Real Types of Diversification Strategies – An Analysis of different Types of Relatedness in German Companies

Table of Contents

II Table of Abbreviations

III Table of Figures

IV Table of Tables
1 Introduction
1.1 Problem Definition
1.2 Goal
1.3 Approach
2 Fundamentals of Corporate Strategy
2.1 Definition
2.2 Portfolio Design
2.3 Diversification
2.3.1 Focused Diversification
2.3.2 Relational Diversification
2.3.3 Conglomerate Diversification
3 Diversification and Success
3.1 Theoretical Approaches to explain Success
3.1.1 Industrial Economics Perspective
3.1.2 Market-based View
3.1.3 Resource-based View
3.2 Success Factors
3.2.1 Business Relatedness
3.2.2 Resource Transferability
3.2.3 Corporate Leadership
4 Systematization and Measurement of Diversification
4.1 Classical Approaches to Measurement
4.1.1 Degree of diversification
4.1.2 Type of diversification
4.2 Measurement Problems
4.3 Measurement according to WULF
5 Analysis of Real Types of Diversification Strategies
5.1 Dataset Characteristics
5.2 Classical Measurements
5.2.1 Berry-Index
5.2.2 Entropy Measure
5.3 Measurement according to WULF
5.3.1 General Types of Relatedness
5.3.2 Real Types of Relatedness according to Factor Analysis
5.4 Real Types of Diversification Strategies
5.4.1 According to Relative Factor Dominance
5.4.2 According to Absolute Factor Dominance
5.5 Real Types of Diversification Strategies and Success
5.5.1 Measures of Success
5.5.2 Success based on Relative Factor Dominance
5.5.3 Success based on Absolute Factor Dominance
5.5.4 Factor Regression Analysis
6 Conclusion

V Table of Annexes
Annex A: List of Analyzed Companies
Annex B: Survey Questionnaire
Annex C: Total Variance Explained by Factor Analysis
Annex D: Distribution of Factor Values according to Companies
Annex E: Reproduced Correlations

VI Bibliography

II Table of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

III Table of Figures

Figure 1 - Underlying model of diversification and success

Figure 2 - BCG Growth/Share-Matrix for a fictional case

Figure 3 - Types of diversification strategies

Figure 4 - Criteria of relatedness based on a survey by Stimpert & Duhaime (Figures represent correlation coefficients)

Figure 5 - Criteria to assess business relatedness according to Wulf

Figure 6 - Synergy potential of specific and unspecific resources

Figure 7 - Combination matrix of relatedness/leadership-types

Figure 8 - Types of Diversification according to Rumelt

Figure 9 - Criteria to assess business relatedness according to Wulf

Figure 10 - Overall Berry Index values distribution (n=47)

Figure 11 - Overall Entropy-Measure values distribution (n=47)

Figure 12 - Sums of answers categories „Applies completely“ and „Applies“ given in section A2 of the questionnaire (n=47)

Figure 13 - Answers given to the question of management relatedness (n=47)

Figure 14 - Answers given to the question of product/process relatedness (n=47)

Figure 15 - Answers given to the question of no kind of relatedness (n=47)

Figure 17 - Relatedness hierarchy

Figure 18 - Distribution of 1st Quantile Memberships (n=47)

Figure 19 - Relative factor dominance compared to the Entropy measure. (n=47)

Figure 20 - Real Types of Diversification Strategies according to relative factor

dominance (n=47)

Figure 21 - Relatedness Classes and Diversification Measures (n=47)

Figure 22 - Dominant Factors Occurrence and Classical Diversification Measures (n=46)

Figure 23 - Real Types of diversification strategies according to absolute factor dominance (n=46)

Figure 24 - Relatedness according to relative factor dominance and performance (n=46)

Figure 25 - Performance figures based on absolute factor dominance (n=46)

IV Table of Tables

Table 1 - Scale levels overview

Table 2 - KMO and Bartlett's Test (n=47)

Table 3 - Rotated Component Matrix (n=47)

Table 4 - Correlations between number of 1st quantile memberships (Firstqmemb) and profitability measures

Table 5 - Correlation analysis model summary

Table 6 - Regression coefficients of factors towards dependant variable ROA (n=47)

1 Introduction

1.1 Problem Definition

On corporate level main strategic decisions involve the question which businesses are to be pursued and which to be neglected, thus how the portfolio of businesses is designed¹. The ultimate goal is a value adding business portfolio, meaning every single business is better off being part of this very portfolio instead of operating as a totally separate entity².

