Successful Growth Strategies

Successful Growth Strategies
Evidence-based Best Practices
Center for Management Studies
Preface
When striving for shareholder value creation,
corporate top executives consider growth the
most important path to boosting performance.
The vast majority of the Global Fortune 500
companies, for instance, repeatedly post high
sales growth. But does growth always succeed?
Do specific growth strategies succeed more
than others? And are there success factors that
make specific strategies work?
In this brochure, we provide evidence-based
answers to these questions. On the basis of more
than 200,000 empirical company observations,
strategic options, such as innovation, internationalization, diversification, as well as mergers and
acquisitions and cooperation, are quantitatively
evaluated and compared in terms of financial
performance effects.
Both results presented and analytical method
applied are an innovation in the management discipline. So-called psychometric metaanalysis methodology is used that, to date, is
primarily applied in medicine and applied
psychology. Within these domains meta-analysis
has virtually become a gold standard, and
is widely employed as a basis for therapy
recommendations.
By means of statistically integrating the entire set of
single empirical studies available worldwide, metaanalysis can generate evidence-based results that
represent the status quo of empirical knowledge on
specific topics of interest. The methodology allows
for a scientifically valid derivation of best practices.
In the management discipline, however, few
researchers are acquainted with meta-analysis
methodology, and even fewer practitioners draw
on meta-analytic findings as decision-making
support. And yet, with ten meta-analyses accomplished to date, the Center for Management
Studies (CMS) at Jacobs University Bremen and
Friedrich-Schiller-University Jena has an exposed
position in this domain.
In cooperation with The Advisory House AG,
CMS presents in this publication its most recent
research findings on successful growth strategies.
As much as meta-analysis may be used to find
those therapies that best cure patients from
disease, it may be applied to cure companies from
inferior performance.
The authors hope that this brochure becomes a
helpful companion for executives on their way to
profitable growth.
Contents
Executive Summary
6
About the Center for Management Studies
7
A. Growth, Value, and Profitability
9
B. Innovation
15
C. Internationalization
25
D. Diversification
33
E. In Search of High-Growth Excellence
40
F. Mergers and Acquisitions
43
G. Cooperation
51
H. Summary
57
Methods
62
Meta-analytic Literature
64
About the Authors
65
Executive Summary
Quantitatively integrating the entire body of
empirical research published on the focal topics
(US, European, and Asian companies), we find
that company size growth per se does not pay
off. This contrasts with the belief widely held
among practitioners that “corporate bigness” is a
panacea for company survival and value creation. In fact, executives myopically pursuing
company growth are ill-advised. Instead, differentiated approaches are required when going
about developing and growing a corporation
successfully.
frequently postulated value-destruction theories
of M&A actually do not hold, to stress but one
surprising insight of our analyses.
In addition, we have evidence of success factors
that elevate specific strategies’ success rates
and ROCE effects. With a view to internationalization, we find that entrepreneurial behavior
and intangible assets drive success. And with a
view to innovation, we find that entrepreneurial
minds must meet the required capital and spawn
radically new products, to give yet another
example.
Another general implication of our analyses is
that company profitability is influenced by both
industry- and company-level factors. Ideally,
high levels of industry attractiveness are joined
with strong competitive positions. Specifically,
results indicate that industry concentration and
company market share have strong positive
performance effects. While this scenario will
often be hard to achieve in growth projects, it is
what companies should generally aspire to.
Strikingly, some success factors are found to
apply across growth strategies. Entrepreneurial
orientation, for instance, increases success rates
and performance effects of innovation as well as
of internationalization. The leveraging of intangible assets, such as technological know-how or
brands, elevates the success of internationalization and mergers and acquisitions. The relatedness of country and /or product markets is a
success factor for internationalization, diversification, and M&A. Finally, process-related issues,
such as ensuring sufficient endowment with
managerial and financial resources, organizing
for sufficient deal experience, and involving local
know-how, for instance, prove to nurture success across growth strategies.
A differentiated look at the performance consequences of specific growth strategies shows that
substantially increasing innovation activities
enhances performance in 64% of cases and
leads on average to an increase in return on
capital employed (ROCE) by 34%. Alongside
innovation, internationalization also emerges as
a promising option. With a success rate of 55%,
internationalization entails on average a 13%
increase in ROCE. Contrarily, product diversification emerges as a growth option that results in
performance declines in the majority of cases.
We conclude by deriving three major success
factor categories and offer ideas for practical
implementation.
In terms of “the how” of growth, results suggest
that cooperation activities pay off in 65% of
cases, while opting for mergers and acquisitions
(M&A) still enhances performance in 59% of
cases. Identifying an average ROCE effect of
+21% for M&A, we present evidence that the
6
About the Center for Management Studies
The Center for Management Studies (CMS) is an
inter-universitarian institution that pursues the
goal of advancing the field of Evidence-based
Management EbM (Fig. 1).
For this purpose, meta-analysis integrates all studies available worldwide to derive overall conclusions that constitute the status quo of empirical
knowledge on specific topics of interest.
Figure 1: The CMS Mission – Focus on EbM
Empirical Evidence
Evidence-based Management
Evidence-based Best Practices
(Meta-Analyses and Primary
Research Studies)
Empirically
Tested
Empirical-based Hypotheses
(Explorative Studies)
Empirically
Untested
Speculation and
Guesswork
Theory-based Hypotheses
(Frameworks)
Unsubstantiated Statements
Theory-based Propositions
Theoretical Foundation
CMS is headed by a board of academic directors,
composed of many renowned university professors, associated directors, and an industry advisory board, currently composed of 15 chief strategy
officers of global players, with each company
representing one particular industry. Major CMS
research teams are located at Jacobs University
Bremen and Friedrich-Schiller-University Jena,
and they collaborated closely with The Advisory
House AG on this publication.
In terms of subject matter, CMS focuses its
research on three major issues: strategy, innovation, and behavior (Fig. 2). At its core, each study
answers two fundamental questions:
By means of conducting meta-analytic and empirical
studies, CMS seeks to generate target-oriented and
context-dependent knowledge that is actionable and
of direct value for management practitioners.
Figure 2: CMS Field of Research
1. What is the true average relationship between
specific corporate courses of action and company performance?
2. Which moderators influence success and failure of specific courses of action?
Strategy
What is the basic idea of EbM? The innovation
is the method applied, so-called meta-analysis,
a research methodology that today is primarily
applied in the fields of medicine and psychology.
In contrast to single empirical studies, metaanalysis allows the generation of evidence-based
results that are free of statistical artifacts.
Performance
Innovation
7
Behavior
A. Growth, Value, and Profitability
Profitable growth requires ROCE to exceed cost of capital
ROCE is the critical lever for company value maximization
Company size per se is not ROCE-enhancing, and blind growth does not pay
ROCE is a function of industry- and company-level factors
From a financial perspective companies elevate
shareholder value when adding market value.
Market value added (MVA®) plus the book value
of equity make up the market value of equity, i.e.
total shareholder value. MVA® reflects the value
creation that investors expect from a company.
It can be approximated by the quotient of the
current economic value added (EVA®) and the
cost of capital minus the growth rate of future
EVA®. EVA®, in turn, is determined by the spread
between the return on capital employed and cost
of capital multiplied by the quantity of capital
invested (Fig. 3).
In the long run, corporations best ensure the
satisfaction of their diverse stakeholders by
striving for corporate value maximization. Due to
globalizing capital markets, intensifying competition for equity capital, and the growing meaning
of the market for corporate control, it is the
maximization of sustainable shareholder value
that has become the corporate objective of overriding importance.
Since the mid 1980s, concepts of value-based
management enjoy ever-increasing popularity,
and corporate top management is more and more
pressurized to successfully activate the levers that
build shareholder value.
Figure 3: Value Creation from a Financial Perspective
Meeting this challenge presupposes: a) an understanding of the fundamental drivers of company
value, and b) as much information as possible
on the value creation potential of alternative
strategies.
MVA® =
The potential for squeezing out additional value
of existing business operations, for instance
through streamlining activities, is limited. For this
reason, it is alternative growth strategies that
deserve particular attention in a discussion of
company value creation.
EVA®
Cost of Capital - EVA® Growth
EVA ® = (ROCE – Cost of Capital ) x Invested Capital
Operational Lever
9
Financial Lever
Company Size
resources, greater market power, economies of
scale (especially in manufacturing operations),
and economies of scope. At the same time, however, greater size may entail inefficiencies that
lead to increased costs of coordination and
motivation. These costs are due to increased
information asymmetries and potentially higher
levels of interest divergences, free-riding and loafing, to name but some examples. A positive relationship between size and performance prevails
if the benefits systematically outweigh the costs.
What follows is that in order to boost MVA®,
companies have to elevate EVA®. Consequentially,
corporate management striving for company
value maximization has the options of:
1. increasing operating returns (ROCE),
2. decreasing the cost of capital, and/or
3. increasing the capital invested
Raising the amount of capital invested, which
essentially means increasing company size, is only
a viable option, however, if a positive spread
between ROCE and capital costs prevails.
Otherwise value is destroyed.
The meta-analysis on the relationship between
company size and financial performance evidences that there is in fact no significant relationship between company size and company performance (44,653 empirical observations, Fig. 4).
A general rule must therefore be that in growing
and developing a business or portfolio, capital
that gets invested or reallocated must meet a
positive spread if it is to create economic value.
In this case one may speak of the profitable
growth sought after.
This is a very important finding, especially in
light of the fact that this contrasts sharply with
conventionally held beliefs.
From the fact that “bigness” per se is no panacea,
we derive that growth per se is also not a viable
option. Blind growth does not pay! Growth only
adds additional economic value if it occurs above
the cost of capital.
If one assumes limited opportunities to lower
capital costs, spread increases are merely realizable by means of elevating ROCE. ROCE is consequentially identified as the critical lever that is
to be activated to create shareholder value. In the
remainder of this brochure, therefore, we provide
evidence on the true average ROCE impacts of
alternative growth strategies.
Competitive Position
Discussing company size, it is necessary to
distinguish absolute size from relative size.
Relative company size is the size of a company
relative to market size or relative to major
competitors’ size. It is indicated by absolute and
relative market share.
Company Size
Initially, we take a closer look at the linkage
between company size and performance. We do
so to account for the widespread assertion that
company size growth is favorable to the company
and should generally be aspired to. Company size
is usually measured either by input-based or by
output-based variables, such as the amount of
capital invested into a corporation or total sales.
Meta-analytic evidence suggests, on the basis of
13,505 empirical observations, that a significant
gain in absolute or relative market share yields on
average a 32% jump in ROCE (Fig. 4).
The performance-enhancing benefits commonly
associated with company size are greater access to
This comes as no surprise. Market share in fact
proxies the competitive position and strength of
10
Figure 4: Performance Effects of Company Size, Market Share, and Industry Concentration
ROCE
Average Company
5.0%
Increasing ...
... Company Size
(n = 44,653)
... Market Share
(n = 13,505)
No Impact!
5.0%
+32%
6.6%
... Industry
Concentration
(n = 2,581)
8.2%
+64%
n: number of empirical observations
a company and is ultimately defined by the edge
companies have or do not have over competitors in terms of value proposition. In other
words, it is a result of the net effect of competitive advantages and disadvantages held vis-à-vis
the competition. We derive, therefore, that
achieving strong competitive positions sooner
rather than later should become one of the key
goals in growth projects. This is a recurring
theme in what follows, and applies across
growth strategy types.
The degree of rivalry, sometimes also referred to
as intensity of competition, is commonly proxied
by the extent of concentration of industry output
in the hands of a few big players. The higher the
concentration, the less competitive the industry,
and the more attractive the industry for incumbent companies according to theory.
A meta-analysis on the relationship between industry concentration in terms of the sum of market
shares of the four or eight biggest companies in
an industry and average financial performance
evidences on the basis of 2,581 empirical industry
observations a significant positive relationship.
Industry Attractiveness
Market share is largely a product of companylevel decision-making. However, theory suggests
that company profitability is not only a function
of managerial performance but also a function of
industry-level factors that determine its attractiveness. Next to buyers’ and suppliers’ bargaining
power, and the threats of new entrants as well as
substitutes, the degree of rivalry is one of the most
evident structural characteristics determining
industry attractiveness.
A significant increase in the degree of industry
concentration entails on average a 64% upsurge
in ROCE for the incumbent companies (Fig. 4).
Benefits from increased market power, among
which the discretion to elevate prices and the
opportunity to obtain inputs at lower costs, as
well as benefits from economies of scale, materialize apparently to a considerable extent in this
type of industry environment.
11
As a consequence, incumbent companies are
well-advised to strive to further increase concentration. This may be accomplished by driving out
competitors, for instance through predatory pricing and by merging and acquiring. In addition,
companies should seek to erect entry barriers, as
otherwise high profits will increasingly attract
new entrants. Entry barriers may be a result of
creating switching costs and of limiting access to
critical resources, to name but a few possibilities.
Anecdotal evidence for this can be found in companies such as Google and Microsoft, for instance.
Both industries, i.e. Internet information providers as well as the application software
business, are highly attractive for incumbents in
that they are highly concentrated and promise
high market growth and future value creation
potential. Also, both companies have significant
edges over the competition in their industries.
