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Spread Too Thin: Uncertainty Shocks and Diseconomies of Scope

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Abstract

Although many streams of literature have recognized that firms with broader scope often underperform those with greater focus, relatively little research has examined the mechanisms that might account for these diseconomies of scope. One potential mechanism is that uncertainty shocks -- events or short-term periods that upset the normal course of business -- place unusual demands on the limited attention of managers. When managers of larger, more diverse firms allocate their time and organizational resources to address these events, they necessarily divert attention and resources away from other businesses, thereby converting these uncertainty shocks in one part of the organization to performance shocks in other parts of it. An empirical examination of the relationship between the distribution of films in theaters and videos for sale demonstrates that uncertainty shocks in theatrical distribution become performance shocks in the video market and that the magnitude of these effects increases for larger, more diversified firms.

Suggested Citation

  • Gabriel Natividad & Olav Sorenson, 2011. "Spread Too Thin: Uncertainty Shocks and Diseconomies of Scope," Working Papers 11-04, NET Institute.
  • Handle: RePEc:net:wpaper:1104
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    Cited by:

    1. Chen, I-Ju & Hsu, Po-Hsuan & Officer, Micah S. & Wang, Yanzhi, 2020. "The Oscar goes to…: High-tech firms’ acquisitions in response to rivals’ technology breakthroughs," Research Policy, Elsevier, vol. 49(7).

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    More about this item

    Keywords

    Uncertainty shocks; organizational scope; entertainment and media industries.;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media

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