This added value arises from synergies among the businesses and the role of the corporate center³. In the case of success this would lead to a conglomerate premium (the conglomerate is of higher value than the sum of its parts) in terms of company value instead of a conglomerate discount.

Corporate managers are generally very free in deciding what businesses they want to add to their portfolio and which to divest. This raises two questions: one regarding the type of businesses in a portfolio (i.e. what industries do they serve) and the other regarding the optimal size of a portfolio (i.e. how many businesses can be managed at once). The term diversification deals with both questions: it describes how broad and how diverse a company’s business portfolio is. On the one hand it can be very narrow or focused in a barely diversified company, on the other it can be very broad in a highly diversified company. Three forms of diversification strategies are commonly distinguished: focused, relational and conglomerate diversification⁴.

Many researchers in the field of strategic management have dealt with the question of diversification and the pros and cons involved⁵. Yet there is no clear hint on the likelihood of superior performance of more or less diversified firms. Rather success stories for both extremes can be told⁶.

Further findings indicate: not the degree of diversification is relevant for success but the relatedness among the strategic business units (SBUs) a company operates⁷. Portfolios of somehow related SBUs obviously perform better than those completely unrelated⁸. This is due to the fact the success is explained by the ability to transfer core competencies (“resources”) between the business units of a company.

Yet relatedness is a manifold concept. At least two main types have to be distinguished: relatedness on the level of products and processes and such on the level of management requirements⁹. But which type of relatedness is the most promising in terms of superior company performance? Although many researchers have approached this question by empirical examinations, there is yet no clear answer to that question.

Since earlier research work is insufficient to fully explain the phenomenon of diversification further research is indicated. This especially applies to German conglomerates since most research work focused on US firms mainly¹⁰.

1.2 Goal

The thesis at hand constitutes one part of that proceeding research. Its aim is to gain further insights on diversification and relatedness by empirically identifying and exploring real types of relatedness and their respective diversification strategies.

This includes a discussion on comprehensive diversification measurement and the implications that arise from the empirical analysis conducted in this case.

The general character of this work is explorative; findings are primarily supposed to form a basis for further research rather than having direct and significant practical implications.

1.3 Approach

This goal will be achieved by using a two step approach: Firstly, an overview on the relevant theoretical framework of diversification strategies and their success will be given. This part is based on a vast set of literature comprising books, papers and journal articles. Secondly, an empirical study of 47 German conglomerates will be analyzed.

The general underlying notion to the thesis is depicted in Figure 1. It is believed that according to the resource-based view of the firm¹¹ a diversification strategy is derived by the type of resources a company possesses and how they can be transferred to other business units. This strategy then requires a certain style of leadership meaning how the relation among business units and business units and corporate center is. Only the adequate combination of those four factors yields diversification success.

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Figure 1 - Underlying model of diversification and success.

In detail the work’s structure is as follows: the work starts with an introduction to strategic management on corporate level (chapter 2). Here it turns out that planning and design of a business portfolio is the core of strategy work and diversification is closely related to that since it refers to the fact of how broad and diverse such a portfolio is. As the main question is what kind of diversification strategy is most successful, chapter 3 deals with success. Here approaches to explain success in diversification are discussed. Based on earlier research an approach following the “resourced-based view” ¹² to analyze corporate performance seems most adequate to explain success (also) in a diversification context¹³. Based on that insight, crucial success factors are presented. Chapter 4 concludes the theoretical part and is supposed to lay a foundation for the upcoming analysis by dealing with the crucial question of systematization and measurement of diversification. Various ways of measurement, both classical and new, are introduced. Overall the insights gained here will be a solid basis for the upcoming empirical part.

This empirical part, that forms the thesis’ core, will use a given set of primary data on German conglomerates. Those data will be analyzed in an explorative way using factor analysis. This culminated in an empirical identification of real types of relatedness among German conglomerates in chapter 5. Based on those relatedness types it is analyzed how strongly and in what combinations they appear across the sample thereby illustrating real types of diversification strategies. These strategies are confronted with traditional measures of diversification that only measure a limited type of relatedness and may thus have limitations in use in such a context. Furthermore performance figures of those real types of diversification are incorporated.

Chapter 6 lastly reflects findings and highlights the work’s results as well as the need for further research.

