Diversification and Firm Performance: Exploring the Moderating Effects of Information Technology Spending

A large body of research has examined the performance effects of diversification. However, these results have been mixed, and scholars have called for examining contingencies under which the effects of different types (related, unrelated, geographic) and levels of diversification on performance vary. This study attempts to fill this gap in the literature by arguing that examining the performance effects of diversification is incomplete without taking into consideration the firm's information technology (IT) spending. We posit that IT, by enabling coordination and control in firms, is likely to moderate the relationship between diversification and performance. Combining arguments from both resource-based view and the organizational controls literature, we theorize about the moderating effects of IT spending under different types and levels of diversification. Using data from large U.S. manufacturing firms, we test our research hypotheses. Our results indicate that while IT spending interacts with related diversification to have a positive effect on firm performance, similar interactions with unrelated diversification do not have any effects on firm performance. Furthermore, the interaction between IT spending and geographic diversification is positively associated with performance only when the level of geographic diversification is low. We interpret and discuss these results and highlight the theoretical and practical implications of our findings.

[1]  Cynthia A. Montgomery,et al.  The Measurement of Firm Diversification: Some New Empirical Evidence , 1982 .

[2]  Peter Hwang,et al.  MULTINATIONALS' DIVERSIFICATION AND THE RISK-RETURN TRADE-OFF , 1993 .

[3]  René M. Stulz,et al.  Tobin's q, Corporate Diversification, and Firm Performance , 1993, Journal of Political Economy.

[4]  Anne-Wil Harzing.  Acquisitions versus greenfield investments: international strategy and management of entry modes , 2002 .

[5]  Robert M. Grant,et al.  Multinationality and Performance among British Manufacturing Companies , 1987 .

[6]  Vijay Gurbaxani,et al.  The impact of information systems on organizations and markets , 1991, CACM.

[7]  Abdul A. Rasheed,et al.  Diversification and Performance: Critical Review and Future Directions* , 1991 .

[8]  Patrick M. Wright,et al.  Related and unrelated diversification and their effect on human resource management controls , 1997 .

[9]  Namchul Shin,et al.  The impact of information technology on the financial performance of diversified firms , 2006, Decis. Support Syst..

[10]  Peter Weill,et al.  Strategic context and patterns of IT infrastructure capability , 1999, J. Strateg. Inf. Syst..

[11]  Robert E. Hoskisson,et al.  Strategy and Structure in the Multiproduct Firm , 1987 .

[12]  William G. Egelhoff.  STRATEGY AND STRUCTURE IN MULTINATIONAL CORPORATIONS: A REVISION OF THE STOPFORD AND WELLS MODEL , 1988 .

[13]  E. Ofek,et al.  Diversification's effect on firm value , 1995 .

[14]  Alfred D. Chandler.  Strategy and Structure: Chapters in the History of the Industrial Enterprise , 1962 .

[15]  Varun Grover,et al.  Shaping Agility through Digital Options: Reconceptualizing the Role of Information Technology in Contemporary Firms , 2003, MIS Q..

[16]  P. Beamish,et al.  INTERNATIONAL DIVERSIFICATION AND FIRM PERFORMANCE: THE S-CURVE HYPOTHESIS , 2004 .

[17]  Henri Servaes,et al.  The Cost of Diversity : The Diversification Discount and Inefficient Investment , 1997 .

[18]  Constantinos C. Markides,et al.  Diversification, restructuring and economic performance , 1995 .

[19]  Peter Hwang,et al.  An eclectic theory of the choice of international entry mode , 1990 .

[20]  Paul W. Beamish,et al.  Geographic Scope, Product Diversification and the Corporate Performance of Japanese Firms , 1999 .

[21]  John G. Matsusaka,et al.  Corporate Diversification, Value Maximization, and Organizational Capabilities , 2001 .

[22]  William G. Egelhoff.  Strategy and Structure in Multinational Corporations: An Information- Processing Approach , 1982 .

[23]  C. Hill,et al.  Internal Capital Market Controls and Financial Performance in Multidivisional Firms , 1988 .

[24]  J. F. Pickering,et al.  DIVISIONALIZATION, DECENTRALIZATION AND PERFORMANCE OF LARGE UNITED KINGDOM COMPANIES 1 , 1986 .

[25]  Anil K. Gupta.  SBU Strategies, Corporate-SBU Relations, and SBU Effectiveness in Strategy Implementation , 1987 .

