The Impact of Frictions in Routine Execution on Economies of Scope

Brahm, F, Tarzijan, J and Singer, M (2017) The Impact of Frictions in Routine Execution on Economies of Scope. Strategic Management Journal, 38 (10). pp. 2121-2142. ISSN 0143-2095

Abstract

Based on a detailed database of a beverages producer‐distributor that expanded its product variety by leveraging its logistic network, we show that product diversification generates economies of scope and also higher operational costs. The result is an inverted‐U relationship between variety and productivity: When the firm offers few additional categories, productivity grows, but as the number of categories rises, the costs of executing the operational routines increase rapidly and productivity falls. The negative effect on productivity increases if the added product category is more dissimilar to previous ones, and decreases with learning from operational experience. Our results highlight how frictions at the operational level can limit the benefits of diversification, even in the absence of other sources of diseconomies, such as increased coordination needs.