Google has advantages over the next-best
competitor Yahoo, for example in terms of number of users, and Microsoft is a quasi-monopolist
in the application software business. In contrast,
Ford, for instance, is an example of a company
that has to deal with a situation in which an
industry of comparatively low attractiveness
meets a weak competitive position. The automotive business is exposed to fierce competition
between a large number of players, decreasing
margins, and declining demand in the light of
In conjunction with the findings mentioned above,
the ideal combination for achieving superior
performance is apparently joining high levels of
industry attractiveness (here indicated by industry
concentration) with strong competitive positions
(here indicated by market share). Admittedly, this
combination will be hard to achieve in growth
endeavors. Nonetheless, this is what companies
should ultimately aspire to (Fig. 5).
Figure 5: Performance as Function of Industry Concentration and Market Share
Industry
Concentration
High
Low
Lucky
Laggards
Premium
Monopolizers
Mediocre Performance
Top Performance
Vulnerable
Followers
Disadvantaged
Champions
Inferior Performance
Mediocre Performance
Low
High
Market Share
12
ever-elevating oil prices. The industry on average
enjoys low profitability and is characterized by
high capital intensity. In addition, Ford is still
behind competitors such as Daimler or Toyota.
Ford has to cope with competitive disadvantages
as regards design and marketing, overcapacities,
financing costs, and its brand, to name just a few.
the mergers and acquisitions and cooperation
options. The analysis will allow us to answer
an array of the most pressing questions from
business practice.
Does innovation indeed generate competitive
advantages and reinforce a company’s competitive position? Or do the considerable expenses
incurred by innovation overcompensate the
envisioned benefits in the majority of cases?
Does it pay off for companies to diversify into
new lines of activity to leverage resources across
a portfolio of businesses? Or are the costs of
having to manage increasing business dissimilarity just too high to be recouped by expected
synergies? Is internationality of operations really
the name of the game in the globalizing environment? Or is internationalization most often
simply too difficult to be successfully realized in
the light of country markets not converging as
fast as has long been assumed? And are the
frequent proclamations of mergers and acquisitions destroying value justified? If so, is it cooperation that constitutes a promising alternative?
Do the benefits from potential resource sharing
overcompensate the costs of limited control?
All in all, may there be in fact universally valid
success factors for growing profitably?
Outlook
What we have seen so far is that companies’
returns are influenced by industry- as well as
company-level factors. At the same time, we have
learned that growth per se does not pay. Given
that, in the pursuit of value creation, there is
no point in just growing the company bigger,
a differentiated analysis of alternative growth
options is indispensable.
The remainder of this brochure is devoted,
therefore, to successively analyzing and discussing, on the basis of meta-analytic evidence,
the ROCE impacts of specific growth options
and the underlying reasons. We distinguish
“the what of growth” in terms of the innovation, internationalization, and diversification
options from “the how of growth” in terms of
13
B. Innovation
Innovation has strong and positive effects on company performance
An adequate endowment with financial and managerial resources is key to success
Entrepreneurial orientation elevates innovation quality and ROCE impact
Radical innovations are more rewarding than are incremental innovations
Innovation is critical in more and in less technologically dynamic industries
Innovation is commonly believed to constitute
the essential source of corporate development and
growth. It ought to be the ultimate lever paving
the way to attaining competitive advantages and
to achieving superior performance. Especially in
the face of ever-shortening product life cycles,
innovation seems to be the name of the game.
It is more than evident that innovation may
expose companies to tremendous risks. Nonetheless, innovation is said to promise huge opportunities, too.
Now, what does the empirical evidence base
tell us about innovation as a growth strategy?
Is innovation in the majority of cases performance
enhancing? Or may the positive effects of innovation be greatly overestimated? Moreover, is innovation more important to performance in specific
industries, as may be suggested by the varying
degrees of R&D expenditures (Fig. 7)?
Yet, product innovation is not easily accomplished –
neither in terms of the product development itself
nor in terms of the commercialization of newly
engineered products. Innovation is, first of all,
costly. Substantial outlays may initially be
required for research and development. Similarly,
product launch and distribution will entail significant costs before any cash inflows materialize –
if they do at all (Fig. 6).
Figure 6: Costs during the Course of the Innovation Process
Market Launch and
Penetration
Product and Process
Development
Concept Generation
and Selection
Adequate Portion of
Innovation Costs
15–20%
30–40%
15
40–60%
Figure 7: R&D Expenditures Vary Strongly across Industries
16
14
R&D Intensity in %
12
10
8
6
4
2
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Year
Pharma
Electronics
Automotive
Telecom
Source: Datastream
n = 100 largest companies in terms of sales in 2005 per industry
It is the prevalence of specific conditions, however, that codetermines to what extent innovation
ultimately enhances performance. Under specific
circumstances the value of innovation is comparatively higher. It is resource availability, the
quality of managerial resources utilized in innovation projects, as well as national and industry
environments that matter in this respect.
General
Performance Impact
Meta-analytic results summarizing 19,017 empirical company observations indicate that on average
innovation has a positive performance impact.
If an average company significantly increases its
innovation activity, it can achieve a 34% jump in
ROCE.
Performance
Impact Moderators
The benefits of innovation in the lion’s share of
cases exceed the costs. Companies successfully
make use of product innovations to achieve competitive advantages that allow them to skim
substantial margins. Temporarily, monopoly-like
situations are attained that facilitate the earning of
substantial returns, overcompensating, in turn,
even huge initial outlays.
Resource Availability
Successfully engineering and commercializing
innovations require substantial amounts of
human, technological, and financial resources, and
it is not exactly foreseeable when and to what
extent innovations will generate net cash inflows.
16
As a consequence, those companies that have sufficient resources, among which are also marketing
and distribution capacities, to develop, to bring to
market, and to push a new product, may have
advantages in realizing the gains from innovation.
While larger companies make a 64% gain, smaller
ones merely grasp a 19% effect on ROCE when
significantly increasing innovation activity (Fig. 8).
The larger the company, the more comprehensive
the overall resource base available for fuelling
innovation projects and the more successful innovations in terms of financial performance.
Also, having at their disposal sufficient financial
resources may make it easier to absorb negative
cash flows for a longer period until net cash
inflows finally materialize. Companies that lack
this resource base may find it difficult to stay the
course and to finally reap the fruits of product
innovation. It is for these reasons that larger
companies may benefit to a greater extent from
innovations. Company size is an intuitive proxy
for the availability of resources.
Entrepreneurial Orientation
Having at one’s disposal the required quantity of
resources to spawn innovations and to penetrate
new markets does not necessarily say something
about the quality of the resources used for such
endeavors. It is the quality – not the quantity – of
resources, however, that may largely determine
the efficacy of the innovation. Higher-quality
innovations in terms of a better tailoring of
products to future customer needs, for instance, can
be expected to have a more favorable ROCE impact.
The underlying meta-analysis brings to light that
company size indeed has a positive effect on the
innovation-performance relationship.
Figure 8: Selected Success Factors of Innovation
ROCE
Average Company
5.0%
Increasing
Innovation …
6.7%
+34%
… with …
Low
… Resource
Availability
6.0%
Low
+64%
8.2%
High
6.0%
… Entrepreneurial
Orientation
High
Low
… Radicality
of Innovation
High
6.9%
+38%
6.2%
7.3%
17
+45%
follow people. In addition, they are less affected
by organizational inertia.
In this context, company age was used to verify
the importance of entrepreneurial orientation
among the people involved. Meta-analytic data
indicates that upon significantly increasing innovation activity, younger companies realize a 38%
increase in ROCE, while older companies merely
generate a 19% effect on ROCE.
The intermediate result is that an entrepreneurial,
innovative mindset in conjunction with the availability of the required quantity of resources is the
ideal combination. In a nutshell, the entrepreneurial mind must meet the required capital to
maximize innovation success.
Obviously, managerial quality in the form of high
levels of entrepreneurial orientation is a success
factor for innovation projects.
Radicality of Innovation
The meta-analysis further indicates that companies from liberal market economies can capture
a 45% increase in ROCE, while companies from
coordinated market economies merely grasp
a 23% ROCE impact when significantly increasing innovation activity. Liberal markets are, for
instance, those of the US, the UK, or Australia.
In contrast, more coordinated market economies
are those of Germany, the Netherlands, or Japan.
What are the underlying reasons for this difference in performance effects?
Younger companies’ actions and workforce behaviors are influenced by a mindset and culture
that develop in the particular environment that
this type of company faces. From the outset,
young companies must be successful. In the
majority of cases product failure will be equal to
business failure. In other words, being exposed to
an “all or nothing” situation, successful innovation is a question of company survival from the
very beginning. As a consequence, younger companies face an incentive environment that forces
them not only to innovate but to do it successfully. The continuous pressure to ultimately make
something out of the money ventured substantially shapes activities and processes within younger
companies. To eventually survive, they must be
creative, must be prepared to experiment, must
show competitive aggressiveness, and must be
risk-taking. It is this environment that requires
and, therefore, breeds entrepreneurial behavior.
Actually, this difference may well be rooted in
environmental context characteristics that influence the way in which people go about innovating per se. Specific contexts provide differing
incentives with a view to innovation activity.
Radical Innovations Have the
Strongest Performance Effects
Economic exchanges in liberal market economies
are, for instance, coordinated to a greater extent
via price and market mechanisms than are
transactions in more coordinated environments.
Economic relationships, among which are also
employment relations, are rather short-term
oriented and less stable in liberal systems.
In contrast to more coordinated economies, these
conditions provide less stability and security to
the actors involved. Accordingly, economic actors
in liberal systems are, from the outset, used to
a greater extent to dealing with insecure situations, and are by necessity more flexible in their
Facilitated also by more autonomous decisionmaking and loose organizational structures,
younger companies proactively seek opportunities. Younger companies are also better able to
monitor change in the business environment.
They quickly adapt to it and may also exploit
windows of opportunity that open only for short
time periods.
While people in older businesses tend to follow
existing operations and structures, in younger
companies operations and structures will tend to
18
behavior. Contrarily, people from coordinated
market economies tend to favor stable conditions
and are more risk-averse.
an incremental type. In contrast, more liberal systems by nature require and reward more radical
innovations.
Another crucial difference between these two
extremes of market systems is how business
operations are financed. In this respect, liberal
economies are traditionally characterized by a
strong venture capital market, whereas operations
in more coordinated environments are to a far
greater extent fuelled by capital from the debt
market. Here, a strong banking sector has developed, and has built long-term relationships with
corporate clients.
Liberal systems are characterized by highly efficient capital markets, and actors have to cope
with a hire and fire environment, less structural
and personal inertia prevails, and competition is
even more fierce than elsewhere. In liberal
markets, the pressure for success is simply
stronger for economic players, in turn, entailing
greater radicality in competitive behavior. This
competitive aggressiveness in conjunction with
the awareness that small-steps politics may be
doomed to failure from the beginning is nurturing
the strive for innovations of the breakthrough
kind rather than the incremental one.
Corporations in debt-focused systems have to try
hard to get the money for operations, whereas
companies from venture-capital environments
have to try hard to make something out of it.
In this context, empirical studies have shown that
it is radical innovations that have a comparatively
stronger impact on company performance than
incremental ones. Customers appear to disproportionately value radical innovations which
expresses itself in a willingness to pay substantial price premiums that can be skimmed by
breakthrough innovators. This may explain why
a difference in the average performance effects of
innovation actually prevails across countries.
Taking these points together alludes to why more
coordinated systems and the corresponding incentives provided on location tend to spawn different
types of innovation than do liberal systems.
The preference for stable conditions, the associated risk aversion, as well as a general lack of flexibility of actors, do, if at all, favor innovations of
19
Industry Dynamics
It is not only the macro environment but also the
industry environment that potentially exerts
influence on the innovation-performance relationship. It appears intuitively plausible that in
specific industries innovation may matter more to
performance than in others.
As a consequence, innovations must be considered crucial across industries. This is further supported by the meta-analytic finding that its positive performance effects do not vary between
manufacturing and service companies.
Implications
High-tech industries, for instance, are characterized by rapid technological change and correspondingly intense competitive dynamics. It does
not seem far-fetched to assume that here performance is to a greater extent influenced by innovation than in more stable industry environments.
Also, in high-tech industries, innovation may
require large-scale R&D investments. This may
create entry barriers that are substantially higher
than in lower-tech industries. As a consequence,
it may be harder for competitors to imitate
innovations and to reduce monopoly rents of
innovators. Contrarily, in less dynamic, low-tech
environments it appears easier for companies to
compete well also on other strategies. Innovation
may not be of such high necessity to survive as in
high-tech industries in which refraining from
innovation is equal to being superseded.
Given that innovation is so promising, the question arises as how to maximize the returns from
this strategy in practice. Across industries, corporate decision makers must ask themselves how to
most favorably activate the levers fostering innovation success.
The paradigm for maximizing returns from innovation activity follows directly from the meta-analytical evidence:
Entrepreneurial Mind Must Meet
the Required Capital and Spawn
Radically New Products
First, empirical evidence has shown that
radical innovations outperform incremental
product improvements. Radical innovations
should therefore explicitly be aspired to. Second,
the necessary condition for successful innovation
is an adequate and pertinent endowment with
financial and human resources. The capacities
required to realize innovation projects have to
be secured from the outset. And, third, the
quality of innovations in terms of radicality
and marketability is nurtured by entrepreneurial
behavior that should be elicited from employees
with the help of adequate means.
The meta-analysis shows that companies from
R&D-intensive industries enjoy a 47% jump in
ROCE when significantly elevating innovation
activity. In contrast, companies from low-tech
industries witness a 30% increase in ROCE.
