Product Market Diversification Research Articles

Modeling the dynamics of firms’ international and product market diversification strategy: the case of U.S. firms’ response to late 20th century globalization

PurposeThis paper aims to derive and estimate a theory-based empirical specification that models a firm’s choices of its international diversification (ID) and product diversification (PD) and how they evolve over time in response to shocks that alter the relative cost and relative profitability of ID and PD.Design/methodology/approachWe use longitudinal data on U.S. manufacturing firms from 1984 to 1999, a period of intense shocks associated with rapid globalization, to estimate a dynamic panel data Tobit model that permits lags in a firm’s adjustment to its optimal mix of ID and PD over time.FindingsWe find strong support for the theoretical framework underlying our empirical specifications and posited dynamics, with full adjustment estimated to require, on average, 1.5 years, a finding with implications for the time spacing of observations in empirical studies of ID and PD to avoid biased inferences. Among the globalization shocks during the time period studied, our results indicate that global competitive pressures and efficiency gains from global supply integration to be the more important factors driving U.S. firms toward greater ID relative to PD. Augmentation of firms’ organizational (managerial) and physical capital resources is also found to be important for supporting an expansion of ID relative to PD. Technological resource augmentation is instead found to favor expansion of PD relative to ID.Originality/valueOur empirical specification is novel. It readily incorporates an often ignored but necessary theoretical condition that defines a firm’s optimal choices of its ID and PD, and it allows observed choices at a point in time to deviate from their optimal values.

Employee Redeployment in Diversified Firms

This paper examines the link between product market diversification and employee redeployment. Prior work finds that firms can redeploy resources to react to inducements and performance advantages but may thereby compromise potential synergies. This paper argues that expected synergies are an additional mechanism for employee redeployment and depend on the origin and the destination of the redeployed employees. Using employer-employee data on Finnish multiunit firms, I find that employee redeployment across subsidiaries increases with firm diversification. In line with the argument that diversified firms may seek to increase their parenting advantage by redirecting resources from parent firms to subsidiaries, firm diversification is also positively linked with employee redeployment from parent units towards subsidiaries. The study contributes to the resource reconfiguration and diversification literature by examining and offering large-scale empirical insights into the corporate parent role and expected synergies in employee redeployment decisions.

Product market diversification and market emphasis

PurposeExtant literature indicates that increased product market diversification generates both positive and negative impact on firm performance. This inconclusive pattern hinders the decision-making of deploying a firm’s resources across different markets. This research aims to embed diversification into a moderation-based framework and demonstrates the conditions under which increased diversification produces either beneficial or harmful effects on firm outcomes. The authors introduce another market configuration dimension, viz., market emphasis, and reveal how changes in diversification and in emphasis yield interactive effects on an important firm performance indicator, idiosyncratic risk. An additional moderator, market turbulence, is also incorporated to further enrich the model in a three-way interaction. Results show that when market turbulence is high, and a firm highly skews its resources to some of its markets, diversifying into more market domains will increase firm idiosyncratic risk. A better choice during increased diversification is to evenly emphasize each of its markets. However, in a market displaying low turbulence, the high diversification-high emphasis pattern may be preferred because of lower firm risk.Design/methodology/approachTo test the hypotheses, the authors collected a comprehensive archival data that contained a large group of public traded US-based manufacturing companies from three different resources. These were the Compustat Annual Database, the Center for Research in Security Prices database and Compustat Business Segment Database. These databases and the combinatorial approach are widely adopted in marketing and management research involving firm strategies and financial outcomes.FindingsWhen market turbulence is high, simultaneously increasing market diversification and emphasis will more strongly raise firm idiosyncratic risk. However, polarizing into either diversification or emphasis reduces firm risk. When in a low turbulence market, expanding to more product markets and simultaneously emphasizing key markets will decrease idiosyncratic risk. One noticeable fact is that irrespective of whether a firm is in high or low turbulence conditions, choosing a diversification strategy always decreases firm risk when market emphasis is low. However, the impact of this effect however is higher when turbulence is greater. The authors also present the boundary conditions under which the three-way interaction holds.Research limitations/implicationsFirst, the extension to the utilization of idiosyncratic risk stretches the understanding of effective ways of reducing firm risks from an angle of marketing management. This view of firm risk also contributes to further analysis of shareholder value. Classic corporate asset valuation focuses more on the financial performance indicators as well as the firm’s strategic domains. This research thus provides a unique and meaningful guideline for the corporate valuation approach from the angle of analyzing the firm’s business segment scope and emphasis in the context of the environment.Practical implicationsThe idea about how many product markets a firm should enter is always one of the primary decisions that contain significant trade-offs. This makes the managers choice difficult during the decision-making processes. The authors suggest that managers should not only consider the scope of product markets but also think carefully about the resources allocated toward each segment. A matrix with dimensions of diversification and emphasis can be explicitly studied during the strategy formulation. The individual blocks within this matrix may have significant outcome differences.Originality/valuePrevious research focuses on either a firm’s internal assets or external competitive situations when researchers seek the drivers of risk-reduction. This research extends this horizon by adding the interplay between a set of fundamental firm decision areas, diversification and emphasis and the external conditions facing a firm (turbulence).

