GROUP 8
Chapter 9:
Diversifying and
Managing
Acquasition Globally
CONTENTS
01
Define product diversification and geographic
diversification
02 A Comprehensive model of diversification
03 Motives and performance of Acquisitions
04
Participate in four leading debates concerning
diversification and acquisitions
05 Draw strategic implications for action
06 Closing case study
Define product
diversification and
geographic diversification
Product diversification
Product - Related diversification: Entries into
new product markets or activities that are
related to a firm’s existing markets or
activities.
Product - Unrelated diversification: Entries
into industries that have no obvious product-
related connections to the firm’s current lines
of business
Product diversification and Firm performance:
Performance increases as firms shift from a
single business strategy to a product-related
diversification strategy, but performance may
decrease as firms change from product-
related to product-unrelated diversification-in
other words, the relationship seems to be an
inverted U shape
Geographic
Limited international scope
diversification The emphasis is on geographically and
culturally adjacent countries in order to
reduce the liability of foreignness
Extensive international scope
Maintaining a substantial presence
beyond geographically and culturally
neighboring countries
Geographic Diversification and
Firm Performance
At low internationalization, geographic scope initially
harms performance before improving (U-shape). At
higher levels, performance improves with expansion
but only up to a point (inverted U-shape), challenging
the idea that more global expansion is always better.
Combining Product and
Geographic diversification
Anchored replicator
A firm that seeks to replicate a set of activities in
related industries in a small number of countries
anchored by the home country
Multinational replicator
A firm that engages in product-related diversification
on the one hand and far-flung multinational expansion
on the other hand
Far-flung conglomerate
A conglomerate firm that pursues both extensive
product-unrelated diversification and extensive
geographic diversification
Classic conglomerate
A firm that engages in product-unrelated
diversification within a small set of countries centered
on the home country
A Comprehensive model
of diversification
Industry-based considerations
1. Industry-based factors motivating firms to diversify. It begins
by noting that growth opportunities in an industry encourage
diversification. In contrast, companies in declining industries
often exit and seek opportunities elsewhere.
The five forces framework also influences diversification
decisions.
High rivalry pushes firms to explore new markets.
High entry barriers in industries allow only certain firms to
diversify successfully.
Other factors include the bargaining power of suppliers and
buyers, where firms may diversify through vertical integration .
Additionally, the threat of substitutes encourages
diversification, as seen with smartphones replacing products
like cameras and maps.
Resource-based considerations
01 02 03 04
Value Rarity Imitability Organization
Diversification can create value by Firms must possess rare and Successful post-acquisition Whether diversification adds
spreading risk and leveraging core unique capabilities to succeed in integration is difficult to replicate. value depends on how the firm is
competencies. A moderate level diversification. Lenovo's Northrop Grumman excels in organized
of diversification tends to be most turnaround of IBM's PC division, integrating acquired businesses
effective, reducing risk while making it the largest PC maker, is using a highly structured process, a
adding value. cited as an example of a rare skill that is hard for competitors to
capability. imitate.
Economies Organizational Structure Information Processing
PRD achieves PRD generally requires In PRD, communication tends
economies of scale centralization to be intensive and rich
PUD gains PUD benefits from PUD communication is less
economies of scope decentralization intensive
Synergy Control Emphasis Organizational Culture
PRD focuses on In PRD, control is strategic PRD fosters a
operational synergy behavior-based cooperative culture
PUD emphasizes In PUD, financial or output PUD tends to be
financial synergy control is emphasized competitive
Institution-Based Considerations
Formal Institutions
Historical Context in Developed Economies
In 1950s and 1960s, antitrust authorities in the United States
discouraged product-related diversification, viewing mergers
as anticompetitive, creating a wave of conglomerates
By 1980s, US policies allowing more related mergers. Result in
the trend of dismantling conglomerates and focusing on core
competencies gained momentum
Emerging Economies
In emerging markets, conglomerates thrive under protectionist
policies, leveraging government connections.
As governments in these regions reduce protectionism,
conglomerates face increased competition from foreign and
domestic non-diversified firms. Push them to narrow their focus
and operate in fewer, more manageable industries
Geographic Diversification
The increase in geographic diversification is linked to the
gradual opening of economies due to market-supporting
and policy changes, allowing firms to expand globally.
Institution-Based Considerations
Informal Institutions
Normative Pressures
Managers often follow industry norms to avoid criticism from
shareholders, directors, and the media. When conglomeration
becomes the norm, even underperforming firms may follow
the trend, despite lacking the necessary skills to execute
such strategies successfully.
Early movers may succeed due to unique capabilities, while
late movers often struggle because they merely follow the
trend without the needed expertise.
