Successful Growth Strategies

Successful Growth Strategies Evidence-based Best Practices Center for Management Studies Preface When striving for shareholder value creation, corp...
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Successful Growth Strategies Evidence-based Best Practices

Center for Management Studies

Preface When striving for shareholder value creation, corporate top executives consider growth the most important path to boosting performance. The vast majority of the Global Fortune 500 companies, for instance, repeatedly post high sales growth. But does growth always succeed? Do specific growth strategies succeed more than others? And are there success factors that make specific strategies work? In this brochure, we provide evidence-based answers to these questions. On the basis of more than 200,000 empirical company observations, strategic options, such as innovation, internationalization, diversification, as well as mergers and acquisitions and cooperation, are quantitatively evaluated and compared in terms of financial performance effects. Both results presented and analytical method applied are an innovation in the management discipline. So-called psychometric metaanalysis methodology is used that, to date, is primarily applied in medicine and applied psychology. Within these domains meta-analysis has virtually become a gold standard, and is widely employed as a basis for therapy recommendations.

By means of statistically integrating the entire set of single empirical studies available worldwide, metaanalysis can generate evidence-based results that represent the status quo of empirical knowledge on specific topics of interest. The methodology allows for a scientifically valid derivation of best practices. In the management discipline, however, few researchers are acquainted with meta-analysis methodology, and even fewer practitioners draw on meta-analytic findings as decision-making support. And yet, with ten meta-analyses accomplished to date, the Center for Management Studies (CMS) at Jacobs University Bremen and Friedrich-Schiller-University Jena has an exposed position in this domain. In cooperation with The Advisory House AG, CMS presents in this publication its most recent research findings on successful growth strategies. As much as meta-analysis may be used to find those therapies that best cure patients from disease, it may be applied to cure companies from inferior performance. The authors hope that this brochure becomes a helpful companion for executives on their way to profitable growth.

Contents Executive Summary


About the Center for Management Studies


A. Growth, Value, and Profitability


B. Innovation


C. Internationalization


D. Diversification


E. In Search of High-Growth Excellence


F. Mergers and Acquisitions


G. Cooperation


H. Summary




Meta-analytic Literature


About the Authors


Executive Summary Quantitatively integrating the entire body of empirical research published on the focal topics (US, European, and Asian companies), we find that company size growth per se does not pay off. This contrasts with the belief widely held among practitioners that “corporate bigness” is a panacea for company survival and value creation. In fact, executives myopically pursuing company growth are ill-advised. Instead, differentiated approaches are required when going about developing and growing a corporation successfully.

frequently postulated value-destruction theories of M&A actually do not hold, to stress but one surprising insight of our analyses. In addition, we have evidence of success factors that elevate specific strategies’ success rates and ROCE effects. With a view to internationalization, we find that entrepreneurial behavior and intangible assets drive success. And with a view to innovation, we find that entrepreneurial minds must meet the required capital and spawn radically new products, to give yet another example.

Another general implication of our analyses is that company profitability is influenced by both industry- and company-level factors. Ideally, high levels of industry attractiveness are joined with strong competitive positions. Specifically, results indicate that industry concentration and company market share have strong positive performance effects. While this scenario will often be hard to achieve in growth projects, it is what companies should generally aspire to.

Strikingly, some success factors are found to apply across growth strategies. Entrepreneurial orientation, for instance, increases success rates and performance effects of innovation as well as of internationalization. The leveraging of intangible assets, such as technological know-how or brands, elevates the success of internationalization and mergers and acquisitions. The relatedness of country and /or product markets is a success factor for internationalization, diversification, and M&A. Finally, process-related issues, such as ensuring sufficient endowment with managerial and financial resources, organizing for sufficient deal experience, and involving local know-how, for instance, prove to nurture success across growth strategies.

A differentiated look at the performance consequences of specific growth strategies shows that substantially increasing innovation activities enhances performance in 64% of cases and leads on average to an increase in return on capital employed (ROCE) by 34%. Alongside innovation, internationalization also emerges as a promising option. With a success rate of 55%, internationalization entails on average a 13% increase in ROCE. Contrarily, product diversification emerges as a growth option that results in performance declines in the majority of cases.

We conclude by deriving three major success factor categories and offer ideas for practical implementation.

In terms of “the how” of growth, results suggest that cooperation activities pay off in 65% of cases, while opting for mergers and acquisitions (M&A) still enhances performance in 59% of cases. Identifying an average ROCE effect of +21% for M&A, we present evidence that the


About the Center for Management Studies The Center for Management Studies (CMS) is an inter-universitarian institution that pursues the goal of advancing the field of Evidence-based Management EbM (Fig. 1).

For this purpose, meta-analysis integrates all studies available worldwide to derive overall conclusions that constitute the status quo of empirical knowledge on specific topics of interest.

Figure 1: The CMS Mission – Focus on EbM Empirical Evidence

Evidence-based Management Evidence-based Best Practices (Meta-Analyses and Primary Research Studies)

Empirically Tested

Empirical-based Hypotheses (Explorative Studies)

Empirically Untested

Speculation and Guesswork

Theory-based Hypotheses (Frameworks)

Unsubstantiated Statements

Theory-based Propositions Theoretical Foundation

CMS is headed by a board of academic directors, composed of many renowned university professors, associated directors, and an industry advisory board, currently composed of 15 chief strategy officers of global players, with each company representing one particular industry. Major CMS research teams are located at Jacobs University Bremen and Friedrich-Schiller-University Jena, and they collaborated closely with The Advisory House AG on this publication.

In terms of subject matter, CMS focuses its research on three major issues: strategy, innovation, and behavior (Fig. 2). At its core, each study answers two fundamental questions:

By means of conducting meta-analytic and empirical studies, CMS seeks to generate target-oriented and context-dependent knowledge that is actionable and of direct value for management practitioners.

Figure 2: CMS Field of Research

1. What is the true average relationship between specific corporate courses of action and company performance? 2. Which moderators influence success and failure of specific courses of action?


What is the basic idea of EbM? The innovation is the method applied, so-called meta-analysis, a research methodology that today is primarily applied in the fields of medicine and psychology. In contrast to single empirical studies, metaanalysis allows the generation of evidence-based results that are free of statistical artifacts.





A. Growth, Value, and Profitability Profitable growth requires ROCE to exceed cost of capital ROCE is the critical lever for company value maximization Company size per se is not ROCE-enhancing, and blind growth does not pay ROCE is a function of industry- and company-level factors

From a financial perspective companies elevate shareholder value when adding market value. Market value added (MVA®) plus the book value of equity make up the market value of equity, i.e. total shareholder value. MVA® reflects the value creation that investors expect from a company. It can be approximated by the quotient of the current economic value added (EVA®) and the cost of capital minus the growth rate of future EVA®. EVA®, in turn, is determined by the spread between the return on capital employed and cost of capital multiplied by the quantity of capital invested (Fig. 3).

In the long run, corporations best ensure the satisfaction of their diverse stakeholders by striving for corporate value maximization. Due to globalizing capital markets, intensifying competition for equity capital, and the growing meaning of the market for corporate control, it is the maximization of sustainable shareholder value that has become the corporate objective of overriding importance. Since the mid 1980s, concepts of value-based management enjoy ever-increasing popularity, and corporate top management is more and more pressurized to successfully activate the levers that build shareholder value.

Figure 3: Value Creation from a Financial Perspective

Meeting this challenge presupposes: a) an understanding of the fundamental drivers of company value, and b) as much information as possible on the value creation potential of alternative strategies.

MVA® =

The potential for squeezing out additional value of existing business operations, for instance through streamlining activities, is limited. For this reason, it is alternative growth strategies that deserve particular attention in a discussion of company value creation.

EVA® Cost of Capital - EVA® Growth

EVA ® = (ROCE – Cost of Capital ) x Invested Capital

Operational Lever


Financial Lever

Company Size

resources, greater market power, economies of scale (especially in manufacturing operations), and economies of scope. At the same time, however, greater size may entail inefficiencies that lead to increased costs of coordination and motivation. These costs are due to increased information asymmetries and potentially higher levels of interest divergences, free-riding and loafing, to name but some examples. A positive relationship between size and performance prevails if the benefits systematically outweigh the costs.

What follows is that in order to boost MVA®, companies have to elevate EVA®. Consequentially, corporate management striving for company value maximization has the options of: 1. increasing operating returns (ROCE), 2. decreasing the cost of capital, and/or 3. increasing the capital invested Raising the amount of capital invested, which essentially means increasing company size, is only a viable option, however, if a positive spread between ROCE and capital costs prevails. Otherwise value is destroyed.

The meta-analysis on the relationship between company size and financial performance evidences that there is in fact no significant relationship between company size and company performance (44,653 empirical observations, Fig. 4).

A general rule must therefore be that in growing and developing a business or portfolio, capital that gets invested or reallocated must meet a positive spread if it is to create economic value. In this case one may speak of the profitable growth sought after.

This is a very important finding, especially in light of the fact that this contrasts sharply with conventionally held beliefs. From the fact that “bigness” per se is no panacea, we derive that growth per se is also not a viable option. Blind growth does not pay! Growth only adds additional economic value if it occurs above the cost of capital.

If one assumes limited opportunities to lower capital costs, spread increases are merely realizable by means of elevating ROCE. ROCE is consequentially identified as the critical lever that is to be activated to create shareholder value. In the remainder of this brochure, therefore, we provide evidence on the true average ROCE impacts of alternative growth strategies.

Competitive Position Discussing company size, it is necessary to distinguish absolute size from relative size. Relative company size is the size of a company relative to market size or relative to major competitors’ size. It is indicated by absolute and relative market share.

Company Size Initially, we take a closer look at the linkage between company size and performance. We do so to account for the widespread assertion that company size growth is favorable to the company and should generally be aspired to. Company size is usually measured either by input-based or by output-based variables, such as the amount of capital invested into a corporation or total sales.

Meta-analytic evidence suggests, on the basis of 13,505 empirical observations, that a significant gain in absolute or relative market share yields on average a 32% jump in ROCE (Fig. 4).

The performance-enhancing benefits commonly associated with company size are greater access to

This comes as no surprise. Market share in fact proxies the competitive position and strength of


Figure 4: Performance Effects of Company Size, Market Share, and Industry Concentration

ROCE Average Company


Increasing ... ... Company Size (n = 44,653) ... Market Share (n = 13,505)

No Impact!




... Industry Concentration (n = 2,581)



n: number of empirical observations

a company and is ultimately defined by the edge companies have or do not have over competitors in terms of value proposition. In other words, it is a result of the net effect of competitive advantages and disadvantages held vis-à-vis the competition. We derive, therefore, that achieving strong competitive positions sooner rather than later should become one of the key goals in growth projects. This is a recurring theme in what follows, and applies across growth strategy types.

The degree of rivalry, sometimes also referred to as intensity of competition, is commonly proxied by the extent of concentration of industry output in the hands of a few big players. The higher the concentration, the less competitive the industry, and the more attractive the industry for incumbent companies according to theory. A meta-analysis on the relationship between industry concentration in terms of the sum of market shares of the four or eight biggest companies in an industry and average financial performance evidences on the basis of 2,581 empirical industry observations a significant positive relationship.

Industry Attractiveness Market share is largely a product of companylevel decision-making. However, theory suggests that company profitability is not only a function of managerial performance but also a function of industry-level factors that determine its attractiveness. Next to buyers’ and suppliers’ bargaining power, and the threats of new entrants as well as substitutes, the degree of rivalry is one of the most evident structural characteristics determining industry attractiveness.

A significant increase in the degree of industry concentration entails on average a 64% upsurge in ROCE for the incumbent companies (Fig. 4). Benefits from increased market power, among which the discretion to elevate prices and the opportunity to obtain inputs at lower costs, as well as benefits from economies of scale, materialize apparently to a considerable extent in this type of industry environment.


As a consequence, incumbent companies are well-advised to strive to further increase concentration. This may be accomplished by driving out competitors, for instance through predatory pricing and by merging and acquiring. In addition, companies should seek to erect entry barriers, as otherwise high profits will increasingly attract new entrants. Entry barriers may be a result of creating switching costs and of limiting access to critical resources, to name but a few possibilities.