2 Fundamentals of Corporate Strategy

2.1 Definition

Strategic management on corporate level differs significantly from that performed on business level. A business strategy always aims for a sustainable competitive advantage in a given industry¹⁴. Due to that fact strategic actions taken there¹⁵ are also different from those concerning the corporation as a whole¹⁶. Corporate strategy strives for a “parenting advantage”¹⁷. This means designing a portfolio of businesses in various industries that creates superior value in that very constellation. Every single business¹⁸ being a member of that portfolio has to be better off compared to the alternative of operating as a stand-alone company or as part of an alternative corporation. At the same time the parent at hand must add superior value to what other alternative parents could possibly add.

This would ultimately lead to a conglomerate premium, meaning the market value of the corporation exceeds the sum of values of all SBUs if they were standing alone. In the contrary case, the conglomerate discount, the corporation actually destroys value; hence a break-up is indicated¹⁹.

2.2 Portfolio Design

The process of strategic management, comprising the steps strategy analysis, strategy formulation and strategy implementation, is essentially quite similar as on the level of one single business²⁰. The core task here however is designing the business portfolio. This ultimately means “the choice, prioritization and alignment of the diverse businesses”²¹. Or very bluntly: “what businesses should a corporation compete in?”²²

For that purpose portfolio planning tools are a core tool. These allow an easy comparison of all operational SBUs at once. To highlight this notion a selected and exemplary portfolio concept, namely the BCG growth-share matrix²³, is presented in Figure 2.

The basic idea behind those concepts is to depict the strategic positioning of SBUs in a two dimensional grid. While one axis indicates the positioning from an internal perspective (here market strength measured by market share), the other uses an external perspective (in this case market attractiveness measured by market growth). The grid breaks into four areas (here clockwise starting from the upper left hand corner: “Question Marks”, “Stars”, “Dogs” and “Cash Cows”). For each of them specific strategic implications are considered to be appropriate, e.g. concerning investment or divestment actions.

Figure 2 - BCG Growth/Share-Matrix for a fictional case²⁴.

These kinds of portfolio analysis tools generate valuable strategic implications. This concerns not only measures of developing certain existing businesses but also evidence on potential new ventures or divestitures of business that offer only poor future potential. Resulting strategic actions lead directly to the diversification of a business portfolio. Thus the next section is designated to explore this in detail.

2.3 Diversification

Earlier, multiple definitions of the term have been used by researchers²⁵. Some scholars have even asserted “confusion through terminology”²⁶. Now the term is commonly considered as the extent to which a company offers different products, is active in different markets while using various resources and abilities as well as management requirements²⁷.

The term is used for the process of entering new economic sectors as well as for a state, meaning when a company is already operational in various industries. Mixing both meanings up is unlikely though, at the same time it is unproblematic, since the underlying concept is the same. Therefore a strict distinction between process and state is not necessary.

But why do companies diversify at all? The main reasons discussed are: growth opportunities, risk spreading, synergy exploitation among businesses, market power and superior efficiency of internal capital markets²⁸. These factors are seen as major drivers for a value adding business portfolio²⁹.

Certainly due to its fundamental implications for corporations, diversification has over time become one of the major fields in strategic management. First research dates back decades³⁰, and still today it is intensely discussed within the scholar community³¹. The dominant question is what diversification strategy is the most beneficial (i.e. successful) one and under what conditions, hence called diversification success research³².

Since also this work deals with that question it is worthwhile first to describe possible diversification strategies. Three main ones can be distinguished (see Figure 3)³³, they will be further discussed in the following subsections.

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Figure 3 – Types of diversification strategies.

2.3.1 Focused Diversification

The strategy closest to a single business firm (SBF), thus the least diversified one, is the focused diversification strategy.

Not only the number of businesses the corporation encompasses is limited, but also the heterogeneity among them. Businesses are essentially relatively similar in terms of the products they offer, the markets they serve or the processes they use. Furthermore clients and competitors that businesses encounter are to a large extent the same.

The overall degree of similarity is therefore very high. The goal of this strategy is to gain advantages due to improved efficiency and shared (specific) know-how within the business portfolio.

2.3.2 Relational Diversification

This strategy involves diverse product/market-combinations while at the same time different processes are used within each business. Yet they way the businesses are run, i.e. management requirements, are quite similar.

Operated businesses are somewhat different but also related. This relatedness comes from the fact, that those businesses share the same stage in the value chain (in case of a horizontal relation) or they have direct business relations as subsequent partners in the value chain (vertical relation). Overall only a moderate number of businesses is operated.

The goal is to gain advantages for all businesses by connecting them and transferring core competencies.

