global strategy mike w. peng c h a p t e r 99 copyright © 2005 south-western.powerpoint...
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Global StrategyGlobal StrategyMike W. PengMike W. Peng
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Copyright © 2005 South-Western. PowerPoint Presentation by David Ahlstrom, Chinese University of Hong KongAll rights reserved. and Charlie Cook, The University of West AlabamaCopyright © 2005 South-Western. PowerPoint Presentation by David Ahlstrom, Chinese University of Hong KongAll rights reserved. and Charlie Cook, The University of West Alabama
Diversifying, Diversifying, Acquiring, and Acquiring, and RestructuringRestructuring
Part III: Corporate-Level StrategiesPart III: Corporate-Level Strategies
Copyright © 2005 South-Western. All rights reserved. 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 + 2 = 5.– Also known as scale economies or economies of scale.
Copyright © 2005 South-Western. All rights reserved. 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)
Copyright © 2005 South-Western. All rights reserved. 9–4
Product Diversification and Firm Performance
Figure 9.1Source: Adapted from R. E. Hoskisson, M. A. Hitt, & R. D. Ireland, 2004, Competing for Advantage (p. 228), Cincinnati: Thomson South-Western.
Copyright © 2005 South-Western. All rights reserved. 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.
Copyright © 2005 South-Western. All rights reserved. 9–6
Geographic (International) Diversification
Geographic Geographic DiversificationDiversification
Geographic Geographic DiversificationDiversification
Limited International ScopeLimited International Scope(geographically and culturally (geographically and culturally
adjacent countries)adjacent countries)
Limited International ScopeLimited International Scope(geographically and culturally (geographically and culturally
adjacent countries)adjacent countries)
Extensive International ScopeExtensive International Scope(beyond geographically and (beyond geographically and
culturally neighboring countries)culturally neighboring countries)
Extensive International ScopeExtensive International Scope(beyond geographically and (beyond geographically and
culturally neighboring countries)culturally neighboring countries)
Copyright © 2005 South-Western. All rights reserved. 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.
Copyright © 2005 South-Western. All rights reserved. 9–8
Geographic Diversification and Firm Performance
Figure 9.2
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 © 2005 South-Western. All rights reserved. 9–9
Geographic Diversification and Firm Performance
• Not all firms have been sufficiently involved overseas to experience the ups and downs.
Studies reported a U-shaped relationship because they only sampled firms in the early to intermediate stages of internationalization.
Other studies document an inverted-U shape, because their samples are biased for larger firms with moderate to high levels of diversification.
Given the complexity, it is hardly surprising that there is a large debate about geographic diversification.
Copyright © 2005 South-Western. All rights reserved. 9–10
A Comprehensive Model of Diversification
Figure 9.4
Copyright © 2005 South-Western. All rights reserved. 9–11
Industry-Based Considerations
• Motivations for Diversification:Overseas growth opportunities in an industry
(e.g., typewriters)Structural attractiveness
Interfirm rivalries based on cost leadership and differentiation and high entry barriers may not deter new entrants.
Bargaining power of suppliers and buyersFirms broaden their scope by acquiring suppliers
upstream and/or buyers downstream.The threat of substitute products
Kodak and Fuji threatened by digital camera makers which produce substitute products
Copyright © 2005 South-Western. All rights reserved. 9–12
Resource-Based Considerations• Value
Diversification reduces risk—compared with non-diversified, single-business firms
• RarityLeveraging unique core competencies and
capabilities.
• ImitabilityGE is enviable, but few firms can imitate it.
• OrganizationOrganizational structure and control
mechanisms must support certain diversification strategies (product-related (strategic control) or –unrelated (finanicial control))
Copyright © 2005 South-Western. All rights reserved. 9–13
Formal InstitutionsFormal InstitutionsFormal InstitutionsFormal Institutions
Promote product unrelated diversification by banning
intraindustry mergers
Promote product unrelated diversification by banning
intraindustry mergers
Enable or constrain geographic diversification by loosening or
tightening FDI policies
Enable or constrain geographic diversification by loosening or
tightening FDI policies
Internalized, cognitive beliefs guide managerial action (e.g.,
empire building)
Internalized, cognitive beliefs guide managerial action (e.g.,
empire building)
Normative pressures to jump on the diversification “bandwagon”
Normative pressures to jump on the diversification “bandwagon”
Informal InstitutionsInformal InstitutionsInformal InstitutionsInformal Institutions
Institution-Based Considerations
Copyright © 2005 South-Western. All rights reserved. 9–14
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.
