Exploring firm strategy using financial reports: performance impact of inward and outward relatedness with digitisation

A firm’s success critically hinges on its strategies in selecting its portfolio of products and services. In this paper, we study how differentiation and market alignment at the offering level impact firm performance. To that end, we mine firms’ 10-K filings to characterise the portfolio of offerings through the lens of outward relatedness, inward relatedness, and digitisation. We define outward relatedness as a measure of alignment of firm offerings within its market space, inward relatedness as a measure of differentiation of firm offerings with its own past offerings, and digitisation as a measure of the firm’s focus on IT. We find that markets react positively to firms that operate with high levels of outward relatedness, low levels of inward relatedness and high levels of digitisation. However, we find that highly digitised firms do not have to conform to peers’ offerings. Digitisation enables these firms to differentiate by internally diversifying their offerings. Interestingly, our results show that only firms already highly digitised benefit from further digitisation.