Structural Change and Economic Dynamics 11 2000 295 – 315
Relatedness and coherence in technological and product diversification of the world’s largest
firms
Lucia Piscitello
Dipartimento di Economia e Produzione, Politecnico di Milano, P.za L. da Vinci
32
,
20133
Milan, Italy Received 12 May 1998; received in revised form 24 February 2000; accepted 17 March 2000
Abstract
The present paper investigates relatedness and coherence with reference to both product and technological diversification. In particular, it is argued that: i relatedness can be
disentangled into three dimensions: industry-, technology- and firm-specific; and that ii coherence refers to both product and technological diversification. We provide empirical
support of our premises with a study of a large cross-firm panel of technological and economic activity for 248 large firms over the period 1977 – 1995. The results support the
view that large firms’ diversification processes are characterised by product-based coherence at the beginning of the period considered, and by technology-based coherence more recently.
© 2000 Elsevier Science B.V. All rights reserved.
JEL classification
:
L2; O33 Keywords
:
Corporate diversification; Relatedness; Coherence; Competencies www.elsevier.nllocateeconbase
1. Introduction
Diversification has long been studied as a broad topic. The economic and managerial literature has paid extensive attention to corporate diversification,
emphasising the benefits from diversification in terms of lower costs and risk-
Tel.: + 39-2-23992740; fax: + 39-2-23992710. E-mail address
:
lucia.piscitellopolimi.it L. Piscitello. 0954-349X00 - see front matter © 2000 Elsevier Science B.V. All rights reserved.
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spreading, as would arise from the exploitation of economies of scale and scope by firms. Nonetheless, diversification has still largely focused upon the
reasons for, and the nature of, product diversification Rumelt, 1974; Bigadikke, 1979; Didrichsen, 1982; Pavitt et al., 1989; Montgomery, 1994, for which the
concepts of relatedness and coherence have been specifically developed. These concepts led to the perception that, by diversifying into related product markets or
areas which lie ‘close’ into the firms’ existing profiles of competencies, those firms could grow and attain economies of scale and scope Chandler, 1990. In this
way the firm is able to diversify and expand whilst corporate coherence is maintained.
More recently, these issues have begun to be extended to the concept of corporate technological diversification e.g. Granstrand and Sjo¨lander, 1992;
Granstrand et al., 1997; Pavitt, 1999, meaning the diversification of the firm’s technological
competencies. In
accordance with
Penrose’s resource-based
view of the firm as a collection of productive assets, and with the more recent competence-based theory of the firm Richardson, 1972; Winter, 1987, 1988;
Loasby, 1991; Nelson, 1991; Foss, 1993; Cantwell, 1994; Teece et al., 1994, in which the firm is seen as an institution that constructs capabilities through
internal learning processes in the form of evolutionary experimentation, firms extend their capabilities into ‘closely’ related fields of production and technology.
Therefore, firms do not diversify in a random way. Instead, most of them display a pattern and logic to both the product and the technological diversification
choices.
Nonetheless, although several approaches have been so far suggested in the literature in order to capture the ‘orientated patterns’ Cainarca and Mariotti,
1985, the ‘coherence’ Dosi et al., 1992; Teece et al., 1994 or the ‘purposiveness’ Scott, 1993 of corporate product diversification, there remains great ‘fuzziness’
over what the concept of relatedness does actually include.
In this context, the purpose of the present paper is twofold: 1. to suggest an alternative multidimensional interpretation of relatedness which
distinguishes between: i industry-specific, ii technology-specific, and iii firm-specific aspects; and
2. to measure and investigate the coherence with reference to both the technolog- ical and the product diversification patterns pursued by large firms.
These are both quite novel contributions to the literature in the field, as — to our knowledge — previous studies have neither considered multi-dimensional
measures of relatedness, nor applied the concept of coherence to the diversifica- tion of technological activities by the firm.
Additionally, the assessment of what degree of closeness amounts to relatedness has been so far highly subjective in most studies. The empirical contribution in
this paper formulates objective measures, based on actual data. Specifically, the analysis makes use of a large panel of the largest European, US and Japanese
firms over the period 1977 – 1995.
2. Relatedness and coherence: a theoretical framework