Within-industry Diversification Research Articles

Looking for complementarities. Within-industry diversification and geographic diversification of Venture Capital Firms

ABSTRACT Research on Venture Capitalists' (VCs) industrial diversification is supplemented with the notion of diversification along an industry’s value chain. VCs are hypothesized to create a portfolio of complementary investments along the value chain, accompanied by low geographic diversification. Further, VCs specializing in an industry with network externalities are predicted to devote relatively more investments to this industry, followed by an increased propensity for diversification along the value chain. This, subsequently, will result in less geographic diversification. The hypotheses are supported through a study on VCs in the US and Europe. Contributions to the literature on VCs, diversification, geographic agglomeration and network effects are discussed.

The impact of within-industry diversification on firm performance

PurposeThe purpose of this paper is to investigate how within-industry diversification affects the financial performance of small- and medium-sized enterprises (SMEs) in emerging markets (EMs). The authors draw on both the resource-based view and the institutional perspective and argue that within-industry diversification can enhance the financial performance of SMEs in EMs. Due to institutional voids in emerging economies, SMEs can gain additional benefits from scope economies, as well as from market returns, by filling product market voids and gaps in business ecosystems, while also enjoying low input and labor costs that reduce the coordination costs of diversification. This, in turn, enhances benefits of within-industry diversification, thereby resulting in higher financial profitability.Design/methodology/approachThis study employs panel data econometrics to estimate the model. The authors test hypotheses on 195 firms, originating from five countries in Southeast Asia, during the period of 2009–2014.FindingsThe empirical results support the arguments. Within-industry diversification has a positive impact on the performance of SMEs in EMs. These effects become weaker when the institutional contexts are more developed. Nevertheless, such effects become stronger when SMEs in EMs are more efficient.Research limitations/implicationsThe relationship between within-industry diversification and performance is a positive linear pattern, which differs from the pattern in advanced economies. In addition to unrelated diversification, the related diversification is preferable for firms in EMs.Practical implicationsThe paper provides implications for SMEs that aim to enhance their performance by engaging in single product lines and within-industry diversification.Originality/valueThis paper examines the different ways within-industry diversification can enhance SMEs performance in EM contexts.

Sources of transfer problems in within-industry diversification

This research examines how firms’ accumulation of experience in other markets within an industry causes transfer problems and limits the performance advantage of within-industry diversification. Using data on the Japanese nonlife insurance industry between 1907 and 1940, we demonstrate that a firm’s performance in a focal market decreases with more experience in other markets (i.e., nonfocal markets). This cumulative nonfocal market experience causes managers to transfer preexisting routines extensively and inappropriately to the focal market. We show that the negative effect deteriorates when the firms have already entered such nonfocal markets prior to their entry into the focal markets, and such nonfocal markets are populated by performance-comparable peers. We also find that the negative effect increases when firms transfer knowledge from nonfocal markets in which the focal market has low realized financial synergies, and when firms’ experience prior to entry into the focal market was successful. These findings explicate mechanisms by which negative performance effects of within-industry diversification occur, and advance our understanding of within-industry diversification by applying the idea of transfer problems from the literature on organizational learning.

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

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.

‘Diversification: Performance turnaround’ (A case of Sarvodaya Hospitals)

Diversification is a strategic decision that management practises to improve its firm's performance. It continues to be an important strategy for a sustainable corporate growth. Corporate diversification has been found to have a curvilinear relation with the corporate performance, i.e. related diversified firms outperform unrelated diversified firms and single business firms. Substantiating this concept, the primary purpose of this study is to examine the role of related or with-in industry diversification in the firm's growth. This study shows that diversification has positive impact on financial and organizational performance of Sarvodaya Hospital.

Trade-off between Types of Experience and the Role of Learning Trajectories in New Niche Entry

Recent studies on within-industry diversification - a firm’s presence in more than one market niche within an industry - have started to unpack diversification and performance relationship inside a...

Open innovation and within-industry diversification in small and medium enterprises: The case of open source software firms

This paper examines the within-industry diversification of software small and medium enterprises that collaborate with the open source software community (OSS SMEs). In doing so, it offers new insights into the association between open innovation and diversification. We rely on arguments inspired by the literature and evidence collected through interviews with OSS SMEs’ top managers to investigate factors that favor or hinder within-industry diversification. First, in line with the mainstream diversification literature, we focus attention on the role of firm size. Second, in the spirit of the open innovation research, we concentrate on the mechanisms that OSS SMEs put in place to get access to the external resources of the OSS community. Econometric evidence on 100 European OSS SMEs shows that firm size is negatively associated to within-industry diversification, while OSS SMEs that have contributed to a larger number of OSS projects have a more diversified portfolio of software products. Furthermore, we provide preliminary evidence that the practice of authorizing firm programmers to contribute autonomously to OSS projects of their own choice during working hours may be positively associated to within-industry diversification only if OSS SMEs possess adequate internal technological resources.

