Synergy, coordination costs, and diversification choices

Abstract

Sharing common inputs across business lines can potentially generate synergy that justifies related diversification. The pursuit of such synergy through diversification is, however, fundamentally driven by the indivisibility of inputs between firms. Following Penrose's insight, I argue that to realize this synergy, a firm needs to actively manage the interdependencies between different business lines, which, in turn, increases its coordination costs. The coordination costs may increase faster than synergy and set a limit to related diversification. This is particularly salient when the firm's existing business lines already have complex interdependencies among them. I test these arguments on a dataset of U.S. equipment manufacturers for the period 1993 to 2003. The results show that a firm is more likely to diversify into a new business when its existing business lines can potentially share more inputs with the new business; however, the firm is less likely to diversify into any new business when its existing business lines are complex. Importantly, the 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. These results suggest that increasing coordination costs counterbalance the potential synergistic benefits associated with related diversification. Copyright © 2010 John Wiley & Sons, Ltd.

Organizational Constraints to Adaptation: Intrafirm Asymmetry in the Locus of Coordination

“…The consequence of this is that changing external conditions will then create the need for possible adjustments (e.g., Gulati et al 2005) as misalignment vis-à-vis the new environment imposes costs on the organization (e.g., Rawley 2010, Zhou 2011. The new postshock conditions impel the organization to ensure effective coordination of knowledge and information, with the central question being whether the change (preshock to postshock) in the nature of uncertainty faced by the organization, which Galbraith (1977, pp.…”

“…Recall that this particular case of coordination is akin to product bundling, in which the firm engages multiple distinct product areas to serve a single customer. Synergies across product markets (e.g., via economies of scope) are likely to be a key driver for such an organizational form (Hill and Hoskisson 1987, Rawley 2010, Zhou 2011, Kumar 2013; realizing the associated benefits involves multiple product areas working in concert with one another across a range of activities such as shared procurement, joint marketing, and distribution. Because a demand shock involves changes in multiple markets, however, the interdependencies cross organizational modules; in the context of a demand shock, this would likely 223 reduce the decomposability of the system, making coordinated activity more difficult.…”

Cross-listing and the scope of the firm

“…The additional economic benefits of the last unit of growth (such as the latest cross-listing) can be defined as marginal economic benefits (MEB). 9 The additional bureaucratic costs (such as the necessity to coordinate on a larger scale and hire additional accountants to satisfy cross-listing requirements) can be viewed as marginal bureaucratic costs (MBC) (Rawley, 2010;Zhou, 2010). Consequently, the product scope of the firm "is determined by a comparison of MEB and MBC" (Peng et al, 2005: 625).…”

Desempenho de Empresas Diversificadas: Evidências da Indústria de Transporte Aéreo dos Estados Unidos

“…No entanto, a literatura recente de estratégia tem sinalizado que a variabilidade no desempenho não é decorrente do tipo de estratégia em si, mas dos mecanismos e das implicações associadas a cada tipo de estratégia (Hashai, 2015). Zhou (2011), por exemplo, identificou que a similaridade de insumos entre o negócio principal e um novo negócio aumenta a probabilidade de a firma se inserir neste novo negócio. Além disso, Kumar (2013) observou que o negócio principal exerce influência sobre os demais negócios e que isso tem um impacto negativo na produtividade dos demais negócios relacionados de modo que os subsídios fornecidos ao negócio principal podem ser importantes fontes de ineficiência para a corporação.…”