Academic journal article Journal of Business Economics and Management

A Resource-Based Perspective on the Relationship between Service Diversification and Firm Performance: Evidence from Italian Facility Management Firms

Academic journal article Journal of Business Economics and Management

A Resource-Based Perspective on the Relationship between Service Diversification and Firm Performance: Evidence from Italian Facility Management Firms

Article excerpt

1. Introduction

The relationship between business diversification and the firm's economic performance has become a particularly prominent issue in the strategic management literature with the development of the resource-based view of the firm. Resource-based theory argues that shared strategic assets or resources within corporate portfolios are critical to firm performance, and corporate strategy relies upon scope economies of that type among businesses (Peteraf 1993). However, possessing valuable and inimitable resources in a business portfolio is a necessary but insufficient condition to achieve a competitive advantage. Those valuable resources must also be managed effectively to increase performances (Barney, Arikan 2001; Dhaoui 2008; Sirmon et al. 2007).

By borrowing from the resource-based theory, authors in the strategic management literature seem to have found a general consensus about the performance implications of business diversification, where a 'business' may refer both to a product (product diversification) or a geographic area in which the firm is operative (international diversification). In particular, when examining financial performance indicators, most of empirical studies have shown that business diversification is positive for firms only up to a certain point. Past a certain level diversification seems to cause performance problems (Hitt et al. 1997; Palich et al. 2000). The reasons for this curvilinear inverted U-shape relationship can be synthesized as follows. A firm must coordinate different businesses if it is to capture economies of scale and scope and the advantages of diversification. When business diversification is limited, most firms are able to manage their resources efficiently and achieve several positive outcomes from them. However, this becomes increasingly complex when the portfolio includes many businesses. Managerial complexity increases because each product represents a unique mixture of competitive structures, customers and resources. Therefore, moderate levels of business diversification may present the optimal balance of the costs and benefits.

Although a general theoretical and empirical consensus has been found about the performance implications of product and international diversification strategies (Palich et al. 2000), less is understood about the performance outcomes of service-diversified organizations. In fact, on the one hand, excluding those studies focusing on international diversification, most of the other studies on the diversification-performance relationship has considered 'product' firms as unit of analysis; very few arguments have been developed around 'service' firms. On the other hand, the few studies analyzing the performance implications of service diversification have offered opposing arguments.

In the service industry, a first group of authors suggests that one possible strategic option for the firm to make efficient use of its resources and achieve a competitive advantage is to expand the service portfolio (Carman, Langeard 1980; Hitt et al. 2001). By enlarging its service portfolio a firm can more efficiently use its underutilized resources and capabilities and thereby benefit from scope economies (Nayyar 1993). Moreover, by expanding the total package of services offered, a firm may attract new clients or more fully serve existing clients by offering bundles of services (Hitt et al. 2006). But there are also authors that suggest that enlarging the line of businesses in the service industry is much more difficult that it is in manufacturing (Heskett 1986) and, therefore, service firms are unlikely to obtain competitive advantages from diversification. The main drawback of service diversification resides in the complexity of managing efficiently heterogeneous resources (Normann 2002).

In light of these divergent arguments, also empirical studies investigating the relationship between service diversification and firm financial performance have shown mixed results (Table 1). …

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