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Research Summary We study the effect of coordination between businesses on the adaptation of diversified firms. Using a simulation‐based approach, we show that coordination between businesses limits adaptation, causing the relative performance of diversified firms to decline relative to their focused counterparts over time, with this effect being strongest for moderate levels of relatedness between, and complexity within, businesses. Given complexity, firms diversifying into moderately related businesses may therefore be better off limiting coordination between businesses to a few key activities—if they diversify at all—sacrificing short run synergies for long run flexibility. Our study thus offers a novel argument for conglomerate diversification, while linking work on the costs of coordination in diversified firms to the literature on organizational adaptation. Managerial Summary While coordination of activities between businesses enables a diversified firm to realize synergies, it may also limit the flexibility of each business to adapt to changing conditions over time. Thus, the very cross‐business coordination that gives a diversified firm an advantage relative to its single business competitors in the short run may cause it to fall behind them in the long run. Using a mathematical simulation, we show that this negative effect is strongest for firms coordinating across moderately related businesses with activities that are highly interdependent. Multibusiness firms—especially moderately related diversifiers in complex businesses—may thus be better off coordinating only those activities that yield the greatest synergies, foregoing more marginal synergies in the short run for the sake of long run flexibility.

This study shows that the interplay between \"adjustment costs\", \"coordination costs\" and within-industry diversification benefits, results in an S-shaped relationship between within-industry diversification and firm performance. At low levels ofwithin-industry diversification, coordination costs are negligible but \"adjustment costs\" are higher than the synergy benefits of a limited product scope, hence leading to negative performance outcomes. At moderate levels of within-industry diversification synergies between related product categories substantially increase and outweigh the rise in adjustment and coordination costs, resulting in positive performance outcomes. Yet, extensive within-industry diversification gives rise to considerable coordination costs, which, coupled with adjustment costs, outweigh synergy effects and hamper performance. The study further shows that a greater change rate ofwithin-industry diversification results in negative performance outcomes.

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.

This paper examines the impact of coordination costs and organizational rigidity on the returns to diversification. The central thesis is that coordination costs offset economies of scope, while organizational rigidity increases coordination costs, further constraining economies of scope. The empirical tests of this proposition identify the effects of coordination and organizational rigidity costs on business unit and firm productivity, using novel data from the Economic Census on taxicab and limousine firms. The key results show that coordination and organizational rigidity costs are economically and statistically significant, while organizational rigidity itself accounts for a 16 percent decrease in paid ride-miles per taxicab in incumbent diver sifters, controlling for the other costs and benefits of diversification and incumbency. The findings suggest that coordination costs, in general, and organizational rigidity costs, in particular, limit the scope of the firm.

PurposeHow to determine the appropriate contractual structure for an outsourcing relationship has been a major theme in the business process outsourcing (BPO) literature. Drawing on transaction cost economics, this study aims to examine how anticipated coordination and adaptation costs in a BPO relationship affect the choice of contract types. Specifically, this research categorizes contracts types (fixed-price, time and materials and hybrid contracts) based on levels of contract design comprehensiveness and flexibility to change.Design/methodology/approachThe research setting is the BPO for a focal firm, involving a contractor. Data from 153 US companies are collected using a structured questionnaire on senior executives of functional areas of marketing, IT and finance. Hypotheses were tested using ordered probit model.FindingsThe results show that maturity is negatively associated with anticipated adaptation costs, while modularity and IT detachability are negatively related to anticipated coordination costs. Furthermore, adaptation costs have a direct impact on the choice, whereas the anticipated coordination costs do not have a significant direct impact on contract choice. The strength of adaptation costs' impact, however, is significantly reduced when coordination costs are high.Originality/valueThis study explicitly examines the role of anticipated coordination and adaptation costs in shaping the strategic choice of contract types in the BPO market. By differentiating the two types of anticipated transaction costs, this research enables a better understanding of the dynamics between transaction characteristics, anticipated transaction costs and contract types in complicated relationships such as BPO relationships.

Platform desertion, or a developer's stopping the development of an app for a platform, is a widespread phenomenon to the detriment of platforms. However, the extant literature focuses primarily on why app developers join-not leave-a platform. This app-level study develops two ideas: (a) coordination costs borne by an app's developer are associated with platform desertion, and (b) these costs are, in turn, shaped by a nuanced interplay between app decision rights and app \"microarchitecture\" introduced here. We use survey and snapshot archival data spanning 2009-2014 on over 300 apps in the Mozilla Firefox ecosystem to test these ideas. Our novel contribution shows how, by influencing coordination costs, the previously invisible interplay between app decision rights and app microarchitecture shapes an app's platform desertion. We find that delegating app decision rights to its developer weakens the coordination cost-reducing benefits of decoupling an app from the platform but strengthens those of standardizing its interfaces to the platform. The key theoretical implication is that app decision rights and app microarchitecture symbiotically influence the coordination costs borne by an app's developer. The key practical implication for platform designers is that the choices about who ought to make what decisions are intertwined with the architecture of the governed information technology artifact.

