Learning and corporate evolution: a longitudinal study of how product-market relatedness and environmental relatedness impact firm scope
Abstract
I examine corporate evolution, i.e. how a firm changes its scope through
diversification into new businesses and exits from existing ones and what it learns
from this process. I analyze the type of scope experience acquired by the firm, and
suggest that the firm’s scope decisions entail two types of learning, product-market
learning and environmental learning, that have distinct effects on the firm’s future
scope choices. I suggest that by failing to account for environmental differences
and focusing too closely on product-market relatedness, firms may be misled into
presuming that potential new businesses are much closer to their existing
businesses than they truly are. I use longitudinal data on the Fortune 250 firms to
test these arguments and show that ignoring environmental relatedness may be one
explanation for an unanswered riddle in the strategy literature: why does related
diversification fail?
Department
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