9 9 c chapter Diversifying Acquiring and Restructuring

9 9 c chapter Diversifying, Acquiring, and Restructuring Part III: Corporate-Level Strategies Global Strategy Mike W. Peng Copyright © 2009 Cengage. All rights reserved. Power. Point Presentation by John Bowen, Columbus State Community College

Outline • Product diversification • Geographic diversification • Combining product and geographic diversification • A comprehensive model of diversification • Acquisitions • Restructuring • Debates and extensions • The savvy strategist Copyright © 2009 Cengage. All rights reserved. 2

Product Diversification • Product-related diversification Ø Emphasis on operational synergy • Product-unrelated diversification Ø Conglomeration • Product diversification and firm performance Copyright © 2009 Cengage. All rights reserved. 3

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. Copyright © 2009 Cengage. All rights reserved. Figure 9. 1 4

Geographic (International) Diversification Geographic Diversification Limited International Scope Extensive International Scope (geographically and culturally adjacent countries) (beyond geographically and culturally neighboring countries) Copyright © 2009 Cengage. All rights reserved. 5

Geographic Diversification • International diversification • Limited international scope Ø Geographically and culturally adjacent countries • Extensive international scope Ø Beyond geographically and culturally neighboring countries • Geographic diversification and firm performance Copyright © 2009 Cengage. All rights reserved. 6

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: 5– 18. Copyright © 2009 Cengage. All rights reserved. Figure 9. 2 7

Combining Product and Geographic Diversification • Entertain both dimensions of diversification simultaneously • Four possible combinations Ø Anchored replicators Ø Multinational replicators Ø Far-flung conglomerates Ø Classic conglomerates • Migrate from one cell to another strategically Copyright © 2009 Cengage. All rights reserved. 8

Combining Product and Geographic Diversification Figure 9. 3 Copyright © 2009 Cengage. All rights reserved. 9

A Comprehensive Model of Diversification • Industry-based considerations Ø Growth opportunity Ø Structural attractiveness of an industry (Porter’s five forces) • Resource-based considerations: VRIO • Institution-based considerations: Formal, informal • The evolution of the scope of the firm: Benefits and costs - economic, bureaucratic, marginal Copyright © 2009 Cengage. All rights reserved. 10

A Comprehensive Model of Diversification Figure 9. 4 Copyright © 2009 Cengage. All rights reserved. 11

Product-Related and -Unrelated Diversification PRODUCT-RELATED DIVERSIFICATION PRODUCT-UNRELATED DIVERSIFICATION Synergy Operational synergy Financial synergy 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 Table 9. 1 Copyright © 2009 Cengage. All rights reserved. 12

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) Copyright © 2009 Cengage. All rights reserved. 13

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. Copyright © 2009 Cengage. All rights reserved. Figure 9. 5 14

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, Academy of Management Review (in press). Copyright © 2009 Cengage. All rights reserved. Figure 9. 6 15

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, Academy of Management Review (in press). Copyright © 2009 Cengage. All rights reserved. Figure 9. 7 16

Acquisitions • Setting the terms straight Ø Acquisition Ø Merger Ø Cross-border M&A, three primary categories: merger, vertical, conglomerate Ø Friendly and hostile M&A • Motives for M&A: Synergistic, hubris, managerial • Performance: Pre- and post-acquisition Copyright © 2009 Cengage. All rights reserved. 17

Understanding Cross-Border M&As Source: Adapted from United Nations, 2000, World Investment Report 2000 (p. 100), New York: UN Copyright © 2009 Cengage. All rights reserved. Figure 9. 8 18

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 Copyright © 2009 Cengage. All rights reserved. 19

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 Copyright © 2009 Cengage. All rights reserved. 20

Stakeholders’ Concerns During Mergers and Acquisitions Figure 9. 9 Copyright © 2009 Cengage. All rights reserved. 21

Restructuring • Setting the terms straight (Restructuring) Ø Downsizing Ø Down scoping Ø Refocusing • Motives for restructuring Ø Perspectives: Industry, resource, institution • Increasing the odds for acquisition success Copyright © 2009 Cengage. All rights reserved. 22

Debates and Extensions Product Relatedness Versus Other Forms of Relatedness Acquisitions Versus Alliances Copyright © 2009 Cengage. All rights reserved. 23

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. Copyright © 2009 Cengage. All rights reserved. 24