Resource-based theory and corporate diversification*

A firm implements a corporate diversification strategy when it operates multiple businesses within its boundaries. This strategy is one of the most studied phenomena in the field of strategic management (Berg 2001). A wide variety of theoretical tools have been used to understand this phenomenon, everything from agency theory (Jensen and Meckling 1976) to portfolio theory. Depending on these different theoretical perspectives, corporate diversification has been characterized as a systematic waste of shareholder’s money (Lang and Stulz 1994; Berger and Ofek 1995, 1999), as having no impact on shareholder wealth (Bradley, Desai, and Kim 1988; Graham, Lemmon, and Walf 2002; Villalonga 2004), and as having a positive impact on shareholder wealth (Elgers and Clark 1980; Jensen and Ruback 1983; Schipper and Thompson 1983; Matsusaka 1993; Hubbard and Palia 1999). Resource-based theorists, almost from the beginning, have also been interested in the causes and consequences of corporate diversification (Wernerfelt 1989; Chatterjee and Wernerfelt 1991). Indeed, one of the most cited explanations of corporate diversification—that firm’s diversify to exploit their core competencies (Prahalad and Bettis 1986; Prahalad and Hamel 1990)—is very consistent with, and an early contributor to, resource-based theory. This chapter summarizes this traditional resource-based approach to understanding corporate diversification. In addition, this chapter proposes an alternative approach to understanding resource-based theory. Where the traditional theory combines the assumption that firms may have different resources and capabilities that can create value in multiple business. This chapter draws from Barney (2002) and Wang and Barney (2006).