Anecdotal evidence for this can be found in companies such as Google and Microsoft, for instance. Both industries, i.e. Internet information providers as well as the application software business, are highly attractive for incumbents in that they are highly concentrated and promise high market growth and future value creation potential. Also, both companies have significant edges over the competition in their industries. Google has advantages over the next-best competitor Yahoo, for example in terms of number of users, and Microsoft is a quasi-monopolist in the application software business. In contrast, Ford, for instance, is an example of a company that has to deal with a situation in which an industry of comparatively low attractiveness meets a weak competitive position. The automotive business is exposed to fierce competition between a large number of players, decreasing margins, and declining demand in the light of

In conjunction with the findings mentioned above, the ideal combination for achieving superior performance is apparently joining high levels of industry attractiveness (here indicated by industry concentration) with strong competitive positions (here indicated by market share). Admittedly, this combination will be hard to achieve in growth endeavors. Nonetheless, this is what companies should ultimately aspire to (Fig. 5).

Figure 5: Performance as Function of Industry Concentration and Market Share

Industry Concentration



Lucky Laggards

Premium Monopolizers

Mediocre Performance

Top Performance

Vulnerable Followers

Disadvantaged Champions

Inferior Performance

Mediocre Performance



Market Share


ever-elevating oil prices. The industry on average enjoys low profitability and is characterized by high capital intensity. In addition, Ford is still behind competitors such as Daimler or Toyota. Ford has to cope with competitive disadvantages as regards design and marketing, overcapacities, financing costs, and its brand, to name just a few.

the mergers and acquisitions and cooperation options. The analysis will allow us to answer an array of the most pressing questions from business practice. Does innovation indeed generate competitive advantages and reinforce a company’s competitive position? Or do the considerable expenses incurred by innovation overcompensate the envisioned benefits in the majority of cases? Does it pay off for companies to diversify into new lines of activity to leverage resources across a portfolio of businesses? Or are the costs of having to manage increasing business dissimilarity just too high to be recouped by expected synergies? Is internationality of operations really the name of the game in the globalizing environment? Or is internationalization most often simply too difficult to be successfully realized in the light of country markets not converging as fast as has long been assumed? And are the frequent proclamations of mergers and acquisitions destroying value justified? If so, is it cooperation that constitutes a promising alternative? Do the benefits from potential resource sharing overcompensate the costs of limited control? All in all, may there be in fact universally valid success factors for growing profitably?

Outlook What we have seen so far is that companies’ returns are influenced by industry- as well as company-level factors. At the same time, we have learned that growth per se does not pay. Given that, in the pursuit of value creation, there is no point in just growing the company bigger, a differentiated analysis of alternative growth options is indispensable. The remainder of this brochure is devoted, therefore, to successively analyzing and discussing, on the basis of meta-analytic evidence, the ROCE impacts of specific growth options and the underlying reasons. We distinguish “the what of growth” in terms of the innovation, internationalization, and diversification options from “the how of growth” in terms of


B. Innovation Innovation has strong and positive effects on company performance An adequate endowment with financial and managerial resources is key to success Entrepreneurial orientation elevates innovation quality and ROCE impact Radical innovations are more rewarding than are incremental innovations Innovation is critical in more and in less technologically dynamic industries

Innovation is commonly believed to constitute the essential source of corporate development and growth. It ought to be the ultimate lever paving the way to attaining competitive advantages and to achieving superior performance. Especially in the face of ever-shortening product life cycles, innovation seems to be the name of the game.

It is more than evident that innovation may expose companies to tremendous risks. Nonetheless, innovation is said to promise huge opportunities, too. Now, what does the empirical evidence base tell us about innovation as a growth strategy? Is innovation in the majority of cases performance enhancing? Or may the positive effects of innovation be greatly overestimated? Moreover, is innovation more important to performance in specific industries, as may be suggested by the varying degrees of R&D expenditures (Fig. 7)?

Yet, product innovation is not easily accomplished – neither in terms of the product development itself nor in terms of the commercialization of newly engineered products. Innovation is, first of all, costly. Substantial outlays may initially be required for research and development. Similarly, product launch and distribution will entail significant costs before any cash inflows materialize – if they do at all (Fig. 6). Figure 6: Costs during the Course of the Innovation Process

Market Launch and Penetration

Product and Process Development Concept Generation and Selection Adequate Portion of Innovation Costs





Figure 7: R&D Expenditures Vary Strongly across Industries

16 14

R&D Intensity in %

12 10 8 6 4 2 0 1996










Year Pharma Electronics

Automotive Telecom

Source: Datastream n = 100 largest companies in terms of sales in 2005 per industry

It is the prevalence of specific conditions, however, that codetermines to what extent innovation ultimately enhances performance. Under specific circumstances the value of innovation is comparatively higher. It is resource availability, the quality of managerial resources utilized in innovation projects, as well as national and industry environments that matter in this respect.

General Performance Impact Meta-analytic results summarizing 19,017 empirical company observations indicate that on average innovation has a positive performance impact. If an average company significantly increases its innovation activity, it can achieve a 34% jump in ROCE.

Performance Impact Moderators

The benefits of innovation in the lion’s share of cases exceed the costs. Companies successfully make use of product innovations to achieve competitive advantages that allow them to skim substantial margins. Temporarily, monopoly-like situations are attained that facilitate the earning of substantial returns, overcompensating, in turn, even huge initial outlays.

Resource Availability Successfully engineering and commercializing innovations require substantial amounts of human, technological, and financial resources, and it is not exactly foreseeable when and to what extent innovations will generate net cash inflows.


As a consequence, those companies that have sufficient resources, among which are also marketing and distribution capacities, to develop, to bring to market, and to push a new product, may have advantages in realizing the gains from innovation.

While larger companies make a 64% gain, smaller ones merely grasp a 19% effect on ROCE when significantly increasing innovation activity (Fig. 8). The larger the company, the more comprehensive the overall resource base available for fuelling innovation projects and the more successful innovations in terms of financial performance.

Also, having at their disposal sufficient financial resources may make it easier to absorb negative cash flows for a longer period until net cash inflows finally materialize. Companies that lack this resource base may find it difficult to stay the course and to finally reap the fruits of product innovation. It is for these reasons that larger companies may benefit to a greater extent from innovations. Company size is an intuitive proxy for the availability of resources.

Entrepreneurial Orientation Having at one’s disposal the required quantity of resources to spawn innovations and to penetrate new markets does not necessarily say something about the quality of the resources used for such endeavors. It is the quality – not the quantity – of resources, however, that may largely determine the efficacy of the innovation. Higher-quality innovations in terms of a better tailoring of products to future customer needs, for instance, can be expected to have a more favorable ROCE impact.

The underlying meta-analysis brings to light that company size indeed has a positive effect on the innovation-performance relationship.

Figure 8: Selected Success Factors of Innovation

ROCE Average Company


Increasing Innovation …



… with … Low … Resource Availability







… Entrepreneurial Orientation High

Low … Radicality of Innovation High



6.2% 7.3%



follow people. In addition, they are less affected by organizational inertia.

In this context, company age was used to verify the importance of entrepreneurial orientation among the people involved. Meta-analytic data indicates that upon significantly increasing innovation activity, younger companies realize a 38% increase in ROCE, while older companies merely generate a 19% effect on ROCE.

The intermediate result is that an entrepreneurial, innovative mindset in conjunction with the availability of the required quantity of resources is the ideal combination. In a nutshell, the entrepreneurial mind must meet the required capital to maximize innovation success.

Obviously, managerial quality in the form of high levels of entrepreneurial orientation is a success factor for innovation projects.

Radicality of Innovation The meta-analysis further indicates that companies from liberal market economies can capture a 45% increase in ROCE, while companies from coordinated market economies merely grasp a 23% ROCE impact when significantly increasing innovation activity. Liberal markets are, for instance, those of the US, the UK, or Australia. In contrast, more coordinated market economies are those of Germany, the Netherlands, or Japan. What are the underlying reasons for this difference in performance effects?

Younger companies’ actions and workforce behaviors are influenced by a mindset and culture that develop in the particular environment that this type of company faces. From the outset, young companies must be successful. In the majority of cases product failure will be equal to business failure. In other words, being exposed to an “all or nothing” situation, successful innovation is a question of company survival from the very beginning. As a consequence, younger companies face an incentive environment that forces them not only to innovate but to do it successfully. The continuous pressure to ultimately make something out of the money ventured substantially shapes activities and processes within younger companies. To eventually survive, they must be creative, must be prepared to experiment, must show competitive aggressiveness, and must be risk-taking. It is this environment that requires and, therefore, breeds entrepreneurial behavior.

Actually, this difference may well be rooted in environmental context characteristics that influence the way in which people go about innovating per se. Specific contexts provide differing incentives with a view to innovation activity.

Radical Innovations Have the Strongest Performance Effects Economic exchanges in liberal market economies are, for instance, coordinated to a greater extent via price and market mechanisms than are transactions in more coordinated environments. Economic relationships, among which are also employment relations, are rather short-term oriented and less stable in liberal systems. In contrast to more coordinated economies, these conditions provide less stability and security to the actors involved. Accordingly, economic actors in liberal systems are, from the outset, used to a greater extent to dealing with insecure situations, and are by necessity more flexible in their

Facilitated also by more autonomous decisionmaking and loose organizational structures, younger companies proactively seek opportunities. Younger companies are also better able to monitor change in the business environment. They quickly adapt to it and may also exploit windows of opportunity that open only for short time periods. While people in older businesses tend to follow existing operations and structures, in younger companies operations and structures will tend to


behavior. Contrarily, people from coordinated market economies tend to favor stable conditions and are more risk-averse.

an incremental type. In contrast, more liberal systems by nature require and reward more radical innovations.

Another crucial difference between these two extremes of market systems is how business operations are financed. In this respect, liberal economies are traditionally characterized by a strong venture capital market, whereas operations in more coordinated environments are to a far greater extent fuelled by capital from the debt market. Here, a strong banking sector has developed, and has built long-term relationships with corporate clients.

Liberal systems are characterized by highly efficient capital markets, and actors have to cope with a hire and fire environment, less structural and personal inertia prevails, and competition is even more fierce than elsewhere. In liberal markets, the pressure for success is simply stronger for economic players, in turn, entailing greater radicality in competitive behavior. This competitive aggressiveness in conjunction with the awareness that small-steps politics may be doomed to failure from the beginning is nurturing the strive for innovations of the breakthrough kind rather than the incremental one.

Corporations in debt-focused systems have to try hard to get the money for operations, whereas companies from venture-capital environments have to try hard to make something out of it.

In this context, empirical studies have shown that it is radical innovations that have a comparatively stronger impact on company performance than incremental ones. Customers appear to disproportionately value radical innovations which expresses itself in a willingness to pay substantial price premiums that can be skimmed by breakthrough innovators. This may explain why a difference in the average performance effects of innovation actually prevails across countries.

Taking these points together alludes to why more coordinated systems and the corresponding incentives provided on location tend to spawn different types of innovation than do liberal systems. The preference for stable conditions, the associated risk aversion, as well as a general lack of flexibility of actors, do, if at all, favor innovations of


Industry Dynamics It is not only the macro environment but also the industry environment that potentially exerts influence on the innovation-performance relationship. It appears intuitively plausible that in specific industries innovation may matter more to performance than in others.

As a consequence, innovations must be considered crucial across industries. This is further supported by the meta-analytic finding that its positive performance effects do not vary between manufacturing and service companies.


High-tech industries, for instance, are characterized by rapid technological change and correspondingly intense competitive dynamics. It does not seem far-fetched to assume that here performance is to a greater extent influenced by innovation than in more stable industry environments. Also, in high-tech industries, innovation may require large-scale R&D investments. This may create entry barriers that are substantially higher than in lower-tech industries. As a consequence, it may be harder for competitors to imitate innovations and to reduce monopoly rents of innovators. Contrarily, in less dynamic, low-tech environments it appears easier for companies to compete well also on other strategies. Innovation may not be of such high necessity to survive as in high-tech industries in which refraining from innovation is equal to being superseded.

