DIVERSIFICATION

JAN. 27, 2009MATT MOSLEYSUH-HEE CHOIHTM 681

2ND TOPIC

THREE LEVELS OF BUSINESS STRATEGIES

(Dess et al., 1995)

1. International level

2. Corporate level

3. Business level

DEFINITIONS OF DIVERSIFICATION(FROM RAMANUJAM & VARADARAJAN, 1989, 524)

Older definition (e.g. Gort,1962) Many markets output should be heterogeneous (products serve

separate markets) Lack of synergy and resource sharing concept

Newer definition (e.g. Booz et al., 1982) A means of spreading the base of a business to achieve growth and/or

reduce overall risk that (a) includes all investments except those aimed directly supporting the

competitiveness of existing businesses; (b) may take the form of investments that address new products,

services, customer segments, or geographic markets; and (c) may be accomplished by different methods including internal

development, acquisition, joint ventures, licensing agreements, etc. Ramanujam & Varadarajan (1989) : “the entry of a firm or business unit into

new lines of activity, either by process of internal business development or acquisition, which entail changes in its administrative structure, systems, and other management processes. “

SCOPE OF DIVERSIFICATION

(Dess et al., 1995) Product diversification

Proctor and GambleToothbrushes + Toothpaste

Geographic diversification Expansion to foreign countries

LEVELS OF DIVERSIFICATION

Low --- Moderate --- High --- Very high Low

Single business (>95%)

Dominant business diversification (70~95%)

LEVELS OF DIVERSIFICATION

Low --- Moderate --- High --- Very high Moderate-high

Related constrained diversification

Related linked diversification strategy (related + unrelated)

LEVELS OF DIVERSIFICATION

Low --- Moderate --- High --- Very high Very high

Unrelated

TYPES OF DIVERSIFICATION Horizontal Vs. Vertical Diversification Horizontal

Not associated with current products Good when the new product is in the same

economic environment (culinary : knife fork, restaurants: Yum Brands)

Vertical Associated with current products but not on

the same level of the supply chain

http://www.youtube.com/watch?v=fHIjxqbNRg4

BRIEF LOOK -- HOSPITALITY

1886 – Canadian Pacific Railroad Company

Owned 14 hotels

Inter-Continental Hotels

PepsiCo/Yum Brands

Marriott

THEORIES

Resource-based theories of diversification Portfolio theory Agency theories Transaction costs theory : internalization

theory (Hennart, 1991) Strategic theory -- Competence-based

theory of the firm (Foss, 1993; Teece et al., 1994; Penrose, 1995)

Network and cluster theory

Value-creation Value creation types:

Related ----- Unrelated (Teece, 1982) Market Power

Growth Risk Minimization

Consumer Perspective Need Fulfillment

Hotels not in travel destinations

WHY DO FIRMS DIVERSIFY?

VALUE-CREATING STRATEGIES OF DIVERSIFICATION:

OPERATIONAL AND CORPORATE RELATEDNESS

Related ConstrainedDiversificati

on( Vertical

Integration)

Both Operational

and Corporate Relatednes

s

UnrelatedDiversificati

on

Related Linked

Diversification

(Economies of Scope)

Sharing:OperationalRelatedness

BetweenBusiness

High

Low

Corporate Relatedness: Transferring Skills Into Business Through Corporate Headquarters

Low High

RELATED DIVERSIFICATION STRATEGY

Competitive advantage by synergies

Operational relatedness – share the resources – reducing costs : economies of scope/scale

Corporate relatedness – share the corporate competencies: managerial, technological knowledge and expertise – leveraging brand

Market power Multimarket

UNRELATED DIVERSIFICATION STRATEGY

Means.. No identical strategies / brand identities No value chain relationship Diversifying business to any sectors Profitable acquire of other assets

UNRELATED DIVERSIFICATION STRATEGY

Benefits Reducing risks by engaging in diverse sectors Enhancing profit by purchasing bargained

companies Ability to invest money into the business sector

with higher profitability / potential Disadvantages

Hard to manage all the businesses in diverse sectors

Difficult to enhance synergy effects

PREVIOUS RESEARCH

Theoretical Discussions & Literature Reviews

Ramanujam & Varadarajan (1989)

Empirical Studies1. Empirical Measurement of

PerformanceDoes diversification really work?

