This presentation file was prepared by Matt and Suh-hee, Ph.D. students in Hospitality and Tourism management at Purdue University. It was designed for one of the presentations in HTM 681 class (about advanced hotel management). It explains basic ideas and types of diversification and recent research trends on this topic.

1. Diversification Jan. 27, 2009 Matt Mosley Suh-hee Choi HTM 681 2nd topic

2. three levels of Business strategies (Dess et al., 1995) International level Corporate level Business level

3. Definitions of diversification(from Ramanujam & Varadarajan, 1989, 524) Older definition (e.g. Gort,1962) Many markets  output should be heterogeneous (products serve separate markets) Lack of synergy and resource sharing concept Newer definition (e.g. Booz et al., 1982) A means of spreading the base of a business to achieve growth and/or reduce overall risk that includes all investments except those aimed directly supporting the competitiveness of existing businesses; may take the form of investments that address new products, services, customer segments, or geographic markets; and may be accomplished by different methods including internal development, acquisition, joint ventures, licensing agreements, etc. Ramanujam & Varadarajan (1989) : “the entry of a firm or business unit into new lines of activity, either by process of internal business development or acquisition, which entail changes in its administrative structure, systems, and other management processes. “

4. Scope of diversification (Dess et al., 1995) Product diversification Proctor and Gamble Toothbrushes + Toothpaste Geographic diversification Expansion to foreign countries

5. Levels of diversification Low --- Moderate --- High --- Very high Low Single business (>95%) Dominant business diversification (70~95%)

6. Levels of diversification Low --- Moderate --- High --- Very high Moderate-high Related constrained diversification Related linked diversification strategy (related + unrelated)

7. Levels of diversification Low --- Moderate --- High --- Very high Very high Unrelated

8. types of diversification Horizontal Vs. Vertical Diversification Horizontal Not associated with current products Good when the new product is in the same economic environment (culinary : knife  fork, restaurants: Yum Brands) Vertical Associated with current products but not on the same level of the supply chain

9. http://www.youtube.com/watch?v=fHIjxqbNRg4

10. brief look -- hospitality 1886 – Canadian Pacific Railroad Company Owned 14 hotels Inter-Continental Hotels PepsiCo/Yum Brands Marriott

11. theories Resource-based theories of diversification Portfolio theory Agency theories Transaction costs theory : internalization theory (Hennart, 1991) Strategic theory -- Competence-based theory of the firm (Foss, 1993; Teece et al., 1994; Penrose, 1995) Network and cluster theory

12. Value-creation Value creation types: Related ----- Unrelated (Teece, 1982) Market Power Growth Risk Minimization Consumer Perspective Need Fulfillment Hotels not in travel destinations Why do firms diversify?

13. Value-creating Strategies of Diversification:Operational and Corporate Relatedness Related Constrained Diversification ( Vertical Integration) Both Operational and Corporate Relatedness High Unrelated Diversification Related Linked Diversification (Economies of Scope) Sharing: Operational Relatedness Between Business Low Low High Corporate Relatedness: Transferring Skills Into Business Through Corporate Headquarters

14. Related diversification strategy Competitive advantage by synergies Operational relatedness – share the resources – reducing costs : economies of scope/scale Corporate relatedness – share the corporate competencies: managerial, technological knowledge and expertise – leveraging brand Market power Multimarket

15. unrelated diversification strategy Means.. No identical strategies / brand identities No value chain relationship Diversifying business to any sectors Profitable acquire of other assets

16. unrelated diversification strategy Benefits Reducing risks by engaging in diverse sectors Enhancing profit by purchasing bargained companies Ability to invest money into the business sector with higher profitability / potential Disadvantages Hard to manage all the businesses in diverse sectors Difficult to enhance synergy effects

17. Previous research

18. Previous research Singh (2007) Diversification doesn’t work What Types of Value Creation? Rumelt (1974) Ways of diversification and its efficiency Sharma et al. (2007) Diversification works! Geographic diversification Additional factors A lot of studies from Academy of Management Journal and Strategic Management Journal

19. Previous research Rumelt’s 1974 work : fail to control industry factors

20. Previous Research Economic/ Finance Strategy Corporate Diversification Global Media Conglomerates (Chan-Olmstead & Chang, 2003) US service firms (Nayyar, 1992) Hospitality and Tourism • A lot of cases studies and articles but not many academic studies • Case studies : Applebee’s diversification didn’t really work (NRA, 1999) Case studies by each industry sector Perspectives

21. How to do research on this topic? TONS OF Diversification – performance relationship testing (e.g. Rumelt, 1974) Possible variables indicating diversification geographic : degree of multinationality , R&D + advertising intensity (stock of intangibles) organization structure (moderates the effect of diversification on performance) (Hill, Hitt & Hoskisson, 1992) Possible variables indicating accomplishments Financial performance Tobin’s q ROA (Kim et al. 1993)  does not show intangible assets

22. Possible Research Ideas Control system Develop a model that businesses can use to help decide if diversification would be beneficial to them or not Are the current models for estimating the value of diversification accurate? More sophisticated, controlled research needed Distinguishing corporate / business level Considering geographic, cultural factors Controlling variables Other mediating / moderating factors? International diversification the moderating role of a local partner. The mediating effect of technology in international diversification Academic research in hospitality and tourism industries needed

23. references Booz Allen Hamilton Inc., New Products Management for the 1980s. Booz Allen and Hamilton, Inc., New York, 1982 Dess, G. G., Gupta, A., Hennart, J.-F., & Hill, C. W. L. (1995). Conducting and Integrating Strategy Research at the International, Corporate, and Business Levels: Issues and Directions. Journal of Management, 21(3), 357. Gort, M. (1962). Diversification and Integration in American Industry, Princeton, NJ: Princeton University Press Hill, C. W. L., Hitt, M. A., & Hoskisson, R. E. (1992). Cooperative versus Competitive Structures in Related and Unrelated Diversified Firms. Organization Science, 3(4), 501-521. Morck, R., & Yeung, B. (1991). Why Investors Value Multinationality. The Journal of Business, 64(2), 165. Nayyar, P. R. (1992). On the measurement of corporate diversification strategy: Evidence from large U.S. service firms. Strategic Management Journal, 13(3), 219-236. Piscitello, L. (2004). Corporate diversification, coherence and economic performance. Ind Corp Change, 13(5), 757-787. Ramanujam, V., & Varadarajan, P. (1989). Research on Corporate Diversification: A Synthesis. Strategic Management Journal, 10(6), 523-551. Rumelt, R.P. (1974). Strategy, Structure and Economic Performance. Cambridge, MA: Harvard University Press. Sharma, R. S., Priscilla Teng Yu Hui, & Tan., M.-W. (2007). Value-added knowledge management for financial performance VINE, 37(4), 484-501. Singh, M., Nejadmalayeri, A., & Mathur, I. (2007). Performance impact of business group affiliation: An analysis of the diversification-performance link in a developing economy. Journal of Business Research, 60(4), 339-347.