A Theory of Diversification

During the last decade there has been a repetitive imperative towards large enterprises: "focus on the core" from consulting firms, which is a precise recommendation to stick to the main business.
Theorists of strategic management, industrial organisation, evolutionary economics, and other fields of economic science have given various and convincing explanations to such a tendency.
Here it is worth noticing that explanations in terms of efficiency and profitability of ëcoherent-businessí firms do not set out -among others- the reasons why in the sixties the tendency of large enterprisesí strategies seemed to go in the opposite direction: conglomerate diversification. The purpose of this thesis is to provide the issue of diversification with a comprehensive theory.
By "comprehensive" I do not mean that the theory covers every detail but that it explains all types of diversification together, from geographical to conglomerate. However I will focus on geographical diversification and conglomerate diversification, since these have been explained to a lesser degree in economic science. The study is divided into two parts. Each part includes two chapters. The first part is an overview of the main explanations of diversification and a selection of relevant concept and definitions. In chapter 1 I do not face an easy task. I will try to show the structure of a puzzling list of numerous opinions about the diversificationís rationale. This is due to the fact that there is no common framework. The reading of "Corporate Diversification" by Cynthia Montgomery (1994) helped me shed a little light on this field of economic literature. Chapter 2 represents a link towards the theory. Here I will separate the relevant concepts and definitions arising from different points of view within an economic clause: the subject (very large firms), the object (capital concentration), the linking verb (diversifying). As for the subject, I shall define the very large firms (VLFs).
I will also provide such firms with an historical reference (Chandler 1997). With regard to the object I will show the significant merger waves of last century (Nelson 1959). As far as the linking verb is concerned, I will provide the diversification with three possible definitions (Gort 1962, Rumelt 1974, Salter 1979).
The second part is concerned with the theory. It now comes in useful to show some methodological points. In line with a mathematical approach, in chapter 3 I will provide the theory with a list of landmarks (like for the postulates in Euclidean geometry) wherein the theory can be assessed.
Then in chapter 4 I will divide the theory into two blocks, each of which is based on an assumption (as in the hypothesis). Therefore I shall show the reasoning (as in the demonstration) that leads to the desired conclusion (as in the thesis). Having looked at the methodology, we can continue the outlining of contents. In chapter 3 I will list six propositions that serve the purpose of giving a quick picture of the theory of VLFs (Leijonhufvud 1986, La Grassa 1996, Pagano and Rowthorn 1997).
In chapter 4 I will discuss the softening of the budget constraint (Kornai 1986) and the increasing returns (Leijonhufvud 1995, Arrow, Ng, and Yang 1999, Heal 1999). The former shows that many ex-post incentives to diversification can be grouped into the rationale of relaxing the budget constraint. The latter concerns the ex-ante rationale for VLFs to diversify. Therefore I will show at once the robust connection that exists between geographical and conglomerate diversification and the evident link to the reality. Finally I will discuss a few Strategic Management issues concerning the role of the top management. In the conclusion I will highlight the results and I will point out eventual developments of related topics. In addition to the final references, I will also write those relevant to each chapter, given that each chapter refers to quite different literature.