Within-industry diversification and firm performance-an S-shaped hypothesis

Abstract

This study shows that the interplay between “adjustment costs”, “coordination costs” and within-industry diversification benefits, results in an S-shaped relationship between within-industry diversification and firm performance. At low levels of within-industry diversification, coordination costs are negligible but “adjustment costs” are higher than the synergy benefits of a limited product scope, hence leading to negative performance outcomes. At moderate levels of within-industry diversification synergies between related product categories substantially increase and outweigh the rise in adjustment and coordination costs, resulting in positive performance outcomes. Yet, extensive within-industry diversification gives rise to considerable coordination costs, which, coupled with adjustment costs, outweigh synergy effects and hamper performance. The study further shows that a greater change rate of within-industry diversification results in negative performance outcomes. Copyright © 2014 John Wiley & Sons, Ltd.