Given that innovation is so promising, the question arises as how to maximize the returns from this strategy in practice. Across industries, corporate decision makers must ask themselves how to most favorably activate the levers fostering innovation success. The paradigm for maximizing returns from innovation activity follows directly from the meta-analytical evidence:

Entrepreneurial Mind Must Meet the Required Capital and Spawn Radically New Products First, empirical evidence has shown that radical innovations outperform incremental product improvements. Radical innovations should therefore explicitly be aspired to. Second, the necessary condition for successful innovation is an adequate and pertinent endowment with financial and human resources. The capacities required to realize innovation projects have to be secured from the outset. And, third, the quality of innovations in terms of radicality and marketability is nurtured by entrepreneurial behavior that should be elicited from employees with the help of adequate means.

The meta-analysis shows that companies from R&D-intensive industries enjoy a 47% jump in ROCE when significantly elevating innovation activity. In contrast, companies from low-tech industries witness a 30% increase in ROCE.

Innovations Pay Off in High-Tech and in Low-Tech Industries This basically confirms the intuitive assertion that the performance-lever innovation is somewhat stronger in technologically dynamic industries. What is even more important, however, is the finding that innovation is nonetheless a critical lever for performance in lower-tech, more stable industries. Despite lower levels of technological change, innovation does provide companies with substantial competitive advantages.

While larger companies may have at their disposal the required resources to finance innovation projects, they may find it particularly difficult to establish an entrepreneurial work environment and – somewhat relatedly – to come up with breakthrough innovations.


By nature, companies that grow bigger and become more mature exhibit a tendency towards increased bureaucracy and higher levels of inertia in terms of structures and processes, as well as employee behavior. People specialize over time, adjust to an increasingly stable work environment, and increasingly lose the holistic picture of the business that is so central to entrepreneurial behavior. In such instances, company-specific knowledge can become a rigidity. Over time, people will be less prepared to act flexibly and to change.

competitive groups as opposed to large bureaucratic organizational structures that stand in the way of innovation.

In such environments, people tend to lose more and more of what could be called an entrepreneurial mindset. Creativity, experimentation, and risk-taking behavior appear less rewarding and are, therefore, hardly pursued. Decisionmaking becomes increasingly dependent on hierarchy, and thus autonomy is lost. Operations no longer follow people, but rather people follow existing operations in given structures.

Minicase 1

Given the importance of entrepreneurial behavior for innovation success and the considerable company performance relevance of innovation, companies may as well reconsider their hiring standards to begin with.

Minnesota Mining & Manufacturing Corporation (3M) Innovation-fuelled Growth at Its Best 3M is a global, multi-technology corporation that is well-known for its famous brands such as Scotch, Post-it, and Thinsulate. 3M employs more than 69,000 employees worldwide and generates sales exceeding $20 billion. The corporation offers, all in all, more than 55,000 different products that are organized in 35 business units under the roof of the six businesses: consumer and office, display and graphics, electro and communications, health care, industrial and communication, and safety, security, and protection services.

This is exactly the scenario that is to be prevented! This is the scenario that hinders innovation success! In particular, larger organizations must seek to establish an organizational incentive environment – which also includes a corporate culture – that elicits the desired behavior from its people. Proactivity, opportunity seeking, anticipation of future developments and market demands as well as competitive aggressiveness are some of those traits that people ought to be characterized by. It is intrapreneurs that are sought.

3M is the prime example for a corporation that has made use of innovation as the essential fuel to corporate development and growth. 3M has managed to maintain a unique way of doing business that expresses itself in the continuous delivery of breakthrough innovations, despite its huge organizational size. While most of today’s large corporations struggle with this endeavor, 3M has established an organizational environment, a climate and culture that consistently spawns unanticipated products.

In this respect, larger companies may be welladvised to emulate the environment that younger companies face. A work environment that resembles younger companies’ incentive environments may channel employee behavior into the desired directions. A potential starting point could be the establishment of some kind of “cell organization” that keeps people in small,


In fact, researchers are free to spend up to 15% of their time pursuing projects of interest to them – even less promising ones in terms of marketability. The idea is that alternative applications may be found later. In this respect, the “Carlton Society” and the “Golden Step Award Program” are used as further mechanisms and incentives to foster and reward outstanding scientific achievements.

3M’s unrivaled commitment to innovation, more precisely to radical innovation, expresses itself in the form of one of the corporation’s top financial goals. 30% of company sales are to come from products introduced within the past four years. This excludes sales from improvements to existing products. Accordingly, breakthrough innovations are explicitly preferred to incremental ones. This is a clear signal to employees. The implementation of this ambition is backed by substantial R&D investment amounting to 6% of sales in 2005, and is somewhat reflected also in the fact that 10% of 3M personnel are research personnel.

Research and experimentation are central, and the climate at 3M is to encourage people to find ways of how technologies can be combined and leveraged into new market opportunities. In particular, the research community at 3M is to share knowledge to facilitate such leverage. The overriding paradigm is reflected in the frequently cited norm: “While products belong to businesses, technology belongs to the company.”

The 55,000 products sold by 3M are developed on the basis of combining 40 distinct technology platforms. A technology platform is a technology from which one can generate multiple products for multiple markets. These platforms include, among others, adhesives, abrasives, metal matrix composites, microreplication, non-woven materials, nano technology and surface modification. Having recognized the continuous expansion and leverage of its technological base as the essential ingredient to its success, 3M has established an organizational environment that channels employee behavior into desired directions. Being provided with pertinent incentives, senior management as well as lower level personnel have internalized 3M’s technology-driven culture and unique way of operating that is characterized above all by a strong belief in the power of entrepreneurship.

To ensure the knowledge transfer, 3M has established an array of formal mechanisms. There is a technical council in which heads of different laboratories regularly meet to discuss potential cross-unit transfers. An annual technology fair is held that in essence serves the same purpose. At this internal fair scientists exhibit their latest accomplishments and develop an informal network. 3M purposefully brings together staff from research, manufacturing, and sales departments to allow for the rapid diffusion of knowledge and ideas and to trigger the development of market-oriented solutions.

In the 3M environment, autonomous action and employee initiative is desired and rewarded, bureaucracy is minimized, and open communication is deemed particularly important. Also, failure is allowed. Supervisors are urged not to be too critical in order not to prematurely kill initiative.

With a view to new product development, 3M does not only rely on internal developers, however. Knowledge and information on potential future products is also gathered by 3M through the increased application of the so-called “lead-user process.”

While the development of an extremely weak adhesive may mean a failure to one researcher, another may view this feature as a strength and create Postit notes from it, to cite the most popular example.


The way 3M goes about doing business with its focus on technological innovation and institutionalized entrepreneurship seems to provide endless opportunities. This places it where it is today: the corporation is continuously recognized as one of the world’s most innovative companies.

Many new products are initially thought of and also – due to commercial unavailability – prototype-like developed by specific users (companies, organizations, or individuals) that have needs that go far beyond those of the average user. These lead users are, in their needs, well ahead of market trends, and may already have developed specific solutions that can constitute the basis for commercial breakthrough innovations to be marketed by 3M. 3M seeks to learn from such lead users, and puts considerable effort into bringing together technical and marketing personnel with lead users in workshops. Selected personnel continuously conduct expert interviews and comprehensive networking is sought.

Sources: Bartlett, A., Mohammed, A. (1995), 3M: Profile of an Innovating Company, Harvard Business School Case, Boston: HBS Publishing. Hippel, E. von, Thomke, S., Sonnack, M. (1999), Creating Breakthroughs at 3M, Harvard Business Review, Sep/Oct, pp. 2–10.

3M’s strive for innovation is further reflected in that divisions are not allowed to grow too big. Experience had shown that when reaching a specific organizational size, divisions tended to focus too much on existing businesses and established markets. New product development was neglected, however. Accordingly, 3M has decided to break up these divisions and to assign new management teams to the spin-offs. And, indeed, at 3M these newly created organizational units grow faster than in the previous larger entity.


C. Internationalization Internationalization positively influences company performance A significant increase in internationalization increases a company’s ROCE by 13% Successful internationalization is inseparably linked to the leverage of intangible assets Entrepreneurial orientation and internationalization experience are elevating the returns

The internationalization of company activities has been an important strategic option for many companies since the 1980s. Today, in the light of the steadily increasing convergence of country markets and the resulting intensification of competition, it appears to be a strategic imperative.

General Performance Impact Based on 7,792 empirical company observations, meta-analytic results suggest that internationalization has a positive impact on company performance. If an average company from the sample looked at significantly increases its degree of internationalization, it can realize a gain in ROCE by 13%.

Internationalization per se is essentially a consequence of companies’ ambitions to exploit ownership advantages, i.e. the exclusive access to specific resources. The related questions of where and how to internationalize are answered in conjunction with location-specific advantages as well as advantages associated with specific organizational arrangements (Fig. 9).

Evidently, the benefits accruing from internationalization of business activities exceed, in the majority of cases, the costs associated with this growth option. But what are the particular benefits and costs of internationalization? First of all, internationalization allows companies to leverage company-specific resources across country markets. In particular, the cross-country utilization of brands, proprietary technology, and companyspecific know-how may prove economically fruitful.

In this chapter, internationalization is understood as the degree of internationality of a company’s business operations. Figure 10 illustrates that companies across industries have increased their international involvement over time.


Figure 9: Market Entry Mode Choice as a Function of Specific Advantages

Market Entry Modes

Contractual Agreements


Foreign Direct Investments

Ownership Advantages

Location Advantages

Internalization Advantages

Moreover, alert companies may spot market imperfections as well as factor cost differences that they can exploit once they are internationally positioned. In this respect, options such as local sourcing and production may entail substantial advantages in the form of labor and material cost savings not attainable for domestic counterparts.

valuable capabilities, rendering easier future internationalization moves or even spawning innovative, unanticipated products. Potential benefits from internationalization are no free lunch, however. In fact, internationalization may come at non-negligible costs. Companies may encounter severe difficulties in having to cope with new contexts and in being foreign on location. The catchword “liability of foreignness and newness” represents an array of disadvantages a company may face if it is considered a foreigner in non-home markets by incumbent market participants.

Not to forget benefits that can accrue from additional market power and economies of scale and scope. By means of combining inputs and/or outputs across country markets substantial competitive advantages may be achievable vis-à-vis competitors. Moreover, internationally active companies may experience and subsequently make use of specific learning and organizational development effects. These effects may translate, in turn, into


Against this background, it is most often management capacity and capability that constitute critical bottlenecks.

Ethnocentrically oriented customers, for instance, may prefer the offerings of local companies over those of foreign companies. Also, regulatory institutions may be in place that support domestic companies by means of subsidies, tax allowances, or trade regulations. Eventually, foreign companies often lack local market knowledge that is easily available to domestic competitors.

Ultimately, the increased financial and political risks the company exposes itself to, are to be pointed at as factors that may well hinder companies from reaping the fruits of internationalizing activities.

The latter point is closely connected to the fact that, in general, the increasing heterogeneity of markets served adds complexity to the task of managing operations and puts additional strain on management. In the face of geographic and cultural diversity and consequentially increasing communication, coordination, and motivation problems, severe barriers to efficient organization may stand in the company’s way.

Nonetheless, meta-analytical findings suggest that the benefits of internationalization systematically outweigh the costs. But under which circumstances do internationalization strategies tend to be most successful?

Figure 10: Foreign Sales Ratios across Industries


Foreign Sales/Total Sales in %






0 1996











Electronics Pharma Automotive

Airlines Logistics Telecom

Source: Datastream n = 100 largest companies in terms of sales in 2005 per industry


company characteristics unique to the younger type of company. In this respect, it is above all entrepreneurial orientation and resulting behavior that is variously pointed at as being present in younger companies.

Performance Impact Moderators Entrepreneurial Orientation Results indicate that in comparatively young companies, internationalization has a strong impact on performance. If a younger company significantly increases its degree of internationalization, it increases its ROCE on average by 46%. In contrast, older companies merely have a fiftyfifty chance of succeeding and on average do not generate any significant effects from internationalization (Fig. 11).

Entrepreneurial Orientation Is a Key Success Factor Entrepreneurial orientation expresses itself, for instance, in a reinforced focus on innovation, proactivity, willingness to learn, flexibility, and fast exploitation of opportunities. Given that successfully entering new markets frequently requires adaptation to local circumstances, the absorption of new information, the

The reason for this tremendous difference in impact on performance must be rooted in

Figure 11: Selected Success Factors of Internationalization

ROCE Average Company


Increasing Internationalization …



… with …

Low … Entrepreneurial Orientation

5.0% 7.3%





… Intangible Assets Level High

… Market Familiarity/ Experience





5.9% 6.4%



relationship between internationalization and performance, whereas this is not the case for Japanese companies.

development of new capabilities, and fast reaction in the face of opening windows of opportunity, such company traits may prove particularly pertinent when internationalizing. In addition, younger companies do not suffer from inflexible structures and systems, inertia phenomena, and uncertainty avoidance tendencies usually associated with older companies.

