Adapt or die. In recent decades, this has been the slogan of companies throughout the world that have been modifying their growth strategies and redesigning their internal organizational structures in order to adjust to the external competitive environment. However, has this evolution followed a universal pattern?
During the 1960s, companies in the United States engaged in vertical integration and horizontal combinations aimed at product diversification and globalization. Organizational structures evolved from a centralized pattern to one in which centralization was limited only to strategic decision-making, the so-called ‘multidivisional’ structure. With its wave of mergers and acquisitions, the 1960s and 1970s brought new approaches to growth strategy, leading to a period of unrelated diversification and the “conglomerate.” During the 1980s and 1990s, there was a widespread return to specialization.
In Europe, meanwhile, an analysis of major corporations in the United Kingdom, France and Germany shows that the pattern of growth was very similar to that in America until the 1970s. However, although there was a growing trend toward adopting a multidivisional structure, this approach did not reach the same level as in the United States. It was not until the 1980s and 1990s that this practice caught on. During the last two decades of the 20th century, Europe was more diversified and ‘divisionalized’ than during the 1970s.
In Spain, there has been a shortage of empirical research about this subject. Now, three professors from the University of Salamanca — María José Sánchez Bueno, Jose Ignacio Galan Zazo and Isabel Suárez González -– have attempted to fill that gap with a study entitled, “The Evolution of the Strategy and Structure of Large Spanish Companies: A Comparative Analysis Using European Evidence.” Their goal is “to offer a vision of the evolution that major business conglomerates in Spain have experienced between 1993 and 2003.” Their study, published in Universia-Business Review, looks at the strategic and organizational behavior of large corporations within a specific context (Spain) that had not previously been analyzed. It also looks at a period that is significantly different from earlier times.
The University of Salamanca professors chose this period because more recent studies through 2003 show that such phenomena as globalization and technological revolution have generated a very important change in the environment that has repercussions on the strategies and organizational structures of corporations.
To carry out their project, the professors used the rankings of large corporate groups with the highest sales volume, as published in 2004 by Actualidad Economica, the Spanish business magazine. The authors say they used corporate groups in their sample, rather than individual companies, because they were attempting to analyze global corporate strategy and organizational structure. They were looking for links between strategy, structure and corporate management.
More Stable Corporate Strategy
The study discovered that the strategies adopted by most Spanish business groups involved focusing on one single, dominant business activity – i.e., one in which the sales of the principal business were either between 70% and 95% of total sales or 95% or more. They noted that only a small group of companies have opted for diversification, which the authors define as dependence on a principal business activity for less than 70% of total sales. From 1993 through 2003, they observed a clear trend toward greater diversification, especially toward the type in which diverse businesses share resources with one another.
Nevertheless, it is becoming less and less common to have a single business, and more common to have one predominant business. Over the course of those 10 years, the percentage of companies with just one business activity declined from 88% to 73%. The authors conclude that there has been a low degree of diversification, as during earlier periods.
Several reasons may account for the lower degree of diversification in Spanish corporations than in other developed countries, Jose Ignacio Galan told Universia-Knowledge at Wharton. “First, there is the small average size [of Spanish companies] compared with other companies in developed countries. Second, there is a propensity toward internal or ‘corporate entrepreneurship.’ Expenses for R&D were lower than in other countries which may have been caused by a lower propensity toward risk. The focus on basic technologies (and skills) did not favor the creation of synergies and the deployment of related businesses. Third, the corporate structure of ownership is more concentrated [in Spain]. That may have been another reason that explains the lower diversification in relative terms. Finally, government regulation is a variable that may have had an influence, and which is related to all the other points too.” Nevertheless, Galan insists that he has observed a trend toward diversification during the period covered by his research.
Actually, Spanish business groups have followed this route in their corporate strategies — from a single business to a dominant one and from these two categories to one category called “diversification.” The authors note that this is an irreversible trend; not a single group of companies that was diversified has turned back toward specialization in its business sector. On the whole, corporate strategy has become more stable; only 28% of all business groups initiated any strategic change during the decade.
In 1993, nearly half of all Spanish business groups were organized internally based on functional areas. Ten years later, things changed and this kind of structure lost popularity in favor of the multidivisional approach. It became the indisputable leader, accounting for more than 50% of all corporate groups.
