Corporate diversification and the value of individual firms: A Bayesian approach

Research summary: Prior theory suggests that the performance effects of a firm's diversification strategy depend on a firm's individual resources and capabilities and the setting within which it is operating. However, prior tests of this theory have examined the average diversification‐performance relationship across all firms, instead of estimating the diversification‐performance relationship at the individual firm level. Efforts to estimate this average relationship are inconsistent with a central assumption of much of strategic management theory—that firms maximize value by choosing strategies that exploit their heterogeneous resources and individual situation. By adopting an approach that allows an evaluation of the diversification‐performance relationship for individual firms, this article shows that firms, both focused and diversified, tend to choose that diversification strategy—focus, related diversification, or unrelated diversification—that maximizes value. Managerial summary: Instead of a universal diversification discount or premium, this article shows that the effect of diversification on performance is heterogeneously distributed across firms and that firms tend to be rational in their diversification decisions. Copyright © 2015 John Wiley & Sons, Ltd.     

Outward foreign direct investment by emerging market firms: A resource dependence logic

This study examines and extends the resource dependence logic of diversification for a better understanding of outward foreign direct investment (OFDI) activities by emerging market firms. We contend that the diversification logic is bounded by state ownership, an important but less considered component of interdependence. Our empirical results, based on panel data analysis of Chinese listed firms, suggest that the level of interdependence between Chinese and foreign firms in China in multiple forms, including symbiotic, competitive, and partner interdependencies, is positively associated with the level of the Chinese firms' OFDI activities. However, Chinese firms with higher levels of state ownership are less susceptible to the pressures imposed by foreign firms to invest abroad. Copyright © 2013 John Wiley & Sons, Ltd.     

Resource relatedness and the mode of entry into new businesses: Internal resource accumulation vs. access by collaborative arrangement

When firms seek to enter a new business segment, they have to decide how to best gain access to the required resources. This paper analyzes how resource relatedness influences a firm's decision between internal development and collaborative arrangement as modes of entry. We distinguish between a firm's capacity to transfer its established resources to the new segment (resource transferability) and the integration and synergistic combination of current firm resources with target segment resources in day‐to‐day operations (resource complementarity). Resource transferability makes entry by internal development more likely, but this effect depends on segment characteristics. Synergies from complementary resources can be exploited more easily within firm boundaries than across an alliance interface. However, certain partner characteristics can substitute in part for belonging to the same firm. Copyright © 2014 John Wiley & Sons, Ltd.     

Ecological uncertainty,adaptation, and mitigation in the U.S. ski resort industry: Managing resource dependence and institutional pressures

We draw on resource dependence and institutional theories to study how firms manage uncertainty in nature (ecological uncertainty) in the U.S. ski resort industry. Through resource dependence theory, we develop the concept of ecological uncertainty and explain its effects on firms' access to and management of natural resources. We then predict that firms adapt to ecological uncertainty with natural‐resource‐intensive practices, as well as practices that attempt to mitigate its underlying causes. Using institutional theory, we also predict that environmental expectations moderate these responses. Our results indicate that firms did manage ecological uncertainty by adopting natural‐resource‐intensive practices, but not mitigation practices. They also show that stronger environmental expectations constrained firms from adopting natural‐resource‐intensive practices and promoted their adoption of mitigation practices in response to ecological uncertainty. Copyright © 2015 John Wiley & Sons, Ltd.     

Interindustry merger patterns and resource dependence: a replication and extension of Pfeffer (1972)

This paper reexamines Pfeffer’s (1972) classic study on interindustry merger patterns by replicating and then extending his findings. Pfeffer argued and found that resource dependencies, as measured by interindustry economic transactions, explained merger patterns. The replication investigates how robust the resource dependence explanation for interindustry mergers is when more precise methods are applied to a data set that essentially recreates Pfeffer’s. The extension examines the strength of the resouce dependence effect over time, and offers hypotheses that seek to explain both longitudinal and cross-sectional variation in the strength of this effect. Results indicate that while the significance of the resource dependence effect is once again observed, after applying more refined analytical methods to the data the explanatory power of resource dependence is greatly diminished. In addition, variation in the strength of the resource dependence effect suggests some boundary conditions for the theory, at least with respect to its ability to predict interindustry mergers. © 1997 John Wiley & Sons, Ltd.     