Purpose To obtain in-depth explanations of the effects of servitization, this paper aims to analyse the benefits and costs at different servitization levels. The authors also investigate the moderating roles of demand uncertainty and technological turbulence on such effects. Design/methodology/approach The authors use the resource-based view (RBV) and transaction cost economics (TCE) to analyse the varying benefits and costs associated with servitization at its different levels and proposes the hypotheses. Then they use the survey data of 239 Chinese manufacturing firms to empirically test these hypotheses. Findings The interplay among service benefits, adjustment costs and coordination costs results in a nonlinear relationship between servitization and business performance. A negative servitization–performance relationship is observed at low levels of servitization as adjustment costs would be dominant. At moderate servitization levels, a positive relationship is observed because service benefits increase substantially and outweigh the increase in adjustment and coordination costs. As servitization levels further increase, coordination costs become dominant and a negative servitization–performance relationship reappears. The study further shows the significant moderating role of demand uncertainty and the insignificant moderating role of technological turbulence. Research limitations/implications This study provides a nuanced understanding of the curvilinear effects of servitization on business performance in response to the calls for detailed insights from quantitative studies. Practical implications The findings provide guidance on the degree to which the manufacturing firm should extend its service businesses based on demand and technological environments. Originality/value This is one of the pioneering empirical studies applying RBV and TCE to examine the varying benefits and costs across different servitization levels. The findings provide insight into the ongoing discussion about “service paradox” and “deservitization”.

PurposeTo remain sustainable, open source software (OSS) projects must attract new members—or newcomers—who make contributions. In this paper, the authors develop a set of hypotheses based on the knowledge barriers framework that examines how OSS communities can encourage contributions from newcomers.Design/methodology/approachEmploying longitudinal data from the source code repositories of 232 OSS projects over a two-year period, the authors employ a Poisson-based mixed model to test how community characteristics, such as the main drivers of knowledge-based costs, relate to newcomers' contributions.FindingsThe results indicate that community characteristics, such as programming language choice, documentation effort and code structure instability, are the main drivers of knowledge-based contribution costs. The findings also suggest that managing these costs can result in more inclusive OSS communities, as evidenced by the number of contributing newcomers; the authors highlight the importance of maintaining documentation efforts for OSS communities.Originality/valueThis paper assumes that motivational factors are a necessary but insufficient condition for newcomer participation in OSS projects and that the cost to participation should be considered. Using the knowledge barriers framework, this paper identifies the main knowledge-based costs that hinder newcomer participation. To the best of the authors' knowledge, this is the first empirical study that does not limit data collection to a single hosting platform (e.g., SourceForge), which improves the generalizability of the findings.

Offshoring offers managers the promise of substantial economic benefits, but also comes with the risk of increased complexity and coordination challenges. We argue that offshoring firms must accumulate architectural knowledge to keep the cost of coordination of the geographically separated activities at bay. Based on a simulation model that examines the performance implications of firms’ learning strategies when offshoring, we show that such knowledge accumulation can be achieved through either a home-based or a host-based learning strategy. Our analysis suggests that the relative performance of these two strategies depends on nontrivial interactions among the costs of communication, the distance to the offshoring location, and the level of noise in the firm’s performance function. In particular, the difficulties of interpreting performance signals in noisy situations suggest that there are benefits of making changes to the configuration after the offshoring implementation (host-based learning). In contrast, when coordination costs and distance dominate, the strategy of gearing the organization for offshoring prior to separating them across country borders prevails (home-based learning). Thus, by formalizing these two learning strategies for acquiring architectural knowledge in offshoring, we show that important contingencies can lead to significant performance trade-offs in the search for new organizational configurations that span international borders.

Two key questions were discussed in the evolution of electronic markets over the years. How will future traffic on the World Wide Web and Internet affect each segment of an industry value chain? Will electronic markets provide new and innovative areas of opportunity for retailers, producers, and consumers as well? Electronic markets are unique virtual organizational forms and evolve through the automated mediation of market transactions. Consequently, we observe that traditional industry chains potentially lose their relative importance since business can be carried out faster and often with more and new opportunities. The developments have shown that consumers profit from an increased access to a vast selection of goods, which in turn will cause a restructuring and redistribution of profits among the stakeholders along the virtual value chain. There will also be an evolution from single-source sales channels to electronic markets. In particular, electronic markets may lower coordination costs for producers and retailers, lower transaction and distribution costs, or eliminate retailers and wholesalers entirely, as consumers directly access manufacturers. In the same way as electronic markets make disintermediation possible, disintermediation may suggest the deployment of electronic markets as they function as a form of eventual reintermediation in this context. Consumers’ full access to the market will absorb an issue that policymakers need to explore.