Diversification, industry dynamism, and economic performance the impact of dynamic related diversification on the multi busine

Diversification, Industry Dynamism, and Economic Performance Matthias Knecht Diversification, Industry Dynamism, and Economic Performance The Impact of Dynamic-related Diversification on the Multi-business Firm Matthias Knecht Universität Erlangen-Nürnberg Erlangen, Germany Dissertation Universität Erlangen-Nürnberg, 2013 ISBN 978-3-658-02676-9 DOI 10.1007/978-3-658-02677-6 ISBN 978-3-658-02677-6 (eBook) The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data are available in the Internet at http://dnb.d-nb.de Library of Congress Control Number: 2013942503 Springer Gabler © Springer Fachmedien Wiesbaden 2014 This work is subject to copyright All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed Exempted from this legal reservation are brief excerpts in connection with reviews or scholarly analysis or material supplied specifically for the purpose of being entered and executed on a computer system, for exclusive use by the purchaser of the work Duplication of this publication or parts thereof is permitted only under the provisions of the Copyright Law of the Publisher’s location, in its current version, and permission for use must always be obtained from Springer Permissions for use may be obtained through RightsLink at the Copyright Clearance Center Violations are liable to prosecution under the respective Copyright Law The use of general descriptive names, registered names, trademarks, service marks, etc in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use While the advice and information in this book are believed to be true and accurate at the date of publication, neither the authors nor the editors nor the publisher can accept any legal responsibility for any errors or omissions that may be made The publisher makes no warranty, express or implied, with respect to the material contained herein Printed on acid-free paper Springer Gabler is a brand of Springer DE Springer DE is part of Springer Science+Business Media www.springer-gabler.de For Lena FOREWORD With the rise of diversified conglomerates in the 1960s corporate diversification has become a central element in the strategist’s toolbox as a means to boost growth, enter into new markets, or acquire technology and intellectual property Today diversified corporations command significant market share across virtually all industries and play an important role in economic activity Yet, since adding value to a diverse set of businesses often proves difficult, corporate top management faces a crucial question: how to diversify? While most academics stand firm in the widely-held belief that related diversification can improve firm performance, empirical results are mixed This is partly due to the limitation that most prior research narrowly focuses on explaining the diversification-performance linkage through the traditional lens of synergies based on product/market-relatedness; alternative perspectives that could provide a more comprehensive understanding tend to be sidelined In his doctoral thesis Matthias Knecht examines today’s turbulent economic environments and identifies industry dynamism as a major factor influencing the multi-business firm Based on the resource-based school of thought and the dynamic capabilities view Knecht systematically analyzes the impact of dynamic environments on the organization and explains in detail how combining businesses from similarly dynamic industries can result in superior economic performance Through his work on corporate diversification and dynamic environments he is able to integrate for the first time these two highly relevant streams of the strategic management literature The first empirical part of this work develops a comprehensive, theoretically-grounded methodology to measure industry dynamism along multiple dimensions Using a global dataset of unprecedented breadth and depth, Knecht is able to comprehensively measure and interpret the dynamism of a wide range of industries The second empirical part of the project develops two unique methods to quantify dynamic-relatedness in order to address the effect of dynamic-related diversification on performance Based on his innovative conceptual work Knecht is able to provide empirical proof that dynamic-relatedness contributes significantly to firm performance This dissertation is a cornerstone in advancing our knowledge about successful corporate diversification It makes important contributions to theory development by opening up a new perspective on relatedness and should be seen as a highly valuable contribution to ongoing research in the field of corporate diversification Professor Dr Harald Hungenberg VII ACKNOWLEDGMENTS The writing of this dissertation has been one of the most significant academic challenges I have ever had to face It is the product of a journey that demanded sacrifice, discipline, and compromise, yet it has also been one of the most rewarding experiences of my life Though this dissertation is an individual work, it never would have been possible without the support, guidance, and inspiration of so many people around me It is to them that I owe my deepest gratitude I owe special thanks to Professor Harald Hungenberg who took on the role of