[26]  Paul Harrison,et al.  Does Multinationality Matter? Evidence of Value Destruction in U.S. Multinational Corporations , 2000 .

[27]  S. Jarvenpaa,et al.  Organizing for Global Competition , 1993 .

[28]  Laura B. Cardinal,et al.  Curvilinearity in the diversification–performance linkage: an examination of over three decades of research , 2000 .

[29]  Douglas D. Moesel,et al.  CONSTRUCT VALIDITY OF AN OBJECTIVE (ENTROPY) CATEGORICAL MEASURE OF DIVERSIFICATION STRATEGY , 1993 .

[30]  P. Rajan Varadarajan,et al.  Standardization versus Adaptation of International Marketing Strategy: An Empirical Investigation , 1993 .

[31]  W. Rogers.  Regression standard errors in clustered samples , 1994 .

[32]  Peter J. Buckley,et al.  The Limits of Explanation: Testing the Internalization Theory of the Multinationial Enterprise , 1988 .

[33]  Hüseyin Tanriverdi,et al.  Performance Effects of Information Technology Synergies in Multibusiness Firms , 2006, MIS Q..

[34]  Thiagarajan Ravichandran,et al.  Effect of Information Systems Resources and Capabilities on Firm Performance: A Resource-Based Perspective , 2005, J. Manag. Inf. Syst..

[35]  R. Duane Ireland,et al.  MERGERS AND ACQUISITIONS AND MANAGERIAL COMMITMENT TO INNOVATION IN M-FORM FIRMS , 1990 .

[36]  J. Harrison,et al.  Manufacturing-based relatedness, synergy, and coordination , 1999 .

[37]  D. Teece.  ECONOMIES OF SCOPE AND THE SCOPE OF THE ENTERPRISE , 1980 .

[38]  Stephen Tallman,et al.  PRODUCT AND INTERNATIONAL DIVERSIFICATION AMONG JAPANESE MULTINATIONAL FIRMS , 2000 .

[39]  David J. Teece,et al.  Towards an economic theory of the multiproduct firm , 1982 .

[40]  Erik Brynjolfsson,et al.  Intangible Assets: Computers and Organizational Capital , 2002 .

[41]  D. J. Wu,et al.  Investment in Enterprise Resource Planning: Business Impact and Productivity Measures , 2002, J. Manag. Inf. Syst..

[42]  Shu Han,et al.  AIS Electronic Library (AISeL) , 2013 .

[43]  Antoinette Schoar,et al.  Effects of Corporate Diversification on Productivity , 2002 .

[44]  Stephen Tallman,et al.  Effects of International Diversity and Product Diversity on the Performance of Multinational Firms , 1996 .

[45]  C. Hill,et al.  Oliver Williamson and the M-Form Firm: A Critical Review , 1985 .

[46]  George P. Huber,et al.  A theory of the effects of advanced information technologies on organizational design, intelligence , 1990 .

[47]  J. Barney.  Gaining and Sustaining Competitive Advantage , 1996 .

[48]  V. Govindarajan.  Implementing competitive strategies at the business unit level: Implications of matching managers to strategies , 1989 .

[49]  Bernard Yeung,et al.  Why Investors Value Multinationality , 1993 .

[50]  Robert E. Hoskisson,et al.  Cooperative Versus Competitive Structures in Related and Unrelated Diversified Firms , 1992 .

[51]  Hüseyin Tanriverdi,et al.  Information Technology Relatedness, Knowledge Management Capability, and Performance of Multibusiness Firms , 2005, MIS Q..

[52]  Varun Grover,et al.  Strategic Information Systems Revisited: A Study in Sustainability and Performance , 1994, MIS Q..

[53]  Paul P. Tallon.  Does IT pay to focus? An analysis of IT business value under single and multi-focused business strategies , 2007, J. Strateg. Inf. Syst..

[54]  Paul G. Simmonds,et al.  The combined diversification breadth and mode dimensions and the performance of large diversified firms , 1990 .

[55]  Cynthia A. Montgomery,et al.  Product-Market Diversification and Market Power , 1985 .

[56]  Peter Weill,et al.  The Relationship Between Investment in Information Technology and Firm Performance: A Study of the Valve Manufacturing Sector , 1992, Inf. Syst. Res..

[57]  Kevin Zhu,et al.  The Complementarity of Information Technology Infrastructure and E-Commerce Capability: A Resource-Based Assessment of Their Business Value , 2004, J. Manag. Inf. Syst..

