Academy of Management


Diversification Bibliography

Bibliography compiled by Jim Blasick and Kurt Heppard
Last updated: January 6th, 1995.

Argyres, Nicholas (1996) Capabilities, technological diversification and divisionalization. Strategic Management Journal, 17(5): 395-410.

The hypothesis that greater R&D diversification is associated with less divisionalization in multidivisional firms is developed. It is argued, using transaction cost theory, that the extent of divisionalization of a large firm is indicative of its emphasis on interdivisional coordination, since fewer divisional boundaries reduce interdivisional bargaining costs. Also, greater interdivisional coordination is required to pursue strategies aimed at broadening technological capabilities. Conversely, less interdivisional coordination is required for more specialized R&D, that is, for strategies aimed at deepening existing capabilities. The hypothesis finds support in patent and organizational data.

Markides, Constantinos C; Williamson, Peter J. (1996) Corporate diversification and organizational structure: A resource-based view. Academy of Management Journal, 39(2): 340-367.

It is argued that related diversification enhances performance only when it allows a business to obtain preferential access to strategic assets - those that are valuable, rare, imperfectly tradable and costly to imitate. As the advantage this access affords will decay as a result of asset erosion and imitation by single-business rivals, in the long run only competences that enable a firm to build new strategic assets more quickly and efficiently than competitors will allow it to sustain supernormal profits. Both short- and long-run advantages are conditional, however, on organizational structures that allow the firm's divisions to share existing strategic assets and to transfer the competence to build new ones efficiently.

Lubatkin, Michael H; Lane, Peter (1996) Psst... The merger mavens still have it wrong! Academy of Management Executive, 10(1): 21-39.

The 1990s are witnessing a wave of mergers that rivals the size of those of the 1980s and 1960s. Proponents whisper that these mergers are fundamentally different from the earlier waves, that managers have learned their lessons, and that the underlying logic has fundamentally changes. A discussion contends it is useful to review the misinformed beliefs that drove mergers in past decades, and as these merger myths continue to influence managers today. The myths discussed include: 1. risk reduction through diversification, 2. creating value through a portfolio perspective, and 3. related mergers are easier than unrelated. Some guidelines for making mergers truly strategic include: 1. Keep your eggs in similar baskets of knowledge. 2. Collaborate to learn. 3. Date before you marry. 4. There is more to a marriage than a courtship.

Anslinger, Patricia L; Copeland, Thomas E (1996) Growth through acquisitions: A fresh look. Harvard Business Review, 74(1): 126-135.

Many companies today find themselves with a surplus of cash and a shortage of places to use it. In the past 5 years, more than 1,300 companies have stashed upwards of $150 billion into their coffers. It is suggested that companies can pursue nonsynergistic acquisitions profitably. A diverse group of organizations, including Thermo Electron, Sara Lee, and Clayton, Dubilier & Rice, have used nonsynergistic acquisitions to grow dramatically. sustained returns of 18% to 35% per year have been captured by making nonsynergistic acquisitions. However, making these acquisitions work is not easy. They require senior managers to ask themselves a difficult set of questions.

Brush, Thomas H. (1996) Predicted change in operational synergy and post-acquisition performance of acquired businesses. Strategic Management Journal, 17(1): 1-24.

The 1980s acquisitions are widely believed to have unwound that conglomerate boom of the 1960s through horizontal mergers, yet alternative forms of unwinding have not been examined. A study tests the explanation that changes in the opportunity to share resources and activities among businesses of the firm may have contributed to post-acquisition performance improvements in the recent acquisition wave. After estimating the sources of competitive performance that are due to these changes within each of 356 manufacturing industries, the study calculates predictions of changes in competitive performance for each acquired business between 1980 and 1984. The predictions are positive and in turn are positively associated with change in competitive performance between 1984 and 1986. This finding highlights the importance of resource sharing and activity in these acquisitions, and leads to the re-examination of theories for the 2nd acquisition wave that are supported by the finding of horizontal acquisitions.

Bettis, Richard A; Prahalad, C.K. (1995) The dominant logic: Retrospective and extension. Strategic Management Journal, 16(1): 5-14.

A brief review is presented of the history of dominant logic, then the ways in which this concept has been further developed in recent years are described. Discussion focuses on the dominant logic as a filter, on the dominant logic as a level of strategic analysis, on the unlearning (forgetting) curve, on the dominant logic as an emergent property of organizations as complex adaptive systems, and on the relationship between organizational stability and the dominant logic. Throughout emphasis is give to the inherent nonlinear nature of organizations and the mental models that they create.

Campbell, Andrew; Goold, Michael; Alexander, Marcus (1995) Corporate strategy: The quest for parenting advantage. Harvard Business Review, 73 (2): 120-132.

While the core competence concept appealed powerfully to companies disillusioned with diversification, it did not offer any practical guidelines for developing corporate-level strategy. To fill the gap, the parenting framework is proposed. Instead of looking at how businesses relate to one another, a parent

organization should look at how well its skills fit its businesses' needs and whether owning them creates or destroys value. Businesses that seem related, such as minerals and oil, often require completely different skills. To determine the fit between a parent and its businesses, corporate strategists should look at 4 areas: 1. the critical success factors of the business, 2. the parenting opportunities in the business, 3. the characteristics of the parent, and 4. the financial results. Changing the portfolio to fit the parent organization is usually easier than trying to change the parent to fits its business.

Ito, Kiyohiko (1995) Japanese spinoffs: Unexplored survival strategies. Strategic Management Journal, 16 (6): 431-446.

A study analyzes spinoffs of Japanese firms and the use of the spinoff as an instrument to achieve corporate growth objectives. The initial separation of the organizations and its governance mode are analyzed in the context of transaction costs theory. Spinoffs may be created in order to: 1. balance costs associated with managing diversified businesses, 2. generate growth based on core competencies of a firm, and 3. pursue an efficient internal labor market. In a changing environment, the spinoff has been a widely used flexible organizational arrangement that is suitable to survival and offers an alternative way of diversification.

Li, Jiatao (1995) Foreign entry and survival: Effects of strategic choices on performance in international markets. Strategic Management Journal, 16 (5): 333-351.

A study investigates effective strategies that can reduce the risk of failure in international expansion by examining the entry and survival of foreign subsidiaries in the US computer and pharmaceutical industries over the 1974-1989 period. Using a hazard rate model, the study examines the effects of diversification strategies, entry strategies, and organizational learning and experience on the survival probabilities of foreign subsidiaries. The results show a higher exit rate for foreign acquisitions and joint ventures than for subsidiaries established through greenfield investments. The results also indicate a higher exit rate for subsidiaries that diversify than for those that stay in the parent firm's main product area.

Markides, Constantinos C. (1995) Diversification, restructuring and economic performance. Strategic Management Journal, 16 (2): 101-118.

During the 1980s, many conglomerates and other diversified firms reduced their diversification by refocusing on their core businesses. A study provides an economic explanation for this phenomenon and empirically tests the hypotheses that emerge from the analysis. Perhaps the most important contribution of this study is the finding that refocusing in the 1980s by the over-diversified firms is associated with profitability improvements. This finding is consistent with the available ex-ante evidence on refocusing, which shows that refocusing is associated with market value improvements. The results of this study also lend support to the claim by Wernerfelt and Montgomery (1988) that the existence of a negative relationship between diversification and the firm's average profitability does not necessarily imply that diversifying firms are not maximizing profits, only that their marginal returns decrease as they diversify farther afield.

Robins, James; Wiersema, Margarethe F. (1995) A resource-based approach to the multibusiness firm: Empirical analysis of portfolio interrelationships and corporate financial performance. Strategic Management Journal, 16 (4): 277-299.

The resource-based view of the firm has provided important new insights into corporate strategy (Barney, 1991, and Peteraf, 1993). However, there has been only limited empirical research linked to the theory (Farjoun, 1994). Although a great deal of work has been done on corporate diversification, the measures and data typically have a weak connection to resource-based theory. Empirical research on resource-based corporate strategy has been particularly difficult because key concepts such as tacit knowledge or capabilities resist direct measurement. A study attempts to narrow the gap between theory and empirical research on the multibusiness firm. The study develops a resource-based approach to modeling interrelationships among businesses and applies it to the analysis of corporate economic performance. This approach proves to be significant in explaining the financial performance of large manufacturing firms, and it promises to be an important source of insight into corporate strategy.

Taylor, Peter; Lowe, Julian (1995) A note on corporate strategy and capital structure. Strategic Management Journal, 16 (5): 411-414.

The relationships between capital structure and corporate strategy in previous US and Australian empirical studies, which use different definitions of capital structure, and hence have different functional relationships, are considered. A model using the US specification with the Australian data is estimated, for which previous conclusions relating to profit are confirmed. The relationship between strategy and capital structure is thus shown to be less than robust. The conclusion that debt-equity ratios of highly diversified firms are more strongly affected by firm-level variables is supported. An explanation that the capital market rewards focused firms because they are easier to understand and price is offered.

Wiersema, Margarethe F; Liebeskind, Julia Porter (1995) The effects of leveraged buyouts on corporate growth and diversification in large firms. Strategic Management Journal, 16 (6): 447-460.

A study investigates the effects of LBOs on corporate growth and diversification in large US firms which underwent leveraged buyouts during the 1980s. Based on the analysis, the study found that revenue and employee growth are significantly lower in LBO firms than in control firms that remained public. Strategically, it found that LBO firms decreased the size of both their periphery and core businesses more than public control firms and that LBO firms divested a significantly higher volume of periphery and core businesses than control firms. These postbuyout differences between LBO and public firms are consistent with the argument that LBO firms provide managers with incentives to downsize and prune lines of business, resulting in reduction in overall firm size and diversification.

Buchko, Aaron A. (1994) Conceptualization and measurement of environmental uncertainty: An assessment of the Miles and Snow perceived environmental uncertainty scale. Academy of Management Journal, 37 (2): 410-425.

To measure executives' perceived environmental uncertainty, the Miles and Snow (1978) perceived environmental uncertainty questionnaire was incorporated into a survey examining business strategy among firms that supply parts and components to the automobile industry. The survey was mailed to the chief executive officers of 354 supplier firms identified from the ELM Guide to US Automotive Sourcing. Results supported the internal consistency of the scale; however, stability as measured by test-retest correlations was inadequate. The scale did not correlate with criterion measures of firm diversification. Implications for measurement of the perceived environmental uncertainty construct are discussed.

Hall, Ernest H Jr; St John, Caron H. (1994) A methodological note on diversity measurement. Strategic Management Journal, 15 (2): 153-168.

Using analysis of variance, cluster analysis, and discriminant analysis, a study investigates whether continuous measures (entropy and product count) differentiate between diversification categories, whether continuous measures converted to categories and subjectively assigned categories classified companies similarly, and whether continuous and categorical measures predicted similar diversity-performance relationships. It is concluded that the techniques were associated, but did not yield the same performance predictions. For researchers investigating diversity-performance relationships, choice of measurement technique will influence research results. The results suggest that attempts to combine categorical and continuous techniques as a way to overcome the limitations of both methods is not appropriate.

Hitt, Michael; Hoskisson, Robert E; Ireland, R Duane (1994) A mid-range theory of the interactive effects of international and product diversification on innovation and performance. Journal of Management, 20 (2): 297-326.