Effects of within-industry diversification and related diversification strategies on firm performance

The major objective of this study was to investigate the effects of within-industry diversification and related diversification on short and long-run firm performance in the restaurant industry. Accordingly, this study decomposed Jacquemin and Berry's (1979) traditional related diversification entropy into within-industry diversification entropy and pure related diversification entropy. Further, this study examined the interaction effect of within-industry and related diversification strategies on firm performance. The results of this study suggested that in the short-run within-industry diversification strategies have a negative impact on firm profitability but no significant effect on sales growth. However, the long-run effect of within-industry diversification was significantly positive in terms of profitability but not sales growth. This study also showed that related diversification strategies had a positive and significant effect on profitability in the short-run, which turned negative and significant in the long-run. Further, the interaction model indicated that when the two strategies are simultaneously carried out synergy is quickly realized because efficiency is enhanced. A more detailed discussion of the results is provided in the main body of this paper.

WITHIN-INDUSTRY DIVERSIFICATION AND FIRM PERFORMANCE: SYNERGY CREATION AND CAPABILITY DEVELOPMENT

Different from previous literature on cross-industry diversification, this study investigates the performance implications of multiunit firms' related and unrelated diversification behavior within a single industry. In addition, the study contributes to the literature by examining performance implications of firms' dynamic development of capabilities based on their accumulated diversification experience. Drawing from the resource-based view of diversification, I conceptualize related within-industry diversification based on the resource overlap of operating units and test performance outcomes using a unique dataset of the world's leading retail firms' unit (i.e., retail format) diversification behavior over thirteen years (from 1997 to 2009). Results show that profits first decrease at low levels of relatedness and then increase at an increasingly higher level as corporate parents focus stronger on related within-industry diversification. Moreover, I find suggestive evidence that unrelated within-industry diversification has a negative effect on profits. In contrast to profits, both related and unrelated within-industry diversification increase a parent firm's sales-based market share in the following year. Finally, the study indicates that especially related diversifiers who exceed a distinct (minimum) level of related within-industry diversification are able to develop capabilities over time that lead to superior firm performance. Specifically, the complementary effects of high degrees of related within-industry diversification in combination with longer experience with related diversification enable corporate parents to outperform competition.

Within-Industry Diversification and Firm Performance in the Presence of Network Externalities: Evidence From the Software Industry

In the presence of network externalities, complementary related diversification strategies in production and consumption can be critical for achieving positive returns to within-industry diversific...

The Impact of Property Type Diversification on REIT Liquidity

Executive Summary. This paper examines the degree to which property type diversification affects the liquidity of the market for real estate investment trusts. The findings reveal that investments in financial assets are correlated with higher spreads, effective spreads, and trading volumes. The findings also reveal that underlying property types affect liquidity measures. Generally, more volatile underlying property types are reflected in larger spreads, effective spreads, and adverse selection measures. Diversification across either the mortgage equity or property type spectrum is accompanied by reduced liquidity, a result at odds with diversification studies that examine diversification across SIC codes. The evidence suggests that withinindustry diversification may denote the existence of hard-to-value managerial redeployment options, which are difficult to value and are penalized by the market in the form of reduced market liquidity.

PERFORMANCE EFFECTS OF DIVERSIFICATION WITHIN THE SOFTWARE INDUSTRY: INDEPENDENT AND JOINT EFFECTS OF PRODUCTION-SIDE AND CONSUMPTION-SIDE SYNERGIES.

Despite the prevalence of the within-industry diversification phenomenon, very little is known about how within-industry diversification creates or destroys value. This study seeks to inform this question by studying performance implications of diversification within the software industry. Software firms can exploit production-side synergies by developing products for related operating system platforms. They can also exploit consumption-side synergies by serving the multiple needs of the same customers with a suite of related products. In the software industry, there are strong complementarities between the production-side and consumptions-side synergies. Thus, firm performance depends not only on the two types of synergies but also on their interaction. Due to the complementarities, absence or weakness along one type of synergy could diminish the value of the other type of synergy, and negatively influence the overall firm performance. The study finds empirical support for these hypotheses in a sample of about 1200 software firms over a period of 13 years (1990-2002). Implications for theory and practice are discussed.

Corporate Growth and Diversification

Corporate Growth and Diversification