Cooperative Versus Competitive Structures in Related and Unrelated Diversified Firms

Abstract

Herein we argue that different diversification strategies are associated with different sets of economic benefits. Firms that have diversified into related areas can realize benefits from economies of scope, while those that have diversified into unrelated areas can realize benefits from efficient internal governance mechanisms. We hypothesize that distinctly different internal organizational arrangements are required to realize these different benefits. Firms attempting to realize economies of scope need organizational arrangements that stress cooperation between business units. Firms attempting to realize economic benefits from efficient internal governance need organizational arrangements that stress competition between business units. If a diversified firm is to achieve high performance it must establish an appropriate fit between its diversification strategy on the one hand, and its organizational structure and control systems on the other. We test this thesis on 184 Fortune 1000 firms that participated in a survey of organizational arrangements. The results indicate that the appropriate fit between strategy, structure, and control systems is associated with superior performance. Firms attempting to realize economies of scope perform better if their organizational arrangements stress cooperation between business units, while firms attempting to realize economic benefits from efficient internal governance perform better if their organizational arrangements stress competition between business units.