Academic journal article Journal of Small Business Strategy

Diversification in Small Firms: Does Parental Influence Matter?

Academic journal article Journal of Small Business Strategy

Diversification in Small Firms: Does Parental Influence Matter?

Article excerpt

Introduction

"Diversification is like sex: its attractions are obvious, often irresistible. Yet the experience is often disappointing." (Grant, 2008: p. 409)

The above quote suggests that diversification is a common goal for most businesses, despite research indicating that diversification often has negative consequences (Arikan & Stulz, 2016; Graebner, Eisenhardt, & Roundy, 2010). Extent research suggests that most corporate acquisitions are later divested (e.g. Phelps, 2010), merger activity often leads to a loss in shareholder value (e.g. Malhotra, Ku, & Murnighan, 2008), and firms pay irrationally large takeover premiums to acquire targets (e.g. Lunnan & Haugland, 2008). Research also indicates that internal diversification efforts such as adding cost leader products to a differentiated product line and launching offerings in different industries tend to have limited profits and often take resources away from a firm's main market offerings (Dunlap-Hinkler, Kotabe, & Mudambi, 2010), leading to reduced long-term profits (Govindarajan & Trimble, 2010). Notably though, such research primarily focuses on large, established ventures, resulting in a lack of scholarly understanding of diversification patterns in small firms (Deligianni, Voudouris, & Lioukas, 2014; Diestre & Rajagopalan, 2011; Nippa, Pidun, & Rubner, 2012). This gap is particularly troubling because research indicates that diversification efforts in small firms may have more influence on profitability, growth, and survival compared to comparable efforts within large, established ventures (Stern & Henderson, 2004). Given this, the present paper examines an important piece of the small firm diversification puzzle by studying if the product lines of small, subsidiary firms are more or less diversified than those of small, independently owned firms.

Interestingly, diversification efforts represent a conundrum for small firms. Importantly, small, independent firms diversify for a variety of reasons such as to protect their firm's income (e.g. Rosa, 1998), enhance their chance to survive specific market downturns (e.g. Sandvig & Coakley, 1998), and build wealth for the firm's owner (e.g. Gutter & Saleem, 2005). Notably however, small, independent firms often have limited access to critical resources (Zimmerman & Zeitz, 2002) hindering their abilities to undertake critical diversification efforts (Rutherford, Tocher, Pollack, & Coombes, 2016). Conversely, corporate parents tend to invest in small firms to add the small firm's specific market offerings to the parent's portfolio and thus likely want the small business to stay focused on continual improvement of such market offerings (Carroll, Bigelow, Seidel, & Tsai, 1996). That said, it must also be noted that the presence of a corporate parent will likely expand small subsidiary access to resources, enhancing small subsidiary's chances to successfully undertake desired diversification efforts (Murphy & Tocher, 2011). Further, while such diversification efforts are likely desired by the subsidiary's managers for income and market protection (Gutter & Saleem, 2005; Sandvig & Coakley, 1998), they may not be desired by parent firms following a portfolio management strategy (Lange, Boivie, & Henderson, 2009). Hence, a conundrum exists whereby small, independent firms may need to diversify for their firm's wellbeing, but are not able to; while small, subsidiary firms may possess access to resources needed for diversification, but their corporate parent may not want them to do so. Perplexingly, despite this conundrum, little research has examined if the presence of a corporate parent affects diversification patterns of small firms (Diestre & Rajagopalan, 2011).

Given the above, the present paper contributes to the literature by providing one of the first studies of the diversification patterns of small, independent firms versus small, subsidiary firms. …

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