Innovations Pay Off in High-Tech
and in Low-Tech Industries
This basically confirms the intuitive assertion that
the performance-lever innovation is somewhat
stronger in technologically dynamic industries.
What is even more important, however, is the
finding that innovation is nonetheless a critical
lever for performance in lower-tech, more stable
industries. Despite lower levels of technological
change, innovation does provide companies with
substantial competitive advantages.
While larger companies may have at their
disposal the required resources to finance innovation projects, they may find it particularly
difficult to establish an entrepreneurial work
environment and – somewhat relatedly – to come
up with breakthrough innovations.
20
By nature, companies that grow bigger and
become more mature exhibit a tendency towards
increased bureaucracy and higher levels of inertia in terms of structures and processes, as well
as employee behavior. People specialize over
time, adjust to an increasingly stable work environment, and increasingly lose the holistic
picture of the business that is so central to entrepreneurial behavior. In such instances, company-specific knowledge can become a rigidity.
Over time, people will be less prepared to act
flexibly and to change.
competitive groups as opposed to large bureaucratic organizational structures that stand in the
way of innovation.
In such environments, people tend to lose more
and more of what could be called an entrepreneurial mindset. Creativity, experimentation,
and risk-taking behavior appear less rewarding
and are, therefore, hardly pursued. Decisionmaking becomes increasingly dependent on
hierarchy, and thus autonomy is lost. Operations
no longer follow people, but rather people follow existing operations in given structures.
Minicase 1
Given the importance of entrepreneurial behavior for innovation success and the considerable
company performance relevance of innovation,
companies may as well reconsider their hiring
standards to begin with.
Minnesota Mining
& Manufacturing
Corporation (3M)
Innovation-fuelled Growth at Its Best
3M is a global, multi-technology corporation that is
well-known for its famous brands such as Scotch,
Post-it, and Thinsulate. 3M employs more than
69,000 employees worldwide and generates sales
exceeding $20 billion. The corporation offers, all in
all, more than 55,000 different products that are
organized in 35 business units under the roof of the
six businesses: consumer and office, display and
graphics, electro and communications, health care,
industrial and communication, and safety, security,
and protection services.
This is exactly the scenario that is to be prevented! This is the scenario that hinders innovation
success!
In particular, larger organizations must seek to
establish an organizational incentive environment – which also includes a corporate culture –
that elicits the desired behavior from its people.
Proactivity, opportunity seeking, anticipation of
future developments and market demands as
well as competitive aggressiveness are some of
those traits that people ought to be characterized
by. It is intrapreneurs that are sought.
3M is the prime example for a corporation that has
made use of innovation as the essential fuel to
corporate development and growth. 3M has managed to maintain a unique way of doing business
that expresses itself in the continuous delivery
of breakthrough innovations, despite its huge
organizational size. While most of today’s large
corporations struggle with this endeavor, 3M
has established an organizational environment,
a climate and culture that consistently spawns
unanticipated products.
In this respect, larger companies may be welladvised to emulate the environment that
younger companies face. A work environment
that resembles younger companies’ incentive
environments may channel employee behavior
into the desired directions. A potential starting
point could be the establishment of some kind of
“cell organization” that keeps people in small,
21
In fact, researchers are free to spend up to 15% of
their time pursuing projects of interest to them –
even less promising ones in terms of marketability.
The idea is that alternative applications may be
found later. In this respect, the “Carlton Society”
and the “Golden Step Award Program” are used as
further mechanisms and incentives to foster and
reward outstanding scientific achievements.
3M’s unrivaled commitment to innovation, more
precisely to radical innovation, expresses itself in
the form of one of the corporation’s top financial
goals. 30% of company sales are to come from products introduced within the past four years. This
excludes sales from improvements to existing products. Accordingly, breakthrough innovations are
explicitly preferred to incremental ones. This is a
clear signal to employees. The implementation of
this ambition is backed by substantial R&D investment amounting to 6% of sales in 2005, and is
somewhat reflected also in the fact that 10% of 3M
personnel are research personnel.
Research and experimentation are central, and the
climate at 3M is to encourage people to find ways of
how technologies can be combined and leveraged
into new market opportunities. In particular, the
research community at 3M is to share knowledge to
facilitate such leverage. The overriding paradigm is
reflected in the frequently cited norm: “While products belong to businesses, technology belongs to the
company.”
The 55,000 products sold by 3M are developed on
the basis of combining 40 distinct technology platforms. A technology platform is a technology from
which one can generate multiple products for multiple markets. These platforms include, among others, adhesives, abrasives, metal matrix composites,
microreplication, non-woven materials, nano technology and surface modification. Having recognized
the continuous expansion and leverage of its technological base as the essential ingredient to its success,
3M has established an organizational environment
that channels employee behavior into desired directions. Being provided with pertinent incentives, senior management as well as lower level personnel
have internalized 3M’s technology-driven culture
and unique way of operating that is characterized
above all by a strong belief in the power of entrepreneurship.
To ensure the knowledge transfer, 3M has established an array of formal mechanisms. There is a
technical council in which heads of different laboratories regularly meet to discuss potential cross-unit
transfers. An annual technology fair is held that in
essence serves the same purpose.
At this internal fair scientists exhibit their latest
accomplishments and develop an informal network.
3M purposefully brings together staff from research,
manufacturing, and sales departments to allow for
the rapid diffusion of knowledge and ideas and
to trigger the development of market-oriented
solutions.
In the 3M environment, autonomous action and
employee initiative is desired and rewarded,
bureaucracy is minimized, and open communication is deemed particularly important. Also, failure
is allowed. Supervisors are urged not to be too critical in order not to prematurely kill initiative.
With a view to new product development, 3M does
not only rely on internal developers, however.
Knowledge and information on potential future
products is also gathered by 3M through the
increased application of the so-called “lead-user
process.”
While the development of an extremely weak adhesive may mean a failure to one researcher, another
may view this feature as a strength and create Postit notes from it, to cite the most popular example.
22
The way 3M goes about doing business with its
focus on technological innovation and institutionalized entrepreneurship seems to provide endless
opportunities. This places it where it is today: the
corporation is continuously recognized as one of the
world’s most innovative companies.
Many new products are initially thought of and
also – due to commercial unavailability – prototype-like developed by specific users (companies,
organizations, or individuals) that have needs that
go far beyond those of the average user. These lead
users are, in their needs, well ahead of market
trends, and may already have developed specific
solutions that can constitute the basis for commercial breakthrough innovations to be marketed by
3M. 3M seeks to learn from such lead users, and
puts considerable effort into bringing together
technical and marketing personnel with lead users
in workshops. Selected personnel continuously conduct expert interviews and comprehensive networking is sought.
Sources:
Bartlett, A., Mohammed, A. (1995), 3M: Profile of an Innovating
Company, Harvard Business School Case, Boston: HBS Publishing.
Hippel, E. von, Thomke, S., Sonnack, M. (1999), Creating Breakthroughs at 3M, Harvard Business Review, Sep/Oct, pp. 2–10.
3M’s strive for innovation is further reflected in that
divisions are not allowed to grow too big.
Experience had shown that when reaching a specific organizational size, divisions tended to focus too
much on existing businesses and established markets. New product development was neglected, however. Accordingly, 3M has decided to break up these
divisions and to assign new management teams
to the spin-offs. And, indeed, at 3M these newly
created organizational units grow faster than in the
previous larger entity.
23
C. Internationalization
Internationalization positively influences company performance
A significant increase in internationalization increases a company’s ROCE by 13%
Successful internationalization is inseparably linked to the leverage of intangible assets
Entrepreneurial orientation and internationalization experience are elevating the returns
The internationalization of company activities
has been an important strategic option for
many companies since the 1980s. Today, in the
light of the steadily increasing convergence of
country markets and the resulting intensification of competition, it appears to be a strategic
imperative.
General
Performance Impact
Based on 7,792 empirical company observations,
meta-analytic results suggest that internationalization has a positive impact on company performance.
If an average company from the sample looked at
significantly increases its degree of internationalization, it can realize a gain in ROCE by 13%.
Internationalization per se is essentially a consequence of companies’ ambitions to exploit ownership advantages, i.e. the exclusive access to specific resources. The related questions of where and
how to internationalize are answered in conjunction with location-specific advantages as well as
advantages associated with specific organizational
arrangements (Fig. 9).
Evidently, the benefits accruing from internationalization of business activities exceed, in the
majority of cases, the costs associated with this
growth option. But what are the particular benefits and costs of internationalization?
First of all, internationalization allows companies to
leverage company-specific resources across country
markets. In particular, the cross-country utilization
of brands, proprietary technology, and companyspecific know-how may prove economically fruitful.
In this chapter, internationalization is understood
as the degree of internationality of a company’s
business operations. Figure 10 illustrates that
companies across industries have increased their
international involvement over time.
25
Figure 9: Market Entry Mode Choice as a Function of Specific Advantages
Market Entry Modes
Contractual
Agreements
Export
Foreign Direct
Investments
Ownership
Advantages
Location
Advantages
Internalization
Advantages
Moreover, alert companies may spot market
imperfections as well as factor cost differences
that they can exploit once they are internationally positioned. In this respect, options such as
local sourcing and production may entail
substantial advantages in the form of labor and
material cost savings not attainable for domestic
counterparts.
valuable capabilities, rendering easier future
internationalization moves or even spawning
innovative, unanticipated products.
Potential benefits from internationalization are
no free lunch, however. In fact, internationalization may come at non-negligible costs.
Companies may encounter severe difficulties in
having to cope with new contexts and in being
foreign on location. The catchword “liability of
foreignness and newness” represents an array of
disadvantages a company may face if it is considered a foreigner in non-home markets by incumbent market participants.
Not to forget benefits that can accrue from additional market power and economies of scale and
scope. By means of combining inputs and/or
outputs across country markets substantial competitive advantages may be achievable vis-à-vis
competitors.
Moreover, internationally active companies may
experience and subsequently make use of
specific learning and organizational development
effects. These effects may translate, in turn, into
26
Against this background, it is most often management capacity and capability that constitute critical bottlenecks.
Ethnocentrically oriented customers, for instance,
may prefer the offerings of local companies over
those of foreign companies. Also, regulatory institutions may be in place that support domestic
companies by means of subsidies, tax allowances,
or trade regulations. Eventually, foreign companies often lack local market knowledge that is
easily available to domestic competitors.
Ultimately, the increased financial and political
risks the company exposes itself to, are to be
pointed at as factors that may well hinder companies from reaping the fruits of internationalizing
activities.
The latter point is closely connected to the fact
that, in general, the increasing heterogeneity of
markets served adds complexity to the task of
managing operations and puts additional strain
on management. In the face of geographic and
cultural diversity and consequentially increasing
communication, coordination, and motivation
problems, severe barriers to efficient organization
may stand in the company’s way.
Nonetheless, meta-analytical findings suggest that
the benefits of internationalization systematically
outweigh the costs. But under which circumstances do internationalization strategies tend to
be most successful?
Figure 10: Foreign Sales Ratios across Industries
60
Foreign Sales/Total Sales in %
50
40
30
20
10
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Year
Electronics
Pharma
Automotive
Airlines
Logistics
Telecom
Source: Datastream
n = 100 largest companies in terms of sales in 2005 per industry
27
company characteristics unique to the younger
type of company. In this respect, it is above all
entrepreneurial orientation and resulting behavior
that is variously pointed at as being present in
younger companies.
Performance
Impact Moderators
Entrepreneurial Orientation
Results indicate that in comparatively young
companies, internationalization has a strong
impact on performance. If a younger company
significantly increases its degree of internationalization, it increases its ROCE on average by 46%.
In contrast, older companies merely have a fiftyfifty chance of succeeding and on average do not
generate any significant effects from internationalization (Fig. 11).
Entrepreneurial Orientation
Is a Key Success Factor
Entrepreneurial orientation expresses itself, for
instance, in a reinforced focus on innovation,
proactivity, willingness to learn, flexibility, and
fast exploitation of opportunities.
Given that successfully entering new markets
frequently requires adaptation to local circumstances, the absorption of new information, the
The reason for this tremendous difference
in impact on performance must be rooted in
Figure 11: Selected Success Factors of Internationalization
ROCE
Average Company
5.0%
Increasing
Internationalization …
5.7%
+13%
… with …
Low
… Entrepreneurial
Orientation
5.0%
7.3%
High
Low
+46%
5.0%
… Intangible
Assets Level
High
… Market Familiarity/
Experience
Low
High
6.9%
+38%
5.9%
6.4%
28
+28%
relationship between internationalization and
performance, whereas this is not the case for
Japanese companies.
development of new capabilities, and fast reaction
in the face of opening windows of opportunity,
such company traits may prove particularly
pertinent when internationalizing. In addition,
younger companies do not suffer from inflexible
structures and systems, inertia phenomena, and
uncertainty avoidance tendencies usually associated with older companies.
American, and to a lesser extent European, companies thus reap a higher portion of benefits from
internationalization than do their Japanese counterparts. Possibly, there are country-of-originspecific differences in the levels of benefits and
costs associated with internationalization.
Intangible Assets
An argument often made is that internationalization is particularly beneficial to companies that
have comparatively high levels of innovative
capabilities and technology-based know-how.
And, indeed, meta-analytic data supports this
point.
Companies from certain countries are from the
outset exposed to comparatively unfamiliar markets when internationalizing, whereas others
are not. The former are, therefore, much more
confronted with adaptation requirements, and
thus with the need for local market knowledge.
