Transcript Global Strategy 1e.

9
chapter
Diversifying, Acquiring,
and Restructuring
Part III: Corporate-Level Strategies
Global Strategy
Mike W. Peng
Copyright © 2005 South-Western.
All rights reserved.
PowerPoint Presentation by David Ahlstrom, Chinese University of Hong Kong
and Charlie Cook, The University of West Alabama
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.
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9–2
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)
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9–3
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.
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Figure 9.1
9–4
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.
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9–5
Geographic (International) Diversification
Geographic
Diversification
Limited International Scope
Extensive International Scope
(geographically and culturally
adjacent countries)
(beyond geographically and
culturally neighboring countries)
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9–6
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.
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9–7
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.
Copyright © 2005 South-Western. All rights reserved.
Figure 9.2
9–8
Geographic Diversification
and Firm Performance
• Not all firms have been sufficiently involved
overseas to experience the ups and downs.
 Studies reported a U-shaped relationship because
they only sampled firms in the early to intermediate
stages of internationalization.
 Other studies document an inverted-U shape,
because their samples are biased for larger firms with
moderate to high levels of diversification.
 Given the complexity, it is hardly surprising that there
is a large debate about geographic diversification.
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9–9
A Comprehensive
Model of
Diversification
Figure 9.4
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9–10
Industry-Based Considerations
• Motivations for Diversification:
 Overseas growth opportunities in an industry (e.g.,
typewriters)
 Structural attractiveness
 Interfirm rivalries based on cost leadership and
differentiation and high entry barriers may not deter
new entrants.
 Bargaining power of suppliers and 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
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9–11
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 (strategic control) or –unrelated
(finanicial control))
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9–12
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)
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9–13
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.
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9–14
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.
Copyright © 2005 South-Western. All rights reserved.
Figure 9.5
9–15
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, Academy of Management Review (in press).
Copyright © 2005 South-Western. All rights reserved.
Figure 9.6
9–16
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, Academy of Management Review (in press).
Copyright © 2005 South-Western. All rights reserved.
Figure 9.7
9–17
Conglomeration in Emerging Economies
• Why does conglomeration add value in
emerging economies?
 This analysis relies on two critical and reasonable
assumptions (Figure 9.7):
 That
at a given level of diversification,
MEBEmergingEcon > MEBDevelopedEcon
 That
at a given level of diversification,
MBCEmergingEcon < MBCDevelopedEcon
 Overall, industry dynamics, resource repertoires, and
institutional conditions are not static, nor are
diversification strategies.
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9–18
Acquisitions: Setting the Terms Straight
• Although the term “mergers and acquisitions”
(M&As) is often used, in reality, acquisitions
dominate the scene.
 Acquisition: transfer of the control of assets,
operations, and management from one firm (target)
to another (acquirer), the former becoming a unit of
the latter.
 PeopleSoft is now a unit of Oracle
 Merger: the combination of assets, operations, and
management of two firms to establish a new legal
entity.
 South African Brewery & Miller Beer  SABMiller
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9–19
Types of Cross-Border Mergers and Acquisitions
Source: Adapted from United Nations, 2000, World
Investment Report 2000 (p. 100), New York: UN
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Figure 9.8
9–20
Types of M&As
• Primary categories of M&As
 Horizontal: deals involving competing firms in the same
industry—BP/Amoco.
 Vertical: deals which allow the focal firms to acquire suppliers
upstream and/or buyers downstream—Sony/Columbia Pictures.
 Conglomerate: transactions undertaken by product unrelated
diversifiers involving firms in product unrelated industries and
markets—Vivendi/Universal.
• Terms of M&As
 Friendly: the board and management of a target firm agrees to
the transaction (although they may initially resist).
 Hostile (or hostile takeovers): undertaken against the
wishes of the target firm’s board and management, who reject
M&A offers
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9–21
Motives for Mergers and Acquisitions
• Industry-based perspective
 Enhance and consolidate market power in an industry.
• Resource-based perspective
 Leverage superior managerial resources.
 Access needed resources
• Institution-based perspective




Often a response to formal institutional constraints.
Also often a reflection of informal norms and cognitions
Hubris motives: Managerial over-confidence
Managerial motives: Self-interested empire building in search of
more power, prestige, and income
• These motives may coexist simultaneously
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9–22
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
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9–23
Symptoms of Merger and Acquisition Failures
Table 9.3
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9–24
Stakeholders’ Concerns During Mergers and Acquisitions
Figure 9.9
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9–25
Improving Acquisition Performance
• Managers should:
 Not pay too much for targets.
 Avoid a bidding war—be willing to walk out when
premiums are too high.
 Screen for both strategic and organizational fit to
avoid surprises after the acquisition.
 Address the concerns of multiple stakeholders.
 Try to keep the best talents.
 Be prepared to deal with road blocks thrown out by
people whose jobs and power may be jeopardized.
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9–26
Restructuring: Setting the Terms Straight
• Restructuring
 A reduction in either firm size and scope or both.
• Primary means
 Downsizing
 Reducing the number of employees through layoffs, early retirements, and out-sourcing.
 Downscoping
 Reducing the scope of the firm through divestitures
and spin-offs.
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9–27
Motives for Restructuring
• Industry-based Perspective
 Restructuring is often triggered by a rising level of competition
within an industry (e.g., auto, telecom)
• Resource-based Perspective
 While restructuring may bring benefits, there are also significant
costs—organizational chaos, anxiety, frustration, and low
morale—which often fail the VRIO test.
• Institution-based Perspective
 Firms and managers in developed economies increasingly feel
institutional pressures from capital markets to restructure.
 Also, strong institutional pressures against restructuring around
the world (e.g., Germany, CEE, Asia)
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9–28
Improving Restructuring Performance
• Given the high risks and high stakes involved,
firms will do better if they:
 Use restructuring as a last—not first—resort.
 Manage survivors more effectively—treating departing
employees fairly and decently, which sends a positive
signal to surviving employees.
 Are careful in restructuring knowledge-intensive units,
whose organizational memory and capabilities are
largely embedded in employees.
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9–29