This dissertation proposes an alternative perspective for studying the relationship between corporate performance and diversification. Extensive research into the relationship between diversification and economic performance has been conducted using two different perspectives. One perspective, pursued mainly by industrial organization economists, examined the effect that a firm's level (or degree) of diversity had on its performance. A second perspective, utilized by strategic management researchers, uses Rumelt's (1974) notion of product-market relatedness to explain performance differences among diversified firms. Rumelt (1974) hypothesized 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.
Blackburn and Shrader (1990, pg. 1) argue that "a consensus seems to be forming that related corporate acquisitions are superior to unrelated acquisitions." This consensus view is not without its critics, however. Other research results (e.g. Barton, 1988) suggest that unrelated acquisitions need not produce inferior performance. This debate suggests that further research into the nature of the relationship between corporate diversification and its financial performance may be productive, especially if new ways of examining it can be devised.
An alternative perspective for studying the relationship between corporate performance and diversification is proposed. 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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