Value-Enhancing Learning from Industry-wide Diversification Experience

Diversification is an important strategic decision and a rare event. By definition, when undertaking a new diversification, a firm will not have direct internal experience of the venture. In this regard, external experience of similar diversifications provides a valuable lesson pool for the focal manager. While there are many studies of internal learning in organizational learning literature, research on external learning is still scarce. This paper proposes a theoretical framework for external experiential learning and applies it to study the effect of industry experience on diversification value. We report the novel finding of a cubic relationship between external learning from industry experience and diversification value. This indicates that industry experience matters to the outcomes of strategic decisions, but that the effect of this external experience on learning is conditional upon certain characteristics of the experience: namely specificity and heterogeneity.