Direct estimation of synergy: a new approach to the diversity-performance debate

This study examines the linkages between relatedness and synergy in the context of diversification among U.S. pharmaceutical firms for the period 1960--1980. Rather than assume (as in the entropy, Herfindahl and concentric indices of diversification) that the levels of synergy generated by different related combinations of business units are identical, we estimate synergy directly using a modified version of the concentric index. In addition to estimating synergy using capital market performance of the firm as a whole, we examine the effects of nondrug diversification on the innovative productivity of firms' pharmaceutical divisions alone. Our two main findings are that production relatedness, such as that between drugs and chemicals, in fact did not imply synergy over the period of our study; and that the patterns of synergy for different types of relatedness shifted over time with the industry life cycle.

[1]  L. G. Thomas.  Regulation and Firm Size: FDA Impacts on Innovation , 1990 .

[2]  Budget,et al.  Standard Industrial Classification Manual , 1987 .

[3]  P. Rajan Varadarajan,et al.  Diversification and Measures of Performance: Additional Empirical Evidence , 1987 .

[4]  D Schwartzman.  "Innovation in the Pharmaceutical Industry". , 1978, British medical journal.

[5]  C. H. Berry.  Corporate diversification and market structure , 1974 .

[6]  K. Palepu.  Diversification strategy, profit performance and the entropy measure , 1985 .

[7]  Gareth R. Jones,et al.  Transaction cost analysis of strategy‐structure choice , 1988 .

[8]  John T. Scott,et al.  Competition in an Open Economy: A Model Applied to Canada , 1980 .

[9]  K. N. M. Dundas,et al.  Corporate strategy and the concept of market failure , 1980 .

[10]  A. Trimble,et al.  New drug development by United States pharmaceutical firms: With analyses of trends in the acquisition and origin of drug candidates, 1963–1979 * , 1982, Clinical pharmacology and therapeutics.

[11]  Raphael Amit,et al.  Diversification strategies, business cycles and economic performance , 1988 .

[12]  Cynthia A. Montgomery,et al.  Diversification, Ricardian rents, and Tobin's q , 1988 .

[13]  Frederic M. Scherer,et al.  Mergers, sell-offs, and economic efficiency , 1987 .

[14]  Cynthia A. Montgomery,et al.  The Measurement of Firm Diversification: Some New Empirical Evidence , 1982 .

[15]  M. Salinger.  Tobin's q, Unionization, and the Concentration-Profits Relationship , 1984 .

[16]  H. Grabowski,et al.  Estimating the Effects of Regulation on Innovation: An International Comparative Analysis of the Pharmaceutical Industry , 1978, The Journal of Law and Economics.

[17]  Robert M. Grant,et al.  Performance differences between the wrigley/rumelt strategic categories , 1988 .

[18]  H. Ansoff.  Corporate strategy : an analytic approach to business policy for growth and expansion , 1965 .

[19]  Richard Reed,et al.  Diversification: The growing confusion , 1986 .

[20]  R. Rumelt.  Strategy, structure, and economic performance , 1974 .

[21]  A. Jacquemin,et al.  Entropy Measure of Diversification and Corporate Growth , 1979 .

[22]  M. Porter.  From Competitive Advantage to Corporate Strategy , 1989 .

[23]  Allen Michel,et al.  Does Business Diversification Affect Performance , 1984 .

[24]  Howard Thomas,et al.  DIVERSITY, DIVERSIFICATION, AND PROFITABILITY AMONG BRITISH MANUFACTURING COMPANIES, 1972-84 , 1988 .

[25]  L. Vogel,et al.  Strategy and Structure , 1986 .

[26]  S. Sitkin,et al.  Corporate Acquisitions: A Process Perspective , 1986 .

[27]  R. Reed,et al.  Diversification in British industry in the 1970s , 1982 .

[28]  W. S. Comanor,et al.  The political economy of the pharmaceutical industry. , 1986, Journal of economic literature.