Diversification, Industry Dynamism, and Economic Performance: The Impact of Dynamic-related Diversification on the Multi-business Firm

365 Pages·2014·2.319 MB·English

by  Matthias Knecht (auth.)

Diversifi cation, Industry Dynamism,
and Economic Performance
Matthias Knecht

Diversifi cation, Industry
Dynamism, and
Economic Performance
The Impact of
Dynamic-related Diversifi cation
on the Multi-business Firm
Matthias Knecht
Universität Erlangen-Nürnberg
Erlangen, Germany

Dissertation Universität Erlangen-Nürnberg, 2013
ISBN 978-3-658-02676-9 ISBN 978-3-658-02677-6 (eBook)
DOI 10.1007/978-3-658-02677-6
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For Lena
FOREWORD
With the rise of diversified conglomerates in the 1960s corporate diversification has become a
central element in the strategist’s toolbox as a means to boost growth, enter into new markets,
or acquire technology and intellectual property. Today diversified corporations command
significant market share across virtually all industries and play an important role in economic
activity. Yet, since adding value to a diverse set of businesses often proves difficult, corporate
top management faces a crucial question: how to diversify? While most academics stand firm
in the widely-held belief that related diversification can improve firm performance, empirical
results are mixed. This is partly due to the limitation that most prior research narrowly focuses
on explaining the diversification-performance linkage through the traditional lens of synergies
based on product/market-relatedness; alternative perspectives that could provide a more
comprehensive understanding tend to be sidelined.
In his doctoral thesis Matthias Knecht examines today’s turbulent economic environments
and identifies industry dynamism as a major factor influencing the multi-business firm. Based
on the resource-based school of thought and the dynamic capabilities view Knecht
systematically analyzes the impact of dynamic environments on the organization and explains
in detail how combining businesses from similarly dynamic industries can result in superior
economic performance. Through his work on corporate diversification and dynamic
environments he is able to integrate for the first time these two highly relevant streams of the
strategic management literature.
The first empirical part of this work develops a comprehensive, theoretically-grounded
methodology to measure industry dynamism along multiple dimensions. Using a global
dataset of unprecedented breadth and depth, Knecht is able to comprehensively measure and
interpret the dynamism of a wide range of industries. The second empirical part of the project
develops two unique methods to quantify dynamic-relatedness in order to address the effect of
dynamic-related diversification on performance. Based on his innovative conceptual work
Knecht is able to provide empirical proof that dynamic-relatedness contributes significantly to
firm performance.
This dissertation is a cornerstone in advancing our knowledge about successful corporate
diversification. It makes important contributions to theory development by opening up a new
perspective on relatedness and should be seen as a highly valuable contribution to ongoing
research in the field of corporate diversification.
Professor Dr. Harald Hungenberg
VII
ACKNOWLEDGMENTS
The writing of this dissertation has been one of the most significant academic challenges I
have ever had to face. It is the product of a journey that demanded sacrifice, discipline, and
compromise, yet it has also been one of the most rewarding experiences of my life. Though
this dissertation is an individual work, it never would have been possible without the support,
guidance, and inspiration of so many people around me. It is to them that I owe my deepest
gratitude.
I owe special thanks to Professor Harald Hungenberg who took on the role of doctoral advisor
with passion and dedication despite his many other academic and professional commitments.
His deep knowledge in the field of strategic management is a constant source of inspiration,
and his openness creates an inclusive work environment that has been a great pleasure to be
part of. I am also highly indebted to Professor Kathryn R. Harrigan for her generous invitation
to continue my research at Columbia Business School in New York. It was a exceptional
privilege to benefit from her extensive experience and from her insightful challenges to my
ideas. I will always cherish the openness and academic caliber of the vibrant community at
Columbia University, which supported and substantially improved the quality of my
dissertation. I moreover owe sincere gratitude to my supervisor Dr. Martin Weiss for his
invaluable input and strong commitment to my research. He coached me from the start and
provided suggestions that were instrumental to overcoming the challenges I encountered
during the process. Furthermore, it gives me great pleasure to acknowledge the support of my
friend and fellow doctoral candidate Frank Freund. I will never forget the countless nights we
spent problem solving on flip charts or the hours on the phone bouncing ideas and challenging
findings. I am truly indebted and thankful to Frank on the professional level as a sparring
partner and on the personal level as a motivator, supporter, and friend during the ups and
downs of the dissertation. I could not have wished for a better companion on this journey.
I am also very grateful to my employer McKinsey & Company for the opportunity to pursue
this research and for their material support of my dissertation. Furthermore, I would like to
express my deepest gratitude to the Foundation of German Business (Stiftung der Deutschen
Wirtschaft, SDW) for awarding me a PhD scholarship and for granting financial support
during my time at Columbia Business School.

