Downscoping: How to Tame the Diversified Firm

Large, diversified firms face unique challenges as they compete worldwide, and corporate restructuring is one way multinationals strive for competitive advantage. Weighing the pros and cons of a variety of approaches to restructuring, Downscoping offers executives a clear, strategic path through the maze.

The authors show that when a multinational conglomerate fails to compete effectively, too much diversification may be the culprit. Whether the result of weak corporate governance or poor corporate strategy, over-diversification can make managers, unfamiliar with some of the markets in which they compete, opt for safety over innovation. This risk-aversion and lack of long-range commitment to innovation lead inevitably to stagnation over the longer term.

The answer is not downsizing—closing offices and laying off personnel—but downscoping: a strategic approach to restructuring. The options include incentive and compensation adjustments for executives, leveraged buy-outs and capital structure changes, focusing on core skills, diversifying internationally while focusing on businesses in which a firm has strong competencies, and buying and selling mature businesses where product development is not a great concern. Regardless of the approach, executives must exercise strategic leadership during and after restructuring, including providing strategic direction, exploiting core competencies, developing human capital, and sustaining the corporate culture.

Based on systematic research rather than casual observation, Downscoping provides a strong description of restructuring alternatives and their resulting tradeoffs. Its specific guidelines for maintaining competitiveness will be essential reading for managers involved in corporate restructuring.

Large, diversified firms face unique challenges as they compete worldwide, and corporate restructuring is one way multinationals strive for competitive advantage. Weighing the pros and cons of a variety of approaches to restructuring, Downscoping offers executives a clear, strategic path through the maze.

The authors show that when a multinational conglomerate fails to compete effectively, too much diversification may be the culprit. Whether the result of weak corporate governance or poor corporate strategy, over-diversification can make managers, unfamiliar with some of the markets in which they compete, opt for safety over innovation. This risk-aversion and lack of long-range commitment to innovation lead inevitably to stagnation over the longer term.

The answer is not downsizing—closing offices and laying off personnel—but downscoping: a strategic approach to restructuring. The options include incentive and compensation adjustments for executives, leveraged buy-outs and capital structure changes, focusing on core skills, diversifying internationally while focusing on businesses in which a firm has strong competencies, and buying and selling mature businesses where product development is not a great concern. Regardless of the approach, executives must exercise strategic leadership during and after restructuring, including providing strategic direction, exploiting core competencies, developing human capital, and sustaining the corporate culture.

Based on systematic research rather than casual observation, Downscoping provides a strong description of restructuring alternatives and their resulting tradeoffs. Its specific guidelines for maintaining competitiveness will be essential reading for managers involved in corporate restructuring.

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Hoskisson and Hitt draw from their scholarly experiences to give us this worthwhile book about "downscoping" (reducing firm diversification and strategically refocusing on the core business[es]). Using analysis and research findings, the authors address the antecedents and consequences of the difficulties faced by U.S. companies being forced to compete globally and offer effective strategies for restructuring and refocusing. Their first section analyzes how problems of governance and strategy have hurt many firms. Hoskisson and Hitt illustrate that when a multinational conglomerate fails to compete, too much diversification may be the culprit. Strategic control, M-form implementation, acquisitions, and global strategies are examined. Their last section reviews alternative restructuring approaches to restoring competitiveness. Executive compensation, debt, LBOs, international diversification, and strategic leadership issues are discussed. Enhanced by examples such as GE, Ford, and GM, by chapter summaries, and by strategic management terminology, this well-written book is highly recommended for academicians and practicing managers.

Robert E. Hoskisson is Associate Professor of Management at Texas A&M University. Michael A. Hitt holds the Paul M. and Rosalie Robertson Chair in Business Administration at Texas A&M University.