Corporate strategies may include both product and geographic international diversification components. However, little theoretical work has linked the interaction of these 2 strategies to innovation and performance. Theoretical arguments depicting the interactive effects of international and product diversification are presented. The theory presented suggests that international diversification is positively related to both innovation and firm performance, and positively moderates the relationship between product diversification and innovation and performance. The central concept is that innovation is generally facilitated by international diversification, while the general relationship between product diversification and innovation is negative. Given appropriate firm capabilities and country circumstance, international diversification facilitates innovation and performance.

Ingham, Hilary; Thompson, Steve (1994) Wholly-owned vs. collaborative ventures for diversifying financial services. Strategic Management Journal, 15 (4): 325-334.

Recent empirical work has supported the Penrose-Teece view that firms diversify to exploit fully specific assets or capabilities. Where transactions costs permit, these economies of scope may be realized via input supply contracts among producers. However, asset specificities frequently create transaction costs which discourage market contracting and leave firms with a choice between collaborative ventures and wholly-owned new entry. This research uses the natural experiment of financial services deregulation to explore the collaborative-own entry choice for 292 new entries in 13 financial product markets. The results generally support the maintained hypotheses that specificity encourages full ownership while collaboration is used to ease a resource constraint.

Ito, Kiyohiko; Rose, Elizabeth L . (1994) The genealogical structure of Japanese firms: Parent-subsidiary relationships. Strategic Management Journal, 15 (Summer): 35-51.

A study analyzes the genealogical structure of large Japanese firms, with particular emphasis on the relationship between parent firms and spinoff subsidiaries. The wide use of spinoffs and subsidiaries in japan provides for flexible organizational mutations that appear to facilitate increased competitiveness and offer the opportunity to obtain beenfits through a deliberate separation of core competencies. The study discusses a conceptual framework for the spinoff arrangement, the results of an exploratory empirical analsyis of the relationship between parent and subsidiary organizations, and implications of the use of this organizational structure. The importance of considering the genealogical aspects of large Japanese firms in strategy research is emphasized.

Kashlak, Roger J; Joshi, Maheshkumar P. (1994) Core business regulation and dual diversification patterns in the telecommunications industry. Strategic Management Journal, 15 (8): 603-611.

Ameritech is one of the Regional Bell Operating Companies (RBOC) and was confronted with the separate decisions of product and international diversification. It is suggested that these postures are linked to external contingencies in firms who face core business regulation. A technique is developed to explain dual diversification patterns using evidence obtained from the new industry comprised of the RBOCs. The proposed framework appears to satisfactorily explain RBOC diversification patterns. Only one RBOC deviated from both predicted patterns. It is believed that the technique should be considered exploratory and more statistically sound work is needed before any universal claims are made.

Koch, James V; Cebula, Richard J. (1994) In search of excellent management. Journal of Management Studies, 31 (5): 681-699.

A study examines the determinants of managerial excellence as perceived by corporate CEOs, directors, and financial analysts in Fortune magazine's annual survey of the best-managed American firms in 33 industries. While the firms perceived to be best managed are more profitable and less risky, and grow faster and reward their stockholders more than less well-managed firms, these variables explain only about 30% of the variance in management ratings. The firms perceived to be best management have more involvement in international markets and research and development, while large firm size and firm diversification reflect negatively upon perceived managerial quality. The relative inability of conventional financial measures of firm performance to explain perceptions of managerial excellence underlines the complex nature both of these perceptions and strategic behavior.

Markides, Constantinos C; Williamson, Peter J. (1994) Related diversification, core competences and corporate performance. Strategic Management Journal, 15 (Summer): 149-165.

There is still considerable disagreement about precisely how and when diversification can be used to build long-run competitive advantage. The disagreement exists for 2 main reasons. First, the traditional way of measuring relatedness between 2 businesses is incomplete because it ignores the strategic importance and similarity of the underlying assets residing in these businesses. Second, the way researchers have traditionally thought of relatedness is limited, primarily because it has tended to equate the benefits of relatedness with the static exploitation of economies of scope, thus ignoring the main contribution of related diversification to long-run, competitive advangtage; namely, the potential for the firm to expand its stock of strategic assets and create new ones more rapidly and at a lower cost than rivals that are not diversifed across related businesses. An empirical test supports the view that strategic relatedness is superior to market relatedness in predicting when related diversifiers outperform unrelated ones.

Mitchell, Will; Shaver, J Myles; Yeung, Bernard (1994) Foreign entrant survival and foreign market share: Canadian companies' experience in United States medical sector markets. Strategic Management Journal, 15 (7): 555-567.

A study shows that successful foreign market entry is related to the extent of foreign presence in an industry at the time of entry. Survival of 31 Canadian-based businesses that entered 24 US medical sector markets between 1968 and 1989 tended to be somewhat longer in product markets in which foreign-based businesses held a moderate market share when the Canadian businesses entered than in low and high foreign share product markets. The result controls several other industry and business-level factors, including industry concentration, entry year, corporate size, related diversification, entry mode, and service sector status.

Lamont, Bruce T; Williams, Robert J; Hoffman, James J. (1994) Performance during 'M-form' reorganization and recovery time: The effects of prior strategy and implementation speed. Academy of Management Journal, 37 (1): 153-166.

The long-term performance benefits of companies' reorganizing to an 'M-form' or multidivisional structure, in which strategic decisions are centralized and operating decisions are decentralized, are well documented. In the short term, however, such a major restructuring may be quite disruptive. Taking a different tack from previous work on the performance effects of 'M-form' adoption, a study examined performance deterioration during reorganization periods and the subsequent time required for performance to recover to prereorganization levels. Seventy-six firms were studied. These firms were pursuing 3 diversification strategies: vertical, related and unrelated. Prior strategy and implementation speed were found to affect both transition performance and recovery time.

Lubatkin, Michael; Chatterjee, Sayan (1994) Extending modern portfolio theory into the domain of corporate diversification: Does it apply? Academy of Management Journal, 37 (1): 109-136.

Executives frequently justify a diversification move by claiming that it reduces a firm's exposure to cyclical and secular uncertainties or risk. However, very little is known about the relationship between corporate diversification and risk. Much of what is known is borrowed from modern portfolio theory. A study offers evidence that the evolving theory of strategic management better explains the risk outcomes of corporate diversification than modern portfolio theory. The notions that diversification lowers a firm's unsystematic risk but does not affect its systematic risk were tested while controlling for other factors that influence risk. The findings show that the relationship between corporate diversification and both forms of stock return risk generates a U-shaped graph. Thus, an important way for corporations to minimize risk is to diversify into similar businesses rather than into identical or very different businesses.

Ollinger, Michael (1994) The limits of growth of the multidivisional firm: A case study of the U.S. oil industry from 1930-90. Strategic Management Journal, 15 (7): 503-520.

Some scholars, including Chandler (1977) and Penrose (1959), believe that firms grow by transferring inimitable marketing, production, and research skills from one line of business to another. Extending this view and emphasizing the role of the central office of a multidivisional firm to transfer administrative skills, Williamson (1975) argues that competition among business units within the firm mimics a competitive capital market and leads to an efficient allocation of resources. Coase (1937), however, argues that firm size is limited by the costs of organizing diverse transactions and Chandler (1991) claims that growth is constrained by the technical and marketing expertise of the top managers. This

study demonstrates that the scope of the multidivisional firm is limited by the transferability of firm-specific skills and the efficiency of capital markets. Support comes from a case study of 19 oil companies over the 1930-1990 period.

Harrison, Jeffrey S; Hall, Ernest H Jr; Nargundkar, Rajendra (1993) Resource allocation as an outcropping of strategic consistency: Performance implications. Academy of Management Journal, 36 (5): 1026-1051.

Theory and empirical evidence are presented to support a resource-based view of the relationship between diversification and performance. Similarities in financial resource allocations across the lines of business of diversified firms may indicate corporate strategic consistency, which may lead to superior corporate performance. In support of this argument, the variance in R&D intensity across the lines of business of 96 diversified firms was found to be inversely related to industry-adjusted return on assets. However, no relationship was found for capital intensity. A consistently high emphasis on R&D across closely related lines of business can provide strategic advantages that are unavailable to diversified firms that do no display such consistency. These results provide partial support for the usefulness of a resource-based approach to the study of diversification strategy.

Hoskisson, Robert E; Hill, Charles W L; Kim, Hicheon (1993) The multidivisional structure: Organizational fossil or source of value? Journal of Management, 19 (2): 269-298.

The multidivisional (M-form) structure has been variously characterized as the most significant organizational innovation in the 20th century and as an organizational fossil that is increasingly irrelevant in the modern world. A consideration of research on the M-form is done to: 1. evaluate 3 perspectives (transaction cost, strategic management, and sociological) relating to the M-form, 2. examine what the empirical evidence finds about relationships proposed by these perspectives, and 3. develop a model that summarizes the relationships proposed among these perspectives and make suggestions about future theory building and areas where further empirical work is needed. The cumulative evidence on M-form structures is that corporate form does make a difference in organizational performance. However, the accumulated body of research evidence on diversification suggests that diversification does little to create economic value.


Hoskisson, Robert E; Hitt, Michael A; Johnson, Richard A; Moesel, Douglas D. (1993) Construct validity of an objective (entropy) categorical measure of diversification strategy. Strategic Management Journal, 14 (3): 215-235.

A study measures the construct validity of an objective (entropy) approach to the measurement of diversification strategy. The results indicate strong convergent, discriminant, and criterion-related validity for the entropy measure of diversification. In particular, support for the entropy measure of diversification strategy was demonstrated through associations with: 1. the Rumelt subjective measure of diversification (convergent validity), 2. size, debt, and R&D intensity (discriminant validity), and 3. accounting and market-based performance (criterion-related validity). It may be more appropriate to use the diversification factor with both the entropy and Rumelt subjective measures for maximum accuracy. However, using either alone would also be acceptable. In addition, the standard industrial classification (SIC) measure may be appropriate in more limited circumstances.

Kim, W Chan; Hwang, Peter; Burgers, Willem P. (1993) Multinationals' diversification and the risk-return trade-off. Strategic Management Journal, 14 (4): 275-286.

A study advances a theoretical rationale to explain Bowman's paradox (1980) that firms with high returns can have low risk. Drawing on the large body of international management research, it is argued that global market diversification, which provides firms with 3 distinct options and opportunities over domestic firms, can explain the high return-low risk profile. There exists no strong theoretical rational in support of either related or unrelated product diversification generating such a favorable risk-return profile. The results of the study, which are based on the diversification experiences of 125 multinational corporations, reveal the important role that global market diversification plays in the joint management of corporate risk and return.

Lubatkin, Michael; Merchant, Hemant; Srinivasan, Narasimhan (1993) Construct validity of some unweighted product-count diversification measures. Strategic Management Journal, 14 (6): 433-449.

In a study, current (1980-1987) diversification and corporate risk return data were used to compare Rumelt's (1974) classification measure and several unweighted product-count measures as to their ability to demonstrate construct validity. Convergent and predictive validity assessments were conducted of 3 unweighted product-count measures and the 2-dimensional unweighted product-count measure which Varadarajan and Ramanujam (1987) recently proposed. The discriminatory power of the different diversification measures and their internal consistency were also assessed. All empirical tests were conducted with 3 lists of firms, each drawn over an 8-year time frame, and with 2 types of SIC diversification data. Two of the 3 continuous measures were found to correspond strongly to Rumelt's categorial measures, suggesting that these 2 objective and easy-to-calculate measures are better suited for large sample, strategy research than has previous been assumed. No support was found for the 2-dimensional measure.

