The Independent and Joint Effects of the Skill and Physical Bases of Relatedness in Diversification. Moshe Farjoun SMJ,Vol.9,611 – 630 ( 1998)

Relatedness O Relatedness, the logic and extent by which a firm’s different lines of business ( or industries) are connected. O Multiple dimension encompasses it, vary from O Choosing one among several. O Combining different bases of relatedness. Both have implications. O The choice of a particular approach to asses relatedness is not just a matter of methodological convenience, it can significantly affect motive and consequences of diversification. O Combining different dimensions of relatedness: O Combined assessment has both theoretical and practical impact. O One example, firm's expansion using many related resources.

Research questions: O How do the skill and physical bases differ in the ways they identify relatedness in the same set of industries (or lines of business)? O What are the separate and joint contributions of the two approaches in explaining firm-level performance differences?

This study O Skills and Physical characteristics. Particularly this study present recently developed approach that captures the skill base of relatedness ( Farjoun,1994). O Broadly speaking it’s all about human factor. O Synthesizes a conceptualization of relatedness that is multi-dimensional. O Besides Farjoun (1998), physical and skill bases, elaborates a better understanding of underlying assumptions and merits and limits of these bases.

Independent effects of physical & skill Bases of Relatedness O Physical base, of relatedness is concept of firms and industries as a collections of material resources and physical processes.The elements of material resources (e.g., raw materials, plant and equipment, etc.) O Difference between physical and skill resources and activates have explicit implications for diversification. O More observable and identifiable. O More product-specific, constraining the range of diversification opportunities

Independent effects of physical & skill Bases of Relatedness O Human/skill bases, are not easy to identify. O Performance benefits are associated with cost reduction stem out from the economic of scope (Teece,1982). O Little difficult to observe. O Diversification is favored over market transactions because the innovations and lessons are retained within the firm and can be used for future purposes. O ‘Dynamic reciprocity’

Independent effects - Hypotheses O Hypothesis 1a: The level of related diversification as indicated by the physical base of relatedness will be positively associated with financial performance. O Hypothesis 1b: The level of related diversification as indicated by the skill base of relatedness will be positively associated with financial performance.

Joint effects of physical & skill Bases of Relatedness O When both combined, union or intersection of both may be of importance. Both are complementary in nature. O Like interact in many valued added activities. O The example of production process when some kind of information or knowledge is able to direct energy toward final products. O Both employees and material resources increase the learning. O Hypothesis 2; The level of related diversification indicated by a combination of both the physical and skill dimensions will be positively associated with financial performance.

Method O Focuses on the manufacturing sector ( SIC codes 20 to 30).Combining of previous research and personal experience with the data. O 1985 fortune 500 list of companies. O Each Industry was characterized by skill and physical bases of relatedness. O Human skills, occupational ratios etc. for the skills based relatedness. O SIC code for physical bases. O Performance is based on, ROA,MBOOK, ROE, Alpha.

Method

Analyses and results

Relatedness and performance (ROA) 13

14 Relatedness and performance (MBOOK)

Results  Relationship between relatedness and performance:  H1a: The level of related diversification as indicated by the physical base of relatedness will be positively associated with financial performance (Not supported)  H1b: The level of related diversification as indicated by the skill base of relatedness will be positively associated with financial performance (Not supported)  H2: The level of related diversification indicated by a combination of both the physical and skill dimensions will be positively associated with financial performance (Supported)

Discussion O Findings support our understanding that relatedness is multidimensional. O Interaction effect between two is consistent. O Implications for managers are that they need to explore different industries in terms of diversification and range of potential competitors and partners. O Looking to method section, relatedness is captured as external observer not as internal so there may be an endogeneity issue.