As a consequence, it may be comparatively easy
for the latter to make a move across borders.
Countries such as Japan, for instance, have
frequently been characterized as “more isolated”
countries given that they simply do not have
many potential culturally and institutionally
related target markets around their home
market. No matter which foreign markets
Japanese companies expand into, they move into
culturally distant and unrelated markets. This
issue of isolation is less prevalent in the case of
American and European companies.
If a company with a comparatively high stock of
intangible assets increases its degree of internationalization significantly, it manages to increase
its ROCE by more than 38%. The underlying
meta-analysis even suggests that for companies
with low R&D intensity there may be no impact
at all from internationalization on performance.
These findings underscore the crucial meaning of
ownership advantages for internationalization to
make sense in the first place.
Intangibles Are Key to
Internationalization Success
In addition, assuming that the average degree of
internationalization of a company reflects the
level of accumulated internationalization experience, European and American companies may
have another advantage. As companies from the
latter two countries exhibit on average higher
degrees of internationalization, their capacity and
competence in dealing with internationalization
problems may be superior. This is particularly
true in comparison with Japanese companies that
are the least internationalized among the three
country clusters and generally favor regional over
global internationalization.
Successful internationalization seems inseparably
linked to successfully developing, transferring,
and leveraging company-specific assets across
countries. These assets may take the form of
innovative strength, technological know-how,
and other valuable capabilities, as well as specific property rights. Also, a particularly strong
brand is a form of intangible asset that may fruitfully be exploited across country markets.
Experience and Market Familiarity
The meta-analysis reveals that American and
European companies exhibit a significant positive
29
with entrepreneurial orientation. Quality and
speed of decision-making, responsiveness to local
facts and circumstances, and strong personal commitment are the attributes of those people that are
particularly well suited to make internationalization projects a success. In larger organizations, it is
exactly this type of people that must be put in
charge of internationalization projects. Staffing
logic and policies should be amended accordingly.
We can conclude with the rule-of-thumb that:
Implications
We have seen that internationalization is a reasonable option to elevate company performance.
What we have learned most importantly, however,
is that successful internationalization appears to
require as a basic prerequisite intangible assets that
can be leveraged across country markets. In the
absence of a critical level of intangibles, companies
must think twice whether internationalization
moves make sense economically. Put differently,
corporate decision makers pondering internationalization moves must be very clear about companies’ potential ownership advantages and how they
will help in making internationalization succeed.
Entrepreneurial Mind and
Intangible Assets Drive Successful
Internationalization
It is indispensable that intangible assets are exploited in such a way that they render unique companies’ offerings in each of the country markets to be
served. Be it on the cost side of the products offered
or on the benefit side – intangibles must be used to
create or reinforce competitive advantages that
allow companies to serve customers better than
competitors do. This is a must-have – especially
with a view to outcompete local companies.
Minicase 2
Starbucks Coffee
Leveraging Intangibles Across the Globe
In 1996, Starbucks Coffee Company opened its
first store outside North America, located in a busy
district of Tokyo. It was the beginning of an international expansion, which Howard Schultz believed
incorporated the opportunity to build an enduring
A second major point in making internationalization succeed is the managerial behavior associated
30
Substantial effort is put into regularly launching
new products that complement the range of products available in the stores. By today, many of the
innovations developed by Starbucks have become
industry standards. The 1995 introduction of the
Frappucino, for instance, has resulted in an array
of imitations by competitors. Also, a recyclable corrugated beverage container and holder initially
developed by Starbucks to facilitate convenient
holding of hot drinks now carries multiple patents,
and is widely used by other companies.
global brand. Schultz bought the company in 1987,
when it was a small Seattle retailer, which sold
mainly coffee beans. Today, Starbucks is the leading
global player in the specialty-coffee market. Its
brand is associated with fine coffee, accessible
elegance, community, and individual expression.
Starbucks has more than 15,000 stores in 43 countries. One third of these stores is operated outside
the US. In fiscal year 2005, for instance, Starbucks
opened on average four new stores a day.
Critical for the international expansion of
Starbucks has been the leveraging of its image to the
creation of an “experience” around the consumption
of coffee. The underlying brand strategy is built on
the interplay of three critical components: highestquality coffee, service, and atmosphere. As the business grew, Starbucks built a set of organizational
capabilities that consistently delivered on the promises of the brand and its associations. Starbucks
established clear quality and service standards for
every store around the globe. Also, policies of
recruiting leadership, investing in human resources,
and quality control were designed to be in line with
and to nurture the development and global exploitation of the unique brand.
Starbucks developed and draws on a huge network
of cooperation partners including corporations such
as PepsiCo, Barnes & Noble, United Airlines, and
Kraft, to name but a few. This network’s expertise is
used to generate new product developments. It is
further utilized to gain access to diverse distribution
channels.
Today, despite recent problems in its home market,
Starbucks seems still on the way to reaching its
overall goal of becoming the “most recognized and
respected brand in the world.” In response to a
sharp share price decline in 2007, after more than
a decade of almost continual growth, chairman
Howard Schultz took over the additional role of
chief executive. Schultz said that expanding too
quickly in the US had lead to a “commoditization”
of the Starbucks experience and a loss of entrepreneurial attitude. In the future, focus shall be shifted
back on the customer and developing blockbuster
products again. Schultz plans to slow growth in the
US and to accelerate store openings abroad. His
goal still is to open 40,000 stores worldwide.
Next to leveraging the brand and the connected
capabilities, Starbuck’s international expansion
as a relatively young company was shaped by an
array of behavior that can be associated with entrepreneurial orientation. Starbuck’s internationalization strategy has been accompanied, for instance,
by consequent responsiveness to local circumstances
and by continuous innovativeness. Starbucks has
sought to overcome the problems of foreignness and
to keep a certain degree of flexibility by means of
licensing reputable and capable local companies
with retailing know-how to operate the Starbucks
stores on location. This is contrary to the US where
Starbucks favors company-operated stores.
Sources:
Koehn, N.F. (2005), Howard Schultz and Starbucks Coffee
Company, Harvard Business School Case, Boston: HBS Publishing.
Martin, A. (2008), Starbucks Replaces Chief with Chairman,
The New York Times, January 8.
Starbucks Corporation, Annual Report 2004 and 2005.
Starbucks has also strived to keep customers interested in and intrigued about their offerings by putting the emphasis on continuous innovation.
31
D. Diversification
Diversification is on average detrimental to company performance
A significant increase in diversification entails on average a 6% decrease in ROCE
Related diversifiers outperform unrelated diversifiers in the majority of cases
Strategy-environment fit and strategy-structure fit are keys to success
Capital markets keep an attentive eye on diversification strategies
Diversification is about determining corporate
scope and goes right to the heart of corporate
level strategizing. In stipulating which businesses
a corporation should be in, it aims at making the
corporate whole add up to more than the sum
of its parts. It is essential to ascertain how the
corporation can add value to the businesses it
oversees. Overriding importance is, correspondingly, ascribed to the concept of synergy.
General
Performance Impact
Meta-analytic results summarizing 82,742 empirical company observations indicate that, in fact,
diversification has on average a negative performance impact. If an average company significantly
increases its level of diversification, it suffers a 6%
loss in ROCE. It appears as if the benefits of
diversification, among which may be synergies
from increased debt capacity, increased market
power, internal market efficiencies, and activity
sharing and resource leverage, in the majority
of cases cannot recoup the increased costs of
coordination and motivation incurred by diversification. Does this mean in other words that any
type of diversification is detrimental?
Diversification involves answering questions such
as which strategic logic is to underlie the linkage of
businesses, how many businesses a portfolio is to
comprise, and how sales are to be dispersed across
the portfolio. In this way, alternative diversification
strategies characterize different types of business
portfolios. The strategic logic of business linkages,
however, deserves particular attention as it predetermines which types of synergies will be realizable
in diversification endeavors (Fig. 12).
Ultimately, it is synergies that will have to
overcompensate the costs incurred by diversification to make this form of corporate development
a valuable strategy.
33
Figure 12: Synergy Type as Function of Diversification Strategy
Diversification Strategy
Single Business
Companies
Unrelated Business
Portfolio
Risk, Debt,
Tax Advantages
Related Business
Portfolio
(
)
Market
Power
Internal Market
Efficiencies
Activity Sharing and
Resource Leverage
synergies from risk reduction, market power, and
internal market efficiencies, this is a clear sign that
these types of synergies simply do not suffice to
compensate for the increased costs of organization
incurred by diversification.
Performance
Impact Moderators
Unrelated vs. Related Diversification
The meta-analytic data suggests that in terms of
corporate performance unrelated diversification
is significantly inferior to related diversification.
This finding is well in line with theories that
point at the potential for scope economies being
exclusively available to related diversifiers.
Synergies such as those from cost-sharing, centralized procurement, the combination of valuechain functions, product bundling as well as
joint leverage of a brand, specific knowledge and
skills, to name but a few, are not realizable in
unrelated diversification attempts.
In contrast to unrelated diversification, diversification into related businesses does on average pay
off, however. Related diversification promises an
ROCE improvement of 12% (Fig. 13).
This means, in turn, that diversification does not
make economical sense in the absence of the
opportunity to generate synergies from sharing
and jointly exploiting valuable resources. The
potential for economies of scope is a must-have in
diversification attempts.
Type of Relatedness
Recognizing the positive performance effects associated with related diversification one may ask in
Making a significant move into unrelated diversification entails a loss in ROCE of 12%. As unrelated
diversification may – at most – facilitate exploiting
34
what particular way businesses are to be related to
make diversification succeed.
Minicase 3
In this respect, meta-analytic findings indicate
that business similarity in tangible as well as in
intangible assets can be performance-enhancing.
Sharp Corporation
Technology Leverage as Philosophy
Following the $24 billion electronics giant’s business philosophy, Sharp does not merely seek to
expand its business volume. Instead, Sharp is dedicated to the leverage of its unique, innovative technologies in business development. The technology
most successfully exploited across businesses is the
liquid crystal displays (LCDs). This technology has
become a critical component in an array of products
and has provided Sharp with competitive advantages in businesses such as television, video cameras, and organizers, to name just a few.
With a view to tangible assets, it is important that
diversification attempts build on businesses that
are similar in terms of the physical characteristics
of the products. This means, for instance, that
products should draw on similar raw materials,
equipment, production processes, plants, and facilities. Similarity of products’ end-users is also
pertinent in realizing synergies from the sharing of
physical assets. Nonetheless, intangibles in the
form of know-how and expertise can also constitute important bases of relatedness. The evidence
suggests that it is above all the leverage of technological capabilities that holds an above-average
potential for realizing synergies across businesses.
Source:
www.sharp-world.com
Figure 13: Selected Success Factors of Diversification
ROCE
Average Company
5.0%
Increasing
Diversification …
4.7%
-6%
… with …
Unrelated
4.4%
… Businesses
Related
Less Efficient
+12%
5.6%
5.0%
… Environment
More Efficient
4.6%
35
-9%
or business group can open many other doors as
well in environments that are characterized by
comparatively lower levels of informational efficiency. One may think, for instance, of issues of
customer trust, confidence, and loyalty, and thus
easier new product-market entries and easier
access to funding as well as to talent. Examples of
companies exploiting these types of synergies are
Samsung in Korea and Reliance in India.
Environmental Context
An argument frequently brought forward is that
the success of diversification is contingent upon
a fit between diversification strategy and environment of implementation. And, indeed, results
suggest that a specific type of such strategy-environment fit applies here.
Meta-analytic findings suggest that diversification in developed countries with more efficient
factor markets entails an average ROCE decline of
9%. In less efficient market environments this
average effect disappears.
Investors’ Viewpoint
The economical justification of multi-business
companies, in particular of conglomerates, has
always been lively discussed. In this context, it has
frequently been argued that multi-business companies are assigned a so-called diversification discount on capital markets. Somewhat connected
is the question as to whether investors systematically view diversification more skeptically than
accounting-based assessments would justify. This
was tested by opposing and comparing the impact
of diversification on market-based measures and
on accounting-based measures of performance.
The meta-analysis indicates that diversification
projects that build substantially on the exploitation
of internal market efficiencies and market power –
which is the case in the unrelated or conglomerate
type – pay to a greater extent in environments in
which factor markets are not sufficiently efficient
and in which institutional facilitation and protection of business exchanges is not readily available.
Today, this applies largely in less developed and
emerging economies such as, for instance, those
of China and India. Within these environments,
a conglomerate, business-group-like company
may well use the corporate structure to achieve
competitive advantages. On location the company
may benefit from a fast and proper allocation of
capital, labor, and other factors of production to
individual businesses. This means that the corporate structure is used to mediate transactions in
markets that do not function well in order to
achieve an edge over the competition.
And, in fact, evidence for a systematic difference
in impact was found. Unrelated diversification is
evaluated more negatively by the capital market
than accounting-based measures of performance
seem to justify.
Does this mean that investors generally dislike and
correspondingly evaluate diversification moves in
a disproportionately negative manner? It does not.
It was also found that related diversification is
assessed more positively by the capital market than
accounting-based returns would suggest.
A Great Deal of Synergies
Is Context Dependent
Apparently, shareholders’ expectations of future
performance effects of diversification are in principle in line with the historical data that is reflected in accounting-based performance. They associate negative performance effects with unrelated
diversification and positive effects with related
diversification. Nonetheless, investors systematically expect a stronger performance impact.
