Essays on related diversification

Anders, Pascal (2019) Essays on related diversification. Doctoral thesis, University of London: London Business School.

Abstract

This thesis represents an effort to improve our understanding of the link between related diversification and firm performance. Across three chapters, I first conduct a review of work on related diversification performance and propose an agenda for future research based on disaggregating the related diversification advantage into multiple subcomponents at the micro level. In chapters 2 and 3, I then investigate these components in the context of the German manufacturing sector, relying on a detailed census dataset not previously used by strategy and management scholars. In chapter 1, I review extant work on related diversification performance to identify avenues for future research with the potential of bringing our understanding of the related diversification-performance link to the next level. I make three main contributions: First, I conduct a review of the related diversification performance literature. Second, I propose a path forward that breaks with the current paradigm by shifting the empirical and theoretical focus on the portfolio relationships and geographic location of firms' activities at the micro level. Third, I illustrate the potential of my proposed research agenda for deepening our understanding of related diversification performance. I discuss the key contributions of chapter 1 and the implications for future research on related diversification. In chapter 2, I examine the complementarity between geographic co-location and re-lated diversification. Diversification scholars increasingly agree that the related diversification advantage is limited by two factors: the relatedness of firms' activities and the number of resource sharing activities. The former limits the gains from resource sharing, while the latter drives the costs. Chapter 2 proposes geographic co-location as a third important driver of the efficiency of resource sharing. To this end, I draw on the resource sharing literature and argue that efficient resource sharing across geo-graphic locations might often be impossible because it can reduce activity relatedness and increase the coordination effort of resource sharing. In contrast to my argument, existing theory as well as empirical evidence from the diversification literature and the literature on intra-organizational knowledge transfers suggests that geographic distances in the firm do not significantly limit the gains from resource sharing. I test these competing hypotheses using census data on the universe of multi-location firms in the German manufacturing sector from 2002 to 2014. Consistent with the prediction that geographic distances severely obstruct resource sharing, I find that related diversifi-cation performance crucially depends on activity co-location; controlling for the number of activities, at least 50 percent of the effect of relatedness depends on geographic co-location. Based on my results, I propose a theoretical distinction between location free and location restricted resources that differ in their shareability across geographic locations, and I develop a set of generic diversification strategies that maps profitability and growth to different sharing patterns of the two types of resources. I discuss the key contributions of chapter 2 and the implications for future research on related diversification and resource sharing. In chapter 3, I empirically disaggregate the total related diversification advantage into its within- and between-business components. Scholars in strategy and management increasingly agree that related diversifiers command a performance advantage over firms with other diversification strategies. This has started a rich conversation about the microfoundations of the related diversification advantage. An open question emerging from this debate is to what extent related diversifiers share resources between versus within their businesses. Chapter 3 contributes to this inquiry by theoretically arguing that sharing resource across businesses might often be inefficient and by empirically separating out the performance effects of within- and between-business related diversification, using census data covering the product and business portfolios of firms in the German manufacturing sector from 2002 to 2014. Consistent with resource sharing within businesses, I find a positive performance effect of within-business diversification. Inconsistent with resource sharing between businesses, I find that related between-business diversification has no incremental effect on performance. I discuss the key contributions of chapter 3 and the implications for future research on resource sharing and related diversification performance.