Frithjof Pils Diversification, Relatedness, and Performance

Frithjof Pils Diversification, Relatedness, and Performance

GABLER EDITION WISSENSCHAFT

Frithjof Pils Diversification, Relatedness, and Performance With a Foreword by Prof. Dr. Andreas Bausch GABLER EDITION WISSENSCHAFT

Bibliographic information published by the Deutsche Nationalbibliothek The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data are available in the Internet at http://dnb.d-nb.de. Dissertation Jacobs University Bremen, 2008 1 st Edition 2009 All rights reserved Gabler GWV Fachverlage GmbH, Wiesbaden 2009 Editorial Office: Frauke Schindler / Anita Wilke Gabler is part of the specialist publishing group Springer Science+Business Media. www.gabler.de No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the copyright holder. Registered and/or industrial names, trade names, trade descriptions etc. cited in this publication are part of the law for trade-mark protection and may not be used free in any form or by any means even if this is not specifically marked. Cover design: Regine Zimmer, Dipl.-Designerin, Frankfurt/Main Printed on acid-free paper Printed in Germany ISBN 978-3-8349-1404-0

Foreword A large body of business strategy literature examines the relationship between (product) diversification and firm performance. From a conceptual point of view, increasing levels of diversification should have positive effects on firm performance, particularly due to economies of scope and scale, market power influence, and risk reduction. At the same time, diversifiers have to cope with substantial negative effects associated with increasing complexity. Unsurprisingly, the results of extensive empirical analyses of diversification effects on performance are somewhat contradictory. Against this background, Frithjof Pils answers two central research questions: First, what overall relationship exists between diversification strategies and firm performance? Secondly, what newly developed indicators of business relatedness can add to the understanding of the performance implications of diversification strategies? Frithjof Pils chooses a topic which is of high practical relevance since the decision in which businesses a firm wants to be in is at the core of corporate strategy. His research objectives are well developed based on a sound description of the current research status. The empirical approaches applied reflect a suitable research design in order to answer the research questions at hand. The combination of narrative review, metaanalysis and primary empirical research indicates the wide range of the author s methodological knowledge. Overall, the author significantly contributes with this thesis to a comprehensive understanding of the drivers that influence the success of diversification strategies and of those that are of less relevance. The different empirical studies are based on sound theoretical analyses and argumentations. Furthermore, the conclusions the author draws add perceptibly to the existing body of knowledge in the research field of corporate strategy. Thereby, the study does not only inform a broad readership about a central topic but also offers the expert new insights. The results may thus have important implications for future research and theory building. Prof. Dr. Andreas Bausch

Preface The dissertation at hand results from the research that I have done as a doctoral student at the Department of Strategic Management and Controlling at Jacobs University Bremen. The dissertation is of cumulative nature. It comprises three consecutive papers all of which were accepted for presentation at the Annual International Conference of the Strategic Management Society (SMS) during the period 2006-2008. The 2008 paper has been nominated for the SMS Best Conference Paper Award. I would like to use the occasion and express my gratitude to a number of people who have supported me throughout the process of completing this work. My thesis supervisor and academic mentor, Professor Andreas Bausch, created a peerless environment for developing academic talent at Jacobs University. I appreciate the mix of guidance and empowerment that characterizes his leadership. I thank him for his personal support and how he paved the way for what is yet to come. Also, I would like to thank Professor Adalbert FX Wilhelm and Professor Hans H. Hinterhuber for very fruitful discussions and for reviewing the dissertation. At the same time, I am indebted to my colleagues and fellow Ph.D. students at Jacobs University. Not least, I owe thanks to Professor Birgitta Wolff and Professor Rulzion Rattray for shaping my initial academic work. Finally, special thanks go to my family who facilitated this education in the first place and to Duc Linh Van Tri for her invaluable support. I dedicate my dissertation to Gretchen and Margret. Frithjof Pils

Table of Contents List of Tables...XI List of Figures... XIII List of Abbreviations... XV 1 Research Problems, Objectives, and Structure... 1 2 Meta-Analysis on the Relationship between Diversification and Performance... 9 2.1 The Construct Product Diversification (Strategy)... 9 2.2 Empirical Measures of Product Diversification (Strategy)... 11 2.3 The Construct Performance... 20 2.4 Theory on Product Diversification as a Cause of Performance... 22 2.5 Evidence on Product Diversification as a Cause of Performance... 25 2.6 Overall Meta-Analytic Proceeding... 37 2.6.1 Meta-Analytic Methods... 38 2.6.2 Testing Contingency Variables: Hedges/Olkin versus Hunter/Schmidt... 38 2.6.3 Technical Integration Model... 40 2.6.4 Sampling... 42 2.6.5 Coding... 46 2.7 Meta-Analytic Results... 47 2.8 Discussion... 57 2.9 Intermediate Conclusion... 60