In addition, corporate size and scope may well
help to lobby institutional decision makers in
ways beneficial to the company, and to favorably
influence the development of the institutional
environment as a whole. It should also not be forgotten that a well-known brand of a conglomerate
36
The reason for this may well be the different time
horizons inherent in the two types of performance evaluations. Accounting-based performance
measures reflect historical returns and refer to one
or very few years only. Contrarily, market-based
measures of performance are forward-looking and
reflect expected future returns. Future returns,
however, may well be realized in an almost infinite number of evaluation periods that with certainty exceeds the number of evaluation periods
underlying accounting-based measurements.
The underlying meta-analysis does not directly
test the more popular notion of the “diversification discount” as the comparison of the market
value of the entire corporation to the sum of the
stand-alone market values of the businesses in the
portfolio. Nonetheless, recent empirical research
suggests that a diversification discount of this
kind does not necessarily arise. It is a function of
core business industry and, above all, of how efficiently the corporate center manages the portfolio
and realizes cross-business synergies.
37
With a view to efficient organization, therefore,
a corporate center must be kept as lean as possible,
and avoid influencing single businesses in areas in
which it is not necessary. Due to complexity and
dynamics, the coordination of business units
entails significant costs. For this reason, integration, for instance in the form of centralized decision-making, must only occur where synergy realization requires the management of interdependencies among businesses, the reconciliation of
divergent interests, or the clearing of information
asymmetries. In areas in which this does not apply,
units’ decision-making processes should not be
interfered with by the center. Needless coordination and conflict is to be prevented.
Implications
The most important point to be taken from the
chapter is that diversification moves do not pay if
they do not create a potential for realizing synergies from transferring, sharing, and exploiting
valuable resources. Practitioners in charge must
bear this point in mind when determining the
strategic logic of diversification projects. The key
message is:
Successful Diversification Requires
the Transfer and Leverage of
Valuable Resources
Pondering related diversification, the types of
synergies sought must be explicitly specified and
quantified. This involves as a prerequisite an
understanding of the type of linkages that
are to be established among distinct businesses.
These linkages ultimately constitute the basis
for realizing scope economies. In this respect,
in particular the leverage of physical assets
and of technological capabilities have proven
fruitful and should correspondingly be aspired to
in practice.
As the demand for integration usually declines
with rising business unrelatedness, so should
integration and centralization attempts by the
corporate center. Adhering to this rule will prevent incurring unnecessary costs and keep the
organization closer to an efficient level.
Finally, managers must get straight that capital
markets indeed keep an attentive eye on diversification moves. Accounting-based performance
impacts multiply in the eyes of investors. Nonetheless, managers need not fear capital markets –
at least as long as diversification involves growth
into evidently related businesses and net value is
added by the center.
In terms of synergies in general, managers must
further understand that the potential to realize
them varies with context. Synergies are central to
making diversification succeed. But different
types of synergies materialize to differing extents
on different locations. Consequently, practitioners
are well-advised to carefully tailor diversification
strategies to environmental contexts.
Next to a strategy-context fit, a strategy-structure
fit should also be on corporate decision makers’
agenda. If the overall goal is to make the corporate whole add up to more than the sum of its
parts, it is obligatory for the corporate center to
add net value. Net value is created only if realized
synergies exceed the costs incurred by the corporate form of organization.
38
Minicase 4
Moët Hennessy. Louis Vuitton
Related Diversifier? Conglomerate? Both!
LVMH is one of the world’s leading luxury products
group. It operates in wines and spirits, fashion and
leather goods, perfumes and cosmetics, watches and
jewelry, and selective retailing. LVMH’s portfolio
comprises more than 60 top brands such as, for
instance, Moët & Chandon, Dom Pérignon, Veuve
Clicquot Ponsardin, Tag Heuer, Christian Dior,
Givenchy, Fendi, Christian Lacroix, as well as Louis
Vuitton. Repeatedly, LVMH is pointed at as both a
case study to illustrate successful related diversification and a success story of running a multi-brand
conglomerate. Evidently, there is something special
about LVMH.
tion system as well as the joint usage of a logistics
platform for the brands dealing in men’s ready-towear markets.
LVMH’s portfolio exclusively contains high-margin
businesses with strong brands of global niche market reach, and has grown through acquisitions as
well as through new product development. What is
intriguing about LVMH is that this corporation evidently strikes a reasonable balance between exerting financial control on individual businesses,
exploiting operational synergies across these businesses, and leaving them with the freedom required
to successfully compete in their respective markets.
Source:
McGee, J., Thomas, H., Wilson, D. (2005),
Strategy – Analysis and Practice, London: McGraw Hill.
At the same time, however, LVMH is – despite headquarters imposing financial controls on single businesses – largely organized in a decentralized manner with single businesses having their own general
manager and top-management teams. In this way,
the businesses are left with the necessary freedom
for what can be considered critical success factors in
the product markets served – creativity and innovation.
LVMH realizes synergies across brands within their
five divisions by means of selectively integrating
sourcing, research and development, production,
and distribution activities. Negotiating in bulk for
the entire portfolio of brands, for instance, allows
LVMH to reduce its advertising costs by almost
20%.
In seeking synergies, LVMH also builds on the bestpractices encountered in single businesses and
leverages them across businesses. This has been the
case, for instance, with Tag Heuer’s retail distribu-
39
E. In Search of High-Growth
Excellence
The world’s largest and most renowned corporations repeatedly post excessive growth. But how
successful is this growth in fact?
The overall rank is calculated by summing up a
company’s delta sales rank (Dell with 41st best
score in absolute sales growth from 1995 to 2005)
and its delta MVA®/Sales rank (Dell with the 31st
best score in improving the ratio of MVA®/Sales
from 1995 to 2005). The lower the combined
score, the better the company in value-creating
high growth, and the better the overall rank. MVA®
was calculated by subtracting the book value of
equity from the market value of equity. It was
divided by total sales to allow for meaningfully
comparing the value creation of companies of
different size.
We examined the Global Fortune 500 over the
period 1995–2005 and tested which corporations
excelled at value-creating high growth. The companies that made it into the top 30 are active in
various industries. The energy and health care
sectors are overrepresented, however. Corporations such as Telefonica and Sanofi-Aventis made
it to the top positions because of comparatively
high value creation. Contrarily, companies such
as Total and Exxon rank high because of tremendous sales growth figures.
Overall
Rank
Company Name
1
DELL INC
Computers
39.6
37.0
41
1.45
0.86
31
2
GENERAL ELECTRIC CO
Diversified
119.1
66.6
14
1.84
0.55
63
3
TELEFONICA SA
Telecom
37.9
27.3
63
1.27
1.28
14
4
TOTAL
Energy
122.6
102.0
6
0.67
0.49
73
5
SANOFI-AVENTIS
Health Care
27.3
23.8
75
1.93
1.32
13
6
PROCTER & GAMBLE CO
Personal Care Products
45.7
20.3
86
2.33
0.96
25
7
INTEL CORP
Semiconductors
31.2
19.0
90
3.03
0.97
23
8
SAMSUNG ELECTRONICS CO LTD
Consumer Electronics
63.4
47.5
30
0.75
0.40
87
9
TARGET CORP
Retail
37.7
21.6
84
0.81
0.71
41
EXXON MOBIL CORP
Energy
264.1
182.4
1
0.75
0.20
127
10
Sales
2005
in € bn
Delta
Delta
Delta Sales Delta Sales (MVA®/Sales)
Rank
2005
(MVA®/Sales) (MVA®/Sales)
2005–1995
2005–1995
Rank
in € bn
40
Sales
2005
in € bn
Delta
Delta
Delta Sales Delta Sales (MVA®/Sales)
Rank
2005
(MVA®/Sales) (MVA®/Sales)
2005–1995
2005–1995
Rank
in € bn
Overall
Rank
Company Name
11
INTL BUSINESS MACHINES CORP
Computers and Services
73.3
18.8
91
1.11
0.73
37
12
TOYOTA MOTOR CORP
Automotive
135.6
69.6
12
0.58
0.23
117
13
ENI-ENTE NAZIONALE IDROCAR
Energy
73.7
47.3
31
0.68
0.30
99
14
JOHNSON & JOHNSON
Health Care
40.7
26.4
67
2.94
0.51
68
15
NOKIA (AB) OY
Telecom Equipment
34.2
27.8
61
1.53
0.47
77
16
LOWE’S COMPANIES INC
Home Improvement Retail
29.3
24.7
73
1.16
0.52
66
17
NOVARTIS AG
Health Care
25.9
16,1
105
2.92
0.83
35
18
VALERO ENERGY CORP
Energy
65.5
63.2
16
0.22
0.21
125
19
UNITED TECHNOLOGIES CORP
Diversified
34.3
17.0
100
0.98
0.67
43
20
NESTLE SA
Food and Beverage
58.8
22.6
77
1.12
0.52
67
21
WALGREEN CO
Health Care Retail
34.0
26.1
68
0.90
0.44
80
22
BEST BUY CO INC
Consumer Electronics Retail
22.1
18.2
97
0.65
0.59
52
23
TELECOM ITALIA SPA
Telecom
29.9
25.4
71
0.65
0.44
81
24
BP PLC
Energy
200.8
157.6
3
0.59
0.10
151
25
ALTRIA GROUP INC
Tobacco and Food
55.5
15.2
114
1.83
0.70
42
26
FEDEX CORP
Transport and Delivery
23.6
16.5
103
0.78
0.58
55
27
ASTRAZENECA PLC
Health Care
19.3
13.4
127
2.78
0.80
36
28
SIEMENS AG
Diversified
75.4
28.5
58
0.50
0.25
109
29
TESCO PLC
Retail
49.7
37.6
40
0.49
0.20
128
30
SUEZ
Energy
41.5
26.5
66
0.40
0.29
105
41
F. Mergers and Acquisitions
M&A positively influence the performance of bidders and targets
M&A increase targets’ ROCE by 33% and bidders’ ROCE by 8%
Vertical M&A pay off most
Successful M&A are often a means to acquire and/or leverage intangible resources
The success of mergers and acquisitions has steadily increased over time
Although mergers and acquisitions have always
been an important option in companies’ strategic
development, the volume of M&A has fluctuated
over time. Since the beginning of the 19th century basically five major merger waves have taken
place. Figure 14 shows that transaction volume
reached its record high in 2000, declined in 2001
and 2002, and since then has risen again. In fact,
what we observe may well be the beginning of a
sixth wave.
General
Performance Impact
Meta-analytic integration of 41,260 M&A transactions reveals a positive performance impact on
average. The performance effects are positive for
both partners in M&A transactions. However, the
effects are significantly stronger for targets compared to bidders, suggesting that acquired companies annex the lion’s share of the positive performance effects.
Besides the general upward trend in the volume
of M&A transactions, the question whether M&A
actually create value is still unresolved. Empirical
studies by practitioners and academics show
mixed results for bidders and targets.
The combined performance effect of the overall
transaction leads to an increase in ROCE by 21%.
Differentiating acquiring and acquired companies
reveals an 8% increase in ROCE for the former
and a 33% increase for the latter.
In principle, M&A create value for shareholders
when the performance of a combined company is
higher than the sum of the individually realizable
performance of two independent companies.
Necessary for realizing such a value-enhancing
position is that increases in revenues and/or
decreases in costs due to M&A are not overcompensated by the costs of the transaction (including postmerger integration costs). Figure 15 illustrates this logic.
Theoretical arguments that explain the positive
performance effects of M&A can be divided into
four streams: (1) market power, (2) operational
efficiency, (3) financial advantages, and (4) the
market for corporate control.
43
Figure 14: The Development of M&A Transaction Volumes
Transaction Volume in Billion US $
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
Year
Source: Thompson Financial
pay higher prices in order to accomplish a transaction, and thereby fulfill other, own targets
instead of shareholders’ goals (e.g. increased power,
salaries, or reputation).
The argument of increased operational efficiency,
especially, is often highlighted when explaining
the benefits of M&A. Possible increases in the
operational efficiency of a combined company in
comparison to formerly isolated companies can
be realized when one of the following effects is
achieved in the course of the transaction:
Performance
Impact Moderators
· Economies of scale
· Economies of scope
· Experience curve effects
· Reduction of transaction costs
While the performance effects of M&A are on
average positive, the nature of effects is influenced
by contextual factors. Thus, the key question for
undertaking a successful M&A transaction is
under which conditions they are most favorable.
But why do acquired companies capture the
majority of the positive performance effects in
M&A transactions? First, managers of acquiring
companies may, in fact, systematically overestimate the benefits they can achieve with a particular deal, underestimate associated costs, and thus
accept too high acquisition prices. Second,
besides this hubris effect, managers may willingly
Types of Transaction
Vertical M&A are found to generate the strongest
performance effect, whereas horizontal and heterogeneous M&A show nearly no differences in
the observed performance impact.
44
Performance impact analysis shows that vertical
M&A transactions increase ROCE by 55%.
Although still impressive in magnitude, horizontal and heterogeneous M&A lead to a significant
weaker increase in ROCE by 24% and 29%
respectively.
of scale and scope to be in general superior to the
former. However, in reality the high bureaucracy
costs of horizontal M&A seem to compensate
potentially higher benefits, in turn, resulting in a
non-significant difference between these two
transaction types.
Vertical M&A Show
Strongest Performance Effects
Intangible Assets
Intangible assets are typically described as tacit
resources that cannot be easily transferred on
factor markets, substituted by other assets, or imitated by competitors. Therefore, intangible
resources are today seen as a major source of
competitive advantage. Thus, M&A which are
used as a means to acquiring and/or transferring
intangible resources should be superior to other
transactions.