Copyright © 2005 South-Western. All rights reserved. 9–15
What Determines the Scope of the Firm?
Figure 9.5Source: Adapted from G. Jones & C. Hill, 1988, Transaction cost analysis of strategy-structure choices (p. 166), Strategic Management Journal, 9: 159–172.
Copyright © 2005 South-Western. All rights reserved. 9–16
The Evolution of the Scope of the Firm in the United States: 1950–1970 and 1970–1990
Figure 9.6Source: 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 © 2005 South-Western. All rights reserved. 9–17
The Optimal Scope of the Firm: Developed versus Emerging Economies at the Same Time
Figure 9.7Source: 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 © 2005 South-Western. All rights reserved. 9–18
Conglomeration in Emerging Economies
• Why does conglomeration add value in emerging economies?This analysis relies on two critical and
reasonable assumptions (Figure 9.7):
That at a given level of diversification, MEBEmergingEcon > MEBDevelopedEcon
That at a given level of diversification, MBCEmergingEcon < MBCDevelopedEcon
Overall, industry dynamics, resource repertoires, and institutional conditions are not static, nor are diversification strategies.
Copyright © 2005 South-Western. All rights reserved. 9–19
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 & Miller Beer SABMiller
Copyright © 2005 South-Western. All rights reserved. 9–20
Types of Cross-Border Mergers and Acquisitions
Figure 9.8Source: Adapted from United Nations, 2000, World Investment Report 2000 (p. 100), New York: UN
Copyright © 2005 South-Western. All rights reserved. 9–21
Types of M&As
• Primary categories of M&As Horizontal: deals involving competing firms in the same
industry—BP/Amoco.
Vertical: deals which allow the focal firms to acquire suppliers upstream and/or buyers downstream—Sony/Columbia Pictures.
Conglomerate: transactions undertaken by product unrelated diversifiers involving firms in product unrelated industries and markets—Vivendi/Universal.
• Terms of M&As Friendly: the board and management of a target firm
agrees to the transaction (although they may initially resist).
Hostile (or hostile takeovers): undertaken against the wishes of the target firm’s board and management, who reject M&A offers
Copyright © 2005 South-Western. All rights reserved. 9–22
Motives for Mergers and Acquisitions
• Industry-based perspective Enhance and consolidate market power in an industry.
• Resource-based perspective Leverage superior managerial resources. Access needed resources
• Institution-based perspective Often a response to formal institutional constraints. Also often a reflection of informal norms and cognitions Hubris motives: Managerial over-confidence Managerial motives: Self-interested empire building in
search of more power, prestige, and income
• These motives may coexist simultaneously
Copyright © 2005 South-Western. All rights reserved. 9–23
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
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Symptoms of Merger and Acquisition Failures
Table 9.3
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Stakeholders’ Concerns During Mergers and Acquisitions
Figure 9.9
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Improving Acquisition Performance
• Managers should: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.
Copyright © 2005 South-Western. All rights reserved. 9–27
Restructuring: Setting the Terms Straight
• RestructuringA reduction in either firm size and scope or
both.
• Primary meansDownsizing
Reducing the number of employees through lay-offs, early retirements, and out-sourcing.
DownscopingReducing the scope of the firm through divestitures
and spin-offs.
Copyright © 2005 South-Western. All rights reserved. 9–28
Motives for Restructuring
• Industry-based Perspective Restructuring is often triggered by a rising level of
competition within an industry (e.g., auto, telecom)
• Resource-based Perspective While restructuring may bring benefits, there are also
significant costs—organizational chaos, anxiety, frustration, and low morale—which often fail the VRIO test.
• Institution-based Perspective Firms and managers in developed economies increasingly
feel institutional pressures from capital markets to restructure.
Also, strong institutional pressures against restructuring around the world (e.g., Germany, CEE, Asia)
Copyright © 2005 South-Western. All rights reserved. 9–29
Improving Restructuring Performance
• Given the high risks and high stakes involved, firms will do better if they:Use restructuring as a last—not first—resort.Manage survivors more effectively—treating
departing employees fairly and decently, which sends a positive signal to surviving employees.
Are careful in restructuring knowledge-intensive units, whose organizational memory and capabilities are largely embedded in employees.