Business relatedness and performance: a study of managerial perceptions

Understanding of business relatedness and performance effects is the foundation of any diversification decision, but we have limited knowledge of how managers consider relatedness. This study identified relatedness classes and performance effects using perceptual survey data from top industrial executives. Four classes with significant variable differences were found: high, technology, customer, and low relatedness. Technology relatedness had a strong positive performance effect and high relatedness had a negative effect. The findings confirm that perceptions are multidimensional, but may include five key factors rather than the previously identified attribute categories of product–markets, resources, and value chains. Contributions to diversification literature are discussed. Copyright © 2006 John Wiley & Sons, Ltd.     

Product diversification in international joint ventures: performance implications in an emerging market

This study extends product diversification research to a new organizational form (IJV) and a new environmental context (emerging market). It explores the extent to which product relatedness with both foreign and local parents affects IJV performance as perceived by venture managers. After controlling for relevant variables, analysis of the data containing 134 IJVs in China validates our major premise: the relatedness of an IJV's products with that of its foreign and local parents is positively associated with its performance. An IJV maintaining bilateral related diversification (i.e., with both parents) performs better than a venture maintaining a unilateral related linkage (i.e., with one parent), which in turn outperforms an IJV which is unrelated to either parent. When resource complementarity or goal congruity between parents is higher, there is a stronger positive relationship between product relatedness and IJV performance. When structural opportunities are fewer or institutional deterrence is higher, there is a weaker positive relationship between product relatedness and IJV performance. Copyright © 2002 John Wiley & Sons, Ltd.     

Business unit relatedness and performance: A look at the pulp and paper industry

Discussions of relatedness in the strategy literature concentrate on linkages among business units in terms of key business functions such as marketing and production. While much is known about relatedness from the standpoint of corporate diversification, evidence about the relationship between relatedness and performance at the business unit level has been notably lacking. To further our understanding of the benefits and costs of relatedness, this study examined the perspectives of business unit managers to assess: (1) how the relationship between the two primary types of relatedness–production and marketing–are emphasized at the business unit level, and (2) how these types of relatedness affect business unit performance.     

Digital Transformation Through Exploratory and Exploitative Internet of Things Innovations: The Impact of Family Management and Technological Diversification*

This study examines the impact of family management on digital transformation with specific regard to the firm’s development of Internet of Things (IoT) innovations. Drawing on the distinctive characteristics of firms with family managers, such as the focus on family‐centered noneconomic goals, long tenure, emotional ties to existing assets, and rigid mental models, it hypothesizes that increasing family involvement in the top management team is negatively related to the development of IoT innovations that are distant from a firm’s existing technology base (i.e., exploratory IoT innovations) compared to exploitative IoT innovations. Further, the study proposes that the firm’s degree of technological diversification, especially in unrelated forms, reinforces this relationship. The longitudinal analysis between 2002 and 2013 on a sample of publicly traded German firms allows us to test our hypotheses from the beginning of the emergence of the IoT concept. Our findings show that due to the particular characteristics of their managers, family‐managed firms do not welcome the risks related to exploratory IoT innovations, and the benefit of risk diversification from technological diversification is lower than the cost of abandoning family‐centered goals. As our results imply that the involvement of family managers constrains the development of exploratory IoT innovation, the top management team composition in firms that intend to be at the forefront of the digital transformation should be accurately designed by avoiding a high proportion of family members.     

The independent and joint effects of the skill and physical bases of relatedness in diversification

By examining the independent and joint effects of the skill and physical bases of relatedness, this study develops a multidimensional view of relatedness in diversification. The paper compares the ways the two bases identify relatedness, and examines empirically the relationship between relatedness and performance for a sample of 158 large diversified manufacturing firms. Each base of relatedness alone had no significant effect on financial performance. However, when the two approaches were combined, there was a strong positive effect on most indicators of performance. The findings demonstrate how different bases of relatedness complement and extend one another, and they clarify findings of previous studies that used a single base of relatedness. © 1998 John Wiley & Sons, Ltd.     

