| Stabilizing Company Cash Flows: Strategy, Scope, and New Alternatives |
| | Bethel, Jennifer | Babson College / U.S. Securites & Exchange Commission | bethelj@sec.gov | (202) 492-1987 |
| | Anecdotal and empirical evidence suggests that managers may try to stabilize firms' cash flows by altering diversification strategy; that is, they diversify into countercyclical or low-variability businesses to reduce cash flow risk. This type of diversification, however, may not be in shareholders' best interests, especially if it does not create synergistic gains. In these instances, shareholders may prefer that managers adopt lower cost alternatives for managing risk.
In this paper, we argue that managers may be able to use financial products, such as derivatives and asset-linked securities, to stabilize certain types of cash-flow fluctuations. Managers' choice between using real and financial assets should depend, at least in part, on the costs and benefits of conglomerate diversification, relative to the costs and benefits of using financial products. When conglomerate diversification is less profitable than related diversification, shareholders may prefer that managers reverse prior conglomerate diversification, adopting instead related business strategies and hedging risk using financial products. They will also want managers to forgo new investments in unrelated businesses. These preferences will be especially storng when managers can more finely manage risk using financial products than real assets. Using financial assets to manage cash-flow volatility, however, can impose cots. THese cots will be greates when standardized market cotnracts are nto readily available and when secondary markets for financial assets are illiquid. Costs iwll be high when firms alck the expertise and the control systems necessary to hedge risks appropirately. EHnce there are offsetting costs and benefits to adopting different risk management strategies. |
| | Keywords: Risk; Diversification |
| Corporate-Divisional Relations and Divisional Performance in Strategy Implementation |
| | Chu, Wenyi | National Taiwan U. | wenyichu@handel.mba.ntu.edu.tw | 886-22364-5141 |
| | Chuang, Cheng-Min | National Taiwan U. | cmchuang@handel.mba.ntu.edu.tw | (8862)2363-0231 ext. 2936 |
| | Recent academic studies on diversification have argued that the HQ-divisional relations should differ accordingly in order to implement the firm's chosen strategy effectively. When examining the internal differentiation, scholars have adopted an economic and structural approach. That is, the appropriate HQ-divisional relation, particularly divisional autonomy, is determined by contingency variables: when a division is following a differentiation strategy, is facing a volatile environment, and is not sharing resources with other divisions, the granting of autonomy will lead to improved divisional performance. However, costs and risks may also pertain to autonomy: loss of control, unnecessary and costly repetitions in every division, and insufficient transfer of best practice within the organization. Therefore, we argue that, in addition to autonomy, culture and shared values are important. Shared values create a sense of reciprocity within the organization and help match individual interests with organizational goals.With strong shared values the corporate center will be more willing to grant autonomy without the fear that its divisions will misbehave. Effectiveness thus should be determined by the interaction of autonomy, contingency variables, and shared values. Statistical evidence was provided to support our predictions. |
| | Keywords: diversification; autonomy; performance |
| The Determinants of the Expansion Process of the Spanish Savings Banks |
| | Fuentelsaz, Lucio | U. de Zaragoza | lfuente@posta.unizar.es | (34-976)-76-1000 |
| | Gomez-Villascuerna, Jaime | U. de Zaragoza | jgvillas@posta.unizar.es | (34-976)-76-1000 |
| | This paper studies the determinants of the expansion process carried out by the Spanish savings banks during the period 1986-1996, after the restrictions which impeded them to operate all over the national territory were removed. The model we use is the one initially proposed by Lemelin (1982). We adapt the methodology recently presented by Merino and Rodríguez (1997) for the consistent analysis of diversification decisions to the geographic diversification case. In accordance to previous studies, our results show that firm specific characteristics and objective market features are important to explain diversification patterns in the Spanish savings bank market. |
| | Keywords: Entry decisions; Spanish banking competition; Geographic diversification |
| Technological vs. Product Market Diversification: Economies of Scope for Innovation |
| | Heeley, Michael B. | Georgia Institute of Technology | michael.heeley@mgt.gatech.edu | (404) 894-4370 |
| | Matusik, Sharon F. | Rice U. | matusik@rice.edu | (713) 737-6139 |
| | Hansen, Gary S. | U. of Washington | hansen@u.washington.edu | (206) |
| | Wernerfelt’s seminal article establishing the resource based view of the firm specifically argues that looking at the firm in terms of its resources leads to different insights than the traditional product perspective, especially with regard to diversified firms (Wernerfelt, 1984). This study examines the relationship between innovation and both resource (technological) and traditional product market diversification. This paper investigates innovation because its relationship to diversification has received only limited attention, despite the ability of innovation to provide a window not only on the firm’s current competitive position, but also on its potential into the future.
This study contributes to the strategic management literature by building and testing a comprehensive model of the link between diversification and innovation. Specifically, this model contributes in four ways. First, it examines the little studied relationship between diversification and innovation. Second, it studies which source of economies of scope is important by simultaneously testing the relationship between both product market and technological diversification on inventive productivity. Third, it investigates the effect of related as well as unrelated product market diversification on inventive productivity. Fourth, it studies diversification’s effect on inventive productivity with a measure that accounts for the value and appropriability of firm innovation.
The results indicate that both technological and related product diversification play an important role in inventive productivity. Contrary our expectation, product market diversification is relatively more important. This suggests that market opportunity, rather than technological capability, is a greater driver of invention.
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| | Keywords: innovation; diversification |