TY - JOUR
T1 - Economies of Scope, Resource Relatedness, and the Dynamics of Corporate Diversification
AU - Sakhartov, Arkadiy V.
N1 - Funding Information:
I am grateful to Richard Bettis, Matthew Bidwell, Thomas Brush, Olivier Chatain, Shivaram Devarakonda, Supradeep Dutta, Emilie Feldman, Timothy Folta, Exequiel Hernandez, Daniel Levinthal, Marvin Lieberman, Katherine Maritan, Anoop Menon, Olga Petricevic, Jeffrey Reuer, Nicolaj Siggelkow, Lenos Trigeorgis, and Natalya Vinokurova for their valuable comments on the earlier versions of the article. The study has benefitted from the feedback received at the 18th International Conference on Real Options in Medellin (Colombia), the 12th Atlanta Competitive Advantage Conference, and the DRUID-Asia Inaugural Conference on Asian Innovation (Singapore) as well as from the comments provided by participants at the research seminars held at the Leeds School of Business (the University of Colorado Boulder), the Stephen M. Ross School of Business (the University of Michigan), the Warrington College of Business Administration (the University of Florida), Frankfurt School of Finance & Management, the Strategic Organizational Design Unit (University of Southern Denmark), the College of Business Administration (University of Illinois Urbana-Champaign), Rutgers Business School Newark and New Brunswick, and INSEAD. I greatly appreciate the guidance offered by Constance Helfat and two anonymous reviewers at the Strategic Management Journal. I am also thankful to Wharton Computing for the provided computational resources and to the Management Department at the Wharton School for the financial support to the project. Finally, I am grateful to Beverly Michaels for editing the manuscript.
Publisher Copyright:
Copyright © 2017 John Wiley & Sons, Ltd.
PY - 2017/11
Y1 - 2017/11
N2 - Research summary: The dominant view has been that businesses that are more related to each other are more often combined within diversified firms. This study uses a dynamic model to demonstrate that, with inter-temporal economies of scope, diversified firms are more likely to combine moderately related businesses than the most-related businesses. That effect occurs because strong relatedness reduces redeployment costs and makes firms redeploy all resources to better performing businesses. The strength of that effect depends on inducements for redeployment measured as the current return advantage of one business over another business, volatilities of business returns, and correlation of those returns. This study develops hypotheses for those relationships and suggests empirical operationalizations, encouraging empiricists to retest the implications of relatedness for the dynamics of corporate diversification. Managerial summary: It is believed that diversified firms are more likely to combine more-related businesses because relatedness enables sharing of resources between businesses. Indeed, a firm can apply knowledge created in one business to another business, avoiding costly duplication in knowledge development. Resource sharing also adds value when a firm offers several products, adding the convenience of one-stop shopping and charging higher prices. However, resource sharing is not the only motivation for corporate diversification. In environments where profitability of businesses changes frequently, firms diversify by redeploying part of resources from an underperforming business to a better performing business. This study uses a dynamic model to demonstrate that, with that second motivation for corporate diversification, firms end up combining moderately related businesses rather than the most-related businesses.
AB - Research summary: The dominant view has been that businesses that are more related to each other are more often combined within diversified firms. This study uses a dynamic model to demonstrate that, with inter-temporal economies of scope, diversified firms are more likely to combine moderately related businesses than the most-related businesses. That effect occurs because strong relatedness reduces redeployment costs and makes firms redeploy all resources to better performing businesses. The strength of that effect depends on inducements for redeployment measured as the current return advantage of one business over another business, volatilities of business returns, and correlation of those returns. This study develops hypotheses for those relationships and suggests empirical operationalizations, encouraging empiricists to retest the implications of relatedness for the dynamics of corporate diversification. Managerial summary: It is believed that diversified firms are more likely to combine more-related businesses because relatedness enables sharing of resources between businesses. Indeed, a firm can apply knowledge created in one business to another business, avoiding costly duplication in knowledge development. Resource sharing also adds value when a firm offers several products, adding the convenience of one-stop shopping and charging higher prices. However, resource sharing is not the only motivation for corporate diversification. In environments where profitability of businesses changes frequently, firms diversify by redeploying part of resources from an underperforming business to a better performing business. This study uses a dynamic model to demonstrate that, with that second motivation for corporate diversification, firms end up combining moderately related businesses rather than the most-related businesses.
KW - corporate diversification
KW - dynamic choice model
KW - economies of scope
KW - resource relatedness
KW - resource-based view
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U2 - 10.1002/smj.2654
DO - 10.1002/smj.2654
M3 - Article
AN - SCOPUS:85018629232
SN - 0143-2095
VL - 38
SP - 2168
EP - 2188
JO - Strategic Management Journal
JF - Strategic Management Journal
IS - 11
ER -