Related adjustment of firm production after demand shocks

Abstract

Multiproduct firms often diversify into technologically related activities to exploit efficiencies of joint production; however, unrelated products in the company’s portfolio provide access to distinct markets and can help to avoid industry-specific shocks. Yet, the underlying mechanisms of related and unrelated diversification are still poorly understood. Here we investigate diversification decisions of firms in periods when corporations’ markets are hit by a demand shocks. In these times, cost efficiency considerations might drive firms to reduce costs by narrowing product portfolios and focusing on combinations of technologically related products, in which economies of scope and mutual capabilities can be exploited. To test this hypothesis, we consider two measures of demand shocks, decreasing sales volumes on the product market and increasing import competition; and analyze their association with changes of product portfolios of Hungarian firms in the 2003-2012 period. We find that production has become more coherent in terms of technological relatedness after firms were exposed to demand shocks. Evidence suggests related adjustment of firm production after demand shocks such that products unrelated to firms’ core product are dropped from the portfolio but related products are added.

Innovation-based diversification strategies and the survival of emerging economy village-owned enterprises (VOEs) in the COVID-19 recession

“…An enterprise diversifies when it engages in a number of distinct business lines (Briglauer, 2000). Diversification strategies can be classified into related diversification (that is, when an enterprise develops new products into product lines that are similar (Khemani and Shapiro, 1993) and unrelated diversification (when an enterprise develops products that are not similar to their existing product lines (Kiss et al , 2018).…”

“…Secondly, in times of crisis such as recession, innovating firms can choose from four different types of diversification strategies, which are: related products; unrelated products; related services; and unrelated services (Kiss et al , 2018). That is, whether to develop new innovative products or services that are related to their existing product line(s) or to diversify by developing new products or services that are unrelated to their existing product line (s) (Kiss et al , 2018). Related diversification has to do with producing technologically similar product (s) and is supported by efficiency arguments (Kiss et al , 2018).…”

“…That is, whether to develop new innovative products or services that are related to their existing product line(s) or to diversify by developing new products or services that are unrelated to their existing product line (s) (Kiss et al , 2018). Related diversification has to do with producing technologically similar product (s) and is supported by efficiency arguments (Kiss et al , 2018). Many research works suggest that synergies in the processes of producing related products can enhance efficiency, thereby motivating firms to engage in related diversification (Zhou, 2011).…”

“…Many research works suggest that synergies in the processes of producing related products can enhance efficiency, thereby motivating firms to engage in related diversification (Zhou, 2011). In contrast, unrelated diversification is often linked to risk mitigation but also other managerial motives (Kiss et al , 2018). Nevertheless, it is not clear how enterprises react to recessions when demand drops and uncertainties and risk rise (Kiss et al , 2018), especially VOEs in the hostile rural areas of emerging economies.…”

“…In contrast, unrelated diversification is often linked to risk mitigation but also other managerial motives (Kiss et al , 2018). Nevertheless, it is not clear how enterprises react to recessions when demand drops and uncertainties and risk rise (Kiss et al , 2018), especially VOEs in the hostile rural areas of emerging economies. Such research can help the managers of VOEs to learn about the types of diversification strategies are more likely to help VOEs survive recessions.…”