Chapter 9 Diversifying, Acquiring, and Restructuring

Global Strategy 1e Michael Peng Global Strategy Mike W Peng c h a p t e r 9 © M W Peng (www mikepeng com) Diversifying, Acquiring, and Restructuring Part III Corporate Level Strategies © M W Peng (www.

9 chapte r Diversifying, Acquiring, and Restructuring Part III: Corporate-Level Strategies Global Strategy Mike W Peng © © M M W W Peng Peng (www.mikepeng.com) (www.mikepeng.com) Outline • Product diversification • Geographic diversification • Combining product and geographic diversification • A comprehensive model of diversification • Acquisitions • Restructuring • Debates and extensions • The savvy strategist 9–2 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 + =  Also known as scale economies or economies of scale  GS3E SIA 9.2 HondaJet 9–3 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) 9–4 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 Figure 9.1 9–5 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  GS3E OPENING CASE: Corporate diversification strategy in South Korean business groups (chaebols) 9–6 Geographic (International) Diversification Geographic Geographic Diversification Diversification Limited LimitedInternational InternationalScope Scope (geographically (geographicallyand andculturally culturally adjacent countries) adjacent countries) Extensive ExtensiveInternational InternationalScope Scope (beyond (beyondgeographically geographicallyand and culturally neighboring countries) culturally neighboring countries) 9–7 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 9–8 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 Figure 9.2 9–9 Combining Product and Geographic Diversification GS3E SIA 9.1 Evolution of Danisco’s Corporate Strategy Figure 9.3 9–10 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 9–16 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 9–17 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 (p 627), Academy of Management Review, 30: 622-633 Figure 9.6 9–18 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 (p 628), Academy of Management Review, 30: 622-633 Figure 9.7 9–19 Conglomeration in Emerging Economies • Why does conglomeration add value in emerging economies?  This analysis relies on two critical and reasonable assumptions (Figure 9.7):  At a given level of diversification, MEBEmergingEcon > MEBDevelopedEcon  At a given level of diversification, MBCEmergingEcon < MBCDevelopedEcon  Overall, industry dynamics, resource repertoires, and institutional conditions are not static, nor are diversification strategies 9–20 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 and Miller Beer  SABMiller 9–21 The Variety of Mergers and Aquisitions © 2010 Cengage Learning All rights reserved VRIO behind Acquisitions Do acquisitions create value? Firms involved must supply rarity to the acquisition Successful postacquisition integration is hard to imitate How are the firms organized to benefit from acquisition? 23 Motives Behind Mergers and Acquisitions Table 9.2 9–24 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 9–25 SYMPTONS OF ACQUISITION FAILURES 26 Stakeholders’ Concerns During Mergers and Acquisitions Figure 9.9 9–27 Improving Acquisition Performance  Do 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 9–28 Two Leading Debates Product ProductRelatedness RelatednessVersus Versus Other OtherForms Formsof ofRelatedness Relatedness Acquisitions AcquisitionsVersus VersusAlliances Alliances 9–29 The Savvy Strategist • Understand the nature of your industry that may call for diversification, acquisitions, and restructuring • Develop capabilities that facilitate successful acquisitions and restructuring • Master the rules of the game governing acquisitions and restructuring around the world • GS3E CLOSING CASE: Emerging acquirers from China and India 9–30 ... 166), Strategic Management Journal, 9: 1 59? ??172 Figure 9. 5 9? ??17 The Evolution of the Scope of the Firm in the United States: 195 0– 197 0 and 197 0– 199 0 Source: M W Peng, S H Lee, & D Wang, 2005, What... multinationality and performance in the service sector (p 7), Journal of International Business Studies, 34: 5–18 Figure 9. 2 9? ? ?9 Combining Product and Geographic Diversification GS3E SIA 9. 1 Evolution... acquisitions and restructuring • Master the rules of the game governing acquisitions and restructuring around the world • GS3E CLOSING CASE: Emerging acquirers from China and India 9? ??30