RELATED DIVERSIFICATION, CORE COMPETENCES AND CORPORATE PERFORMANCE

Despite nearly 30 years of academic research on the benefits of relate d diversification, there is still considerable disagreement about prec isely how and when diversification can be used to build long-run compe titive advantage. In this paper we argue that the disagreement exists for two main reasons: (a) the traditional way of measuring relatedness between two businesses is incomplete because it ignores the 'strageti c importance' and similarity of the underlying assets residing in thes e businesses, and (b) the way researchers have traditionally thought o f relatedness is limited, primarily because it has tended to equate th e benefits of relatedness with the static exploitation of economies of scope (asset amortization), thus, ignoring the main contribution of r elated diversification to long-run, competitive advantage; namely the potential for the firm to expand its stock of strategic assets and cre ate new ones more rapidly and at lower cost than rivals who are not di versified across related businesses. An empirical test supports our vi ew that 'strategic' relatedness is superior to market relatedness in p redicting when related diversifiers outperform unrelated ones.