Economies of Scope, Resource Relatedness, and the Dynamics of Corporate Diversification

Sakhartov, Arkadiy V.

doi:10.1002/smj.2654

Cited by 53 publications

(43 citation statements)

References 56 publications

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“…Still further, one implication of our work is that even though diversification and refocusing shift firm scope in opposite directions, the costs of refocusing may or may not be the reverse of the benefits of diversification. On the one hand, just as the benefits of related diversification exceed those of unrelated diversification (Bryce & Winter, ; Chang, ; Helfat & Eisenhardt, ; Levinthal & Wu, ; Sakhartov, ), our results suggest that refocusing costs are larger when firms remove related rather than unrelated businesses. On the other hand, however, while there is no agreed‐upon theory about the durability of the gains from related versus unrelated diversification (perhaps suggesting an interesting direction for future research), our results reveal that refocusing costs persist for longer when firms remove more related businesses.…”

Section: Discussionmentioning

confidence: 65%

“…Importantly, the source of synergy in firms with related businesses may also arise from operational interdependences, or the extent to which one activity in a company depends on another related activity within that firm (Capron, Dussauge, & Mitchell, ; Kaul, ; Teece, Rumelt, Dosi, & Winter, ). Thus, at least since Rumelt's () seminal work, scholars have recognized that related diversification creates more value for firms than unrelated diversification because of its synergy potential (Bryce & Winter, ; Chang, ; Levinthal & Wu, ; Sakhartov, ).…”

Section: Theory and Hypothesesmentioning

confidence: 99%

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The costs of refocusing: Evidence from hedge fund closures during the financial crisis

Figueiredo

Feldman

Rawley

2019

Strategic Management Journal

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However, refocusing can also reduce economies of scale and scope, and will often impose direct operational costs associated with the refocusing event itself. Although recent research has acknowledged that refocusing may impose costs on firms (Alaix, 2014; Feldman, 2014;Wiedner & Mantere, 2018), there are major conceptual and empirical gaps in our knowledge about refocusing costs.Conceptually, there is a lack of clarity surrounding where refocusing costs come from, which limits our ability both to fully characterize the implications of an important corporate strategic decision (i.e., scope reduction) and to advise managers on how to mitigate these costs. As such, in this paper, we argue that there are two broad mechanisms that drive refocusing costs. First, refocusing may destroy synergies, whereby businesses are no longer able to share overlapping activities and operations. Second, refocusing may create adjustment costs, whereby the common management activities that underpin the functioning of the entire organization are temporarily impaired. We therefore characterize and investigate the mechanisms driving refocusing costs along two dimensions: the degree of relatedness between the business that has been removed and its sister divisions, and the duration of time over which refocusing costs persist.Empirically, testing theories about refocusing is challenging because selection effects make it difficult to measure refocusing costs. When managers choose to refocus, the benefits of doing so typically outweigh the costs, obscuring a researcher's ability to observe such costs by looking at performance data. Thus, one possible interpretation of the finding that endogenous refocusing is associated with an improvement in operating performance is that although the benefits of refocusing outweigh the costs, some costs of refocusing are present whenever managers choose to refocus. Employing some simple notation to clarify what "costs" means, we denote the gross benefits of refocusing (GB) as the operational gains associated with a reduction in firm scope, and the gross costs of refocusing (GC) as any associated cost that offsets the gross benefits of refocusing. Thus, the net implications of refocusing (NET) are GB − GC. If managers only choose to refocus when there are net benefits of refocusing, meaning that NET = GB − GC > 0, one will not be able to measure GC by studying the relationship between refocusing and performance, even if GC > 0.A key empirical question then becomes how to measure the costs of refocusing. Notably, when exogenous factors force managers to reduce the scope of the firm, it means that the equilibrium conditions for positive net performance implications of refocusing do not hold. Thus, when exogenous refocusing takes place, one might expect there to be net costs of refocusing-in other words, NET = GB − GC < 0-and, therefore, refocusing should be associated with a decrease in operating performance. Thus, we test our theory of refocusing costs by inferring the net costs of refocusing from decreases in...

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Section: Discussionmentioning

confidence: 65%

Section: Theory and Hypothesesmentioning

confidence: 99%

The costs of refocusing: Evidence from hedge fund closures during the financial crisis

Figueiredo

Feldman

Rawley

2019

Strategic Management Journal

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“…In the ORBIS data, this is operationalized by defining firms as a liates if their independence score is a C or D. This operationalization is conservative as some nongroup a liates may be able to benefit from flexibility and transfer factors between markets. Also, some groups will have businesses that are not able to use each others' inputs or face a high cost of doing so Sakhartov (2017). These two facts bias us against finding results.…”

Section: Datamentioning

confidence: 98%

Flexible Production and Entry: Institutional, Technological, and Organizational Determinants

2019

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Academics, the media, and policymakers have all raised concerns about the implications of human workers being replaced by machines or software. Few have discussed the implications of the reverse: firms' ability to replace capital with workers. We show that this flexibility can help new firms overcome uncertainty and increase entrepreneurial entry. We develop a simple real options model where permissive labor regulations allow firms to take advantage of capital-labor substitutability by replacing 'rigid' capital with 'flexible' labor. The model highlights institutional, technological, and organizational preconditions to using this flexibility. Using a large and comprehensive dataset on entry by standalone firms and group a liates, we provide evidence in support of the model.

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“…Return correlation ρ ij can be approximated with correlation of mean ROA between industries. Costs S ij of redeploying nonscale free resources between industries i and j can be estimated as the Euclidean distance between profiles of those industries in terms of tangible resources (Sakhartov, ).…”

Section: Toward Empirical Identification Of Resource Undervaluationmentioning

confidence: 99%

Stock market undervaluation of resource redeployability

Sakhartov

2018

Strategic Management Journal

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Research Summary: Stock market undervaluation of resources was often assumed to have strategic implications. Such undervaluation lets firms buy resources relatively cheaply, but it can also constrain resource deployment. This article shows that the option to redeploy a firm's resources to a new business can be undervalued in stock markets when investors face ambiguity about that option due to uniqueness of redeployment. The developed formal model derives conditions under which stock markets undervalue resources. Those conditions are summarized with an empirical operationalization that can be tested with a broad range of strategic implications. Besides, the model provides a more complete account of resource redeployability by demonstrating the redeployability paradox. The paradox highlights that some determinants of redeployability enhance undervaluation, while simultaneously increasing objective value of redeployable resources. Managerial Summary: Stock markets can systematically undervalue resources. On the one hand, such undervaluation creates a profitable opportunity for a firm that needs some resources for its growth and compares the option to buy stock in another firm, whose resource are undervalued, with the option to build those resources internally. On the other hand, such undervaluation poses limits to resource deployment strategies of the undervalued firm. When does such undervaluation occur? This study highlights one possible source for undervaluation, ambiguity that is faced by stock market investors about the option to redeploy a firm's resources to a new business. The study specifies conditions under which stock markets are more likely to undervalue resources. The understanding of those conditions can guide managers toward strategic opportunities.

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Economies of Scope, Resource Relatedness, and the Dynamics of Corporate Diversification

Cited by 53 publications

References 56 publications

The costs of refocusing: Evidence from hedge fund closures during the financial crisis

The costs of refocusing: Evidence from hedge fund closures during the financial crisis

Flexible Production and Entry: Institutional, Technological, and Organizational Determinants

Stock market undervaluation of resource redeployability

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