| Abstract: | Strategy research has a long‐standing interest in the performance consequences of corporate diversification. In theory, resource sharing should yield economic benefits in related multi‐business firms, but the extensive empirical research remains equivocal. To explore this paradox, this paper examines the process of implementing a related diversification strategy. Working from existing theory, a formal model is constructed that describes the process and performance implications of a related diversification move. The model is analyzed using computer simulation, and the analysis suggests that successful diversification strategies require managerial policies that maintain organization slack. In the absence of such policies, related diversification can negatively impact firm performance even when substantial synergy opportunities exist. The analysis also demonstrates, contrary to existing theory, that diversification strategies based on a very high degree of relatedness can lead to lower performance than less related strategies in some circumstances. Counter‐intuitively, extracting potential synergies may require additional investment in shared resources. Copyright © 2005 John Wiley & Sons, Ltd. |
