Business relatedness measurements: State‐of‐the‐art and a proposal

Abstract

Purpose

The purpose of this paper is to extend understanding of business relatedness, a concept that is central to diversification issues. These questions are put forward: What characterizes existing types of measurements of business relatedness? What are the weaknesses of these types? What would be the features of a model for measurement of business relatedness?

Design/methodology/approach

As relatedness concerns specific business attributes, common attributes used in measurements are presented. A review of previous studies on types of measurements of business relatedness (codes or indices, researcher assessments and managerial perceptions) is followed by a discussion on correlations between perceptual and objective measurements.

Findings

The review shows that application of standard industrial classification codes/indices and researcher assessments suffer from weak content validity of the measurements, and underestimation of the multidimensionality of the construct. Use of managerial perceptions needs to address the uncertainty inherent in managerial self‐assessments; previous research has found a major divergence between perceptual and objective measurements.

Practical implications

A model is proposed for the measurement of business relatedness using perceptual data. It is stressed that the context of the comparisons (i.e. reason for comparison and units to be compared) has a major influence on the outcomes. Business attributes to be subjectively compared by managers are those that have been singled out as important for financial performance.

Originality/value

The paper is unique as it represents a continuation of the most recent research on measurement of business relatedness, i.e. those measurements that are based on managerial perceptions. Another key value is that the review of research leads to a measurement model.

Citation

Pehrsson, A. (2006), "Business relatedness measurements: State‐of‐the‐art and a proposal", European Business Review, Vol. 18 No. 5, pp. 350-363. https://doi.org/10.1108/09555340610686949