September, 1997 - Vol. 1, No. 12

Asset Diversification or Consolidation in Declining Industries

A new study by Wharton faculty member Harbir Singh and Jaideep Anand of the University of Western Ontario examines acquisitions in the U.S. defense industry, a sharply declining sector due to the drop in U.S. military spending after the close of the Cold War.

They find that some defense firms, such as Raytheon, opted to diversify their assets by acquiring consumer applications, while other, such as Martin Marrietta, chose to consolidate their assets by acquiring other operations within the defense industry. Distinguishing between diversifying and consolidating acquisitions, the researchers find that:

• consolidating acquisitions outperform diversifying acquisitions in both stock and operating measures;
• firms that are more focused outperform those that are more diversified.
  

Thus, concentrating on core business enhances a firm's competitive advantage even when an industry is in decline. The consolidating acquirers, it seems, still manage to find profitable areas. Diversification out of a declining market and into an expanding one may appear an attractive strategy, but many diversifying firms evidently do not have the capability to compete effectively in the new areas. Put differently, focus on traditional segments is preferable over diversification out of them even when an industry is in decline.

Source: Jaideep Anand and Harbir Singh, "Asset Redeployment, Acquisitions and Corporate Strategy in Declining Industries," Strategic Management Journal, Vol. 18 (August, 1997), pp. 99-118

Critical Moments in Work Decisions

Joseph Badaracco asks how managers resolve conflicts between work responsibilities and personal values. The branch manager for a major bank, for instance, is told by her boss that the branch will be closed in two months -- and that she cannot reveal the decision to anybody. A coworker, however, hears a rumor and asks the manager whether the branch will be shut. He wants to know of course so that he can begin a job search and reduce his spending. Should the branch manager reveal what the company has said she cannot?

Badaracco, an ethics professor at the Harvard Business School, tracks several such "defining moments" and then provides a set of questions to equip readers to better face their own such moments:

1. "What are the other strong, persuasive, competing interpretations of the situation or problem that I hope to use as a defining moment for my organization?"
2. "What is the cash value of this situation and of my ideas for the people whose support I need?"
3. "Have I orchestrated a process that can make the values I care about become the truth for my organization?"
4. "Am I playing to win?"

Source: Joseph L. Badaracco, Jr., Defining Moments: When Managers Must Choose Between Right and Wrong (Boston: Harvard Business School Press, 1997).

Technology, Strategy, and Organization

Wharton Executive Education is offering a one-week program focusing on the relationship between technology, strategy, and organization and its impact on innovation. Entitled "Managing Technology and Innovation," the program is offered on June 21-26, 1998.

Information: execed@wharton.upenn.edu and http://www.wharton.upenn.edu/execed

Flexible Preferences in Corporate Governance

Joining the debate over best practices in corporate governance, the U.S. Business Roundtable -- an organization of more than 200 CEOs of America's largest companies -- has called for a focus on "substance over form," rejecting a call by some institutional investors for such fixed policies as mandatory retirement ages for directors, outside directors that are completely independent of management, and separation of the roles of CEO and board chair. Its statement on corporate governance can be found at http://www.brtable.org/issue.cfm/2/0/0/12

"How privileged I feel to have been part of the most exciting period in the history of South Africa."

"The more boundaries you stretch across, and even transgress, the more opportunities you have to meet with interesting people" and broaden your "perspectives."

"A good dose of humor and some willingness to take risks give one the chance not only to transcend artificial boundaries but to derive deep pleasure in doing so."

Source: Mamphela Ramphele, Across Boundaries: The Journey of a South African Woman Leader (New York: The Feminist Press at the City College of New York, 1995). The author was a founder with Steven Biko and others of the Black Consciousness Movement; she is a physician and anthropologist, and presently serves as Vice-Chancellor of the University of Cape Town.