Miles, Grant; Snow, Charles C; Sharfman, Mark P. (1993) Industry variety and performance. Strategic Management Journal, 14 (3): 163-177.

A study advances a nascent perspective in the strategic management literature through a focus on the beneficial effects of competition among firms in an industry. The overall purpose of the study is to provide a theoretical foundation for the study of the mutual gains associated with industry competition. Because of its importance to several different organizational theories, the concept of variety is examined as a potential source of interfirm benefits. The influence of variety is observed in 12 industries, 4 each from the growth, mature, and decline stages of the life cycle. Study results show that industry variety and performance are positively related, suggesting that interfirm benefits are most feasible in industries characterized by diversity among firms' competitive strategies. As industries move through the life cycle, variety decreases, implying that both strategists and policymakers need to consider the impact on aggregate variety when evaluating prescriptions for the revitalization of declining industries.

Nayyar, Praveen R. (1993) Stock market reactions to related diversification moves by service firms seeking benefits from information asymmetry and economies of scope. Strategic Management Journal, 14 (8): 569-591.

In the US, services account for nearly 75% of employment, 65% of gross national product (GNP), and nearly 90% of new jobs. Service firms may seek benefits from information asymmetry and economies of scope by diversifying. Each source of benefit is based on different underlying mechanisms and each is affected differently by implementation difficulties and service characteristics. Previous research, however, has not analyzed the relative performance effects of these 2 very different sources of benefits for related diversified service firms. An integrative framework is used including these aspects to examine the relative performance effects of benefits from information asymmetry and economies of scope in service firms.

Nayyar, Praveen R; Kazanjian, Robert K. (1993) Organizing to attain potential benefits from information asymmetries and economies of scope in related diversified firms. Academy of Management Review, 18 (4): 735-759.

Diversified firms can obtain benefits from information asymmetries and economies of scope. Each source of benefits is based on different underlying mechanisms. Attaining benefits relies on the adoption of appropriate organization structures and processes, which should be designed on the basis of the organizational requirements of each source of benefits. The contingency theory linking diversification strategy to organization design is extended by proposing that the particular source of benefits being pursued by related diversified firms causes variations in the multidivisional form of organization. Propositions derived from a consideration of the structure and processes required to successfully realize potential benefits are presented. Consistent with Govindarajan (1986), Hoskisson (1987), and Kazanjian and Drazin (1987), the importance of strategy as a critical contingency for organization

design is emphasized.

Seth, Anju; Easterwood, John (1993) Strategic redirection in large management buyouts: The evidence from post-buyout restructuring activity. Strategic Management Journal, 14 (4): 251-273.

A study examines the nature of post-transaction restructuring activities for 32 large US corporations that underwent management buyouts (MBO) between 1983 and 1989. Evidence is provided on the extent and type of divestment and acquisition activities under private ownership, and outcomes associated with MBOs and the longevity of the buyout organization are documented. The study also investigates the claim that buyouts are primarily mechanisms for breaking up public corporations and selling the pieces to related acquirers. The balance of the evidence indicates that restoring strategic focus is an essential function of the buyout for these large firms. However, the evidence also indicates that the buyout organization does continue to operate significant parts of the prebuyout firm.

Amburgey, Terry L; Miner, Anne S. (1992) Strategic Momentum: The Effects of Repetitive, Positional, and Contextual Momentum on Merger Activity. Strategic Management Journal, 13 (5): 335-348.

Three types of strategic momentum are repetitive, positional, and contextual. Repetitive momentum occurs when organizations repeat their previous strategic actions. Positional momentum occurs when organizations take actions that sustain or extend existing strategic positions. Contextual momentum occurs when general traits, such as organizational structure, shape strategic action in a consistent fashion. An event-history analysis of 262 large firms over a period of 29 years indicates that: 1. the occurrence of mergers tends to increase the rate of mergers of the same type (repetitive momentum), and 2. organizational decentralization increases the rate of diversifying mergers (contextual momentum). Product market diversification was found to increase the probability of product extension mergers, but not conglomerate mergers, only partly confirming positional momentum. The findings indicate that internal momentum can affect merger activity.

Chatterjee, Sayan; Blocher, James D. (1992) Measurement of Firm Diversification: Is it Robust? Academy of Management Journal, 35 (4): 874-888.

Analysis is presented of the convergent validity of Rumelt's categorical classification of types of business diversification across different data sources and variations from Rumelt's method. The convergent and predictive validity of Rumelt's classification and continuous measures of diversification are also assessed. Also investigated is the ability of continuous measures to discriminate between Rumelt's categories. The results suggest weak convergent validity for Rumelt's measures but good discriminating power of continuous measures to discriminate between Rumelt's measures. The lack of strong convergent validity in Rumelt's classifications affects the dominant and single-business categories more than the related and unrelated categories, which lessens any problems in testing the relatedness principle. Finally, the measures demonstrate predictive validity with specific performance criteria.

Davis, Peter S; Robinson, Richard B., Jr; Pearce, John A., II; Park, Seung Ho (1992) Business Unit Relatedness and Performance: A Look at the Pulp and Paper Industry. Strategic Management Journal, 13 (5): 349-361.

A study examined the perspectives of business unit managers to assess how the relationship between the 2 primary types of relatedness - production and marketing - are emphasized at the business unit level and how these types of relatedness affect business unit performance. The data were collected by questionnaires from key informants who manage 362 business units in the US pulp and paper industry. The results show that a high level of marketing relatedness is associated with high sales growth and a high level of production relatedness with high return on assets. When sales growth is the primary goal, a high emphasis on market relatedness produces high sales growth coupled with respectable profitability. When profitability is the primary goal, high production relatedness produces the best results. Contrary to expectations, the single businesses had higher growth than the related businesses, although the differences were not statistically significant. Only business unit size had a significant relationship to sales growth.

Davis, Rachel; Duhaime, Irene M. (1992) Diversification, Vertical Integration, and Industry Analysis: New Perspectives and Measurement. Strategic Management Journal, 13 (7): 511-524.

The use of industry segment and establishment data are considered for 3 issues of significant interest to strategic management practitioners and researchers: 1. assessment of strategic diversity, 2. analysis of industry trends, and 3. evaluation of the presence of vertical integration. An extensive analysis of the COMPUSTAT II database and the TRINET database was conducted in all 3 research contexts. With proper use of COMPUSTAT II data, researchers can detect forward and backward vertical integration within firms and within segments of firms. The database can be used quite effectively to calculate Herfindahl, entropy, and other measures. COMPUSTAT II industry segment data is quite satisfactory for the study of industry trends. The TRINET database lends itself to use in the calculation of diversification indexes as well as in the calculation of industry benchmarks. However, TRINET's limitations include years of coverage (1981, 1983, 1985, 1987, and 1989 only) and likely termination of publication.

Gomez-Mejia, Luis R. (1992) Structure and Process of Diversification, Compensation Strategy, and Firm Performance. Strategic Management Journal. 13 (5): 381-397.

A study tests 6 hypotheses on the extent to which a match between compensation and diversification strategies affects the performance of a firm. The sample consists of 867 firms used in a larger study on chief executive compensation, with 243 usable questionnaires returned. Both archival and survey data are used. The results generally support the notion that firm performance is a positive function of the degree to which compensation strategies reinforce or match corporate strategies. An algorithmic compensation pattern tends to make a greater contribution to firm performance among dominant and related product firms and companies that grow internally. An experiential compensation pattern tends to make a greater contribution to firm performance among single-product firms and corporations whose diversification process is evolutionary in nature. The proportion of explained variance in firm performance attributed to compensation-diversification strategy fit is modest but

not trivial.

Hoskisson, Robert O; Johnson, Richard A. (1992) Corporate Restructuring and Strategic Change: The Effect on Diversification Strategy and R&D Intensitu. Strategic Management Journal, 13 (8): 625-634.

In the 1980s, a number of large firms restructured their diversified business through divestitures. It is hypothesized that restructuring activity focused on firms at intermediate levels of diversification that have a mixture of related and unrelated business units. The results confirm this hypothesis, which explains that such mixed corporate strategies create organizational and control inefficiencies in managing both related and unrelated types of business units. Restructured firms are also found to move toward 2 types of different internal capital markets (related and unrelated). Most restructuring firms moved toward lower levels of diversification, although some moved toward higher levels of diversification. The results also show that restructuring firms that changed their corporate strategy by reducing diversified scope increased their research and development (R&D) intensity. Firms that resturctured and increased their diversified scope decreased their R&D intensity. This result suggests a partial substitution between diversification and R&D activity.

Judge, William Q., Jr; Zeithaml, Carl P. (1992) Institutional and Strategic Choice Perspectives on Board Involvement in the Strategic Decision Process. Academy of Management Journal, 35 (4): 766-794.

The level of a board of directors' involvement in strategic decisions can be viewed as an institutional response or as a strategic adaptation to external pressures for greater board involvement. The antecedents and effects of board involvement were examined from both the institutional and strategic choice perspectives. Data obtained from personal interviews with 114 board members and archival records indicated that board size and levels of diversification and insider representation were negatively related to board involvement, and organizational age was positively related to it. Furthermore, board involvement was found to be positively related to financial performance after controlling for industry and size effects. Overall, the results suggest that both theoretical perspectives are necessary for a comprehensive description of the strategic role of boards.

Lundquist, Jerrold T. (1992) Shrinking Fast and Smart in the Defense Industry. Harvard Business Review, 70 (6): 74-85.

By the late 1990s, US defense spending will drop $80 billion from its present level due to cuts that will be deeper and longer than any in US history. As the Cold War ends and demand from the Department of efense dwindles, the defense industry faces its most profound shift since the end of World War II. Boom-bust patterns have always driven the industry. But in 1992, in addition to a cyclical drop in procurement, defense contractors are reeling from reforms of the past decade that decreased their profits and increased the risk of bidding on new programs. Although the conventional strategies of commercialization, globalization, and diversification helped contractors survive the downturns after World War II, Korea, and Vietnam, defense contractors can no longer seek to grow faster than their industry. They must shrink fast and smart, investing in businesses where the company can be preeminent, and shutting down or selling off everything else.

Nayyar, Praveen R. (1992) On the Measurement of Corporate Diversification Strategy: Evidence from Large U.S. Service Firms. Strategic Management Journal, 13 (3): 219-235.

Actual, not potential, relatedness determines the results of diversification strategies. An external examination of a firm's businesses, products, markets, and technologies allows the assessment of potential relatedness among its various businesses. Potential relatedness is often not realized, however. In addition, relatedness may be externally invisible. Thus, actual relatedness may diverge from externally measured potential relatedness. Evidence is provided which suggests that measures of corporate diversification strategy based on internal data differ significantly from those based on externally avaliable data. Difficulties in implementing related diversification strategies may force firms to forego the benefits of relatedness among their businesses. Consequently, externally observed similarities in products, markets, or technologies may not reveal actual relatedness among businesses in diversified firms.

Russo, Michael V. (1992) Power Plays: Regulation, Diversification, and Backward Integration in the Electric Utility Industry. Strategic Management Journal, 13 (1): 13-27.

The influence of regulatory oversight on strategic management is examined. Predictions of the extent to which a firm diversifies and integrates upstream based on transaction-cost economics are developed and then tested among 49 US electric utilities from 1974 through 1986, a period that witnessed increasingly hostile regulatory relations. The results confirm the influence of regulation in both diversification and backward integration, supporting the transaction-cost view of these phenomena. The threat associated with increases in regulatory monitoring led to decreases in integration. The response of firms, then, to greater increases in monitoring was to remove their presence in the threatened domain. Thus, externalization takes place when transaction costs are higher under unified governance.

