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Approaches to Diversification
There are various approaches to diversification strategies. For analytical purposes, diversification strategies may be classified as concentric, verti- cally integrated, or conglomerate. Whereas concentric diversification re- fers to a firm’s branching into business units in related markets, vertical integration is the linking of businesses that have a buyer–supplier rela- tionship or represent stages of production. Conglomerate diversification is the expansion of a corporation into new, unrelated lines of business. A diversification can again be viewed as either “related” or “unrelated.” Re- lated diversification enables a firm to benefit from economies of scope and scale through the leveraging of core competencies and sharing of activi- ties and information. Related diversification also offers a firm the advan- tages of pooled negotiation power and access to, as well as control over, production materials and product flows through vertical integration. Unrelated diversification, on the other hand, may derive benefits from the possible synergies created by leveraging corporate restructuring and general management capabilities, learning “best practices” in other busi- ness units, improving capital allocations by forming an internal capital market, and reducing financial risk through a diversified business portfo- lio (Dess et al., 2004; Sanchez & Heene, 2004).
	
Diversification Strategy and Performance

So do diversifiers generally outperform nondiversifiers? The empirical re- sults on the linkage between diversification and performance seem to sug-gest that a “moderate” diversification strategy is the key to success. Grant, Jammine, and Thomas (1988) found managerial difficulties as a firm tries to manage an increasingly disparate portfolio of businesses. Markides (1992) discovered many hidden costs such as coordination costs and other diseconomies related to the organizational inefficiencies of conflicting “dominant logics” between businesses and internal capital market ineffi- ciencies. In essence, studies put forward that moderate levels of product di- versification yield higher levels of performance than either limited or extensive diversification. In fact, an inverted-U curvilinear model wherein performance increases as firms shift from single-business strategies to re- lated diversification but performance decreases as firms change from re- lated diversification to unrelated diversification was generally supported by empirical findings (Geringer, Tallman, & Olsen, 2000; Grant et al., 1988;
W. C. Kim, Hwang, & Burgers, 1989; Palepu, 1985; Palich, Cardinal, & C. C. Miller, 2000; Palich, Carini, & Seaman, 2000; Sambharya, 1995).
Researchers have also found that international diversification in- creases the stability of a firm’s revenues and that geographic scope is positively related to firm performance in the analysis of U.S. corpora- tions (Geringer, Beamish, & daCosta, 1989; Grant, 1987; Grant et al., 1988; Hitt, Hoskisson, & H. Kim, 1997; W.C. Kim et al., 1989; Tallman & Li, 1996). The positive relationship between international diversifica- tion and firm performance was supported in the context of other coun- tries outside of the United States as well (Bengtsson, 2000; Buhner, 1987). However, some studies have argued that as firms diversified in- ternationally, the costs associated with geographic dispersion began es- calating. Thus, profit margins erode after a certain hurdle point (Chen, 1998; Geringer et al., 2000; Hitt et al., 1997).
Some research has shown that the interaction between international and product diversification leads to a substantial increase in firm per- formance (Sambharya, 1995). Hitt et al. (1997) found that geograph- ical diversification improves performance in firms that are highly diversified in terms of product markets. In fact, W. C. Kim et al. (1989) concluded that the performance of related and unrelated product diver- sification strategies depends on the degree of international diversifica- tion. Nevertheless, another group of studies has also indicated an inverse relationship between product and international diversification (Buhner, 1987; Madura & Rose, 1987). As both types of diversification involve substantial risks, it is unlikely that a firm would take on both strategies simultaneously (Sambharya, 1995). In sum, geographic and product diversifications interact with one another and, individually and collectively, influence different performances among firms (Grant, 1987; Palepu, 1985).
Research in Diversification
Diversification has had a rich tradition as a topic of research since the late 1950s (Ansoff, 1958; Chandler, 1962; Gort, 1962). Salter and Weinhold (1979) proposed three general but related models in the discussion of cor- porate diversification strategies. The product/market-portfolio model emphasizes the attractiveness of the target market in terms of attributes such as market size, growth rate, and profitability. The strategy model stresses the interrelationship between the core-business market and the target market. The third approach, the risk/return model, derives mainly from financial theories and reflects the concern and interest of investors. Studies of diversification have generally focused on one or more of the three aspects of diversification: (a) the “extent” (i.e., less or more diversifi- cation), (b) the “directions” (i.e., related or unrelated diversification), and
(c) the “mode” (i.e., diversification via internal expansion, M&A, or choices of M&A strategy) of diversification (Qian, 1997; Sambharya, 1995). Diversification strategy may be studied from either the “product” or “geographic” perspective. More recent studies in product diversifica- tion often investigate the directions of diversification as related or unre- lated (Qian, 1997; Rumelt, 1984). Some have argued that related diversification might exploit economies of scope, product knowledge, and other relevant experience, thus reducing transaction costs and improving performance (Grant, 1988; Williamson, 1981). Others have found no dif- ferences or the opposite (Grant & Jammine, 1988; Michel & Shaked, 1984). In general, the RBV of strategic management strongly argues for strategic relatedness within a conglomerate when it comes to diversifica- tion strategy (Chatterjee & Wernerfelt, 1991).