2.3.3 Conglomerate Diversification

This is the extremist form of a diversification strategy. It involves businesses with strong differences in all areas: products/markets, processes and management requirements. At the same time the number of businesses held is very high.

By being present in a vast number of branches, the corporation following that strategy aims to reduce risk and generate a steady cash flow. As a text book example of a conglomerate US-based General Electric (GE) can be mentioned. GE offers a product/service range as diverse as aircraft engines, power generation, water processing, security, medical equipment, financing, media and industrial products³⁴. By doing so, over a timeframe of more than 100 years, it became one of the world’s largest companies³⁵.

This already serves as an indication for the economic relevance of conglomerates. In fact after World War II they have gained a significant share in all western economies’ production³⁶. Technical progress, such as the development of the telephone, decreased effort and cost of coordination thus allowing the management of large sized corporations for the first time in history³⁷.

However experience showed excessive diversification strategies were not without downsides, which again would favor a more focused approach. With increased corporation size operational inefficiencies became more and more a problem. Also the advantage of risk distribution by diversification became less important³⁸. Due to an overestimation of synergies in the first place or higher cost of coordination and resource allocation in bigger corporations, unexpected cost occurred when synergies actually should be exploited³⁹. Overall those pitfalls caused a rollback movement towards refocusing in the late 1980s⁴⁰.

Yet, today the question remains still unanswered, which diversification strategy generally bears the greatest potential for success⁴¹. Chapter 3 is dedicated to present approaches striving to explain diversification success, thus serving as a basis for the upcoming empirical analysis in the preceding chapters.

3 Diversification and Success

3.1 Theoretical Approaches to explain Success

The scientific community has intensively discussed the causality of different forms of diversification strategies and resulting success⁴². Subsequently theoretical approaches to explain success have been developed: the industrial economics perspective, the market-based view and the resource based-view⁴³. Differences occur mainly regarding the underlying assumptions on market characteristics and the root cause of superior returns. In the following section those approaches are introduced and critically reflected, ending up with an appropriate one as a tool for the thesis’ analysis.

3.1.1 Industrial Economics Perspective

The main underlying assumption of this research trait is the existence of a perfect market. This suggests information is widely available at no cost to every market participant and product offerings are relatively similar⁴⁴. Since this is widely not the case in real life this approach seems already inadequate to explain diversification success.

The general basis of this perspective is the so called structure-conduct- performance paradigm of strategic management. It assumes that success is mainly a result of characteristics of a given industry and a company’s positioning within that industry. Thus this view has a focus outside a company.

In terms of diversification, the general logic here is that there is no connection whatsoever between diversification and success of a corporation. Any company could be successful or unsuccessful, whether diversified or focused.

3.1.2 Market-based View

Both of the following theoretical approaches are distinct to the industrial economics perspectives as they assume market imperfection. This implies information is believed to be unevenly distributed, market participants’ rationality is bounded and rights of disposal of goods are given.

Both approaches believe in a connection between diversification and success. Yet they differ in its root cause.

The market-based-view (MBV), as the industrial economics perspective, which actually is its theoretic predecessor, focuses more on external factors. Industry characteristics are brought forward as the major cause for a specific performance. A superior way of positioning in and across industries is believed to yield success.

Especially when looking at diversification, this is always then the case when advantages in one industry can be leveraged and transferred also to other industries. The relatedness of those is in this case irrelevant. As Grant argues those advantages are results of superior market power⁴⁵.

Four sources of such an advantage can be distinguished, namely predatory pricing, mutual forbearance, bundling and reciprocal pricing. In the following they are briefly described.

Predatory pricing comes down to the ability of large enterprises, active in many industries, to cross-subsidize their offerings. As an effect of that they are able to offer products or services at very competitive prices (even below production cost), squeezing industry margins and thus forcing others participants, that lack these options, to dismiss operations.

Mutual forbearance refers to a situation of multiple market competition between two conglomerates. Extreme tactics in single markets might be avoided by both players in order to cultivate a relationship of live and let live in all other markets.

Each player forebears the other while neglecting hurting him too much to ultimately avoid the vice versa behavior⁴⁶.

Bundling can be applied only when a company is active in related markets. In this case it is possible to bundle two related products to achieve an advantage over competitors being active in only in one of these markets. This bundling can either come along with a price advantage for customers or even by force, meaning the single products are not available as standalone versions but can only be purchased together⁴⁷.