2. Performance Measurement Methodology

Dess et al. (1995)

PREVIOUS RESEARCHDiversification doesn’t work Singh (2007)

Diversification works!

What Types of Value Creation? Rumelt (1974)

Ways of diversification

and its efficiency

Sharma et al. (2007)

Geographic diversification

Additional factors

A lot of studies from Academy of Management Journal and Strategic Management Journal

PREVIOUS RESEARCHIt works!

What Types of Value Creation?

Ways of diversification and its efficiency

Geographic diversificationDoes geographical diversification

work? Morck and Yeung, 1991: it doesn’t work!

Kim et al. (1993) : geo-diversification works!

Additional factorsBy industry sectors

Which industry?

Case studies by each industry sector

Piscitello (2004): corporate coherence

Rumelt’s 1974 work : fail to control industry factors

CorporateDiversification

PREVIOUS RESEARCH

Hospitality and Tourism• A lot of cases studies and articles but not many academic studies • Case studies : Applebee’s diversification didn’t really work (NRA, 1999)

Global Media Conglomerates(Chan-Olmstead & Chang, 2003)

Strategy

Economic/

FinanceCase studies by

each industry sector

Perspectives

US service firms (Nayyar, 1992)

HOW TO DO RESEARCH ON THIS TOPIC?

TONS OF Diversification – performance relationship testing (e.g. Rumelt, 1974) Possible variables indicating diversification

geographic : degree of multinationality , R&D + advertising intensity (stock of intangibles)

organization structure (moderates the effect of diversification on performance) (Hill, Hitt & Hoskisson, 1992)

Possible variables indicating accomplishments Financial performance Tobin’s q ROA (Kim et al. 1993) does not show intangible

assets

POSSIBLE RESEARCH IDEAS Control system

Develop a model that businesses can use to help decide if diversification would be beneficial to them or not Are the current models for estimating the value of

diversification accurate? More sophisticated, controlled research needed

Distinguishing corporate / business level Considering geographic, cultural factors Controlling variables Other mediating / moderating factors?

– International diversification the moderating role of a local partner.

– The mediating effect of technology in international diversification

Academic research in hospitality and tourism industries needed

REFERENCES Booz Allen Hamilton Inc., New Products Management for the 1980s. Booz Allen and Hamilton, Inc.,

New York, 1982 Dess, G. G., Gupta, A., Hennart, J.-F., & Hill, C. W. L. (1995). Conducting and Integrating Strategy

Research at the International, Corporate, and Business Levels: Issues and Directions. Journal of Management, 21(3), 357.

Gort, M. (1962). Diversification and Integration in American Industry, Princeton, NJ: Princeton University Press

Hill, C. W. L., Hitt, M. A., & Hoskisson, R. E. (1992). Cooperative versus Competitive Structures in Related and Unrelated Diversified Firms. Organization Science, 3(4), 501-521.

Morck, R., & Yeung, B. (1991). Why Investors Value Multinationality. The Journal of Business, 64(2), 165.

Nayyar, P. R. (1992). On the measurement of corporate diversification strategy: Evidence from large U.S. service firms. Strategic Management Journal, 13(3), 219-236.

Piscitello, L. (2004). Corporate diversification, coherence and economic performance. Ind Corp Change, 13(5), 757-787.

Ramanujam, V., & Varadarajan, P. (1989). Research on Corporate Diversification: A Synthesis. Strategic Management Journal, 10(6), 523-551.

Rumelt, R.P. (1974). Strategy, Structure and Economic Performance. Cambridge, MA: Harvard University Press.

Sharma, R. S., Priscilla Teng Yu Hui, & Tan., M.-W. (2007). Value-added knowledge management for financial performance VINE, 37(4), 484-501.

Singh, M., Nejadmalayeri, A., & Mathur, I. (2007). Performance impact of business group affiliation: An analysis of the diversification-performance link in a developing economy. Journal of Business Research, 60(4), 339-347.