Related diversification by service businesses: Types of relatedness, potential economies, and organizational costs.

Abstract

Under what circumstances is it more advantageous for a diversified service firm to share resources among businesses compared to sharing clients without sharing any resources among businesses? This dissertation argues that resource-based diversification by service businesses is always an inferior strategy compared to client-based diversification. Further, the relative advantage of the latter over the former is even greater when services high on experience qualities are involved. This result was obtained based on the premise that potential economies from relatedness are not automatically realized, and that explicit consideration of the organizational costs and impediments associated with attempts to exploit each type of relatedness is required in order to arrive at the net benefit from adopting any related diversification strategy. It is also shown that there exist different minimum organizational cost variations of the multidivisional structure concomitant with different types of relatedness. Departing from previous work on diversification, this research used primary data, collected via questionnaire, on realized relatedness among the businesses of diversified service firms and obtained unequivocal support for the theory developed here. Based on the results obtained, it is concluded that previous studies on the diversification-performance relationship may benefit from a reexamination based on the theory developed here. Also, it is established that service firms need not eschew strategies of diversification as some have suggested. Finally, it is suggested that diversified service firms ought to examine the bases of diversification they have adopted in order to see whether or not opportunities for client-based diversification have been fully exploited and whether any existing resource-based diversification is yielding net benefits.