Identifying internal markets for resource redeployment

• Author: Timothy B. Folta,Teresa A. Dickler
• Date: 01 December 2020
• DOI: http://doi.org/10.1002/smj.3205
• Published date: 01 December 2020

RESEARCH ARTICLE

Identifying internal markets for resource

redeployment

Teresa A. Dickler

1

| Timothy B. Folta

2

1

IE Business School, Madrid, Spain

2

University of Connecticut, Storrs,

Connecticut

Correspondence

Teresa A. Dickler, IE Business School,

Calle de Castellón de la Plana 8, 28006

Madrid, Spain.

Email: teresa.dickler@ie.edu

Abstract

Research summary: This article explores one impor-

tant way in which multi-business firms have advan-

tages over single-business firms. By having flexibility to

reallocate resources, such as human capital, production

capacity, or equipment, between businesses in their

portfolio, they may be able to efficiently expand in mar-

kets with strong opportunities and contract in less

attractive markets. We provide empirical evidence con-

firming that compared to single-business firms in the

same industry and of the same size, businesses in

multi-business firms expand revenues 12% more

aggressively, and retrench revenues 37% more aggres-

sively, on average. This first generalizable test of the

theory also reveals that the relative advantage of multi-

business firms escalates with lower internal resource

adjustment costs, higher external transaction costs, and

greater opportunity differences with the portfolio.

Managerial summary: In this article, we show an

important way in which multi-business firms have

advantages over single-business firms. By having flexi-

bility to reallocate resources, such as employees, pro-

duction capacity, or equipment, between businesses in

their portfolio, they may be able to efficiently expand

in markets with strong opportunities and contract in

less attractive markets. We provide empirical evidence

confirming that compared to similar single-business

firms in the same industry and of the same size, busi-

nesses in multi-business firms expand revenues 12%

more aggressively, and retrench revenues 37% more

Received: 22 March 2018 Revised: 25 March 2020 Accepted: 28 April 2020 Published on: 2 September 2020

DOI: 10.1002/smj.3205

Strat Mgmt J. 2020;41:2341–2371. wileyonlinelibrary.com/journal/smj © 2020 Strategic Management Society 2341

aggressively, on average. The article also provides theo-

retical predictions about when the advantage is most

pronounced.

KEYWORDS

corporate strategy, demand opportunities, multi-business firms,

resource redeployment, resource-based theory

1|INTRODUCTION

Understanding advantages of multi-business firms over focused firms is a fundamental issue in

corporate strategy and finance. The potential to benefit from economies of scope (Penrose, 1959;

Rumelt, 1974) or internal capital markets (Matsusaka & Nanda, 2002; Williamson, 1988) are

advantages commonly cited.

1

Recent theoretical advances suggest an alternative advantage

uniquely available to multi-business firms—having flexibility to partially or fully withdraw

non-financial resources from a business to internally redeploy them elsewhere in the portfolio

(e.g., Folta, Helfat, & Karim, 2016; Helfat & Eisenhardt, 2004; Sakhartov & Folta, 2014).

Sakhartov and Folta (2014) refer to such flexibility as “resource redeployability,”and their theo-

retical model predicts when firms having it are more valuable. Lieberman, Lee, and Folta (2017)

also predict that because internal resource redeployability lowers sunk cost associated with

market exit, it should induce more aggressive complete resource withdrawal from poorer per-

forming businesses.

At least three important issues around this emerging theory remain unaddressed. First,

lacking is an understanding of whether, compared to single-business firms, multi-business firms

can more efficiently adapt to fluctuations in demand given their ability to partially withdraw

resources from existing businesses with relatively fewer demand opportunities than the busi-

nesses to which these resources might be internally redeployed. Second, what remain uni-

dentified are the conditions under which multi-business firms are heterogeneous in their ability

and incentives to exploit demand opportunities relative to their focused counterparts. Third,

lacking is empirical evidence around the recent theoretical advances predicting flexibility

advantages of corporate strategies that emphasize redeployment.

This study addresses these issues by exploring the link between resources and demand,

which has some precedence in the literature (e.g., Penrose, 1959; Wu, 2013). In particular, we

develop theory suggesting that businesses within multi-business firms will show more variance

in revenue growth than single-business firms. This is because multi-business firms should more

aggressively withdraw resources from less attractive businesses in the portfolio, allowing them

to more aggressively shift resources toward more attractive businesses in the portfolio. Substan-

tive changes in demand place the diversified firm at an advantage if resources might be produc-

tively deployed elsewhere in the corporation and if internal redeployment is more efficient than

transacting resources in the external market (Teece, 1980)—the only option available to single

business firms. As a result, we expect businesses in multi-business firms to be more aggressive

in expanding and retrenching revenues compared to single-business firms. By focusing on the

1

Other explanations include diversifying risk to reduce the cost of debt (Lewellen, 1971) and filling institutional voids

(Khanna & Palepu, 1997).

2342 DICKLER AND FOLTA