CORPORATE LEVEL STRATEGY
ARTICLES
STRATEGIC MANAGEMENT: 2023-2024
,Table of Contents
Week 2 – Diversification benefits & costs...........................................................................2
Zhou (2011) – Synergy, Coordination Costs and Diversification Costs...........................................2
Schommer, M., Richter, A. and Karna, A. (2019) Does the diversification– firm performance
relationship change over time? A meta-analytical review............................................................5
Week 3 - Expansion mode choices......................................................................................7
Stettner & Lavie (2014) – Ambidexterity under scrutiny: exploration and exploitation via internal
organization, alliances and acquisitions.......................................................................................7
Castañer, X., Mulotte, L., Garrette, B., and Dussauge, P. (2014). Governance mode vs.
governance fit: Performance implications of make-or-ally choices for product innovation in the
worldwide aircraft industry........................................................................................................10
Week 4 - M&As................................................................................................................13
Moatti, Ren & Anand (2015) – disentangling the performance effects of efficiency and
bargaining power in horizontal growth strategies: an empirical investigation in the global retail
industry......................................................................................................................................13
Rabier (2017) – Acquisition motives and the distribution of acquisition performance.................16
Week 5 - CEOs and corporate strategy.............................................................................19
Chen, G., Crossland, C., & Huang, S. (2016). Female board representation and corporate
acquisition intensity...................................................................................................................19
Shi, Zhang & Hoskisson (2017) – Ripple effects of CEO awards: investigating the acquisition
activities of superstar CEOs competitors.....................................................................................21
Week 6 - Divestitures.......................................................................................................26
Vidal & Mitchell (2015) – Adding by subtracting: The relationship between performance
feedback and resource configuration through divestitures.........................................................26
Feldman (2014) – Legacy Divestitures: Motives and Implications...............................................30
Summaries of the cases....................................................................................................35
Paper 4 castaner important, performance is same, big and smal firms internal growth
Big firms opting for alliance failing
Small firms opting for internal growth failing
Many acquistions is not going well, very poorly fail to do internal growth failing
Philips divestiture, not saying doing poorly but doing very well
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,Week 2 – Diversification benefits & costs
Zhou (2011) – Synergy, Coordination Costs and Diversification Costs
Abstract: In this study, the focus is on the concept of related diversification in businesses. Related
diversification, which involves expanding into new business lines that can benefit from shared inputs, has the
potential to create synergy and enhance overall performance. However, the pursuit of synergy through
diversification is complicated by the need to manage interdependencies between different business lines.
These interdependencies increase coordination costs for the firm, potentially limiting the extent to which
diversification can be pursued.
Drawing on Penrose's insights, this research argues that for a firm to realize synergy through related
diversification, active management of interdependencies is crucial. However, as a firm manages these
interdependencies, its coordination costs may rise. These costs can escalate faster than the actual synergy
gains, creating a constraint on the feasibility of related diversification. This challenge becomes more significant
when the existing business lines of the firm already have intricate interconnections.
To validate these arguments, the study analyzes data from U.S. equipment manufacturers spanning
the period from 1993 to 2003. The findings reveal that a firm is more inclined to diversify into a new business
when there are potential shared inputs between the existing and new businesses. However, the complexity of
existing business lines acts as a deterrent to diversification. Notably, the study shows that the likelihood of
diversification decreases significantly when the existing business lines are complex and share more inputs with
the new business. These results underscore the balancing act firms face: while synergistic benefits drive
diversification, the associated increase in coordination costs acts as a counterforce, potentially limiting the
scope of related diversification strategies.
Main contribution of the paper: This paper investigates why there are limits to expanding businesses into
related areas (related diversification) and why some companies choose unrelated diversification instead. The
study argues that for a company to benefit from the synergy (positive outcomes from combining different
businesses), it needs to actively manage the connections between its new and existing businesses. Managing
these connections incurs coordination costs.
The paper suggests that the decline in overall synergy doesn't always happen because of external factors or
lack of opportunities. Instead, it occurs because the costs of managing these connections between different
business lines increase as a company diversifies into more related areas. So, even though synergy can enhance
diversification, the increasing difficulty and expense of coordinating these connections limit a company's
choice of industries and establish a cap on how much related diversification it can pursue. In simpler terms, the
paper shows that while synergy is good for business, the effort and cost of managing diverse business
connections can restrict how much a company can expand into related areas.