Diversification has gradually become a topic of interest in media management and economics research as well. Dimmick and Wallschlaeger (1986), in one of the initial diversification endeavors, ex- amined the level of diversification of television network parent compa- nies and found that the least diversified parent companies were most active in new media ventures. Albarran and Porco (1990), applying Dimmick and Wallschlaeger’s measures, studied the diversification strategy of pay cable and concluded that these firms appeared to utilize diversification as a means to limit resource dependency and ensure or- ganizational survival. Picard and Rimmer (1999) further explored whether the degree of product and geographical diversification affected the financial performance of newspaper firms during the economic downturn. Whereas Albarran and Moellinger (2002) examined 6 lead- ing media conglomerates’ structure, conduct, and performance follow- ing the IO model, Powers and Pang (2002) reviewed the diversification and performance of 11 media conglomerates before and after the Tele- communications Act of 1996. The trend of research in this area contin- ued as Shaver and Shaver (2003) investigated the activities of 11 companies over a 10-year period and concluded that operating margins were significantly and negatively correlated to the degree of business di- versity. Peltier (2002) further suggested that although there is no posi- tive correlation between a media conglomerate’s presence in multiple businesses and its economic performance, the internationalization rate of a firm appears to be positively correlated with its economic perfor- mance. Adopting a strategic management perspective, Chan-Olmsted and Chang (2003) studied the diversification patterns of seven leading media companies in the product/international dimension and proposed an analytical framework for examining the factors influencing these strategic choices. They also explained how the medium diversifiers yielded the best financial performance. Finally, Kranenburg (2004) pro- posed a series of useful indicators to measure the international diversifi- cation of publishing companies and discovered that the publishing companies have preferred related diversification.
It is our belief that the embedded characteristics of media products (see chap. 1) would lead to a market environment in which related prod- uct and geographic diversification are likely to be the preferred diversifi- cation strategy. For example, as the “intangible,” “content-based” media product may be stored and presented in various formats (e.g., print vs. electronic media), related product diversification that extends a diversifier’s product lines into related content formats (e.g., owning a magazine and an online content site) would likely benefit the corpora- tion by enabling content repurposing, marketing know-how, and shar- ing of production resources, thus leading to superior performance. It is also likely for a media diversifier to seek out distribution products that complement its own content products and vice versa. The fact that an existing product may be redistributed to and reused in different outlets via a windowing process again reinforces the advantage of diversifying into multiple related distribution sectors in various international mar- kets to increase the revenue potential for such a product.
The dual-revenue source mechanism would likely lead to related di- versification as the larger aggregated number of subscribers or audience enhances a media firm’s ability to offer promotional outlets to multina- tional corporations more efficiently and acquired marketing knowledge about the customers more effectively. In addition, because of the impor- tance of cultural sensitivity and the understanding of a country’s regu- latory environment, global media corporations are more inclined to diversify into related product and geographic markets to take advan- tage of the acquired local knowledge and relationships. The dependency on local communications and media infrastructure may also lead to a diversification strategy that is geographically related (i.e., regionalized) because geographically clustered countries are often at similar stages of infrastructure development and clusters of media systems may lead to cost- and resource-sharing benefits.
MERGERS AND ACQUISITIONS
The strategy of M&A is closely related to the previous topic. It is, in fact, a main means to achieve diversification. There are subtle differences be- tween the terms mergers, acquisitions, and takeovers. According to Hitt et al. (2001), strategically, a merger is a balanced integration of two firms’ operations to combine resources and capabilities for creating a stronger competitive advantage, whereas an acquisition is the purchase of a tar- get firm as a subsidiary business with the intent of enhancing a core competency of the acquirer. When the target firm did not solicit the ac- quisition, it is called a takeover.
Many rationales have been suggested as the drivers for M&A. Assum- ing a rational managerial approach, thus excluding the motives of “em- pire building” and “risk reduction” for maximizing a manager’s personal utility, a primary reason for M&A might be to achieve greater “market power” (Haspeslagh, 1999). Market power exists when a firm is able to sell its goods or services above competitive levels or when the costs of its primary or support activities are below those of the competitors (Hitt et al., 2001). Many media companies may have attractive core competen- cies such as the ownership of valuable content or talents and distribution outlets, but lack the size to benefit from these unique resources and capa- bilities. M&As offer an opportunity to achieve greater market power through the increase of firm size (e.g., mergers of MSOs). An attempt to reduce barriers to entry might be another driver for the formation of M&As. For example, market barriers may arise when well-established competitors are able to enjoy significant scale economies and/or brand loyalty. Facing these barriers, a new entrant may find the acquisition of an established company to be more effective than an attempt to enter the market as a competitor offering a good or service that is unfamiliar to current buyers (Hitt et al., 2001; e.g., GE’s acquisition of NBC). In addi- tion, because developing new products internally and successfully intro- ducing them into the marketplace often requires significant investments of a firm’s resources and makes it difficult to earn a profitable return quickly (Shank & Govindarajan, 1992), M&As are another means through which a firm can gain access to new products and to current products that are new to the firm. Compared to internal development processes, M&As provide a more predictable return and faster market en- try (McCardle & Viswanathan, 1994; Rappaport & Sirower, 1999) (e.g., the merger between AOL and Time Warner gave Time Warner immediate access to many Internet subscribers). Again, because it is harder for com- panies to develop products that differ from their current lines for new geographical markets in which they lack experience, a firm is more likely to use M&A rather than internal development as a strategy when engag- ing in international product diversification (Hitt, Hoskisson, & Ireland, 1990; Hitt, Hoskisson, Ireland, & J. S. Harrison, 1991; e.g., News Corp.’s acquisition of DirecTV via Hughes gave News Corp. a presence in the U.S. direct broadcast satellite [DBS] market). Finally, a firm may use M&A as a way to restrict its dependence on a single or a few products or markets, thus reducing its reliance on the financial performance of individual sec- tors (e.g., NBC’s merger with Universal gave NBC the important access to a major studio).