American, and to a lesser extent European, companies thus reap a higher portion of benefits from internationalization than do their Japanese counterparts. Possibly, there are country-of-originspecific differences in the levels of benefits and costs associated with internationalization.

Intangible Assets An argument often made is that internationalization is particularly beneficial to companies that have comparatively high levels of innovative capabilities and technology-based know-how. And, indeed, meta-analytic data supports this point.

Companies from certain countries are from the outset exposed to comparatively unfamiliar markets when internationalizing, whereas others are not. The former are, therefore, much more confronted with adaptation requirements, and thus with the need for local market knowledge. As a consequence, it may be comparatively easy for the latter to make a move across borders. Countries such as Japan, for instance, have frequently been characterized as “more isolated” countries given that they simply do not have many potential culturally and institutionally related target markets around their home market. No matter which foreign markets Japanese companies expand into, they move into culturally distant and unrelated markets. This issue of isolation is less prevalent in the case of American and European companies.

If a company with a comparatively high stock of intangible assets increases its degree of internationalization significantly, it manages to increase its ROCE by more than 38%. The underlying meta-analysis even suggests that for companies with low R&D intensity there may be no impact at all from internationalization on performance. These findings underscore the crucial meaning of ownership advantages for internationalization to make sense in the first place.

Intangibles Are Key to Internationalization Success

In addition, assuming that the average degree of internationalization of a company reflects the level of accumulated internationalization experience, European and American companies may have another advantage. As companies from the latter two countries exhibit on average higher degrees of internationalization, their capacity and competence in dealing with internationalization problems may be superior. This is particularly true in comparison with Japanese companies that are the least internationalized among the three country clusters and generally favor regional over global internationalization.

Successful internationalization seems inseparably linked to successfully developing, transferring, and leveraging company-specific assets across countries. These assets may take the form of innovative strength, technological know-how, and other valuable capabilities, as well as specific property rights. Also, a particularly strong brand is a form of intangible asset that may fruitfully be exploited across country markets. Experience and Market Familiarity The meta-analysis reveals that American and European companies exhibit a significant positive


with entrepreneurial orientation. Quality and speed of decision-making, responsiveness to local facts and circumstances, and strong personal commitment are the attributes of those people that are particularly well suited to make internationalization projects a success. In larger organizations, it is exactly this type of people that must be put in charge of internationalization projects. Staffing logic and policies should be amended accordingly. We can conclude with the rule-of-thumb that:

Implications We have seen that internationalization is a reasonable option to elevate company performance. What we have learned most importantly, however, is that successful internationalization appears to require as a basic prerequisite intangible assets that can be leveraged across country markets. In the absence of a critical level of intangibles, companies must think twice whether internationalization moves make sense economically. Put differently, corporate decision makers pondering internationalization moves must be very clear about companies’ potential ownership advantages and how they will help in making internationalization succeed.

Entrepreneurial Mind and Intangible Assets Drive Successful Internationalization

It is indispensable that intangible assets are exploited in such a way that they render unique companies’ offerings in each of the country markets to be served. Be it on the cost side of the products offered or on the benefit side – intangibles must be used to create or reinforce competitive advantages that allow companies to serve customers better than competitors do. This is a must-have – especially with a view to outcompete local companies.

Minicase 2

Starbucks Coffee Leveraging Intangibles Across the Globe In 1996, Starbucks Coffee Company opened its first store outside North America, located in a busy district of Tokyo. It was the beginning of an international expansion, which Howard Schultz believed incorporated the opportunity to build an enduring

A second major point in making internationalization succeed is the managerial behavior associated


Substantial effort is put into regularly launching new products that complement the range of products available in the stores. By today, many of the innovations developed by Starbucks have become industry standards. The 1995 introduction of the Frappucino, for instance, has resulted in an array of imitations by competitors. Also, a recyclable corrugated beverage container and holder initially developed by Starbucks to facilitate convenient holding of hot drinks now carries multiple patents, and is widely used by other companies.

global brand. Schultz bought the company in 1987, when it was a small Seattle retailer, which sold mainly coffee beans. Today, Starbucks is the leading global player in the specialty-coffee market. Its brand is associated with fine coffee, accessible elegance, community, and individual expression. Starbucks has more than 15,000 stores in 43 countries. One third of these stores is operated outside the US. In fiscal year 2005, for instance, Starbucks opened on average four new stores a day. Critical for the international expansion of Starbucks has been the leveraging of its image to the creation of an “experience” around the consumption of coffee. The underlying brand strategy is built on the interplay of three critical components: highestquality coffee, service, and atmosphere. As the business grew, Starbucks built a set of organizational capabilities that consistently delivered on the promises of the brand and its associations. Starbucks established clear quality and service standards for every store around the globe. Also, policies of recruiting leadership, investing in human resources, and quality control were designed to be in line with and to nurture the development and global exploitation of the unique brand.

Starbucks developed and draws on a huge network of cooperation partners including corporations such as PepsiCo, Barnes & Noble, United Airlines, and Kraft, to name but a few. This network’s expertise is used to generate new product developments. It is further utilized to gain access to diverse distribution channels. Today, despite recent problems in its home market, Starbucks seems still on the way to reaching its overall goal of becoming the “most recognized and respected brand in the world.” In response to a sharp share price decline in 2007, after more than a decade of almost continual growth, chairman Howard Schultz took over the additional role of chief executive. Schultz said that expanding too quickly in the US had lead to a “commoditization” of the Starbucks experience and a loss of entrepreneurial attitude. In the future, focus shall be shifted back on the customer and developing blockbuster products again. Schultz plans to slow growth in the US and to accelerate store openings abroad. His goal still is to open 40,000 stores worldwide.

Next to leveraging the brand and the connected capabilities, Starbuck’s international expansion as a relatively young company was shaped by an array of behavior that can be associated with entrepreneurial orientation. Starbuck’s internationalization strategy has been accompanied, for instance, by consequent responsiveness to local circumstances and by continuous innovativeness. Starbucks has sought to overcome the problems of foreignness and to keep a certain degree of flexibility by means of licensing reputable and capable local companies with retailing know-how to operate the Starbucks stores on location. This is contrary to the US where Starbucks favors company-operated stores.

Sources: Koehn, N.F. (2005), Howard Schultz and Starbucks Coffee Company, Harvard Business School Case, Boston: HBS Publishing. Martin, A. (2008), Starbucks Replaces Chief with Chairman, The New York Times, January 8. Starbucks Corporation, Annual Report 2004 and 2005.

Starbucks has also strived to keep customers interested in and intrigued about their offerings by putting the emphasis on continuous innovation.


D. Diversification Diversification is on average detrimental to company performance A significant increase in diversification entails on average a 6% decrease in ROCE Related diversifiers outperform unrelated diversifiers in the majority of cases Strategy-environment fit and strategy-structure fit are keys to success Capital markets keep an attentive eye on diversification strategies

Diversification is about determining corporate scope and goes right to the heart of corporate level strategizing. In stipulating which businesses a corporation should be in, it aims at making the corporate whole add up to more than the sum of its parts. It is essential to ascertain how the corporation can add value to the businesses it oversees. Overriding importance is, correspondingly, ascribed to the concept of synergy.

General Performance Impact Meta-analytic results summarizing 82,742 empirical company observations indicate that, in fact, diversification has on average a negative performance impact. If an average company significantly increases its level of diversification, it suffers a 6% loss in ROCE. It appears as if the benefits of diversification, among which may be synergies from increased debt capacity, increased market power, internal market efficiencies, and activity sharing and resource leverage, in the majority of cases cannot recoup the increased costs of coordination and motivation incurred by diversification. Does this mean in other words that any type of diversification is detrimental?

Diversification involves answering questions such as which strategic logic is to underlie the linkage of businesses, how many businesses a portfolio is to comprise, and how sales are to be dispersed across the portfolio. In this way, alternative diversification strategies characterize different types of business portfolios. The strategic logic of business linkages, however, deserves particular attention as it predetermines which types of synergies will be realizable in diversification endeavors (Fig. 12). Ultimately, it is synergies that will have to overcompensate the costs incurred by diversification to make this form of corporate development a valuable strategy.


Figure 12: Synergy Type as Function of Diversification Strategy

Diversification Strategy

Single Business Companies

Unrelated Business Portfolio

Risk, Debt, Tax Advantages

Related Business Portfolio



Market Power

Internal Market Efficiencies

Activity Sharing and Resource Leverage

synergies from risk reduction, market power, and internal market efficiencies, this is a clear sign that these types of synergies simply do not suffice to compensate for the increased costs of organization incurred by diversification.

Performance Impact Moderators Unrelated vs. Related Diversification The meta-analytic data suggests that in terms of corporate performance unrelated diversification is significantly inferior to related diversification. This finding is well in line with theories that point at the potential for scope economies being exclusively available to related diversifiers. Synergies such as those from cost-sharing, centralized procurement, the combination of valuechain functions, product bundling as well as joint leverage of a brand, specific knowledge and skills, to name but a few, are not realizable in unrelated diversification attempts.

In contrast to unrelated diversification, diversification into related businesses does on average pay off, however. Related diversification promises an ROCE improvement of 12% (Fig. 13). This means, in turn, that diversification does not make economical sense in the absence of the opportunity to generate synergies from sharing and jointly exploiting valuable resources. The potential for economies of scope is a must-have in diversification attempts. Type of Relatedness Recognizing the positive performance effects associated with related diversification one may ask in

Making a significant move into unrelated diversification entails a loss in ROCE of 12%. As unrelated diversification may – at most – facilitate exploiting


what particular way businesses are to be related to make diversification succeed.

Minicase 3

In this respect, meta-analytic findings indicate that business similarity in tangible as well as in intangible assets can be performance-enhancing.

Sharp Corporation Technology Leverage as Philosophy Following the $24 billion electronics giant’s business philosophy, Sharp does not merely seek to expand its business volume. Instead, Sharp is dedicated to the leverage of its unique, innovative technologies in business development. The technology most successfully exploited across businesses is the liquid crystal displays (LCDs). This technology has become a critical component in an array of products and has provided Sharp with competitive advantages in businesses such as television, video cameras, and organizers, to name just a few.

With a view to tangible assets, it is important that diversification attempts build on businesses that are similar in terms of the physical characteristics of the products. This means, for instance, that products should draw on similar raw materials, equipment, production processes, plants, and facilities. Similarity of products’ end-users is also pertinent in realizing synergies from the sharing of physical assets. Nonetheless, intangibles in the form of know-how and expertise can also constitute important bases of relatedness. The evidence suggests that it is above all the leverage of technological capabilities that holds an above-average potential for realizing synergies across businesses.


Figure 13: Selected Success Factors of Diversification

ROCE Average Company


Increasing Diversification …



… with … Unrelated


… Businesses Related

Less Efficient




… Environment More Efficient




or business group can open many other doors as well in environments that are characterized by comparatively lower levels of informational efficiency. One may think, for instance, of issues of customer trust, confidence, and loyalty, and thus easier new product-market entries and easier access to funding as well as to talent. Examples of companies exploiting these types of synergies are Samsung in Korea and Reliance in India.

Environmental Context An argument frequently brought forward is that the success of diversification is contingent upon a fit between diversification strategy and environment of implementation. And, indeed, results suggest that a specific type of such strategy-environment fit applies here. Meta-analytic findings suggest that diversification in developed countries with more efficient factor markets entails an average ROCE decline of 9%. In less efficient market environments this average effect disappears.

Investors’ Viewpoint The economical justification of multi-business companies, in particular of conglomerates, has always been lively discussed. In this context, it has frequently been argued that multi-business companies are assigned a so-called diversification discount on capital markets. Somewhat connected is the question as to whether investors systematically view diversification more skeptically than accounting-based assessments would justify. This was tested by opposing and comparing the impact of diversification on market-based measures and on accounting-based measures of performance.

