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

Research summary: This study explores the relationship between business model diversification (BMD) and firm performance 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 heterogeneity 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 diversification (BMD) may be associated with firm performance. Our study explores this question from a demand-side perspective, leading us to distinguish between two BMD strategies: demand-related BMD and demand-unrelated BMD. We 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 performance 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 on their heterogenous preferences.