IX
Finally, I would like to thank my parents and my brother for their unconditional support and
encouragement throughout the dissertation. Moreover, I will be forever indebted to my wife
Lena for her constant support and encouragement throughout this academic endeavor. I thank
her for unyielding devotion and love, selfless patience, and the freedom she gave me that
allowed me to focus. None of this would have been possible without the love and patience of
my family.
Dr. Matthias Knecht

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CONTENTS
FOREWORD ................................................................................................................. VII
ACKNOWLEDGMENTS .................................................................................................. IX
CONTENTS .................................................................................................................... XI
LIST OF FIGURES ..................................................................................................... XVII
LIST OF TABLES ........................................................................................................ XIX
LIST OF ABBREVIATIONS .......................................................................................... XXI
1 INTRODUCTION ....................................................................................................... 1
1.1 Problem Definition ................................................................................................... 1
1.2 Research Gap and Motivation ................................................................................ 3
1.2.1 Diversification, Relatedness, and Performance .................................................. 3
1.2.2 The Dynamism of Industries .............................................................................. 5
1.3 Research Question .................................................................................................... 6
1.3.1 Industry Dynamism ............................................................................................ 7
1.3.2 Corporate Diversification ................................................................................... 8
1.3.3 Method of Reasoning ....................................................................................... 10
1.4 Dissertation Outline ............................................................................................... 11
2 THEORETICAL BACKGROUND.............................................................................. 14
2.1 Guiding Theories in Strategic Management ........................................................ 14
2.1.1 Market-based View .......................................................................................... 15
2.1.2 Resource-based View ....................................................................................... 19
2.1.3 Dynamic Capabilities View ............................................................................. 24
2.2 Terminology ............................................................................................................ 28
2.2.1 Resources ......................................................................................................... 29
2.2.2 Capabilities and Competencies ........................................................................ 30
2.2.3 Dynamic Capabilities ....................................................................................... 32
2.2.4 Rents ................................................................................................................. 35
2.3 The Environment of the Firm ............................................................................... 37
2.3.1 Definition of the Macro Environment .............................................................. 38
XI
2.3.2 Definition of the Task Environment ................................................................. 39
2.3.3 Dimensions of the Environment ....................................................................... 40
2.3.3.1 Munificence .................................................................................................. 41
2.3.3.2 Complexity ................................................................................................... 42
2.3.3.3 Dynamism .................................................................................................... 44
3 CORPORATE DIVERSIFICATION ........................................................................... 47
3.1 Corporate Diversification: An Introduction ........................................................ 47
3.1.1 Definition of Diversification ............................................................................ 47
3.1.1.1 Related and Unrelated Diversification ......................................................... 49
3.1.1.2 Horizontal, vertical, and conglomerate diversification ................................ 50
3.1.1.3 Domestic and international diversification .................................................. 51
3.1.2 A Process Perspective on Diversification ........................................................ 52
3.1.3 A Status Perspective on Diversification ........................................................... 53
3.1.4 Perspective on Corporate Diversification in this Research .............................. 54
3.2 Motives for Diversification .................................................................................... 55
3.2.1 Synergies .......................................................................................................... 56
3.2.2 Agency Theory ................................................................................................. 59
3.2.3 Market Power ................................................................................................... 60
3.2.4 Risk Reduction ................................................................................................. 62
3.2.5 Transaction Costs ............................................................................................. 64
3.3 Limits and Costs of Diversification ....................................................................... 66
3.3.1 Implementation Costs ....................................................................................... 66
3.3.2 Complexity and Coordination Costs ................................................................ 67
3.3.3 Limited Cognitive Capacity ............................................................................. 68
3.4 Diversification and Economic Performance ........................................................ 70
3.4.1 Substitutability vs. Complementarity ............................................................... 71
3.4.2 Relatedness and the Realization of Synergies .................................................. 73
3.4.3 Operational Relatedness ................................................................................... 74
3.4.4 Strategic Relatedness ........................................................................................ 75
3.4.5 Relatedness as a Multidimensional Construct .................................................. 77
3.5 The Diversification-Performance Puzzle ............................................................. 78
3.5.1 State of Research on the Diversification-Performance Linkage ...................... 78
3.5.2 Methodological Considerations ........................................................................ 85
3.6 Interim Conclusion ................................................................................................. 88
4 INDUSTRY DYNAMISM .......................................................................................... 90
4.1 Industry Dynamism: An Introduction ................................................................. 90
4.1.1 The Concept of Dynamism .............................................................................. 90
4.1.2 Understanding Dynamism: A Growing Confusion .......................................... 92
XII