Integrative Capabilities, Vertical Integration, and Innovation Over Successive Technology Lifecycles

The analysis presented here provides a new explanation for why vertically integrated and specialized firms may continue to coexist as industries evolve, especially during time periods when conditions unequivocally favor lower cost specialized firms. In contrast to the common view that firms should match their organizational form to the prevailing nature of technology, vertically integrated firms may rationally choose to stay integrated and bear the sunk costs of developing integrative capabilities as well as the ongoing costs of maintaining them, even when they lose money during some time periods due to competition from lower cost specialized firms. In particular, in industries characterized by successive systemic innovations, which entail interdependence across stages of production, some firms may remain vertically integrated to maintain their capability to innovate over multiple cycles of technological innovation. The results hinge on the sunk costs of long-lived investments in integrative capabilities. An extension to the analysis suggests that vertically integrated firms may retain their organizational form to pioneer systemic innovations in other industries, including industries not subject to frequent technology lifecycles—providing another explanation of product-market diversification and market entry over time.

(Un)Conventional Combinations: At the Origins of Breakthrough Inventions

Impactful inventions carry forward combinations of components which depart from common practices: they remove restrictions in the knowledge space by breaking conventional rules. In this paper we present a novel measure of the extent to which combinations in the inventive process conform to established practices. We borrow an established approach from the literature on product market diversification and adapt it to measure how combinations are typical or unconventional. We find that most of the inventive activities are grounded in conventional efforts, with rare instances of unconventional connections. Unconventionality is more likely to occur with experience, in teams and in large organizations. Moreover, patents which cite a widespread spectrum of previous results have a higher chance to identify unconventional connections. We also observe that inventions carrying forward unconventional combinations are cited more by future patent applications than conventional inventions.

Performance Effectiveness of Related Product Market Diversification Strategy in Nigerian Companies : Information and Communication Technology as a Virile Tool

This study examined the impact of Information and Communication Technology (ICT) on the performance of 12 selected Nigerian firms that are pursuing a strategy of related product-market diversification. Related diversification was measured by the extent of diversification arising from involvement in several industries of the same industry group. ICT intensity was measured by dividing the ICT budget of a company. Gross margin, financial performance ratios and sales growth were used to measure performance. a cross-sectional survey research design was used to collect primary and secondary data for the study. Convenience sampling technique was used to select the sampled firms while purposive random sampling method was used to select 426 respondents who served as multiple informants for the survey. A five-point Likert scale was used to measure the opinions of the respondents on the level of product-market diversification and ICT with the former group performing better than the later group. The result of the regression analysis showed that the intensity of ICT has a significant influence on the performance of firms that are using a related product-market diversification strategy with a co-efficient of 5.170. The R 2 obtained showed that the total variability in the corporate performance of a related productmarket diversifier can be explained by the intensity of ICT thus making ICT intensity a good predictor of organizational performance. The study concludes that the performance impact of related-market diversification is not the same for all firms and is largely relative and determined and moderated by the intensity of ICT in a firm.

Foreign Banks and Credit Volatility: The Case of Latin American Countries

AbstractThe number of foreign banks in Latin America increased substantially over the period 1995–2001, prompting a debate on the potential consequences for host countries. Discussions focused on efficiency, the impact on competition and product market diversification in the banking industry, and the quality of the regulatory environment, among other issues. Against this background, this paper uses ARCH techniques to test the impact of foreign banks on both the level and the volatility of real private bank credit in a panel of eight Latin American countries, using quarterly data over the period 1995–2001. The empirical findings show that, together with financial development, the presence of foreign banks has contributed to reducing real credit volatility, improving the buffer shock function of the banking sector.

