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Corporate level strategy - summary of all articles - by Michel Dagli
- Instelling
- Tilburg University (UVT)
Summary of all the articles.
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Voorbeeld van de inhoud
Summary by Michel Dagli,INHOUD
Week 1 What is corporate strategy ........................................................................................................................ 3
Slides week 1 ....................................................................................................................................................... 3
Week 2 Diversification benefits and costs .............................................................................................................. 5
Zhou, Y. M. (2011). Synergy, coordination costs, and diversification choices. Strategic Management Journal,
32(6), 624-639. .................................................................................................................................................... 5
Schommer, M., Richter, A. and Karna, A. (2019) Does the diversification–firm performance relationship
change over time? A meta-analytical review. ..................................................................................................... 8
Week 3 Expansion mode choices .......................................................................................................................... 12
Stettner, U., & Lavie, D. (2014). Ambidexterity under scrutiny: Exploration and exploitation via internal
organization, alliances, and acquisitions. .......................................................................................................... 12
Castañer, X., Mulotte, L., Garrette, B., and Dussauge, P. (2014). Governance mode vs. governance fit:
Performance implications of make- or-ally choices for product innovation in the worldwide aircraft industry,
1942–2000. ....................................................................................................................................................... 17
Week 4 M&As ....................................................................................................................................................... 21
Moatti V, Ren CR, Anand J, Dussauge P (2015) Disentangling the performance effects of efficiency and
bargaining power in horizontal growth strategies ............................................................................................ 21
Rabier M (2017). Acquisition motives and the distribution of acquisition performance.................................. 24
Week 5 CEOs and corporate strategy ................................................................................................................... 27
Chen, G., Crossland, C., & Huang, S. (2016). Female board representation and corporate acquisition intensity.
.......................................................................................................................................................................... 27
Shi, W., Zhang, Y., & Hoskisson, R. E. (2017). Ripple effects of CEO awards: Investigating the acquisition
activities of superstar CEOs' competitors. ........................................................................................................ 30
Week 6 Divestitures .............................................................................................................................................. 34
Vidal, E., & Mitchell, W. (2015). Adding by subtracting: The relationship between performance feedback and
resource reconfiguration through divestitures. ................................................................................................ 34
Feldman, E. (2014) Legacy Divestitures: Motives and Implications. ................................................................. 39
Appendix 1 Indivisibility ........................................................................................................................................ 43
Appendix 2 Bounded rationality ........................................................................................................................... 43
Appendix 3 Behavioral Theory, Evolutionary Economics and Upper Echelons Theory......................................... 44
,WEEK 1 WHAT IS CORPORATE STRATEGY
SLIDES WEEK 1
,
,WEEK 2 DIVERSIFICATION BENEFITS AND COSTS
ZHOU, Y. M. (2011). SYNERGY, COORDINATION COSTS, AND DIVERSIFICATION CHOICES.
STRATEGIC MANAGEMENT JOURNAL, 32(6), 624 -639.
This paper examines whether the pursuit of synergy itself explains limits to related diversification and
therefore the choice for unrelated diversification. It argues that to realize the potential synergy, a firm must
actively manage the interdependencies between new and existing businesses, which results in coordination
costs. Net synergy (benefits) may decline not because of exogenous (external) opportunity constraints but
because of the rising costs of coordinating interdependencies across an increasing number of related business
lines. Therefore, while decreasing synergistic benefits limit diversification in general, increasing coordination
costs moderate the impact of synergy on the choice of industries and set a limit to related diversification.
Main contribution
The paper operationalizes a mechanism that causes both synergy (benefits) and coordination costs to rise with
related diversification: input sharing between business lines. Seeking synergy through input sharing within a
firm is fundamentally driven by the indivisibility (unsharable – appendix 1) of these inputs between firms: if
these inputs were divisible (sharable), firms could share (or sell) them through contracting (agreements). At
the same time, indivisibility creates coordination costs within diversified firms. Therefore, the potential for
input sharing between a firm's existing business and a new business can both attract and discourage entry into
the new business, depending on the synergy relative to the associated coordination costs.
Second, the paper specifies a circumstance where marginal coordination costs surpass marginal synergistic
benefits: corporate-level complexity in the firm’s existing business lines, or the extent of their
interdependence. Complexity increases the demand for coordination. Complexity also worsens the
coordination problem associated with input sharing: it increases the number of existing interdependencies that
must be adjusted when a new business imposes its own requirements on the same pool of inputs that are
shared across business lines. Therefore, firms with greater complexity in the mix of their existing business lines
are more likely to see marginal coordination costs surpass marginal synergistic benefits and face tighter
constraints on the degree of input sharing they pursue by diversification.
