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.

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