doctoral advisor with passion and dedication despite his many other academic and professional commitments His deep knowledge in the field of strategic management is a constant source of inspiration, and his openness creates an inclusive work environment that has been a great pleasure to be part of I am also highly indebted to Professor Kathryn R Harrigan for her generous invitation to continue my research at Columbia Business School in New York It was a exceptional privilege to benefit from her extensive experience and from her insightful challenges to my ideas I will always cherish the openness and academic caliber of the vibrant community at Columbia University, which supported and substantially improved the quality of my dissertation I moreover owe sincere gratitude to my supervisor Dr Martin Weiss for his invaluable input and strong commitment to my research He coached me from the start and provided suggestions that were instrumental to overcoming the challenges I encountered during the process Furthermore, it gives me great pleasure to acknowledge the support of my friend and fellow doctoral candidate Frank Freund I will never forget the countless nights we spent problem solving on flip charts or the hours on the phone bouncing ideas and challenging findings I am truly indebted and thankful to Frank on the professional level as a sparring partner and on the personal level as a motivator, supporter, and friend during the ups and downs of the dissertation I could not have wished for a better companion on this journey I am also very grateful to my employer McKinsey & Company for the opportunity to pursue this research and for their material support of my dissertation Furthermore, I would like to express my deepest gratitude to the Foundation of German Business (Stiftung der Deutschen Wirtschaft, SDW) for awarding me a PhD scholarship and for granting financial support during my time at Columbia Business School IX Finally, I would like to thank my parents and my brother for their unconditional support and encouragement throughout the dissertation Moreover, I will be forever indebted to my wife Lena for her constant support and encouragement throughout this academic endeavor I thank her for unyielding devotion and love, selfless patience, and the freedom she gave me that allowed me to focus None of this would have been possible without the love and patience of my family Dr Matthias Knecht X CONTENTS FOREWORD VII ACKNOWLEDGMENTS IX CONTENTS XI LIST OF FIGURES XVII LIST OF TABLES XIX LIST OF ABBREVIATIONS XXI INTRODUCTION 1.1 Problem Definition 1.2 Research Gap and Motivation 1.2.1 Diversification, Relatedness, and Performance 1.2.2 The Dynamism of Industries 1.3 Research Question 1.3.1 Industry Dynamism 1.3.2 Corporate Diversification 1.3.3 Method of Reasoning 10 1.4 Dissertation Outline 11 THEORETICAL BACKGROUND 14 2.1 Guiding Theories in Strategic Management 14 2.1.1 Market-based View 15 2.1.2 Resource-based View 19 2.1.3 Dynamic Capabilities View 24 2.2 Terminology 28 2.2.1 Resources 29 2.2.2 Capabilities and Competencies 30 2.2.3 Dynamic Capabilities 32 2.2.4 Rents 35 2.3 The Environment of the Firm 37 2.3.1 Definition of the Macro Environment 38 XI 2.3.2 Definition of the Task Environment 39 2.3.3 Dimensions of the Environment 40 2.3.3.1 Munificence 41 2.3.3.2 Complexity 42 2.3.3.3 Dynamism 44 CORPORATE DIVERSIFICATION 47 3.1 Corporate Diversification: An Introduction 47 3.1.1 Definition of Diversification 47 3.1.1.1 Related and Unrelated Diversification 49 3.1.1.2 Horizontal, vertical, and conglomerate diversification 50 3.1.1.3 Domestic and international diversification 51 3.1.2 A Process Perspective on Diversification 52 3.1.3 A Status Perspective on Diversification 53 3.1.4 Perspective on Corporate Diversification in this Research 54 3.2 Motives for Diversification 55 3.2.1 Synergies 56 3.2.2 Agency Theory 59 3.2.3 Market Power 60 3.2.4 Risk Reduction 62 3.2.5 Transaction Costs 64 3.3 Limits and Costs of Diversification 66 3.3.1 Implementation Costs 66 3.3.2 Complexity and Coordination Costs 67 3.3.3 Limited Cognitive Capacity 68 3.4 Diversification and Economic Performance 70 3.4.1 Substitutability vs Complementarity 71 3.4.2 Relatedness and the Realization of Synergies 73 3.4.3 Operational Relatedness 74 3.4.4 Strategic Relatedness 75 3.4.5 Relatedness as a Multidimensional Construct 77 3.5 The Diversification-Performance Puzzle 78 3.5.1 State of Research on the Diversification-Performance Linkage 78 3.5.2 Methodological Considerations 85 3.6 Interim Conclusion 88 INDUSTRY DYNAMISM 90 4.1 Industry Dynamism: An Introduction 90 4.1.1 The Concept of Dynamism 90 4.1.2 Understanding Dynamism: A Growing Confusion 92 XII 334 Bibliography Newbert, S (2007) Empirical research on the resource-based view of the firm: An assessment and suggestions for future research Strategic Management Journal, 28(2): 121–146 Newey, W., & West, K (1987) A simple, positive semi-definite, heteroskedasticity and autocorrelation consistent covariance matrix Econometrica, 55(3): 703–708 Ngah-Kiing Lim, E., Das, S., & Das, A (2009) Diversification strategy, capital structure, and the Asian financial crisis (1997–1998): Evidence from Singapore firms Strategic Management Journal, 30(6): 577–594 Ng, D (2007) A modern resource 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