A reason for the approximately two times stronger
performance impact observed for vertical transactions may be that vertical integration allows companies to better manage strategically important
interactions with upstream or downstream markets. Although vertical M&A are typically associated with relatively high bureaucracy costs, the
benefits of internalizing certain market transactions seem to considerably outweigh these costs.
Using R&D and marketing expenditures as
an indicator for intangible assets, these expectations are confirmed in the meta-analysis. In M&A,
in which the bidder and/or the target company
possess a high amount of intangible resources, the
performance impact is significantly stronger than
in transactions between companies with a low
Heterogeneous M&A typically aiming at financial
advantages seem to benefit from the relatively low
bureaucracy costs associated with these transactions compared to horizontal M&A. Theory
describes the latter with their focus on economies
Figure 15: Value Creation in Mergers and Acquisitions
Performance
Increase
Performance
Decrease
Performance
Standalone
Company A
Performance
Standalone
Company B
Transaction
Benefits/
Synergies
45
Costs of
Transaction
Performance
Combined
Company
Figure 16: Selected Success Factors of Mergers and Acquisitions
ROCE
Average Company
5.0%
Increasing
Mergers & Acquisitions …
6.1%
+21%
… with …
Horizontal
… Type of
Transaction
6.2%
6.5%
Heterogeneous
Vertical
Low
… Intangible
Assets Level
High
7.8%
+55%
5.0%
6.1%
+21%
amount of intangible assets. For the former
the ROCE increases by 21%, whereas for the
latter no performance impact is observable at all
(Fig. 16).
first and second phase no significant average performance effects of M&A are observable, in the
third and fourth phase M&A lead to significant
gains of 23% and 33% enhancement in ROCE.
Historical Phase
Along the M&A waves in the past, dominating
strategic foci of M&A can be identified in certain
historical phases. Since the middle of the 20th
century four phases can be observed:
These results suggest that the focus of the particular transaction, i.e. the strategic underlying
logic, matters to deal performance. In addition,
the steady increase in the M&A performance relationship over time suggests an apparently
increased efficiency of the market for corporate
control and corporate governance mechanisms.
1950–1973:
1981–1985:
1985–1989:
1992–2000:
Conglomeration
Deconglomeration
Leveraged buyouts
Shareholder value and globalization
Further Moderators
Dividing the underlying sample on the basis of the
number of transactions conducted by an acquirer
in the past reveals that companies with a low number of past transactions can achieve a significantly
stronger performance effect when conducting
M&A than companies with a high number.
Looking closer at the development of the relationship of M&A and performance over time reveals
an interesting trend. The performance impact of
M&A is constantly increasing. Whereas in the
46
Companies that conduct several M&A over
a short time period may not have “digested” these
former transactions when acquiring a new target.
That is to say, the necessary resources for successfully managing the postmerger integration
process may not be available in the required
amount. Management attention, especially, will
be lower than in cases where M&A activity is a
relatively exceptional event.
Theory suggests that unfriendly M&A, which
typically do not have the support of the top
management team, will be associated with a
significant loss of management resources after the
deal. Apparently, this does not apply. At least, it
does not translate into performance problems.
Finally, the impact of the payment method on
the M&A and performance relationship was
analyzed by differentiating between stock- and
cash-based payments. No moderating effects
were identified, however.
International M&A are discussed in theory as
a possibility to transfer intangible resources to
other country markets. In addition, international M&A can be a means to achieving international portfolio diversification – a value-enhancing
strategy when international capital markets are
not perfectly integrated. Both arguments are typically discussed when benefits of international
M&A are highlighted in comparison to national
M&A. However, meta-analytic results do not
support this argumentation – international M&A
do not have more positive effects than domestic
transactions.
Implications
First and foremost, our meta-analytic results evidence that, in contrast to the widespread belief
that most M&A transactions fail, on average
M&A are actually a value-enhancing strategy.
Moreover, the positive performance effects even
increase over time, hinting towards an even
higher value creation potential in the future.
Thus, we formulate the major take-away from
this chapter as follows:
Comparing friendly and unfriendly M&A does
not reveal significant differences in performance
effects, either. This is somewhat surprising.
M&A Actually Do Create Value
47
tion tasks. Especially past transactions might
still need a substantial amount of a company’s
management for their integration processes.
In fact, failing to pay adequate attention to this
issue may harm the value creation potential of
both past and future transactions.
At the same time, our findings highlight that targets’ owners can typically usurp the lion’s share of
the positive performance effect of M&A. This
might be caused by an overestimation of possible
synergies created by the transaction, resulting in
too high premiums being paid. Thus, both an
extremely thorough assessment of the realizable
positive performance effects of an M&A transaction and outstanding negotiation skills are
obviously key elements for realizing at least an
equal split of the performance effects between the
two transaction parties.
Minicase 5
Unilever’s “Path to Growth”
As shown above, the strongest performance effects
in the sample are observable for vertical M&A
transactions. Therefore, the prolongation of
a company’s value chain in upstream and/or
downstream markets seems to be a viable strategy
allowing strong performance improvements.
Consequently, companies should actively assess
the value creation potential of down- or upstream
mergers. In particular, better communication with,
and knowledge about, downstream market players
and decrease of dependency from upstream market players seem to be key factors triggering substantial positive performance effects.
Seeking Strong Competitive Positions and
Leveraging Complementary Assets
With total sales amounting to $52 billion in 2006
and 189,000 employees worldwide, the Unilever
Group is one of the world’s largest suppliers
of consumer goods in the foods and personal
and home care business. Its portfolio comprises
around 400 brands such as Knorr, Flora/Becel,
Hellmann’s, Lipton, Omo, Surf, Lux, Dove, Blue
Band/Rama, Sunsilk, Rexona, and Heart ice cream.
Unilever is the global market leader in all food categories in which it operates, i.e. Savory and
Dressings, Spreads, Weight Management, Tea, and
Ice Cream. In addition, Unilever is the world
market leader in Skin and Deodorants, and has
strong positions in other personal and home care
businesses categories.
Moreover, intangible resources are identified as
a key factor determining the performance effects
of M&A. Results demonstrate that, except for
commodity-driven markets, consolidating M&A
transactions and pure scale transactions are
usually less successful than are scope transactions
that pool and jointly leverage valuable assets.
On the way to achieving the leading position in the
food businesses a critical milestone was the acquisition of US-based Bestfoods in 2000. This acquisition
was, along with a series of smaller acquisitions and
diverse divestments, part of the five-year strategic
plan “Path to Growth,” initiated at the start
of the decade. This plan envisioned restructuring
Unilever’s brand portfolio, focusing on leading star
brands. With a total equity value of approximately
$20 billion, the Bestfoods acquisition was the largest
acquisition ever undertaken by Unilever and, at
that time, the second-largest cash acquisition ever.
Quite surprising is the fact that there is no difference in the performance effects between friendly
and unfriendly M&A. This result strongly advises
managers to strive also for transactions that are
not supported by the management of the target
company – provided a strategic fit between the
two companies is sufficiently certain.
Finally, acquirers are strongly advised to crucially assess capacities required for merger integra-
48
reduction synergies had already been realized. In
fact, from 2001 on Unilever has enjoyed increasing
operating margins.
Prior to the acquisition, Bestfoods was a global consumer goods company with sales amounting to
approximately $9 billion in 1999, 60% of which
was generated outside the US. Bestfoods employed
44,000 people. Its most renowned brands were
Knorr, Hellmann’s, Mazola, and Skippy.
Unilever’s acquisition of Bestfoods is a good
example of a growth strategy that, at its core, builds
on the positive performance effects of the leverage
of complementary assets and strong competitive
positions.
The most important characteristic of Bestfoods’
products was that they had attained in the vast
majority of cases very strong competitive positions.
They were either leader or second in terms of market share in the country markets respectively
served. Nonetheless, soon after the Bestfoods acquisition, Unilever sold off an array of the brands
bought. The entirely US-based Bestfoods Baking
Company, for instance, was deemed not to adequately fit Unilever’s other businesses.
It seems unsurprising, therefore, that it is exactly
since 2001 that Unilever’s return on invested
capital, net profit, and share price have continuously increased. Apparently, Unilever has achieved
what they were after with their “Path to Growth”
initiative – namely, being positioned for strong and
profitable growth prospects.
Sources:
Thompson, A. A. Jr. (2004), Unilever’s Path to Growth Strategy:
Is it working?, in: Thompson, A. A. Jr., Strickland III, A. J.,
Gamble, J. E., Crafting and Executing Strategy – The Quest for
Competitive Advantage, 14th ed., Boston: McGraw Hill.
Unilever’s plan was to integrate Bestfoods’ operations in such a way that cost savings could be
attained by combining purchases, by streamlining
administrative functions, and by realizing additional economies of scale. A strategic goal also was to
create a stronger position in the US market with the
help of Bestfoods. At the same time, it was, in particular, synergies in distribution and marketing that
Unilever aspired to.
www.unilever.com
In terms of target choice, Unilever had placed particular emphasis on finding a corporation, the
brand portfolio of which, and the country market
reach of which, were complementary to Unilever’s
brands and coverage. Individual strengths were
sought to be mutually leveraged. Unilever sought to
capitalize on Bestfoods’ strong position in Latin
America, and wanted to employ its own distribution
network strengths in Asia-Pacific to boost sales of
the Bestfoods brands. Also, Bestfoods’ food service
(catering) channels should be used to elevate sales
of Unilever’s culinary products.
In 2003, Unilever management stated that they
believed to have successfully integrated Bestfoods’
operations into the corporation. Businesses had
been combined globally, and considerable cost-
49
G. Cooperation
Cooperation positively influences company performance
Substantially engaging in cooperative agreements increases ROCE by 36% on average
Small companies benefit most from cooperation
Type of cooperation per se does not matter to performance
In recent years many industries have witnessed
value chain reorganizations and corporate refocusing strategies. In the face of intensifying competition on a global scale, companies have
returned to increased specialization by means of
divestments and outsourcing in order to (re-)gain
and maintain their edge over the competition.
vented. Not to forget that cooperation allows
maintaining a certain degree of organizational
flexibility. Lock-ins are limited and competitive
(re-)positioning may be implemented comparatively rapidly.
Joining the value-adding activities of two or more
companies incurs costs as well, however.
Cooperation requires continuous coordination
among partners. This requires management
capacities, and entails costs that increase with
increasing partner interest divergences.
In the light of these disintegration tendencies, it
is indeed cooperation that may constitute a particularly valuable mode of growth. Many activities
of company development may be organized more
favorably with the help of a partner in different forms of cooperative agreements (Fig. 17).
Acquisitions or internal organization may prove
inadequate or simply not feasible in many
instances.
Moreover, companies entering into alliances may
be exposed to the risk of undermining their
competitive advantages, if, for instance, company-specific knowledge is lost in the course of the
collaboration. If incumbent companies partner
with newcomers, specific entry barriers into
industries may erode. And, in terms of sharing
the gains from cooperation, severe problems
may be encountered by partners with inferior
bargaining power.
General
Performance Impact
Entering cooperative agreements holds the potential of increased operational efficiency, risk
reduction, and access to valuable resources. Competition may be reduced and market power may
be increased. Also, government restrictions on
entering specific country markets may be circum-
Now, what does the empirical evidence suggest as
regards the performance effects of the benefits of
cooperating net of costs?
51
Figure 17: Form of Cooperation Determined by Collaboration Purpose
High
Equity Joint
Venture
Contractual
Joint Venture
Degree of
Interorganizational
Dependence
Management/
Marketing/Service
Agreement
Licensing/
Franchising
Agreement
Long-term
Supply Contract
Low
Form of Cooperation
Based on 11,017 company observations, metaanalytic results reveal that cooperation has, in the
main, a positive impact on company performance. Significantly engaging in inter-company
cooperation leads on average to a 36% jump in
ROCE. The benefits of entering into cooperative
arrangements are in the vast majority of cases
outweighing the costs associated with it.
Nonetheless, specific circumstances matter to the
nature of effects.
While larger companies generally have resource
endowment advantages, they usually partner with
smaller companies to annex and benefit from particular types of innovations and related knowhow that they have not managed to develop on
their own. Contrarily, smaller partners may realize
benefits from positive reputation effects on capital
markets, for instance, and from gaining access to
financial and managerial resources that otherwise
would be hardly accessible. In this way, they may
overcome what is one of the major disadvantages
of small companies – a limited resource base.
Performance
Impact Moderators
In the case of an innovative product owned by
a small company, an alliance may provide access
to the funds necessary to commercialize the product. Particularly in technology-intensive industries, such as biotech, this alliance strategy has
been successful.
Larger vs. Smaller Partners
Meta-analytic results indicate that the return from
cooperative strategies is larger for smaller partners.
If You Are Small, Cooperate
Furthermore, small enterprises may often lack
local market knowledge when pondering internationalization moves. Here, alliances may be used
to ease expansion into those markets and allow
important time saving, to name but another
potential benefit of cooperative mechanisms.
If a small company significantly increases its cooperative activities, it boosts its ROCE by a tremendous 78% on average. In contrast, larger companies
generate an increase of ROCE by 40% (Fig. 18).
52
Organizational Form of Cooperation
Meta-analytic results also reveal that there is no
difference in performance impact among alternative organizational forms of cooperating. In other
words, joint ventures as well as simpler contractual agreements apparently provide similar upward and downward potential as regards company performance implications.
