Business model diversification and firm performance: A demand‐side perspective

• Published date: 01 June 2020
• Date: 01 June 2020
• DOI: http://doi.org/10.1002/sej.1342
• Author: Brian T. McCann,Govert Vroom,Timo Sohl

RESEARCH ARTICLE

Business model diversification and firm

performance: A demand-side perspective

Timo Sohl

1

| Govert Vroom

2

| Brian T. McCann

3

1

Department of Economics and Business, Univ. Pompeu Fabra (UPF), UPF Barcelona School of Management and Barcelona GSE,

Barcelona, Spain

2

IESE Business School, Strategic Management Department, Barcelona, Spain

3

Owen Graduate School of Management, Vanderbilt University, Nashville, Tennessee

Correspondence

Timo Sohl, Univ. Pompeu Fabra (UPF),

Department of Economics and Business, UPF

Barcelona School of Management and

Barcelona GSE, C/Ramon Trias Fargas, 25-27,

08005 Barcelona, Spain.

Email: timo.sohl@upf.edu

Funding information

Agència de Gestió d'Ajuts Universitaris i de

Recerca, Grant/Award Number: 2017 SGR

1244; Ministerio de Economía y

Competitividad, Grant/Award Number:

ECO2017-85763-R

Abstract

Research summary: This study explores the relationship

between business model diversification (BMD) and firm per-

formance from a demand-side perspective. We focus on the

addition of a business model with a high degree of demand

complementarity, which we refer to as demand-related

BMD and explain the ways that such an addition can

increase firm performance. We further extend theoretical

understanding by first providing a comparison of demand-

related BMD to demand-unrelated BMD, describing why

we expect the former to be the more profitable form of

BMD. Second, we contend that the ability to exploit

demand complementarities depends on both demand het-

erogeneity as well as the level of demand for the added

business model. Using a unique panel dataset of global retail

corporations, we find evidence supportive of our

arguments.

Managerial summary: Despite the strong recognition that

many firms operate multiple business models at the same

time, little is known about how business model diversifica-

tion (BMD) may be associated with firm performance. Our

study explores this question from a demand-side perspec-

tive, leading us to distinguish between two BMD strategies:

demand-related BMD and demand-unrelated BMD. We

Received: 15 May 2018 Revised: 15 November 2019 Accepted: 28 November 2019 Published on: 16 January 2020

DOI: 10.1002/sej.1342

© 2020 Strategic Management Society

198 wileyonlinelibrary.com/journal/sej Strategic Entrepreneurship Journal. 2020;14:198–223.

argue and show that demand-related BMD increases firm

performance and is more profitable than demand-unrelated

BMD. We also explore external market conditions under

which demand-related BMD should lead to greater perfor-

mance improvements. Our results reveal that demand-related

BMD is more profitable in markets with higher demand

heterogeneity—as fostered by increases in consumer

incomes—and increased technology availability that enables

consumers to act ontheir heterogenous preferences.

KEYWORDS

business model, demand-side perspective, diversification, firm

performance, retail sector

1|INTRODUCTION

The business model has become a topic of increasing interest in the literature on strategic entrepreneurship. This

interest is driven in part by the recognition that the business model—defined as an activity system that connects fac-

tor and product markets—can contribute to the domain of strategic entrepreneurship in at least two important ways

(Demil, Lecocq, Ricart, and Zott, 2015): (a) by integrating strategy research with its focus on value capture and entre-

preneurship research with its focus on value creation, and (b) by suggesting a more central role of the demand side in

the development of theoretical frameworks.

Recently, a growingstream of business modelresearch hasbegun to devotemore attentionto the topic offirms that

operate multiple business models at the same time (e.g., Ahuja & Novelli, 2016; Aversa, Furnari, & Haefliger, 2015;

Casadesus-Masanell & Tarzijan, 2012; Casadesus-Masanell & Zhu, 2010; Kim & Min, 2015; Markides, 2013; Markides &

Charitou, 2004; Sabatier, Mangematin, & Rousselle, 2010; Snihur & Tarzijan, 2018), a practice we refer to as “business

model diversification”(BMD). Our aim in this paper is to build upon these early studies that have largely described the phe-

nomenon with anecdotal and case-based evidence. More specifically, our research complements and extends recent work

that has begun to conduct systematic, large-scale examination of how BMD may relate to firm performance. Kim and Min

(2015), for example, examined how the sales revenue of an incumbent may improve from the addition of a new business

model, arguing that whether the two models draw on complementary or conflicting resources is a key consideration.

We contend that a natural extension of existing work focused on supply-side concerns of resource complemen-

tarity is to consider the demand side as well, leading to a more holistic theoretical understanding of business model

diversification. This extension builds links from the business model literature to the rapidly growing and increasingly

influential demand-side literature stream. Building upon the foundation of seminal works, such as Bowman and

Ambrosini (2000), Adner and Levinthal (2001), Priem and Butler (2001), Adner (2002), and Priem (2007), demand-

side research “looks downstream from the focal firm, toward product markets and consumers, rather than upstream,

toward factor markets and producers (Priem, Li, & Carr, 2012: 347).

This extension seems particularly appropriate when examining BMD because of the emphasis on customer-

facing relationships in the business model literature (e.g., Chesbrough & Rosenbloom, 2002; Rietveld, 2018; Teece,

2010). Viewing the BMD phenomenon from the customer perspective is also consistent with research that has

begun to examine how product diversification might involve demand-side synergies associated with increases in con-

sumer willingness to pay—the maximum price a consumer will pay for one unit of a product or service (e.g., Ye,

Priem, & Alshwer, 2012).

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