Corporate controls, geographic dispersion, and their effect on corporate financial performance in related diversified corporations

Abstract

Purpose

Drawing on the literature on corporate diversification, the purpose of this paper is to shed light onto the influence of geographic dispersion on the effectiveness of control mechanisms in related diversified corporations. This research contends that control mechanisms implemented by corporations and the extent of geographic diversification play a role in the synergies expected from related diversification being realized.

Design/methodology/approach

This study uses OLS regression to analyze data collected through surveys from managers of 193 Iranian corporations and their 2,704 subsidiaries to examine the relationship between relatedness, corporate performance, geographic dispersion, and emphasis of strategic controls.

Findings

The author finds that a triple interaction effect between corporate strategy (diversification approach), controls mechanisms, and the extent of geographic diversification influences the overall performance of corporations. Findings of this research suggest that the positive effects of strategic controls in related diversified corporations are most when there is less geographic dispersion and will attenuate as corporations become more geographically disperse.

Research limitations/implications

The findings of this research, have contributed to the extant literature in several ways. First, the findings further establish the superiority of related diversification to unrelated diversification in achieving economic performance in corporations. The findings reveal that, ceteris paribus, the more relatedness between activities of subsidiaries in corporations exists, higher performance can be expected at the corporate level. Second, the findings show once more that to achieve the higher performance that results from synergies in related diversified corporations, emphasis of strategic controls play a crucial and important role. Third, the author find that although the emphasis of strategic controls in essential to realizing the potentials in related diversified corporations, greater geographic dispersion attenuates the positive effects expected from stricter enforcement of strategic control mechanisms.

Practical implications

An important consequence of findings of this research is that managers should be more aware of the implications of selecting the geographic location of the subsidiaries that they either acquire or establish. While the literature focusing on corporate diversification has mainly focused on the differences between related and unrelated diversification, this paper brings a new factor into light. Therefore, the findings of this research provide the author with a better understanding of the factors that define success or failure in achieving financial objectives of corporations.

Originality/value

There has been very little done to investigate the factors that influence effectiveness of strategic controls in related diversified corporation. Much of this shortcoming has resulted due to difficulties in measurement of strategic controls their operationalization in empirical studies. This study has taken a step to that direction and therefore, provides a more coherent and clear picture of the factors that influence the overall performance in corporations.

Citation

Seifzadeh, P. (2017), "Corporate controls, geographic dispersion, and their effect on corporate financial performance in related diversified corporations", Journal of Strategy and Management, Vol. 10 No. 1, pp. 102-117. https://doi.org/10.1108/JSMA-10-2015-0079