Biomedical Engineering Reference
In-Depth Information
Second, switching partners regularly does not necessarily expose the allying fi rm
with non-redundant knowledge bases as all partners may be active in the same tech-
nology domain and have similar technological expertise. Third, partner diversity
captures also relational elements that infl uence collaboration. Collaborating regularly
with the same partners can lead to better knowledge transfer and the development of
trust (Wuyts et al.
2004a
). In sum, not only is partner diversity likely a fl awed proxy
for non-redundancy, its effects on fi rm innovativeness and performance mask pos-
sibly contrasting sub-effects if relational factors are not explicitly accounted for.
5.3.3
Industry and Product Market Diversity
The most commonly studied type of diversifi cation is industry diversifi cation (e.g.,
Montgomery
1985
), calculated on the basis of industries entered into by the fi rm
(mostly defi ned in terms of 4-digit SIC codes). Some studies on industry diversifi ca-
tion have argued that it confers competitive advantages (e.g., Caves
1981
), but
according to other studies it reduces the fi rm's competitive position in each indi-
vidual industry because of a lack of resource commitment (e.g., Montgomery
1985
).
The decision to enter new product markets is, however, more at the core of day-
to-day managerial decision making than the decision to enter new industries.
Interestingly, it has been argued that the benefi ts of diversifi cation are most apparent
when diversifying
within
a given industry (Soni et al.
1993
; Stern and Henderson
2004
; Varadarajan
1986
). Ansoff (
1958
) conceptualized product market diversity as
the product market makeup of the fi rm, where a market is defi ned in terms of “the
job which the product is intended to perform” (p. 393).
For instance, drugs that reduce blood pressure, such as ACE-inhibitors, differ
along different submarkets. While some patients are in need of an ACE-inhibitor
only, an ACE-inhibitor with a diuretic is targeted at patients with kidney problems,
implying different product markets based on different patient needs. While related,
product market diversity differs from technology diversity. Product market diversity
relates to the variety of downstream patient groups that the pharmaceutical com-
pany targets, whereas technology diversity relates to the upstream technology
domains that the pharmaceutical fi rm draws from to serve its target markets.
In the excerpt below, I briefl y summarize a research project that was focused on
pharmaceutical fi rms'
internal
product market diversifi cation and technology diver-
sifi cation. A key take-away is that while product market diversity and technology
diversity are related, they are empirically distinct constructs that exert separate
effects on fi rm profi tability. More precisely, their effects are positive and log-linear,
indicating decreasing returns to diversifi cation. The log-linear nature of the effects
may be explained by the focus in this study on internal rather than external diversi-
fi cation: internal resource constraints may cause resource allocation problems when
diversifying internal R&D too intensively. Since externalizing R&D provides fi rms
with access to external resources, an effective response to internal resource con-
straints, the positive log-linear effects of internal technology diversity may not gen-
eralize to alliance portfolio diversity.
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