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Corporate Strategy & Organisation DesignWEEK 1 (Growth and Corporate Strategy: Diversification) (1) related = physical and technical requirement of businesses or products have at
least one important similarity; share resources and/or business models
(constrained = strengthens the core; linked = link to core competency)
Corporate strategy = the pattern of decisions in a company that determines and (2) unrelated = physical and technical requirements of businesses or products are
reveals its objectives, purposes, or goals, and defines the range or businesses the quite disparate
company is to pursue (L1;L4), the kind of economic and human organization it is or
intends to be (L5;L6), and the nature of the economic and noneconomic contribution it Risk Reduction as a Managerial Motive for Conglomerate Mergers (Amihud & Lev, ‘81)
intends to make to its shareholders, employees, customers, and communities (L2;L3) Managers (as opposed to investors) engage in conglomerate mergers to decrease their
largely undiversifiable ‘employment risk’ => agency problem (especially big conglom.)
The Driving Factor: Growth No real agency problem in (1) within industry acquisition, and (2) vertical
The RBV within the Conversation of Strategic Management (Mahoney & Pandian, ‘92) acquisitions
Navigating a Path to Smart Growth (Raisch & Von Krogh, ‘07) Resource-Based Theory and Corporate Diversification (Wan et al., ‘11)
Why is growth necessary? (largest conglomerates are highly diversified, market value)
(1) competitive growth (not keeping up = defeat), (2) shareholder growth Corporate Diversification (Montgomery, ‘94)
expectations (growth = main driver of shareholder wealth), and (3) productivity Perspectives: (see L5 for relational perspective)
growth (frees up slack resources; generally better to reallocate these than to divest) (1) market power (u.o.a.: product-market; reasons: cross-subsidization (profits from
What limits growth rate? (model of growth corridor) one market are used to support predatory price behavior in a different market) +
(1) shortage of labor or resources (short term market conditions), (2) shortage of mutual forbearance (competition in one market is less because of shared interests in
capital (short term capital market conditions), (3) lack of investment opportunities a different market) + reciprocal buying (economic transaction occur across
(can always enter a new industry => diversification), and (4) managerial capacity subsidiaries, so smaller firms are shut out); perf. outc.: diversification increases
(only long term issue: balancing entrepreneurship (plan, coordinate, monitor performance) – firms diversify to wield conglomerate market power across markets
integration of growth) versus management (monitor day-to-day activities), which too crude to come up with nuanced conclusions; type of diversification difficult to
makes overall sufficiency suffering whenever growing too fast) judge, most likely related diversification (little support from empirical research)
(2) resource-based view (u.o.a.: factor market/resources; reasons: organizing
The Limits to Profitable Growth Rare (Snoeren, ‘ 18) optimally around resources (generic (can be used for multiple products) vs specific
How fast to grow? Inflection point = limit to profitable growth (input/efficiency) resources – if firms have slack resources (unused generic resources (e.g.
(1) competitive growth rate (minimum growth rate determined by industry management, overcapacity of machines), it might be optimal to enter into another
growth), (2) sustainable growth rate (maximum growth rate determined by the industry in which they can be productively used; alternative reason: search for
ability of managers to conduct both tasks), and (3) growth rate has an inverse-U knowledge); perf. outc.: optimal level of diversification depends on resource
shaped relationship with profits (increase in inputs (scale and scope; higher inputs characteristics (i.e. firm specific) (related (linked) strategies more likely to be
=> higher outputs) AND efficiency loss effect (managerial attention to monitor successful; moderators: (1) dynamic capabilities, (2) knowledge/search (experience,
integration; less attractive growth opportunities)) relatedness), and (3) institutional environment (resource sharing, substitute for
Moderators of the limits to growth rate country level institutions (i.e. related to risk) – firms diversify in response to excess
(1) external factors (not a limit to profitable growth in the long run), (2) growth capacity in productive factors
strategy (affects limits to growth; faster growth possible through acquisitions, has can help firms understand what their optimal level of diversification is; will mostly
long term disadvantages), and (3) capabilities (ability to sense and seize see related-linked diversification
opportunities affect limits to profitable growth) (3) agency theory (deals with identifying and minimizing cost of agency problem)
(u.o.a.: agency problem between shareholders and managers; reasons: managerial
Limits to growth (fixed managerial capacity + training takes time) vs limits to size self-interst + ‘free cash flow’ (cash flows can be paid back to shareholders via
(theoretically diversification into all industries possible, thus not really limited) dividend or used on acquisitions); perf. outc.: over-diversification compared to
optimal level – diversification is undertaken by managers pursuing their own
Reasons for Diversification interests at the expense of the firm’s owners
Diversification = a firm is engaging in multiple activities simultaneously can help understand why firms over-diversify; can help firms implement
Generally: Product-market diversification = company produce multiple product(s) safeguards against managerially motivated over-diversification; more likely to see
(lines) (versus country-market diversification, generally called globalization) types: unrelated diversification
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