Environment-Strategy-Performance Linkages: A Study of Indian Firms during Economic Liberalization

How firms from emerging economies transform themselves to adapt to the changing institutional environment during economic liberalization has generated a lot of interest among management scholars and practitioners alike. This paper presents an analysis of the corporate strategic behaviour of firms in India, a giant emerging economy undergoing economic reforms over the last one decade. Based on existing theories, a multivariate model has been developed to explore the contingency linkages of environment, corporate strategy, and performance. The model has been empirically verified in LISREL framework using primary and secondary data for 111 firms mainly belonging to the list of top 500 firms in India. The major observations emerging from the analysis are as follows: Environment played a significant role in shaping firm strategies and performance during reforms. Environmental munificence and competitive intensity influenced firm strategies and performance as hypothesized. Availability of high growth and profit opportunities across industries, easier access to resources in the international market, improvement in the supply situation, etc., had the greatest influence on the strategic behaviour of firms in the liberalized era. Firms facing intense competition and demanding customers reorganized the business portfolio by divesting some businesses and moving into more promising unrelated businesses, cut down the organization flab through downsizing, and promoted greater sharing of resources within. Firms having better environment-strategy ‘fit’ achieved superior performance. The effect of environment on firm performance was moderated by firm strategies. This conforms to the general principle of contingency theory derived based on the developed economy institutional framework. Among the corporate strategies, scale expansion strategy was found to be the most effective, as it yielded superior profit and market performance. Scale expansion benefited firms not only in gaining advantage due to economy of scale but also in using more modern technology and equipments. The strategy of product-market diversification did not have any significant effect on profitability. However, it resulted in poor market performance as observed from the significant negative influence of business scope on market return. This indicates that investors were generally wary of diversification moves by firms. Increased diversity in operation did not have any significant negative impact on performance. Therefore, unrelated diversification per se did not harm firms, at least, in the short run. The study does not support the earlier observations by researchers that firms with focused strategy and adopting defensive strategic orientation perform better during deregulation of industries in both developed and emerging economies. In fact, it can be observed that, during economic liberalization in India, firms that recognized the favourable and unfavourable changes in the environment early and increased their scale of business and diversified into deregulated industries selectively but aggressively achieved superior performance

DOES THE LEFT FOOT FOLLOW THE RIGHT WHEN GOING DOWNHILL? AN EXTENSION OF STRATEGY AND STRUCTURAL DYNAMICS.

This article discusses a study which examined the relationship between strategy and structure for firms decreasing their level's product market diversification and structural differentiation. The results from the analyses suggest that the likelihood of a structural change is not impacted by a decrease in diversification. This runs contrary to the proposed relationship and suggests that firms may not alter their structures following a decrease in diversification. The authors suggest two explanations for this finding. First, it is generally assumed that firms diversify for economic reasons, and when these economic advantages fail to materialize, the firms divest themselves of previous acquisitions. Thus, if firms are efficiency seeking, this finding may indicate that some firms reduce diversification because they have previously been over-diversified. Previous literature suggests that high levels of diversification create inefficiencies, which then cause performance problems and future decreases in diversification. Second, contrary to economic justifications for diversification, various writers have suggested that managers are motivated to diversify their firm in order to maximize their own utility and not shareholder's utility.