EQUIVOCAL INFORMATION AND ATTRIBUTION: AN INVESTIGATION OF PATTERNS OF MANAGERIAL SENSEMAKING

Organizational research has revealed ample evidence of self-serving attributional patterns in managerial sensemaking, but has not yet resolved whether actor–observer attributional effects also influence managers’ sensemaking tendencies. The primary purpose of this study was to investigate whether such actor–observer effects can be detected in managers’ interpretation of equivocal information. Results indicate that managers receiving equivocal information about the performance of an organization described as their own credited positive outcomes to organizational strengths and blamed negative outcomes on environmental threats. In contrast, managers receiving equivocal information about an organization described as managed by others associated positive outcomes with environmental opportunities and linked negative outcomes to organizational weaknesses. Both self-serving and actor–observer attributional patterns were thus detected. © 1997 by John Wiley & Sons, Ltd     

On the measurement of corporate diversification strategy: Evidence from large U.S. service firms

Actual, not potential, relatedness determines the results of diversification strategies. An external examination of a firm's businesses, products, markets and technologies permits an assessment of potential relatedness among its various businesses. Potential relatedness is, however, often not realized. Also, relatedness may be externally invisible. Hence, actual relatedness may diverge from externally measured potential relatedness. This paper provides evidence suggesting that measures of corporate diversification strategy based on internal data differ significantly from those based on externally available data.     

Knowledge relatedness and the performance of multibusiness firms

This study examines corporate performance effects of cross‐business knowledge synergies in multibusiness firms. It synthesizes the resource‐based view of diversification and the economic theory of complementarities to conceptualize cross‐business knowledge synergies in terms of the relatedness and the complementarity of knowledge resources across business units of the multibusiness firm. The study hypothesizes that corporate performance is improved when the firm simultaneously exploits a complementary set of related knowledge resources across its business units. In a sample of 303 multibusiness firms, the study finds that synergies arising from product knowledge relatedness, customer knowledge relatedness, or managerial knowledge relatedness do not improve corporate performance on their own. Synergies arising from the complementarity of the three types of knowledge relatedness significantly improve both market‐based and accounting‐based performance of the multibusiness corporation. Copyright © 2004 John Wiley & Sons, Ltd.     

Does corporate ownership structure affect its strategy towards diversification?

We claim that there is a link between corporate control structure and managers’ strategy towards unrelated mergers and risk diversification. Companies with greater ownership concentration are less diversified. Evidence also shows that corporate diversification generally results in value loss while focussing is value increasing. This highlights the potentially detrimental effect of agency problems on corporate strategy. Copyright © 1999 John Wiley & Sons, Ltd.     

Demand‐side strategy,relational advantage,and partner‐driven corporate scope: The case for client‐led diversification

Research Summary: We advance research on corporate diversification by joining insights from the demand‐side and relational views in strategy to offer a novel theory of client‐led diversification. We propose that client‐led diversification results from a combination of the customer‐driven opportunities emphasized in the demand‐side view and the creation of added value through relational assets that is a central tenet of the relational view. Furthermore, we hypothesize that suppliers’ client‐specific knowledge, clients’ relational commitment to suppliers, and growth opportunities in clients’ markets (relative to the suppliers’ own markets) will magnify the client‐led diversification effect. We test our hypotheses using a longitudinal dataset on patent law firms and their diversification into new domains of patent prosecution work for their corporate clients. Managerial Summary: Explanations of why firms diversify into new lines of business have largely concerned the redeployment of underutilized resources, with little regard to opportunities or influences stemming from firms’ existing customers. In our article, we show how the changing scope of business needs from a knowledge‐based supplier firm's set of existing clients is a central driver of supplier‐firm diversification, and this is especially the case when the level of relational assets shared between a supplier and its clients is higher. In a competitive landscape where suppliers compete intensively for the business of clients, our results show how managers can increase the likelihood of capturing additional business from its existing exchange relationships rather than bearing the risks of seeking new exchange relationships.     