X Table of Contents 3 Types of Operational Relatedness, Core Business Industry, and Performance... 63 3.1 Theory and Hypotheses... 65 3.2 Methods... 71 3.2.1 Sample... 72 3.2.2 Variables... 73 3.3 Regression and T-Test Results... 81 3.4 Discussion... 97 3.5 Intermediate Conclusion... 105 4 A Two-Factor Model of Operational Relatedness and Strategic Relatedness... 107 4.1 Theory and Hypotheses... 109 4.2 Methods... 118 4.2.1 Structural Equation Modeling... 118 4.2.2 Variables... 119 4.3 Structural Equations Results... 124 4.4 Discussion... 136 4.5 Intermediate Conclusion... 143 5 Summary... 145 Limitations and Some ex post Remarks on Meta-Analysis... 157 Bibliography... 161 Appendices... 193

List of Tables Table 2.1 Studies included in the Meta-Analyses... 45 Table 2.2 Hedges/Olkin-based Weighted Regression of Accounting-based Correlations onto Contingency-Variables. 50 Table 2.3 Hedges/Olkin-based Weighted Regression of Market-based Correlations onto Contingency-Variables... 51 Table 2.4 Hunter/Schmidt-based Weighted Integration of Diversification- Performance Correlations and Hierarchical Breakdown. 55 Table 3.1 Descriptive Statistics and Correlation Matrix: Pooled Sample... 84 Table 3.2 Portfolio Characteristics: Pooled Sample 86 Table 3.3 Portfolio Characteristics: Food Industry. 87 Table 3.4 Portfolio Characteristics: Chemicals Industry. 88 Table 3.5 Portfolio Characteristics: Pharmaceuticals Industry 89 Table 3.6 Portfolio Characteristics: Personal Care Industry... 90

XII Table 3.7 List of Tables Portfolio Characteristics: Computers Industry 91 Table 3.8 Portfolio Characteristics: Electronics Industry 92 Table 3.9 Portfolio Characteristics: Automotive Industry.. 93 Table 3.10 Absolute Excess Values in Seven Core Business Industries... 96 Table 3.11 Empirical Results in Comparison: Linkage between Types of Relatedness and between Types of Relatedness and Performance.. 99 Table 4.1 Descriptive Statistics and Correlations of Structural Equations.. 126 Table 4.2 Factor Loadings: Measurement Model and Final Model 127 Table 4.3 Model Statistics... 131 Table 4.4 Testing Sequence and Model Difference Tests... 132 Table 4.5 Structural Modeling Results Comparing Hypotheses Tests for the Theoretical and Final Model... 135

List of Figures Figure 2.1 Diversification Strategies defined in terms of the Specialization Ratio and the Related Ratio. 15 Figure 2.2 Heuristic Logic of the Overall Goal of Diversification Strategy... 22 Figure 2.3 Classification of Empirical Evidence from Individual Studies... 26 Figure 2.4 Empirical Evidence on the Linkage between Degree and Type of Diversification and Performance Level 1 and 2.. 30 Figure 2.5 Empirical Evidence on the Linkage between Degree and Type of Diversification and Performance Level 3. 31 Figure 2.6 The Inverted-U Association between Diversification and Performance. 36 Figure 2.7 Decomposing a Curvilinear Association via Sample Range Restriction... 41 Figure 4.1 Theoretical Model... 123 Figure 4.2 Final Model. 133

List of Abbreviations BSD Broad Spectrum Diversity CAPX Capital Expenditures CFI Comparative Fit Index CMIN Chi-square Statistic cf. confer; compare DC Concentric Index of Diversification DH Herfindahl Index of Diversification DR Diversity Related (Entropy) DU Diversity Unrelated (Entropy) DT Diversity Total (Entropy) DW Weighted Index of Diversification ed. editor eds. editors e.g. exempli gratia; for example et al. et alia; and others et sqq. et sequens; and the following EV Excess Value GFI Goodness of Fit Index H Hypothesis i.e. id est; that is to say MNSD Mean Narrow Spectrum Diversity MSA Measure of Sampling Adequacy n number of subjects, sample size NFI Normed Fit Index NSD Narrow Spectrum Diversity OES Organizational Employment Survey (U.S. Department of Labor) p. page

XVI List of Abbreviations PCFI Q R&D RDX RMSEA ROA ROS R 2 S.D. SIC STX Parsimony Comparative Fit Index Tobins s Q Research & Development Research & Development Expenses Root Mean Square Error of Approximation Return on Assets Return on Sales Multiple Regression Coefficient squared Standard Deviation Standard Industrial Classification Staff and related Expenses