Product-Market Diversity, Resource Deployment, and Performance

This paper develops a framework which suggests that the decision to diversify is influenced by four factors, viz., environmental, organizational, performance, and ownership. These factors influence the deployment of resources over a period thereby creating ‘specific assets’ that, in turn, along with these factors will determine the extent of diversification. The environmental factors like the rate of industrial growth and the level of industry concentration encourage the use of the enterprise's specific assets. The organizational variables such as top management attitudes, size of enterprise, age, etc., will determine the extent to which an enterprise shall use the specific assets within environmental constraints. Past performance representing organizational slack will also motivate and constrain the management's willingness to undertake diversification because this will determine the availability of resources to be allocated and invested over a period. Using this framework, this paper seeks to investigate the diversification trend in the pre-liberalization phase in India. Specifically, it addresses the following issues: What types of diversification strategy have the Indian enterprises been pursuing in the past? Did these strategies change over a period of time? What was the impact of these strategies on the performance of enterprises? To test the model, the author develops two measures of diversification: Wrigley's qualitative measure of product-market diversification and the entropy measure. The performance is measured by cash flow and return on assets (ROA), return on equity (ROE), and growth of sales (GRS). The empirical analysis is based on 336 private firms listed on the Bombay Stock Exchange of which more than 80 per cent are more than 25 years old with low marginal foreign equity. The extent of diversification of the firms at two different points of time-1977 and 1988-is measured. The results of the study indicate the following: Enterprises in India in the pre-liberalization period are dominated by single and dominant business categories. They have moved from specialization (single product market) to diversification. Performance-wise, specialized enterprises are found to be far ahead of diversified enterprises in terms of ROA and GRS. This paper explains the variation in performance among firms classified under different diversification categories using multiple regression technique. Both related and unrelated diversified categories show negative relationship with ROA. The impact of variables like industry, foreign equity, etc. on the firms' performance is measured through multiple regression method. The relationship between diversification and performance variables is isolated by controlling other variables. The impact of diversification on four industry groups is also analysed separately with ROA as a dependent variable. The results show that the performance is superior for firms in the food, chemical, and engineering industries. Similarly, the impact of foreign equity on performance is found to be positive and significant while capital intensity, R&D, technology import, etc. have negative relationship with ROA. The main conclusions of the paper are: Corporate strategy and its relationship with performance cannot be understood merely by relating diversification level to ROA. Diversification strategy in combination with industry, foreign equity, and firm- specific variables explains the performance significantly. To study diversification and its impact on performance, an industry focus study would be appropriate. Firm-specific variables are equally important along with industry-specific vari- ables to explain the variation in the performance of firms.

Strategic momentum: The effects of repetitive, positional, and contextual momentum on merger activity

AbstractThis paper defines and examines three types of strategic momentum. Repetitive momentum occurs when organizations repeat previous strategic actions. Postitional 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. Event‐history analysis of 262 large firms over a 29‐year period 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 results indicate that internal momentum can affect merger activity, and suggest the importance of continuing research on the role of inertia in organizational adaptation.

STRATEGIC MOMENTUM: THE EFFECTS OF PRODUCT DIVERSIFICATION, DECENTRALIZATION, AND HISTORY ON MERGER ACTIVITY.

This study examines strategic momentum in merger activity. The results suggest that, independently of other factors, prior mergers and organizational structure influence the probability of different types of mergers. Product market diversification was found to have no significant effect.

Product-Market Diversification and Market Power

This study examines relationships among diversification, market structure, and firm performance. Theory and empirical data are offered that argue that highly diversified firms have lower market pow...

Diversification and the Divisional Structure in Italy.

The strategy and structure of the 100 largest manufacturing firms in Italy over the 1950-1970 period are analyzed. Strategy is classified as to the degree of diversification: single, dominant, related, or unrelated business. Formal management structure (as distinct from legal form) is classified as functional, holding-company, or multi-divisional. Diversification and structure are classified as of 1950, 1960, and 1970. It was found that there has been widespread adoption of the strategy of product-market diversification, with considerable decline in the number of single business companies and a large increase in the number of diversified companies. As the prevalence of the strategy of diversification has grown, there has been increased adoption of the multi-divisional structure. The form, virtually absent in 1950 from the population studied, has been adopted by 48 per cent of the population in 1970. Companies in the drink, oil, paper, and power machinery industries exhibited little tendency to diversify beyond the dominant business category. Firms in the ceramics, chemical-pharmaceutical-toiletry, rubber, textile, electric-electronic, engineering, and printing-publishing industries tended to evolve into related business category. No clear tendency was observed for firms in the food, and metal and mineral industries. Variable financial rewards related to performance measures were absent in Italian multi-divisional companies.

A Model for Diversification

During the past few years, many interesting papers have been written on the subject of product-market diversification. A majority of the writers have dealt with either case histories of successful diversification or with qualitative check-off lists to be used in analyzing specific diversification opportunities. A much smaller group of papers has been devoted to formulation of a systematic approach which a company can use to compare alternative diversification decisions. This paper falls in the latter category. As a first step, diversification is defined and distinguished from other company growth alternatives. Typical growth perspectives are described which may motivate a company to diversify. Diversification objectives are established and related to the company's long-range objectives. A two-step evaluation scheme is proposed for selection of the preferred diversification strategy. The first is a qualitative step, which narrows a wide field of diversification opportunities to a selected few which are consistent with the company's diversification objectives and long-range policy. In the second step, a quantitative procedure is outlined for evaluating the relative profit potential of the selected alternatives. Finally, limitations of the present method are discussed.