The meta-analysis indicates that diversification projects that build substantially on the exploitation of internal market efficiencies and market power – which is the case in the unrelated or conglomerate type – pay to a greater extent in environments in which factor markets are not sufficiently efficient and in which institutional facilitation and protection of business exchanges is not readily available. Today, this applies largely in less developed and emerging economies such as, for instance, those of China and India. Within these environments, a conglomerate, business-group-like company may well use the corporate structure to achieve competitive advantages. On location the company may benefit from a fast and proper allocation of capital, labor, and other factors of production to individual businesses. This means that the corporate structure is used to mediate transactions in markets that do not function well in order to achieve an edge over the competition.

And, in fact, evidence for a systematic difference in impact was found. Unrelated diversification is evaluated more negatively by the capital market than accounting-based measures of performance seem to justify. Does this mean that investors generally dislike and correspondingly evaluate diversification moves in a disproportionately negative manner? It does not. It was also found that related diversification is assessed more positively by the capital market than accounting-based returns would suggest.

A Great Deal of Synergies Is Context Dependent

Apparently, shareholders’ expectations of future performance effects of diversification are in principle in line with the historical data that is reflected in accounting-based performance. They associate negative performance effects with unrelated diversification and positive effects with related diversification. Nonetheless, investors systematically expect a stronger performance impact.

In addition, corporate size and scope may well help to lobby institutional decision makers in ways beneficial to the company, and to favorably influence the development of the institutional environment as a whole. It should also not be forgotten that a well-known brand of a conglomerate


The reason for this may well be the different time horizons inherent in the two types of performance evaluations. Accounting-based performance measures reflect historical returns and refer to one or very few years only. Contrarily, market-based measures of performance are forward-looking and reflect expected future returns. Future returns, however, may well be realized in an almost infinite number of evaluation periods that with certainty exceeds the number of evaluation periods underlying accounting-based measurements.

The underlying meta-analysis does not directly test the more popular notion of the “diversification discount” as the comparison of the market value of the entire corporation to the sum of the stand-alone market values of the businesses in the portfolio. Nonetheless, recent empirical research suggests that a diversification discount of this kind does not necessarily arise. It is a function of core business industry and, above all, of how efficiently the corporate center manages the portfolio and realizes cross-business synergies.


With a view to efficient organization, therefore, a corporate center must be kept as lean as possible, and avoid influencing single businesses in areas in which it is not necessary. Due to complexity and dynamics, the coordination of business units entails significant costs. For this reason, integration, for instance in the form of centralized decision-making, must only occur where synergy realization requires the management of interdependencies among businesses, the reconciliation of divergent interests, or the clearing of information asymmetries. In areas in which this does not apply, units’ decision-making processes should not be interfered with by the center. Needless coordination and conflict is to be prevented.

Implications The most important point to be taken from the chapter is that diversification moves do not pay if they do not create a potential for realizing synergies from transferring, sharing, and exploiting valuable resources. Practitioners in charge must bear this point in mind when determining the strategic logic of diversification projects. The key message is:

Successful Diversification Requires the Transfer and Leverage of Valuable Resources Pondering related diversification, the types of synergies sought must be explicitly specified and quantified. This involves as a prerequisite an understanding of the type of linkages that are to be established among distinct businesses. These linkages ultimately constitute the basis for realizing scope economies. In this respect, in particular the leverage of physical assets and of technological capabilities have proven fruitful and should correspondingly be aspired to in practice.

As the demand for integration usually declines with rising business unrelatedness, so should integration and centralization attempts by the corporate center. Adhering to this rule will prevent incurring unnecessary costs and keep the organization closer to an efficient level. Finally, managers must get straight that capital markets indeed keep an attentive eye on diversification moves. Accounting-based performance impacts multiply in the eyes of investors. Nonetheless, managers need not fear capital markets – at least as long as diversification involves growth into evidently related businesses and net value is added by the center.

In terms of synergies in general, managers must further understand that the potential to realize them varies with context. Synergies are central to making diversification succeed. But different types of synergies materialize to differing extents on different locations. Consequently, practitioners are well-advised to carefully tailor diversification strategies to environmental contexts. Next to a strategy-context fit, a strategy-structure fit should also be on corporate decision makers’ agenda. If the overall goal is to make the corporate whole add up to more than the sum of its parts, it is obligatory for the corporate center to add net value. Net value is created only if realized synergies exceed the costs incurred by the corporate form of organization.


Minicase 4

Moët Hennessy. Louis Vuitton Related Diversifier? Conglomerate? Both!

LVMH is one of the world’s leading luxury products group. It operates in wines and spirits, fashion and leather goods, perfumes and cosmetics, watches and jewelry, and selective retailing. LVMH’s portfolio comprises more than 60 top brands such as, for instance, Moët & Chandon, Dom Pérignon, Veuve Clicquot Ponsardin, Tag Heuer, Christian Dior, Givenchy, Fendi, Christian Lacroix, as well as Louis Vuitton. Repeatedly, LVMH is pointed at as both a case study to illustrate successful related diversification and a success story of running a multi-brand conglomerate. Evidently, there is something special about LVMH.

tion system as well as the joint usage of a logistics platform for the brands dealing in men’s ready-towear markets.

LVMH’s portfolio exclusively contains high-margin businesses with strong brands of global niche market reach, and has grown through acquisitions as well as through new product development. What is intriguing about LVMH is that this corporation evidently strikes a reasonable balance between exerting financial control on individual businesses, exploiting operational synergies across these businesses, and leaving them with the freedom required to successfully compete in their respective markets.

Source: McGee, J., Thomas, H., Wilson, D. (2005), Strategy – Analysis and Practice, London: McGraw Hill.

At the same time, however, LVMH is – despite headquarters imposing financial controls on single businesses – largely organized in a decentralized manner with single businesses having their own general manager and top-management teams. In this way, the businesses are left with the necessary freedom for what can be considered critical success factors in the product markets served – creativity and innovation.

LVMH realizes synergies across brands within their five divisions by means of selectively integrating sourcing, research and development, production, and distribution activities. Negotiating in bulk for the entire portfolio of brands, for instance, allows LVMH to reduce its advertising costs by almost 20%. In seeking synergies, LVMH also builds on the bestpractices encountered in single businesses and leverages them across businesses. This has been the case, for instance, with Tag Heuer’s retail distribu-


E. In Search of High-Growth Excellence The world’s largest and most renowned corporations repeatedly post excessive growth. But how successful is this growth in fact?

The overall rank is calculated by summing up a company’s delta sales rank (Dell with 41st best score in absolute sales growth from 1995 to 2005) and its delta MVA®/Sales rank (Dell with the 31st best score in improving the ratio of MVA®/Sales from 1995 to 2005). The lower the combined score, the better the company in value-creating high growth, and the better the overall rank. MVA® was calculated by subtracting the book value of equity from the market value of equity. It was divided by total sales to allow for meaningfully comparing the value creation of companies of different size.

We examined the Global Fortune 500 over the period 1995–2005 and tested which corporations excelled at value-creating high growth. The companies that made it into the top 30 are active in various industries. The energy and health care sectors are overrepresented, however. Corporations such as Telefonica and Sanofi-Aventis made it to the top positions because of comparatively high value creation. Contrarily, companies such as Total and Exxon rank high because of tremendous sales growth figures.

Overall Rank

Company Name


DELL INC Computers
























TOTAL Energy
















PROCTER & GAMBLE CO Personal Care Products








INTEL CORP Semiconductors































Sales 2005 in € bn

Delta Delta Delta Sales Delta Sales (MVA®/Sales) Rank 2005 (MVA®/Sales) (MVA®/Sales) 2005–1995 2005–1995 Rank in € bn


Sales 2005 in € bn

Delta Delta Delta Sales Delta Sales (MVA®/Sales) Rank 2005 (MVA®/Sales) (MVA®/Sales) 2005–1995 2005–1995 Rank in € bn

Overall Rank

Company Name


































NOKIA (AB) OY Telecom Equipment








LOWE’S COMPANIES INC Home Improvement Retail
































NESTLE SA Food and Beverage








WALGREEN CO Health Care Retail








BEST BUY CO INC Consumer Electronics Retail
















BP PLC Energy








ALTRIA GROUP INC Tobacco and Food








FEDEX CORP Transport and Delivery
















SIEMENS AG Diversified
















SUEZ Energy








F. Mergers and Acquisitions M&A positively influence the performance of bidders and targets M&A increase targets’ ROCE by 33% and bidders’ ROCE by 8% Vertical M&A pay off most Successful M&A are often a means to acquire and/or leverage intangible resources The success of mergers and acquisitions has steadily increased over time

Although mergers and acquisitions have always been an important option in companies’ strategic development, the volume of M&A has fluctuated over time. Since the beginning of the 19th century basically five major merger waves have taken place. Figure 14 shows that transaction volume reached its record high in 2000, declined in 2001 and 2002, and since then has risen again. In fact, what we observe may well be the beginning of a sixth wave.

General Performance Impact Meta-analytic integration of 41,260 M&A transactions reveals a positive performance impact on average. The performance effects are positive for both partners in M&A transactions. However, the effects are significantly stronger for targets compared to bidders, suggesting that acquired companies annex the lion’s share of the positive performance effects.

Besides the general upward trend in the volume of M&A transactions, the question whether M&A actually create value is still unresolved. Empirical studies by practitioners and academics show mixed results for bidders and targets.

The combined performance effect of the overall transaction leads to an increase in ROCE by 21%. Differentiating acquiring and acquired companies reveals an 8% increase in ROCE for the former and a 33% increase for the latter.

In principle, M&A create value for shareholders when the performance of a combined company is higher than the sum of the individually realizable performance of two independent companies. Necessary for realizing such a value-enhancing position is that increases in revenues and/or decreases in costs due to M&A are not overcompensated by the costs of the transaction (including postmerger integration costs). Figure 15 illustrates this logic.

Theoretical arguments that explain the positive performance effects of M&A can be divided into four streams: (1) market power, (2) operational efficiency, (3) financial advantages, and (4) the market for corporate control.


Figure 14: The Development of M&A Transaction Volumes

Transaction Volume in Billion US $ 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 1987










Year Source: Thompson Financial

pay higher prices in order to accomplish a transaction, and thereby fulfill other, own targets instead of shareholders’ goals (e.g. increased power, salaries, or reputation).

The argument of increased operational efficiency, especially, is often highlighted when explaining the benefits of M&A. Possible increases in the operational efficiency of a combined company in comparison to formerly isolated companies can be realized when one of the following effects is achieved in the course of the transaction:

Performance Impact Moderators

· Economies of scale · Economies of scope · Experience curve effects · Reduction of transaction costs

While the performance effects of M&A are on average positive, the nature of effects is influenced by contextual factors. Thus, the key question for undertaking a successful M&A transaction is under which conditions they are most favorable.

But why do acquired companies capture the majority of the positive performance effects in M&A transactions? First, managers of acquiring companies may, in fact, systematically overestimate the benefits they can achieve with a particular deal, underestimate associated costs, and thus accept too high acquisition prices. Second, besides this hubris effect, managers may willingly

Types of Transaction Vertical M&A are found to generate the strongest performance effect, whereas horizontal and heterogeneous M&A show nearly no differences in the observed performance impact.


Performance impact analysis shows that vertical M&A transactions increase ROCE by 55%. Although still impressive in magnitude, horizontal and heterogeneous M&A lead to a significant weaker increase in ROCE by 24% and 29% respectively.

of scale and scope to be in general superior to the former. However, in reality the high bureaucracy costs of horizontal M&A seem to compensate potentially higher benefits, in turn, resulting in a non-significant difference between these two transaction types.

Vertical M&A Show Strongest Performance Effects

Intangible Assets Intangible assets are typically described as tacit resources that cannot be easily transferred on factor markets, substituted by other assets, or imitated by competitors. Therefore, intangible resources are today seen as a major source of competitive advantage. Thus, M&A which are used as a means to acquiring and/or transferring intangible resources should be superior to other transactions.

A reason for the approximately two times stronger performance impact observed for vertical transactions may be that vertical integration allows companies to better manage strategically important interactions with upstream or downstream markets. Although vertical M&A are typically associated with relatively high bureaucracy costs, the benefits of internalizing certain market transactions seem to considerably outweigh these costs.