Corporate-level influences on internal capital allocation: The role of financial analyst performance projections

Research contends that internal capital should be allocated in proportion to divisional performance, but scholars are often puzzled to find that managers do not adhere to this winner-picking approach. We argue this is because scholarship has not incorporated corporate-level factors that influence how corporate managers structure holistic capital allocation strategies. In this study, we build on the behavioral theory of the firm to focus on analyst performance projections for multidivisional corporations and how they inform corporate managers' allocation strategies. Specifically, we theorize corporate managers deviate from the winner-picking allocation approach owing to search-related behaviors stemming from projected performance below or above expectations. We further theorize about conditions that offer corporate managers opportunities to deviate from winner-picking, focusing particularly on multidivisional relatedness and asset durability.     

Diversification entry: Internal development versus acquisition

The economic theory of barriers to entry is integrated with the corporate strategy concept of relatedness, to develop a model of the choice between internal development and acquisition in diversification entry into new markets. The model is tested on original data collected for this study from PIMS Program participants. These original data cover the parent company characteristics, entry strategy and entry outcome for 59 entrants into 31 markets. These entry-related data are merged with existing PIMS data on the structure of the entered markets and their incumbents. Results of binary regression analysis show that the choice between the two entry modes is well explained by measures of barriers and relatedness. Higher barriers are more likely to be associated with acquisition entry. Greater relatedness is more likely to be associated with direct entry.     

The measurement of corporate portfolio strategy: analysis of the content validity of related diversification indexes

Measures developed for the analysis of corporate diversification have become fundamental to a broad range of strategy research. This paper examines the content validity of the two most widely used continuous measures of related diversification—the related component of the entropy index and the concentric index—and raises fundamental questions about their validity as indicators of portfolio relatedness. These questions are not driven by the use of SIC data for estimation of the indexes; they involve validity problems intrinsic to the construction of the measures. The related component of entropy and the concentric index are sensitive to features of corporate portfolio composition that may not be directly linked to portfolio relatedness. These sensitivities can create important ambiguities in strategy research. Copyright © 2002 John Wiley & Sons, Ltd.     

Skill relatedness and firm diversification

Because of the importance of human capital, a firm's choice of diversification targets will depend on whether these targets offer opportunities for leveraging existing human resources. We propose to quantify the similarity of different industries' human capital or skill requirements, that is, the industries' skill relatedness, by using information on cross‐industry labor flows. Labor flows among industries can be used to identify skill relatedness, because individuals changing jobs will likely remain in industries that value the skills associated with their previous work. Estimates show that firms are far more likely to diversify into industries that have ties to the firms' core activities in terms of our skill‐relatedness measure than into industries without such ties or into industries that are linked by value chain linkages or by classification‐based relatedness. Copyright © 2012 John Wiley & Sons, Ltd.     

Implementation strategy and performance outcomes in related diversification

Strategy research has a long‐standing interest in the performance consequences of corporate diversification. In theory, resource sharing should yield economic benefits in related multi‐business firms, but the extensive empirical research remains equivocal. To explore this paradox, this paper examines the process of implementing a related diversification strategy. Working from existing theory, a formal model is constructed that describes the process and performance implications of a related diversification move. The model is analyzed using computer simulation, and the analysis suggests that successful diversification strategies require managerial policies that maintain organization slack. In the absence of such policies, related diversification can negatively impact firm performance even when substantial synergy opportunities exist. The analysis also demonstrates, contrary to existing theory, that diversification strategies based on a very high degree of relatedness can lead to lower performance than less related strategies in some circumstances. Counter‐intuitively, extracting potential synergies may require additional investment in shared resources. Copyright © 2005 John Wiley & Sons, Ltd.     

