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?