Conglomerate Restructuring in the 1980'S: A Study of Performance/ Strategy Linkages

Abstract

certain conglomerate strategies associated with high levels of corporate performance? Are other strategies associated with lower levels of corporate performance?This study is particularly important given the strong prescriptions to avoid the conglomerate form which have emerged from diversification research. Along these lines, diversification research generally assumes that strategy drives performance. That is, related diversification leads to higher performance than umelated diversification. The diversification research paradigm seems to acknowledge a feedback loop from performance back to subsequent strategy, but this feedback loop has clearly been ofsecondary importance. Given the cross-sectional nature of many past research designs, the strength of this feedback loop has rarely been examined empirically.The purpose of this paper is to examine performance/strategy and strategy/performance relationships in conglomerates. To what degree does poor corporate performance lead to strategic restructuring? Is this feedback loop strong enough to discourage conglomerates with adequate performance from restructuring? Or have the hostile macro-level changes facing conglomerates been so strong that the general trend to de-conglomerate is an overwhelming influence?This paper will examine one type of restructuring, the divestiture of one or more major business segments. A business segment is a group of corporate businesses (business units) as defined by management for presentation in segment reporting within annual financial statements. Despite the fact that these business segment definitions are based upon management perceptions of business activity (which may not be consistent across corporations), these measures have been commonly used in diversification research (Grant, Jammine and Thomas 1988; Lee and Cooperman 1989). Business segments are, by definition, very broad. Therefore, the divestment of even a single business segment could suggest a major change in corporate strategic direction. This paper will use the term conglomerate "focusing" to describe this type of restructuring. Other types of restructuring, not examined in this paper, include: 1) internal reorganizations, including the reshuffling ofbusiness units into other business segments, 2) repositioning of the corporate portfolio by divesting entire business segments, including acquiring completely new business segments, and 3) partial retrenchments within a business segment (by selling a few individual business units, but maintaining the core ofthe business segment).The period of conglomerate restructuring in the 1980s provides an ideal opportunity for examining these performance/strategy linkages because: 1) despite the pressures facing conglomerates in general, a fairly large number of conglomerates did not engage in focusing during this period, 2) performance varied significantly between conglomerates (Dundas and Richardson 1982), and 3) many of the conglomerates had focused so dramatically that the conglomerate form had been abandoned (Lee and Cooperman 198...

Corporate restructuring, performance and competitiveness: an empirical examination

“…A study by Brumagim and Klavans (1994) also found that some conglomerates benefited from becoming more focused.…”

“…It is strongly correlated with other relevant performance measures such as return on sales (ROS) and return on equity (ROE). Consistent with Hoskisson and Johnson (1992) and Brumagim and Klavans (1994), we averaged ROA in our analysis for the two-year post-restructuring period we designated in our definition. The two-year average ROA was used to minimize the effects of random fluctuations.…”

“…For instance, divisions of diversified firms do not perform as well as similar businesses that standalone or are part of related-business firms (Lichtenberg, 1990). The empirical study by Brumagim and Klavans (1994) found that some conglomerates benefited from becoming more focused. They reported that corporate performance in terms of return on equity and profit margin experienced significant improvement within two years after the conglomerate's refocusing actions.…”