Can firms be both broad and deep? Exploring the interdependencies between horizontal and vertical firm scope

Brahm, F, Parmigiani, A and Tarzijan, J (2019) Can firms be both broad and deep? Exploring the interdependencies between horizontal and vertical firm scope. Working Paper. London Business School Working Paper.

Abstract

Firms can be horizontally diversified, with considerable breadth, or vertically integrated, with great depth. This study explores how breadth and depth affect each other as influenced by capability requirements and coordination demands. Using construction industry data, we assess the interdependence between contractors’ portfolios of building types (horizontal scope) and the extent of integration of the activities needed to complete each project (vertical scope). We find that vertical and horizontal scope have a negative interdependency only when contractors face managerial constraints due to coordination challenges. Without these constraints, horizontal and vertical scope are independent. This highlights the role of managerial capacity as an important bottleneck for firms attempting to be both broad and deep.