Wiersema, Margarethe F; Bantel, Karen A. (1992) Top Management Team Demography and Corporate Strategic Change. Academy of Management Journal, 35 (1): 91-121.

The relationship between the demography of top management teams and corporate strategic change, measured as absolute change in diversification level, was examined via a sample of Fortune 500 companies. Controlling for prior firm performance, organizational size, top team size, and industry structure, it was found that the firms most likely to undergo changes in corporate strategy had top management teams characterized by lower average age, shorter organizational tenure, higher team tenure, higher educational level, higher educational specialization heterogeneity, and higher academic training in the sciences than other teams. The results suggested that top managers' cognitive perspectives, as reflected in a team's demographic characteristics, are linked to the team's propensity to change corporate strategy.


Rumelt, Richard P. (1991) How Much Does Industry Matter? Strategic Management Journal, 12(3): 167-185.

Because competition acts to direct resources toward uses offering the highest returns, persistently unequal returns mark the presence of either natural or contrived impediments to resource flows. The implicit assumption has been that the most important market imperfections rise out of the collective circumstances and behavior of firms. However, the field of business strategy holds that the most important impediments are not the common property of collections of firms, but arise instead from the unique endowments and actions of individual corporations or business units. A study partitions the total variance in rate of return among Federal Trade Commission (FTC) Line of Business reporting units into industry factors, time factors, factors associated with corporate parent, and business-specific factors. The data reveal negligible corporate effects, small stable industry effects, and very large stable business-unit effects. These results imply that the most important sources of economic rents are business-specific; industry membership and corporate parentage are less important.

Chatterjee, Sayan; Wernerfelt, Birger, (1991) The Link Between Resources and Type of Diversification: Theory and Evidence. Strategic Management Journal, 12 (1): 33-48.

The research question that may have attracted the most attention in strategic management discipline is the possible association between firm diversification and performance. A study investigated the idea that firms diversify in part to utilize productive resources that are surplus to current operations. The data were obtained from 2 primary sources: the Trinet Establishment database and the COMPUSTAT Industrial Annual database. The results suggest that excess physical resources, most knowledge-based resources, and external financial resources are associated with more related diversification, while internal financial resources are associated with more unrelated diversification. The findings showed a strong association between intangible assets and more related diversification. However, there was no association between ability to raise equity capital and the type of entered market. Higher performing firms were found to support the model better than lower performing firms.

Datta, Deepak K; Rajagopalan, Nandini; Rasheed, Abdul M. (1991) Diversification and Performance: Critical Review and Future Directions. Journal of Management Studies, 28 (5): 529-558.

While diversification remains a very important strategic option, it is not a panacea for lagging corporate performance. There are considerable risks associated with diversification; consequently, it is an option that should be considered ony after a careful examination of all relevant factors. A better understanding of such factors and the complexities surrounding diversification and its relationship to performance is critical to maximize the probabilities of success. An integrative theoretical framework is developed and used to review the existing empirical research on the diversification-performance relationship along the 3 research streams that have studied this relationship. The analysis highlights the considerable diversity in findings across studies in each stream and identifies certain theoretical and methodological issues that might explain this diversity. Also discussed is a contingency-based perspective.

Hill, Charles W. L; Hansen, Gary S. (1991) A Longitudinal Study of the Cause and Consequences of Changes in Diversification in the U.S. Pharmaceutical. Strategic Management Journal, 12 (3): 187-199.

While the relationship between diversification strategy and performance has been the focus of extensive research in the strategic management literature, results remain inconclusive. A study examined the causes and consequences of changes in diversification by firms based in the US pharmaceutical industry during the period 1977-1986. The basic proposition was that the high risks of doing business in the pharmaceutical industry resulted in risk-averse senior managers favoring diversification over strategic concentration during this time period. A pooled time-series methodology was used to analyze the data. The results supported the proposition's line of reasoning. Change in diversity was found to be a negative function of research and development intensity, advertising intensity, market to book value, management holdings, and opening diversification and a positive function of current liquidity, institutional holdings, and firm risk.

Hoskisson, Robert E; Harrison, Jeffrey S; Dubofsky, David A. (1991) Capital Market Evaluation of M-Form Implementation and Diversification Strategy. Strategic Management Journal, 12 (4): 271-279.

Firm announcements of adoption of the multidivisional structure fare assessed using stock market data and event methodology. The sample is composed of 22 firms identified as having undergone the transition to the M-form from one of a number of sources. The results suggest that, in general, the market reacts positively to M-form reorganization announcements. However, caution must be used in interpreting these results. One issue is whether firms having different diversification strategies are affected equally by M-form implementation. To test this notion, the event study data are broken into 2 portfolios, one consisting of vertically integrated and unrelated firms and the other consisting of related

diversified firms. The results seem to support the idea that, in the immediate term, structural consequences are important for the vertically integrated and unrelated firm portfolio. The event period cumulative abnormal return is not significantly different from zero for firms diversified along related lines.

Lubatkin, Michael; Chatterjee, Sayan (1991) The Strategy-Shareholder Value Relationship: Testing Temporal Stability Across Market Cycles. Strategic Management Journal, 12 (4): 251-270.

Multivariate analyses are used to examine the stability of the relationship between diversification and shareholder value across 9 contiguous time periods, organized so as to highlight 3 distinct market cycles. The use of multiple periods facilitated a rigorous examination of the independent and moderating effects of cycle, while controlling for a concurrent economic phenomenon, trend. Shareholder value is measured as a 2-dimensional construct - systematic risk and excess return. The research implies that it may not be meaningful to investigate the association of strategy and performance without explicitly considering the corresponding economic environment. It is suggested that firms that diversify by emphasizing common core technologies show on average lower levels of systematic risk, regardless of market conditions. Cycle does appear to moderate the ability of the 2 strategy types to generate excess returns. The systematic risk findings suggest that corporations can achieve a reduction in risk that stockholders cannot achieve on their own.

Russo, Michael V. (1991) The Multidivisional Structure as an Enabling Device: A Longitudinal Study of Discretionary Cash as a Strategic Resource. Academy of Management Journal: 34 (3): 718-733.

The role of discretionary cash in the adoption of a multidivisional, or M-form, organizational structure was examined. It was argued that the adoption of the M-form structure is linked to increases in a firm's levels of discretionary cash. This proposition was developed by assessing the advantages of M-form as an instrument for directing cash, a fully fungible corporate resource, to alternative uses. Event history analysis was used to model the diffusion of the M-form through a group of privately owned US electric utilities. The results showed that the hypothesized relationship holds, even when the effects of firm size, levels of diversification and vertical integration, and possible imitation effects are controlled.

Schleifer, Andrei; Vishny, Robert W. (1991) Takeovers in the '60s and the '80s: Evidence and Implications. Strategic Management Journal, 12 (Winter): 51-59.

The US economy has experienced 2 large takeover waves in the postwar period: one in the 1960s and one in the 1980s. A typical 1960s transaction was a friendly acquisition, usually for stock, by a large corporation of a smaller public or private firms outside the acquirer's main line of business. Takeovers in the 1980s were very different in that: 1. the size of the average target has increased enormously from the modest level of the 1960s, 2. many transactions, especially the large ones, were hostile, and 3. the medium of exchange in takeovers became cash rather than stock. The takeover wave of the 1980s could be interpreted as a reversal of the unrelated diversification of the 1960s. This experience indicates that: 1. takeovers can be as much a manifestation of agency problems as a route to correcting them, 2. using the stock market as a guage of profitability of corporate actions can lead one seriously astray, and

3. aggressive government action, in this case antitrust policy, can have large unintended effects.

Chatterjee, Sayan; Lubatkin, Michael (1990) Corporate Mergers, Stockholder Diversification, and Changes in Systematic Risk. Strategic Management Journal, 11 (4): 255-268.

Strategic management literature indicates that a relationship exists between systematic risk and the relatedness of merging firms. A recent study demonstrates empirically how the underlying paradigms of strategic management in the context of corporate mergers can make an important contribution toward building a unified theory of systematic risk. A conceptual framework to predict changes in systematic risk is developed that incorporates arguments from the strategic management literature and a relaxed set of capital asset pricing assumptions. A sample of 120 large mergers was tested, controlling for the systematic risk of the target firm, correcting for possible problems of heteroskedasticity, and estimating shifts in risk over daily as well as monthly time horizons. The results highlight a performance distinction between corporate diversification and stockholder diversification in cases of related and unrelated mergers.

Dess, Gregory G; Ireland, R. Duane; Hitt, Michael A. (1990) Industry Effects and Strategic Management Research. Journal of Management, 16 (1): 7-27.

An examination is made of the issue of industry effects in the conduct of strategic management research. Forty of the most frequently cited empirical strategy studies published between 1980 and 1988 are identified and analyzed. Multiple industry controls were used in 11 of 40 studies. The largest percentage used some form of quasi-industry controls. No explicit controls for industry effects were used in 1/4 of the research, suggesting that industry context was not treated adequately in some studies. Others used surrogate environmental measures or focused on a single industry. However, few of those researchers provided the types of detailed descriptions of the industry environments that could be useful for comparisons by future researchers. Methods that can be used to control for potential industry effects include: 1. single industry studies, 2. multiple industry control variables and environmental dimensions, and 3. stratified samples by industry.

Fombrun, Charles J; Ginsberg, Ari (1990) Shifting Gears: Enabling Change in Corporate Aggressiveness. Strategic Management Journal, 11 (4): 297-308.

The corporate strategies of multibusiness firms are interpreted as patterns in their aggregate deployment of resources to functional uses across businesses. By integrating business and corporate levels in the study of strategy-making, such a perspective facilitates evaluating aggressiveness in corporate posture as a concept distinct from, but complementary to, competitive strategy and diversification. It is argued that changes in aggressiveness result from the interplay of 2 sets of forces: 1. inhibitors that create inertia, and 2. inductors that stimulate redeployments. Specific hypotheses are tested using data taken from a random sample of 352 companies in 10 economic sectors between 1977 and 1984. The results support the view that prior performance and sector volatility have a curvilinear impact on the propensity of firms to change their corporate aggressiveness. Change in corporate posture is inhibited significantly by size and prior resource deployments. However, the inductive forces of prior performance and volatility serve to stimulate change.

Fryxell, Gerald E; Barton, Sidney L. (1990) Temporal and Contextual Change in the Measurement Structure of Financial Performance: Implications for Strategy Research. Journal of Management, 16 (3): 553-569.

The study of the influence of strategy on firm performance is central to strategic management research. An empirical analysis is presented of the extent to which the measurement structure of accounting- and market-based indicators converges on a financial performance construct by time period and by diversification strategy. In a longitudinal, single-factor model of financial performance, it is found that the relationship of these 2 types of financial performance measures changes in periods of stability versus instability and for related diversifiers versus unrelated diversifiers. It is suggested that meta-analytic studies in strategy research may be able to incorporate situational factors to obtain more valid findings. A latent variable approach to financial performance has the potential of making direct comparisons of underlying constructs possible.

Ginsberg, Ari (1990) Connecting Diversification to Performance: A Sociocognitive Approach. Academy of Management Review, 15 (3): 514-535.

