Strategic renewal under input scarcity- learnings from private equity

This paper extends the discussion on scope diversification as a means of strategic change to business model diversification as a potential alternative for strategic renewal. Marked by increasing competition, high-priced assets and lower debt ceilings, private equity (PE) firms are adapting their investment strategy from leverage-backed buyouts (LBOs) to creating equity-backed “platforms” – which are aggregates of two to three related investments. Using a large archival dataset of global PE deals and this phenomenon as the backdrop, the paper first isolates key predictors of strategic renewal by using a machine learning algorithm. Consequently, it demonstrates that firms with rigid routines and narrow market exposure find it relatively difficult to adopt a new business model. Moreover, the new model potentially acts as an opportunity for mid-cap firms to differentiate themselves from large established firms. Findings also indicate that when a business model renewal is triggered by a transient scarcity in input resources, alliancing is the preferred mode of renewal.