intent is to obtain financial (not operational)

synergies

The role of corporate headquarters:

An internal capital market

Diversification premium (conglomerate advantage)

Diversification discount (conglomerate

disadvantage)

Product Diversification and Firm Performance

Figure 9.1

Source: Adapted from R E Hoskisson, M A Hitt, & R D Ireland, 2004,

Competing for Advantage (p 228), Cincinnati: Thomson South-Western.

Diversification and Firm

Performance

• There are important caveats:

Not all product related diversifiers outperform unrelated diversifiers (the GE exception)

In emerging economies, the conglomeration

strategy seems to be persisting

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

GS3E OPENING CASE: Corporate diversification strategy in South Korean business groups

(chaebols)

Geographic (International)

Geographic Diversification

Geographic Diversification

Limited International Scope

(geographically and culturally

adjacent countries)

Limited International Scope

(geographically and culturally

adjacent countries)

Extensive International Scope (beyond geographically and culturally neighboring countries)

Extensive International Scope (beyond geographically and culturally neighboring countries)

Geographic Diversification

and Firm Performance

• In this age of globalization, there are frequent calls for wider geographic diversification:

All firms need to go “global.”

Non-international firms need to start venturing abroad

Firms with a little international presence should widen their geographic scope

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

view

Geographic Diversification and Firm Performance

Figure 9.2

Source: Adapted from F Contractor, S K Kundu, & C.-C Hsu, 2003, A three stage

theory of international expansion: The link between multinationality and performance

in the service sector (p 7), Journal of International Business Studies, 34: 5–18.

Combining Product and Geographic Diversification GS3E SIA 9.1 Evolution of Danisco’s Corporate Strategy

Figure 9.3

Industry-Based Considerations

typewriters)

differentiation and high entry barriers may not deter new entrants.

upstream and/or buyers downstream.

which produce substitute products

Resource-Based Considerations

non-diversified, single-business firms

must support certain diversification strategies

Product-Related and -Unrelated Diversification

Table 9.1

tightening FDI policies

Enable or constrain geographic

diversification by loosening or

tightening FDI policies

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

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)

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

more diversified organization—e.g., more headcounts, more expensive information systems

What Determines the Scope of the Firm?

Figure 9.5

Source: Adapted from G Jones & C Hill, 1988, Transaction cost

analysis of strategy-structure choices (p 166), Strategic Management

Journal, 9: 159–172.

The Evolution of the Scope of the Firm in the

United States: 1950–1970 and 1970–1990

Figure 9.6

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.

The Optimal Scope of the Firm: Developed versus

Emerging Economies at the Same Time

Figure 9.7

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.

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,

At a given level of diversification,

Overall, industry dynamics, resource

repertoires, and institutional conditions are not static, nor are diversification strategies

Acquisitions: Setting the Terms

Straight

• Although the term “mergers and acquisitions” (M&As) is often

used, in reality, acquisitions dominate the scene.

Acquisition: transfer of the control of assets,

operations, and management from one firm

(target) to another (acquirer), the former becoming

a unit of the latter

PeopleSoft is now a unit of Oracle

Merger: the combination of assets, operations,

and management of two firms to establish a new legal entity

South African Brewery and Miller Beer  SABMiller

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All rights reserved

The Variety of Mergers and

Aquisitions

VRIO behind Acquisitions

Do acquisitions

create value?

Firms involved must supply

23

Motives Behind Mergers and Acquisitions

Table 9.2

The Performance of M&As

not improve and is often negatively affected.

most firms ever make, yet they are often the

worst planned and executed business activities of all.

take advantage of the M&A chaos.

Boeing/McDonnell Douglas merger

distracted in its merger with Compaq

SYMPTONS OF ACQUISITION

FAILURES

26

Stakeholders’ Concerns During Mergers and Acquisitions

Figure 9.9

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

Product Relatedness Versus

Other Forms of Relatedness

Product Relatedness Versus

Other Forms of Relatedness

Acquisitions Versus Alliances

Acquisitions Versus Alliances

Two Leading Debates

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

and India