Two paths to diversification : Performance implications of related diversification across two dimensions in professional service firms

Purpose – The purpose of this paper is to examine the impact of related diversification across service offerings and industry domains for professional service firms (PSFs) in emerging economies by integrating the reputational and economies of scope perspectives of diversification. The paper also provides insights into how related diversification impacts small and medium sized firms differently. Design/methodology/approach – Using unique data from the Indian Information Technology industry, the authors examine the impact of related diversification along service offerings and industry domains on export performance of firms. Findings – The results show that related diversification across specializations and industry domains impact performance differently across different firm sizes. While the authors find that related diversification across service offerings has an inverted U shape with performance for the medium sized firms, they do not impact performance for small sized firms. Performance of small firms has a U shaped relationship with relatedness in industry domains. The study shows that reputation transfer across industry domains play a significant role in the performance of small size firms whereas the ability to realize economies of scope by cross selling multiple services across clients do matter for performance of medium sized firms. Practical implications – Managers of small PSFs need to expand along related industry domains whereas managers from medium sized firms can experiment across service offerings to exploit economies of scope. Originality/value – The study contributes to hitherto unexamined research on related diversification in PSFs. The study is one of the few studies to examine relatedness along more than one dimension in an intra-industry context.