Global diversification strategy and corporate profit performance

Based on a sample of 62 multinationals, this paper examines the impact of global diversification strategy on corporate profit performance by integrating the product and the international market dimensions of diversification. The results suggest that the corporate profit performance impact of related and unrelated diversification varies contingent upon the extent of a firm's international market diversification. One important lesson of this work is that both business strategy researchers and managers should review corporate diversification as having distinct yet interactive strategic dimensions—product and international market—and they would do well to recognize both the different and the joint effect of these dimensions on corporate profit performance.     

Economies of Scope,Resource Relatedness,and the Dynamics of Corporate Diversification

Research summary: The dominant view has been that businesses that are more related to each other are more often combined within diversified firms. This study uses a dynamic model to demonstrate that, with inter‐temporal economies of scope, diversified firms are more likely to combine moderately related businesses than the most‐related businesses. That effect occurs because strong relatedness reduces redeployment costs and makes firms redeploy all resources to better performing businesses. The strength of that effect depends on inducements for redeployment measured as the current return advantage of one business over another business, volatilities of business returns, and correlation of those returns. This study develops hypotheses for those relationships and suggests empirical operationalizations, encouraging empiricists to retest the implications of relatedness for the dynamics of corporate diversification. Managerial summary: It is believed that diversified firms are more likely to combine more‐related businesses because relatedness enables sharing of resources between businesses. Indeed, a firm can apply knowledge created in one business to another business, avoiding costly duplication in knowledge development. Resource sharing also adds value when a firm offers several products, adding the convenience of one‐stop shopping and charging higher prices. However, resource sharing is not the only motivation for corporate diversification. In environments where profitability of businesses changes frequently, firms diversify by redeploying part of resources from an underperforming business to a better performing business. This study uses a dynamic model to demonstrate that, with that second motivation for corporate diversification, firms end up combining moderately related businesses rather than the most‐related businesses. Copyright © 2017 John Wiley & Sons, Ltd.     

The continuing validity of the strategy‐structure nexus: new findings, 1993–2003

This study analyzes whether a diversification strategy facilitates subsequent divisionalization (and hence that ‘structure follows strategy’), and/or whether the multidivisional structure leads to a diversification strategy (and hence that ‘strategy follows structure’). In theoretical terms, this study is original in that it institutes a debate between the Chandler thesis and other perspectives that challenge the generalizability of the strategy‐structure nexus. Interestingly, this new study with contemporaneous data for the period 1993–2003 sheds light on this contested issue and postulates that despite the criticism of Chandler's contribution, it still works. Our results show that strategic diversification affects structural divisionalization, and in turn, structural divisionalization affects strategic diversification. Copyright © 2009 John Wiley & Sons, Ltd.     

EVIDENCE OF EARNINGS MANAGEMENT FROM THE MEASUREMENT OF THE DEFERRED TAX ALLOWANCE ACCOUNT

Positive accounting literature has provided empirical evidence regarding firms' characteristics that cause their managers to make particular accounting decisions. The purpose of this study is to extend this line of research to the area of accounting for income taxes. The research is designed to identify accounting choice variables that influence managers' decisions to change the level of the deferred tax asset valuation allowance under SFAS No. 109. Specifically, the study presents an empirical examination of whether managerial discretion over the valuation allowance appears to be used for earnings management purposes. Evidence of earnings management motivations can provide insights into whether it is an appropriate accounting policy to give management considerable discretion to choose the level of the valuation allowance.     

FOREIGN EXPERIENCE OF TOP MANAGEMENT TEAMS AND INTERNATIONAL DIVERSIFICATION STRATEGIES OF U.S. MULTINATIONAL CORPORATIONS

This paper extends upper echelon theory to the international business arena and tests the hypothesis that the foreign experience of top management team (TMT) members is associated with international diversification strategies. Regression analyses indicate that TMTs with a higher mean, greater heterogeneity, and a higher proportion of managers with foreign experience in 54 U.S. multinational corporations were significantly associated with the firm's international involvement.