A sociocognitive model of diversification is developed that bases the role of top managers' belief systems in the cognitive and behavioral attributes of corporate strategy. In contrast to more traditional approaches that emphasize the economies generated by diversity and relatedness, this approach emphasizes the creativity and flexibility associated with corporate-level decision-making processes. The sociocognitive perspective of strategy proposed makes 3 important contributions: 1. It allows the examination of the ways in which managers' cognitive structures reflect the systemic properties of strategic position. 2. It allows the examination of the ways in which shared cognitive structures reflect the behavioral dynamics of strategic decision-making processes. 3. It allows the development of specific predictions and prescriptions regarding the influence of top management teams' sociocognitive capacities on processes of diversification and their economic outcomes.

Hitt, Michael A; Hoskisson, Robert E; Ireland, R. Duane (1990) Mergers and Acquisitions and Managerial Commitment to Innovation in M-Form Firms. Strategic Management Journal, 11 (Summer): 29-47.

Acquisitive growth has become a highly popular strategy in recent years, and more attention has been focused on its outcomes. A theory is presented that suggests a trade-off between growth by acquisition and managerial commitment to innovation. A model is developed that proposes that the acquisition process and the resulting conditions after it is consummated affect managerial commitment to innovation. The extent to which acquisitions serve as a substitute for innovation, energy, and attention required during negotiations, increased use of leverage, increased size, and greater diversification may have an effect on managers' time and risk orientations. Because of these effects, managers may reduce their commitment to innovation. Recent research appears to support the proposed model. The results of the studies suggest that firms engaging in acquisition activity may reduce their commitment to innovation as measured by research and development intensity.

Hoskisson, Robert E; Hitt, Michael A. (1990) Antecedents and Performance Outcomes of Diversification: A Review and Critique of Theoretical Perspectives. Journal of Management, 16 (2): 461-509.

The antecedents of diversification are: 1. markets, 2. resources, 3. incentives, and 4. managerial motives. There are 3 theoretical viewpoints that summarize diversification antecedents and performance outcomes. The first perspective examines diversification under the assumption of relative market perfection where firms and products are homogeneous within industries. The 2nd perspective examines diversification where both market and firm imperfections are assumed to exist. The 3rd perspective assumes market and firm imperfections and assumes imperfect governance structures such that managerial motives for diversification are influential. These perspectives provide different explanations of antecedent resources and incentives that encourage or discourage diversification.

Hoskisson, Robert E; Turk, Thomas A. (1990) Corporate Restructuring: Governance and Control Limits of the Internal Capital Market. Academy of Management Review, 15 (3): 459-477.

Corporate restructuring that is initiated by the threat of a takeover provides evidence that corporate governance limits of large diversified firms may exist. Poor corporate monitoring, which is caused by atomistic ownership patterns and inadequate board of director governance, an emphasis on incentive compensation, and free cash flows, may lead to higher levels of diversification. If diversification results in loss of strategic control and poor performance, the threat of a takeover is probably related to the incidence of corporate restructuring. Corporate restructuring, in turn, is likely to: 1. result in the correction of inadequate governance patterns, 2. create a more focused diversification strategy, 3. increase strategic control, 4. reduce the reliance on bureaucratic control through reduced corporate staff, 5. increase the performance of the firm, and 6. increase shareholder wealth.

Keats, Barbara W. (1990) Diversification and Business Economic Performance: Issues of Measurement and Causality. Journal of Management, 16 (1): 61-72.

Past research on the relationship between diversification and firm performance has been plagued by a number of problems. Three such problems are addressed. Relationships between diversification and multiple performance dimensions are reframed in the context of a time-ordered causal model. Firms included in the study are Fortune 500 firms taken from Rumelt's (1978) strategy and structure databank. Of 263 firms listed, 110 meet all criteria. Firm classifications are grouped in 4 broad categories - single, dominant, related, and unrelated business. The results suggest that diversification and performance are multidimensional constructs and that identification of appropriate criteria for performance assessment depends upon the strategy pursued. However, the unrelated-business diversification category exhibits a strong positive relationship with subsequent market-based performance, suggesting that investors value this strategy as well. Thus, criteria used to assess firm performance when unrelated diversified firms are included as subjects of study ought to include market-based measures.

Nayyar, Praveen R. (1990) Information Asymmetries: A Source of Competitive Advantage for Diversified Service Firms. Strategic Management Journal, 11 (7): 513-519.

Information asymmetries are generally considered as leading to costs for both parties in an exchange transaction. However, they can also be a source of competitive advantage. Potential buyers are faced with information asymmetries in their evaluation of services prior to purchase. Since these asymmetries impose costs on buyers, there is an incentive to lower the costs. This incentive may be exploited by service firms that diversify into other services that meet the needs of their existing customers. If reputation can be transferred, diversification into services high on experience or credence, or both, will reduce information acquisition costs for potential buyers. Diversification into services high on search qualities will not reduce those costs. Service firms will gain a competitive advantage by serving multiple needs of their clients for services high on experience or credence or both qualities but not for services high on search qualities.

Nguyen, The Hiep; Seror, Ann; Devinney, Timothy M. (1990) Diversification Strategy and Performance in Canadian Manufacturing Firms. Strategic Management Journal, 11 (5): 411-418.

In a study of the interrelationships between firm diversification, market power, and performance, Montgomery (1985) presented empirical evidence to support the hypotheses that highly diversified firms will have lower market shares in their respective markets than less diversified firms and that the strategy of diversification does not contribute to firm profitability. These results are reexamined using a sample of Canadian manufacturing firms. Multiple regression analysis is used to test the hypothesis that diversification in technologically related activities results in economies of scope and greater firm performance. The results support the hypothesis that degree of technologically related diversification is positively associated with firm performance. The extent of technologically related diversification, including all strategies, is positively related to firm profitability, contrary to Montgomery's finding of no effect when controls are introduced for market share and primary industry concentration.

Seth, Anju (1990) Sources of Value Creation in Acquisitions: An Empirical Investigation. Strategic Management Journal, 11 (6): 431-446.

A conceptual framework and an empirical methodology to assess the relative importance of different sources of value creation in acquisitions are described. The sample, which consisted of 102 tender offers for control that took place between 1962 and 1979, was taken from a comprehensive listing of tender offers obtained from Bradley, Desai, and Kim (1988). The empirical results indicate that value creation in related acquisitions is associated with economic efficiencies, hypothesized to arise both from economies of scale and scope and from operating efficiencies, and with market power. In unrelated acquisitions, where such efficiencies are not expected to be present, value creation occurs nevertheless and is linked to the coinsurance effect. It is shown that financial diversification effects do not play a part in value creation in either type of acquisition.

Simmonds, Paul G. (1990) The Combined Diversification Breadth and Mode Dimensions and the Performance of Large Diversified Firms. Strategic Management Journal, 11 (5): 399-410.

The impact of the symbiotic relationship between diversification breadth and mode on firm performance was investigated. A total of 73 Fortune 500 firms were classified by diversification breadth (related-unrelated) and mode (internal-external). Their performance during the period 1975-1984 was analyzed using 4 financial performance measures: 1. return on assets, 2. return on equity, 3. return on invested capital, and 4. compound sales growth. The 2 related categories (related-internal/related-external) generally were higher performers than were the 2 unrelated categories (unrelated-internal/unrelated-external). However, the differences were not significant on most performance measures. The unrelated-external category appears to be the worst performer, which presents a dilemma because this strategy has dominated the conglomerate movement.

Varadarajan, P. Rajan; Ramanujam, Vasudevan (1990) The Corporate Performance Conundrum: A Synthesis of Contemporary Views and an Extension. Journal of Management Studies, 27 (5): 463-483.

Articles on 74 companies rated by Business Month as being one of the 5 best-managed firms during each of the 15 years in the period 1972-1986 were content analyzed in an effort to isolate the key strategic and organizational factors associated with superior corporate performance. The results indicate that superior performance is associated with: 1. a broad product line accompanied by geographic diversity, 2. an emphasis on planning coupled with sound financial controls and reporting systems, 3. a high level of commitment to product and process innovation, 4. investments in modernization of manufacturing facilities, 5. a reputation for superior quality and customer service, and 6. progressive human resource management practices. These findings are compared to the conclusions of other recent studies. Far from being the result of applying any particular formula, superior performance is found to require a diverse mix of competencies and values.

Baysinger, Barry; Hoskisson, Robert E. (1989) Diversification Strategy and R&D Intensity in Multiproduct Firms. Academy of Management Journal, 32 (2): 310-332.

A study explored the relationship between corporate diversification strategy and research and development (R&D) spending decisions in large multiproduct firms. The data were collected from 971 companies included in Standard & Poor's COMPUSTAT Services database. The results provide empirical evidence that the choice of diversification strategy systematically affects R&D intensity in large multiproduct companies. R&D intensity in dominant-business firms was shown to be significantly higher than in related- and unrelated-business firms. It was also higher in related-business firms than in unrelated-business firms. The results suggest the need to examine the implications of different types of corporate diversification strategy on the management of corporate-strategic-business-unit relations in large multiproduct corporations.

Chang, Yegmin; Thomas, Howard (1989) The Impact of Diversification Strategy on Risk-Return Performance. Strategic Management Journal, 10 (3): 271-284.

A study examined the impact of diversification strategy on risk and return in 64 diversified firms. Data were drawn from Standard & Poor's COMPUSTAT I and COMPUSTAT II and the Census of Manufacturing for 1977-1981. Relationships between risk, return, and diversification are hypothesized. Results from regression analysis show that differences in risk-return performance among diversified firms were more closely associated with markets and businesses than with the particular diversification strategy chosen. Returns also influenced the choice of diversification strategies, which, in turn, did not get rewarded with higher profits. A curvilinear risk-return relationship was observed that is consistent with previous theoretical suggestions. However, there was no evidence supporting the risk premium forms of hypotheses.

Geringer, J. Michael; Beamish, Paul W; daCosta, Richard C. (1989) Diversification Strategy and Internationalization: Implications for MNE Performance. Srategic Management Journal, 10 (2): 109-119.

The concept of competitive advantage is used to examine performance variations among multinational enterprises (MNE). Research variables were diversification strategy and degree of internationalization. These involve basic components of the companies' strategy - range and relatedness of products and relative emphasis on foreign versus domestic operations. The sample of 200 MNEs included 100 of the largest firms in the US and Europe. Using Rumelt's (1974) classification scheme, each of the MNEs was classified according to diversification strategy. Degree of internationalization was measured by the ratio of a company's foreign subsidiaries' sales to its total global sales for 1977-1981. Ratio of net annual profits-to-sales was obtained for each firm, calculated as the mean aftertax profits-to-sales during 1977-1981. The results show that both diversification strategy and degree of internationalization were significantly related to MNE performance.

Ginsberg, Ari (1989) Construing the Business Portfolio: A Cognitive Model of Diversification. Journal of Management Studies, 26 (4): 417-438.

Researchers investigating the relationship between diversification and performance have been generally inattentive to the dominant general management logics that corporate-level managers use to understand and manage strategy diversity. In response to this, the use of the repertory grid is proposed. The grid is a methodology adapted from the work of Kelly (1955) and other personal construct theorists. As an approach to operationalizing the mental maps that direct the management of strategic diversity, the business repertory grid appears to have several important advantages. It is particularly useful in assessing the ways in which top managers construe the corporate portfolio and manage strategic diversity. Grid technique is flexible, efficient, and systematic. It is also highly reproducible, thus allowing researchers to validate or challenge the results of previous studies. A main goal of the application of the repertory grid to the study of strategic diversity is to measure the way in which top managers perceive relationships among businesses in their firms.