Spanish corporate groups were reluctant to change. Only 38% of the sample began any organizational changes during this period. When they did, the most common change was to move from a functional structure toward the multidivisional one. This became the most stable form of organization in Spain, since not one company abandoned it between 1993 and 2003.
Spainand EuropeFace Off
These trends generally coincide with those in Europe, say the authors. “The growing importance of business diversification also involves the more frequent adoption of a parallel multidivisional structure,” they write.
Nevertheless, significant differences exist between Spain and the rest of Europe. Large Spanish companies have a significantly lower degree of diversification. The number of companies that have only one business activity clearly exceeds Spanish figures in France, Germany and the United Kingdom. On the other hand, while a large number of Spanish companies adopt the strategy of a dominant business activity, this approach has rarely been successful in other countries.
In Europe, from 70% to 90% of all companies have opted for a multidivisional structure, but only about 50% of companies have chosen that route in Spain. And while a structure based on functionality is frequently adopted in Spain, it is practically non-existent in France, Germany and the United Kingdom. Holding companies are not nearly as common in Spain as in other places, especially Germany, note the authors.
The authors conclude that there is less of a tendency toward diversification and related multidivisional structures in Spain. One reason is the difference in the average corporate size. “The larger the size [of the company], the greater is the probability that it will adopt diversification and a multidivisional structure.” The French companies included in the research have [an average?] sales volume of 4.668 billion euros compared with 6.832 billion for the German companies, and 6.036 billion in Britain. In Spain, that figure is only 1.4 billion euros. As a result, “Because companies are smaller than in Europe [as a whole], this factor can helps to explain why Spain is less diversified and ‘divisionalized’ than Europe.”
Another variable that affects strategy and organizational structure is the structure of corporate ownership. The authors note that in those economies that depend a great deal on their government for making investments and gaining access to loans, “decision making is extremely centralized because of the importance of this factor when it is time to determine the success or failure of those companies.”
On the contrary, the authors say, when a market is dominated by capital markets, companies adopt strategies that are extremely diversified as well as organizational structures that are decentralized and aimed at internalizing managerial risk. In contrast, when ownership is dominated by banks, that tends to reduce the need for diversification, and companies can focus on specialization in their competencies.
In the case of Spain, family ownership is a lot more common than elsewhere in Europe, as 66% of companies in the study fit into that category. That compares with only 42% in France, 46% in Germany, and 4.5% in the United Kingdom. This can be explained, they say, by the fact that adopting diversification strategies and multidivisional structures are not as common [in Spain] as in other Europe countries, especially the United Kingdom, where the role of the state has very little importance for companies, much like in the United States.
Finally, the study concludes by making this recommendation to managers: They “must take into account the peculiarities of each geographic area, such as political, economic and cultural conditions that have an influence and are relevant when it comes to making appropriate strategies and organizational choices.”
Looking into the Future
Jose Ignacio Galan notes that scientific research clearly demonstrates that the relationship between corporate strategy and organizational structure is the key to profitability. The globalization of the Spanish enterprise has had an impact on its relative lack of diversification. For reasons of cultural affinity and marketing, Spanish companies have moved into markets in Latin America despite the relatively strong flow of their investments into the European Union. Currently, Spain is a bridge between the European Union and Latin America.
“Once companies have set up shop in Latin America, the second phase consists of rationalization, efficiency and innovation required for competing in increasingly demanding global markets,” the authors write. “They need to grow and expand in order to compete with other big, globalized industrial and financial enterprises. When business groups control a major market, they tend to diversify for reasons of synergy; in order to reduce their risks, and to increase their profitability. They also want to create strong power structures that provide protection from threats and from other large power groups from other regions such as the European Union itself, the United States, and China.”
As a result, Jose Ignacio Galan predicts, “We will see a growing trend toward processes of strategic change that lead to diversification and something that is far more important because it is really where companies can acquire a competitive advantage that their competitors cannot imitate. That is to say, we will see major restructuring efforts that lead toward a multidivisional approach that is combined with elements of the network. In the future, the key variable will be to design organizations that coordinate and motivate in order to generate efficiency and innovation, and to promote adaptation and profitability.”