Related diversification, firm level resources, and firm performance in the context of Australian extractive industry

• Published date: 01 April 2022
• Author: Kwaku Alex Gyan,Pieter Jan‐Bezemer
• Date: 01 April 2022
• DOI: http://doi.org/10.1002/jcaf.22541

Received:  November Revised:  February Accepted:  January 

DOI: ./jcaf.

RESEARCH ARTICLE

Related diversification, firm level resources, and firm

performance in the context of Australian extractive industry

Kwaku Alex GyanPieter Jan-Bezemer

Edith Cowan University, Joondalup,

Australia

Correspondence

KwakuAlex Gyan, Edith Cowan univer-

sity, Joondalup drive, Joondalup ,

Australia.

Email:a.gyan@ecu.edu.au

Abstract

Related diversification literature highlights that the reason why corporations

pursue this specific type of diversification is to achieve synergistic benefits

through sharing common resources efficiently across related business units for

higher financial performance. However, it is unclear whether this performance

is influenced by the level of firm resources that a firm possesses. Using data

from Australian extractive industry, this study assesses the heterogeneity of firm

resource-possession in relation to firm performance and found that related diver-

sified firms that possess higher resource levels extract larger proportion of syner-

gistic advantage to enhance financial performance. The study has discussed key

theoretical and practical implications.

KEYWORDS

financial performance, related diversification, resource development stage

1 INTRODUCTION

Related diversification (RD) is a corporate-level strategy

under which a firm extends itself by operating in mul-

tiple related industries (Tanriverdi & Lee, ; Zahavie

& Lavie, ). The existing literature highlights that cor-

porations pursue this type of diversification to achieve

synergistic benefits through the sharing of common

resources across business units (Smeritschnig et al., ;

Teece, ). The similarities of resource requirements

between related business units enhance the applicability of

resources across existing related business units (Hill et al.,

; Li & Greenwood, ;Palichetal.,) and result

in scale and scope benefits. As such, a long line of research

has asserted that relatedly diversified firms have superior

resources (Palich et al., ) that will enhance their per-

formance when compared to companies that do not pursue

diversification or do so in an unrelated way (Rumelt, ;

Sakhartov, ).

Despite the merits in resource-possessions, related

diversified organizations have not always derived a con-

sistent performance outcome (Hashai, ;Palichetal.,

). For example, previous studies show that marginal

benefits of RD decrease with increasing level of resource

expansion into further diversification, a condition, which

makes smaller levels of diversified resources more benefi-

cial (Hitt et al., ; Johnson et al., ; Pierce & Agui-

nis, ). The explanation to this assertion is that at the

initial expansion of resources/small level of RD, organiza-

tions exploit their resources in the first-best opportunities,

such that performance is likely to be poor from additional

expansion into further diversification (Markides, ).

Contrary, other related diversification literatures assume

that the benefits of RD are a positive function of the level of

related business units established by an organization. The

justification is that core advantages such as greater coor-

dination and integration costs tend to decrease with the

expansion of resources intofurther diversif ication (Hashai,

, Markides, ).

These mixed views around RD and performance

point to the fact that benefits of RD are likely to vary

with the extent of resources within RD (Hashai, ;

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