Theory and Hypotheses
Coordination costs of diversification
Diversification involves increasing the range of products or markets served by an organization. Diversification
can be a mechanism to capture integration benefits associated with the simultaneous supply of common
(shared) inputs for different production processes targeting different final product markets. Sharing common
inputs creates interdependencies between business lines. It requires joint designing, joint scheduling, and
mutual adjustments, as well as setting transfer prices and designing incentive schemes for cooperation. These
interdependencies challenge three elements of coordination: communication, information processing, and
joint decision making. Although at the transaction level, the cost of managing interdependent activities within
an integrated firm may be lower than between two separate firms. At the firm level, coordination costs
increase exponentially as the firm's overall coordination demand approaches its coordination capacity. To
reduce transaction costs (like coordination) between firms, firm boundaries should be located such that
interdependencies between integrated activities and outsourced activities are weak.
- Hypotheses 1: A firm is less likely to diversify into a new business when its existing business lines are
more complex. (because transaction / coordination cost will be too high)
Coordination costs of related diversification
While coordination costs pose a challenge to diversification in general, they are higher for firms pursuing more
related diversification. More input sharing between a firm’s existing business lines and a new business adds
,more interdependencies. Coordination costs go up more than linearly with the number of business lines; they
increase with the amount of interdependencies among them. Therefore, coordination costs increase faster
with the scope of the firm with more related than with less related (unrelated) diversification. Depending on
how quickly coordination costs and synergy increase relative to each other, the difference in marginal
coordination costs between more and less related diversification may become greater than the difference in
marginal synergistic benefits between the two. In that case, diversification into a less related business becomes
more attractive than a more related business. In sum, related diversification is more costly to coordinate than
unrelated diversification. It also worsens the problem of coordinating a complex portfolio more than unrelated
diversification. The more inputs that are shared between the new and old business lines, the more existing
relationships need to be adjusted (i.e., the greater the ‘ripple’ effect).
A ripple effect occurs when an initial disturbance to a system propagates outward to disturb an increasingly larger portion of the system,
like ripples expanding across the water when an object is dropped into it (google)
- Hypotheses 2: A firm’s likelihood of diversifying into a new business decreases more with the
complexity in the firm’s existing business lines if they share more inputs with the new business.
o This hypothesis suggests that Input similarity moderates the relationship between complexity
and the likelihood of diversifying entry.
Method and results
The hypotheses were tested by empirical analysis using historical information from databases on the business
activities of U.S equipment manufacturers from 1993 to 2003. It uses equipment manufacturers in Standard
Industrial Classification (SIC) codes 34–38 and their diversifying entries into all manufacturing industries (SIC
20–39) between 1993 and 2003.
Independent variable Moderator Dependent variable
Complexity Input similarity Entry
(or extent of interdependence) (so more related)
H1 is supported because
- Complexity is negatively associated with diversifying entry
- Control variables Capital and R&D intensity are negatively associated with diversifying entry,
suggesting that these firms prefer to diversify in their own industry.
H2 is supported because
- The interaction between input similarity and complexity is significant negative associated with
diversifying entry
- This indicates that as input similarity increases, the negative relationship between complexity and
diversification becomes even stronger. The more input similarity, the more complexity, the less likely
of diversifying entry (due to more coordination cost)
The results show that a firm is more likely to diversify into a new business when its existing business lines can
potentially share more inputs (a source of synergy) with the new business; however, the firm is less likely to
diversify into any new business when its existing business lines are complex (a source of coordination cost).
Importantly, the firm’s likelihood of diversifying into a new business decreases more as the complexity of the
firm’s existing business lines increases as they share more inputs with the new business. These results suggest
that increasing coordination costs counterbalance the potential synergistic benefits associated with related
diversification (which is independent of existing explanations such as risk pooling, agency, and imitation).
,Managerial implications
1. In making diversification choices, a firm needs to balance the potential synergy (benefits) with the
associated coordination costs and evaluate the impact of complexity. All else equal, a firm’s
performance will suffer if it diversifies into a highly related industry when its existing business lines are
already complex, or if it diversifies into unrelated industries when its existing business lines are not so
complex (resulting in lost synergy and little savings in coordination costs)
2. Because a firm’s overall coordination capacity is limited, its scope choices may be substitutive: a firm
may not expand into all markets where it can apply excess resources, since doing so will create a
coordination burden for the company. Likewise, standardizing components and outsourcing existing
activities along the vertical value chain may free up coordination capacity for horizontal diversification.
Therefore, in making integration and diversification decisions, the firm needs to be aware of the
potential constraints in terms of coordination capacity these decisions will impose/create on its future
integration and diversification choices.
