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From corporate strategy to business-level advantage: Relatedness as resource congruence

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  • Richard A. D'Aveni

    (The Tuck School of Business at Dartmouth College, NH, USA)

  • David J. Ravenscraft

    (Kennan-Flagler Business School, University of North Carolina at Chapel Hill, USA)

  • Philip Anderson

    (INSEAD, Singapore)

Abstract

In this paper, we study resource congruence, the degree to which the expenditure profile of a focal lines of business (LB) resembles others in its parent's portfolio. Taking each individual LB as a focal point, we examine the degree to which its resource allocation profile resembles or differs from the profiles of the other businesses in the corporation. We argue that business lines are most efficient and profitable when their resource allocation patterns are highly similar to those of the parent's other businesses, a condition we term resource congruence. The results show that the more closely LB is aligned with its parent's dominant logic-that is, the more congruent it is-the better it performs and the lower its costs relative to competitor LBs in the focal LB's industry. Improved performance and cost are not found when a LB is embedded within similar two-digit standard industrial codes (SICs) as those of other LBs within its parent's portfolio. Even though the SIC classification system has been used as a measure of 'output' relatedness based on similarity of product and customer market characteristics, the results suggest that resource congruence (and resource-based views of the firm) are better predictor of synergies and competitive advantage at the business level than is output relatedness. We also suggest that theories of managerial capability, dominant logic, and monitoring can explain our discovery of spillover and congruence effects that are not explained by economies of scope or resource sharing-based explanations alone. Copyright © 2004 John Wiley & Sons, Ltd.

Suggested Citation

  • Richard A. D'Aveni & David J. Ravenscraft & Philip Anderson, 2004. "From corporate strategy to business-level advantage: Relatedness as resource congruence," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 25(6-7), pages 365-381.
  • Handle: RePEc:wly:mgtdec:v:25:y:2004:i:6-7:p:365-381
    DOI: 10.1002/mde.1196
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    References listed on IDEAS

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    1. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
    2. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    3. Vernon, John M & Graham, Daniel A, 1971. "Profitability of Monopolization by Vertical Integration," Journal of Political Economy, University of Chicago Press, vol. 79(4), pages 924-925, July-Aug..
    4. Jovanovic, B., 1993. "The Diversification of Production," Working Papers 93-11, C.V. Starr Center for Applied Economics, New York University.
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    Cited by:

    1. repec:gam:jsusta:v:10:y:2018:i:1:p:189-:d:126884 is not listed on IDEAS
    2. repec:spr:scient:v:86:y:2011:i:2:d:10.1007_s11192-010-0290-9 is not listed on IDEAS
    3. Andreas Bausch & Frithjof Pils, 2009. "Product diversification strategy and financial performance: meta-analytic evidence on causality and construct multidimensionality," Review of Managerial Science, Springer, vol. 3(3), pages 157-190, November.

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