Downscoping: How to Tame the Diversified Firm. – book reviews
William McKinley
Taking a cue from Sutton and Staw (1995), it may be useful to state what this book is not. Despite its rather dramatic subtitle, the book is not a polemic for one more fashionable change program designed to permit top managers to display their legitimacy and progressiveness in an uncertain environment. Hoskisson and Hitt largely resist the temptation to eulogize downscoping or to present it as a “magic bullet” that will cure everything that ails a corporation. This book is also not a how-to guide, because it seems to be targeted toward an academic audience, despite a disclaimer to the contrary in the Preface. While it is important to develop the implications of management research for management practice, I, for one, find it refreshing that this book clings to its scholarly roots. Finally, the book is not a textbook. Its value will be greatest for specialized researchers in the areas of diversification and deconglomeration, and it is clearly not intended as a general introduction for the beginning student of strategic management.
The basic thesis of this serious scholarly volume will be familiar to anyone who has delved into Hoskisson, Hitt, and coauthors’ voluminous corpus of research published in scholarly management journals. Hoskisson and Hitt set out to deconstruct the strategy of diversification, popular in the 1960s and 1970s, arguing that diversification can have a positive influence on the performance of corporations, but only up to a point. After a certain (unspecified) level, diversification begins to create problems that exert downward pressure on corporate performance. The most critical of those problems is the information overload that diversification imposes on top managers, who find it difficult to exert strategic control over a diverse set of businesses in multiple product markets about which they know little. The information-processing complexities produced by diversification nudge corporate managers toward the use of financial controls for the administration of the businesses in the corporate portfolio. Financial controls, in turn, create incentives for division managers to focus on the short term and reduce expenditures for R&D and advertising. The result is lower risk taking by division managers and the sacrifice of long-term competitiveness for quarterly profit goals. The authors argue that these problems are most salient when firms pursue a strategy of unrelated diversification and least salient when international diversification is the dominant strategic theme (although even the latter reaches a point of “no returns”). While the authors do not completely disavow unrelated diversification, they do conclude, at the end of chapter 8, that “unrelated diversification should be avoided, except in the special circumstances described in this chapter” (p. 144).
As a solution to the problem of excessive diversification, the authors offer a variety of restructuring options, with special emphasis on “downscoping.” They are careful to distinguish downscoping from downsizing, defining the former as a reduction in diversification through the divestiture of assets unrelated to a company’s core business. Downsizing, by contrast, is described as a shrinkage of a corporation’s workforce, often through layoffs. Downscoping reverses the information-processing problems created by overdiversification, providing a context in which top management can reassert strategic control over individual businesses in the corporate portfolio. It “facilitates emphasis on innovation and entrepreneurial action” (p. 197), partly by diverting excess cash flows from the business of acquisition to the business of R&D. As a result, firms achieve greater competitiveness, the pivotal role of which is reflected in the authors’ statement that “if downscoping does not become the main approach to restructuring, strategic competitiveness will continue to erode” (p. 197).
The authors’ thesis is an interesting one and is consistent with the general deinstitutionalization of the conglomerate form that appears to have taken place in the 1980s and 1990s (Davis, Diekmann, and Tinsley, 1994). Despite its solid contribution, though, the book contains several conceptual and logical problems. Because these problems are symptomatic of larger issues in the field of organization studies today, a brief discussion of them seems worthwhile. The purpose is less to critique Hoskisson and Hitt’s book than to open a window on the state of organization studies as it leaps (or lurches, depending on one’s viewpoint) toward the twenty-first century.
The first problem is the assumption of causal symmetry that pervades much of Hoskisson and Hitt’s thinking. The authors apparently assume that if diversification causes outcomes like information overload, excessive reliance on financial controls, and reduced R&D investment, reversing diversification through downscoping will reverse those outcomes. While such symmetrical thinking is attractive for its simplicity, Lieberson (1985) has pointed out that not all causal relationships are governed by a symmetry principle. Reversing the direction of a force exerted on a billiard ball does reverse its trajectory across a pool table, but can we safely assume that this tidy relationship applies to the causal processes in organizations over time? For one thing, there are many kinds of friction in organizational processes that don’t apply to billiard balls: Managers develop cognitive and political investments in the control systems they are responsible for, and those investments increase the inertia surrounding such systems. This inertia often remains a factor even when the causal variable (e.g., diversification) that originally created the need for a particular control system disappears. McKinley (1992) reviewed an extensive body of literature that suggests such “stickiness” in the relationship between organizational size and administrative structure when size is decreasing. The conclusion that emerges from this literature is that downsizing does not necessarily lead to a shrinkage of administrative structure at the same rate or over the same trajectory as that observed during growth-induced expansion (see also DeWitt, 1993). This should make us less sanguine about Hoskisson and Hitt’s claim that downscoping will result in a devolution of financial control systems and their replacement by strategic control. Lest I appear to be singling out these authors unfairly, I would add that most of us working in the area of organization studies have, at one time or another, been guilty of unconsciously adopting symmetrical causal thinking. An ideal organization studies project for the twenty-first century would be a search for dubious assumptions of causal symmetry embedded in the discipline’s theoretical foundation, using empirical tests with longitudinal data as a guide.