A bargaining perspective on resource advantage

Whereas prices serve to allocate many resources in market economies, there remain vast reservoirs of unpriced resources to be managed. Business management and strategy concerns the creation, evaluation, manipulation, administration, and deployment of unpriced specialized scarce resource combinations. This paper applies the formalism of cooperative game theory to these concerns. In cooperative game theory, rents appear as the negotiated payments for the services of scarce valuable resources. The division of surplus is determined by the relative values created by different use combinations of resources. Within this framework, the strategy problem is clearly seen as one of discovering or estimating the value of various resource combinations. New wealth can be created by trade in resources as long as there are hitherto unexamined combinations. Copyright © 2003 John Wiley & Sons, Ltd.     

The paradox of resource vulnerability: Considerations for organizational curatorship

Resource‐based scholars have focused on the properties of resources and the isolating mechanisms that sustain their rents in the face of competition. Unfortunately, they have devoted far less attention to the sources of vulnerability of many of these resources. We argue that, paradoxically, sources of rent such as isolating mechanisms often have a dark side that renders resources more vulnerable. We highlight three categories of challenges to managing resource vulnerability—protecting them from erosion, coping with their ambiguity, and preserving their required alignment—and identify sources of vulnerability within each. We address these via three primary functions of curatorship: preservation, connoisseurship, and orchestration, respectively. Copyright © 2013 John Wiley & Sons, Ltd.     

Why strategic factor markets matter: “New” multinationals' geographic diversification and firm profitability

This study examines firm profitability differences among “new” multinational enterprises (NMNEs) pursuing geographic diversification into two distinct types of geographic locations based on the development of strategic factor markets. Building on strategic factor markets theory, we propose that firm‐specific advantages of NMNEs contribute differentially to firm profitability because they evolve differently given strategic factor market differences in host compared to home countries. Using a sample of Korean manufacturing MNEs during the 1993–2003 period, we find that geographic diversification into resource‐poorer host countries has a positive relationship with firm profitability, whereas geographic diversification into resource‐richer host countries has a U‐shaped relationship with firm profitability. Our study demonstrates why strategic factor markets—an important and often overlooked contextual factor—matter in exploring rationales for geographic diversification. Copyright © 2014 John Wiley & Sons, Ltd.     

Mutual dependence,partner substitutability,and repeated partnership: the survival of cross‐border alliances

Drawing on the resource dependence perspective, this study suggests that alliance survival is an adaptive response to both environmental dependence and partner dependence independently and jointly. Based on a sample of cross‐border alliances formed and terminated by local and foreign firms in a longitudinal setting, the results suggest that the mutual trade dependence between a home country and a host country is positively related to the survival of cross‐border alliances in the host country. Whereas partner substitutability reduces the probability of alliance survival, repeated partnership increases the probability. Moreover, mutual trade dependence reduces the negative effect of partner substitutability on alliance survival. The findings support the idea that resource dependence theory provides an important framework for the study of cross‐border alliances. Copyright © 2010 John Wiley & Sons, Ltd.     

The performance implications of resource and pay dispersion: The case of Major League Baseball

Research summary: Building on research in strategic management that has found that high levels of pay dispersion are detrimental to firm performance; we examine the potential dependence of those findings on similar dispersion in the latent potential of those resources to contribute to performance. We find that congruence between resource value dispersion and pay dispersion is positively related to organizational performance. Additionally, we find that this congruence moderates the effects of both organizational resources and organizational pay levels on organizational performance. These findings contribute to a growing line of research that explores the implications of key human resource value and pay combinations for organizational performance. Managerial summary: While differences in income between key employees (i.e., dispersed pay) can instill feelings of inequity and be detrimental to organizational performance, such differences may also increase the odds of attracting star talent and help performance. In the context of Major League Baseball (MLB), we find that performance improves when dispersions in pay are congruent with the dispersion in the contributions that team members make to their organizations. We also find that the positive effects on performance of higher total pay and of level of organizational talent are enhanced by congruent pay and contribution dispersions. These findings suggest organizations may benefit from consistent dispersions in pay and talent and that important contributions by key organizational members need to be visible when organizations have dispersed pay structures. Copyright © 2016 John Wiley & Sons, Ltd.     

