Beyond Industry Boundaries: Human Expertise, Diversification and Resource-Related Industry Groups

Abstract

This paper is concerned with revealing and explaining patterns in the ways firms diversify into new products and industries. Shifting the focus from the observable similarity of products provided by the firm, to the less observable underlying resources required in different industries, can be a useful and interesting way of looking at patterns of diversification. The theory outlined in the paper suggests that firms diversify within groups of industries that are related to one another in the types of human skills and expertise required in each industry. Within these resource-related industry groups, firms can more efficiently utilize their resources by sharing and transferring them across similar products. The theory was tested with a sample of 12,781 diversified firms operating in all sections of the U.S. economy. Across the firms studied, much of a firm's diversification was found to be on average within resource-related industry groups and was consistent with the efficiency arguments developed. The study demonstrates the utility of looking at human expertise similarity to reveal and explain patterns in diversification. It suggests new ways of examining the concept of resources. It also suggests that the industry group, rather than the single industry, needs to be used to analyze the context where diversified firms operate. By looking at resource-related industry groups, the study encourages strategic thinking that views demand, competition, and relatedness of industries more broadly.

Theory and research in strategic management: swings of a pendulum

“…However, there has been limited empirical research testing the theory (Farjoun, 1994). Empirical research on resource-based corporate strategy has been particularly difficult because key concepts such as tacit knowledge or capabilities resist direct measurement (Robins & Wiersema, 1995).…”

Inter-industry labor flows

“…For instance, relatedness matrices such as the skill-relatedness matrix in this paper have various practical and academic applications, ranging from employment and retraining programs to research in labor economics (Poletaev and Robinson, 2008;Gathmann and Schön-berg, 2010), economic geography (Porter, 2003;Neffke et al, 2011;Boschma et al, 2013), development economics (Hidalgo et al, 2007) and strategic management (e.g., Teece et al, 1994;Farjoun, 1994;Bryce and Winter, 2009;Lien and Klein, 2009). Moreover, our results suggest that analyzing inter-industry flows may offer new ways to study labor markets and the flexibility of a labor force.…”

Redirecting Research Efforts on the Diversification–Performance Linkage: The Search for Synergy

“…Amit & Livnat, 1989;Davis & Duhaime, 1992;Davis & Thomas, 1993) and used them in different ways, such as calculating the measures based on line of business data versus segment data (e.g. Farjoun, 1994;Montgomery & Hariharan, 1991;; longitudinal versus cross sectional (Bergh, 1995); and different levels of analysis (Stimpert & Duhaime, 1997).…”