The Role of Corporate Diversification in Resource Allocation Adjustments of Multi-Business Firms

Abstract

Resource allocation is fundamental to both strategic management scholarship and business practice. While a major research stream in strategy has generated a well-developed understanding of the link between resource allocation and firm performance, we are yet struggling to understand why certain firms allocate their resources more dynamically – i.e., they adjust their allocations very strongly over time – while other firms keep their allocations quite persistent. Drawing on the concept of private information, we develop and test theory in order to address this puzzle in the literature. Results from our study indicate that those firms that are less diversified act more dynamically in terms of adjusting their resource allocation. In addition, our findings suggest that several critical factors related to the main stages of the process of utilizing private information moderate the diversification level–resource adjustment relationship, allowing highly diversified firms to reduce their agility disadvantages.