The dynamics of diversification: Market entry and exit by public and private firms

Abstract

Research summary:We replicate one of the first studies on the dynamics of diversification, Chang (1996). Our sample of public and private firms from 1992 to 2001 yields findings similar to the earlier research. Firms tend to enter new markets that have human resource profiles that are similar to the firms' existing businesses, and exit markets that have dissimilar human resource profiles. This general finding is robust to alternative specifications and controls, including the timing of market entry and technological diversification. However, we also find that entry and exit by private firms is much more prevalent than that by public firms. Differences in how public and private firms diversify based on knowledge similarity invite further research in evolutionary economics.Managerial summary: Chang (1996) revealed that large, public manufacturing firms in the 1980s tended to enter new businesses that leveraged the firm's knowledge, some of which is embedded in routines among employees sharing similar occupations. The new businesses provide the basis for further expansion, while a firm divests businesses that do not stay profitable, or which no longer match the firm's new portfolio of businesses. Our data show that these patterns continued in the 1990s. Our sample also includes private firms, which conduct the majority of market entry and exit. Private firms enter new businesses with different proportions of scientific and marketing personnel than their existing operations. Thus, diversification still reflects knowledge resources for smaller, private firms, but differently than for the largest firms in the economy. reductions in firm scope over time. 1 In his landmark paper, he made three main contributions to an evolutionary economics view (Nelson and Winter, 1982) of how diversification develops. First, he considered market entry and exit together, which 1 Starting with Gort's (1962) seminal book, a few other dynamic analyses of diversification predate Chang (1996), primarily focused on explaining firm financial performance, not behavior. In the management literature, Palepu (1985) tested one longitudinal hypothesis about related diversification, Hill and Hansen (1991) examined changes in diversification in the U.S. pharmaceutical industry, and Pennings, Barkema, and Douma (1994) analyzed "expansion projects" (i.e., market entry) in terms of organizational learning. 2325 2 Chang (1996) used the change in ROA and operating cash flows (OCF) over a 14-year period to measure performance. In our view, later research that controlled for riskiness of cash flows and self-selection of diversification strategy greatly improved the specification of models for testing the relationship between diversification and financial performance.

Dynamic resource redeployment in global semiconductor firms

“…The previous incumbent business‐target category similarity and previous deepening‐target similarity are positively related to entry and deepening decisions, with p values <0.01 in most models, meaning that firms are more likely to enter and deepen businesses similar to their incumbent businesses. Previous entry‐target category similarity is positively related to the likelihood of entry with p value of 0.019 for whole in model (2) and with p value of 0.075 for fabless firms in model (6), which is in line with the sequential entry hypothesis: firms generally enter businesses similar to previously entered businesses based on intratemporal scope economies (Chang, 1996; Miller & Yang, 2016a).…”

“…A firm's sequential entry and exit pattern is a manifestation of intratemporal scope economies. That is, a firm sequentially searches for new businesses to enter where it can leverage its existing resources, including those from previously entered businesses, and also sequentially exits businesses whose resources are less similar to other incumbent businesses and so cannot enable economies of scope (Chang, 1996; Miller & Yang, 2016a). More recent literature, however, pays closer attention to resource redeployment to other businesses over time, based on “intertemporal scope economies” (Helfat & Eisenhardt, 2004).…”

Knowledge-based marketing and competitive advantage: developing new scales using mixed method approach

“…One point of view is that KBM refers to marketing strategies that are formed based on a broader understanding of marketing knowledge (Cader, 2007). As a knowledge-based capability, which is vital to gain CA (Berman et al, 2002;Miller and Yang, 2016), KBM deals with new trends in marketing, such as customer learning orientation, competitive learning capability and marketing knowledge variety. Customer learning orientation is the capability based on which the company acquires customers' information and uses them in developing marketing strategies and creating value for the customers (Feng et al, 2012).…”

Not All Wine Businesses Are the Same: Examining the Impact of Winery Business Model Extensions on the Size of Its Core Business

“…This research deals with BM and takes a resource-based approach because it is more suitable for agri-food SMEs, as they rely on finite and scarce resources, knowledge, and relations, all identified to be major elements of a resource-based theory by Acedo et al [79]. It does not deal with BM diversification, as this approach tends to be more suitable in the publicly traded companies with abundance of capital and human resources, operating globally [80][81][82]. These conditions do not apply to the German SME wineries, therefore deeming a resource-based approach more suitable.…”