Strategic Management of Global Business

Diversifying and Acquisitions

2016. 5. 16 & 23

Professor Jaeho Lee

Department of International Business and Trade
Kyung Hee University

Outline
Corporate-level vs. Business-level strategies
Product diversification
Geographic diversification
Combining product and geographic diversification
A comprehensive model of diversification
Acquisitions
Debates and extensions

Product Diversification
Product-related diversification
Emphasis on operational synergy and economies of scale

Product-unrelated diversification
Focus on financial synergy and economies of scope
Conglomerate serves as internal capital market that direct financial
resources to high-potential high-growth areas.

Product diversification and firm performance

How is core competence related to the performance of
diversification?

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.

Geographic (International) Diversification

Geographic
Diversification

Limited International Scope

(geographically and culturally adj

acent countries)

Extensive International Scope

(beyond geographically and cultu

rally neighboring countries)

Geographic Diversification

International diversification
Limited international scope
Geographically and culturally adjacent countries

Extensive international scope

Beyond geographically and culturally neighboring countries

Geographic diversification and firm performance

A lot of debate about this issue, mainly performance resting on
the sample firms.

Geographic Diversification and Firm Performance: An S Curve

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: 518.

Combining Product and Geographic Diversification

Entertain both dimensions of diversification simultaneously

Four possible combinations

Anchored replicators
Multinational replicators
Far-flung conglomerates
Classic conglomerates

Migrate from one cell to another strategically

Combining Product and Geographic Diversification

Figure 9.3

A Comprehensive Model of Diversification

Industry-based considerations
Growth opportunity
Structural attractiveness of an industry (Porters five forces)
Intense rivalry leads firms to seek opportunities for
diversification
High entry barrier often results in acquisitions as opposed to
green-field for diversification
Bargaining power of suppliers and buyers, respectively, may
prompt firms to extend their scope by acquiring suppliers
upstream and/or downstream buyers.

Resource-based considerations

PRODUCT-RELATED DIVERSIFICATION

PRODUCT-UNRELATED DIVERSIFICATION

Synergy

Operational synergy

Financial synergy

Economies

Economies of scale

Economies of scope

Control emphasis

Strategic (behavior) control

Financial (output) control

Organizational structure

Centralization

Decentralization

Organizational culture

Cooperative

Competitive

Information processing

Intensive, rich communication

Less intensive communication

Diversification create value by spreading risk, but what rare, nonimitable and organizationally-embedded values does it create?

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)

The evolution of the scope of the firm: Benefits and costs economic, bureaucratic, marginal

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: 19501970 and 19701990

Source: M. W. Peng, S. H. Lee, & D. Wang, 2005, What determines the scope of the firm ov
er time? A focus on institutional relatedness, Academy of Management Review (in press).

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 o
ver time? A focus on institutional relatedness, Academy of Management Review (in pres
s).

Figure 9.7

Acquisitions
Setting the terms straight
Acquisition
Merger
Cross-border M&A, three primary categories: merger, vertical,
conglomerate
Friendly and hostile M&A

Motives for M&A: Synergistic, hubris, managerial

Performance: Pre- and post-acquisition

Understanding Cross-Border M&As

Source: Adapted from United Nations, 2000, World Investment Report 2000 (p. 100), New York: U
N

Figure 9.8

Motives Behind Mergers and Acquisitions

Synergistic motives

INDUSTRY-BASED ISSUES

RESOURCE-BASED ISSUES

INSTITUTION-BASED ISSUES

Enhance and consolidate

market power

Leverage superior
managerial capabilities

Respond to formal institutional

constraints and transitions

Overcome entry barriers

Access to complementary
resources

Take advantage of market

opening and globalization

Reduce risk
Scope economies

Hubris motives

Managerial motives

Learning and developing

new skills
Managers over-confidence
in their capabilities

Herd behavior-following norms and

chasing fads of M&As
Self-interested actions such as
empire-building guided by
informal norms and cognitions

Table 9.2

Symptoms of Merger and Acquisition Failures

PARTICULAR PROBLEMS FOR

Pre-acquisition: Overpayment
for targets

Post-acquisition: Failure in
integration

PROBLEMS FOR ALL M&As

CROSS-BORDER M&As

Managers overestimate their ability

to create value

Lack of familiarity with foreign cultures,

institutions, and business systems

Inadequate pre-acquisition screening

Inadequate number of worthy targets

Poor strategic fit

Nationalistic concerns against foreign

takeovers (political and media levels)

Poor organizational fit

Clashes of organizational cultures

compounded by clashes of national cultures

Failure to address multiple

stakeholder groups concerns

Nationalistic concerns against foreign

takeovers (firm and employee levels)

Table 9.3

Debates and Extensions

Product relatedness vs. Other forms of relatedness
What is the nature of relatedness?
Measurement issue (Selling music CDs in Starbucks, wide coverage of
selling items in Amazon.com)
dominant logic issue: a set of common underlying dominant logic that
connects various businesses in a diversified firm (Easy Group in Britain)
Product-unrelated conglomerates may be linked by institutional
relatedness.

Acquisitions vs. Alliances

Can strategic alliances be an alternative to acquisitions or a
preceding stage before full-blown acquisitions?