Samenvatting CLS corporate level strategy, master Strategic management Tilburg university.
Does the diversification-firm Performance relationshop change over time? A Meta-analytical review. Monika schrommer (2019).
Samenvatting van de paper Schommer(2019) Does the Diversification-Firm Performa...
ARTICLE 3. DOES THE DIVERSIFICATION-FIRM
PERFORMANCE RELATIONSHIP CHANGE OVER TIME?
A META-ANALYTICAL REVIEW. SCHROMMER (2019)
PREVIOUS RESEARCH
Firms diversify into further and less related lines of business, the marginal benefits of doing so decline and the
marginal costs increase, such that above its optimal level the effects of diversification on performance begin
to turn negative.
Lee et al. argued that with increasing institutional (government) development, the relative benefits of
diversification have decreased, and its relative costs increased.
A number of studies that have investigated long-term trends in diversification is very small and do not
distinguish between related and unrelated diversification.
CONTRIBUTION
- First, we analyze the development of diversification over time, distinguishing between related and
unrelated forms of diversification. Over 60 years of research is this research longer than any other
study.
- Second, We investigate shifts in the diversification – performance relationship in the context of the
changes in levels of diversification over time.
- Our arguments implies that, while overall levels of diversification have declined over time, the
average performance effect of diversification (among the fewer firms that continued to diversify) may
have become more positive (or at least less negative).
- We challenge the view that the diversification – performance relationship is inherently (Onafscheidelijk verbonden
met)
inverted U-shaped.
DIVERSIFICATION AND ITS RELATIONSHIP WITH FIRM PERFORMANCE
Previous Strategic management scholars have argued for an inverted U-shaped relationship between levels of
diversification and firm performance.
Previous research
Benefits of diversification include:
10
9
- Risk reduction; 8
Firm performance
- The cross-utilization and exploitation of resources 7
o Managerial skills 6
5
o Talent 4
o Time 3
- Operational capabilities 2
1
- Physical and informational resources 0
- Reputation Low differentiation Medium differentiated High differentiation
Firms are likely to exploit their resources (such as product- or customer- specific knowledge) in the first-best
opportunity, such that returns from diversification into further lines of business are likely to decline.
At the same time, scholars have argued that the marginal costs of diversification are an increasing function of
the level of diversification, because its disadvantage (coordination and integration costs) tend to grow
disproportionately with increased diversification.
, The level of diversification is often equated with the degree of relatedness, such that firms with a smaller
(larger) number of businesses are likely to be more related (unrelated) diversifiers than those with a larger
(smaller) number of businesses.
But is widely measured as relatedness between product or service markets.
in contrast to unrelated businesses, related ones tend to share common firm-specific assets and to give rise to
resource complementarities.
MAIN INSIGHTS
First, The traditional view has been that the effect of diversification on firm performance is inverted U-shaped,
such that low levels and related types of diversification have positive firm performance consequences, whereas
high levels and less related types of diversification strategies have negative performance effects. they have cast
doubt on whether higher levels and unrelated types of diversification are necessarily detrimental to
performance
Second, Ther is no complete agreement with respect to whether the strength of any effects of (related or
unrelated) diversification on performance have changed over time.
CHANGES IN DIVERSIFICATION LEVELS OVER TIME
In Germany, changes in corporate diversification appear to have been small.
In many emerging economies, average levels of diversification remain high due to the presence of integrated
business groups.
First, changes in factor markets, specifically a general shift in the balance of power from managers towards
shareholders, and other capital market pressures, have curbed the ability of managers to engage in managerial
empire building.
Second, greater competition in product markets has forced firms to focus on those lines of business where they
have the clearest advantage over competitors, rather than to compete on scale by acquiring firms in other lines
of business. Over-diversification was one of the contributing factors to the decline in competitiveness in the US
in 1970s.
Third, changes in the institutional environment – i.e., greater deregulation, privatization and capital market
liberalization – favored reduced diversification.
HYPOTHESIS 1: “OVERALL LEVELS OF DIVERSIFICATION HAVE DECREASED OVER TIME”.
Partial support!!
We find for related diversification evidence of a U-shaped development of related diversification over time.
The decline in overall diversification appears to have come primarily from the reduction in unrelated
diversification, whereas firms appear to have seen an increase in related diversification, following an initial
(early) decrease.
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