Reciprocal pricing finally means gaining an advantage by leveraging relations to specific customers across multiple businesses. Loyal customers in one business can be treated preferential as suppliers in other areas for a mutual advantage.

3.1.3 Resource-based View

Market imperfection is also the basic assumption of the resource-based view (RBV)⁴⁸. Again information is believed to be unevenly distributed, market participants’ rationality is bounded and rights of disposal of goods are given.

Business success is assumed to be mainly based on the resources a firm possesses. A theory that is within strategic management also referred to as Resource-conduct-paradigm.

Here valuable, inimitable, non-transferrable resources or capabilities that are specially success relevant are thought to be main drivers of success. These are also called core competencies of a firm⁴⁹. These can be either material (location, machines) or immaterial (systems, processes) and are specific, thus exclusively available, to a firm.

Those lead to the ability to generate customer utility with lower cost as competitors or generate a higher customer utility at the same cost as competitors.

A valuable resource has five characteristics: it is hard to copy, it depreciates slowly, its value is controlled by the company that possesses them only, it cannot be easily substituted and it is better than competitors’ similar resources⁵⁰.

Overall, the notion of the RBV has gained significant applause within the research community and has been long awaited⁵¹. Although also market-based aspects seem to have some relevance for diversification success⁵², the RBV is thought as the most adequate theoretic foundation to explain diversification success. Thus it will also be used as the underlying notion of this work.

The following sections built on that framework and describe three success factors for diversification that are essentially the cornerstones of the upcoming analysis. The interplay of these three is considered as crucial in the given context. Therefore they form the next sections, namely business relatedness, resource transferability and corporate leadership.

3.2 Success Factors

3.2.1 Business Relatedness

For decades business relatedness was always considered as the very apparent relatedness of products and markets⁵³. Businesses were considered as similar when they produced the same things. Yet this has turned out to be insufficient; it is rather so that relatedness is a more dimensional construct⁵⁴. Especially taking a resource-based approach on diversification “resource congruence” (i.e. relatedness in processes, skills, management requirements and the like) is a better indicator for the similarity of businesses⁵⁵. And thus it is also a better predictor for success of a portfolio of businesses.

And the limitation to product relatedness caused another major problem namely the measurement of diversification in a comprehensive form. This however was needed to analyze and compare differently diversified companies⁵⁶. Thus the need for new and more comprehensive approaches to address the phenomenon has been stated⁵⁷.

During Stimpert & Duhaime’s work, which was based on a survey of 174 CEOs, the concept of relatedness was enhanced to a two dimensional one. Beside the “classical” product/market relatedness they identified a second type, named differentiation relatedness. See Figure 4 for an overview of their relatedness criteria.

The name was chosen according to one of Porter’s generic strategies of competitive advantage⁵⁸, due to underlying responses that managers gave. Those were linked to what Porter described as measures to achieve a differentiation advantage, e.g. emphasize on quality, design, brand, high value added, R&D and so forth.

On that basis Wulf concluded that differentiation advantage can also be considered as relatedness on the basis of management requirements, since all underlying factor seem to represent factors of special strategic relevance⁵⁹. Furthermore underlying features were refined in detail to facilitate measurement.

Abbildung in dieser Leseprobe nicht enthalten

Figure 4 – Criteria of relatedness based on a survey by Stimpert & Duhaime⁶⁰.

Since this work uses the same survey as Wulf and is basically a continuation or complement to his work, this concept of relatedness is also used in the following. It is depicted in Figure 5.

Abbildung in dieser Leseprobe nicht enthalten

Figure 5 – Criteria to assess business relatedness according to Wulf.

Generally relatedness is considered an important lever for diversification success. Many researchers have shown results that related diversification is generally more ⁶¹ successful than unrelated diversification61. However these relatedness definitions are mostly based on a definition only considering product/market-relatedness, yet neglecting relatedness of management requirements.

3.2.2 Resource Transferability

Earlier research suggests however that relatedness alone is insufficient to generate diversification success. Rather it can be seen as a necessary condition only⁶². As stated, the logic behind diversification success is that it stems from an advantageous transfer of available resources to various businesses. This advantage comes from business comprehensive synergies⁶³.

Synergies refer to an added value that a portfolio of businesses can generate instead of every business operating as a freestanding unit. This applies especially to synergies of those resources notably relevant for success.

Within the diversification context at hand, not only the existence but also the transferability of resources is essential. Thus the distinction between specific and unspecific resources seems appropriate to be used here, because those two types differ in their synergy potential as well as in their transferability⁶⁴.

