A Modern Resource Based Approach to Unrelated Diversification


Desmond W. Ng, Department of Agricultural Economics, Texas A&M University, Blocker Building 349B, 525 Ireland Street, College Station, Texas, 77843-2123, USA (dng@ag.tamu.edu).


abstract  For over three decades, the questions of how and why an organization diversifies into related and unrelated businesses have drawn the attention of strategy scholars. However, explanations of unrelated diversification have been less than clear. A conceptual model of unrelated diversification is thus proposed. In drawing on Penrose's (1959) resource based approach, unrelated diversification is explained by an organization's ‘three pillars’, which consist of its strength of dynamic capabilities, absorptive capacity, and weak ties. The role of the three pillars is to discover new resource applications or uses in conditions of market failure that are characterized by ‘incomplete’ markets. A novel feature of this model is that an organization can diversify more broadly than predicted by Penrose (1959) and other modern resource-based approaches (Teece et al., 1997). Furthermore, unrelated diversification can be beneficial. This study also offers suggestions to measure the three pillars; its contributions and implications are discussed as well.