Relatedness: An Application to Firm Portfolio Management

The concept of “relatedness” between activities is starting to play a more central role in Strategic Management and economics. Moreover, portfolio management is considered to be vital: in assessing new interesting business opportunities, for gaining control over the firm’s value chain, to lower firm risk and to exploit idle resources. However, the empirical application of the “relatedness” concept on firm portfolio management on a strategic level stays rather elusive. This article, investigates how “relatedness” between industries influences the composition of industrial portfolios and the mode of industry entry (Merger & Acquisition vs. Joint Venture). Furthermore, it examines how markets value certain kinds of industry entry. In particular, this article uses input-output profiles and human skills to investigate the influence of a certain degree of relatedness on portfolio composition and the mode of industry entry. The data used in this paper is based on one hundred Dutch firms, listed on the Amsterdam Stock Exchange (AEX). Analyses in this paper clearly show that firms have a strategic tendency to diversify in a related manner, mainly with respect to their current resource base. Although, from a stockholder perspective, vertically related diversifications are valued higher than diversifications which are based on the firm’s resource base. Furthermore, investigating the role of relatedness in the firm’s decision to enter markets through Merger & Acquisition or by a Joint Venture seems to be far more complex than what the rationale behind previous literature suggests.