Cognitive Motives
Managers may be driven by personal interests that do not
align with the best interests of the firm or shareholders.
They may seek to reduce their own employment risk by
diversifying the company to protect their jobs during
economic downturns, even if this does not benefit the
company
WHAT DETERMINES
THE SCOPE OF THE
FIRM?
Economic benefits are benefits
brought by the various forms of
synergy in the context of
diversification.
Bureaucratic costs are the
additional costs associated with a
larger, more complex organization
with more employees and more
complicated information systems.
Marginal economic benefit (MEB): The economic benefit of the last unit of growth
(such as the last acquisition)
Marginal bureaucratic cost (MBC): The additional bureaucratic costs incurred (such
as the additional expenditures on payroll and insurance from hiring more employees)
THE EVOLUTION OF THE SCOPE OF THE
FIRM IN THE US
Between the 1950s and the 1970s
If hold MBC constant, MEB shifted
upward
=> Expanded scope of the firm on
average (from D1 to D2). Due to:
Lack of growth opportunities
within the same industry
through product-related
diversification
The emergence of
organizational capabilities to
derive financial synergy from
conglomeration.
THE EVOLUTION OF THE
From the 1980s to the 1990s
SCOPE OF THE FIRM IN
THE US US government no longer
critically scrutinize M&A =>
Unnecessary to focus on
unrelated diversification
It’s challenging to derive
competitive advantage from
conglomeration, MBC also
increased.
Parallel to these events:
External capital markets
became more efficient
Managers became more
disciplined and focused on
shareholder value maximization
THE EVOLUTION OF THE
From the 1980s to the 1990s
SCOPE OF THE FIRM IN
THE US In the 1990s, the scope of the firm
was pushed from D2 back to the
appropriate point D3. Knowns as:
Refocusing: narrowing the
scope of the firm to focus on a
few areas
Downscoping: Reducing the
scope of the firm through
divestitures, sell-offs and spin-
offs
Downsizing: Reducing the
number of employees through
layoffs and outsourcing
THE OPTIMAL
SCOPE OF THE
FIRM
At MEB (EE) > MEB (DE)
External capital markets in emerging
economies are underdeveloped making
internal capital markets, such as
conglomerates, more attractive
At MBC (EE) < MBC (DE)
Most conglomerates of emerging economies are family firms → Lower level of
bureaucratization, formalization and professionalization -> Lower bureaucratic costs.
=> For any scope between D1 and D2 :
- Firms in developed economies at point C need to downscope to point A
- Firms in emerging economies at point E can move up to point B
The wider the scope, the harder it is for corporate headquarters to coordinate, control and
invest effectively in different units.
There is a point where if diversify more, conglomerates may suffer financial crisis
Motives and performance
of Acquisitions
Industry-based Resource-based Institution-based
perspective perspective perspective
Acquisitions are motivated by a desire to Acquisitions driven by responses to
The main rationale is to enhance
leverage superior resources institutional constraints and transitions,
and consolidate market power,
Companies also aim to gain access to such as regulatory changes or economic
meaning that firms seek to merge or complementary resources. shifts that make mergers or acquisitions
acquire others to dominate the In some cases, this is referred to as strategically necessary.
market, reduce competition, and acqui-hiring -> Synergistic motives are value-adding
increase their market share Firms acquire other firms to learn and because they create synergies that
develop new skills, enhancing their enhance the combined firm's performance.
capabilities.
HUBRISTIC RESOURCE-BASED PERSPECTIVE
MOTIVES Hubris refers to the overconfidence of managers who
believe they can manage the assets of the target firm
better than the current managers. This overconfidence
often leads to overvaluation and overpayment for
acquisitions
However, if the capital market is efficient, the market
price of the target firm already reflects its true value,
making it unlikely that the acquirer can add much more
value. Even if the market is inefficient, paying a premium
that's too high means the acquiring firm has likely
overpaid.
INSTITUTION-BASED PERSPECTIVE
Many managers follow the trend of acquisitions, jumping
on the "M&A bandwagon" after first movers in the
industry start acquiring other companies. This creates
"waves" of acquisitions, often driven more by a herd
mentality than by sound strategic reasoning.
Hubristic motives generally reduce value because they are
based on overconfidence and lead to overpayment and poor
post-acquisition performance.
MANAGERIAL
MOTIVES Managerial motives suggest that some managers may
engage in acquisitions for self-interested reasons. They
may knowingly overpay for target firms to achieve
personal goals, such as increasing their power or
prestige.
Some managers may also deliberately over-diversify their
firms through acquisitions, often motivated by norms or
personal incentives, which can dilute the firm’s core
strengths.
Managerial motives also tend to reduce value, as they are
driven by the self-interest of managers rather than the
strategic interests of the firm.