Firms' technological resources and the performance effects of diversification: a longitudinal study

While agency theory claims managerial self‐interest creates a diversification discount, strategic theory explains that firms with certain kinds of resources should diversify. Longitudinal data on 227 firms that diversify between 1980 and 1992 reveal that the sample firms invest less in R&D and have greater breadth of technology (based on patent citations) than their industry peers prior to the diversification event. Also, acquiring firms may appear to have lower performance because of accounting conventions and because firms that use internal growth rather than acquisition pursue less extensive diversification. These findings help explain how diversification and financial performance are endogenous. Copyright © 2004 John Wiley & Sons, Ltd.     

Marketing and technology resource complementarity: an analysis of their interaction effect in two environmental contexts

The dynamic capabilities perspective posits that a firm can leverage the performance impact of existing resources through resource configuration, complementarity, and integration, but little empirical research addresses these issues. We investigate the effects on performance of marketing capabilities, technological capabilities, and their complementarity (interaction), and whether these effects are moderated by low vs. high technological turbulence. Results from SEM two‐group analyses (with controls) show that both main effects positively impact performance in both environmental contexts. However, (1) their interaction effect is significant only in the high‐turbulence environment; (2) the marketing‐related main effect is lower in the high‐turbulence environment; and (3) the main effects of technology‐related capabilities are the same in both environments. Our research suggests that the synergistic performance impact of complementary capabilities can be substantive in particular environmental contexts: while synergistic rents cannot always be obtained, it is possible to leverage existing resources through complementarity. Copyright © 2005 John Wiley & Sons, Ltd.     

The implementation and structuring of divestitures: the unit's perspective

Existing literature on value creation of divestitures focuses on their antecedents, typically relating them to the parent company's financial performance. Whether and how divestitures can create value for the divested unit remains unclear. This paper presents an exploratory study based on multiple cases, to examine which factors of the implementation and structuring of a divestiture may increase the performance of a divested unit. The emergent granular framework consists of previously unreported aspects of the divesting process and provides new insights into divestitures and their outcomes. Results indicate that antecedents alone may be insufficient for understanding the outcomes of divestitures. Different combinations of understanding of the rationale for the divestiture and perceived capabilities in the divesting process affect perceptions of divestiture feasibility. Sense of opportunity emerges as the key element of the divesting process for the success of divested units. Factors that participate with sense of opportunity in determining the success of divested units are further considered in the theoretical framework. Copyright © 2010 John Wiley & Sons, Ltd.     

Resolving a dilemma of signaling bankrupt‐firm emergence: A dynamic integrative view

Research summary : Predicting the emergence of bankrupt firms relying on firm signals involves a stigma‐related dilemma. On the one hand, bankrupt firms tend to send positive signals through restructuring to decouple themselves from the stigma of bankruptcy. On the other hand, the preexistence of the bankruptcy stigma may reduce the signaling effectiveness of firms' restructuring efforts, making the outcome prediction difficult. We address this dilemma by developing a dynamic integrative view to extend signaling theory, arguing that subsequent signals from key external stakeholders can effectively help evaluate bankrupt firms' quality and reduce the ambiguity in interpreting firms' restructuring signals. Using a sample of U.S. public bankrupt firms under Chapter 11 reorganization, we find evidence supporting the argument. Managerial summary : Applications of signaling theory to predict reorganization outcomes are in their infancy. The dynamic integrative framework developed in this study is useful in identifying different types of signals and predicting outcomes of firms in crisis. The results of this study can be useful for various decision makers to predict the turnaround potential of bankrupt firms. Our results show that an increase in alliance partners, institutional investors, and securities analysts following a bankrupt firm predicts the firm's reorganization outcome. Moreover, firms that are able to gain positive attention from key stakeholders will also gain positive interpretations of their strategic efforts. Signals from alliance partners and institutional investors amplify the signaling effect of a firm's de‐diversification effort in predicting its reorganization outcome. Copyright © 2015 John Wiley & Sons, Ltd.     

