Mapping a sector's scope transformation and the value of following the evolving core

Nicola Cetorelli, Michael G. Jacobides and Samuel Stern

Strategic Management Journal, 2021, vol. 42, issue 12, 2294-2327

Abstract: Research Summary A surprisingly neglected facet of sector evolution is the evolutionary analysis of firms', and thus a sector's, scope. Defining a sector as a group of firms that can change their scope over time, we study the transformation of U.S. banking firms. We undertake a sectoral, population‐wide study of business‐scope transformation, with particular focus on which segments banks expand into. As financial intermediation evolved, a continuously shifting set of activities became associated with “core banking,” with scope changing and relatedness itself (measured through coincidence) evolving over the banking sector's history. Banks that expand scope while staying close to this evolving core attain net performance benefits. Identification tests show that the benefits of following the evolving core are robust to endogeneity. Managerial Summary When does it pay to diversify into new segments? Our study looks at the transformation of U.S. banking firms from 1992 to 2006. Drawing on the full population of banks, we show that, as financial intermediation evolved, a continuously shifting set of activities became associated with “core banking.” Bank Holding Companies expanded their scope on aggregate, moving in and out of new segments. We find that while entry into new segments is negatively associated with performance improvement, diversification into this evolving core of activities is positively associated with performance improvement. This redefines “related diversification” and its positive value, showing relatedness changes over time, as a function of the evolution of the sector. We find that our results are robust to selection.

Date: 2021
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https://doi.org/10.1002/smj.3274

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Working Paper: Mapping a Sector’s Scope Transformation and the Value of Following the Evolving Core (2021)
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