[58]  Robert E. Hoskisson,et al.  Home country environments, corporate diversification strategies, and firm performance , 2003 .

[59]  Hun Lee,et al.  What matters about internationalization: a market-based assessment , 2005 .

[60]  Eric K. Clemons,et al.  Sustaining IT Advantage: The Role of Structural Differences , 1991, MIS Q..

[61]  R. Bühner,et al.  Assessing international diversification of West German corporations , 1987 .

[62]  Rajiv Sabherwal,et al.  Knowledge Management Using Information Technology: Determinants of Short-Term Impact on Firm Value , 2005, Decis. Sci..

[63]  Anandhi S. Bharadwaj,et al.  A Resource-Based Perspective on Information Technology Capability and Firm Performance: An Empirical Investigation , 2000, MIS Q..

[64]  Robert E. Hoskisson,et al.  International Diversification: Effects on Innovation and Firm Performance in Product-Diversified Firms , 1997 .

[65]  Kar Yan Tam,et al.  The Impact of Information Technology Investments on Firm Performance and Evaluation: Evidence from Newly Industrialized Economies , 1998, Inf. Syst. Res..

[66]  David H. Gobeli,et al.  Managerial Incentives, Internalization, and Market Valuation of Multinational Firms , 1998 .

[67]  Yu Liu,et al.  A comprehensive investigation on the relationship between information technology investments and firm diversification , 2008, Inf. Technol. Manag..

[68]  P. Williamson,et al.  Related diversification, core competences and corporate performance , 2007 .

[69]  GurbaxaniVijay,et al.  Does Information Technology Lead to Smaller Firms , 1994 .

[70]  Kenneth L. Kraemer,et al.  e-Commerce Metrics for Net-Enhanced Organizations: Assessing the Value of e-Commerce to Firm Performance in the Manufacturing Sector , 2002, Inf. Syst. Res..

[71]  Namchul Shin,et al.  The impact of information technology on financial performance: the importance of strategic choice , 2001, Eur. J. Inf. Syst..

[72]  Mo Adam Mahmood,et al.  Measuring the Organizational Impact of Information Technology Investment: An Exploratory Study , 1993, J. Manag. Inf. Syst..

[73]  Robert E. Hoskisson,et al.  Diversification Strategy and R&D Intensity in Multiproduct Firms , 1989 .

[74]  K. Palepu.  Diversification strategy, profit performance and the entropy measure , 1985 .

[75]  Peter R. Richardson,et al.  Implementing the unrelated product strategy , 1982 .

[76]  E. Brynjolfsson,et al.  Information Technology As A Factor Of Production: The Role Of Differences Among Firms , 1995 .

[77]  Dorothy E. Leidner,et al.  Review: Knowledge Management and Knowledge Management Systems: Conceptual Foundations and Research Issues , 2001, MIS Q..

[78]  Sundar G. Bharadwaj,et al.  Information Technology Effects on Firm Performance as Measured by Tobin's q , 1999 .

[79]  Charles H. Kriebel,et al.  Information Technologies and Business Value: An Analytic and Empirical Investigation , 1995, Inf. Syst. Res..

[80]  N. Shin,et al.  Does information technology improve coordination ? An empirical analysis , 1999 .

[81]  Sabyasachi Mitra,et al.  Analyzing Cost-Effectiveness of Organizations: The Impact of Information Technology Spending , 1996, J. Manag. Inf. Syst..

[82]  Erik Brynjolfsson,et al.  Does Information Technology Lead to Smaller Firms , 2011 .

[83]  Sven C. Voelpel,et al.  Five steps to creating a global knowledge-sharing system: Siemens' ShareNet , 2005 .

[84]  Paul W. Beamish,et al.  DIVERSIFICATION STRATEGY AND INTERNATIONALIZATION: IMPLICATIONS FOR MNE PERFORMANCE , 1989 .

[85]  David J. Denis,et al.  Global Diversification, Industrial Diversification, and Firm Value , 2001 .

[86]  Peter Hwang,et al.  Global diversification strategy and corporate profit performance , 1989 .

[87]  Michael Shayne Gary,et al.  Implementation strategy and performance outcomes in related diversification , 2005 .

[88]  JoAnne Yates,et al.  Electronic markets and electronic hierarchies , 1987, CACM.

[89]  M. Hitt,et al.  Strategic Control Systems And Relative R&D Investment , 1988 .

[90]  Erik Brynjolfsson,et al.  The productivity paradox of information technology , 1993, CACM.