Using R&D and marketing expenditures as an indicator for intangible assets, these expectations are confirmed in the meta-analysis. In M&A, in which the bidder and/or the target company possess a high amount of intangible resources, the performance impact is significantly stronger than in transactions between companies with a low

Heterogeneous M&A typically aiming at financial advantages seem to benefit from the relatively low bureaucracy costs associated with these transactions compared to horizontal M&A. Theory describes the latter with their focus on economies

Figure 15: Value Creation in Mergers and Acquisitions Performance Increase

Performance Decrease

Performance Standalone Company A

Performance Standalone Company B

Transaction Benefits/ Synergies


Costs of Transaction

Performance Combined Company

Figure 16: Selected Success Factors of Mergers and Acquisitions

ROCE Average Company


Increasing Mergers & Acquisitions …



… with … Horizontal … Type of Transaction

6.2% 6.5%



Low … Intangible Assets Level High



5.0% 6.1%


amount of intangible assets. For the former the ROCE increases by 21%, whereas for the latter no performance impact is observable at all (Fig. 16).

first and second phase no significant average performance effects of M&A are observable, in the third and fourth phase M&A lead to significant gains of 23% and 33% enhancement in ROCE.

Historical Phase Along the M&A waves in the past, dominating strategic foci of M&A can be identified in certain historical phases. Since the middle of the 20th century four phases can be observed:

These results suggest that the focus of the particular transaction, i.e. the strategic underlying logic, matters to deal performance. In addition, the steady increase in the M&A performance relationship over time suggests an apparently increased efficiency of the market for corporate control and corporate governance mechanisms.

1950–1973: 1981–1985: 1985–1989: 1992–2000:

Conglomeration Deconglomeration Leveraged buyouts Shareholder value and globalization

Further Moderators Dividing the underlying sample on the basis of the number of transactions conducted by an acquirer in the past reveals that companies with a low number of past transactions can achieve a significantly stronger performance effect when conducting M&A than companies with a high number.

Looking closer at the development of the relationship of M&A and performance over time reveals an interesting trend. The performance impact of M&A is constantly increasing. Whereas in the


Companies that conduct several M&A over a short time period may not have “digested” these former transactions when acquiring a new target. That is to say, the necessary resources for successfully managing the postmerger integration process may not be available in the required amount. Management attention, especially, will be lower than in cases where M&A activity is a relatively exceptional event.

Theory suggests that unfriendly M&A, which typically do not have the support of the top management team, will be associated with a significant loss of management resources after the deal. Apparently, this does not apply. At least, it does not translate into performance problems. Finally, the impact of the payment method on the M&A and performance relationship was analyzed by differentiating between stock- and cash-based payments. No moderating effects were identified, however.

International M&A are discussed in theory as a possibility to transfer intangible resources to other country markets. In addition, international M&A can be a means to achieving international portfolio diversification – a value-enhancing strategy when international capital markets are not perfectly integrated. Both arguments are typically discussed when benefits of international M&A are highlighted in comparison to national M&A. However, meta-analytic results do not support this argumentation – international M&A do not have more positive effects than domestic transactions.

Implications First and foremost, our meta-analytic results evidence that, in contrast to the widespread belief that most M&A transactions fail, on average M&A are actually a value-enhancing strategy. Moreover, the positive performance effects even increase over time, hinting towards an even higher value creation potential in the future. Thus, we formulate the major take-away from this chapter as follows:

Comparing friendly and unfriendly M&A does not reveal significant differences in performance effects, either. This is somewhat surprising.

M&A Actually Do Create Value


tion tasks. Especially past transactions might still need a substantial amount of a company’s management for their integration processes. In fact, failing to pay adequate attention to this issue may harm the value creation potential of both past and future transactions.

At the same time, our findings highlight that targets’ owners can typically usurp the lion’s share of the positive performance effect of M&A. This might be caused by an overestimation of possible synergies created by the transaction, resulting in too high premiums being paid. Thus, both an extremely thorough assessment of the realizable positive performance effects of an M&A transaction and outstanding negotiation skills are obviously key elements for realizing at least an equal split of the performance effects between the two transaction parties.

Minicase 5

Unilever’s “Path to Growth”

As shown above, the strongest performance effects in the sample are observable for vertical M&A transactions. Therefore, the prolongation of a company’s value chain in upstream and/or downstream markets seems to be a viable strategy allowing strong performance improvements. Consequently, companies should actively assess the value creation potential of down- or upstream mergers. In particular, better communication with, and knowledge about, downstream market players and decrease of dependency from upstream market players seem to be key factors triggering substantial positive performance effects.

Seeking Strong Competitive Positions and Leveraging Complementary Assets With total sales amounting to $52 billion in 2006 and 189,000 employees worldwide, the Unilever Group is one of the world’s largest suppliers of consumer goods in the foods and personal and home care business. Its portfolio comprises around 400 brands such as Knorr, Flora/Becel, Hellmann’s, Lipton, Omo, Surf, Lux, Dove, Blue Band/Rama, Sunsilk, Rexona, and Heart ice cream. Unilever is the global market leader in all food categories in which it operates, i.e. Savory and Dressings, Spreads, Weight Management, Tea, and Ice Cream. In addition, Unilever is the world market leader in Skin and Deodorants, and has strong positions in other personal and home care businesses categories.

Moreover, intangible resources are identified as a key factor determining the performance effects of M&A. Results demonstrate that, except for commodity-driven markets, consolidating M&A transactions and pure scale transactions are usually less successful than are scope transactions that pool and jointly leverage valuable assets.

On the way to achieving the leading position in the food businesses a critical milestone was the acquisition of US-based Bestfoods in 2000. This acquisition was, along with a series of smaller acquisitions and diverse divestments, part of the five-year strategic plan “Path to Growth,” initiated at the start of the decade. This plan envisioned restructuring Unilever’s brand portfolio, focusing on leading star brands. With a total equity value of approximately $20 billion, the Bestfoods acquisition was the largest acquisition ever undertaken by Unilever and, at that time, the second-largest cash acquisition ever.

Quite surprising is the fact that there is no difference in the performance effects between friendly and unfriendly M&A. This result strongly advises managers to strive also for transactions that are not supported by the management of the target company – provided a strategic fit between the two companies is sufficiently certain. Finally, acquirers are strongly advised to crucially assess capacities required for merger integra-


reduction synergies had already been realized. In fact, from 2001 on Unilever has enjoyed increasing operating margins.

Prior to the acquisition, Bestfoods was a global consumer goods company with sales amounting to approximately $9 billion in 1999, 60% of which was generated outside the US. Bestfoods employed 44,000 people. Its most renowned brands were Knorr, Hellmann’s, Mazola, and Skippy.

Unilever’s acquisition of Bestfoods is a good example of a growth strategy that, at its core, builds on the positive performance effects of the leverage of complementary assets and strong competitive positions.

The most important characteristic of Bestfoods’ products was that they had attained in the vast majority of cases very strong competitive positions. They were either leader or second in terms of market share in the country markets respectively served. Nonetheless, soon after the Bestfoods acquisition, Unilever sold off an array of the brands bought. The entirely US-based Bestfoods Baking Company, for instance, was deemed not to adequately fit Unilever’s other businesses.

It seems unsurprising, therefore, that it is exactly since 2001 that Unilever’s return on invested capital, net profit, and share price have continuously increased. Apparently, Unilever has achieved what they were after with their “Path to Growth” initiative – namely, being positioned for strong and profitable growth prospects. Sources: Thompson, A. A. Jr. (2004), Unilever’s Path to Growth Strategy: Is it working?, in: Thompson, A. A. Jr., Strickland III, A. J., Gamble, J. E., Crafting and Executing Strategy – The Quest for Competitive Advantage, 14th ed., Boston: McGraw Hill.

Unilever’s plan was to integrate Bestfoods’ operations in such a way that cost savings could be attained by combining purchases, by streamlining administrative functions, and by realizing additional economies of scale. A strategic goal also was to create a stronger position in the US market with the help of Bestfoods. At the same time, it was, in particular, synergies in distribution and marketing that Unilever aspired to.

In terms of target choice, Unilever had placed particular emphasis on finding a corporation, the brand portfolio of which, and the country market reach of which, were complementary to Unilever’s brands and coverage. Individual strengths were sought to be mutually leveraged. Unilever sought to capitalize on Bestfoods’ strong position in Latin America, and wanted to employ its own distribution network strengths in Asia-Pacific to boost sales of the Bestfoods brands. Also, Bestfoods’ food service (catering) channels should be used to elevate sales of Unilever’s culinary products. In 2003, Unilever management stated that they believed to have successfully integrated Bestfoods’ operations into the corporation. Businesses had been combined globally, and considerable cost-


G. Cooperation Cooperation positively influences company performance Substantially engaging in cooperative agreements increases ROCE by 36% on average Small companies benefit most from cooperation Type of cooperation per se does not matter to performance

In recent years many industries have witnessed value chain reorganizations and corporate refocusing strategies. In the face of intensifying competition on a global scale, companies have returned to increased specialization by means of divestments and outsourcing in order to (re-)gain and maintain their edge over the competition.

vented. Not to forget that cooperation allows maintaining a certain degree of organizational flexibility. Lock-ins are limited and competitive (re-)positioning may be implemented comparatively rapidly. Joining the value-adding activities of two or more companies incurs costs as well, however. Cooperation requires continuous coordination among partners. This requires management capacities, and entails costs that increase with increasing partner interest divergences.

In the light of these disintegration tendencies, it is indeed cooperation that may constitute a particularly valuable mode of growth. Many activities of company development may be organized more favorably with the help of a partner in different forms of cooperative agreements (Fig. 17). Acquisitions or internal organization may prove inadequate or simply not feasible in many instances.

Moreover, companies entering into alliances may be exposed to the risk of undermining their competitive advantages, if, for instance, company-specific knowledge is lost in the course of the collaboration. If incumbent companies partner with newcomers, specific entry barriers into industries may erode. And, in terms of sharing the gains from cooperation, severe problems may be encountered by partners with inferior bargaining power.

General Performance Impact Entering cooperative agreements holds the potential of increased operational efficiency, risk reduction, and access to valuable resources. Competition may be reduced and market power may be increased. Also, government restrictions on entering specific country markets may be circum-

Now, what does the empirical evidence suggest as regards the performance effects of the benefits of cooperating net of costs?


Figure 17: Form of Cooperation Determined by Collaboration Purpose

High Equity Joint Venture Contractual Joint Venture Degree of Interorganizational Dependence

Management/ Marketing/Service Agreement Licensing/ Franchising Agreement Long-term Supply Contract

Low Form of Cooperation

Based on 11,017 company observations, metaanalytic results reveal that cooperation has, in the main, a positive impact on company performance. Significantly engaging in inter-company cooperation leads on average to a 36% jump in ROCE. The benefits of entering into cooperative arrangements are in the vast majority of cases outweighing the costs associated with it. Nonetheless, specific circumstances matter to the nature of effects.

While larger companies generally have resource endowment advantages, they usually partner with smaller companies to annex and benefit from particular types of innovations and related knowhow that they have not managed to develop on their own. Contrarily, smaller partners may realize benefits from positive reputation effects on capital markets, for instance, and from gaining access to financial and managerial resources that otherwise would be hardly accessible. In this way, they may overcome what is one of the major disadvantages of small companies – a limited resource base.

Performance Impact Moderators

In the case of an innovative product owned by a small company, an alliance may provide access to the funds necessary to commercialize the product. Particularly in technology-intensive industries, such as biotech, this alliance strategy has been successful.

Larger vs. Smaller Partners Meta-analytic results indicate that the return from cooperative strategies is larger for smaller partners.

If You Are Small, Cooperate

Furthermore, small enterprises may often lack local market knowledge when pondering internationalization moves. Here, alliances may be used to ease expansion into those markets and allow important time saving, to name but another potential benefit of cooperative mechanisms.

If a small company significantly increases its cooperative activities, it boosts its ROCE by a tremendous 78% on average. In contrast, larger companies generate an increase of ROCE by 40% (Fig. 18).


Organizational Form of Cooperation Meta-analytic results also reveal that there is no difference in performance impact among alternative organizational forms of cooperating. In other words, joint ventures as well as simpler contractual agreements apparently provide similar upward and downward potential as regards company performance implications.

