Synergy, coordination costs, and diversification choices
Zhou (2011)
- US equipment manufacturers > 300 employees and 10 million revenue
- Focus on coordination costs of related diversification
- Logistic regression
Related diversification / diversification entry = whether a firm diversified from its primary industry
into a related industry (to pursuit synergy/input sharing)
Complexity = percentage of segment pairs in a firm’s portfolio that supplied significant inputs to one
another (=source of coordination costs)
Input similarity = the degree to which a firm’s primary industry shares physical inputs with a target
industry (=source of synergy)
Coordination = ongoing process of making joint decisions and investments to generate, maintain and
exploit synergy
Assumption:
(+) Diversification Potential for scope economy + utilize technical and
Input similarity into a new managerial knowledge = synergy
business
H1:
A firm is less likely to diversify into a new business when its existing business lines are more complex
Complexity of (-) Diversification Likely to see marginal coordination costs surpass the
existing business into a new marginal synergetic benefits
lines (=source) business
H2:
A firm’s likelihood of diversifying into a new business decreases more with the complexity in the
firm’s existing business lines if they share more inputs with the new business
Input similarity Interdependencies are increasing coordination that
(=source) counter balance the potential synergetic benefits
(+) - Communication
Complexity of (-) Diversification - Information processing
existing business into a new - Joint decision making
lines (=source) business
,Coordination costs are thus an important explanation for limits to related diversification independent
of existing explanations such as risk pooling, agency and imitation
Note that a firm cannot keep diversifying due to a coordination capacity (standardizing or
outsourcing may free up space)
Firm specific capabilities may offset limitation of coordination costs
Firm specific capabilities can be obtained through:
- Acquiring managerial expertise
- Development of knowledge and routines
- Adaptation of organizational structure
Related diversification (input sharing) is more costly to coordinate than unrelated diversification
, Intra-industry diversification and firm performance
Zahavi & Lavie (2013)
- US-based firms in pre-packaged software industry
- Archival data + press release on product introduction announcements
Intra-industry diversification = diversifying to related product lines (markets) within industry
boundaries = degree of variation in a firm’s portfolio of related products in a particular industry
Economies of scope reach a boundary condition at low level intra-industry product diversity
- Benefits of sharing resources across related products is less if product do not offer customers
complementary value
- Negative transfer: learned behaviour generates negative consequences (hard to distinguish
and manage) when applied in a slightly different context (illusion of control and
overconfidence)
Vice versa in high level of intra-industry product diversity
Diversity measures: Herfindahl diversity measure / index + Concentric measure / index measure
for economies of scope and negative transfer
H1:
Firm performance will exhibit a U-shaped association with intra-industry product diversity, so that
performance will initially decrease and then increase with the extent of such diversity
(U-shape) Firm
Intra-industry
performance
Firm diversity
product performance
(sales growth)
Negative transfer is likely to occur with low levels of
intra industry diversity because products are hard to
distinguish
Economies of scope increase with high levels of intra
industry diversity because reuse of resources
materialize and complementarity of products
increase firm’s value proposition
Intra-industry product diversity
Zhou (2011)
- US equipment manufacturers > 300 employees and 10 million revenue
- Focus on coordination costs of related diversification
- Logistic regression
Related diversification / diversification entry = whether a firm diversified from its primary industry
into a related industry (to pursuit synergy/input sharing)
Complexity = percentage of segment pairs in a firm’s portfolio that supplied significant inputs to one
another (=source of coordination costs)
Input similarity = the degree to which a firm’s primary industry shares physical inputs with a target
industry (=source of synergy)
Coordination = ongoing process of making joint decisions and investments to generate, maintain and
exploit synergy
Assumption:
(+) Diversification Potential for scope economy + utilize technical and
Input similarity into a new managerial knowledge = synergy
business
H1:
A firm is less likely to diversify into a new business when its existing business lines are more complex
Complexity of (-) Diversification Likely to see marginal coordination costs surpass the
existing business into a new marginal synergetic benefits
lines (=source) business
H2:
A firm’s likelihood of diversifying into a new business decreases more with the complexity in the
firm’s existing business lines if they share more inputs with the new business
Input similarity Interdependencies are increasing coordination that
(=source) counter balance the potential synergetic benefits
(+) - Communication
Complexity of (-) Diversification - Information processing
existing business into a new - Joint decision making
lines (=source) business
,Coordination costs are thus an important explanation for limits to related diversification independent
of existing explanations such as risk pooling, agency and imitation
Note that a firm cannot keep diversifying due to a coordination capacity (standardizing or
outsourcing may free up space)
Firm specific capabilities may offset limitation of coordination costs
Firm specific capabilities can be obtained through:
- Acquiring managerial expertise
- Development of knowledge and routines
- Adaptation of organizational structure
Related diversification (input sharing) is more costly to coordinate than unrelated diversification
, Intra-industry diversification and firm performance
Zahavi & Lavie (2013)
- US-based firms in pre-packaged software industry
- Archival data + press release on product introduction announcements
Intra-industry diversification = diversifying to related product lines (markets) within industry
boundaries = degree of variation in a firm’s portfolio of related products in a particular industry
Economies of scope reach a boundary condition at low level intra-industry product diversity
- Benefits of sharing resources across related products is less if product do not offer customers
complementary value
- Negative transfer: learned behaviour generates negative consequences (hard to distinguish
and manage) when applied in a slightly different context (illusion of control and
overconfidence)
Vice versa in high level of intra-industry product diversity
Diversity measures: Herfindahl diversity measure / index + Concentric measure / index measure
for economies of scope and negative transfer
H1:
Firm performance will exhibit a U-shaped association with intra-industry product diversity, so that
performance will initially decrease and then increase with the extent of such diversity
(U-shape) Firm
Intra-industry
performance
Firm diversity
product performance
(sales growth)
Negative transfer is likely to occur with low levels of
intra industry diversity because products are hard to
distinguish
Economies of scope increase with high levels of intra
industry diversity because reuse of resources
materialize and complementarity of products
increase firm’s value proposition
Intra-industry product diversity