Kim, W. Chan; Hwang, Peter; Burgers, William P. (1989) Global Diversification Strategy and Corporate Profit Performance. Strategic Management Journal, 10 (1): 45-57.

The influence of global diversification strategy on corporate profit performance was examined by studying 62 multinational companies randomly selected from Dun and Bradstreet's 'America's Corporate Families and International Affiliates.' The product and the international market dimensions of diversification were integrated, and 4 distinct strategic modes of global diversification were identified. Results suggest that the corporate profit performance impact of related and unrelated diversification may vary depending on the extent of a firm's international market diversification. One important implication of the study is that both managers and business strategy researchers should review corporate diversification as having distinct but interactive strategic dimensions -- product and international markets -- and they should recognize both the different and the joint effect of these dimensions on corporate profit performance.

Lubatkin, Michael; Rogers, Ronald C. (1989) Diversification, Systematic Risk, and Shareholder Return: A Capital Market Extension of Rumelt's 1974 Study. Academy of Management Journal, 32 (2): 454-465.

A study reexamined the performance outcome of diversification strategies by combining the advantages of security-market-based measures and Rumelt's (1974) classification scheme. A multivariate analysis of variance design was employed to simultaneously account for the effects of corporate diversification

on risk and on return. The results underscore the popular, but weakly supported, belief that controlled diversity is associated with the highest performance. Firms that diversified in a constrained manner demonstrated significantly lower levels of systematic risk and significantly higher levels of shareholder returns than firms employing other strategies. The systematic risk findings suggest that constrained strategies can achieve a reduction in risk that stockholders cannot achieve on their own, underscoring the distinction between managing a portfolio of securities and managing a portfolio of businesses.

Nayyar, Praveen; McGee, John; Thomas, Howard (1989) Research Notes and Communications Strategic Groups: A Comment; A Further Comment. Strategic Management Journal, 10 (1): 101-107.

A review of recent studies (McGee, Thomas, 1986) on strategic groups that notes limitations with previous studies was found to have some weaknesses, including: 1. the omission of the fact that different bases of diversification could lead to differences in economic performance, 2. the tendency to view firms

as following 'pure' diversification strategies, and 3. the use of performance or firm output measures as dimensions to identify strategic groups. In reply, McGee and Thomas acknowledge that very little is known empirically and that extensive testing is required. The proposition remains valid that systematic similarities and differences exist among firms as a result of strategic resource choices. An example is the decision to invest in assets that are often difficult and costly to imitate.

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

Diversification has emerged as a central research topic in strategic management. Although the topic has been widely and intensively studied by scholars from a variety of different areas, a synthesis of these diverse streams of research is lacking. Such a synthesis is presented with a view to fostering further strategic management research in this area by taking a multidisciplinary perspective on diversification. A wide-ranging literature search led to the development of an overarching research framework that facilitates the classification of a vast body of literature. Proceeding from this framework, a critique of the literature is performed that emphasizes studies by strategic management researchers. Five key conceptual and methodological problems are identified and discussed.

Reed, Richard; Reed, Margaret (1989) CEO Experience and Diversification Strategy Fit. Journal of Management Studies, 26 (3): 251-270.

An examination was made of the impact of chief executive officer (CEO) experience upon strategy adoption and corporate performance in the post-implementation strategy phase. A sample of 52 companies was identified and chosen to analyze the relationship between CEO experience and the separate strategies of internal and acquisitive diversification. No evidence was found of an observable relationship between CEO experience and selected strategy, expressed in terms of the manner in which companies choose to diversify. It was shown that the interaction effect between CEO experience and the selected means of diversification affects performance. Companies with a fit between CEO experience and the chosen means of diversification exhibit significantly different features of performance compared to companies where there is no fit. An experience-strategy fit suggests astute segmentation and high commitment to the strategy.

Amit, Raphael; Livnat, Joshua (1988) Diversification Strategies, Business Cycles and Economic Performance. Strategic Management Journal, 9 (2): 99-110.

Two major diversification strategies of firms are investigated: 1. diversification into related business, and 2. diversification into unrelated businesses. The first strategy tries to exploit operating synergies. In the 2nd, the firm tries to gain financial benefits from its ability to increase financial leverage due to a greater stability of cash flows. A large sample of firms is utilized to assess empirically the benefits and costs of the 2 diversification strategies using a new measure of diversification across business cycles and economic sectors. This measure is compared with Berry-Herfindahl-type measures of total diversification and recent measures of diversification into related businesses. The results indicate that pure financial diversification is associated with: 1. more stable cash flows, 2. increased leverage levels, and 3. lower profitability. However, firms that diversify into related business do seem to have higher profits than their nondiversified counterparts.

Balakrishnan, Srinivasan (1988) The Prognostics of Diversifying Acquisitions. Strategic Management Journal, 9 (2): 185-196.

A possible explanation is offered for the discrepancy between the observed increase in the number of diversified firms in the US and the evidence from finance studies that at best offers weak support for value creation in diversifying acquisitions. It is argued that the acquisition could be the culmination of a series of related strategic moves by the acquiring company to enter a new industry, and therefore, a significant fraction of the gains from synergy could have been anticipated by the capital market well ahead of the acquisition. The results of an event study of the 1984 acquisition of Rolm Corp., the world's 2nd-largest manufacturer of PBXs in the US, by IBM Corp., the world's largest computer manufacturer, and the stock market's reaction support this explanation. The Rolm acquisition came at the end of a series of moves by IBM aimed at entering the US PBX market. Having anticipated the move, the stock market reacted weakly to IBM's acquisition of all of Rolm's stock.

Capon, Noel; Hulbert, James M; Farley, John U; Martin, L. Elizabeth (1988) Corporate Diversity and Economic Performance: The Impact of Market Specialization. Strategic Management Journal, 9 (1): 61-74.

A market-based typology of corporate strategy is introduced, which builds on typologies by Rumelt (1974, 1982). The new typology is based on critical values of a series of 3 ratios: 1. Rumelt's specialization ratio, the proportion of a firm's revenues attributable to its largest single business, 2. a category ratio, the proportion of revenues attributable to the largest market category, and 3. a product ratio, the proportion of a company's revenues attributable to its largest product group. It is proposed that, because different markets require varying skills for success, firms that focus in one market area (consumer or industrial), at

given diversification levels, should obtain superior performance. The sample consisted of 112 corporations. Subjective estimates of firm's sales revenue are collected through interviews with corporate planning executives. Performance measures are return-on-capital and sales growth for 1978-1980, based on Value Line data. Empirical tests support the proposed relationship between diversification strategy and financial performance.

Grant, Robert M. (1988) On 'Dominant Logic', Relatedness and the Link Between Diversity and Performance. Strategic Management Journal, 9 (6): 639-642.

Prahalad and Bettis (1986) proposed a new concept, dominant general management logic, which they contend is central to understanding the connection between diversification strategy and firm performance. The importance of dominant logic is in emphasizing business relatedness at the strategic instead of the operational level. The problem of dominant logic is that it is a cognitive concept, and this limits its applicability in academic research and management practice. It is contended that the key features of dominant logic are shown in the corporate-level functions of the company and are reflected in the systems through which the diversified corporation coordinates and controls its business units. Operationalizing the idea of dominant logic in this manner can assist in distinguishing corporate-level relatedness (based upon dominant logic) from operational relatedness and can enable the identification of the features of strategic similarity across business that are conducive to high levels of corporate-level relatedness.

Grant, Robert M; Jammine, Azar P; Thomas, Howard (1988) Diversity, Diversification, and Profitability Among British Manufacturing Companies, 1972-84. Academy of Management Journal, 31 (4): 771-801.

The causal relationships between diversity, diversification, and profitability were investigated for 304 large UK manufacturing companies that differed both in multinational diversity and product. Data were gathered by eliminating nonmanufacturing, unlisted, and foreign-owned firms from the Times 1,000 compilation of the largest UK firms in 1974. The primary measure of firm profitability was pretax return on net assets; variables likely to have an important impact on profitability were controlled. The effects of diversity were distinguished from the effects on profitability of other variables by the use of multiple regression analysis. The results were not clear with respect to the underlying causal relationships. Profitability was not increased by product diversification, and there was limited evidence that diversification was promoted by profitability. However, for multinational diversification, it was found that profitability in the home market encouraged overseas expansion, which, in turn, increased profitability.

Grant, Robert M; Jammine, Azar P. (1988) Performance Differences Between the Wrigley/Rumelt Strategic Categories. Strategic Management Journal, 9 (4): 333-346.

Differences in profit and sales performance between the various Wrigley (1970) and Rumelt (1974) categories of diversification strategy are investigated. A sample of 305 large UK manufacturing firms covering 1972-1984 is reduced to 186 companies by the elimination of firms that moved between strategic categories. The analysis shows only weak relationships between diversification strategy and firm and industry characteristics. Between strategic categories, only company size is significantly different. The more diversified related business and unrelated business strategies are more profitable than the more specialized single-business and dominant-business strategies. There is little evidence that closely related diversification is more profitable than unrelated diversification. The related business strategy is not superior to the unrelated strategy on the Wrigley classification, and the constrained diversification categories failed to outperform the linked diversification categories on the Rumelt classification.

Grinyer, Peter H; McKiernan, Peter; Yasai-Ardekani, Masoud (1988) Market, Organizational and Managerial Correlates of Economic Performance in the U.K. Electrical Engineering Industry. Strategic Management Journal, 9 (4): 297-318.

The strategic, market, planning, and organizational contingencies that bear on economic performance are considered conjointly. Hypotheses concerning market, organizational, and managerial determinants of profitability and growth are developed and tested with data collected by structured interviews in 45 randomly chosen firms in the UK electrical engineering industry. Multiple regression analysis suggests that market share and barriers to entry are the main determinants of profit margins. Tightness of control of working capital and aggressive management style also have a significant impact. Centralization of decision taking among smaller firms is linked to greater profitability, while more extensive budgetary control and planning of acquisitions or diversification are correlated negatively with the latter. The most important predictor of the rate of company growth of sales is profitability. However, constraints from organized labor and financial sources, conservative management styles, the product change rate, research and development intensity, and decentralization all entered significantly.

Hill, Charles W. L; Snell, Scott A. (1988) External Control, Corporate Strategy, and Firm Performance in Research-Intensive Industries. Strategic Management Journal, 9 (6): 577-590.

The proposition that the divergence of interest between managers and stockholders has implications for corporate strategy and company profitability is investigated. Stockholders prefer strategies that maximize their wealth while managers prefer strategies that maximize their utility. In research-intensive industries, it is theorized that innovation strategies are favored when stockholders dominate and that, when managers dominate, diversification strategies are favored. Innovation is contended to be linked with greater company profitability than diversification. The theory is tested on 94 Fortune 500 firms from the listing for 1980. The firms are from 5 industries with research and development expenditures of more than 2% as a proportion of sales and with at least 10 firms in the Fortune 500. The results largely confirm the

theoretical predictions and provide evidence in support of the contention that management stockholdings can align management and stockholder interests by way of their influence upon diversification strategy.


Hoskisson, Robert E; Hitt, Michael A. (1988) Strategic Control Systems and Relative R&D Investment in Large Multiproduct Firms. Strategic Management Journal, 9 (6): 605-621.