At first sight this appears surprising, as one could have argued that exclusively cooperation partners from similar industries are in a position to realize operative and/or collusive synergies in the joint endeavor. This may well apply to contractual cooperation such as long-term supply contracts and marketing alliances which require a certain degree of business linkage to make sense in the first place. Having a closer look at this issue clarifies that this is the wrong perspective when it comes to joint ventures, however. Here, the question is less whether the two cooperating partners’ core businesses enjoy a linkage. Instead, the important question is whether both partners can valuably contribute to the “business” in which they cooperate. If both partners provide resources to a joint endeavor that complement each other to nurture competitive edges, then the partners may well be from different industries. Thus, it is not so much the linkage between partners that matters in joint ventures but rather each partner’s linkage to the cooperation business.

Ultimately, companies will have to decide for a particular mode based on considering company- and context-specifics. In the face of the trade-off between flexibility and control when moving on the continuum from supply contracts to equity joint ventures, issues such as the objective of the partnership, the content of the collaboration, and the typology of the partners involved, will determine the preferable choice of mode. Business Relatedness of Partners The analysis also shows that cooperative agreements between businesses from similar and from dissimilar industries enjoy similar success rates. Apparently, the type of business of partners a priori the transaction per se does not matter to the performance effects of cooperating.

This logic finds support in the meta-analytic evidence in that cooperation between partners from completely different core businesses is found to be as successful as cooperation between partners from similar industries.

Figure 18: Selected Success Factors of Cooperation



Average Company Increasing Cooperation …



… and … The Larger Partner


… Being


The Smaller Partner



Empirical evidence further suggests that the following factors increase the positive performance effects of cooperation:

Implications We may conclude that across alternative forms of cooperation, cooperative agreements are a promising alternative to other modes of growth. There is one critical success factor, however. Companies partnering in cooperative agreements must ensure that they gain access to resources that are valuable either to their core business or to the new business entered into by means of complementarities with own resource endowments:

Contract completeness • Trust between partners • One partner has dominant share in equity ownership • One partner exerts dominant managerial control •

In addition, in international joint ventures it is favorable if:

Gaining Access to Valuable Assets Is Key to Cooperation Success

A local partner is involved • You have prior experience in international cooperation projects • The local partner has high market share • The local partner has experience in dealing with foreign companies •

In particular, smaller companies should proactively search for partnerships with players that can provide necessary base-levels of managerial and financial resources and/or access to other valuable assets such as established distribution networks.

Contrarily, negative effects can be expected from partner conflict, high numbers of parents involved in the cooperation, and if local partners are state-owned enterprises.

Nonetheless, larger partners can benefit, too, if a smaller and younger company provides some kind of innovative process or product. Here, the larger company may benefit from particular entrepreneurial behavior that characterize smaller companies. In this respect, cooperation can enable fast access to specific types of assets developed in smaller companies and translate into time-based advantages. In fact, cooperating may be a very promising response to ever-shortening product life cycles and the need for continuous innovation.

Minicase 6

Star Alliance Cooperating to Compete The deregulation of the airline industry has set the stage for airlines to serve international destinations across the globe. As a response to the opportunities and threats that open markets entail, the airline industry has witnessed the emergence of three major carrier alliances with global reach, namely Star Alliance, OneWorld, and SkyTeam. Today, two out of every three passengers are alliance carrier passengers. All founded in the late ‘90s, the three alliances now go far beyond mere code-sharing agreements in terms of cooperating. While the

Cooperating in the form of multiple R&D alliances, for instance, can also reduce risks by burden sharing, and spawn beneficiary knowledge spillovers. Ideally, a win-win situation is created in cooperative agreements in that both partners have sufficient incentives to fully commit to the agreement.


ters location, and is operated by a committee instead. Contrarily, Star Alliance is headquartered in Frankfurt, Germany, with a distinct legal entity – the Star Alliance Services GmbH.

alliances place differing emphasis along which lines its members cooperate, they have a common characteristic that at the same time is critical to alliance and carrier success: Its members have partnered in order to benefit from revenue- and cost-based synergies that arise from combining the (regional) route networks of the members. In this respect, Star Alliance appears to have a pole position in providing benefits to its members. Today, Star Alliance has a 25% share in global passengers and a 28% share in global operating revenue, with the next best alliance, SkyTeam, capturing a 22% share in both respects. Apparently, Star Alliance’s vision to become the leading global airline alliance for the high-value, international traveler was realized only ten years after its foundation in 1997.

Over time, Star Alliance has shown that it is a rather stable alliance. It has the most comprehensive network, members with strong home market positions, a strong presence at major hubs, high levels of consumer awareness, apparently the best frequent flyer program cooperation, and leads in product development. Amongst others, Star Alliance has developed a paperless electronic ticket that customers can use across the entire alliance network. This is contrary to other alliances, in which members often use bilateral agreements on e-tickets. In addition, Star Alliance is in the process of establishing more and more alliance-wide self-check-in terminals. Also, they are the first alliance to offer a tool to build round-the-world itineraries that can subsequently be sent electronically for ticketing. Finally, Star Alliance offers corporate travel products for global companies and offers them a onestop shopping approach in this respect.

Star Alliance was founded by Lufthansa, United Airlines, Air Canada, SAS, and Thai Airways, who expanded their already existing bilateral cooperation agreements into a multiple-partner alliance. The airlines, all with different geographical areas of strength, moved from reciprocal code-sharing to coordination of flight schedules, joint advertising, integration of frequent flyer programs, and common purchasing, to name but a few areas of cooperation. Today, Star Alliance has 20 (regional) members, serves 842 destinations in 152 countries, and carries 425 million passengers per year. In fact, Star Alliance offers more destinations and serves more countries than other alliances.

Star Alliance’s long-term goal is the establishment of a common IT platform that is currently being developed by United, Lufthansa, and Air Canada. Until this system is implemented, however, Star Alliance makes use of a meta-IT platform called StarNet, that integrates members’ legacy systems with minimum legacy system amendments required. Once finalized, other alliance members will be invited to join in the common platform. Star Alliance is convinced that the system will improve customer service, delivery speed, and reduce distribution costs, and, at the same time, be unrivalled in the industry. In this way, Star Alliance plans to continue what they have done – helping their members to compete more successfully.

The success of Star Alliance can be traced to an array of factors. First, Star Alliance strives for common governance mechanisms and a common infrastructure, transparent and lean processes, aligning members’ business objectives and product delivery processes. They unify and centralize baggage service facilities, check-in areas, and lounges. Also, common business rules and standards have been established to reduce lengthy partner negotiations. Other alliances do not seem to be so committed to joint organization. OneWorld, for instance, has its headquarters in Vancouver, Canada, but no real formalized structures. SkyTeam has no headquar-

Source: Albrecht, J. (2005), State of Alliances, Presentation given by the CEO of Star Alliance, available from:


H. Summary In this chapter we briefly recap and summarize our findings on the linkage between growth strategies and company performance to derive major implications for practice.

In addition, we found that company profitability is a function of both industry- and company-level factors. In this respect, we provided concrete evidence that industry concentration and company competitive position with the latter being indicated by level of market share attained are positively related to profitability. A second maxim was derived that should be considered by executives across growth strategies. Companies should generally seek to be in or enter product and country markets that allow the company to become an important player sooner rather than later. At the same time, companies should seek to be in markets that exhibit concentration tendencies or that allow for inducing these tendencies. While this combination of competitive strength and industry attractiveness is not going to be achieved easily, it is the ideal scenario for profitability maximization. Strive for becoming a premium monopolizer!

First, we take a look back at the general guidelines that are to be considered by executives when pondering growth. Second, we again show the average ROCE impacts of “the what and the how” of growth strategy options (Fig. 19, 20). Third, we provide, in addition to the average performance impacts, the probabilities of specific strategies to succeed at all. More precisely, we offer an overview of the success rates of growth strategy options as well as performance impacts under specific conditions (Fig. 21). Fourth, we derive success factors common to a number of growth strategies (Fig. 22). And, fifth, we list ideas for practice in terms of satisfying the common success factors identified (Fig. 23).

Building on these more general guidelines, we subsequently paid considerable attention to successively analyzing the track record of alternative growth options. All in all, more than 200,000 empirical company observations were used to generate evidencebased best practices in terms of successful growth.

In the early chapters of the brochure, we clarified that company size growth per se does not enhance company performance. We derived the simple and yet fundamental maxim that blind growth will not pay.

Figure 19: ROCE Effects of “the What” of Growth

ROCE Average Company


Increasing … … Innovation (n = 19,017) … Internationalization (n = 7,792) … Diversification (n = 82,742)


6.7% 5.7%




n: number of empirical observations


tion that we brought to light. If this is not the case, companies may ponder some external “ingredient” to their growth endeavor.

It was found that innovation and internationalization are on average favorable to the company, while diversification is detrimental to company performance in the majority of cases. More specifically, significantly increasing innovation activities boosts ROCE by, on average, 34%, while internationalization still generates a jump of 13%. Contrarily, significantly increasing corporate diversification results in ROCE declining by 6%.

So far, we have presented average ROCE effects of alternative growth options. As the probabilities of growth strategies to succeed per se will also be of interest to practitioners, we present in Figure 21 the success rates of alternative options as well as the success rate if the option is exercised under specific conditions.

In terms of “the how” of growth, the options of mergers and acquisitions and cooperation were investigated. It was found that both modes of growth do entail positive effects on average, with cooperation being, in the majority of cases, the superior option. Mergers and acquisitions on average entail a 21% increase in ROCE, while significantly increasing cooperation activities enhances ROCE by a substantial 36%.

Indeed, specific success factors were found to be elevating the success rates and ROCE impacts. In this respect, of particular interest are those factors that apply across a number of alternative growth options. These factors can be considered key success factors for growth endeavors in general and are summarized in Figure 22. Entrepreneurial orientation, for instance, increases the success rates of innovation as well as of internationalization. The presence and leverage of intangible assets such as technological know-how, customer relationships, or brands elevates the probability of success of internationalization and mergers and acquisitions.

Our general guidelines also suggest that internal growth may well be a viable option if executives are sufficiently certain to be able to remain in or enter attractive industries and to build a strong competitive position herein without any external support. At the same time, these executives must be certain that their companies are able to satisfy entirely on their own the success factor conditions of innovation, internationalization, and diversifica-

Figure 20: ROCE Effects of “the How” of Growth

ROCE Average Company


Increasing … … Mergers and Acquisitions (n = 41,260) … Cooperation (n = 11,017)

6.1% 6.8%

n: number of empirical observations


+21% +36%

Figure 21: Success Rates and ROCE Effects under Contingencies

Growth Option

Contingency /Success Factor

Average Success Rate 40%


Average ROCE Change (%)


Company Size



Market Share



Industry Concentration






High Resource Availability Low Resource Availability

77% 58%

+64% +19%

Strong Entrepreneurial Orientation Weak Entrepreneurial Orientation

66% 58%

+38% +19%

Breakthrough Innovation Incremental Innovation

69% 59%

+45% +23%

High-Tech Industry Low-Tech Industry

70% 62%

+47% +30%



Strong Entrepreneurial Orientation Weak Entrepreneurial Orientation

69% 50%

+46% 0%

High Levels of Intangible Assets Low Levels of Intangible Assets

66% 50%

+38% 0%

Companies from Europe Companies from the US Companies from Japan

57% 62% 50%

+18% +28% 0%



Related Diversification Unrelated Diversification

55% 45%

+12% -12%

More Efficient Environments Less Efficient Environments

46% 50%

-9% 0%



Bidder Target

53% 64%

+8% +33%

Vertical Transactions Heterogeneous Transactions Horizontal Transactions

73% 62% 60%

+55% +29% +24%

High Levels of Intangible Assets Low Levels of Intangible Assets

59% 50%

+21% 0%



67% 82%

+40% +78%




Cooperation Larger Partner Smaller Partner


companies, and there is, of course, no insurance that any one strategy will be as successful in your company as it is in other companies. Management is always based on the specifics of context, and there is never just one strategy that works across all contexts. However, executives need to know the average success rates of a certain approach and they should consider what turns out to be the best practice in most companies – and then make their considered decision. In this way, they will come closer to what is increasingly deemed crucial for corporate performance maximization – Evidence-based Management.