Specific resources are those that are tightly connected to the business of their original application⁶⁵. In depth knowledge or specific hardware are examples for specific resources. They can be transferred only to businesses that are relatively similar, thus related in terms of products and / or processes to the original one. Fields of application are hence fairly limited. Yet, there significant synergies can materialize⁶⁶.

With unspecific resources the connection to one business is much looser. Mainly management capabilities are considered as unspecific resources⁶⁷. It is argued, that those can be transferred to business following the same logics, meaning the way strategies are derived, the way investment decisions are made and resources are allocated. Experience accumulated in one business can thus be beneficially employed also in quite dissimilar business from a product/market standpoint which however works along the same principles. In the end the number of businesses where management capabilities can be transferred to can be very high, yet the synergy potential is lower as with the transfer of specific resources.

The relation of synergy potential and transferability of specific and unspecific resources is also depicted in Figure 6.

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Figure 6 – Synergy potential of specific and unspecific resources⁶⁸.

That means ultimately that a company must be aware of what distinct competencies it has and how they can generate value among a set of businesses⁶⁹. And for businesses that are considered to be entered the type of their relatedness to the “home” business has to be evaluated.

In the end the competencies a company possesses determine the possible pattern of diversification⁷⁰. In case there are specific resources only, a focused diversification strategy is the only reasonable one. While in the other case: the possession of unspecific resources may recommend a diversification far broader than only in similar businesses.

Yet, this does not show the full picture. Only because synergy potential is higher with the transfer of specific resources, related diversification strategies are not generally and in all cases more successful than unrelated diversification strategies⁷¹.

For a complete understanding also costs of synergy realization have to be considered. This is especially crucial since potential synergies are not always realized'^{72 73}.

These costs can in general occur when acquiring a business, organizing or administrating its operations . They are influenced by internal factors, meaning how a company is lead. In a corporate context this involves the relation of a corporate parent and its SBUs.

Following the RBV it is crucial for diversification success that the diversification strategy and corporate leadership fit⁷⁴. Accordingly the next section deals with corporate leadership.

3.2.3 Corporate Leadership

Leadership in a corporation, in this context meaning the relation between the corporate center and its SBUs as well as among SBUs, comes down to two issues: the centralization of decisions, meaning the influence a center executes on decision making of its BUs, and integration among SBUs⁷⁵.

Corporate Leadership determines strongly the effort invested in coordination activities. That also involves cost of synergy realization as they can only be realized among BUs when a certain coordination effort is taken.

That ultimately means the higher those coordination efforts the higher are the cost of synergy realization. Yet the greater is also the synergy potential⁷⁶.

Two main levers involving these efforts have to be taken into consideration. Both are parts of organizational design, namely organizational structure and management systems⁷⁷.

Given the distinction between synergies and the transferability of resources as outlined in section 3.2.2, the assumption has been brought forward, that different resources also need a special kind of corporate leadership in a diversification scenario.

Specific resources, which can only be transferred to closely related businesses, are assumed to demand a more cooperative leadership, while unspecific resources need a more competitive style of leadership.

Cooperative would mean to a centralized form of corporate leadership aiming for an added value through cooperation among BUs. Competitive leadership on the opposite would imply decentralized control and competition among BUs.

Hence, cooperative structures are assumed to cause higher cost of operations while they also offer a higher potential for synergies.

[...]

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¹ See Hungenberg, Wulf (2007), p. 111.

² See Goold, Campbell & Alexander (1994), p. 12, and Campbell, Goold & Alexander (1995), pp. 120-132.

³ See e.g. Chandler (1991), pp. 31-50, or Goold & Campbell (1987) who addresses corporate center functions in greater detail and e.g. Wulf (2007), p. 38 regarding synergies.

⁴ See Hungenberg, Wulf (2007), p. 138.

⁵ See Ramanujam & Varadarajan (1989), pp. 523-551 for an exhaustive overview on diversification research up until that time.

⁶ See Comment & Jarrell (1995), pp. 67-87, for a study seemingly favouring a focussed strategy and Shulman (1999), who empirically proves that there can very well be a conglomerate strategy resulting in superior performance.

⁷ For this and the following see e.g. an empirical study by Palich, Cardinal & Miller (2000), pp. 155-174, or Varadarajan & Ramanujam (1987), pp. 380-393, who found further support, yet also raise concerns about generalization.

⁸ See e.g. Mayer & Whittington (2003), pp. 773-781.

