Competence-based Diversification Vittorio Chiesa and Raffaella Manzini zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA An Internal Perspective Approach to Diversification The process of diversification within firms has received much attention in the business literature. Various branches of economic and strategic thinking have included diversification among the principal items of their theories, recognizing its influence on the growth, performance and competitive advantage of firms. Ramanujam and Varadarajan’ give an inter- esting and helpful overview on how different streams of thought have investigated the concept and process of diversification, pointing out their different per- spect ives. In the literature, the process of diversification has been analysed from two main points of view: 1. a perspective external to the firm, which focuses on the markets/ businesses/ industries entered, the prod- uctsiservices offered and the clients/ geographical areas served; 2. an internal perspective which focuses on specific factors within the firm which affect (and are affected by) the process of diversification, i.e on the internal determinants and the main internal chan- ges implied. In this sense, the attention shifts from the output variables to the input and state variables of the diversifying firm, seen as a dynamic system,’ and to the relationships between diversification pro- cess and tangible and intangible resources of the firm. In this article, starting from an analysis of the con- tributions to the resource-based, competence-based and evolutionary theories (which have focused on diversification from an internal perspective), a frame- work for interpreting the diversification process is proposed. The theoretical basis is provided by a pre- vious work of the authors, in which the concept of competence is analysed.3 A classification is proposed of different patterns of diversification, based on the specific resources and capabilities which are exploited by firms through diversification. The frame- work also helps to investigate, in a dynamic perspec- tive, the intrinsic coherence and continuity of the ‘trajectory’ of diversification followed by firms over time. The article consists of four sections: in the first section the theoretical basis is put forward; in the second section internal determinants and sources of diversification are analysed; the third section shows the diversification process classification and its use in a dynamic perspective; in the fourth section mana- gerial implications are discussed. The Theoretical Base of the Framework Suggestions from the literature are here integrated in a framework presented in a previous work,3 which analyses the different levels of competencies existing within firms and how they interact with each other in Pergamon PII:SOO24-6301(96)00113-6 Long Range Planning, Vol. 30, No. 2, pp. 209 to 217, 1997 0 1997 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0024~6301/ 97 $17.00+0.00