Related diversification, core competences and corporate performance

Abstract

Despite nearly 30 years of academic research on the benefits of related diversification, there is still considerable disagreement about precisely how and when diversification can be used to build long‐run competitive advantage. In this paper we argue that the disagreement exists for two main reasons: (a) the traditional way of measuring relatedness between two businesses is incomplete because it ignores the ‘strategic importance’ and similarity of the underlying assets residing in these businesses, and (b) the way researchers have traditionally thought of relatedness is limited, primarily because it has tended to equate the benefits of relatedness with the static exploitation of economies of scope (asset amortization), thus ignoring the main contribution of related diversification to long‐run, competitive advantage; namely the potential for the firm to expand its stock of strategic assets and create new ones more rapidly and at lower cost than rivals who are not diversified across related businesses. An empirical test supports our view that ‘strategic’ relatedness is superior to market relatedness in predicting when related diversifies outperform unrelated ones.

Diversification as a Corporate Strategy and Its Effect on Firm Performance: A Study of Zimbabwean Listed Conglomerates in the Food and Beverages Sector

“…The findings tend to concur with Markides and Williamson (2007)'s view that related diversifiers may fail to exploit relatedness whilst unrelated diversifiers may fail to reap benefits due to administrative costs, coordination costs, business risk and management problems associated with different line of businesses being brought together. The rewards in terms of profitability, earnings, dividends and market share price compensate for the risk taken as shown in the study as they improved with the adoption of diversification.…”

Do synergies exist in related acquisitions? A meta-analysis of acquisition studies

“…The 'economies of sameness' argument is supported by different studies (Capron and Mitchell 2000;Markides and Williamson 1994;Puranam and Srikanth 2007). Hagedoorn and Duysters (2002) find positive effects in technological similarity which they attribute to similar knowledge management mechanisms.…”

The Effect of Business Diversification on a Firm’s Performance, Depending on Its Dynamic Capabilities and Market Dynamism

“…These results seem to support the curvilinear model: firm performance increases as firms move from a single business strategy to related diversification but decreases as firms shift from related diversification to unrelated diversification. In addition, much other empirical evidence supports the curvilinear model directly or indirectly (e.g., Singh & Montgomery, 1987;Markides, 1992;Lubatkin & Chatterjee, 1994;Markides & Williamson, 1994;Palich et al 2000). Figure 1 demonstrates the conceptualized model of the overall relationships among dynamic capabilities, diversification, and firm performance.…”