Diversifying, Acquiring, and Restructuring Part III: Corporate-Level Strategies © 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

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 4

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) 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

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) 4

Geographic (International) Diversification Geographic Diversification Limited International Scope (geographically and culturally adjacent 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. 4

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

Combining Product and Geographic Diversification GS3E SIA 9. 1 Combining Product and Geographic Diversification GS3E SIA 9.1. Evolution of Danisco’s Corporate Strategy Figure 9.3

A Comprehensive Model of Diversification Figure 9.4

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 4

Resource-Based Considerations Value Diversification reduces risk—compared with non-diversified, 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) 4

Product-Related and -Unrelated Diversification Table 9.1

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) 4

The Evolution of 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. 4

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

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

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

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 MBCEmergingEcon < MBCDevelopedEcon Overall, industry dynamics, resource repertoires, and institutional conditions are not static, nor are diversification strategies. 4

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 4

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 post-acquisition integration is hard to imitate. How are the firms organized to benefit from acquisition?

Motives Behind Mergers and Acquisitions Table 9.2

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 4

SYMPTONS OF ACQUISITION FAILURES

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. 4

Two Leading Debates Product Relatedness Versus Other Forms of Relatedness Acquisitions Versus Alliances 4

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 4