A second problem, also mirrored in contemporary scholarship on organizations, is construct ambiguity. Perhaps the most prominent example of this in Downscoping is the term “competitiveness” (or “strategic competitiveness”). Despite a total of 46 citations to the word “competitiveness” in the book’s index, I did not find one instance in which the construct was actually defined. This reflects current usage of the term in the business press, where “competitiveness” has taken on a mythic quality. Almost any strategic move or organizational change can be rationalized by linking the word “competitiveness” or “competitive” with it, yet it is striking that the audiences for this business press rhetoric never seem to ask what the term means. Astley and Zammuto’s (1992) analysis of managerial “language games” gives us a clue as to why this is so: Ambiguity enhances the political usefulness of constructs to managers. Nevertheless, construct ambiguity reduces a social scientist’s ability to conduct conclusive empirical tests of propositions. In Hoskisson and Hitt’s case, because a key term like “competitiveness” is not defined, it is difficult to evaluate empirically the validity of their argument that downscoping increases competitiveness. While Hoskisson and Hitt’s underdefinition is not inconsistent with scholarly usage in organization studies today (Astley and Zammuto, 1992), underdefinition is a collective problem with which the entire discipline must deal. We must all “look to our definitional flanks” if we hope to develop cumulative knowledge about how organizations work.
Third, the authors exhibit a penchant for what I would call overattribution, or the inference of a causal relationship when such an inference is not necessarily warranted. Overattribution is especially prevalent in the analysis of case studies, such as those that the business press and organizational scholars sometimes use to illustrate their points. As one example, the authors infer a causal relationship between downscoping and improved performance in their reference to the case of General Mills: “Thus, through restructuring, General Mills downscoped, became more strategically focused, and improved its performance” (p. 125). Improved performance may indeed have followed downscoping and restructuring in this case, but is there really solid evidence that it was downscoping and restructuring that caused the performance upturn, rather than other organizational and environmental variables that were undoubtedly changing at the same time? My point is not that the causal inference they suggest is necessarily wrong but merely that it is uncertain and therefore should be stated cautiously. One reason such caution is warranted is that it constantly reminds us, as researchers, of the need for statistical or experimental controls in deriving rigorous causal theories. An even more important reason for caution is that management decisions are sometimes based on causal reasoning derived from experience with single cases, and those decisions have real consequences, both positive and negative, for corporate employees.
Downscoping is a valuable contribution that demonstrates many of the strengths and weaknesses of the academic discipline from which it springs. Hoskisson and Hitt are to be commended for their detailed review of the literature on diversification, restructuring, and downscoping. They also display a sophisticated understanding of the different types of portfolio restructuring that are currently in vogue in corporate America. At the same time, the book highlights a number of theoretical issues that organization studies needs to come to grips with in the coming years. If this book stimulates readers to go forth and wrestle with those issues in their own research, its positive influence will extend far beyond the specialized niche the authors intended to fill.
William McKinley Associate Professor of Management Southern Illinois University at Carbondale Carbondale, IL 62901
REFERENCES
Astley, W. Graham, and Raymond F. Zammuto 1992 “Organization science, managers, and language games.” Organization Science, 3: 443-460.
Davis, Gerald F., Kristina A. Diekmann, and Catherine H. Tinsley 1994 “The decline and fall of the conglomerate firm in the 1980s: The deinstitutionalization of an organizational form.” American Sociological Review, 59: 547-570.
DeWitt, Rocki-Lee 1993 “The structural consequences of downsizing.” Organization Science, 4: 30-40.
Lieberson, Stanley 1985 Making It Count: The Improvement of Social Research and Theory. Berkeley: University of California Press.
McKinley, William 1992 “Decreasing organizational size: To untangle or not to untangle?” Academy of Management Review, 17: 112-123.
Sutton, Robert I., and Barry M. Staw 1995 “What theory is not.” Administrative Science Quarterly, 40: 371-384.
COPYRIGHT 1997 Cornell University, Johnson Graduate School
COPYRIGHT 2004 Gale Group
