Synergy, relatedness, and organization form in the strategic management of diversification

This study investigates the empirical relationship between synergy and related diversification. Multi-dimensional measures of related diversification and relatedness are developed. These are hypothesized to be correlated with synergy, also a multi-dimensional construct. It is argued that diversification synergy arises from sharing firm-specific resources among the business units of a multi-business firm. Therefore, the stronger the competitive advantages derived from these shared resources, the higher would be the realized synergy among the business units. The concept is further expanded to incorporate organization structure as a synergy source. Hence, realized synergy is hypothesized to be a function of relatedness, the strengths of firm-specific skills, and the design of appropriate organization structures. Research hypotheses about synergy, relatedness, and organization form are examined with sample firms randomly selected from the list of Fortune 1000 firms. Additional data covering the 1976-83 time period are drawn from several sources. Empirical findings show that the existence of diversification synergy can be explained in terms of relatedness measures, firm strengths, and organization form. Among the different dimensions of relatedness, marketing skills and marketing relatedness seem to show greater impact on synergy than other sources of functional skills and relatedness. Other findings support previous research particularly regarding the presence of industry effects or market effects, and the influence of specific organizational forms such as the M-form.