It is hypothesized that tight financial controls linked with large diversified multidivisional (M-form) companies lead to a short-term, low-risk orientation and thereby lower relative investment in research and development (R&D). Also, it is hypothesized that increasing levels of diversification necessitate different control systems that have substantial implications for investing in R&D. Data about type of structure and diversification strategy are obtained from 249 surveys received from Fortune 1,000 industrial firms. Data on R&D intensity is available on 124 of these companies -- 81 M-form and 43 more centralized functional (U-form). Data are analyzed through analysis of variance and covariance and correlation analysis. Results suggest that less diversified U-form firms invest more heavily in R&D than more diversified M-form firms after controlling for size and industry effects. Dominant business firms invested more in R&D than either related or unrelated business firms. The link between R&D intensity and market performance is negative for related and unrelated firms.

Jones, Gareth R; Hill, Charles W. L. (1988) Transaction Cost Analysis of Strategy-Structure Choice. Strategic Management Journal, 9 (2): 159-172.

Using a transaction cost approach, the relationship between corporate strategy, structure, and organizational performance is analyzed. Three main strategies for realizing economic benefits are vertical integration, related diversification, and unrelated diversification. Firms must trade off the economic gains from the different strategies against the bureaucratic costs associated with the realization of those gains. In this study, 3 related issues are addressed: 1. What determines the limit to growth via internalization for a firm pursuing a particular strategy? 2. Why does a firm pursue different strategies for achieving growth? 3. What determines changes in the strategy and structure used by the organization over time? Strategy and structure need to be separated longitudinally for the issues to have relevance. Whether related diversification is more profitable than unrelated diversification depends upon the interaction of intrinsic and exogenous factors in any given situation.

Keats, Barbara W; Hitt, Michael A. (1988) A Causal Model of Linkages Among Environmental Dimensions, Macro Organizational Characteristics, and Performance. Academy of Management Journal, 31 (3): 570-598.

In response to suggestions from previous research regarding linkages among environmental conditions, organization size, strategy, and economic performance, a study developed and tested an initial integrative general system model which integrates key variables from 3 models. Identified by Romanelli and Tushman (1986), these are: an external control model, a strategic management model, and an inertial model. Data were taken from 110 firms representing a broad range of industries. After initial analysis using LISREL VI, which allowed simultaneous analysis of a set of complex interrelationships, the model was reformulated by deleting those parameters which were nonsignificant. Final results provide support for all 3 models. Specifically, it was indicated that: 1. environmental instability had a negative effect on levels of divisionalization and diversification, 2. strategy was related to structure, and 3. the strategy-structure relationship was not mediated by size.


Smith, Clayton G; Cooper, Arnold C. (1988) Established Companies Diversifying into Young Industries: A Comparison of Firms with Different Levels of Performance. Strategic Management Journal, 9 (2): 111-121.

Differences in performance among established firms diversifying into young industries are analyzed, and hypotheses concerning 11 corporate-level strategic and organizational variables are examined. The analysis relies on both multi-industry data and single-industry data. Multi-industry data are from: 1. the US microwave oven industry, 2. the US color television set industry, 3. the US pocket calculator industry, 4. the US transistor industry, and 5. the US computer tomography (CT) scanner industry. The single-industry data apply to the US microwave oven industry. Performance is found to be associated with firm size and financial strength, time of entry, and the maturity of the firm's markets. The importance of several of the variables appears to change as the industry evolves. For example, in the microwave oven industry, for product-market maturity, the negative association with performance is found to be more significant for the earlier growth period (1972-1977) than for the later growth stage (1978-1983).

Williams, Jeffrey R; Paez, Betty Lynn; Sanders, Leonard (1988) Conglomerates Revisited. Strategic Management Journal, 9 (5): 403-414.

Recent research on corporate restructuring has drawn conclusions that are contradictory when applied to conglomerates. An overview of recent literature on conglomerates is presented. Based on the annual Forbes lists of conglomerates from 1975 through 1984, a database of 389 acquisitions and 357 divestitures is constructed for the period. The sample is examined for changes in conglomerate behavior as manifested in acquisition and divestiture decisions. Results indicate that, through the sample period, conglomerate managers were actively redefining the scope of the conglomerate enterprise by reducing the number of businesses managed and by increasing the average degree of business relatedness within the overall enterprise. However, the findings are not conclusive because the field is too large and, at least theoretically, too complex to lend itself to definitive analysis.

Buhner, Rolf (1987) Assessing International Diversification of West German Corporations. Strategic Management Journal, 8 (1): 25-37.

An attempt is made to analyze the effects of international diversification of firms in Germany on market performance. The analysis is based on a sample comprising 40 large German corporations among the top 300 firms in the country, and the period examined is 1966-1981. Diversification is measured quantitatively and categorically. A number of variables are modeled in a multiple regression approach, including: 1. size and growth, 2. ownership structure and internal multidivisional M-form structure, and 3. financial leverage. The results suggest that international corporate diversification may be perceived by shareholders as a wealth-increasing measure. Specifically, the results suggest that internationalization and domestic product expansion are 2 alternative diversification options in view of shareholders' wealth. Domestic product diversity seems to be motivated by internal push stimuli, while internationalization seems to be pulled by external stimuli.

Dubofsky, Paulette; Varadarajan, P. Rajan (1987) Diversification and Measures of Performance: Additional Empirical Evidence. Academy of Management Journal, 30 (3): 597-608.

The findings of Michel and Shaked (1984) are reexamined and their work extended by examining the relationship between diversification strategy and performance using both an accounting measure and market measures of performance. The same firms (51 firms from the Fortune 250 list) and the same time period (1975-1981) are used. However, 3 of the firms are excluded because use of Rumelt's (1974) rules for categorization leads the firms to be classified as either dominant-business or single-business firms. Three main findings emerge: 1. There is a high degree of interrater agreement between the computations of Michel-Shaked (MS) and the present computations. 2. The characteristics of 4 firms with fairly high performance and mid-range relatedness ratios and their group assignments appear to have influenced the significant differences in performance between diversification groups reported by MS. 3. The type of performance measure used seems to lead to conflicting inferences about the relationship between diversification strategy and a firm's performance.

Hopkins, H. Donald (1987) Acquisition Strategy and the Market Position of Acquiring Firms. Strategic Management Journal, 8 (6): 535-547.

Three acquisition strategies are employed to hypothesize differences in the market position of acquisitive firms. The strategies are: 1. conglomerate (acquisition of companies in areas unrelated to the acquiring firms's main business), 2. technology-related (acquisition of firms with the same or similar production techniques or product technology), and 3. marketing-related (acquisition of firms with markets homogeneous to those of the acquiring firm). The sample used consists of 64 firms from the 1965 Fortune 1,000 that were active acquirers during the 1965-1979 period. The data are analyzed by comparing the mean values associated with each strategy on 4 market position variables, measures of: 1. market share, 2. market concentration, 3. market growth, and 4. market profitability. The results show that, while acquisitive growth generally is associated with a decline in market position, the marketing-related strategy is associated with a distinctly superior position. Firms using this strategy are found to be in more profitable industries and to have higher market shares in these industries.

Hopkins, H. Donald, (1987) Long-Term Acquisition Strategies in the U.S. Economy. Journal of Management, 13 (3): 557-572.

Despite research suggesting that the use of consistent long-term acquisition strategies should be beneficial, there is evidence that acquisitive firms do not use such strategies. A study was conducted to determine whether acquisitive firms show, by their externally observable patterns of behavior, evidence of pursuing consistent long-term strategies. If so, an attempt was made to determine the nature of these strategies and whether they are associated with superior performance. Using a sample of 103 Fortune 1,000 companies for the period 1965-1979, the results show that the majority of the firms did appear to follow acquisition strategies that were consistent over time. About half of the companies followed one of 2 highly consistent strategies -- a marketing-related strategy or a technology-related one. While the consistency of a firm's acquisition strategy was found not to be associated with better performance, strategies that exhibited 'strategic fit' did show superior profitability.

Johnson, Gerry; Thomas, Howard (1987) The Industry Context of Strategy, Structure and Performance: The U.K. Brewing Industry. Strategic Management Journal, 8 (4): 343-361.

An attempt is made to identify influences on the competitive performance of companies involved in the UK brewing industry. The influencing factors examined include: 1. the characteristics of the industry environment, 2. the strategies pursued by companies within the industry, and 3. the performance

achieved by companies adopting different competitive strategies. A sample of 21 companies is studied. It is shown that more focused, limited diversification, and regional brewing strategies may be preferable in the UK brewing industry -- in contrast to prior research findings. Thus, support is provided for the hypothesis that an optimum level of diversification exists within an industry that balances economies of scope and diseconomies of organizational scale. In the UK industry, the traditional single or dominant business brewers seem to have found the strategy that matches firms effectively with the important characteristics of industry structure.

Napier, Nancy Knox; Smith, Mark (1987) Product Diversification, Performance Criteria and Compensation at the Corporate Manager Level. Strategic Management Journal, 8 (2): 195-201.

A study was conducted to examine the potential relationship between product diversification strategy and 3 human resources management practices affecting corporate managers, namely: 1. performance criteria, 2. bonus size, and 3. bonus distribution method. The study tested empirically the idea embedded in a model proposed by Galbraith and Nathanson (1978), which suggests that organizational characteristics vary by level of product diversification. The sample firms were 46 manufacturing firms on the 1982 Fortune 1,000 list. The hypothesis that higher diversified firms use more objective criteria in evaluating corporate managers was not supported. However, support was provided for the hypothesis that the proportion of executive pay received as a bonus would increase as a firm diversifies. A 3rd hypothesis, that bonus allocation would be made on a formula basis as firms diversified, although not supported statistically, does reflect the general predictions of the model, i.e., that the use of a formula is more likely in diverse firms.

Porter, Michael E. (1987) From Competitive Advantage to Corporate Strategy. Harvard Business Review, 65 (3): 43-59.

There are 2 levels of strategy in a diversified company: 1. business unit or competitive, and 2. corporate or companywide. The diversification records of 33 US companies from 1950-1986 show that, on average, firms divested more than half their acquisitions in new industries and more than 60% of their acquisitions in entirely new fields. Each corporation went into an average of 80 new industries and 27 new fields, with just over 70% of the new entries being acquisitions, 22% being start-ups, and 8% being joint ventures. The 3 tests for successful diversification which set the standards that any corporate strategy must meet are: 1. the attractiveness test, 2. the cost-of-entry test, and 3. the better-off test. Concepts of corporate strategy identified from the diversification records studied include: 1. portfolio management, 2. restructuring, 3. transferring skills, and 4. sharing activities. All 4 ideas of strategy have succeeded under the right circumstances.

Prahalad, C. K; Bettis, Richard A. (1986) The Dominant Logic: A New Linkage Between Diversity and Performance. Strategic Management Journal, 7 (6): 485-501.

A linkage between diversification and performance is proposed and examined. The proposed conceptual framework linking diversity and performance is based on 4 premises: 1. Top management is a collection of key individuals who significantly influence the way the company is managed. 2. The strategic characteristics of the firm's businesses vary according to their underlying structures, technologies, and customers. 3. Strategically similar businesses can be managed using a dominant general management logic. 4. The top management group's ability to manage is limited by the logic(s) to which they are accustomed. The implications of including the concept of dominant general management logic in researching diversification and performance involve the way the logic limits diversity and the manner in which it affects managers' ability to react. The process of changing or adding dominant logic is discussed briefly.

