Management Attitudes, Learning and Scale in Successful Diversification: A Dynamic and Behavioural Resource System View

  • J. D. W. Morecroft
Part of the OR Essentials book series (ORESS)


The paper presents a system dynamics model to examine an enduring puzzle of corporate strategy. Why do extensive empirical studies continue to show a weak relationship between diversification and performance, despite persuasive arguments suggesting performance should improve? And why do well-intentioned executives seemingly turn a blind eye to the available empirical and anecdotal evidence that diversification rarely pays-off? Some diversification strategies go seriously wrong. Could it be that researchers and executives are misled by the complexity of dynamic multi-business investment decisions? The model draws on case material describing Goodyear’s move out of its core tyre business into oil and gas in the late 1980s. Two versions of the model compare the fortunes and performance of hypothetical twin firms, FocusCo and DiversiCo, each facing an identical downturn in their traditional core business, and starting with identical levels of strategic resources. FocusCo invests strictly in its core business while DiversiCo has the option to invest in non-core business if managers view the performance of the core to be unsatisfactory. Simulations show how DiversiCo’s success (relative to FocusCo) depends both on business fundamentals (real profitability and relative scale of the core and non-core) and behavioural traits of typical corporate investment policy covering target setting, managers’ expectations, limited foresight, prior beliefs, optimism, confidence and learning style. There are some surprises such as the very long time delay in recognising clear winners, and counterproductive effects on performance of seemingly positive traits such as optimism and fast learning. The paper ends with comments on the implications of the results for practice and research.


Core business Corporate policy Diversification Dynamic resource system Multi-business investment decisions Portfolio management Resource-based view System dynamics Simulation 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. 1.
    Markides CC and Williamson PJ (1994). Related diversification, core competencies and corporate performance, Strat Mgmt J 15: 149–165.CrossRefGoogle Scholar
  2. 2.
    Robins J and Wiersema MF (1995). A resource based approach to the multi-business firm: empirical analysis of portfolio interrelationships and corporate financial performance, Strat Mgmt J 16: 277–299.CrossRefGoogle Scholar
  3. 3.
    Penrose E (1959). The Theory of the Growth of the Firm. London: Basil Blackwell.Google Scholar
  4. 4.
    Sterman JD (1989). Modeling managerial behavior: misperceptions of feedback in a dynamic decision making experiment, Mgmt Sci 35: 321–339.CrossRefGoogle Scholar
  5. 5.
    Ginsberg A (1995). Transformation of the US tyre industry and Goodyear on the skids, case studies, Stern School of Business: New York University.Google Scholar
  6. 6.
    Ginsberg A and Morecroft JDW (1997). Weaving feedback systems thinking into the case method: an application to corporate strategy, Mgmt Learning 28: 455–473.CrossRefGoogle Scholar
  7. 7.
    Forrester JW (1961). Industrial Dynamics. Portland, OR: Productivity Press (originally published by MIT Press, Cambridge MA).Google Scholar
  8. 8.
    Forrester JW (1992). Policies, decisions and information sources for modeling, Eur J Opl Res 59: 42–63.CrossRefGoogle Scholar
  9. 9.
    Morecroft JDW and Hines JH (1986). Strategy and the representation of structure. Working Paper WP-1721-85. Revised April 1986, MIT Sloan School of Management, Cambridge MA.Google Scholar
  10. 10.
    Warren KD and Langley PA (1999). The effective communication of system dynamics to improve insight and learning in management education, J Opl Res Soc 50: 396–404.CrossRefGoogle Scholar
  11. 11.
    Wernerfelt B (1984). A resource-based view of the firm, Strat Mgmt J 5: 171–181.CrossRefGoogle Scholar
  12. 12.
    Dierickx I and Cool K (1989). Asset stock accumulation and sustainability of competitive advantage, Mgmt Sci 35: 15041511.Google Scholar
  13. 13.
    Barney J (1991). Firm resources and sustained competitive advantage, J Mgmt 17: 99–120.Google Scholar
  14. 14.
    Warren KD (1996). The dynamics of building resources for competitive advantage, Financial Times, ‘Mastering Management’, issue 17, March 1996.Google Scholar
  15. 15.
    Warren KD (2000). Competitive Strategy Dynamics. Chichester: Wiley (forthcoming).Google Scholar
  16. 16.
    Prahalad CK and Bettis RA (1986). The dominant logic: a new linkage between diversity and performance, Strat Mgmt J 7: 485–501.CrossRefGoogle Scholar
  17. 17.
    Merten PP (1991). Loop-based strategic decision support systems, Strat Mgmt J 12: 371–386.CrossRefGoogle Scholar
  18. 18.
    Merten PP, Loffler R and Wiedman KP (1987). Portfolio simulation: a tool to support strategic management, System Dynamics Review 3: 81–101.CrossRefGoogle Scholar

Copyright information

© The Author(s) 2018

Authors and Affiliations

  • J. D. W. Morecroft
    • 1
  1. 1.London Business SchoolLondonUK

Personalised recommendations