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GSBS6481 International Business Strategy
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Week 7: Diversification and Restructuring
Reference & Readings
Corporate-level strategy versus business-level strategy
Product-related diversification
Product-unrelated diversification
Diversification premium
Geographic diversification
Conglomeration
Key concepts
Peng, (2021), Global Strategy, 5th ed. USA: Cengage Learning.
Chapter 9 Diversifying, Acquiring and Restructuring
Loredana, E 2017. ‘The use of Ansoff matrix in the field of Business’ (This article is in week 7 course materials)
Tan, H. 2022. Declining industries in emerging economies and firms’ strategies. (This article is in week 7 course materials)
Diversifying
Product diversification
Geographic diversification
Three perspectives on diversification
Evolution of the scope of the firm
Merge & Acquisition
Restructuring and divesture
Case study
Diversification
Opening Case: How did Korean Chaebol emerge
“My father and I started a cosmetic cream factory in the late 1940s. At that time, no company could supply us with plastic caps of adequate quality for cream jars, so we had to start a plastic business. Plastic caps alone were not sufficient to run the plastic molding plant, so we added combs, toothbrushes, and soap boxes. This plastics business also led us to manufacture electric fan blades and telephone cases, which in turn led us to manufacture electrical and electronic products and telecommunications equipment. The plastics business also took us into oil refining, which needed a tanker shipping company. The oil refining company alone was paying an insurance premium amounting to more than half the total revenue of the then largest insurance company in Korea. Thus, an insurance company was started.
A quote from the Chairman of LG
Source Peng (2014, p.259)
Source: https://commons.wikimedia.org/wiki/File:Lg_group_structure.png
Product diversification
Product-related diversification
Enter into new product markets and / or business activities that are related to a firm’s existing markets and /or activities
Common technologies, marketing and manufacturing
Product-unrelated diversification
no obvious product-related connections
those firms are also called conglomerates
Benefits and costs of product diversification
..of Product-related diversification?
Economies of scale – derived from operational synergy
..of the Product-Unrelated diversification?
Economies of scope – derived from financial synergy
Diversification premium and diversification discount
Product diversification and firm performance
Geographic diversification
Limited international scope
Extensive international scope
Geographic Diversification of the Largest Multinational Enterprises (MNEs) by Sales
“Global” MNEs have at least 20 percent of sales in each of the three regions of the Triad (Asia, Europe, and North America), but less than 50 percent in any one region.
“Bi-regional MNEs” have at least 20 percent of sales in each of two regions of the Triad, but less than 50 percent in any one region.
“Host-region based” MNEs have more than 50 percent of sales in one of the Triad regions other than their home region.
“Most internationalized” MNEs have the highest “transnationality index,” calculated by the United Nations as the average of (1) foreign/total sales, (2) foreign/total assets, and (3) foreign/total employment.
Sources: All data are from 2001. The first three columns are adapted from A. Rugman & A. Verbeke, 2004, A perspective on regional and global strategies of multinational enterprises (pp. 8–10), Journal of International Business Studies, 35: 3–18. The last column is adapted from United Nations, 2003, World Investment Report 2003 (p. 5), and Geneva: United Nations.
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.
… it may also depend on where the firm internationalize to
Greater China
Performance
Internationalisation
Chen, S. and Tan, H. (2012). Region effects in the internationalization–performance relationship in Chinese firms.
Product market growth
Source: (Ansoff, 1965)
Existing Product
Existing Market
Ansoff Matrix
Growth by Development
Growth by Diversification
Consolidation
Growth by Development
Why do firms diversify – three perspectives on diversification
Source: Peng 2017 Global Strategy 4th Edition. Cengage.
Industry-Based Considerations
Motivations for Diversification:
Growth opportunities in an industry
Structural attractiveness
Five forces
Resource-Based Considerations
Imitability
Organization
Institution-Based Considerations
Formal Institutions, e.g.
Promote product unrelated diversification by banning intraindustry mergers
Informal Institutions, e.g.
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)
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.
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 © 2005 South-Western. All rights reserved.
The Optimal Scope of the Firm: Developed versus Emerging Economies
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).
Mergers and Acquisitions (M&As): Types and Motives
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—SIA 9.2: Vodafone AirTouch/Mannesman
Motives Behind Mergers and Acquisitions
Symptoms of Merger & Alliance Failures
Problems for all M & A’s Problems for Cross-border M & A’s
Preacquisition: Overpayment for targets Lack of familiarity with foreign cultures, institutions, and systems
Managers overestimate their ability to create value Inadequate number of worthy targets
Inadequate preacquisition screening Nationalistic concerns against foreign takeovers (political sovereignty)
Poor strategic fit and lack of trust in motives for M & A Clashes of organisational cultures compounded by clashes of national cultures
Postacquisition: Poor organisational fit National concerns against foreign takeovers by firm and employees
Failure to address multiple stakeholder group’s concerns
The Performance of M&As
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.
Restructuring – reducing firm size, scope, and complexity
Downsizing: Reducing number of employees
Downscoping: Reducing scope of firm
Refocusing: Narrowing scope of firm
Motives for restructuring
Perspectives: Industry, resource, institution
Not widely embraced around the world
Motives for Restructuring
Industry-based Perspective
Restructuring is often triggered by a rising level of competition within an industry
Resource-based Perspective
While restructuring may bring benefits, there are also significant costs—organizational chaos, anxiety, frustration, and low morale
Institution-based Perspective
Firms and managers in developed economies increasingly feel institutional pressures from capital markets to restructure.
Strong institutional pressures against restructuring around the world
Divestiture
The action or process of selling off subsidiary business interests or investments.
One divestiture strategy involves the sale of the subsidiary or business line to another company.
By selling the business or its assets, the parent can obtain capital to use to acquire another company or assets that better fit with its current strategy.
Example – Pepsi
Paper discussion – “Declining industries in emerging economies and firms’ strategies”
Prepare for the next week (Week 8)
Read Chap 10
In the session next week, every student please prepare ONE ppt slide that shows the organization structure of one REAL multinational corporation (in the form of “organisational chart”)
Please present in the session an organizational chart and explain how the main businesses of the multinational company are organized internationally based on your research and group discussion
The company you choose could be an organization you are familiar with (e.g. your current/former employer), or one you could find information from secondary sources
Tips for searching organizational charts
Many companies reveal their organizational charts in their annual reports
You can also search company names (e.g. tencent + “organization chart” or “reporting structure” or “organizational structure” in Google (choose the option “image”)
An Example
Accountable Now
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