Operationalizing and testing Galbraith's center of gravity theory

This paper develops and tests an expanded model of relatedness and firm performance, based on Galbraith's (1983) center of gravity concept. Traditional empirical approaches to relatedness have focused primarily on product similarities. This research operationalizes and tests a managerial dimension of relatedness, based on a firm's historical center of gravity, which assumes that businesses in the same vertical stage of the value chain are more similar to manage than those in different stages. Empirical results support Galbraith's hypothesis that this managerial dimension of relatedness may be more important than constrained product relatedness in achieving high performance. This finding suggests that diversified firms should operate in lines of business that are managerially similar in order to minimize complexity and apply core skills appropriately. Interestingly, while managerial relatedness was positively associated with firm performance in two out of three samples, constrained product relatedness was negatively associated with performance in two of the three samples. Taken together, these results suggest that optimal relatedness profiles may be industry specific, and that corporate relatedness may be more important in managing diversity than product relatedness. Future research should seek a better understanding of the specific dimensions which underlie both product and managerial relatedness.