⁹ See Wulf (2007), p.163.

¹⁰ See Wulf (2007), p. 3.

¹¹ See Bamberger & Wrona (1996), pp. 130-153.

¹² See Mahoney & Pandian (1992), pp. 363-380 or Bamberger & Wrona (1996), pp. 130-153, for an appreciation of the RBV within the field of strategic management.

¹³ See Chatterjee & Wernerfelt (1991), pp. 33-48.

¹⁴ Therefore it is also known as “competitive strategy”. See Grant (2005), p. 388.

¹⁵ For a basic overview on business level strategies see e.g. the widely recognized fundamental work by Porter (1980) or as a standard reference in German language Hungenberg (2006).

¹⁶ Business strategies are essentially derived from greater corporate strategies.

¹⁷ For this and the following see Goold, Campbell, & Alexander (1994), pp. 12. Throughout the literature the term “Corporate Advantage” is used equivalently (see e.g. Collis & Montgomery [1998], pp. 71-83).

¹⁸ In the organizational setup of a multibusiness firm also called Strategic Business Unit (SBU). This stems from the fact that they are to a large extent operated separately and independently. A business basically stands for a distinct product/market combination.

¹⁹ However this might not always be realized due to significant break-up-cost. Also problems measuring the discount were being brought forward, that might deter break-ups, e.g. by Reimund & Schwetzler (2003).

²⁰ See e.g. Johnson, Scholes, & Whittington (2008).

²¹ Hungenberg (2006), p. 453.

²² Dess, Lumpkin, & Eisner (2006), p. 191.

²³ See The Boston Consulting Group (1970). Although there are a vast variety of similar concepts, a complete overview is neglected at this point since the presented one is sufficient to give an impression on the general structure and value of such tools within corporate strategy.

²⁴ Source: Own illustration of a fictional case. Bubble sizes are supposed to represent turnover contribution by a BU.

²⁵ One of the most recognized among them being Ansoff, who started defining diversification within his matrix concept (see Ansoff [1987]) as a move into new markets and development of new products at the same time.

²⁶ Reed & Luffmann (1986), pp. 29-35.

²⁷ For this and the following see Wulf (2007), pp. 7.

²⁸ See e.g. Davies (1996), p. 168, Goold & Sommers Luchs (1996), p. 2, and Hungenberg & Wulf (2007), p. 140. However also other factors might influence diversification decisions, as Bowen & Wiersema (2005), pp. 1153-1171 have shown for the case of increased foreign-based competition. It is also frequently argued that underutilized core resources actually drive diversification (see e.g. Penrose [1959]). Since such alternative explanations can be very widespread, only the commonly discussed main reasons are presented at this point.

²⁹ See e.g. Montgomery (1994), pp. 163-178.

³⁰ See e.g. Penrose (1959), who first wrote about diversified firms or Coase (1937), who at least talked indirectly about the matter while arguing that based on transaction cost there is an optimal size of a firm.

³¹ See some very recent contributions e.g. by Wiersema & Bowen (2008), pp. 115-132, Goranova et al. (2007), pp. 211-225, Barnes & Hardie-Brown (2006), pp. 1508-1534, Miller (2006), pp. 601-619, or Pehersson (2006), pp. 265-282.

³² See Wulf (2007), pp. 25.

³³ For this and the following see Hungenberg (2006), pp. 491.

³⁴ See General Electric.

³⁵ Ranked 6th in terms of market capitalization in Financial Times' Global 500 Ranking, see Financial Times (2008).

³⁶ See Rumelt (1974), who computed that among Fortune’s 500 the percentage of diversified companies rose from 24% (1949) to 80% (1969).

³⁷ Due to the popularity of large diversified firms at that time, the period is also known as “merger mania”; see Hoskisson & Hitt (1994), p. 5.

³⁸ See Levy & Sarnat (1970), pp. 795-802.

³⁹ This was due to the increased efficiency of capital markets. That resulted in the fact that shareholders could spread risk more efficiently themselves by designing their specific stock portfolio (see Hungenberg [2006], p. 495).

⁴⁰ See e.g. Bhide (1990), pp.70-81, Lichtenberg (1992), p. 427, Markides (1995), pp. 101-118, or Prahalad & Hamel (1990), pp. 79-91.

⁴¹ See Hungenberg & Wulf (2007), p. 140.

⁴² See e.g. Hoskisson & Hitt (1990), pp. 461-509.