3. Firm-specific organizational capabilities may offset (compensate) some limitations of coordination
costs. Firms may obtain such organizational capabilities through acquisition of managerial expertise,
development of knowledge and routines, and/or adaptation of organizational structure.
Limitations
- The study views complexity as predetermined, by taking the existing complexity within firms as a given
and doesn't delve into why some firms choose to have more complex operations while others don't /
while others prefer standardization or outsourcing. So, while the study examines how complexity
affects future decisions, it doesn't explore why firms ended up complex in the first place.
- The measures used for the independent variables, particularly complexity, aren't entirely firm-specific.
They rely on industry-level data, which could introduce errors if individual segments within firms
diverge significantly from industry averages. While the study has employed methods to account for
potential biases due to these errors, the inherent limitation remains.
Notes from lesson – 5-9-2023
- Diversification involves increasing the range of products or markets served by an organization
- Within-industry diversification involves expanding the range of products within the same business
domain
- Related diversification involves expanding into products or services with relationships to the existing
business, but in a different business domain
- Unrelated diversification involves diversifying into products or services with no relationships to
existing business
From strategic management premaster learnings:
,SCHOMMER, M., RICHTER, A. AND KARNA, A. (2019) DOES THE DIVERSIFICATION –FIRM
PERFORMANCE RELATIONSHIP CHANGE OVER TIME? A META -ANALYTICAL REVIEW.
We study the relationship between diversification and firm performance in the context of the decline in levels
of diversification over time. We argue that the pressure to reduce diversification may have more strongly
affected those firms whose diversification strategies were most negative to firm performance. The findings
suggest that levels of unrelated diversification have decreased, whereas levels of related diversification have
increased since the mid-1990s, following an initial decrease in the 1970s and 1980s. Furthermore, we find that
the relationship between unrelated diversification and firm performance has improved significantly over time,
whereas the relationship between related diversification and performance has remained relatively stable.
Theory and hypotheses
Conceptual foundation
Strategic management scholars have argued for an inverted U-shaped relationship between levels of
diversification and firm performance. The benefits of diversification include risk reduction; the cross-utilization
and exploitation of resources, such as managerial skills, talent and time; operational capabilities; physical and
informational resources; and reputation. The common use of resources leads to economies of scale (cost
savings from producing more units) and scope (through the sharing of factors across business lines).
Two main insights emerge from our review of the strategy and the finance literatures on the diversification–
firm performance relationship.
- First, the traditional view has been that the effect of diversification on firm performance is inverted U-
shaped, such that low levels of diversification and related types of diversification have positive firm
performance consequences, whereas high levels of diversification and less related (so more unrelated)
types of diversification strategies have negative performance effects. Existing meta-analyses in this
area have confirmed this view. However, there is considerable variation in the performance effects of
both related and unrelated diversification across firms. Furthermore, more recently authors have
challenged the established view; specifically, they have cast doubt on whether higher levels and
unrelated types of diversification are necessarily negative to performance.
- Second, there is no complete agreement with respect to whether the strength of any effects of
(related or unrelated) diversification on performance have changed over time. The answer to this
question appears to be subject to methodological choices and the type of performance measure used.
Furthermore, both temporal factors and the institutional environment (refers to the formal and
informal rules, norms, and practices that shape and guide behavior within a society or organization) in
which the diversification–performance relationship is studied appear to play a role.
Against this background, we now discuss the effects that environmental pressures have had on levels of
diversification, and on its relationship with performance.
Changes in Diversification Levels Over Time
There are three main reasons why companies have stopped diversifying as much as they used to, especially
from the late 1970s to the mid-1990s.
- First, there were changes in factor markets (money) works in businesses. Before, managers had more
control, but now shareholders (the people who own the company) have more say. This means
managers can't do whatever they want, like expanding the company just to benefit themselves. If they
do, they might get punished in the stock market, and other companies might take them over. Rules
from outside the company are also making sure managers do the right thing.
- Second, there's more competition between companies. So, instead of buying other companies in
different businesses to get bigger (diversifying), companies are focusing on what they're already good
, at. This is because being too diversified made American companies less competitive when companies
from countries like Japan and Germany started competing more.
- Third, changes in the institutional environment – i.e., greater deregulation, privatization and capital
market liberalization – favoured reduced diversification. For example, deregulation in the US (e.g., in
communications, energy and transportation) and a looser interpretation of restrictions on acquisitions
in the same industry encouraged companies to invest in existing industries rather than diversify. In
emerging economies, the development of the institutional environment has also begun to close
‘institutional voids’ that diversified corporate structures can fill.
Overall, these changes made it less important for companies to have many different businesses (diversify). So,
they started focusing on what they were already good at instead of diversifying. They encouraged firms to
invest in existing lines of business rather than diversify.