The impact of modes of entry and resource fit on modes of exit by multibusiness firms

This study examines the choices of modes of entry and exit in the process of new business exploration. We find that exit mode choices are determined by a different set of factors from those that are important for the entry mode decision and the exit decision per se. Our study indicates that when the resource profiles of a parent firm and the business unit are more dissimilar, and there has been less development of firm‐specific idiosyncratic assets, firms are more likely to sell businesses than dissolve them. Further, the study reports a strong relationship between the mode of exit from a line of business (sell‐off vs. dissolution) and the original mode of entry (acquisition versus internal development). Copyright © 1999 John Wiley & Sons, Ltd.     

Financial resource availability and corporate social responsibility expenditures in a sub‐Saharan economy: The institutional difference hypothesis

Studies done in developed economies have demonstrated a positive relationship between financial resource availability and CSR. Arguments that we term the Institutional Difference Hypothesis (IDH) drawn from the institutional literature, however, suggest that institutional differences between developed and developing economies are likely to result in different CSR implications. Integrating the logic of IDH with insights from slack resources theory, we argue that there exists a negative relationship between financial resource availability and CSR expenditures for firms in Ghana, a sub‐Saharan African emerging economy. We use lagged data from the Ghana Investment Promotion Centre and find that Return on Sales, Return on Equity, and Net Profitability were consistently associated with lower CSR expenditures. We highlight the implications of our findings for research and managers. Copyright © 2013 John Wiley & Sons, Ltd.     

A rational‐expectations revision of Makadok's resource/capability synthesis

Makadok has recently developed a mathematical model aimed at synthesizing the resource‐based and dynamic‐capabilities views of the rent creation process. One unstated implicit assumption in that model is that each bidding firm in the resource market is ignorant not only of the content of rival firms' private information, but also of the quality (i.e., the noisiness or reliability) of that information. Consequently, that model does not qualify as a rational‐expectations Bayesian Nash equilibrium—a fact that both generates questionable results (e.g., the possibility of negative expected profits) and impedes any effort to extend the model. The rational‐expectations critique in economics points out that this sort of nonrational assumption becomes increasingly implausible as economic actors learn more about each other's patterns over time through repeated interactions (in this case, as bidders repeatedly compete against each other to buy different resources over time). So, over the long run, the only truly stable, viable, and robust assumption would be rational‐expectations behavior. The primary purpose of this paper is to put Makadok's model on the firmer methodological footing of rational‐expectations Bayesian Nash equilibrium, so that it will no longer generate questionable results, and so that future researchers can more easily extend it. The secondary purpose of this paper is to demonstrate that this shift to rational‐expectations assumptions has little substantive impact on the testable hypotheses generated by Makadok's original model. Copyright © 2002 John Wiley & Sons, Ltd.     

Contingencies within dynamic managerial capabilities: interdependent effects of resource investment and deployment on firm performance

Dynamic managerial capabilities focus on managers' resource‐related decisions. Asset orchestration, a central component of dynamic managerial capabilities and of resource management, highlights the importance of integrating (matching) resource investment and deployment decisions. Building on these recent theoretical advances, we examine the contingent nature of resource investment and deployment decisions. The results, based on a sample of banking firms, indicate that firm performance suffers when managers' investment decisions deviate from the norms of rivals for both human and physical capital. However, when deployment decisions support investment decisions, greater investment deviation, both high and low, generally enhances performance. Specifically, firm performance is optimized by making congruent resource investment and deployment decisions as opposed to maximizing or economizing either decision independently. Therefore, resource management via asset orchestration is vital for superior performance. Copyright © 2009 John Wiley & Sons, Ltd.     

The effect of within‐industry diversification on firm performance: synergy creation,multi‐market contact and market structuration

This paper examines the effect of diversification upon intra‐industry performance. We propose that intra‐industry diversification promises three sets of benefits, which, separately and in combination, provide firms with a competitive advantage: synergies arising from economies of scope; premiums from mutual forbearance enabled by multi‐market competition; and efficiencies derived from market structuration. The additive and integrative effects of the first two have not been explored. The benefits of market structuration remain untheorized and thus untested. The test of our theoretical model in the Canadian general insurance industry indicates that mutual forbearance provides advantage under specified conditions, that market structuration also provides advantages, but that diversification per se does not. Copyright © 2004 John Wiley & Sons, Ltd.