Contents lists available at ScienceDirect Journal of Business Research journal homepage: www.elsevier.com/locate/jbusres The logic of demand-side diversification: Evidence from the US telecommunications sector, 1990–1996 Lalit Manral a, ⁎ , Kathryn R. Harrigan b a College of Business, University of Central Oklahoma, Edmond, OK 73034, United States b Henry R. Kravis Professor of Business Leadership, Columbia Business School, Columbia University, New York, NY 10027, United States ARTICLE INFO Keywords: Demand-side diversification Demand-side relatedness Demand-side strategic assets Horizontal diversification Telecommunications ABSTRACT The logic of demand-side diversification articulated herein explains that a firm's demand-side strategic assets motivate its choice to diversify into an industry whose production function warrant possession of different supply-side strategic assets. The concept of demand-side relatedness, which underpins the logic of demand-side diversification, clarifies the conditions under which a firm's demand-side strategic assets provide it with the motivation to explore opportunities for realizing consumer synergies. We invoke this logic to explain the ob- served variation in the decision of monopoly local telephone service providers to diversify into the competitive long distance telephone services markets in the U.S. during 1990–1996. We find that the likelihood of a monopoly local telephone company to diversify into the long-distance services market within its area of fran- chise increases in the (a) quality of its customer-base for local telephony, and (b) competitive intensity of the market for long-distance services. 1. Introduction The theory developed herein explicates the logic of demand-side diversification. 1 An emerging stream of literature, which responds to the classic scope question, why firms diversify, purports to explain the demand-side drivers of firms' choice to diversify. Our primary objective is to provide rigor to this emerging perspective. The other objective is to provide conceptual clarity to demand-side relatedness that underpins the aforementioned logic. 2 Bereft of such rigor, exemplified for instance by a seemingly tautological relationship between demand-side relatedness and demand-side diversification, the logic of such a diversification choice may seem unfounded. We seek to explain why a seller of product A (home-market) would diversify into another industry to offer a complementary product B (target-market) to its customer-base in home- market without possessing the resources or capabilities that can be shared in producing and/or delivering the two products? The missing logic for hitherto unexplained strategic behavior of many multi-product and/or multi-business corporations motivates our theory. A veritable collage of disparate albeit inter-linked strands have developed over time (as if) in response to the classic scope question to provide myriad strategic logic of multi-product corporations. Yet, a conceptual gap persists due to the missing theoretical rationale for the strategic behavior of those multi-product corporations that offer a portfolio of complementary products. The logic of demand-side diversification supports a theoretical ex- planation for such patterns of diversification that seem paradoxical (i.e., unrelated) when viewed with the extant product-centric lens of supply-side relatedness. Table 1 explains how demand-side https://doi.org/10.1016/j.jbusres.2017.12.025 Received 15 September 2016; Received in revised form 12 December 2017; Accepted 15 December 2017 ⁎ Corresponding author. E-mail addresses: lmanral@uco.edu (L. Manral), Krh1@columbia.edu (K.R. Harrigan). 1 A firm is a collection of activities (Stigler, 1951). Diversification is defined as the addition of new activities by the firm (Rubin, 1973). A logical extension of this argument would be to distinguish between supply-side diversification and demand-side diversification as based on whether the economizing and/or value generating effect of related diversification is due to the increase in supply-side activities or demand-side activities. Priem et al. (2012) suggest that a good perspective on the distinction between supply-side and demand-side activities is achieved by looking upstream (towards factor markets and producers) and downstream (towards product markets and consumers) from the focal firm to identify the value-creating activities. Hence, for a manufacturer customer-service would still be considered a supply-side activity since it is a part of the firm's or the industry's value chain. However, the activities organized around the customers' experience of searching, evaluating, or using the product, can be considered as demand-side activities if they are a part of the buyers' value chain. 2 Manral and Harrigan (2016) conceptualize demand-side diversification to include those cases of product-market diversification wherein the focal firm leverages its demand-side strategic assets (developed in home-market for product A) to successfully enter another industry (target-market for complementary product B) that requires altogether different supply- side strategic assets. They explain and empirically verify the performance benefits of demand-side diversification in terms of the value generating effect accruing to diversified firms that shared demand-side strategic assets across their portfolio businesses. Manral and Harrigan (2016) define demand-side relatedness in terms of shared firms' shared demand-side strategic resources (customer-base) and/or demand-side competences (customer-knowledge and customer-relationship) across its home- and target-market(s). While they employ the concept to explain the superior performance of such related diversifiers they do not explain the conditions under which such assets might influence firms' decision to diversify in the first place. Journal of Business Research 85 (2018) 127–141 0148-2963/ © 2017 Elsevier Inc. All rights reserved. T