- Therefore hypothesis 1: Overall levels of diversification have decreased over time.
Changes in the Diversification–Performance Relationship Over Time
We propose that environmental pressures have led firms to select more value-creating diversification
strategies and avoid value-destroying ones, thus leading to an improvement in the aggregate relationship
between diversification and firm performance. Our argument is that firms differ from one another in terms of
their resources and capabilities. According to this view, the capacity to manage diversification is
heterogeneously distributed across firms. Some firms will be more successful than others in managing a
particular degree of diversification. Firms will select the level and type of diversification that best matches their
capabilities, resources, and other firm-specific factors, and thus produces better performance outcomes (have
higher changes of survival) relative to alternative diversification strategies.
- Therefore hypothesis 2: The relationship between diversification and firm performance has become
more positive over time.
Furthermore, we argue that stronger selection (competitive) environments will distinguish more clearly
between firms with higher levels (i.e., unrelated forms) of diversification, than between firms with lower levels
and more related types of diversification. The performance consequences of unrelated diversification among
the fewer remaining firms pursuing this strategy will have become better because firms with greater capacities
to manage unrelated diversification should have faced less pressure to de-diversify. Changes in the external
environment reduce the relative advantage of using internal capital markets. Therefore, only those unrelated
diversifiers that rely on more firm-specific, inimitable sources of diversification advantages (e.g., superior
managerial competencies, business models with a strong dominant logic) will have remained in the game.
In contrast, changes in the external environment are less likely to affect resource complementarities – which
are prevalent among related lines of business – because they are internal to the firm. Therefore, the average
strength of the relationship between related diversification and performance will be less affected by
environmental forces.
- Therefore Hypothesis 3: The relationship between unrelated diversification and firm performance has
improved more over time than the relationship between related diversification and firm performance.
Method and results
The authors employ meta-analytical regression (MARA) in order to test the hypotheses, using a total of 267
primary studies containing 387 effect sizes based on 150,000 firm-level observations from over 60 years of
research on the diversification–firm performance relationship.
, Independent variable Dependent variable
Time (Median Year of Data Collection) Level of Diversification
Type of Diversification (Related, Unrelated, Overall) Effect sizes of the relationship between
diversification and performance
(Performance Measures)
- H1: Partially supported. While diversification measured by the Herfindahl index declined over time,
trends were mixed when using the Entropy indices, driven by differing patterns in related and
unrelated diversification.
o While levels of unrelated diversification seem to have continuously declined, levels of related
diversification decreased until around 1995 and then increased again. Our analysis with
respect to levels of diversification thus suggests that the pressure to de-diversify over time
has not been uniform (gelijkmatig) across the samples of firms analysed here.
- H2: Not supported. The relationship between diversification and firm performance did not become
more positive over time.
o The temporal effect on the overall performance effects of diversification was positive but not
statistically significant
- H3: Supported. The negative relationship between unrelated diversification and firm performance
reduced more over time compared to the relationship between related diversification and firm
performance.
o Although unrelated diversification still has a negative impact on firm performance, its
negative effects have been reduced over time compared with related diversification that
remained stable.
Theoretical implications
In sum, our study challenges the conventional wisdom that the shape of the diversification–performance
relationship is inherently inverted U-shaped. We believe that this particular shape of the relationship may have
been historically true due a weak selection (competitive) environment that allowed more firms to pursue
unrelated diversification strategies with negative performance outcomes.
With the strengthening of the selection (competitive) environment over time, the number of unrelated
diversifiers has decreased. For the lower number of firms pursuing unrelated diversification, the performance
implications of this strategy appear to be considerably better than was the case in earlier decades. Thus, the
right-hand side of the inverted U-shaped relationship between diversification and performance appears to
have become flatter over time (because the decreasing negative performance of unrelated diversification /
decreasing overal levels of diversification).
Managerial Implications
Given the heterogeneity in the performance effects of diversification discussed above, decision-makers should
not rely on generic recipes to diversify or refocus. They should define their (diversification) strategies in light of
their firm-specific resources and capabilities, and the external conditions in which their firms operate. For
example, our analysis – specifically the significant (negative) coefficient on country size in two of the three
regressions reported in Table 2 – provides some indications that diversification may provide market
opportunities for firms that are constrained/limited by small domestic markets.
While the strength of the negative effect of unrelated diversification on performance has declined, it has not
turned positive either (see the lower panel of Table 3); and the negative performance effect of overall levels of
diversification has remained negative (hypothese 2) (see the top panel in Table 3). Managers should thus
analyse a decision to enter a new line of business carefully, and decide on the merits of each case.
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