⁴³ For this and the following see Wulf (2007), pp. 28.

⁴⁴ Dominant representatives of this stream are e.g. Bain (1956), Bain (1968) and Porter (1981), pp. 609-620.

⁴⁵ For this and the following see Grant (2005), pp. 455.

⁴⁶ See also Li & Greenwood (2004), pp. 1131-1153 for a study including the issue of mutual forebearance in the Canadian insurance industry.

⁴⁷ A practice that is e.g. known from Microsoft when it bundled its Windows operating system with its web browser Internet Explorer to achieve an advantage over Netscape, that was only offering web browsers, yet not operating systems (see United States Department of Justice [2000]).

⁴⁸ For this and the following see also Collis & Montgomery (1995), pp. 118-128 (original version), Collis & Montgomery (2008), pp.140-150 (updated version) and Wernerfelt (1984), pp.171-180.

⁴⁹ See also Prahalad & Hamel (1990), pp. 79-91.

⁵⁰ See Collis & Montgomery (2008), p. 143.

⁵¹ See Wulf (2007), pp. 67, who compared all three approaches using a number of empirical studies.

⁵² See e.g. Chakrabarti, Singh, & Mahmood (2006), 101-120, who discuss the relevance of different institutional environments on diversification.

⁵³ For this and the following see Stimpert & Duhaime (1997), pp. 111-125. For an early classification of product/market driven types of relatedness see Rumelt (1974).

⁵⁴ See e.g. Davis et al. (1992), p. 360, who stated: „the theoretical framework of relatedness is richer in its hypothesized relationships to performance than has heretofore been empirically shown.“ or Farjoun (1998), pp. 611-630, who examined operational business level relatedness but also resource (also including skills) relatedness and the interrelation among them.

⁵⁵ See D'Aveni, Ravenscraft, & Anderson (2004), pp. 365-381 who wrote about resources in general or Kor & Leblebici (2005), pp. 967-985, who especially dealt with the resource of human capital in diversified firms.

⁵⁶ See e.g. Lemelin (1982), pp. 646-657, for a critique on diversification measurement and its effects on research work at that time.

⁵⁷ See Robins & Wiersema (1995), p. 277-299, who stated the need to develop an approach covering all of a company’s resources, i.e. including knowledge or capabilities, instead of only product-related resources and also proposed a model. Farjoun (1998), pp. 611-630, has also highlighted the importance to include relatedness in resources, e.g. skills.

⁵⁸ See also Porter (1980).

⁵⁹ See Wulf (2007), p. 113.

⁶⁰ For a selection of those see e.g. Mayer & Whittington (2003), pp. 773-781, Rumelt (1974), Rumelt (1982), pp. 359-369, Christensen & Montgomery (1981), pp. 327-343, Palepu (1985), pp. 239-255, Gary (2005), 643-664, Amit & Livnat (1988), pp. 99-110, or Palich, Cardinal & Miller (2000), pp. 155-174.

⁶¹ See Varadarajan & Ramanujam (1987), p. 388.

⁶² For this and the following see Wulf (2007), p. 38.

⁶³ This distinction follows Montgomery & Wernerfelt (1988), pp. 625. Also see Chatterjee & Wernerfelt (1991), pp. 33-48 for an empirical study on different resources and their usage for related or unrelated diversification.

⁶⁴ See Chatterjee & Wernerfelt (1991), pp. 40.

⁶⁵ See Montgomery & Wernerfelt (1988), p. 625.

⁶⁶ Figures represent correlation coefficients.

⁶⁷ See Prahalad & Bettis (1986), pp. 485.

⁶⁸ See Wulf (2007), p. 40, and Montgomery & Wernerfelt (1988), p. 626.

⁶⁹ See also Hitt & Ireland (1985), pp. 273-293.

⁷⁰ See e.g. Miller (2004), pp. 1097-1119, who examined technological resources and diversification concluding that “firms with certain kinds of resources should diversify”.

⁷¹ See also Varadarajan & Ramanujam (1987), p. 388, who state that in some cases firms are very well able to manage unrelated diversification.

⁷² See Nayyar (1992), pp. 219-235.

⁷³ See Balakrishnan (1988), p. 188.

⁷⁴ See Wulf (2007), p. 42, and for the theory of 'fit' in strategy research Venkatraman (1989), pp. 423-444.

⁷⁵ See Porter (1995), pp. 331.

⁷⁶ See Hill (1994), pp. 297.

⁷⁷ See Wulf (2007), p. 42.