Academic journal article Advances in Competitiveness Research

Restructuring Strategies That Change Corporate Focus: An Empirical Investigation of Their Performance Consequences in the Early 1990s

Academic journal article Advances in Competitiveness Research

Restructuring Strategies That Change Corporate Focus: An Empirical Investigation of Their Performance Consequences in the Early 1990s

Article excerpt

INTRODUCTION

Since 1980, American corporations have engineered a huge number of mergers, acquisitions and divestitures (Johnson, 1996). The large merger wave is often described as an adjustment to changing environmental conditions and as a correction for over-diversification during the 1960s and 1970s (Markides, 1995; Business Week, July 1, 1985). Apparently, corporate managers began to recognize that the additional corporate infrastructure needed to manage a larger portfolio of unrelated businesses was exceeding the financial benefits bestowed to the firm through corporate coherence and control (Collis and Montgomery, 2005). Moreover, as shareholders felt the negative financial impact of these diversification tactics, they began pressuring top management to develop and implement better corporate strategies to maximize shareholder wealth (Bhagat et al, 1990; Comment and Jarrell, 1995; Hoskisson and Turk, 1990; Markides, 1992 and 1995). In response to these pressures, top managers began engaging in "corporate refstructuring", which are strategies aimed at changing the scope of the corporation's activities and the relatedness among businesses within the corporate portfolio.

The corporate restructuring literature is still in the embryonic stages of theoretical and empirical development. Specifically, scholars have mainly concentrated on organizational and environmental antecedents of corporate restructuring, such as changes in governmental anti-trust regulations (e.g., Davis et al, 1994; Shleifer and Vishny, 1991, Weston et al, 1990), stock market reactions to corporate strategy (e.g., Matsusaka, 1990; Morck eta al, 1990; Kaplan and Weisback, 1990), innovations in takeover financing (e.g., Davis et al, 1994), agency problems (e.g., Jensen, 1986; Hoskisson and Turk, 1990) and performance deterioration due to excessive diversification (e.g., Markides, 1992), and as a management fashion (Nicolai and Thomas, 2006). More recently, this line of research has been extended to emerging economies, as researchers attempted to identify the impact of changing economic environment in these areas on business groups' restructuring efforts (e.g., Hoskisson et al, 2005; Kim et al, 2004). While many insights are scattered through this literature, it leaves several unanswered questions that motivated this research:

* What types of corporate restructuring strategies exist that change corporate focus?

* What are their performance implications?

* Are there significant performance differences among the different types of restructuring strategies that change corporate focus?

For instance, in an effort to scale back from the overarching conglomeration movement, many Korean chaebols started their restructuring programs in the late 1990s post Asia financial crisis. In this process, some companies such as LG significantly reduced their number of business units to include smaller set of unrelated businesses in its portfolio (Kim et al, 2004), while others such as Hyundai actually increased their core business by acquiring related business units (Kim et al, 2004). The question that remains to be answered is: Given the same objective of increasing focus while reducing the high diversification levels of their portfolios, why do these companies pursue different approaches and how would these strategies affect their performance? This gap in the existing literature is important because filling it will provide a much deeper understanding of the multifaceted natures of corporate restructuring, which, as we will illustrate below, is not simply equivalent to reduction of diversification as many previous studies have suggested.

This research addresses these questions in the following manner. The first section summarizes the findings of previous studies that examined the relationship between corporate restructuring and firm performance. The second section defines the construct (restructuring strategies that change corporate focus), develops a classification of these strategies, and presents hypotheses derived from the classification. …

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