At first sight this appears surprising, as one could
have argued that exclusively cooperation partners
from similar industries are in a position to realize
operative and/or collusive synergies in the joint
endeavor. This may well apply to contractual
cooperation such as long-term supply contracts
and marketing alliances which require a certain
degree of business linkage to make sense in the
first place. Having a closer look at this issue
clarifies that this is the wrong perspective when
it comes to joint ventures, however. Here, the
question is less whether the two cooperating
partners’ core businesses enjoy a linkage. Instead,
the important question is whether both partners
can valuably contribute to the “business” in which
they cooperate. If both partners provide resources
to a joint endeavor that complement each other to
nurture competitive edges, then the partners may
well be from different industries. Thus, it is not so
much the linkage between partners that matters
in joint ventures but rather each partner’s linkage
to the cooperation business.
Ultimately, companies will have to decide for
a particular mode based on considering company- and context-specifics. In the face of the
trade-off between flexibility and control when
moving on the continuum from supply contracts
to equity joint ventures, issues such as the objective of the partnership, the content of the
collaboration, and the typology of the partners
involved, will determine the preferable choice
of mode.
Business Relatedness of Partners
The analysis also shows that cooperative
agreements between businesses from similar
and from dissimilar industries enjoy similar
success rates. Apparently, the type of business
of partners a priori the transaction per se does
not matter to the performance effects of cooperating.
This logic finds support in the meta-analytic
evidence in that cooperation between partners
from completely different core businesses is
found to be as successful as cooperation between
partners from similar industries.
Figure 18: Selected Success Factors of Cooperation
ROCE
5.0%
Average Company
Increasing
Cooperation …
6.8%
+36%
… and …
The Larger Partner
7.0%
… Being
8.9%
The Smaller Partner
53
+78%
Empirical evidence further suggests that the
following factors increase the positive performance effects of cooperation:
Implications
We may conclude that across alternative forms
of cooperation, cooperative agreements are
a promising alternative to other modes of
growth. There is one critical success factor,
however. Companies partnering in cooperative
agreements must ensure that they gain access to
resources that are valuable either to their core
business or to the new business entered into by
means of complementarities with own resource
endowments:
Contract completeness
• Trust between partners
• One partner has dominant share in equity
ownership
• One partner exerts dominant managerial
control
•
In addition, in international joint ventures it is
favorable if:
Gaining Access to Valuable Assets
Is Key to Cooperation Success
A local partner is involved
• You have prior experience in international
cooperation projects
• The local partner has high market share
• The local partner has experience in dealing
with foreign companies
•
In particular, smaller companies should proactively search for partnerships with players that
can provide necessary base-levels of managerial
and financial resources and/or access to other
valuable assets such as established distribution
networks.
Contrarily, negative effects can be expected from
partner conflict, high numbers of parents involved in the cooperation, and if local partners
are state-owned enterprises.
Nonetheless, larger partners can benefit, too, if a
smaller and younger company provides some
kind of innovative process or product. Here, the
larger company may benefit from particular
entrepreneurial behavior that characterize smaller companies. In this respect, cooperation can
enable fast access to specific types of assets
developed in smaller companies and translate
into time-based advantages. In fact, cooperating
may be a very promising response to ever-shortening product life cycles and the need for continuous innovation.
Minicase 6
Star Alliance
Cooperating to Compete
The deregulation of the airline industry has set the
stage for airlines to serve international destinations
across the globe. As a response to the opportunities
and threats that open markets entail, the airline
industry has witnessed the emergence of three
major carrier alliances with global reach, namely
Star Alliance, OneWorld, and SkyTeam. Today, two
out of every three passengers are alliance carrier
passengers. All founded in the late ‘90s, the three
alliances now go far beyond mere code-sharing
agreements in terms of cooperating. While the
Cooperating in the form of multiple R&D
alliances, for instance, can also reduce risks by
burden sharing, and spawn beneficiary knowledge spillovers.
Ideally, a win-win situation is created in
cooperative agreements in that both partners
have sufficient incentives to fully commit to the
agreement.
54
ters location, and is operated by a committee
instead. Contrarily, Star Alliance is headquartered
in Frankfurt, Germany, with a distinct legal entity
– the Star Alliance Services GmbH.
alliances place differing emphasis along which lines
its members cooperate, they have a common characteristic that at the same time is critical to alliance
and carrier success: Its members have partnered in
order to benefit from revenue- and cost-based synergies that arise from combining the (regional) route
networks of the members. In this respect, Star
Alliance appears to have a pole position in providing benefits to its members. Today, Star Alliance has
a 25% share in global passengers and a 28% share
in global operating revenue, with the next best
alliance, SkyTeam, capturing a 22% share in both
respects. Apparently, Star Alliance’s vision to
become the leading global airline alliance for the
high-value, international traveler was realized only
ten years after its foundation in 1997.
Over time, Star Alliance has shown that it is a
rather stable alliance. It has the most comprehensive network, members with strong home market
positions, a strong presence at major hubs, high levels of consumer awareness, apparently the best frequent flyer program cooperation, and leads in product development. Amongst others, Star Alliance has
developed a paperless electronic ticket that customers can use across the entire alliance network.
This is contrary to other alliances, in which members often use bilateral agreements on e-tickets. In
addition, Star Alliance is in the process of establishing more and more alliance-wide self-check-in terminals. Also, they are the first alliance to offer a
tool to build round-the-world itineraries that can
subsequently be sent electronically for ticketing.
Finally, Star Alliance offers corporate travel products for global companies and offers them a onestop shopping approach in this respect.
Star Alliance was founded by Lufthansa, United
Airlines, Air Canada, SAS, and Thai Airways, who
expanded their already existing bilateral cooperation agreements into a multiple-partner alliance.
The airlines, all with different geographical areas of
strength, moved from reciprocal code-sharing to
coordination of flight schedules, joint advertising,
integration of frequent flyer programs, and common
purchasing, to name but a few areas of cooperation.
Today, Star Alliance has 20 (regional) members,
serves 842 destinations in 152 countries, and carries 425 million passengers per year. In fact, Star
Alliance offers more destinations and serves more
countries than other alliances.
Star Alliance’s long-term goal is the establishment
of a common IT platform that is currently being
developed by United, Lufthansa, and Air Canada.
Until this system is implemented, however, Star
Alliance makes use of a meta-IT platform called
StarNet, that integrates members’ legacy systems
with minimum legacy system amendments
required. Once finalized, other alliance members
will be invited to join in the common platform. Star
Alliance is convinced that the system will improve
customer service, delivery speed, and reduce distribution costs, and, at the same time, be unrivalled in
the industry. In this way, Star Alliance plans to continue what they have done – helping their members
to compete more successfully.
The success of Star Alliance can be traced to an
array of factors. First, Star Alliance strives for common governance mechanisms and a common infrastructure, transparent and lean processes, aligning
members’ business objectives and product delivery
processes. They unify and centralize baggage service facilities, check-in areas, and lounges. Also,
common business rules and standards have been
established to reduce lengthy partner negotiations.
Other alliances do not seem to be so committed to
joint organization. OneWorld, for instance, has its
headquarters in Vancouver, Canada, but no real
formalized structures. SkyTeam has no headquar-
Source:
Albrecht, J. (2005), State of Alliances, Presentation given by the
CEO of Star Alliance, available from: www.staralliance.com
55
H. Summary
In this chapter we briefly recap and summarize our
findings on the linkage between growth strategies
and company performance to derive major implications for practice.
In addition, we found that company profitability is
a function of both industry- and company-level
factors. In this respect, we provided concrete evidence that industry concentration and company competitive position with the latter being indicated by
level of market share attained are positively related to
profitability. A second maxim was derived that should
be considered by executives across growth strategies.
Companies should generally seek to be in or enter
product and country markets that allow the company
to become an important player sooner rather than
later. At the same time, companies should seek to be
in markets that exhibit concentration tendencies or
that allow for inducing these tendencies. While this
combination of competitive strength and industry
attractiveness is not going to be achieved easily, it is
the ideal scenario for profitability maximization.
Strive for becoming a premium monopolizer!
First, we take a look back at the general guidelines
that are to be considered by executives when pondering growth. Second, we again show the average
ROCE impacts of “the what and the how” of growth
strategy options (Fig. 19, 20). Third, we provide, in
addition to the average performance impacts, the
probabilities of specific strategies to succeed at all.
More precisely, we offer an overview of the success
rates of growth strategy options as well as performance impacts under specific conditions (Fig. 21).
Fourth, we derive success factors common to
a number of growth strategies (Fig. 22). And, fifth,
we list ideas for practice in terms of satisfying the
common success factors identified (Fig. 23).
Building on these more general guidelines, we subsequently paid considerable attention to successively
analyzing the track record of alternative growth
options. All in all, more than 200,000 empirical company observations were used to generate evidencebased best practices in terms of successful growth.
In the early chapters of the brochure, we clarified
that company size growth per se does not enhance
company performance. We derived the simple
and yet fundamental maxim that blind growth
will not pay.
Figure 19: ROCE Effects of “the What” of Growth
ROCE
Average Company
5.0%
Increasing …
… Innovation
(n = 19,017)
… Internationalization
(n = 7,792)
… Diversification
(n = 82,742)
+34%
6.7%
5.7%
+13%
4.7%
-6%
n: number of empirical observations
57
tion that we brought to light. If this is not the case,
companies may ponder some external “ingredient”
to their growth endeavor.
It was found that innovation and internationalization are on average favorable to the company,
while diversification is detrimental to company
performance in the majority of cases.
More specifically, significantly increasing innovation activities boosts ROCE by, on average, 34%,
while internationalization still generates a jump of
13%. Contrarily, significantly increasing corporate
diversification results in ROCE declining by 6%.
So far, we have presented average ROCE effects of
alternative growth options. As the probabilities of
growth strategies to succeed per se will also be of
interest to practitioners, we present in Figure 21
the success rates of alternative options as well as
the success rate if the option is exercised under
specific conditions.
In terms of “the how” of growth, the options of
mergers and acquisitions and cooperation were
investigated. It was found that both modes of
growth do entail positive effects on average, with
cooperation being, in the majority of cases, the
superior option. Mergers and acquisitions on
average entail a 21% increase in ROCE, while
significantly increasing cooperation activities
enhances ROCE by a substantial 36%.
Indeed, specific success factors were found to be
elevating the success rates and ROCE impacts. In
this respect, of particular interest are those factors
that apply across a number of alternative growth
options. These factors can be considered key
success factors for growth endeavors in general
and are summarized in Figure 22.
Entrepreneurial orientation, for instance, increases the success rates of innovation as well as of
internationalization. The presence and leverage
of intangible assets such as technological
know-how, customer relationships, or brands
elevates the probability of success of internationalization and mergers and acquisitions.
Our general guidelines also suggest that internal
growth may well be a viable option if executives
are sufficiently certain to be able to remain in or
enter attractive industries and to build a strong
competitive position herein without any external
support. At the same time, these executives must
be certain that their companies are able to satisfy
entirely on their own the success factor conditions
of innovation, internationalization, and diversifica-
Figure 20: ROCE Effects of “the How” of Growth
ROCE
Average Company
5.0%
Increasing …
… Mergers and Acquisitions
(n = 41,260)
… Cooperation
(n = 11,017)
6.1%
6.8%
n: number of empirical observations
58
+21%
+36%
Figure 21: Success Rates and ROCE Effects under Contingencies
Growth Option
Contingency /Success Factor
Average Success Rate
40%
50%
Average ROCE Change (%)
80%
Company Size
50%
0%
Market Share
63%
+32%
Industry Concentration
76%
+64%
Innovation
64%
+34%
High Resource Availability
Low Resource Availability
77%
58%
+64%
+19%
Strong Entrepreneurial Orientation
Weak Entrepreneurial Orientation
66%
58%
+38%
+19%
Breakthrough Innovation
Incremental Innovation
69%
59%
+45%
+23%
High-Tech Industry
Low-Tech Industry
70%
62%
+47%
+30%
55%
+13%
Strong Entrepreneurial Orientation
Weak Entrepreneurial Orientation
69%
50%
+46%
0%
High Levels of Intangible Assets
Low Levels of Intangible Assets
66%
50%
+38%
0%
Companies from Europe
Companies from the US
Companies from Japan
57%
62%
50%
+18%
+28%
0%
47%
-6%
Related Diversification
Unrelated Diversification
55%
45%
+12%
-12%
More Efficient Environments
Less Efficient Environments
46%
50%
-9%
0%
59%
+21%
Bidder
Target
53%
64%
+8%
+33%
Vertical Transactions
Heterogeneous Transactions
Horizontal Transactions
73%
62%
60%
+55%
+29%
+24%
High Levels of Intangible Assets
Low Levels of Intangible Assets
59%
50%
+21%
0%
65%
+36%
67%
82%
+40%
+78%
Internationalization
Diversification
M&A
Cooperation
Larger Partner
Smaller Partner
59
companies, and there is, of course, no insurance
that any one strategy will be as successful in your
company as it is in other companies. Management
is always based on the specifics of context, and
there is never just one strategy that works across
all contexts. However, executives need to know
the average success rates of a certain approach
and they should consider what turns out to be the
best practice in most companies – and then make
their considered decision. In this way, they will
come closer to what is increasingly deemed
crucial for corporate performance maximization –
Evidence-based Management.
The relatedness, i.e. similarity, of country and /or
product markets is a success factor for internationalization and diversification. In addition,
business relatedness matters to M&A success.