[91]  R. Rumelt,et al.  Diversification strategy and profitability , 1982 .

[92]  Cynthia A. Montgomery,et al.  Corporate economic performance: Diversification strategy versus market structure , 1981 .

[93]  Ishtiaq P. Mahmood,et al.  Diversification and performance: evidence from East Asian firms , 2007 .

[94]  Kenneth L. Kraemer,et al.  Disaggregating the return on investment to IT capital , 1998, ICIS '98.

[95]  J. L. Stimpert,et al.  Seeing The Big Picture: The Influence Of Industry, Diversification, And Business Strategy On Performance , 1997 .

[96]  Stephen W. Pruitt,et al.  A Simple Approximation of Tobin's Q , 1994 .

[97]  R. Duane Ireland,et al.  A Mid-Range Theory of the Interactive Effects of International and Product Diversification on Innovation and Performance , 1994 .

[98]  Laetitia Lepetit,et al.  Diversification versus specialization: an event study of M&As in the European banking industry , 2004 .

[99]  Cynthia A. Montgomery,et al.  Tobin's q and the Importance of Focus in Firm Performance , 1988 .

[100]  Ray J. Pfeiffer,et al.  The Valuation of MNC International Operations During the 1990s , 2002 .

[101]  Frederic M. Scherer,et al.  Mergers, sell-offs, and economic efficiency , 1987 .

[102]  Akin Sayrak,et al.  Corporate diversification and shareholder value: a survey of recent literature , 2003 .

[103]  L. Richard Ye,et al.  Information technology and firm performance: Linking with environmental, strategic and managerial contexts , 1999, Inf. Manag..

[104]  Jonathan Whitaker,et al.  Information Technology, Production Process Outsourcing, and Manufacturing Plant Performance , 2006, J. Manag. Inf. Syst..

[105]  René M. Stulz,et al.  Are Internal capital Markets Efficient , 1998 .

[106]  Sanjeev Dewan,et al.  Firm Characteristics and Investments in Information Technology: Scale and Scope Effects , 1998, Inf. Syst. Res..

[107]  Margarethe F. Wiersema,et al.  The measurement of corporate portfolio strategy: analysis of the content validity of related diversification indexes , 2003 .

[108]  Joan V. Robinson,et al.  The Nature of the Firm , 2004 .

[109]  M. Hitt,et al.  Direct and Moderating Effects of Human Capital on Strategy and Performance in Professional Service Firms: A Resource-Based Perspective , 2001 .

[110]  O. Williamson,et al.  Markets and Hierarchies: Analysis and Antitrust Implications. , 1977 .

[111]  David A. Aaker,et al.  The Role of Risk in Explaining Differences in Profitability , 1987 .

[112]  Traci Carte,et al.  In Pursuit of Moderation: Nine Common Errors and Their Solutions , 2003, MIS Q..

[113]  James L. Bicksler.  International Corporate Diversification, Market Valuation, and Size-Adjusted Evidence: Discussion , 1984 .

[114]  G. Jarrell,et al.  Corporate focus and stock returns , 1995 .

[115]  F. McFarlan,et al.  Corporate Information Strategy and Management: Text and Cases , 2002 .

[116]  Robert E. Hoskisson,et al.  Multidivisional Structure and Performance: The Contingency of Diversification Strategy , 1987 .

[117]  Howard Thomas,et al.  DIVERSITY, DIVERSIFICATION, AND PROFITABILITY AMONG BRITISH MANUFACTURING COMPANIES, 1972-84 , 1988 .

[118]  E. Fama,et al.  The Theory of Finance , 1974 .

[119]  John A. Pearce,et al.  Formulation, Implementation and Control of Competitive Strategy , 1991 .

[120]  Lorin M. Hitt,et al.  Information Technology and Firm Boundaries: Evidence from Panel Data , 1999, Inf. Syst. Res..

[121]  Lemma W. Senbet,et al.  The Effects of International Operations on the Market Value of the Firm: Theory and Evidence , 1981 .

[122]  Douglas J. Miller.  Technological diversity, related diversification, and firm performance , 2006 .

[123]  Sabyasachi Mitra,et al.  Information Technology as an Enabler of Growth in Firms: An Empirical Assessment , 2005, J. Manag. Inf. Syst..

[124]  Stephen E. Christophe.  Hysteresis and the Value of the U.S. Multinational Corporation , 1997 .

[125]  Raphael Amit,et al.  Diversification strategies, business cycles and economic performance , 1988 .