Within-Industry Diversification and Firm Performance : Synergy Creation and Capability Development

Different from previous literature on cross-industry diversification, this study investigates the performance implications of multiunit firms’ related and unrelated diversification behavior within a single industry. In addition, the study contributes to the literature by examining performance implications of firms’ dynamic development of capabilities based on their accumulated diversification experience. Drawing from the resource-based view of diversification, I conceptualize related within-industry diversification based on the resource overlap of operating units and test performance outcomes using a unique dataset of the world’s leading retail firms’ unit (i.e., retail format) diversification behavior over thirteen years (from 1997 to 2009). Results show that profits first decrease at low levels of relatedness and then increase at an increasingly higher level as corporate parents focus stronger on related within-industry diversification. Moreover, I find suggestive evidence that unrelated within-industry diversification has a negative effect on profits. In contrast to profits, both related and unrelated within-industry diversification increase a parent firm’s sales-based market share in the following year. Finally, the study indicates that especially related diversifiers who exceed a distinct (minimum) level of related within-industry diversification are able to develop capabilities over time that lead to superior firm performance. Specifically, the complementary effects of high degrees of related within-industry diversification in combination with longer experience with related diversification enable corporate parents to outperform competition.