Fahey, Liam; Christensen, H. Kurt (1986) Evaluating the Research on Strategy Content. Journal of Management, 12 (2): 167-183.

Strategy content research examines the content of decisions regarding the goals, scope, or competitive strategies of corporations. The major strategy content research streams are: 1. goals and performance, 2. diversification, 3. strategic groups, 4. market share and profitability, 5. taxonomic approaches, and 6. stages of industry evolution. Each of these is discussed in terms of the research questions asked, the key findings, and the concerns arising from the research. Finally, 4 implications for managers are given: 1. Haphazard diversification is not likely to generate above-average long-term earnings. 2. Performance is greatly influenced by how a firm positions itself within a given industry. 3. Managers should consider the benefits, costs, and opportunities before seeking to increase market share. 4. Business leaders should anticipate stage changes and modify strategy accordingly.

McGee, John; Thomas, Howard (1986) Strategic Groups: Theory, Research and Taxonomy. Strategic Management Journal, 7 (2): 141-160.

Since most large firms are multiproduct, sell in more than one market, and have grown by diversification, it is very difficult to determine where the boundaries of the industry should be drawn. This issue is reexamined by using a supply-side concept of classification that seeks to identify groupings or structures within industries but is based on the observed similarity of behavior of firms. These groups are called strategic groups. A comprehensive literature review of recent studies led to several conclusions. Certain theoretical concepts such as mobility barriers, isolating mechanisms, and controllable variables provide much firmer bases for identifying strategic groups within industries than does using substitute elements to determine a firm's strategic direction. Therefore, taxonomies for understanding the nature of strategic group formulation can be developed.

Montgomery, Cynthia A; Wilson, Vicki A. (1986) Mergers That Last: A Predictable Pattern? Strategic Management Journal, 7 (1): 91-96.

The mergers of the 1960s have recently come to be seen as the divestitures of the 1970s and 1980s. To examine this view, the current ownership of 434 large acquisitions made by publicly traded US firms in 1967-1969 are analyzed. Results show that the majority are still held by the acquiring firms. Previous diversification and merger research appears to capture some of the positive wealth effects of relatedness, but results of this study show that unrelated acquisitions were resold at a moderately higher, but not significantly different, rate than related acquisitions. Both unrelated and related acquisitions may possibly be used as strategic planning tools, with some unrelated firms representing the acquiring firm's attempt to refocus defensively. However, the small difference in rate of resale also suggests that related acquisitions may be less successful than previously thought. While potential gains may be greater, the efforts needed to realize them are also likely to be greater.

Reed, Richard; Luffman, George A. (1986) Diversification: The Growing Confusion. Strategic Management Journal, 7 (1): 29-35.

Simplifications and generalizations have caused misguided interpretation of the terminology used to describe the various forms of diversification. Strategic fashion has dictated how the strategy should be adopted, to what extent, and in what form, losing sight of the fundamental principles involved. A strategy should be selected based on clear identification of its benefits, which should be used to help solve specific problems. This requires less emphasis on shorthand methods of describing diversification and more emphasis on the potential of the strategy and the circumstances under which benefits can be of meaningful value. Research and reporting of the facts surrounding diversifications within industries require integrity; there is also a need for self-honesty and realization of the lack of instant solutions in the form of fashionable actions. Since most problems are specific, they are only relevant to individual companies and, therefore, require individual solutions.


Silhan, Peter A; Thomas, Howard (1986) Using Simulated Mergers to Evaluate Corporate Diversification Strategies. Strategic Management Journal, 7 (6): 523-534.

It is proposed that simulated mergers of actual firms can be useful in the evaluation of the effects of diversification on corporate performance. Risk and return were examined for 60 autonomous firms that were aggregated to form 9 sets of conglomerates. Mean absolute percentage error (MAPE) and return on equity (ROE) measured risk and return, with MAPEs and ROEs evaluated for a 3-year holding period. The results supported the proposition that conglomeration can lead to increased market value if risk can be reduced while return is held at the same level. Among the implications of the study's results are: 1. Under conditions of no synergy, conglomeration can be an effective cost-reduction strategy. 2. Conglomerates with more segments apparently improve their risk-return performance. 3. Mergers formed from large units have better performance than those formed from small units.

Bettis, Richard A.; Mahajan, Vijay (1985) Risk/Return Performance of Diversified Firms. Management Science, 31(7): 785-799.

Trade-offs involving risk and expected profit in corporate financial performance are examined at the level of accounting profits for 80 large, related and unrelated diversified firms. The sample used by Bettis and Hall (1982) for the years 1973-1977 is reanalyzed. The return measure is a 5-year average of the return on assets (ROA); risk is measured by the standard deviation of ROA across the same period. Results indicate that, on average, related diversified firms outperform unrelated ones, but this is no guarantee of a favorable risk/return performance. In fact, different diversification strategies may result in a similar risk/return performance. However, it is extremely difficult to achieve favorable risk/return performance with unrelated diversification. Successfully diversified firms differ from others on some managerial dimensions, which include high levels of research and development and advertising expenditures.

Palepu, Krishna (1985) Diversification Strategy, Profit Performance and the Entropy Measure. Strategic Management Journal. 6(3): 239-255.

The diversification-performance relationship is reexamined using a diversification index that distinguishes between related and unrelated diversification. The Jacquemin-Berry (1979) entropy measure of diversification and the line-of-business data are employed. The statistical analysis is based on 30 firms from the food products industry group, and data were analyzed by the t-test, the media test, and the Mann-Whitney U-test. The results and analysis show that: 1. the notion that high total diversification is cross-sectionally associated with higher profitability is not supported by the evidence, 2. the evidence is not sufficient to conclude that the profitability of firms with high related diversification is greater than the profitability of firms with high unrelated diversification, and 3. although failing to achieve significance at the conventional level, the results are generally in the direction expected by the hypothesis that, if related diversification leads to superior growth in profitability, it should eventually lead to a higher profitability level itself.

Montgomery, Cynthia A. (1985) Product-Market Diversification and Market Power

Academy of Management Journal, 28(4): 789-798.

An examination is made of the relationships among diversification, market structure, and firm performance. It is contended that the traditional economic theory of market power overemphasizes collusive or general market power and underemphasizes the role of specific skills and specific market power that give companies advantages in individual market settings. Univariate differences between highly diversified and less diversified companies are examined with t-tests, the sample including 128 Fortune 500 companies ranging in level of diversification from single-line businesses to unrelated diversifiers. It is shown that, contrary to the widely held view that diversified firms wield unfair market advantages, highly diversified firms do not have strong market positions. On average, they compete in less attractive markets than companies with relatively low levels of diversification. However, diversification may have advantages that come from cost efficiencies rather than market power.

Bettis, Richard A.; Hall, William K. (1982) Diversification Strategy, Accounting Determined Risk, and Accounting Determined Return. Academy of Management Journal, 25(2): 254-264.

This study examines the validity of some conclusions previously drawn from research by Rumelt (1974, 1977) on related and unrelated diversification strategies, in view of risk considerations. Accounting measures of risk and return have been used, rather than market measures. The 4 hypotheses studied are: 1. Related diversification strategies are more successful than unrelated diversification strategies; related-constrained diversification strategies outperform related-linked diversification strategies. 2. Unrelated diversification strategies have less accounting risk than related diversification strategies. 3. Accounting-determined return will be strongly correlated with accounting-determined risk in firms following unrelated diversification strategies. 4. Accounting-determined return will be minimally correlated with accounting-determined risk in organizations pursuing related diversification. The results of the study indicate that the accuracy of the hypotheses may be limited to the pharmaceuticals industry. Evidence is provided that related firms do not outperform unrelated firms and that unrelated firms do not have superior risk pooling traits. The results also suggest that the trade-off between accounting-determined risk and return varies among unrelated, related-constrained, and related-linked firms.

Montgomery, Cynthia A. (1982) The Measurement of Firm Diversification: Some New Empirical Evidence. Academy of Management Journal, 25(2): 299-307.

In this research, 2 approaches to the measurement of firm diversification are compared. Continuous Standard Industrial Classification (SIC)-based product count measures are structured on the SIC system developed by the federal government for classifying all types of economic activity. The system is based on establishment classifications which classify each plant of a firm according to its primary activity. The categorical measure of diversification was developed after the weaknesses of the SIC system became apparent; its focus is on the individual firm and its pattern of diversification. What is diversification for the economy as a whole is not necessarily descriptive of diversification in any one firm. The results indicate a high degree of correspondence between the 2 measures. The problems of validity and reliability do not appear to be as serious as has been suggested. Although one measure may be more appropriate than the other in a given situation, neither is plainly superior to the other for all uses.

Rumelt, Richard P. (1982) Diversification Strategy and Profitability. Strategic Management Journal, 3(4): 359-369.

Between 1949 and 1974, the proportion of Fortune 500 firms that were substantially diversified more than doubled, rising to 63%. Rumelt (1974) showed that firms that diversified into areas that drew on a common core skill or resource were more profitable than those that were vertically integrated or those that diversified into unrelated businesses. This earlier study is extended with a larger sample and with more recent data. A theory of product diversity is developed based on economies of scope, idiosyncratic investment, and uncertain imitability. The earlier results are replicated. Tests verify that an association remains once the effects of varying industry profitability are removed. The tests also permit discrimination between the effects of industry and diversification strategy on profitability.

Bettis, Richard A. (1981) Performance Differences in Related and Unrelated Diversified Firms. Strategic Management Journal, 2(4): 379-393.

In 1974, Rumelt studied the relationships among diversification strategy, organizational structure, and economic performance. In 1979, Montgomery examined performance differences in diversified firms by using the market structure variables of industrial organization economics. With these 2 studies as a backdrop, this study examined performance differences between related and unrelated diversified firms. As a dependent return variable, return on assets (ROA) was selected because it represents a return more directly under the control of management. Two separate regression models were used in the study. Data were taken from these samples: 1. 31 related-constrained firms, 2. 24 related-linked firms, and 3. 25 unrelated firms. It was found that related diversified firms outperform unrelated diversified firms by 1 to 3 percentage points. There were also differences between related and unrelated firms in the following 3 areas: 1. advertising, 2. capital intensity, and 3. research and development. The results suggest, where barriers to entry exist, there is a degree of monopoly power, since the firm can price above the competitive level. The higher the barriers, the larger the profits for the industry.

Christensen, H. Kurt; Montgomery, Cynthia A. (1981) Corporate Economic Performance: Diversification Strategy Versus Market Structure. Strategic Management Journal, 2(4): 327-343.

A sample, which included 128 businesses from Rumelt's 1974 study, was updated and used to examine corporate economic performance using 2 variables: 1. diversification strategy, and 2. market structure. Performance differences were found to exist among some, but not all, of Rumelt's categories. The differences appeared to be associated with characteristics of the markets in which the firms exist. Two separate profiles emerge from the study: 1. related-constrained firms, and 2. unrelated portfolio diversifiers. It is argued the firms in markets which constrain their growth or profitability are the best candidates for diversification. However, businesses in ''low opportunity'' markets are more likely to pursue unrelated diversification. The study suggests 2 implications: 1. High earnings are not assured by constrained diversification. 2. Inattention to market structure in entry decisions for unrelated-portfolio firms can result in poor performance. Moreover, unrelated-portfolio firms may lack the needed skills and resources to survive in a faster growing and more concentrated market.


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