The Varying Returns to Diversification Along the Value Chain

Abstract

This study examines whether the benefits of diversification vary across different value chain activities. The returns to diversification in product development and distribution activities are analyzed using a framework grounded in the intraindustry diversification literature and the resource-based view (RBV) of the firm. The study uses data from cocreation arrangements in the motion picture industry in which value chain activities are nearly decomposable—that is, split across producers and distributors—as a natural field study. Results based on 779 movies linked to 57 different production studios and distributed via 30 unaffiliated distributors or vertically integrated distribution branches show that greater focus in film production has a positive effect on profitability, whereas the level of focus/diversification in distribution is unrelated to profitability. This result holds regardless of whether the two functions are carried out within an integrated organization or across independent firms. Moreover, there is significant heterogeneity in the extent to which production studios benefit from increased focus which is tied to the composition of their product portfolios.