This video continues the discussion of implications of resource redeployability, the real option for a firm to withdraw its resources from one business and redeploy them to another business. In the related article published in the Strategic Management Journal, I focus on what determines the propensity of a firm to become and stay diversified across multiple businesses. The response to this question is important to managers of diversifying firms, as well as to researchers, investors, and business analysts who try to understand such diversification. Previous explanations followed the so-called relatedness hypothesis: because relatedness facilitates the transfer of resources between businesses, more related businesses are more likely to be combined by the diversifying firm. However, this prediction confronted the fact that many firms persistently combine businesses that are only limitedly related to each other. The most vivid example in this respect is the paradoxical persistence of conglomerates. My study develops a formal model of corporate diversification as a dynamic choice made by firms. The model demonstrates the limitations of expecting that only strongly related businesses are combined by diversifying firms.
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Gies College of Business
University of Illinois at Urbana-Champaign
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