“When is the Client Not Right? Performance Implication of Client-led Diversification.” by Mr. Heejung Byun
STRATEGY AND IB SEMINAR
Mr. Heejung Byun
University of Maryland
I examine the performance of diversification driven by embedded client ties, a phenomenon I label "client-led diversification." In contrast to existing models of diversification that focus on supply-side capabilities and implicitly assume arm's-length transaction, I focus on diversifications intended to cater to an existing client's needs and its adverse effect on firm performance. In doing so, I explore the potential tension embedded client ties create vis-à-vis firm capabilities and argue that client-led diversification may cause a) diseconomies of scope, b) an erosion of firm capabilities, and c) over-embeddedness to the client. I find support for the negative impact of client-led diversifications on performance and its mechanisms in the context of the U.S. federal lobbying firms between 1999 and 2008. I exploit the exogenous creation of the "Homeland Security" issue market after the 9/11 terrorist attack to identify the effect of client-led diversification on performance.