Conclusion
Synergistic motives are typically value-creating, as they are driven by strategic objectives. On the other hand, hubristic
and managerial motives are value-reducing, as they are driven by overconfidence, herd behavior, or personal interests.
Industry-based issues Resource-based issue Institution-based issues
Leverage superior
Enhance and consolidate Respond to formal
managerial capabilities
market power institutional constraints and
Synergistic Access complementary
Overcome entry barriers transitions
motives Reduce risk
resources
Take advantage of market
Learning and developing
Leverage scope economies opening àn globalization
new skills
Hubristic Manager's overconfidence Herd behavior - following
motives in their abilities norms and chasing fads
Self-interested actions such
Managerial as empire building guided by
motives informal norms and
cognitions
Performance of Mergers
and Acquisitions
All M&As Cross-border M&As
Lack of familiarity with foreign cultures,
Preacquisition: Managers overestimate their ability to
institutions, and business systems
create value
Overpayment for Inadequate number of worthy targets
Inadequate preacquisition screening
targets Nationalistic concerns against foreign
Poor strategic fit
takeovers (political and media level)
Clashes of organizational cultures
Poor organizational fit compounded t clashes of national
Postacquisition:
Failure to address multiple stakeholder cultures
Failure in integration groups' concerns Nationalistic concern against foreign
takeover (firm and employee level)
Debate
DEBATE 1: PRODUCT RELATEDNESS
VS OTHER FORMS OF RELATEDNESS
MEASURING PRODUCT DOMINANT LOGIC INSTITUTIONAL RELATEDNESS
RELATEDNESS
It's difficult to measure product Instead of just looking at product Some companies succeed by having
relatedness in today's diversified similarities, we can consider a strong informal relationships with key
companies. company's dominant logic, or the institutions, such as governments.
common way it operates across its
businesses.
DEBATE 2: OLD-LINE VS NEW-AGE
CONGLOMERATES
Old-line conglomerates used to New-age conglomerates rely on However, both types of
succeed by owning many technology and innovation to conglomerates face
different businesses, but in the grow into multiple areas. challenges. Old-line companies
1980s and 1990s, they Amazon leads in e-commerce failed because they couldn't
struggled to manage their while also expanding into cloud manage their diverse
money and operations across computing, entertainment, and businesses well. Meanwhile,
unrelated industries, which led Alibaba combines e-commerce new-age firms, despite their
to their decline. with social media and financial success, have faced setbacks
services.
High Road Low Road
Integration Style Gradual and collaborative Quick and forceful
Keeps the acquired company’s Acquiring company takes full
Autonomy independence control
Generally higher, promotes Often lower, leads to frustration
Employee Morale teamwork and disengagement
Cultural Encourages blending of different Ignores cultural differences,
Integration work cultures which can cause conflicts
Building long-term value and Cutting costs and achieving
Focus relationships short-term efficiency
Higher chance of success and Risk of losing key people, lower
Outcome retaining talent long-term success
ChemChina's acquisition of Daimler's takeover of Chrysler,
Example Syngenta, allowing the Swiss leading to quick changes and
team to stay in control unhappy employees.
DEBATE 3: HIGH ROAD VS
LOW ROAD IN INTEGRATION
DEBATE 4:
ACQUISITIONS VS
ALLIANCES
ACQUISITIONS INVOLVE ONE COMPANY FULLY TAKING OVER
ANOTHER, GAINING COMPLETE CONTROL OF ITS ASSETS
AND OPERATIONS. WHILE THIS OFFERS IMMEDIATE ACCESS
TO NEW RESOURCES AND MARKETS, IT IS OFTEN EXPENSIVE
AND RISKY, WITH CHALLENGES SUCH AS CULTURAL
DIFFERENCES AND INTEGRATION ISSUES.
ALLIANCES PROVIDE A LESS RISKY ALTERNATIVE, ALLOWING
FIRMS TO COLLABORATE WITHOUT A FULL TAKEOVER.
ALLIANCES ENABLE KNOWLEDGE SHARING, RESOURCE
POOLING, AND CAN ACT AS A LEARNING OPPORTUNITY
BEFORE MOVING TO A FULL ACQUISITION.
WHILE ACQUISITIONS OFFER QUICK ACCESS TO NEW
CAPABILITIES, THEY COME WITH HIGH RISKS.
ALLIANCES, ON THE OTHER HAND, ARE MORE FLEXIBLE
BUT REQUIRE CAREFUL MANAGEMENT.
Draw strategic
implications for action
Understand the nature of your
01 industry that may call for
diversification and acquisitions
Develop capabilities that
facilitate successful
diversification and acquisitions
02
Master the rules of the game
03 governing diversification and
acquisitions around the world
CASE STUDY