The relatedness, i.e. similarity, of country and /or product markets is a success factor for internationalization and diversification. In addition, business relatedness matters to M&A success. Finally, process-related issues, such as, for instance, ensuring sufficient endowment with managerial and financial resources, organizing for sufficient deal experience, and involving local know-how proved to nurture success across strategies. Figure 23 offers starting points for capitalizing on these success factors in practice. Executives should build creatively on these ideas to more successfully implement the growth strategies that best fit their corporations. In retrospect, top executives are well-advised to consider the best practices brought to light in this brochure to improve their decision-making quality. There is no need to do the same as other

Figure 22: Common Success Factors

Successful Growth

Management Behavior

Growth Logic

Process Excellence

Foster Entrepreneurial Spirit

Leverage Intangibles and Capitalize on Relatedness

Master the Technicalities of Growth


Figure 23: Ideas for Practice in Terms of Growth Success Factors

Management Behavior Foster Entrepreneurial Spirit · Build, maintain, and develop an entrepreneurial work environment · Signal a belief in the power of entrepreneurship from the top · “Try the impossible,” set challenging goals, and anchor related goals in corporate top goals · Establish an incentive environment that elicits desired employee behaviors · Build a climate and culture that nurtures the rapid diffusion of ideas, also across functions · Support staff to show high levels of personal commitment · Create pertinent awards to trigger innovation activities · Foster and reward autonomous action · Allow errors and recognize success · Proactively fight bureaucracy and inertia · Enable communication and knowledge transfers through e.g. technical councils and internal fairs · Institutionalize entrepreneurship in implicit and explicit structures · Maintain a lean structure and do not allow divisions to grow too big · Keep people in small, flexible, and competitive units · Structurally separate “new business” from “old business,” assign new management teams to these “spin-offs,” and make them grow faster · Consider alternative team compositions and new recruiting/training processes

Growth Logic Leverage Intangibles and Capitalize on Relatedness · Seek to exploit intangibles across product and country markets · Be clear about your ownership advantages in intangibles, that they are key to successful growth · Think twice about growth when there are no intangibles to draw on in your value propositions · Be it on the cost or benefit side, intangibles must be used to reinforce your competitive edge · When internationalizing, outcompete local companies by drawing on your intangibles · Most worthwhile is leveraging a brand and technological or R&D know-how · In business combinations, strive to bring together businesses with complementary asset bases · Seek to combine businesses that are strategically similar, i.e. similar to manage · Exploit product-market relatedness by cost-based and/or value-based synergies · Strive for cost sharing, centralized procurement, combining functions, product bundling, etc. · Pay careful attention to quantitatively estimating synergies a priori business combinations

Process Excellence Master the Technicalities of Growth · Ensure an adequate endowment with financial and managerial resources · Be sure to have “digested” prior growth before opting for something new · Organize for sufficient deal experience and market familiarity · In particular, prior M&A experience is important · Do not overpay as bidder in M&A and mind postmerger integration costs · Mind the context dependency of synergies and reach a diversification strategy-context fit · Achieve a strategy-structure fit and only centralize where synergies are to be realized · Be aware of different cultures and ways of thinking · Involve local know-how when internationalizing · Choose local partners that have experience in dealing with foreign companies and cultures · Cooperate only when access to valuable resources is provided · Focus cooperation contracts in this respect and try to establish trust in relationships · Continuously challenge strategic fit and economic rationales of business combinations


primary studies and calculating a sample-size weighted mean correlation that is subsequently corrected for an average attenuation factor.

Methods The evidence-based best practices reported in this brochure are derived from combining methods of quantitative meta-analysis with performance impact analysis (PIA). Quantitative meta-analysis allows the identification of true relationships between variables of interest. Subsequently, performance impact analysis is used to convert metaanalytic results in such a way that ROCE impacts of alternative growth options can be systematically quantified. In addition, Rosenthal and Rubin’s approach of the binomial effect size display is used to estimate success rates of alternative strategic options.

The outcome of meta-analysis is the identification of a) true-score correlations that describe the actual nature of relationships in terms of direction and strength between variables and b) third variables that moderate the nature of the relationships. Performance Impact Analysis Correlations are well-suited for meta-analytic integration, as they constitute standardized slopes of linear associations. If we want to express true-score correlations in a way that is easily understood by practitioners, however, we require information on mean and standard deviation of both independent and dependent variables specifically looked at. We use these descriptives in what we label performance impact analysis, and calculate the absolute and relative change in ROCE if a specific growth option is opted for by corporations. The following example illustrates the approach.

Meta-analysis The majority of strategic management research is plagued by empirical studies reporting conflicting results. This applies in particular to studies investigating the performance impacts of alternative strategies. Sound theory building is made very difficult, and delivering consistent advice to practitioners is rendered almost infeasible. Quantitative meta-analysis is the technique that is used to respond to this challenge. Meta-analysis is an analysis of analyses that statistically integrates the results on the nature of specific relationships from the body of single, empirical studies available on a subject. Meta-analysis elicits the true relationships between variables of interest by means of adjusting for statistical artifacts that systematically distort empirical findings. It is for this reason that quantitative meta-analysis is superior to narrative reviews or vote-counting methods in terms of generating valid results. The meta-analyses underlying this brochure employ the Hunter and Schmidt methodology (2004), which is the most popular meta-analytic procedures in strategic management research.

The meta-analysis on the internationalizationperformance linkage suggests a true-score correlation of r = 0.11 between the variables. As a correlation is a standardized slope, this means that an increase of internationalization by one standard deviation can be associated with an increase of 0.11 standard deviations in financial performance. If we know mean and standard deviation of financial performance in terms of ROCE, for instance, and of internationalization in terms of the ratio of foreign sales to total sales, we can calculate to what extent – in the average company – ROCE will change when significantly increasing internationalization. The studies underlying the meta-analysis indicate that the mean ROCE of the average company amounts to 0.05 with a standard deviation of 0.06, and that the mean internationalization degree of the average company is 0.40 with a standard deviation of 0.25.

Following Hunter and Schmidt, true-score correlations between variables of interest are estimated by accumulating observed correlations from


with y: ROCE, a: intercept, ß: regressor, x: growth option, e: error term, r: true-score correlation, sd: standard deviation.

Thus, an increase in internationalization by one standard deviation, i.e. 0.25, can be associated with an increase in ROCE by 0.11*0.06 = 0.0066. ROCE in absolute terms changes from 0.05 to 0.0566. This would mean an increase of 13.2%. It arises as a consequence of an increase in the degree of internationalization from 0.40 to 0.65.

In addition, following Rosenthal and Rubin (1982), meta-analytic results, i.e. Pearson correlations, are converted into growth option success rates p with: p = 0.5 + r/2

We identified mean and standard deviation of the growth strategy and performance variables for the average company from the empirical studies underlying the meta-analyses (Fig. 24).

Sources: Hunter, J. E., Schmidt, F. L. (2004), Methods of Meta-analysis: Correcting Error and Bias in Research Findings, 2nd ed., Thousand Oaks/CA: Sage.

The reported performance changes arise when companies undertake significant strategic moves, i.e. when they increase current activities in the respective growth strategy by at least 50%.

Rosenthal, R., Rubin, D. B. (1982), A Simple, General-Purpose Display of Magnitude of Experimental Effect, Journal of Educational Psychology, 74(2), pp. 166–169.

The mathematical derivation underlying performance impact analysis is as follows: (1) y = a + ß * x + e (2) delta y = ß * delta x (3) ß = r * (sd(y)/sd(x)) (4) delta y = (r * (sd(y)/sd(x))) * delta x (5) If delta x = 1 sd(x), then (6) delta y = r * sd(y)

Figure 24: Variable Descriptives



Standard Deviation





Return on Capital Employed

Company Size



Total Sales (log)

Market Share



Absolute Market Share

Industry Concentration



4-Company Concentration Ratio




R&D Intensity




Foreign Sales/Total Sales




Total Entropy Index




No. of Prior M&A




No. of Prior Joint Ventures


Meta-analytic Literature Bausch, A., Fritz, T. (2005), Financial Performance of Mergers and Acquisitions – A Metaanalysis, Paper presented at the 2005 Academy of Management Meeting, Hawaii, USA.

Bausch, A., Rosenbusch, N. (2005), Does Innovation Really Matter? A Meta-analysis on the Relationship between Innovation and Company Performance, Paper presented at the 2005 Babson Kauffman Entrepreneurship Research Conference (BKERC), Wellesley/Boston, USA.

Bausch, A., Fritz, T., Boesecke, K. (2007), Performance Effects of Internationalization Strategies: A Meta-analysis, in: Rugman, A. (ed.), Research in Global Strategic Management, Vol. 13, pp. 143–176.

Boesecke, K., Bausch, A. (2005), Success Factors of Alliances: Evidence-based Best Practices in the Last 40 Years, Paper presented at the 2005 Strategic Management Society Conference, Orlando, USA.

Bausch, A., Krist, M. (2007), The Effect of Context-related Moderators on the Internationalization-Performance Relationship: Evidence from Meta-analysis, in: Management International Review, Vol. 47, Issue 3, pp. 1–29.

Datta, D. K., Narayanan, V. K. (1989), A Metaanalytic Review of the Concentration-Performance Relationship: Aggregating Findings in Strategic Management, Journal of Management, Vol. 15, Issue 3, pp. 469-483.

Bausch, A., Pils, F. (2006), Product Diversification and Corporate Financial Performance, Paper presented at the 2006 Strategic Management Society Conference, Vienna, Austria. Bausch, A., Pils, F., Van Tri, D.L. (2007), In Search of Profitable Growth: Strategic Priorities Put to a Meta-analytic Performance Test, Paper presented at the 2007 IABE Annual Conference, Las Vegas, USA.


About the Authors Thomas Raffeiner started his career as an electrical engineer at Siemens AG in Germany. After having earned his MBA, he headed the Regional Headquarters Asia Pacific of the Industrial Service division of Siemens out of Singapore. He was Senior Manager at Corporate Planning and Development at Siemens corporate headquarters before he joined Andersen Consulting (today Accenture). Thomas Raffeiner became a partner with Accenture in 2001 and was in charge of the M&A practice and the energy market in Austria and Switzerland. Since 2005, Thomas Raffeiner has been a partner at the premium business consulting group The Advisory House in Zurich, Switzerland.

Professor Dr. Andreas Bausch was Senior Manager for mergers and acquisitions at Siemens AG corporate headquarters between 1996 and 1999. He then qualified for tenured professorship at the department of Industrial Management and Controlling at the University of Giessen, Germany. In 1997, he was awarded the Konrad-Mellerowicz Prize for outstanding research in management. From January 2004 to September 2006 he was Professor for Strategic Management and Controlling at Jacobs University Bremen (formerly International University Bremen), Germany. Since October 2006, he has been Professor of Business Administration and International Management at Friedrich-Schiller-University Jena, Germany, and Adjunct Professor of Strategic Management and Controlling at Jacobs University Bremen. Andreas Bausch is the Co-Founder and Academic Director of the Executive MBA in European Utility Management at Jacobs University, and Guest Professor at Kansas State University in Manhattan/KS (USA) and the Free University of Bozen-Bolzano (Italy). His main research interests are in strategic and international management, controlling, and entrepreneurship.

Frithjof Pils is Senior Manager at the Center for Management Studies and Research and PhD Fellow at Jacobs University Bremen.

The authors would like to thank Thomas Fritz, Tobias Waskönig, Dirk Mulzer, and Kai Karring for their valuable contributions.




Jacobs University Bremen

Friedrich-Schiller-University Jena

Jacobs University Bremen is an independent, private research and educational institution situated in Bremen, Germany. Distinguished by its international orientation and highly selective admission process, Jacobs University fosters excellence and transdisciplinarity in research and teaching. Approximately 1,100 undergraduate and graduate students from more than 90 nations are pursuing their studies here. The language on campus is English.

Friedrich-Schiller-University is a public university situated in Jena, Germany. Founded in 1558, it is today a modern institution that encourages interdisciplinarity and internationality in research and education. The university is organized into ten schools, among which, for instance, are the School of Medicine, the School of Physics and Astronomy, and the School of Economics and Business Administration. In 2008, a number of 21,000 students are enrolled at Jena University, specializing in more than 100 different courses of study. The university cooperates with more than 270 universities and research institutions and with more than 200 industry partners worldwide.

The Advisory House The Advisory House is an independent management and strategy consultancy with a healthy growth track record. Our consulting competencies span all aspects of strategy development and operative implementation. Our offices in Zurich, Munich, and Vienna serve clients all across Europe.


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