2. Framing:
Which theory does the paper use? Which gap in the literature does it address?
I. In the paper, transaction cost economics (TCE) is indirectly linked through the concept of
coordination costs. TCE focuses on the costs associated with coordinating economic activities within
and between firms. These coordination costs arise from the need to manage interdependencies and
ensure effective communication, information processing, and decision-making. The paper suggests
that firms may choose to integrate certain activities to reduce transaction costs, but as the
coordination demand increases, the marginal coordination costs may surpass the marginal benefits of
synergy.
II. In the context of the paper, the Theory of the Firm, specifically the concept of firm boundaries, refers
to the fundamental idea that companies need to define what activities they keep within their
organization (internal boundaries) and what they delegate or outsource (external boundaries). The
paper illustrates that a firm's decisions about diversification and managing interdependencies
between different business lines are directly influenced by these boundaries. When pursuing synergy
through sharing resources among various businesses within the firm, the indivisibility of certain
resources leads to coordination costs. These costs, in turn, influence the firm's operational limits,
determining how extensive its activities can be.
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, III. does not directly reference or cite the work of Penrose. However, the paper builds on Penrose's
insight about the indivisibility of inputs between firms. Penrose argued that sharing common inputs
across business lines can generate synergy, which justifies related diversification. In this paper, Zhou
extends this idea by arguing that to realize this synergy, a firm needs to actively manage the
interdependencies between different business lines, which increases its coordination costs. The
coordination costs may increase faster than the synergy and set a limit to related diversification.
This study addresses a gap in the literature by focusing on the trade-off between synergy and coordination
costs in firms' diversification choices. Previous studies have examined the motivations for diversification, such
as risk reduction, agency problems, imitation, and vertical relatedness. However, these studies have not
specifically considered the impact of coordination costs on diversification decisions.
3.Theory development:
Diversification means a company expanding into new markets or industries to spread out its investments and
reduce risks. There are two types: related (similar to current operations) and unrelated (different from current
operations). It's a way to reduce dependence on one market, find new opportunities, and boost financial
stability.
I. Related diversification involves expanding into similar businesses, like new products or geographic
areas.
II. Unrelated diversification means entering entirely different industries. While diversification offers
benefits like risk reduction and growth opportunities, it also brings challenges. Integrating new
businesses requires careful planning and may lead to coordination problems. Sometimes, expected
benefits may not materialize.
III. Diversification can be restricted by the concept of indivisibility, meaning some resources can't be
easily shared between different products without losing value. This limitation makes it hard for
companies to expand into new industries because these resources can't be effectively used across
various products. This constraint results in extra costs and hampers the potential benefits of
combining different businesses.
In summary, diversification is a strategic move to reduce risk and expand a company. It provides growth
chances but needs thoughtful planning to be successful.
Diversification helps a company save money by using common resources for different products. But when
different parts of a business share these resources, it gets complicated. They need to plan together, share
information, and make decisions jointly. Managing these connections within a single company can be cheaper
than between different companies, but only to a point. As a company grows, coordinating these activities
becomes very costly. To save money, a company should decide which tasks to do together internally and which
to outsource. The key is to minimize complicated connections between internal and outsourced tasks. This
way, the company can work efficiently and keep costs down.
I. H1: A firm is less likely to diversify into a new business when its existing business lines are more
complex supported
The study found that as the complexity of a firm's existing business lines increases, the likelihood of
diversifying into a new business decreases. This suggests that firms are more cautious about diversifying when
they already have complex operations, as the coordination costs associated with managing interdependencies
may outweigh the potential benefits of diversification.
II. H2: A firm’s likelihood of diversifying into a new business decreases more with the complexity in the
firm’s existing business lines if they share more inputs with the new business supported
Coordinating different businesses within a company, especially when they share resources, is challenging
and becomes even harder with more related diversification. When a firm's existing and new businesses share
more resources, managing these connections becomes more complex. The cost of coordination doesn't just go
up proportionally with the number of businesses; it increases significantly based on the number of
interconnections between them. If coordination costs rise faster than the benefits gained from combining
these businesses, it becomes more attractive to diversify into less related businesses. Companies can try to
avoid these costs by diversifying into related businesses but not integrating them with existing ones. However,
to truly benefit from diversification, the firm still needs to carefully manage these interconnected activities. In
summary, coordinating related businesses is more challenging and costly than coordinating unrelated ones,
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