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Published by: Allied Business Academies
Published in: "Academy of Strategic and Organizational Leadership Journal", 1999
Length: 15 pages

Abstract

Extensive research into the relationship between corporate diversification and economic performance has been conducted by strategic management researchers using Rumelt's (1974) notion of product-market relatedness to explain performance differences among diversified firms. Rumelt (1974) hypothesised that firms which diversify into areas related to the original business by either products or markets would financially outperform those firms that diversify into areas unrelated (in a product or market sense) to the original business. An alternative perspective for studying the relationship between corporate performance and diversification is proposed in this paper. Other dimensions of relatedness, such as the strategic similarity between a corporation's business units, may provide alternative means of defining relatedness. It will be argued that a redefinition of relatedness will prove valuable in expanding our ability to predict the effect corporate diversification strategy has on corporate performance.

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Abstract

Extensive research into the relationship between corporate diversification and economic performance has been conducted by strategic management researchers using Rumelt's (1974) notion of product-market relatedness to explain performance differences among diversified firms. Rumelt (1974) hypothesised that firms which diversify into areas related to the original business by either products or markets would financially outperform those firms that diversify into areas unrelated (in a product or market sense) to the original business. An alternative perspective for studying the relationship between corporate performance and diversification is proposed in this paper. Other dimensions of relatedness, such as the strategic similarity between a corporation's business units, may provide alternative means of defining relatedness. It will be argued that a redefinition of relatedness will prove valuable in expanding our ability to predict the effect corporate diversification strategy has on corporate performance.

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