Finally, process-related issues, such as, for
instance, ensuring sufficient endowment with
managerial and financial resources, organizing
for sufficient deal experience, and involving local
know-how proved to nurture success across
strategies.
Figure 23 offers starting points for capitalizing on
these success factors in practice. Executives
should build creatively on these ideas to more
successfully implement the growth strategies that
best fit their corporations.
In retrospect, top executives are well-advised to
consider the best practices brought to light in
this brochure to improve their decision-making
quality. There is no need to do the same as other
Figure 22: Common Success Factors
Successful Growth
Management
Behavior
Growth
Logic
Process
Excellence
Foster
Entrepreneurial
Spirit
Leverage
Intangibles and
Capitalize on
Relatedness
Master the
Technicalities
of Growth
60
Figure 23: Ideas for Practice in Terms of Growth Success Factors
Management Behavior
Foster Entrepreneurial Spirit
· Build, maintain, and develop an entrepreneurial work environment
· Signal a belief in the power of entrepreneurship from the top
· “Try the impossible,” set challenging goals, and anchor related goals in corporate top goals
· Establish an incentive environment that elicits desired employee behaviors
· Build a climate and culture that nurtures the rapid diffusion of ideas, also across functions
· Support staff to show high levels of personal commitment
· Create pertinent awards to trigger innovation activities
· Foster and reward autonomous action
· Allow errors and recognize success
· Proactively fight bureaucracy and inertia
· Enable communication and knowledge transfers through e.g. technical councils and internal fairs
· Institutionalize entrepreneurship in implicit and explicit structures
· Maintain a lean structure and do not allow divisions to grow too big
· Keep people in small, flexible, and competitive units
· Structurally separate “new business” from “old business,” assign new management teams to these
“spin-offs,” and make them grow faster
· Consider alternative team compositions and new recruiting/training processes
Growth Logic
Leverage Intangibles and Capitalize on Relatedness
· Seek to exploit intangibles across product and country markets
· Be clear about your ownership advantages in intangibles, that they are key to successful growth
· Think twice about growth when there are no intangibles to draw on in your value propositions
· Be it on the cost or benefit side, intangibles must be used to reinforce your competitive edge
· When internationalizing, outcompete local companies by drawing on your intangibles
· Most worthwhile is leveraging a brand and technological or R&D know-how
· In business combinations, strive to bring together businesses with complementary asset bases
· Seek to combine businesses that are strategically similar, i.e. similar to manage
· Exploit product-market relatedness by cost-based and/or value-based synergies
· Strive for cost sharing, centralized procurement, combining functions, product bundling, etc.
· Pay careful attention to quantitatively estimating synergies a priori business combinations
Process Excellence
Master the Technicalities of Growth
· Ensure an adequate endowment with financial and managerial resources
· Be sure to have “digested” prior growth before opting for something new
· Organize for sufficient deal experience and market familiarity
· In particular, prior M&A experience is important
· Do not overpay as bidder in M&A and mind postmerger integration costs
· Mind the context dependency of synergies and reach a diversification strategy-context fit
· Achieve a strategy-structure fit and only centralize where synergies are to be realized
· Be aware of different cultures and ways of thinking
· Involve local know-how when internationalizing
· Choose local partners that have experience in dealing with foreign companies and cultures
· Cooperate only when access to valuable resources is provided
· Focus cooperation contracts in this respect and try to establish trust in relationships
· Continuously challenge strategic fit and economic rationales of business combinations
61
primary studies and calculating a sample-size
weighted mean correlation that is subsequently
corrected for an average attenuation factor.
Methods
The evidence-based best practices reported in this
brochure are derived from combining methods of
quantitative meta-analysis with performance
impact analysis (PIA). Quantitative meta-analysis
allows the identification of true relationships
between variables of interest. Subsequently, performance impact analysis is used to convert metaanalytic results in such a way that ROCE impacts
of alternative growth options can be systematically
quantified. In addition, Rosenthal and Rubin’s
approach of the binomial effect size display
is used to estimate success rates of alternative
strategic options.
The outcome of meta-analysis is the identification of a) true-score correlations that describe
the actual nature of relationships in terms of
direction and strength between variables and
b) third variables that moderate the nature of the
relationships.
Performance Impact Analysis
Correlations are well-suited for meta-analytic
integration, as they constitute standardized
slopes of linear associations. If we want to
express true-score correlations in a way that is
easily understood by practitioners, however, we
require information on mean and standard
deviation of both independent and dependent
variables specifically looked at. We use these
descriptives in what we label performance
impact analysis, and calculate the absolute and
relative change in ROCE if a specific growth
option is opted for by corporations. The following example illustrates the approach.
Meta-analysis
The majority of strategic management research is
plagued by empirical studies reporting conflicting results. This applies in particular to studies
investigating the performance impacts of alternative strategies. Sound theory building is made
very difficult, and delivering consistent advice to
practitioners is rendered almost infeasible.
Quantitative meta-analysis is the technique that is
used to respond to this challenge. Meta-analysis is
an analysis of analyses that statistically integrates
the results on the nature of specific relationships
from the body of single, empirical studies available on a subject. Meta-analysis elicits the true
relationships between variables of interest by
means of adjusting for statistical artifacts that
systematically distort empirical findings. It is for
this reason that quantitative meta-analysis is
superior to narrative reviews or vote-counting
methods in terms of generating valid results. The
meta-analyses underlying this brochure employ
the Hunter and Schmidt methodology (2004),
which is the most popular meta-analytic procedures in strategic management research.
The meta-analysis on the internationalizationperformance linkage suggests a true-score correlation of r = 0.11 between the variables. As a correlation is a standardized slope, this means that
an increase of internationalization by one standard deviation can be associated with an increase
of 0.11 standard deviations in financial performance. If we know mean and standard deviation
of financial performance in terms of ROCE, for
instance, and of internationalization in terms of
the ratio of foreign sales to total sales, we can calculate to what extent – in the average company –
ROCE will change when significantly increasing
internationalization. The studies underlying the
meta-analysis indicate that the mean ROCE of
the average company amounts to 0.05 with
a standard deviation of 0.06, and that the mean
internationalization degree of the average
company is 0.40 with a standard deviation of 0.25.
Following Hunter and Schmidt, true-score correlations between variables of interest are estimated
by accumulating observed correlations from
62
with y: ROCE, a: intercept, ß: regressor, x: growth
option, e: error term, r: true-score correlation,
sd: standard deviation.
Thus, an increase in internationalization by one
standard deviation, i.e. 0.25, can be associated
with an increase in ROCE by 0.11*0.06 = 0.0066.
ROCE in absolute terms changes from 0.05 to
0.0566. This would mean an increase of 13.2%.
It arises as a consequence of an increase in the
degree of internationalization from 0.40 to 0.65.
In addition, following Rosenthal and Rubin
(1982), meta-analytic results, i.e. Pearson correlations, are converted into growth option success
rates p with: p = 0.5 + r/2
We identified mean and standard deviation of
the growth strategy and performance variables
for the average company from the empirical
studies underlying the meta-analyses (Fig. 24).
Sources:
Hunter, J. E., Schmidt, F. L. (2004), Methods of Meta-analysis:
Correcting Error and Bias in Research Findings, 2nd ed.,
Thousand Oaks/CA: Sage.
The reported performance changes arise when
companies undertake significant strategic moves,
i.e. when they increase current activities in the
respective growth strategy by at least 50%.
Rosenthal, R., Rubin, D. B. (1982), A Simple, General-Purpose
Display of Magnitude of Experimental Effect, Journal of
Educational Psychology, 74(2), pp. 166–169.
The mathematical derivation underlying performance impact analysis is as follows:
(1) y = a + ß * x + e
(2) delta y = ß * delta x
(3) ß = r * (sd(y)/sd(x))
(4) delta y = (r * (sd(y)/sd(x))) * delta x
(5) If delta x = 1 sd(x), then
(6) delta y = r * sd(y)
Figure 24: Variable Descriptives
Variable
Mean
Standard Deviation
Measure
ROCE
0.05
0.06
Return on Capital Employed
Company Size
3.50
0.70
Total Sales (log)
Market Share
0.03
0.02
Absolute Market Share
Industry Concentration
0.30
0.15
4-Company Concentration Ratio
Innovation
0.04
0.03
R&D Intensity
Internationalization
0.40
0.25
Foreign Sales/Total Sales
Diversification
0.80
0.40
Total Entropy Index
M&A
1.20
2.00
No. of Prior M&A
Cooperation
2.50
3.00
No. of Prior Joint Ventures
63
Meta-analytic Literature
Bausch, A., Fritz, T. (2005), Financial Performance of Mergers and Acquisitions – A Metaanalysis, Paper presented at the 2005 Academy of
Management Meeting, Hawaii, USA.
Bausch, A., Rosenbusch, N. (2005), Does
Innovation Really Matter? A Meta-analysis on the
Relationship between Innovation and Company
Performance, Paper presented at the 2005 Babson
Kauffman Entrepreneurship Research Conference
(BKERC), Wellesley/Boston, USA.
Bausch, A., Fritz, T., Boesecke, K. (2007),
Performance Effects of Internationalization
Strategies: A Meta-analysis, in: Rugman, A. (ed.),
Research in Global Strategic Management, Vol.
13, pp. 143–176.
Boesecke, K., Bausch, A. (2005), Success Factors
of Alliances: Evidence-based Best Practices in the
Last 40 Years, Paper presented at the 2005
Strategic Management Society Conference,
Orlando, USA.
Bausch, A., Krist, M. (2007), The Effect of
Context-related Moderators on the Internationalization-Performance Relationship: Evidence from
Meta-analysis, in: Management International
Review, Vol. 47, Issue 3, pp. 1–29.
Datta, D. K., Narayanan, V. K. (1989), A Metaanalytic Review of the Concentration-Performance Relationship: Aggregating Findings in
Strategic Management, Journal of Management,
Vol. 15, Issue 3, pp. 469-483.
Bausch, A., Pils, F. (2006), Product Diversification
and Corporate Financial Performance, Paper presented at the 2006 Strategic Management Society
Conference, Vienna, Austria.
Bausch, A., Pils, F., Van Tri, D.L. (2007), In Search
of Profitable Growth: Strategic Priorities Put to a
Meta-analytic Performance Test, Paper presented at
the 2007 IABE Annual Conference, Las Vegas, USA.
64
About the Authors
Thomas Raffeiner
started his career as an electrical engineer at Siemens AG in
Germany. After having earned
his MBA, he headed the
Regional Headquarters Asia
Pacific of the Industrial Service
division of Siemens out of Singapore. He was
Senior Manager at Corporate Planning and
Development at Siemens corporate headquarters
before he joined Andersen Consulting (today
Accenture). Thomas Raffeiner became a partner
with Accenture in 2001 and was in charge of the
M&A practice and the energy market in Austria
and Switzerland. Since 2005, Thomas Raffeiner
has been a partner at the premium business consulting group The Advisory House in Zurich,
Switzerland.
Professor Dr. Andreas Bausch
was Senior Manager for mergers and acquisitions at Siemens
AG corporate headquarters
between 1996 and 1999. He
then qualified for tenured professorship at the department of
Industrial Management and Controlling at the
University of Giessen, Germany. In 1997, he was
awarded the Konrad-Mellerowicz Prize for outstanding research in management. From January
2004 to September 2006 he was Professor for
Strategic Management and Controlling at Jacobs
University Bremen (formerly International
University Bremen), Germany. Since October
2006, he has been Professor of Business
Administration and International Management
at Friedrich-Schiller-University Jena, Germany,
and Adjunct Professor of Strategic Management
and Controlling at Jacobs University Bremen.
Andreas Bausch is the Co-Founder and Academic
Director of the Executive MBA in European
Utility Management at Jacobs University, and
Guest Professor at Kansas State University in
Manhattan/KS (USA) and the Free University of
Bozen-Bolzano (Italy). His main research interests
are in strategic and international management,
controlling, and entrepreneurship.
Frithjof Pils
is Senior Manager at the Center
for Management Studies and
Research and PhD Fellow at
Jacobs University Bremen.
The authors would like to thank Thomas Fritz, Tobias Waskönig, Dirk Mulzer, and Kai Karring for their
valuable contributions.
65
Notes
66
Jacobs University Bremen
Friedrich-Schiller-University Jena
Jacobs University Bremen is an independent, private research
and educational institution situated in Bremen, Germany.
Distinguished by its international orientation and highly
selective admission process, Jacobs University fosters excellence and transdisciplinarity in research and teaching.
Approximately 1,100 undergraduate and graduate students
from more than 90 nations are pursuing their studies here.
The language on campus is English.
Friedrich-Schiller-University is a public university situated
in Jena, Germany. Founded in 1558, it is today a modern
institution that encourages interdisciplinarity and internationality in research and education. The university is organized into ten schools, among which, for instance, are the
School of Medicine, the School of Physics and Astronomy,
and the School of Economics and Business Administration.
In 2008, a number of 21,000 students are enrolled at Jena
University, specializing in more than 100 different courses of
study. The university cooperates with more than 270 universities and research institutions and with more than 200
industry partners worldwide.
www.jacobs-university.de
The Advisory House
www.uni-jena.de
The Advisory House is an independent management and
strategy consultancy with a healthy growth track record. Our
consulting competencies span all aspects of strategy development and operative implementation. Our offices in Zurich,
Munich, and Vienna serve clients all across Europe.
www.advisoryhouse.com
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